AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1998
REGISTRATION NO. 333-57191
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EVEREST HEALTHCARE SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 36-4045521
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
AMARILLO ACUTE DIALYSIS SPECIALISTS, L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 8099 75-2600337
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
CON-MED SUPPLY COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 8099 36-3147024
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
CONTINENTAL HEALTH CARE, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 8099 36-3084746
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
DIALYSIS SPECIALISTS OF CORPUS CHRISTI, L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 8099 74-2749663
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
DIALYSIS SPECIALISTS OF SOUTH TEXAS, L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 8099 74-2749689
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
DUPAGE DIALYSIS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 36-3029873
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
EVEREST MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 APPLIED FOR
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
HEMO DIALYSIS OF AMARILLO L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 8099 75-2592110
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
HOME DIALYSIS OF AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 8099 86-0711476
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
HOME DIALYSIS OF DAYTON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 8099 31-1423002
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
LAKE AVENUE DIALYSIS CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 8099 36-3490713
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
MERCY DIALYSIS CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 8099 39-1589773
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
NEW YORK DIALYSIS MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 8099 36-3702390
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
NORTH BUCKNER DIALYSIS CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 APPLIED FOR
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
NORTHWEST INDIANA DIALYSIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 8099 36-3372131
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
OHIO VALLEY DIALYSIS CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 8099 36-3575844
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
WSKC DIALYSIS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 8099 36-2668594
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
EVEREST NEW YORK HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 8099 APPLIED FOR
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
---------------
EVEREST ONE IPA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 8099 13-3988854
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
OFINCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
101 NORTH SCOVILLE, OAK PARK, ILLINOIS 60302, (708) 386-2511
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CRAIG W. MOORE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
EVEREST HEALTHCARE SERVICES CORPORATION
101 NORTH SCOVILLE
OAK PARK, ILLINOIS 60302
(708) 386-2511
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MARGUERITE M. ELIAS, ESQ.
KEVIN L. BARNEY, ESQ.
KATTEN MUCHIN & ZAVIS
525 WEST MONROE STREET, SUITE 1600
CHICAGO, ILLINOIS 60661
(312) 902-5200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS DATED AUGUST 25, 1998
OFFER FOR ANY AND ALL OUTSTANDING
9 3/4% SENIOR SUBORDINATED NOTES DUE 2008
IN EXCHANGE FOR 9 3/4% SENIOR SUBORDINATED
NOTES DUE 2008, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED
[LOGO]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON OCTOBER 2, 1998, UNLESS EXTENDED.
Everest Healthcare Services Corporation, a Delaware corporation (the
"Company"), is hereby offering, upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal," which together with this Prospectus constitutes the
"Exchange Offer"), to issue $100,000,000 aggregate principal amount of its 9
3/4% Senior Subordinated Notes due 2008 (the "Exchange Notes"), in exchange for
a like principal amount of the issued and outstanding 9 3/4% Senior
Subordinated Notes due 2008 of the Company (the "Private Notes," and together
with the Exchange Notes, the "Notes").
The Private Notes were initially sold by the Company to BT Alex. Brown
Incorporated (the "Initial Purchaser") in a transaction not registered under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
an exemption under the Securities Act (the "Initial Offering"). The Initial
Purchaser subsequently placed the Private Notes (i) with Qualified
Institutional Buyers, within the United States, in reliance upon Rule 144A
under the Securities Act and (ii) to a limited number of institutional
"accredited investors," within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act, that agreed in writing to comply with certain
transfer restrictions and other conditions. Accordingly, the Private Notes may
not be reoffered or otherwise transferred in the United States or to U.S.
Persons (as defined in Regulation S under the Securities Act) unless registered
under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Private Notes
are designated for trading in the Private Offering, Resales and Trading through
Automated Linkages ("PORTAL") Market of the National Association of Securities
Dealers, Inc. and are eligible for resale pursuant to Rule 144A under the
Securities Act. After the Exchange Offer, the Private Notes that remain
outstanding will continue to be subject to the restrictions on transfer
contained in the legend thereon and may not be offered or sold except pursuant
to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act.
There is no established trading market for the Exchange Notes. The Initial
Purchaser has advised the Company that it presently intends to make a market in
the Exchange Notes as permitted by applicable laws and regulations. The Initial
Purchaser is not obligated, however, to make a market in the Exchange Notes and
any market-making may be discontinued at any time in the sole discretion of the
Initial Purchaser. The Company does not presently intend to list the Exchange
Notes on any securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Exchange Notes or that a market for
the Exchange Notes will develop. See "Risk Factors -- Absence of Established
Trading Market." To the extent that a market for the Exchange Notes does
develop, the market value of the Exchange Notes will depend on market
conditions (such as yields on alternative investments, general economic
conditions, the Company's financial condition and other conditions). Such
conditions might cause the Exchange Notes, to the extent that they are actively
traded, to trade at a significant discount from face value.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR PRIVATE NOTES.
-----------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(cover continued on next page)
The date of this Prospectus is , 1998
(continued from cover)
The terms of the Exchange Notes are identical in all material respects to
the Private Notes, except that (i) the Exchange Notes will bear a different
CUSIP Number from the Private Notes, (ii) the issuance of the Exchange Notes
will have been registered under the Securities Act and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof, and
(iii) holders of the Exchange Notes will not be entitled to certain rights of
holders of Private Notes under the Registration Rights Agreement (as defined).
The Exchange Notes will evidence the same debt as the Private Notes (which
they replace) and will be issued under and be entitled to the benefits of the
Indenture, dated as of May 5, 1998 (the "Indenture"), by and among the
Company, the Subsidiary Guarantors named therein and American National Bank
and Trust Company of Chicago, as Trustee (the "Trustee" or the "Exchange
Agent"). See "The Exchange Offer" and "Description of Exchange Notes."
Interest on the Exchange Notes will accrue from the date of original
issuance, May 5, 1998 (the "Issue Date"), payable semi-annually on May 1 and
November 1 of each year, commencing November 1, 1998, at the rate of 9 3/4%
per annum. Holders whose Private Notes are accepted for exchange will be
deemed to have waived the right to receive any interest accrued on the Private
Notes.
The Exchange Notes will be redeemable, in whole or in part, at the option of
the Company, on or after May 1, 2003, at the redemption prices set forth
herein plus accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time, or from time to time, on or prior to May 1, 2001, the
Company, at its option, may redeem up to 35% of the aggregate principal amount
of the Notes issued in the Initial Offering, with the cash proceeds received
from one or more Public Equity Offerings (as defined) by the Company at a
redemption price equal to 109.75% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of redemption; provided that at least
65% of the original aggregate principal amount of the Notes originally issued
remains outstanding after any such redemption. Upon a Change of Control (as
defined), each holder of the Exchange Notes will have the right to require the
Company to repurchase such holder's Exchange Notes at a price equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase. In addition, the Company will be obligated to offer to
repurchase the Exchange Notes at 100% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase in the event of certain
Asset Sales (as defined). See "Description of Exchange Notes."
The Exchange Notes will be, and the Private Notes are, (i) general unsecured
obligations of Company, (ii) subordinated in right of payment to all existing
and future Senior Indebtedness (as defined) and (iii) structurally
subordinated to all existing and future indebtedness of the Company's
subsidiaries that are not Subsidiary Guarantors (as defined). The Exchange
Notes will, and the Private Notes do, rank pari passu in right of payment with
any future senior subordinated indebtedness of the Company and rank senior in
right of payment to all other subordinated obligations of the Company. The
Exchange Notes will be, and the Private Notes are, unconditionally guaranteed
(the "Guarantees") on a senior subordinated basis by certain of the Company's
subsidiaries (the "Subsidiary Guarantors"). The Guarantees are now and will be
general unsecured obligations of the Subsidiary Guarantors subordinated in
right of payment to all existing and future Guarantor Senior Indebtedness (as
defined). The Guarantees will and do rank pari passu in right of payment with
all future senior subordinated indebtedness of the Subsidiary Guarantors and
will and do rank senior in right of payment to all other subordinated
obligations of the Subsidiary Guarantors. As of June 30, 1998, the Company and
its subsidiaries had an aggregate of approximately $7.2 million of Senior
Indebtedness outstanding (excluding unused commitments of $95.2 million
available under the New Credit Facility (as defined)) which ranked senior to
the Notes, and subsidiaries of the Company that are not Subsidiary Guarantors
had approximately $7.4 million of other outstanding liabilities to which the
Notes would have been effectively subordinated. The Company has obtained a New
Credit Facility (as defined) which has replaced the Prior Credit Facility and
provides for borrowings of up to $100.0 million. Indebtedness under the New
Credit Facility will constitute Senior Indebtedness.
The current offer and sale of the Exchange Notes are being registered under
the Registration Statement of which this Prospectus forms a part in order to
satisfy certain obligations of the Company contained in the
i
Registration Rights Agreement, dated as of May 5, 1998 (the "Registration
Rights Agreement"), among the Company, the Subsidiary Guarantors and the
Initial Purchaser, on behalf of the Initial Purchaser and subsequent
transferees of the Private Notes. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") set forth in certain
"no-action" letters issued to third parties and unrelated to the Company and
the Exchange Offer, the Company believes that Exchange Notes issued pursuant
to the Exchange Offer in exchange for Private Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company or any Subsidiary Guarantor within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding with
any person to participate in the distribution of such Exchange Notes in
violation of the provisions of the Securities Act. See "The Exchange Offer--
Resale of the Exchange Notes." Holders of Private Notes wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreement, that such conditions have been met. A broker-dealer holding
Private Notes may participate in the Exchange Offer provided that it acquired
the Private Notes for its own account as a result of market-making or other
trading activities. Each broker-dealer (a "Participating Broker-Dealer") that
receives Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
in connection with resales of Exchange Notes received in exchange for Private
Notes where such Private Notes were acquired by such Participating Broker-
Dealer as a result of market making or other trading activities. The Company
and the Subsidiary Guarantors have agreed to make available, during the period
required by the Securities Act, a prospectus meeting the requirements of the
Securities Act for use by any Participating Broker-Dealer and other persons,
if any, with similar prospectus delivery requirements for use in connection
with any such resale of the Exchange Notes. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and "Plan of Distribution."
The Company will accept for exchange Private Notes validly tendered prior to
5:00 p.m., New York City time, on October 2, 1998, unless the Exchange Offer
is extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Private Notes may be withdrawn at any time prior to the Expiration
Date. The Exchange Offer is subject to certain customary conditions, but is
not conditioned upon any minimum aggregate principal amount of Private Notes
being tendered for exchange. See "The Exchange Offer--Certain Conditions to
Exchange Offer."
The Company will not receive any proceeds from the Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company will pay all the expenses
incident to the Exchange Offer (other than any underwriting discounts or
commissions). In the event the Company terminates the Exchange Offer and does
not accept for exchange any Private Notes, the Company will promptly return
the Private Notes to the holders thereof. No underwriter is being used in
connection with the Exchange Offer. See "The Exchange Offer."
----------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SUBSIDIARY GUARANTORS. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY
ii
EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
UNTIL DECEMBER 1, 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "BOOK ENTRY; DELIVERY AND FORM," THE COMPANY EXPECTS
THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
REPRESENTED BY A GLOBAL NOTE (AS DEFINED HEREIN), WHICH WILL BE DEPOSITED
WITH, OR ON BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN
ITS NAME OR IN THE NAME OF CEDE & CO., ITS NOMINEE. BENEFICIAL INTEREST IN THE
GLOBAL NOTE REPRESENTING THE EXCHANGE NOTES WILL BE SHOWN ON, AND TRANSFER
THEREOF WILL BE EFFECTED THROUGH, RECORDS MAINTAINED BY DTC AND ITS
PARTICIPANTS. AFTER THE INITIAL ISSUANCE OF THE GLOBAL NOTE, NOTES IN
CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE FOR THE GLOBAL NOTE ONLY UNDER
LIMITED CIRCUMSTANCES AS SET FORTH IN THE INDENTURE. SEE "BOOK ENTRY; DELIVERY
AND FORM."
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY
OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON
THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY
PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE,
TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus 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 Prospectus, 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. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under "Risk Factors," and elsewhere in
this Prospectus including,
iii
without limitation, in conjunction with the forward-looking statements included
in this Prospectus. These forward-looking statements represent the Company's
judgment as of the date of this Prospectus. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements. The Company disclaims, however, any intent or obligation
to update its forward-looking statements.
iv
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data including
the consolidated financial statements of the Company, its predecessors, Peak
Healthcare, L.L.C. ("Peak"), and West Suburban Kidney Center, S.C. ("WSKC"),
and the notes thereto, appearing elsewhere in this Prospectus. As used in this
Prospectus, unless the context otherwise requires, all references to "Everest"
or the "Company" include Everest Healthcare Services Corporation and its
subsidiaries and predecessors. Certain statements in this Prospectus constitute
forward-looking statements. See "Cautionary Notice Regarding Forward-Looking
Statements." As used herein, the term "Credit Facility" shall at any time refer
to whichever of the Prior Credit Facility or the New Credit Facility was in
effect at the time indicated.
THE COMPANY
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 approximately 5,400 patients through 65 facilities in 12 states. Of
these 65 facilities, 33 are operated as wholly-owned subsidiaries, seven are
majority owned, 16 are minority owned, and nine are unaffiliated and operated
pursuant to management contracts. Everest also contracts with 102 hospitals in
11 states to provide a broad range of other extracorporeal (outside-the-body)
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 26 nephrologists, primarily in the Chicago and
northwest Indiana areas, and (ii) certain minority-owned or unaffiliated
dialysis facilities. The Company derived 85.4% of its net revenues for the 12
months ended June 30, 1998 from chronic dialysis services, 12.9% from Contract
Services and 1.7% from management services. Net revenues for the 12 months
ended June 30, 1998 were $140.0 million.
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
10 acquisitions encompassing 29 facilities and developed 36 de novo centers
since its inception. Through geographic clustering of its outpatient dialysis
centers, the Company has created strong 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 51 full-service outpatient dialysis
centers which provide on-site dialysis services as well as training for home
dialysis patients. Everest also operates 14 home dialysis training and support
centers which provide services and equipment to home dialysis patients.
Everest's chronic dialysis services are provided to patients who suffer from
end-stage renal disease ("ESRD"), a medical condition characterized by the
irreversible loss of kidney function. ESRD patients require dialysis or kidney
transplantation to sustain life. According to the United States Renal Data
System (the "USRDS"), the number of ESRD patients requiring chronic dialysis in
the United States increased from approximately 88,000 in 1986 to approximately
209,000 in 1996, a compound annual growth rate of approximately 9%. The Company
expects the number of ESRD patients to continue to grow at approximately the
historical rate for the foreseeable future. According to the USRDS, the number
of new patients diagnosed each year with ESRD among Medicare-eligible patients
increased from 136 patients per million in 1986 to 253 patients per million in
1995. The Company attributes this increase in the number of ESRD patients and
in the incidence of ESRD to: (i) the aging of the population; (ii) better
treatment and longer survival rates of patients with diabetes, hypertension and
other diseases that lead to ESRD; and (iii) improved technology which has
enabled older patients and patients who could not previously tolerate dialysis
due to other illnesses to benefit from this life-prolonging treatment.
1
According to the Health Care Financing Administration ("HCFA"), the total
estimated direct payments for ESRD in 1995 were $13.1 billion, of which
Medicare paid approximately $9.7 billion. As a result of legislation enacted in
1972, the federal government provides Medicare funding, subject to specified
waiting periods and co-payment obligations, for substantially all patients who
are diagnosed with ESRD, regardless of their age or financial circumstances.
The Company believes that the outpatient dialysis industry is fragmented and
consolidating due to the need for operating efficiencies, high-quality patient
care and the growing need for providers to compete in a managed care
environment.
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 acquisitions in 1996. 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. The Company has contracts with 102 hospitals, and Everest acts
as the exclusive provider of extracorporeal blood treatment services for most
of these hospitals. By leveraging its strengths in blood processing, its
significant market presence in outpatient dialysis services and its strong
physician and hospital relationships, Everest believes it is well positioned to
continue to implement successfully its growth strategy.
Based on industry data and the Company's market research, the non-dialysis
extracorporeal services industry represents approximately $1.4 billion in
annual revenues and is growing at a rate of approximately 7% per annum. The
Company attributes this growth to: (i) an aging population; (ii) the
applicability of existing and developing technologies to a larger number of
diseases; and (iii) continued heightened public concern over the safety of the
nation's blood supply. The Company believes that hospitals, which have
historically provided most of these services, are increasingly seeking to
outsource these services to companies such as Everest that provide both trained
personnel and equipment. The Company believes that the market is consolidating
due to increasing business complexity, the expansion of managed care and the
demand by hospitals for a single provider capable of delivering a broad
portfolio of extracorporeal services.
COMPETITIVE STRENGTHS
The Company attributes its market leadership and its opportunities for
continued growth and profitability to the following strengths:
Strong Physician and Hospital Relationships. Everest believes that the
strength of its relationships with physicians and hospitals is an important
factor in its success. Everest was founded and remains principally owned by
nephrologists, and the Company believes that its sensitivity to the concerns
and objectives of health care professionals, coupled with its reputation for
high-quality service, makes it attractive to physicians and hospitals. Everest
intends to capitalize on its strong relationships in order to increase same-
market growth, successfully complete acquisitions and de novo developments and
market its broad range of extracorporeal services.
Acquisition and Development Expertise. The Company has a successful history
of effecting acquisitions and building de novo dialysis facilities in existing
and new markets. Since January 1, 1996, Everest has completed eight
acquisitions encompassing 24 facilities and has developed 18 de novo dialysis
centers. During this period, the number of patients treated by the Company has
increased from approximately 2,700 to approximately 5,400. Everest believes
that its significant acquisition and development experience positions it well
to continue to pursue growth opportunities.
Focus on Attractive Industry Sectors. The Company focuses on two large and
growing industry sectors: chronic dialysis services and Contract Services.
According to the USRDS, the number of ESRD patients requiring chronic dialysis
in the United States increased from approximately 88,000 in 1986 to
approximately 209,000 in 1996, a compound annual growth rate of approximately
9%. The Company expects this growth to
2
continue at approximately the historical rate for the foreseeable future as a
result of the aging of the population, better treatment and survival rates of
patients with diseases that lead to ESRD and improved technology. The Company
estimates that the non-dialysis Contract Services market represents
approximately $1.4 billion in annual revenues and is growing at an annual rate
of approximately 7%. The Company attributes this growth to the aging
population, applicability of existing and developing technologies to more
diseases and public concern over the safety of the U.S. blood supply.
Comprehensive Portfolio of Extracorporeal Services. The Company believes that
it is the only outsourcing provider currently offering hospitals a full
portfolio of extracorporeal blood treatment services including inpatient acute
dialysis, perfusion, apheresis and auto-transfusion. Everest believes that
hospitals are increasingly outsourcing these services and demanding a single,
high-quality provider to handle all of their extracorporeal blood treatment
needs. Everest currently has contracts with 102 hospitals, and Everest acts as
the exclusive provider of extracorporeal blood treatment services for most of
these hospitals.
Leading Market Positions. The Company seeks to be a leader in each chronic
dialysis and Contract Services market in which it operates. Everest is
currently the sixth-largest provider of chronic dialysis services in the United
States. In addition, through geographic clustering of its outpatient dialysis
centers, the Company has created strong regional market positions, particularly
in the Midwest. Everest seeks to augment its position in existing outpatient
dialysis markets by accelerating same-market growth through such methods as
adding new dialysis stations and extending facility hours.
Proven Management Team. The Company's senior management team has an average
of over 18 years of health care industry experience and an average of over 12
years of experience with Everest. In addition, the seven regional directors of
the Company's chronic dialysis business have an average of over 11 years of
experience with the Company. Under this team's management, the Company has
achieved significant growth in recent years. Everest's management has created a
strong corporate and regional infrastructure which the Company believes can
support future increased patient volumes with limited incremental expenditures.
STRATEGY
The Company's objective is to be a leading provider of high-quality dialysis
and Contract Services in each of its markets. The Company's strategy for
achieving this objective is to:
Acquire and Develop Additional Outpatient Chronic Dialysis Facilities.
Everest intends to continue to leverage its strong physician and hospital
relationships to identify and consummate acquisitions. Everest has completed
eight acquisitions to date and will continue to pursue acquisitions to increase
its presence in existing markets and to enter new markets. When considering
acquisitions, the Company evaluates such factors as historical and projected
profitability, local market share, facility utilization, relationships with
physicians and hospitals, market demographics, growth potential and the
availability of qualified clinical personnel. The Company regularly engages in
discussions with potential acquisition candidates. In addition, Everest
currently has a less than 50.1% ownership interest in 16 outpatient dialysis
facilities. The Company believes that it has an opportunity to continue to
increase its ownership of many of these facilities. Since September 30, 1997,
the Company has acquired majority ownership of five facilities, with
approximately 440 patients, in which it previously had a minority-ownership
position.
Of the Company's 65 outpatient dialysis facilities, 36 were de novo
developments. A "de novo development" is a development which the Company has
organized and developed from inception, as compared to an existing facility
that is acquired from another party. The Company believes that its strong
physician and
3
hospital relationships and its significant development experience afford it a
competitive advantage in developing new dialysis facilities. The Company
intends to continue to pursue de novo development opportunities, particularly
in areas where Everest has existing facilities and can take advantage of
geographic clustering.
Both acquisitions and de novo developments may require substantial
investments of capital. There can be no assurance that adequate sources of
capital will be available in the future as needed on terms acceptable to the
Company. See "Risk Factors--Risks Inherent in Growth Strategy."
Increase Same-Market Growth. Everest believes that its strong relationships
with nephrologists and hospitals are instrumental to its ability to accelerate
same-market growth. In addition, Everest believes that its high-quality service
leads to patient satisfaction, which in turn increases patient referrals. The
Company also seeks to increase same-market growth through such methods as
adding new dialysis stations and extending dialysis center hours. Everest will
also continue to add appropriate ancillary services at each of its facilities,
including Erythropoietin ("EPO") dosing and home dialysis training. As Everest
identifies new needs, it will work with its regional directors and facility
managers to implement these services in all of its facilities. In fiscal 1997,
the Company's same-market growth in net revenues was approximately 10.5%.
Expand its Contract Services Business. Everest began its Contract Services
business to provide a broader range of extracorporeal services to hospitals and
managed care organizations and to develop a source of revenue that is not
directly dependent on government reimbursement. Everest believes that it has a
strong competitive position as the only outsourcing company currently providing
a full portfolio of extracorporeal services, including acute inpatient
dialysis, perfusion, apheresis and auto-transfusion. The Company believes it
can sell its broad service portfolio to its existing customers. Everest intends
to expand this business by leveraging its existing relationships and
establishing new relationships in each of its markets. In addition, the Company
intends to continue to acquire extracorporeal service providers in existing and
new markets.
Leverage its Infrastructure and Systems to Increase Margins and Improve
Quality of Service. Everest has built a strong corporate and regional operating
structure, led by senior management and seven regional directors who are
responsible for all financial, quality and teamwork goals. The Company believes
that this infrastructure can support increased patient volumes with limited
incremental expenditures. In addition, Everest's management information system
enables corporate and regional managers to monitor the quality and outcomes of
the services provided at both its outpatient dialysis facilities and at the
hospitals where Contract Services are performed. The Company intends to
continue to leverage its experienced management team and increase operating
efficiencies through standardization of systems and integration of new centers.
Continue to Foster a Workplace that will Enable the Company to Recruit, Train
and Retain Well-Qualified Employees. Highly qualified employees are
instrumental to Everest's continued delivery of high-quality patient care, and
Everest invests considerable resources in the screening, hiring and training of
its employees. Everest's training programs cover topics such as clinical
skills, leadership development, systems utilization and quality programs. In
addition, the Company has developed and is implementing a recertification
program for all of its patient care employees. Everest provides all regional
directors and key facility managers with an incentive compensation plan linked
to its financial, quality and teamwork objectives.
RECENT DEVELOPMENTS
In May 1998, the Company developed and opened one outpatient dialysis
facility located in the Bronx, New York. In July 1998, the Company exercised a
right of first refusal to purchase four outpatient dialysis facilities, also
located in the Bronx, that have previously been managed by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions."
THE INITIAL OFFERING
Private Notes............. The Private Notes were sold by the Company on April
30, 1998 to BT Alex. Brown Incorporated (the
"Initial Purchaser") pursuant to a Purchase
Agreement dated April 30, 1998 (the "Purchase
Agreement"). The Initial Purchaser subsequently
resold the Private
4
Notes (i) within the United States to qualified
institutional buyers, in reliance upon Rule 144A
under the Securities Act, and (ii) to a limited
number of institutional "accredited investors" that
agreed in writing to comply with certain transfer
restrictions and other conditions.
Registration Rights Pursuant to the Purchase Agreement, the Company,
Agreement................. the Subsidiary Guarantors and the Initial Purchaser
entered into the Registration Rights Agreement,
which grants the holders of the Private Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights which will terminate upon the consummation
of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered........ $100,000,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes due 2008.
The Exchange Offer........ $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Private Notes. As of the date hereof, $100,000,000
aggregate principal amount of Private Notes are
outstanding. The Company will issue the Exchange
Notes to holders on or promptly after the
Expiration Date.
Based on interpretations by the staff of the
Commission set forth in certain "no action" letters
issued to third parties and unrelated to the
Company and the Exchange Offer, the Company
believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business
and such holders have no arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes in violation of
the provisions of the Securities Act. Holders of
Private Notes wishing to accept the Exchange Offer
must represent to the Company, as required by the
Registration Rights Agreement, that such conditions
have been met.
A Participating Broker-Dealer holding Private Notes
may participate in the Exchange Offer provided that
it acquired the Private Notes for its own account
as a result of market-making or other trading
activities. Each Participating Broker-Dealer that
receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-
Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with the
resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were
acquired by such Participating Broker-Dealer as a
result of
5
market-making or other trading activities. The
Company and the Subsidiary Guarantors have agreed
to make available, during the period required by
the Securities Act, a prospectus meeting the
requirements of the Securities Act for use by any
Participating Broker-Dealer and other persons, if
any, with similar prospectus delivery requirements
for use in connection with any such resale of
Exchange Notes. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in "no-action" letters
and, in the absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure to
comply with such requirements in such instance may
result in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date...........
5:00 p.m., New York City time, on October 2, 1998
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Accrued Interest on the
Exchange Notes and the
Private Notes............
Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to
receive any interest accrued on the Private Notes.
However, such holders will receive interest on the
Exchange Notes from the Issue Date, i.e., May 5,
1998.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer............ conditions, which may be waived by the Company, but
it is not conditioned upon any minimum aggregate
principal amount of Private Notes being tendered
for exchange. See "The Exchange Offer--Conditions."
Procedures for Tendering
Private Notes............
Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Private Notes and any
other required documents, to the Exchange Agent,
prior to 5:00 p.m., New York City time, on the
Expiration Date at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Company, among other things,
(i) that any Exchange Notes to be received by it
will be acquired in the ordinary course of its
business; (ii) that it has no arrangement or
understanding with any person to participate in the
distribution (within the meaning of Securities Act)
of the Exchange Notes in violation of the
Securities Act; (iii) that it is not an "affiliate"
(as defined in Rule 405 promulgated under the
Securities Act) of the Company; (iv) if such holder
is not a Participating Broker-Dealer, that it is
not engaged in, and does not intend to engage in,
the
6
distribution of Exchange Notes; and (v) if such
holder is a Participating Broker-Dealer that will
receive Exchange Notes for its own account in
exchange for Private Notes that were acquired as a
result of market-making or other trading
activities, that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes.
See "The Exchange Offer--Purpose and Effect of the
Exchange Offer" and "--Procedures for Tendering."
Untendered Private Notes.. Upon consummation of the Exchange Offer the
provisions of the Registration Rights Agreement
shall continue to apply (i) in the case of any
holders who are not entitled to participate in the
Exchange Offer and upon their request become
holders of unregistered Exchange Notes with respect
to Private Notes; and (ii) in the case of any
holder that participates in the Exchange Offer and
does not receive Exchange Notes on the date of the
exchange that may be sold without restriction under
state and federal securities laws (other than due
solely to the status of such holder as an
"affiliate" of the Company or any Subsidiary
Guarantor within the meaning of the Securities
Act). See "--Shelf Registration Statement."
Consequences of Failure
to Exchange...............
The Private Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Private Notes may be
resold only (i) to the Company; (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act; (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act; or (iv) pursuant
to an effective registration statement under the
Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
Shelf Registration If, (i) because of any change in law or in
Statement................. currently prevailing interpretations of the staff
of the Commission, the Company and the Subsidiary
Guarantors are not permitted to effect an Exchange
Offer, (ii) the Exchange Offer is not consummated
within 150 days of the Issue Date, (iii) holders of
unregistered Exchange Notes so request,
or (iv) in the case of any Holder that participates
in the Exchange Offer, such Holder does not receive
Exchange Notes on the date of the exchange that may
be sold without restriction under state and federal
securities laws (other than due solely to the
status of such Holder as an affiliate of the
Company or any Subsidiary Guarantor within the
meaning of the Securities Act), then in each case,
the Company and the Subsidiary Guarantors have
agreed to (x) promptly deliver to the holders and
the Trustee written notice thereof and (y) at their
sole expense, (a) as promptly as practicable, file
a shelf registration statement covering resales of
the Notes (the "Shelf Registration Statement"), (b)
use their best efforts to cause the Shelf
Registration Statement to be declared effective
under the Securities Act and (c) use their best
efforts to keep effective the Shelf Registration
Statement until the earlier of two years after the
Issue Date or such time as all of the applicable
Notes have been sold thereunder. See "The
7
Exchange Offer--Purpose and Effect of the Exchange
Offer." The Company will, in the event that a Shelf
Registration Statement is filed, provide to each
holder copies of the prospectus that is a part of
the Shelf Registration Statement, notify each such
holder when the Shelf Registration Statement for
the Notes has become effective and take certain
other actions as are required to permit
unrestricted resales of the Notes. A Holder that
sells Notes pursuant to the Shelf Registration
Statement will be required to be named as a selling
security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under
the Securities Act in connection with such sales
and will be bound by the provisions of the
Registration Rights Agreement that are applicable
to such holder (including certain indemnification
rights and obligations).
Special Procedures for
Beneficial Owners........
Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering its Private Notes, either make
appropriate arrangements to register ownership of
the Private Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time. The Company will keep the
Exchange Offer open for not less than thirty days
after the date that notice of the Exchange Offer is
mailed in order to provide for the transfer of
registered ownership.
Guaranteed Delivery Holders of Private Notes who wish to tender their
Procedures................ Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Private
Notes and Delivery of
Exchange Notes........... The Company will accept for exchange any and all
Private Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following
the Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Certain Federal Income
Tax Considerations.......
It is anticipated that the exchange of Private
Notes for Exchange Notes pursuant to the Exchange
Offer will not be a taxable event for United States
federal income tax purposes, because under existing
Treasury
8
regulations, the Exchange Notes will not differ
materially in kind or extent from the Private
Notes. See "Certain Federal Income Tax
Considerations."
Accounting Treatment...... The Exchange Notes will be recorded at the same
carrying value as the Private Notes, which is face
value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no
gain or loss for accounting purposes will be
recognized by the Company. The expenses of the
Exchange Offer will be amortized over the term of
the Exchange Notes.
Use of Proceeds........... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Exchange Agent............ American National Bank and Trust Company of
Chicago.
THE EXCHANGE NOTES
General................... The form and terms of the Exchange Notes are the
same as the form and terms of the Private Notes
(which they replace) except that (i) the Exchange
Notes bear a different CUSIP Number from the
Private Notes; (ii) the Exchange Notes have been
registered under the Securities Act and, therefore,
will not bear legends restricting the transfer
thereof; and (iii) the holders of Exchange Notes
will not be entitled to certain rights under the
Registration Rights Agreement, including the
provisions providing for an increase in the
interest rate on the Private Notes in certain
circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer--Purpose and Effect of Exchange
Offer." The Exchange Notes will evidence the same
debt as the Private Notes and will be entitled to
the benefits of the Indenture. See "Description of
Exchange Notes."
Exchange Notes Offered.... $100,000,000 aggregate principal amount 9 3/4%
Senior Subordinated Notes due 2008.
Maturity Date............. May 1, 2008.
Interest Payment Dates.... Interest on the Exchange Notes will accrue from the
Issue Date, May 5, 1998, and will be payable semi-
annually on May 1 and November 1 of each year,
commencing November 1, 1998. Holders whose Private
Notes are accepted for exchange will be deemed to
have waived the right to receive any interest
accrued on the Private Notes.
Optional Redemption....... The Exchange Notes will be redeemable, in whole or
in part, at the option of the Company on or after
May 1, 2003, at the redemption prices set forth
herein plus accrued and unpaid interest to the date
of redemption. In addition, at any time on or
before May 1, 2001, the Company, at its option, may
redeem up to 35% of the aggregate principal amount
of the Notes issued in the Initial Offering with
the net proceeds of one or more Public Equity
Offerings (as defined) at the redemption prices set
forth herein plus accrued and unpaid interest to
the date of redemption; provided that at least 65%
of the aggregate
9
principal amount of the Notes originally issued
remains outstanding immediately after any such
redemption. See "Description of Exchange Notes--
Optional Redemption."
Change of Control......... Upon a Change of Control, each holder of the
Exchange Notes will have the right to require the
Company to repurchase such holder's Exchange Notes
at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any,
to the date of repurchase. See "Description of
Exchange Notes--Change of Control."
Ranking...................
The Exchange Notes will be general unsecured
obligations of the Company and will be subordinated
in right of payment to all existing and future
Senior Indebtedness and will be structurally
subordinated to all existing and future liabilities
(including trade payables) of the Company's
subsidiaries that are not Subsidiary Guarantors.
The Exchange Notes will rank pari passu in right of
payment with all other senior subordinated
obligations of the Company and will rank senior in
right of payment to all other subordinated
obligations of the Company. As of June 30, 1998,
the Company and its subsidiaries had an aggregate
of approximately $7.2 million of Senior
Indebtedness outstanding (excluding unused
commitments of $95.2 million available under the
New Credit Facility), which ranked senior to the
Notes and subsidiaries of the Company that are not
Subsidiary Guarantors had approximately $7.4
million of other outstanding liabilities to which
the Notes would have been effectively subordinated.
The Company has obtained a New Credit Facility
which has replaced the Prior Credit Facility and
provides for borrowings of up to $100.0 million.
Indebtedness under the New Credit Facility
constitutes Senior Indebtedness. See "Risk
Factors--Subordination of Exchange Notes;
Structural Subordination; Asset Encumbrance" and
"Description of Credit Facility."
Guarantees................
The Notes are unconditionally guaranteed on a
senior subordinated basis by certain of the
Company's subsidiaries (the "Subsidiary
Guarantors"). The Guarantees are general unsecured
obligations of the Subsidiary Guarantors and are
subordinated in right of payment to all existing
and future Guarantor Senior Indebtedness (as
defined). The Guarantees rank pari passu in right
of payment with all future senior subordinated
indebtedness of the Subsidiary Guarantors and will
rank senior in right of payment to all other
subordinated obligations of the Subsidiary
Guarantors. As of June 30, 1998, the Subsidiary
Guarantors had an aggregate of approximately $7.2
million of Guarantor Senior Indebtedness (excluding
unused commitments under the New Credit Facility of
$95.2 million) which would have ranked senior to
the Guarantees. See "Risk Factors--Subordination of
Exchange Notes; Structural Subordination; Asset
Encumbrance," "--Suretyship Defenses" and "--
Fraudulent Conveyance Risks."
Certain Covenants......... The indenture governing the Notes (the "Indenture")
contains certain covenants with respect to the
Company and its subsidiaries that restrict, among
other things: (i) the incurrence of additional
indebtedness; (ii) the payment of dividends and
other restricted payments; (iii) the
10
creation of certain liens; (iv) the use of proceeds
from sales of assets and subsidiary stock; (v) sale
and leaseback transactions; and (vi) transactions
with affiliates. The Indenture also restricts the
Company's ability to consolidate or merge with or
into, or to transfer all or substantially all of
its assets to, another person. In addition, under
certain circumstances, the Company will be required
to offer to purchase the Notes, in whole or in
part, at a purchase price equal to 100% of the
principal amount thereof plus accrued interest to
the date of repurchase, with the proceeds of
certain Asset Sales. These restrictions and
requirements are subject to a number of important
qualifications and exceptions. See "Description of
Exchange Notes--Certain Covenants."
For additional information regarding the Notes, see "Description of Exchange
Notes."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Private Notes in like
principal amount, the form and terms of which are the same as the form and
terms of the Exchange Notes (which replace the Private Notes), except as
otherwise described herein. The Private Notes surrendered in exchange for the
Exchange Notes will be canceled and cannot be reissued.
Net proceeds from the Initial Offering totalled approximately $95.2 million.
Of such amount, approximately $55.6 million has been used to repay certain bank
indebtedness and loans made to the Company by certain of its shareholders. The
remainder of the net proceeds will be used to finance acquisitions of dialysis
facilities and extracorporeal service providers and for working capital and
general corporate purposes. Pending such uses, such proceeds have been invested
in short-term interest-bearing securities. See "Use of Proceeds."
RISK FACTORS
Holders of Private Notes should carefully consider the specific factors set
forth under "Risk Factors" as well as the other information and data included
in this Prospectus.
11
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
PREDECESSOR THE COMPANY
----------- --------------------------------------
FISCAL YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------------ ------------------
1995(1) 1996(2) 1997(2) 1997(2) 1998(3)
----------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Net revenues.............. $ 47,276 $ 83,171 $113,808 $ 82,080 $108,229
Income from operations.... 1,220 4,899 11,387 8,016 10,383
Interest expense, net..... (368) (276) (2,149) (1,502) (3,628)
Minority interests in
(earnings) loss.......... -- (810) (1,601) (1,164) 319
Gain on curtailment of
pension benefits......... -- 3,044 -- -- --
Other income, net......... -- 39 279 -- --
-------- -------- -------- -------- --------
Income before income
taxes.................... 852 6,896 7,916 5,350 7,074
Net income................ 527 4,096 4,227 2,705 3,063
BALANCE SHEET DATA:
Working capital........... $ 6,911 $ 8,514 $ 20,695 $ 23,325 $ 64,722
Total assets.............. 20,937 64,711 102,208 93,542 197,942
Long-term liabilities..... 5,146 23,366 51,632 43,553 115,050
Stockholders' equity...... 7,434 28,873 32,999 31,567 57,633
OUTPATIENT DIALYSIS
OPERATING DATA:
Hemo Patients(4).......... 2,619 2,744 3,693 3,409 4,395
Home Patients(4).......... 459 1,035 1,009 1,027 943
Hemo Treatments(5)........ 295,448 343,499 442,165 317,913 414,432
Home Treatments(5)........ 62,912 139,388 144,344 107,269 100,377
Outpatient facilities(6).. 22 48 59 56 65
Same-market net revenue
growth(7)................ 10.9% 9.1% 10.5% 4.0% 16.2%
CONTRACT SERVICES OPERATING
DATA:
Contract Services
hospitals(8)............. -- -- 95 87 102
OTHER FINANCIAL DATA:
Historical EBITDA(9)...... $ 2,846 $ 8,266 $ 15,817 $ 11,036 $ 16,843
Historical EBITDA
margin(10)............... 6.0% 9.9% 13.9% 13.4% 15.6%
Capital expenditures...... $ 1,581 $ 1,442 $ 7,757 $ 5,446 $ 10,270
Ratio of earnings to fixed
charges(11).............. 1.7x 4.6x 2.9x 2.8x 2.2x
Pro forma ratio of
earnings to fixed
charges(12).............. 1.2x 1.5x
Cash flow from operating
activities............... 3,891 6,195 1,751 (2,070) 3,762
Cash flow from investing
activities............... (1,200) (12,912) (17,570) (18,039) (25,962)
Cash flow from financing
activities............... (2,691) 6,717 18,276 21,876 66,071
- --------
(footnotes on next page)
12
- --------
(1) Reflects the operations and financial condition of WSKC as of and for the
year ended September 30, 1995.
(2) Reflects the operations and financial condition of Peak for such periods.
(3) Reflects the operations and financial condition of Everest Healthcare
Services Corporation.
(4) Reflects the number of ESRD patients receiving treatments at the Company's
wholly-owned, majority-owned, minority-owned and managed outpatient
chronic dialysis facilities, as well as ESRD patients performing home
dialysis treatments who are monitored by such facilities.
(5) Includes all hemodialysis treatments at the Company's wholly-owned,
majority-owned, minority-owned and managed outpatient chronic dialysis
facilities and all home dialysis treatments of patients monitored by such
facilities.
(6) Reflects the Company's wholly-owned, majority-owned, minority-owned and
managed outpatient chronic dialysis facilities at period end.
(7) Reflects the growth in the Company's net revenues from chronic dialysis
markets that have been served by the Company for at least two consecutive
periods.
(8) Reflects the number of hospitals at which the Company provided Contract
Services at period end.
(9) Represents income before income taxes, interest expense, depreciation and
amortization and gain on curtailment of pension benefits. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles. EBITDA is not intended to represent cash flow from
operations and should not be considered as an alternative to income from
operations or net income computed in accordance with generally accepted
accounting principles, as an indicator of the Company's operating
performance, as an alternative to cash flow from operating activities or
as a measure of liquidity. The Company believes that EBITDA is a standard
measure of liquidity commonly reported and widely used by analysts,
investors and other interested parties in the financial markets. In
addition, the Company believes that EBITDA is relevant and useful to
prospective holders of Exchange Notes because it is a widely accepted
indicator of a company's ability to incur and service indebtedness.
However, not all companies calculate EBITDA using the same method and the
EBITDA numbers set forth above may not be comparable to EBITDA reported by
other companies. The components of EBITDA are as follows:
FISCAL YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
----------------------- ---------------
1995 1996 1997 1997 1998
------ ------- ------- ------- -------
Net income.......................... $ 527 $ 4,096 $ 4,227 $ 2,705 $ 3,063
Income taxes........................ 325 2,800 3,689 2,645 3,904
Interest expense.................... 723 1,013 2,962 2,221 4,943
Depreciation and amortization....... 1,271 3,401 4,939 3,465 4,933
Gain on curtailment of pension
benefits........................... -- (3,044) -- -- --
------ ------- ------- ------- -------
EBITDA.............................. $2,846 $ 8,266 $15,817 $11,036 $16,843
====== ======= ======= ======= =======
(10) Represents the ratio of historical EBITDA to net revenues.
(11) For purposes of computing this ratio, earnings consist of income before
income taxes and fixed charges. Fixed charges consist of interest expense
and the portion of operating lease rental expense that is representative
of interest.
(12) Represents the historical ratio described in Note 11 as adjusted for the
consummation of the Initial Offering and the application of the net
proceeds therefrom. Assumes repayment of $48.4 million of indebtedness
under the Prior Credit Facility bearing interest at a weighted average
rate of 8.99% and repayment of $7.2 million of other indebtedness bearing
interest at a weighted average rate of 9.5% and does not assume any
investment return on the remaining net proceeds of the Initial Offering.
13
RISK FACTORS
Holders of Private Notes should consider carefully the following factors, in
addition to the other information contained in this Prospectus, before
tendering their Private Notes for Exchange Notes.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
For the fiscal year ended September 30, 1997, Everest derived approximately
57.5% of its net revenues from Medicare, approximately 8.5% from Medicaid (or
comparable state benefits) and approximately 34.0% from other third-party
payors. Everest is reimbursed for dialysis services primarily at fixed rates
established in advance under the Medicare End-Stage Renal Disease Program.
Under this program, once a patient becomes eligible for Medicare
reimbursement, Medicare is responsible for payment of 80% of the composite
rates determined by HCFA for dialysis treatments. All of the states in which
the Company currently operates dialysis centers provide Medicaid or comparable
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, all of which may have the effect of decreasing program
payments, increasing costs or modifying the way Everest operates its dialysis
business. Everest is unable to predict whether certain services, as to which
Everest is currently separately reimbursed, may in the future be included in
the Medicare composite rate for dialysis. Any future action by the federal
government, or by state governments, limiting or reducing the total amount of
funds available for such programs could lower the amount of reimbursement
available to Everest. Congress considers action in almost every legislative
session to modify the Medicare program's reimbursement to health care
providers. Changes in the reimbursement under such programs could mean either
or both of reduced reimbursement rates or the inclusion of certain ancillary
services, for which Everest currently is separately reimbursed, in Everest's
Medicare composite rate, either of which could have a material adverse effect
on the Company. Increases in operating costs that are subject to inflation,
such as labor and supply costs, without a compensating increase in prescribed
rates, could adversely affect Everest's operating results and financial
condition. Everest believes that if Medicare reimbursement for dialysis
treatment is reduced in the future, private payors may be required to assume a
greater percentage of the costs of dialysis care and, as a result, may focus
on reducing dialysis payments as their overall costs increase. Everest's
private payors include traditional indemnity insurers, managed care companies,
hospitals and other non-government payors which currently pay at rates that
generally exceed the Medicare and Medicaid rates. Everest believes that third-
party payors have a strong incentive to reduce further the costs of specialty
care and may seek to reduce amounts paid for dialysis treatments. Everest
believes that the historically higher rates of reimbursement paid by non-
governmental payors may not be maintained at such levels. Any reduction in the
rates paid by private insurers, managed care companies, hospitals and other
non-governmental payors could have a material adverse effect on Everest's
operating results and financial condition.
RISKS INHERENT IN GROWTH STRATEGY
Everest's future growth will depend, in large part, on the acquisition of
dialysis and extracorporeal service providers and the development of new
dialysis facilities. The success of Everest's acquisition program will be
determined by a number of factors including Everest's ability to identify
suitable acquisitions, consummate such acquisitions on acceptable terms,
operate such acquisitions profitably and successfully integrate such
acquisitions without substantial costs, delays or other problems. There can be
no assurance that Everest will be successful in effecting acquisitions or, if
effected, that Everest can successfully integrate such acquisitions into the
Company's business or operate such acquisitions profitably. The ability of
Everest to develop new dialysis facilities is influenced by a number of
factors including the identification of suitable markets, the hiring and
training of key personnel, including medical directors, for each facility, and
the ability of Everest to operate such facilities profitably. De novo
facilities typically incur initial operating losses, and there can be no
assurance that such facilities will become profitable. In addition, the
development of dialysis facilities requires a substantial investment in
working capital which may adversely affect the financial condition and results
of operations of Everest. See "Business--Strategy." The Company may be
required to obtain licenses, certificates or approvals, or to comply with
other regulatory requirements, in order to consummate certain acquisitions or
develop de novo
14
facilities. Everest may experience delays or difficulties in obtaining
required licenses, certificates or approvals, which could have a material
adverse effect on the Company. See "--Extensive Government Regulation."
Any future growth can be expected to place significant additional demands on
the Company's management, operations, employees, systems and resources.
Although Everest's subsidiaries and predecessors have been operating since as
early as 1968, Everest has a limited operating history as a parent company
responsible for the strategic management of a number of subsidiaries. There
can be no assurance that Everest will be successful in managing its current
facilities or integrating and operating new facilities. Further, Everest will
continue to implement certain information and operating systems in order to
better manage the operations of its various facilities. Everest may experience
delays, complications and expenses in implementing, integrating and operating
these systems, any of which could have a material adverse effect on Everest's
operating and financial results. While the Company believes that the systems
it will implement will be adequate for its current needs, further expansion or
technological development could require subsequent modifications, improvements
or replacements to such systems. Such modifications, improvements or
replacements could require substantial expenditures and could interrupt
operations during periods of implementation, which could have a material
adverse effect on Everest's operating and financial results.
EXTENSIVE GOVERNMENT REGULATION
The Company is subject to extensive federal, state and local regulation
regarding, among other things, fraud and abuse; self-referral; licensure and
other regulatory restrictions and approvals; the rate of, and accurate billing
and reporting for, governmental and other third-party reimbursement; health
and safety; and environmental compliance and hazardous waste disposal. Much of
this regulation, particularly in the areas of fraud and abuse and self-
referral, is complex and open to differing interpretations. There are two
general frameworks under which patient referrals are regulated. First, the
illegal remuneration provisions of the Social Security Act make it illegal for
any person to, among other things, solicit, offer, receive or pay any
remuneration in exchange for referring, recommending or inducing the referral
of, a patient for treatment which may be paid for by Medicare, Medicaid or
other federal health benefit programs. Second, certain provisions contained in
the Omnibus Budget Reconciliation Act of 1989 and the Omnibus Budget
Reconciliation Act of 1993 ("Stark I" and "Stark II," respectively) prohibit
physician referrals for "designated health services" (which do not include
dialysis, but may include items or services provided by the Company that are
components of, or ancillary to, dialysis) to entities with which a physician
or an immediate family member has a "financial relationship." These laws
contain certain statutory exceptions, and federal agencies have promulgated
regulations clarifying certain of these provisions and exceptions and creating
certain additional exceptions, or "safe harbors," from such prohibitions. Many
states have enacted similar provisions of law, which may not have identical
prohibitions or exceptions, and which may apply regardless of whether Medicare
or Medicaid funds are involved. Due to the breadth of the statutory provisions
and the absence in many instances of adopted regulations or court decisions
addressing the specific arrangements by which the Company conducts its
business, it is possible that some of the Company's practices might be
challenged under these laws. Violations of the federal laws are punishable by
civil sanctions, which can include civil monetary penalties and
disqualification from participation in Medicare, Medicaid or other federal
health benefit programs, and, in the case of the federal illegal remuneration
provisions, criminal sanctions. In recent years, the federal government's
enforcement powers have been strengthened by legislation 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. There can be no assurance that the Company's
practices will not be challenged by governmental authorities, or that the
Company will not be subject to sanctions under applicable laws or be required
to alter or discontinue certain of its practices. In addition, there can be no
assurance that if the Company is required to alter its practices, it will be
able to do so successfully. The occurrence of any of these events may result
in a material adverse effect on the Company's business, results of operation
and financial condition. See "Business--Regulatory Matters."
In recent years, numerous legislative proposals have been introduced or
proposed in the U.S. Congress and in some state legislatures that would effect
major changes in the U.S. health care system at both the state and
15
federal levels. There can be no assurance that currently proposed or future
health care programs will not have a material adverse effect on Everest's
business, results of operation and financial condition. Concern about the
potential effects of the proposed reform measures has contributed to the
volatility of prices of securities of companies in the health care and related
industries and may similarly affect the price of the Notes in the future.
As the managed care environment and related legislation evolve, the Company
may be forced to revise its current operations, structure and/or practices to
remain competitive. The Company's ability to do so may be severely restricted
by state laws prohibiting the corporate practice of medicine and fee splitting
as well as laws regulating insurance companies and HMOs. As a result of such
restrictions, the Company may be unable to adapt or respond to a changing
environment as needed. Even if the Company is successful in restructuring its
operations as needed, it could be subject to increased regulatory oversight.
Either of such occurrences could have a material adverse effect on the
Company's business, results of operations and financial condition.
The ownership and operation of dialysis centers in many states may require a
"Certificate of Need" by state health planning boards in order to establish or
acquire a dialysis facility. If such Certificates of Need are required, there
is no assurance that the Company will be able to obtain and/or maintain such
Certificates of Need for any period of time. Any inability to obtain such
Certificates of Need or other material required licenses, certifications or
other approvals, or significant delays in obtaining such items, loss of any
significant licenses and certifications required to operate, or termination of
the Company's authorization to participate in the Medicare or Medicaid
programs could have a material adverse effect on the Company's business,
results of operations or financial condition. See "Business--Regulatory
Matters."
DEPENDENCE ON PHYSICIAN REFERRALS AND OTHER RELATIONSHIPS
Everest's dialysis facilities are dependent upon patient referrals by
nephrologists and other physicians practicing in the communities served by
Everest's facilities. At most facilities, one or a few physicians account for
all or a significant portion of the patient referral base. Loss of one or more
key referring physicians at a particular facility could have a material
adverse effect on the operations of that facility and could adversely affect
Everest's operations and financial results. Financial relationships with
physicians and other referral sources are highly regulated, and provisions of
the Social Security Act and similar state laws prohibit contracts or payments
for referrals. See "--Extensive Government Regulation" and "Business--
Regulatory Matters." Everest's Contract Services business is heavily dependent
upon the Company's relationships with perfusionists, physicians and the
hospitals with which Everest contracts. Competition for perfusionists is high
and there is no assurance that Everest's perfusionists will remain in the
employment of Everest or that, upon termination of their employment, qualified
replacements will be found. Additionally, Everest's contracts to provide
perfusion or other services are typically terminable on relatively short
notice, and there is no assurance that any such contract will not be
terminated, or that the termination of any such contract would not have a
material adverse effect on the Company's business, results of operations or
financial condition.
COMPETITION
The health care industry, in general, and the dialysis industry, in
particular, are highly competitive. The dialysis industry is especially
competitive in the acquisition of existing dialysis facilities and development
of relationships with referring physicians, and competition for acquisitions
has increased the cost of acquiring existing dialysis facilities. The Contract
Services industry is also highly competitive, especially in the competition
for hospital contracts and the acquisition of Contract Services providers.
Many of Everest's competitors have substantially greater financial resources
and more established operations and infrastructure than Everest. Several
dialysis competitors are vertically integrated in that they sell dialyzers and
own laboratories, and such competitors may have a cost advantage over the
Company. In addition, Everest may face competition from referring physicians
who open their own facilities, national and regional providers of physician
practice management services and hospitals and hospital-sponsored management
service organizations. Everest believes that its future success in both the
dialysis and Contract Services businesses will be significantly dependent on
its
16
ability to attract and retain skilled employees, including qualified medical
directors, nurses, dietitians, social workers and perfusionists, for whom
competition is intense. There can be no assurance that Everest will be able to
compete effectively with its competitors for business, acquisitions or
employees or that such competition will not have a material adverse effect on
the Company's business, results of operations or financial condition.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company is dependent upon the services of certain key executive
officers. The Company's growth and future success will significantly depend
upon its ability to attract and retain skilled employees, for whom competition
is intense. See "--Competition." The Company believes that its future success
will also depend on its ability to attract and retain qualified physicians to
serve as medical directors of its dialysis centers. The loss by the Company of
any of its executive officers or the inability to attract and retain qualified
personnel could have a material adverse effect on the Company's business,
results of operations or financial condition. See "Management."
CONCENTRATION OF OWNERSHIP; POTENTIAL CONFLICTS OF INTEREST
Everest's officers and directors beneficially own approximately 80% of the
common stock of Everest. These stockholders have agreed to act together on
certain matters, and thus are able to control the election of the Board of
Directors and the outcome of other corporate actions requiring stockholder
approval. See "Certain Relationships and Related Transactions--Shareholders
Agreements." In addition, physician members of the Company's Board of
Directors and of management collectively own a medical corporation, which has
entered into a management and administrative services agreement (the
"Administrative Services Agreement") with Everest. Under the terms of the
Administrative Services Agreement, the medical corporation provides medical
director and other services to the Company in exchange for a specified annual
fee plus incentive compensation. The outside interests of these directors and
officers may give rise to certain conflicts of interest concerning the
fulfillment of their responsibilities to the Company. See "Certain
Relationships and Related Transactions--NANI-IL and NANI-IN."
EPO REIMBURSEMENT AND SUPPLY
Since June 1, 1989, the Medicare ESRD program has provided reimbursement for
the administration to dialysis patients of EPO. EPO is beneficial in the
treatment of anemia, a medical complication frequently experienced by dialysis
patients. Any reduction in EPO reimbursement could materially adversely affect
Everest's business, results of operations or financial condition. Medicare
reimbursement for EPO was reduced from $11.00 to $10.00 per 1,000 units for
services rendered after December 31, 1993. President Clinton's proposed fiscal
year 1999 budget contains a further reduction in reimbursement for EPO from
$10.00 to $9.00 per 1,000 units administered. EPO is produced by a single
manufacturer, and any interruption of supply or increase in product cost could
materially adversely affect Everest's business, results of operations or
financial condition. See "Business--Sources of Revenue Reimbursement--Medicare
Reimbursement."
LIABILITY EXPOSURE
Everest is involved in the delivery of health care services and,
consequently, is exposed to the risk of professional liability claims. Everest
may also become subject to claims, suits, or complaints relating to services
and products. Although Everest maintains insurance with such coverage as it
deems adequate, there can be no assurance that any claims asserted against
Everest will be covered by insurance, or if covered, will not exceed the
limits of insurance coverage maintained by Everest, or that such coverage will
continue to be available at an acceptable cost, if at all. A successful claim
in excess of the limits of the Company's insurance coverage could have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Business--Legal Proceedings."
17
YEAR 2000 COMPLIANCE BY THE COMPANY AND OTHERS
Year 2000 compliance concerns the ability of certain computerized
information systems to properly recognize date-sensitive information, such as
invoices for the Company's services, as the year 2000 approaches. Systems that
do not recognize such information could generate erroneous data or cause
systems to fail; this problem may occur as early as calendar year 1999. The
Company is at risk both for its own Year 2000 compliance and for the Year 2000
compliance of those with whom it does business, primarily third-party payors.
The Company has established a Year 2000 Task Force to study and address Year
2000 issues. The Task Force currently consists of Karen Gramigna-Warren,
Director of Technology and Chief Information Officer; Donna Raasch, Director
of Facilities; Brian Green, Director of Bio-Med; and Judy Almdale, Director of
Physician Practices. The Company also is planning to hire an employee to
devote his or her full time and attention to Year 2000 issues. The Year 2000
Group of PricewaterhouseCoopers Consultants has also been retained as an
advisor for Year 2000 issues.
The Task Force has formulated and begun to implement a plan with six stages,
as follows: (i) awareness, (ii) inventory, (iii) impact analysis, (iv)
remediation, (v) testing and (vi) implementation. Phases (i) and (ii) are
currently in progress; the Company's goal is to complete all phases and be
Year 2000 compliant by June 30, 1999.
The Company has five major information technology systems, the present
compliance of which is described below:
1. Client tracking system. This system is Year 2000 compliant, but the
Company may replace it in 1999 for unrelated reasons.
2. Accounting package. The existing accounting package is not Year 2000
compliant. The Company will either upgrade within the next few months to a
new version that is compliant or may replace this system altogether.
3. Interim accounting package for Contract Services. This package is Year
2000 compliant. It is intended, however, that this function will be merged
into the basic accounting package once a new package is obtained.
4. Physician billing. The Company has purchased and is installing a new
system that is Year 2000 compliant. It is expected that the new system will
be on-line in about a month.
5. Facilities billing. This system is not yet Year 2000 compliant. It has
been analyzed, and arrangements are being made with the vendor to upgrade
the system.
These systems would have been upgraded or replaced to support Company growth
irrespective of the Year 2000 issue. The process of upgrading or replacing
these systems was not accelerated by Year 2000 considerations.
The Company has not yet made a full review of the Year 2000 compliance of
its non-information technology systems (i.e., embedded technology such as
micro-controllers). The Task Force anticipates undertaking such a review.
Management believes that the most significant risk to the Company of Year
2000 issues is the effect such issues may have on third-party payors, such as
Medicare. News reports have indicated that various agencies of the federal
government may have difficulty becoming fully Year 2000 compliant before the
year 2000. The Company has not yet undertaken to quantify the effects of such
noncompliance or to determine whether such a quantification is even possible.
A consideration of worst case scenarios and contingency plans to deal with
those scenarios have not yet been undertaken by the Task Force.
There can be no assurance that Year 2000 issues will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
18
LEVERAGED FINANCIAL POSITION
Upon consummation of the Initial Offering, the Company became highly
leveraged. As of June 30, 1998, the Company's consolidated indebtedness was
$114.2 million (exclusive of commitments of $95.2 million available for
borrowing under the New Credit Facility), which represented approximately
66.5% of its total capitalization. The Company has obtained the New Credit
Facility, which replaced the Prior Credit Facility and provides for borrowings
of up to $100.0 million. Indebtedness under the New Credit Facility
constitutes Senior Indebtedness. The Company may incur additional indebtedness
in the future, including Senior Indebtedness, subject to limitations imposed
by the Indenture and the Credit Facility. The level of the Company's
indebtedness could have important consequences to the holders of the Notes,
including: (i) a substantial portion of the Company's cash flow from
operations must be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional debt financing
in the future for working capital, capital expenditures or acquisitions may be
limited; and (iii) the Company's level of indebtedness could limit its
flexibility in reacting to changes in the industry and economic conditions
generally. Certain of the Company's competitors may currently operate on a
less leveraged basis and therefore could have significantly greater operating
and financing flexibility than the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Credit Facility."
ABILITY TO SERVICE THE NOTES AND OTHER DEBT
Upon the issuance of the Private Notes, the Company's interest expense
increased compared to prior years. The Company believes, based on current
circumstances, that the Company's cash flow, together with available
borrowings under the Credit Facility, will be sufficient to permit the Company
to meet its operating expenses and to service its debt requirements as they
become due for the foreseeable future. This belief assumes, among other
things, that the Company will succeed in implementing its business strategy
and that there will be no material adverse developments in the business,
liquidity or capital requirements of the Company. However, if the Company is
unable to generate sufficient cash flow from operations to service its
indebtedness, it will be forced to adopt an alternate strategy that may
include actions such as reducing or delaying acquisitions and capital
expenditures, selling assets, restructuring or refinancing its indebtedness,
or seeking equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all. If the Company
were unable to repay its debt as it becomes due, the holders of the Notes
could lose some or all of their investment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture imposes certain limitations on the ability of the Company to,
among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur liens, merge or consolidate or
sell all or substantially all of its assets. If the Company fails to comply
with these covenants, it would be in default under the Indenture and the
principal and accrued interest on the Notes would become due and payable. In
addition, the Credit Facility contains other and more restrictive covenants,
and prohibits the Company from prepaying certain indebtedness, including the
Notes. The Credit Facility also requires the Company to maintain specified
financial ratios and satisfy certain financial condition and operating tests.
The Company's ability to meet those financial ratios and tests may be affected
by events beyond its control and there can be no assurance that the Company
will meet those tests. A breach of any of these covenants could result in a
default under the Credit Facility. If an event of default were to occur under
the Credit Facility, the lenders could declare all principal and interest
immediately payable thereunder and, if the Company were unable to repay such
amounts, the lenders could proceed against their collateral. If the Credit
Facility indebtedness were to be accelerated, there can be no assurance that
the assets of the Company would be sufficient to repay in full that
indebtedness and the other indebtedness of the Company, including the Notes.
Substantially all of the assets of the Company and its majority-owned
subsidiaries are
19
pledged as security under the Credit Facility. In addition, a default under
the Credit Facility or the instruments governing the Company's or its
subsidiaries' other indebtedness could constitute a cross-default under the
Indenture and any instruments governing the Company's or its subsidiaries'
other indebtedness, and default under the Indenture could constitute a cross-
default under the Credit Facility or the instruments governing the Company's
or its subsidiaries' other indebtedness. See "Description of Credit Facility,"
"Description of Exchange Notes--Certain Covenants" and "--Events of Default."
SUBORDINATION OF EXCHANGE NOTES; STRUCTURAL SUBORDINATION; ASSET ENCUMBRANCE
The Exchange Notes will be subordinated in right of payment to all Senior
Indebtedness, including Senior Indebtedness incurred after the date of the
Indenture. At June 30, 1998, the Company and its Subsidiaries had an aggregate
of approximately $7.2 million of Senior Indebtedness outstanding, and the
Company had available $95.2 million for borrowings under the New Credit
Facility, which ranked senior to the Notes. Indebtedness under the New Credit
Facility constitutes Senior Indebtedness. The Indenture permits the Company to
incur Senior Indebtedness under the Credit Facility as well as additional
Senior Indebtedness (provided certain financial or other conditions are met).
Certain of the Company's subsidiaries have guaranteed the obligations of the
Company under the Indenture and the Notes, but such guarantees will be
subordinated to all Senior Indebtedness of such Subsidiary Guarantors, which
will include the guarantees of the Company's indebtedness under the Credit
Facility. See "--Reliance on Payments from Subsidiaries" and "--Suretyship
Defenses."
The Exchange Notes will also be effectively subordinated to the obligations
(including trade payables) of the Company's subsidiaries that are not
Subsidiary Guarantors. All of the Company's existing wholly-owned subsidiaries
are Subsidiary Guarantors; these entities collectively own and operate 33 of
the Company's dialysis centers. However, none of the less than wholly-owned
subsidiaries of the Company (including the subsidiaries which conduct the
Contract Services business) are Subsidiary Guarantors. At June 30, 1998, the
liabilities of the Company's subsidiaries that are not Subsidiary Guarantors
totaled approximately $7.4 million (excluding subsidiary guarantees under the
New Credit Facility). As of June 30, 1998, the Company's subsidiaries that are
not Subsidiary Guarantors had total assets of $21.7 million and stockholders'
equity of $7.3 million. For the year ended September 30, 1997 and the nine
months ended June 30, 1998, such subsidiaries had combined net revenues of
$19.1 million and $20.4 million, respectively, and combined net income of
$631,000 and $454,000, respectively. Except to the extent that the Company may
itself be a creditor with recognized claims against such subsidiaries, claims
of creditors of such subsidiaries will have priority with respect to the
assets and earnings of such subsidiaries over the claim of creditors of the
Company, including claims under the Exchange Notes.
The Company may not pay principal of, premium (if any) on, or interest on,
the Notes, or repurchase, redeem, defease or otherwise retire any Notes (i) if
any Senior Indebtedness is not paid when due or (ii) if any other default on
Designated Senior Indebtedness occurs that permits the holders of such
Designated Senior Indebtedness to accelerate maturity of such Designated
Senior Indebtedness, in accordance with its terms, and the Trustee receives a
notice of default unless, in either case, the default has been cured or
waived, any such acceleration has been rescinded or such Designated Senior
Indebtedness has been paid in full or, in the case of any default other than a
payment default, 179 days have passed since the default notice was given. See
"Description of Exchange Notes--Subordination." Upon any payment or
distribution of the assets of the Company or any Subsidiary Guarantor in
connection with a total or partial liquidation or dissolution or
reorganization of or similar proceeding relating to the Company or such
Subsidiary Guarantor, the holders of Senior Indebtedness will be entitled to
receive payment in full before the holders of the Notes are entitled to
receive any payment. See "Description of Exchange Notes--Subordination." The
Notes are also unsecured and thus, in effect, will rank junior to any secured
indebtedness of the Company or the Subsidiary Guarantors. The indebtedness and
guarantees outstanding under the Credit Facility are secured by liens upon
substantially all assets, including all receivables, inventory and general
intangibles and equipment of the Company and its majority-owned subsidiaries.
See "Description of Credit Facility."
RELIANCE ON PAYMENTS FROM SUBSIDIARIES
The Company conducts all of the operations of its businesses through its
subsidiaries. Therefore, the Company relies primarily upon payment from its
subsidiaries for the funds necessary to meet its obligations,
20
including the payment of interest on the Notes. The ability of the
subsidiaries to make such payments will be subject to, among other things,
applicable laws. The Company's subsidiaries are separate and distinct legal
entities and, except for those subsidiaries that are Subsidiary Guarantors,
have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Notes or to make funds available therefor, whether in the form of
loans, dividends or otherwise. The Company's subsidiaries are obligors with
respect to substantial indebtedness, including in their capacity as guarantors
under the Credit Facility, and the capital stock of such subsidiaries is
pledged to secure amounts borrowed under the Credit Facility. Moreover,
although the Credit Facility generally permits subsidiaries to pay dividends
in amounts sufficient to pay interest on the Notes, the payment of dividends
to the Company by its subsidiaries is contingent upon the earnings of those
subsidiaries and approval of those subsidiaries. Claims of creditors of the
Company's subsidiaries generally have priority as to the assets of such
subsidiaries over the claims of the Company.
SURETYSHIP DEFENSES
Although the Guarantees provide the holders of the Notes with a direct claim
against the assets of the Subsidiary Guarantors, enforcement of the Guarantees
against any Subsidiary Guarantor would be subject to certain "suretyship"
defenses available to guarantors generally, and such enforcement would also be
subject to certain defenses available to the Subsidiary Guarantors in certain
circumstances. See "--Fraudulent Conveyance Risks." Although the Indenture
contains waivers of most "suretyship" defenses, there can be no assurance that
those waivers would be enforced by a court in a particular case. To the extent
that the Guarantees are not enforceable, the Notes and Guarantees would be
effectively subordinated to all liabilities of the Subsidiary Guarantors,
including trade payables of such Subsidiary Guarantors, whether or not such
liabilities otherwise constitute Guarantor Senior Indebtedness under the
Indenture. In addition, certain of the Company's subsidiaries are not
Subsidiary Guarantors, and the Notes will be effectively subordinated to all
liabilities of such subsidiaries, including trade payables.
FRAUDULENT CONVEYANCE RISKS
If the court in a lawsuit brought by an unpaid creditor or representatives
of creditors, such as a trustee in bankruptcy or the Company or any Subsidiary
Guarantor as a debtor-in-possession, were to find under relevant federal and
state fraudulent conveyance statutes that the Company or any Subsidiary
Guarantor did not receive fair consideration or reasonably equivalent value
for incurring the indebtedness represented by the Notes or its Guarantee and
that, at the time of such incurrence, the Company or such Subsidiary
Guarantor: (i) was insolvent; (ii) was rendered insolvent by reason of such
incurrence; (iii) was engaged in a business or transaction for which the
assets remaining with the Company or such Subsidiary Guarantor constituted
unreasonably small capital; or (iv) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured; such
court, subject to applicable statutes of limitation, could avoid the Company's
obligations under the Notes, or the Subsidiary Guarantor's obligations under
the Guarantee, subordinate the Notes or the Guarantee to the other
indebtedness of the Company or such Subsidiary Guarantor, or take other action
detrimental to the holders of the Notes. The measure of insolvency used by a
court will vary depending upon the law of the jurisdiction being applied.
Generally, however, a company will be considered insolvent for these purposes
if, at the time it incurs the indebtedness constituting the Notes, either (i)
the fair market value (or fair salable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute and
matured or (ii) it is incurring debts beyond its ability to pay such debts as
they mature.
The Company believes that it will receive fair consideration and reasonably
equivalent value for the Notes and that at the time of, and after giving
effect to, the incurrence of the indebtedness and obligations evidenced by the
Notes, the Company and the Subsidiary Guarantors (i) will (A) neither be
insolvent nor rendered insolvent thereby, (B) have sufficient capital to
operate their business effectively and (C) be incurring debts within their
ability to pay as the same mature or become due and (ii) will have sufficient
resources to satisfy any probable money judgment against them in any pending
action. In reaching the foregoing conclusions, the Company has relied upon its
analysis of internal cash flow projections and estimated values of assets and
liabilities of the
21
Company. There can be no assurance, however, that such analysis will prove to
be correct or that a court passing on such questions would reach the same
conclusions.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings are initiated by or against
the Company or any Subsidiary Guarantor within 90 days (or a longer period if
the holder of the Notes was deemed to be an "insider") after any payment by
the Company or any Subsidiary Guarantor with respect to the Notes or the
Guarantees or if the Company or any Subsidiary Guarantor anticipated becoming
insolvent at the time of such payment, all or a portion of such payment could
be avoided as a preferential transfer and the recipient of such payment could
be required to return such payment.
ABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase its Notes at 101% of the
principal amount thereof plus accrued and unpaid interest outstanding, if any,
to the date of repurchase. A Change of Control will likely trigger an event of
default under the Credit Facility which would permit the lenders thereto to
accelerate the debt under the Credit Facility. However, there can be no
assurance that sufficient funds will be available at the time of any Change of
Control to make any required repurchases of Notes tendered and to repay debt
under the Credit Facility. In addition, the terms of the Credit Facility
restrict the Company from repurchasing any Notes and also identify certain
events that would constitute a change of control, as well as certain other
events with respect to the Company or certain of its subsidiaries, that would
constitute an event of default under the Credit Facility. See "Description of
Credit Facility." Any future credit agreements or other agreements relating to
other indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Notes, the Company could seek
the consent of its lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such consent or repay such borrowing, the Company would remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the
Indenture, which would, in turn, constitute a further default under certain of
the Company's existing debt agreements and may constitute a default under the
terms of other indebtedness that the Company may enter into from time to time.
In addition, the provisions of the Indenture may not afford holders of Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company that may
adversely affect holders of Notes, if such transaction does not result in a
Change of Control. See "Description of Credit Facility" and "Description of
Exchange Notes--Change of Control."
CONSEQUENCES OF FAILURE TO EXCHANGE PRIVATE NOTES
Holders of Private Notes who do not exchange their Private Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the Private
Notes and the restrictions on transfer of such Private Notes set forth in the
legend thereon as a consequence of the issuance of the Private Notes pursuant
to an exemption from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Private Notes may not be offered or sold unless registered under
the Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register Private Notes under the Securities
Act. See "The Exchange Offer."
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Private Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Private Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Private Notes desiring to tender such Private Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. The Company is
under no duty to give notification of defects or irregularities with respect
to the tenders of Private
22
Notes for exchange. Private Notes that are not tendered or are tendered but
not accepted will, following the consummation of the Exchange Offer, continue
to be subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of
Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Private Notes,
where such Private Notes were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution." To the extent that Private
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Private Notes could be adversely
affected. See "The Exchange Offer."
ABSENCE OF ESTABLISHED TRADING MARKET
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to: (i) the
liquidity of any such market that may develop; (ii) the ability of holders of
Exchange Notes to sell their Exchanges Notes; or (iii) the price at which the
holders of Exchange Notes would be able to sell their Exchange Notes. If such
a market were to exist, the Exchange Notes could trade at prices that may be
higher or lower than their principal amount or purchase price, depending on
many factors, including prevailing interest rates, the market for similar
notes and the financial performance of the Company and its subsidiaries. The
Company has been advised by the Initial Purchaser that it presently intends to
make a market in the Exchange Notes, when issued. However, the Initial
Purchaser is not obligated to do so, and any market-making activity with
respect to the Exchange Notes may be discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Act and the Exchange Act. See "The Exchange Offer." There
can be no assurance that even following registration of the Exchange Notes an
active trading market will exist for the Exchange Notes, or that such trading
market will be liquid.
23
THE COMPANY
The Company is a holding company with 11 wholly-owned direct subsidiaries,
three majority-owned direct subsidiaries and numerous indirect subsidiaries.
The Company was founded in 1968 as a single dialysis facility, West Suburban
Kidney Center, S.C. ("WSKC"), which together with its affiliates grew over the
next 27 years to 21 outpatient dialysis centers in the Midwest and New York
City. In 1995, these affiliated entities were combined to create Everest
Healthcare Services Corporation, a majority of the stock of which was owned by
Peak Healthcare, L.L.C. ("Peak"), which in turn was principally owned by the
original physician owners of WSKC and such affiliated entities (the "Founding
Directors"). In June 1996, the Company acquired Home Dialysis of America, Inc.
("HDA"), which owned or operated 18 outpatient dialysis facilities. In
connection with the acquisition, HDA's former shareholders acquired
approximately 20% of the equity in the Company. In 1996, the Company also
effectively acquired an 80% interest in the combined businesses of three
perfusion companies ("The Extracorporeal Alliance"), which collectively
operated perfusion businesses in seven states. 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. 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, L.L.C., a new limited
liability company ("Peak Liquidating"), which in turn owns approximately 15%
of the equity in the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisitions," Note 3 to the
Consolidated Financial Statements of the Company, Note 7 to the Consolidated
Financial Statements of Peak, "Certain Relationships and Related Transactions"
and "Security Ownership of Certain Beneficial Owners and Management."
The address of the Company is Everest Healthcare Services Corporation, 101
North Scoville, Oak Park, Illinois 60302, and its phone number is (708) 386-
2511.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes contemplated in this
Prospectus, the Company will receive Private Notes in like principal amount,
the form and terms of which are the same as the forms and terms of the
Exchange Notes (which replace the Private Notes), except as otherwise
described herein. The Private Notes surrendered in the exchange for Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase or decrease in
the indebtedness of the Company. As such, no effect has been given to the
Exchange Offer under the heading "Capitalization" herein.
The net proceeds to the Company from the Initial Offering were approximately
$95.2 million, after deducting the Initial Purchaser's discount and estimated
offering expenses. The Company has used approximately $48.4 million of the net
proceeds to repay indebtedness under the Prior Credit Facility that bore
interest at a weighted average rate of 8.99% per annum as of June 30, 1998 and
was to mature in May 2000. Approximately $7.2 million of the net proceeds have
been used to repay loans made to the Company by certain of its shareholders.
Approximately $5.1 million of these loans bore interest at the prime rate plus
1% per annum and matured at various times throughout 1998. Approximately $2.1
million of these loans bore interest at the prime rate plus 1% per annum and
matured on November 29, 2000. The remaining $39.6 million of net proceeds will
be used to finance future acquisitions of dialysis facilities and Contract
Services providers and for working capital and general corporate purposes.
Pending such uses, the net proceeds have been and will be invested in cash and
Cash Equivalents (as defined in the Indenture). See "Risk Factors--
Discretionary Use of Proceeds," "Business--Strategy," "Certain Relationships
and Related Transactions" and "Description of Exchange Notes."
24
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations (the
"Pro Forma Statements") of the Company are based upon the historical audited
and unaudited financial statements of the Company appearing elsewhere in this
Prospectus, as adjusted to illustrate the estimated effects of the purchase of
the minority interests that occurred on November 30, 1997. See "The Company."
The Pro Forma Statements have been prepared to give effect to the purchase of
the minority interests in Everest as if the purchase had been consummated as
of the beginning of the periods being presented. The Pro Forma Statements and
accompanying notes should be read in conjunction with the historical financial
statements of the Company and other information pertaining to the Company and
the purchase of the minority interests appearing elsewhere in this Prospectus.
The Pro Forma Statements do not purport to be indicative of the Company's
results of operations had the acquisition of minority interests been
consummated as of the beginning of the periods indicated or to project the
Company's result of operations for any future date.
25
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
HISTORICAL PRO FORMA
COMPANY ADJUSTMENTS PRO FORMA
------------ ----------- ------------
Net revenues........................ $113,808,296 $113,808,296
Operating expenses:
Patient care costs................ 72,057,929 72,057,929
General and administrative........ 24,710,169 24,710,169
Provision for bad debts........... 714,166 714,166
Depreciation and amortization..... 4,939,481 $ 496,000 (1) 5,435,481
------------ ---------- ------------
Total operating expenses........ 102,421,745 496,000 102,917,745
------------ ---------- ------------
Income from operations.............. 11,386,551 (496,000) 10,890,551
Interest expense.................... (2,961,528) (2,961,528)
Interest income..................... 813,006 813,006
Minority interests in earnings...... (1,600,784) 1,600,784 (2) --
Other income, net................... 278,849 278,849
------------ ---------- ------------
Income before income taxes.......... 7,916,094 1,104,784 9,020,878
Income taxes........................ 3,689,000 3,689,000
------------ ---------- ------------
Net income.......................... $ 4,227,094 $1,104,784 $ 5,331,878
============ ========== ============
See notes to unaudited pro forma consolidated statements of operations.
26
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
HISTORICAL PRO FORMA
COMPANY ADJUSTMENTS PRO FORMA
------------ ----------- ------------
Net revenues......................... $108,228,678 $108,228,678
Operating expenses:
Patient care costs................. 69,177,377 69,177,377
General and administrative......... 20,212,748 20,212,748
Provision for bad debts............ 3,522,636 3,522,636
Depreciation and amortization...... 4,933,199 $ 82,666 (1) 5,015,865
------------ -------- ------------
Total operating expenses......... 97,845,960 82,666 97,928,626
------------ -------- ------------
Income from operations............... 10,382,718 (82,666) 10,300,052
Interest expense..................... (4,942,446) (4,942,446)
Interest income...................... 1,314,314 1,314,314
Minority interests in loss........... 319,383 315,000 (2) 634,383
------------ -------- ------------
Income before income taxes and
extraordinary items................. 7,073,969 232,334 7,306,303
Income taxes......................... 3,903,983 3,903,983
------------ -------- ------------
Net income before extraordinary
items............................... $ 3,169,986 $232,334 $ 3,402,320
============ ======== ============
See notes to unaudited pro forma consolidated statements of operations.
27
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(1) Gives effect to the increase in goodwill amortization as a result of the
purchase of the minority interests. The resultant goodwill of $12.4 million
from the purchase is being amortized over a period of 25 years.
(2) Gives effect to the elimination of minority interests in earnings of the
Company as a result of the purchase of minority interests that occurred on
November 30, 1997 as if such purchase had occurred at the beginning of the
period presented. See "The Company."
28
SELECTED FINANCIAL DATA
The selected financial data for the Predessor represent the financial
position and results of operations of West Suburban Kidney Center, S.C. The
selected statement of operations data of the Predecessor for the fiscal year
ended September 30, 1995 have been derived from audited financial statements
of the Predecessor included elsewhere herein. The selected statement of
operations data of the Predecessor for the fiscal years ended September 30,
1993 and 1994 and the selected balance sheet data of the Predecessor as of
September 30, 1993, 1994 and 1995 have been derived from the unaudited
financial statements of the Predecessor not included herein. In October 1995,
the Predecessor and six affiliated companies were combined to create the
Company. The selected statement of operations data of the Company for the
fiscal years ended September 30, 1996 and 1997 and the selected balance sheet
data of the Company as of September 30, 1996 and 1997 have been derived from
audited financial statements of the Company included elsewhere herein. The
selected statement of operations data for the nine months ended June 30, 1997
and 1998 and the selected balance sheet data as of June 30, 1997 and 1998 have
been derived from the unaudited financial statements of the Company included
elsewhere herein. In the opinion of management of the Company, the unaudited
financial statements have been prepared on the same basis as the Company's
audited financial statements and include all adjustments, consisting only of
normal recurring items, necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results
for the nine months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the entire fiscal year. 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 Prospectus.
PREDECESSOR THE COMPANY
------------------------- -------------------------------------------
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $41,314 $44,313 $47,276 $83,171 $113,808 $82,080 $ 108,229
Patient care costs..... 25,635 29,363 31,340 54,885 72,058 58,784 69,177
General and
administrative
expenses.............. 16,279 10,845 12,691 17,463 24,710 11,177 20,213
Provision for bad debts
...................... 1,449 1,409 754 2,523 714 638 3,523
Depreciation and
amortization.......... 854 1,103 1,271 3,401 4,939 3,465 4,933
------- ------- ------- ------- -------- -------- ---------
Income (loss) from
operations............ (2,903) 1,593 1,220 4,899 11,387 8,016 10,383
Interest expense, net.. (81) (380) (368) (276) (2,149) (1,502) (3,628)
Minority interests in
(earnings) loss....... -- -- -- (810) (1,601) (1,165) 319
Gain on curtailment of
pension benefits...... -- -- -- 3,044 -- -- --
Other income, net...... -- -- -- 39 279 -- --
------- ------- ------- ------- -------- -------- ---------
Income (loss) before
income taxes.......... (2,984) 1,213 852 6,896 7,916 5,349 7,074
Income taxes........... 1,184 (480) (325) (2,800) (3,689) (2,645) (3,904)
Extraordinary item..... -- -- -- -- -- -- 107
------- ------- ------- ------- -------- -------- ---------
Net income (loss)...... $(1,800) $ 733 $ 527 $ 4,096 $ 4,227 $ 2,704 $ 3,063
======= ======= ======= ======= ======== ======== =========
BALANCE SHEET DATA:
Working capital........ $ 5,192 $ 7,462 $ 6,911 $ 8,514 $ 20,695 $ 23,325 $ 64,722
Total assets........... 20,507 20,863 20,937 64,711 102,208 93,542 197,942
Long-term liabilities.. 3,435 5,231 5,146 23,366 51,632 43,553 115,050
Stockholders' equity... 4,690 6,286 7,434 28,873 32,999 31,567 57,633
29
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 Prospectus.
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
approximately 5,400 patients through 65 facilities in 12 states. Everest also
contracts with 102 hospitals in 11 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 26 nephrologists, primarily in the
Chicago and northwest Indiana areas, and (ii) certain minority-owned or
unaffiliated dialysis facilities. For the 12 months ended June 30, 1998, the
Company derived 85.4% of its net revenues from chronic dialysis services,
12.9% from Contract Services and 1.7% from management services.
COMPANY GROWTH
Everest's dialysis operations have grown through de novo facility
development, acquisitions and internal growth. Everest has completed eight
acquisitions encompassing 29 centers and developed 36 de novo centers since
its inception in 1968. A significant portion of the Company's growth has
occurred in recent years. Since January 1, 1996, Everest has completed six
acquisitions encompassing 24 facilities and developed 18 de novo dialysis
centers. In order of priority, the Company's growth in its outpatient dialysis
services business has been accomplished through: (i) the opening of start-up
dialysis centers; (ii) the acquisition of single dialysis centers or multi-
facility operators; and (iii) internal growth.
The following table depicts the number of outpatient dialysis centers
operated by the Company at the beginning and end of each period indicated:
NINE
FISCAL YEAR MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
----------------- ---------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Centers at beginning of period....................... 21(1) 22 48 48 59
Acquisitions......................................... -- 20 1 1 4
De novo developments................................. 1 6 10 7 2
Centers at end of period............................. 22 48 59 56 65
- --------
(1) Reflects the combined operations of the companies included in the 1995
formation of Peak.
The Company seeks to increase its growth within each market through a number
of methods, including: (i) increasing patient referrals by providing high-
quality service; (ii) capitalizing on its strong physician and hospital
relationships; (iii) increasing capacity where possible by adding treatment
stations or expanding hours of operation; and (iv) adding appropriate
ancillary services such as EPO dosing and home dialysis training. The Company
quantifies "same-market net revenue growth" by comparing its net revenues from
chronic dialysis markets that have been served by it for at least two
consecutive periods. The following table sets forth the Company's same-market
net revenue growth for the periods indicated:
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
---------------- ------------
1995 1996 1997 1997 1998
----- ---- ----- ----- ------
Same-market net revenue growth.................... 10.9% 9.1% 10.5% 4.0% 16.2%
30
Everest significantly expanded its Contract Services business with the
acquisition of three Contract Services providers in November 1996. See "--
Acquisitions." Following these acquisitions, Everest has focused on
integrating the acquired companies, developing treatment protocols and quality
programs and identifying suitable acquisition targets. The Company regularly
engages in discussions with Contract Services businesses concerning possible
acquisitions. Everest believes that it has a strong competitive position as
the only outsourcing company currently providing a full portfolio of
extracorporeal blood treatment services, and that it can sell its broad
service portfolio to its existing customers.
SOURCES OF REVENUES
The Company's net revenues from chronic dialysis services are derived from:
(i) in-center dialysis and home dialysis services including drugs and
supplies; and (ii) management contracts with hospital-based and other
outpatient dialysis 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 136. 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 acute dialysis,
perfusion, apheresis and auto-transfusion services provided to hospitalized
patients pursuant to contracts with hospitals. Rates paid for such services
are negotiated with individual hospitals. Because extracorporeal blood
treatment services are required for patients undergoing major surgical
procedures, utilization of the Company's Contract Services is not subject to
seasonal or economic fluctuations.
The Company's revenues also include fees paid under management services
contracts. Management service fee revenue is recognized when earned.
Management service fees are based on contracted rates. The contracted rates
are estimates based upon the cost of services provided such as billing,
accounting, technical support, cash management and facilities management.
ACQUISITIONS
Acquisitions of dialysis and Contract Services providers have been recorded
under purchase accounting with the purchase price being principally allocated
to fixed assets and inventory based on respective estimated fair market values
at the date of acquisition. Any excess of the purchase price over the fair
market value of identifiable 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.
In June 1996, the Company acquired Home Dialysis of America, Inc. ("HDA"),
which became a wholly-owned subsidiary of the Company. At the time of
acquisition, HDA: (i) managed six outpatient and home dialysis centers; (ii)
owned 100% of two subsidiaries providing management and acute dialysis
services; (iii) owned a majority interest in two outpatient and home dialysis
centers; and (iv) owned a minority interest in ten outpatient and home
dialysis centers.
31
In July 1996, the Company purchased a dialysis facility in Crown Point,
Indiana, and in August 1996, the Company purchased an 80% interest in a
dialysis facility in Hammond, Indiana.
In November 1996, the Company effectively purchased an 80% interest in the
combined businesses of Bay Extracorporeal Technologies, Inc., Great Lakes
Medical Services, Inc. and Great Lakes Perfusion, Inc., which collectively
operated perfusion businesses in seven states. Effective September 1997, the
Company's 80%-owned subsidiary purchased a 51% interest in Tri-State
Perfusion, LLC, an extracorporeal services company.
Between December 31, 1997 and June 30, 1998, the Company acquired additional
equity in three entities in which it previously held a minority interest: (i)
Hemo Dialysis of Amarillo, L.L.C., which owns one outpatient and home dialysis
facility located in Amarillo, Texas (the Company's interest was increased from
30.0% to 100.0%); (ii) Home Dialysis of Mount Auburn, Inc., which owns one
home dialysis facility located in Cincinnati, Ohio (the Company's interest was
increased from 50.0% to 80.5%); and (iii) Dialysis Specialists of South Texas,
L.L.C., which owns three outpatient and home dialysis facilities in Corpus
Christi, Texas (the Company's interest was increased from 33.3% to 100.0%).
These entities in the aggregate had approximately $10.5 million in net
revenues for the 12 months ended December 31, 1997. In addition, effective
April 1, 1998, the Company acquired 100.0% of North Buckner Dialysis Center,
Inc., which owns one outpatient dialysis facility in Dallas, Texas and which
had net revenues of approximately $4.4 million for the 12 months ended
December 31, 1997. These acquisitions represented approximately 550 patients
in the aggregate. Effective March 1, 1998, the Company acquired 70% of
Perfusion Resource Association, L.L.C., a Contract Services business with two
hospitals under contract. In May 1998, the Company developed and opened one
outpatient dialysis facility located in Bronx, New York.
Pursuant to a Management Agreement with Montefiore Medical Center ("MMC"),
New York Dialysis Management, Inc., a wholly-owned subsidiary of the Company
("NYDM"), has been managing four dialysis facilities located in the Bronx, New
York (the "Facilities"). 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 earlier this year, 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., a
corporation formed for this purpose under the laws of the State of New York
("EDS"), and which is owned by Craig Moore and Paul Balter. The parties are
presently preparing filings necessary to obtain the approval of the New York
Public Health Council required for the consummation of the transactions
contemplated under the Purchase Agreement and the subsequent operation of the
Facilities by EDS. If the parties are unable to obtain such approval, at the
option of NYDM, either NYDM and MMC will enter into a forty-year
Administrative Services Agreement or MMC will be required to make certain
payments to NYDM in exchange for the transfer by NYDM of the Facilities' non-
medical assets to MMC.
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 "The Company," "Certain Relationships
and Related Transactions" and "Security Ownership of Certain Beneficial Owners
and Management."
32
RESULTS OF OPERATIONS
The following table sets forth: (i) statement of operations data for WSKC
(the Company's predecessor) for the fiscal year ended September 30, 1995,
which data have been derived from audited financial statements included
elsewhere herein; (ii) statement of operations data for the fiscal years ended
September 30, 1996 and 1997 which have been derived from the audited financial
statements of Peak included elsewhere herein; and (iii) statement of
operations data for the nine months ended June 30, 1997 and 1998, which have
been derived from the unaudited financial statements of the Company included
elsewhere herein.
FISCAL YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- --------
(IN THOUSANDS)
Net revenues................... $47,276 $83,171 $113,808 $82,080 $108,229
Patient care costs............. 31,340 54,885 72,058 58,784 69,177
General and administrative
expenses...................... 12,691 17,463 24,710 11,177 20,213
Provision for bad debts........ 754 2,523 714 638 3,523
Depreciation and amortization.. 1,271 3,401 4,939 3,465 4,933
------- ------- -------- ------- --------
Income from operations......... 1,220 4,899 11,387 8,016 10,383
Interest expense, net.......... (368) (276) (2,149) (1,502) (3,628)
Minority interests in
(earnings) loss............... -- (810) (1,601) (1,164) 319
Gain on curtailment of pension
benefits...................... -- 3,044 -- -- --
Other income, net.............. -- 39 279 -- --
------- ------- -------- ------- --------
Income before income taxes and
extraordinary item............ 852 6,896 7,916 5,350 7,074
Income taxes................... (325) (2,800) (3,689) (2,645) (3,904)
Extraordinary item............. -- -- -- -- 107
------- ------- -------- ------- --------
Net income..................... $ 527 $ 4,096 $ 4,227 $ 2,705 $ 3,063
======= ======= ======== ======= ========
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
Net revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Patient care costs.......................... 66.3 66.0 63.3 71.6 63.9
General and administrative expenses......... 26.8 21.0 21.7 13.6 18.7
Provision for bad debts..................... 1.6 3.0 0.7 0.8 3.3
Depreciation and amortization............... 2.7 4.1 4.3 4.2 4.6
----- ----- ----- ----- -----
Income from operations...................... 2.6 5.9 10.0 9.8 9.6
Interest expense, net....................... (0.8) (0.3) (1.9) (1.8) (3.4)
Minority interests in (earnings) loss....... -- (1.0) (1.4) (1.4) 0.3
Gain on curtailment of pension benefits..... -- 3.7 -- 0.0 0.0
Other income, net........................... -- 0.0 0.2 0.0 0.0
----- ----- ----- ----- -----
Income before income taxes and extraordinary
item....................................... 1.8 8.3 6.9 6.5 6.5
Income taxes................................ (0.7) (3.4) (3.2) (3.2) (3.6)
Extraordinary item.......................... -- -- -- -- 0.1
----- ----- ----- ----- -----
Net income.................................. 1.1% 4.9% 3.7% 3.3% 2.8%
===== ===== ===== ===== =====
33
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Net Revenues. Net revenues increased $26.1 million or 31.9% to $108.2
million for the nine months ended June 30, 1998 from $82.1 million for the
nine months ended June 30, 1997. Approximately $16.7 million of the increase
was attributable to an increase in the number of treatments at existing
dialysis facilities, a shift in payor mix and an increase in the average net
revenue per treatment to approximately $226 for the nine months ended June 30,
1998 from $206 for the nine months ended June 30, 1997. Of the remaining $9.4
million of the increase, $3.4 million resulted from the acquisition of
Contract Services businesses in the fourth quarter of fiscal 1997, and $6.0
million was attributable to the opening of two de novo facilities in fiscal
1998 and the acquisition of six facilities in fiscal 1998.
Patient Care Costs. Patient care costs consist of costs directly related to
the care of patients, including direct and indirect labor, drugs and other
medical supplies and operational costs of the facilities. Patient care costs
increased $10.4 million or 17.7% to $69.2 million for the nine months ended
June 30, 1998 from $58.8 million for the nine months ended June 30, 1997.
Approximately $4.7 million of the increase was attributable to the increase of
number of treatments at the existing dialysis facilities. Of the remaining
$5.7 million of the increase, $4.3 million is from the opening of two de novo
facilities in fiscal 1998 and the acquisition of six facilities in fiscal
1998, and $1.4 million was attributable to the acquisition of Contract Service
businesses in the fourth quarter of fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased $9.0 million or 80.8% to $20.2 million for the nine months ended
June 30, 1998 from $11.2 million for the nine months ended June 30, 1997. The
increase was attributable to the growth of the corporate infrastructure,
including the expansion of information systems, increased professional fees
and increased administrative labor costs.
Provision for Bad Debts. Provision for bad debts increased $2.9 million or
452.2% to $3.5 million for the nine months ended June 30, 1998 from $638,000
for the nine months ended June 30, 1997. The increase was due to provisions
established for specific receivables as a result of price increases which may
not be collectible from uninsured patients. The price increases were
applicable to commercial insurance carriers and went into effect beginning
July 1997.
Depreciation and Amortization. Depreciation and amortization increased
approximately $1.5 million or 42.4% to $4.9 million for the nine months ended
June 30, 1998 from $3.5 million for the nine months ended June 30, 1997. 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.
Income from Operations. Income from operations increased $2.4 million or
29.5% to $10.4 million for the nine months ended June 30, 1998 from $8.0
million for the nine months ended June 30, 1997. Income from operations as a
percentage of net revenues remained constant for the nine months ended June
30, 1998 as compared to the nine months ended June 30, 1997.
Interest Expense, Net. Interest expense, net, increased $2.1 million or
141.5% to $3.6 million for the nine months ended June 30, 1998 from $1.5
million for the nine months ended June 30, 1997. The increase was primarily
attributable to the interest associated with the senior subordinated notes and
additional borrowings under the Credit Facility.
Minority Interests in Earnings/Loss. As part of the November 1997
Reorganization, the approximately 30% minority interests in Everest were
purchased and therefore, minority interest expense relating to those interests
have only been included for two of the nine months ended June 30, 1998.
Accordingly, minority interest expense decreased $1.5 million or 127.4% to
income of $319,000 for the nine months ended June 30, 1998 from expense of
$1.2 million for the nine months ended June 30, 1997. The minority income for
the nine months ended June 30, 1998 was due primarily to minority interests in
losses in certain start-up operations.
Income Taxes. Income taxes increased $1.3 million or 47.6% to $3.9 million
for the nine months ended June 30, 1998 from $2.7 million for the nine months
ended June 30, 1997. This increase was due in part to a higher pretax income
of $7.1 million for the nine months ended June 30, 1998 as compared to $5.3
million for
34
the nine months ended June 30, 1997 as a result of the factors discussed
above. In addition, the effective tax rate increased to approximately 55.2%
for the nine months ended June 30, 1998 as compared to 49.4% for the nine
months ended June 30, 1997 due to an increase in non-deductible goodwill
amortization expense associated with acquisitions.
Extraordinary Item. The extraordinary item of $107,000 relates to the write-
off of capitalized finance costs in connection with the early extinguishment
of debt. The Company paid off its credit facility with the proceeds of the
Initial Offering.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1996
Net Revenues. Net revenues increased $30.6 million or 36.8% to $113.8
million for fiscal 1997 from $83.2 million for fiscal 1996. The increase in
net revenues was attributable to (i) the acquisition of the Contract Services
businesses in November 1996 which added net revenues of approximately $12.4
million, (ii) three acquisitions of dialysis companies in the fourth quarter
of fiscal 1996 which incrementally added net revenues of approximately $8.0
million in fiscal 1997, (iii) the opening of three de novo facilities in the
fourth quarter of fiscal 1996 which incrementally added net revenues of
approximately $3.4 million in fiscal 1997, and (iv) an increase in treatments
and the average revenue per treatment at existing facilities, which together
added approximately $6.8 million in net revenues in fiscal 1997. The average
revenue per treatment increased from $202 in fiscal 1996 to $213 in fiscal
1997.
Patient Care Costs. Patient care costs increased $17.2 million or 31.3% to
$72.1 million for fiscal 1997 from $54.9 million for fiscal 1996.
Approximately $14.9 million of this increase was attributable to acquisitions
of dialysis and Contract Services businesses and the opening of de novo
facilities. The remaining $2.3 million resulted primarily from an increase in
the number of treatments at existing facilities.
General and Administrative Expenses. General and administrative expenses
increased $7.2 million or 41.5% to $24.7 million for fiscal 1997 from $17.5
million for fiscal 1996. Approximately $4.9 million of this increase was
attributable to acquisitions of dialysis and Contract Services businesses and
to the opening of de novo facilities. The remaining $2.3 million of this
increase was attributable primarily to growth of the corporate infrastructure,
including increased corporate staff and expanded information systems, to
support a larger organization.
Provision for Bad Debts. Provision for bad debts decreased $1.8 million or
71.7% to $714,000 for fiscal 1997 from $2.5 million for fiscal 1996. This
decrease resulted primarily from the reversal of a provision of $1.0 million
established in 1996 for specific state agency receivables which were
subsequently collected, offset by an increase in provision for bad debts as a
result of higher net revenues.
Depreciation and Amortization. Depreciation and amortization increased $1.5
million or 45.2% to $4.9 million for fiscal 1997 from $3.4 million for fiscal
1996. The increase was due to increased goodwill amortization expense as a
result of acquisitions and an increase in depreciation expense related to
fixed asset purchases.
Income from Operations. Income from operations increased $6.5 million or
132.4% to $11.4 million for fiscal 1997 from $4.9 million for fiscal 1996.
Income from operations as a percentage of net revenues increased to 10.3% for
fiscal 1997 from 6.2% for fiscal 1996.
Interest Expense, Net. Interest expense, net increased $1.9 million or
678.7% to $2.1 million for fiscal 1997 from $276,000 for fiscal 1996. The
increase was primarily attributable to additional borrowings under the Prior
Credit Facility related to acquisitions and working capital.
Minority Interests in Earnings. Minority interests in earnings increased
$790,000 or 97.6% to $1.6 million for fiscal 1997 from $810,000 for fiscal
1996, as a result of increased profitability.
Gain on Curtailment of Pension Benefits. In fiscal 1996, the Company ceased
funding its defined-benefit pension plan and no additional years of benefit
service were accrued by plan participants. The Company recognized a
curtailment gain of approximately $3.0 million.
Income Taxes. Income taxes increased $889,000 or 31.8% to $3.7 million in
fiscal 1997 from $2.8 million in fiscal 1996. This increase was due to in part
to higher pretax income of $7.9 million in fiscal 1997 as compared to $6.9
million in fiscal 1996 as a result of the factors discussed above. In
addition, the effective tax rate was 46.6% in fiscal 1997 as compared to 40.6%
in fiscal 1996 primarily due to an increase in non-deductible goodwill
amortization expense associated with acquisitions.
35
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995
1995 Reorganization. The discussion of the results of operations of the
fiscal year ended September 30, 1996 as compared to the fiscal year ended
September 30, 1995 relates to the operations of WSKC (the Predecessor) for
fiscal year 1995 as compared to the Company for fiscal year 1996. On October
1, 1995, the Company was formed through the combination of seven kidney
dialysis companies. See note 1 to the audited consolidated financial
statements on page F-14.
Net Revenues. Net revenues increased $35.9 million or 75.9% to $83.2 million
for fiscal 1996 from $47.3 million for fiscal 1995. Approximately $2.3 million
resulted from acquisitions of dialysis facilities in the fourth quarter of
fiscal 1996. This was offset by a decrease of $1.8 million in net revenues as
a result of the December 1995 sale of contracts and certain other assets of
the Company's acute dialysis business to an affiliated company. This sale was
effected to accommodate regulatory concerns. The Company reentered the acute
dialysis business, using a different ownership structure, through the
acquisition of HDA in June 1996. The remainder of the increase was
attributable to the 1995 reorganization.
Patient Care Costs. Patient care costs increased $23.5 million or 75.1% to
$54.8 million for fiscal 1996 from $31.3 million for fiscal 1995. The increase
was primarily attributable to the 1995 reorganization.
General and Administrative Expenses. General and administrative expenses
increased $4.8 million or 37.6% to $17.5 million for fiscal 1996 from $12.7
million for fiscal 1995. The increase was primarily attributable to the 1995
reorganization.
Provision for Bad Debts. Provision for bad debts increased $1.8 million or
234.9% to $2.5 million for fiscal 1996 from $753,000 for fiscal 1995. The
increase was primarily attributable to the 1995 reorganization.
Depreciation and Amortization. Depreciation and amortization increased $2.1
million or 167.6% to $3.4 million for fiscal 1996 from $1.3 million for fiscal
1995. The increase was due to increased amortization of goodwill as a result
of acquisitions and the 1995 reorganization of the Company on October 1, 1995.
Income from Operations. Income from operations increased $3.7 million or
308.3% to $4.9 million for fiscal 1996 from $1.2 million for fiscal 1995.
Income from operations as a percentage of net revenues increased to 5.9% for
fiscal 1996 from 2.6% for fiscal 1995.
Interest Expense, Net. Interest expense, net, decreased $92,000 or 25.0% to
$276,000 for fiscal 1996 from $368,000 for fiscal 1995. The decrease was
mainly attributable to interest paid to an affiliate, which was eliminated in
the reorganization.
Minority Interests in Earnings. Minority interests in earnings of $810,000
for fiscal 1996 were attributable to the reorganization transaction that
occurred on October 1, 1995. Accordingly, there were no minority interests in
earnings recognized in fiscal 1995.
Income Taxes. Income taxes increased $2.5 million or 761.5% to $2.8 million
in fiscal 1996 from $325,000 in fiscal 1995 due to the reorganization.
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 June 30, 1998, the Company's working capital was $64.7
million as compared to $20.7 million at September 30, 1997.
The Company's net cash provided by operating activities was $3.8 million for
the nine months ended June 30, 1998 as compared to net cash provided by
operating activities of $2.1 million for fiscal 1997. Cash provided by
operating activities consists of net income increased by non-cash expenses
such as depreciation, amortization
36
and the provision for bad debts and adjusted by the changes in components of
working capital, primarily receivables and payables. For the nine months ended
June 30, 1998, accounts receivable increased approximately $7.5 million due to
the price increases implemented by the Company. Other assets increased
approximately $7.7 million during such period, due primarily to the
capitalized costs associated with the Initial Offering and the refinancing of
the Prior Credit Facility and, to a lesser extent, to the Company's equity in
earnings of unconsolidated affiliates. Accounts payable and other accrued
liabilities increased due to the fact that the Company extended payment terms
for several vendors from 30 to 60 days. The Company's net cash used in
investing activities was $26.0 million for the nine months ended June 30, 1998
and $18.0 million for fiscal 1997. The Company's principal uses of cash
consist of investing activities related to acquisitions, purchases of new
equipment and leasehold improvements for existing dialysis centers, the
development of de novo dialysis centers and net advances due from affiliated
entities. During the nine months ended June 30, 1998, the Company (i) acquired
additional equity in three dialysis entities for approximately $10.9 million,
(ii) acquired majority ownership in a Contract Services business for
approximately $1.4 million, and (iii) acquired 100% ownership in one dialysis
facility for approximately $5.1 million. Net cash provided by financing
activities was $66.1 million for the nine months ended June 30, 1998 and net
cash provided by financing activities was $21.9 million for fiscal 1997. The
primary sources and uses of cash from financing activities during the nine
months ended June 30, 1998 were the proceeds from the Initial Offering as well
as net borrowings or repayments under the Credit Facility.
The Company does not have any current material commitments for capital
expenditures.
On May 18, 1998, the Company refinanced the Prior Credit Facility with the
same commercial bank that provided the Prior Credit Facility. The new credit
facility (the "New Credit Facility") consists of a new revolving line of
credit, acquisition line of credit and supplemental revolver totaling $100.0
million. The New Credit Facility contains substantially the same provisions as
the Prior Credit Facility, including affirmative and negative covenants,
financial ratios and events of default. See "Description of Credit Facility."
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 remaining net proceeds from the
Initial Offering, existing cash and funds from operations, together with funds
available under the New Credit Facility, will be sufficient to meet the
Company's acquisition, development, expansion, capital expenditure and working
capital needs for at least the next twelve months. In order to finance certain
strategic acquisition opportunities, the Company may from time to time incur
additional short and long-term bank indebtedness and may issue equity or debt
securities, the availability and terms of which will depend on market and
other conditions. There can be no assurance that the Company will be
successful in implementing its growth strategy or that adequate sources of
capital will be available in the future as needed on terms acceptable to the
Company. See "Risk Factors--Risks Inherent in Growth Strategy," "--Leveraged
Financial Position" and "--Ability to Service the Notes and Other Debt."
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. In addition, 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.
37
YEAR 2000 COMPLIANCE BY THE COMPANY AND OTHERS
Year 2000 compliance concerns the ability of certain computerized
information systems to properly recognize date-sensitive information, such as
invoices for the Company's services, as the year 2000 approaches. Systems that
do not recognize such information could generate erroneous data or cause
systems to fail; this problem may occur as early as calendar year 1999. The
Company is at risk both for its own Year 2000 compliance and for the Year 2000
compliance of those with whom it does business, particularly third party
payors.
The Company has established a Year 2000 Task Force to study and address Year
2000 issues. The Task Force currently consists of Karen Gramigna-Warren,
Director of Technology and Chief Information Officer; Donna Raasch, Director
of Facilities; Brian Green, Director of Bio-Med; and Judy Almdale, Director of
Physician Practices. The Company also is planning to hire an employee to
devote his or her full time and attention to Year 2000 issues. The Year 2000
Group of PricewaterhouseCoopers Consultants has also been retained as an
advisor for Year 2000 issues.
The Task Force has formulated and begun to implement a plan with six stages,
as follows: (i) awareness, (ii) inventory, (iii) impact analysis, (iv)
remediation, (v) testing and (vi) implementation. Phases (i) and (ii) are
currently in progress; the Company's goal is to complete all phases and be
Year 2000 compliant by June 30, 1999.
The Company has five major information technology systems, the present
compliance of which is described below:
1. Client tracking system. This system is Year 2000 compliant, but the
Company may replace it in 1999 for unrelated reasons.
2. Accounting package. The existing accounting package is not Year 2000
compliant. The Company will either upgrade within the next few months to a
new version that is compliant or may replace this system altogether.
3. Interim accounting package for Contract Services. This package is Year
2000 compliant. It is intended, however, that this function will be merged
into the basic accounting package once a new package is obtained.
4. Physician billing. The Company has purchased and is installing a new
system that is Year 2000 compliant. It is expected that the new system will
be on-line in about a month.
5. Facilities billing. This system is not yet Year 2000 compliant. It has
been analyzed, and arrangements are being made with the vendor to upgrade
the system.
These systems would have been upgraded or replaced to support Company growth
irrespective of the Year 2000 issue. The process of upgrading or replacing
these systems was not accelerated by Year 2000 considerations.
The Company has not yet made a full review of the Year 2000 compliance of
its non-information technology systems (i.e., embedded technology such as
micro-controllers). The Task Force anticipates undertaking such a review.
Management believes that the most significant risk to the Company of Year
2000 issues is the effect such issues may have on third-party payors, such as
Medicare. News reports have indicated that various agencies of the federal
government may have difficulty becoming fully Year 2000 compliant before the
year 2000. The Company has not yet undertaken to quantify the effects of such
noncompliance or to determine whether such a quantification is even possible.
A consideration of worst case scenarios and contingency plans to deal with
those scenarios have not yet been undertaken by the Task Force.
There can be no assurance that Year 2000 issues will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
38
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 5,400 patients through 65 facilities in 12 states. Everest
also contracts with 102 hospitals in 11 states to provide a broad range of
other extracorporeal (outside-the-body) 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 26
nephrologists, primarily in the Chicago and northwest Indiana areas, and (ii)
certain minority-owned or unaffiliated dialysis facilities. The Company
derived 85.4% of its net revenues for the 12 months ended June 30, 1998 from
chronic dialysis services, 12.9% from Contract Services and 1.7% from
management services. Net revenues for the 12 months ended June 30, 1998 were
$140.0 million.
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
10 acquisitions encompassing 29 facilities and developed 36 de novo centers
since its inception. Through geographic clustering of its outpatient dialysis
centers, the Company has created strong 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 51 full-service
outpatient dialysis centers which provide on-site dialysis services as well as
training for home dialysis patients. Everest also operates 14 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 acquisitions in 1996. 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. The Company has contracts with 102 hospitals, and
Everest acts as the exclusive provider of extracorporeal blood treatment
services for most of these hospitals. By leveraging its strengths in blood
processing, its significant market presence in outpatient dialysis services
and its strong physician and hospital relationships, Everest believes it is
well positioned to continue to implement successfully its growth strategy.
DIALYSIS INDUSTRY OVERVIEW
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.
According to the USRDS, the number of patients requiring chronic dialysis in
the United States has increased from approximately 88,000 patients in 1986 to
approximately 209,000 as of December 31, 1996, a compound annual growth rate
of approximately 9%. The Company expects the number of ESRD patients to
continue to grow at approximately the historical rate for the foreseeable
future. According to the USRDS, the number of new patients diagnosed each year
with ESRD among Medicare-eligible patients for all age groups has increased
from 136 patients per million in 1986 to 253 patients per million in 1995. The
Company attributes this increase in the number of ESRD patients and in the
incidence of ESRD to: (i) the aging of the population; (ii) better treatment
and longer survival rates of patients with diabetes, hypertension and other
diseases which lead
39
to ESRD; and (iii) improved technology that has enabled older patients and
patients who could not previously tolerate dialysis due to other illnesses to
benefit from this life-prolonging treatment.
According to HCFA, the total estimated direct payments for ESRD in 1995 were
$13.1 billion, of which Medicare paid approximately $9.7 billion. Relative to
other diseases, ESRD has a unique reimbursement program. Substantially all
ESRD patients are eventually covered under Medicare. As a result of
legislation enacted in 1972, the federal government provides Medicare funding,
subject to specified waiting periods and co-payment obligations, for patients
who are diagnosed with ESRD, regardless of their age or financial
circumstances. The federal government recently increased the period during
which employer group health plans are required to reimburse dialysis providers
for patients who are otherwise below the Medicare age threshold, from 18
months to 30 months. This change could benefit dialysis providers because
commercial insurers currently pay rates which generally are above those paid
by Medicare.
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. According to HCFA, as of December
31, 1995, approximately 85% of ESRD patients in the U.S. received outpatient
treatments, which were virtually all hemodialysis. Of the remaining 15% of
ESRD patients treated at home, more than 97% received peritoneal dialysis.
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. In 1995, approximately 12,000 patients, or 6% of the total ESRD
patient population, underwent kidney transplants. The number of kidney
transplants--the alternative to dialysis--has grown much more slowly than has
the number of dialysis treatments, particularly since 1986, with annual growth
averaging 4%.
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.
Outpatient Dialysis Industry. The Company believes that the outpatient
dialysis industry is fragmented and consolidating due to the need for
operating efficiencies, high-quality patient care, and the growing need for
40
providers to compete in a managed care environment. According to HCFA, as of
December 31, 1995, there were approximately 2,900 Medicare-certified ESRD
treatment centers in the U.S. The Company estimates that at that time, the ten
largest multi-facility providers, including the Company, accounted for
approximately 1,200 facilities (41% of facilities) and 86,000 patients (45% of
patients). Other freestanding facilities (many privately owned by physicians)
and hospital-affiliated facilities were the sites of treatment for the
remaining 55% of patients. At May 31, 1997, industry sources estimated that
the top ten multi-center providers, including the Company, accounted for
approximately 118,000 patients, or 51% of the estimated market.
NON-DIALYSIS EXTRACORPOREAL SERVICES INDUSTRY OVERVIEW
Non-dialysis extracorporeal services include perfusion, apheresis and auto-
transfusion. Based on industry data and the Company's market research, the
non-dialysis extracorporeal services industry represents approximately $1.4
billion in annual revenues and is growing at the rate of approximately 7% per
annum. The Company attributes this growth to: (i) an aging population; (ii)
the applicability of existing and developing technologies to a larger number
of diseases; and (iii) continued heightened public concern over the safety of
the nation's blood supply. The Company believes that hospitals, which have
historically provided most of these services, are seeking increasingly to
outsource these services to companies such as Everest that provide both
trained personnel and equipment.
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.
According to industry sources, in 1995 approximately 900 U.S. hospitals
provided cardiac surgical services to approximately 400,000 patients.
Approximately 40% of all open-heart procedures are supported by contract
perfusion providers like Everest, 50% are serviced by hospital employees and
the balance are serviced by physician-employed perfusionists. The Company
believes that there are approximately 90 independent contract perfusion
providers that operate primarily on a local or regional basis. The Company
believes that the market is consolidating due to increasing business
complexity, the expansion of managed care and the demand by hospitals for a
single provider capable of delivering a broad portfolio of extracorporeal
services.
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.
The Company believes that apheresis procedure growth is being driven by the
increasing acceptance of PBSC in the treatment of an expanding list of cancers
and its significant cost advantages compared to traditional therapies such as
bone marrow transplantation. Additionally, the Company expects the number of
SDP procedures to grow because such procedures reduce transfusion-transmitted
diseases and transfusion reactions, thereby reducing the total number of
platelet transfusions required by the individual patient.
41
Providers of therapeutic apheresis services include hospitals, independent
contractors and blood banks. According to Company research, hospitals perform
approximately 50% of the treatments, independent contractors perform
approximately 35% and blood banks perform approximately 15%. Hospitals, the
primary purchasers of blood products, obtain approximately 80% of their
platelet requirements from local blood banks and, to a lesser extent, regional
blood banks. The Company believes that hospitals have been increasingly
dissatisfied with local blood suppliers due to perceptions of high prices,
lack of flexibility and poor service. In response, hospitals are expanding or
starting their own blood banks and increasingly seeking to outsource apheresis
services.
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. The market for auto-transfusion has grown due to a shortage of
banked blood, increased recognition of the risks of transfusion error and
increased concern with respect to possible infections, such as hepatitis and
AIDS. Of the approximately 300,000 non-open-heart, intra-operative auto-
transfusions performed in 1995, approximately 40% were outsourced.
COMPETITIVE STRENGTHS
The Company attributes its market leadership and its opportunities for
continued growth and profitability to the following strengths:
Strong Physician and Hospital Relationships. Everest believes that the
strength of its relationships with physicians and hospitals is an important
factor in its success. Everest was founded and remains principally owned by
nephrologists, and the Company believes that its sensitivity to the concerns
and objectives of health care professionals, coupled with its reputation for
high-quality service, makes it attractive to physicians and hospitals. Everest
intends to capitalize on its strong relationships in order to increase same-
market growth, successfully complete acquisitions and de novo developments and
market its broad range of extracorporeal services.
Acquisition and Development Expertise. The Company has a successful history
of effecting acquisitions and building de novo dialysis facilities in existing
and new markets. Since January 1, 1996, Everest has completed six acquisitions
encompassing 24 facilities and has developed 18 de novo dialysis centers.
During this period, the number of patients treated by the Company has
increased from approximately 2,700 to approximately 5,400. Everest believes
that its significant acquisition and development experience position it well
to continue to pursue growth opportunities.
Focus on Attractive Industry Sectors. The Company focuses on two large and
growing industry sectors: chronic dialysis services and Contract Services.
According to the USRDS, the number of ESRD patients requiring chronic dialysis
in the United States increased from approximately 88,000 in 1986 to
approximately 209,000 in 1996, a compound annual growth rate of approximately
9%. The Company expects this growth to continue at approximately the
historical rate for the foreseeable future as a result of the aging of the
population, better treatment and survival rates of patients with diseases that
lead to ESRD and improved technology. The Company estimates that the non-
dialysis Contract Services market represents approximately $1.4 billion in
annual revenues and is growing at an annual rate of approximately 7%. The
Company attributes this growth to the aging population, applicability of
existing and developing technologies to more diseases and public concern over
the safety of the U.S. blood supply.
Comprehensive Portfolio of Extracorporeal Services. The Company believes
that it is the only outsourcing provider currently offering hospitals a full
portfolio of extracorporeal blood treatment services including inpatient acute
dialysis, perfusion, apheresis and auto-transfusion. Everest believes that
hospitals are increasingly outsourcing these services and demanding a single,
high-quality provider to handle all of their extracorporeal
42
blood treatment needs. Everest currently has contracts with 102 hospitals, and
Everest acts as the exclusive provider of extracorporeal blood treatment
services for most of these hospitals.
Leading Market Positions. The Company seeks to be a leader in each chronic
dialysis and Contract Services market in which it operates. Everest is
currently the sixth-largest provider of chronic dialysis services in the
United States. In addition, through geographic clustering of its outpatient
dialysis centers, the Company has created strong regional market positions,
particularly in the Midwest. Everest seeks to augment its position in existing
outpatient dialysis markets by accelerating same-market growth through such
methods as adding new dialysis stations and extending facility hours.
Proven Management Team. The Company's senior management team has an average
of over 18 years of health care industry experience and an average of over 12
years of experience with Everest. In addition, the seven regional directors of
the Company's chronic dialysis business have an average of over 11 years of
experience with the Company. Under this team's management, the Company has
achieved significant growth in recent years. Everest's management has created
a strong corporate and regional infrastructure which the Company believes can
support future increased patient volumes with limited incremental
expenditures.
STRATEGY
The Company's objective is to be a leading provider of high-quality dialysis
and Contract Services in each of its markets. The Company's strategy for
achieving this objective is to:
Acquire and Develop Additional Outpatient Chronic Dialysis Facilities.
Everest intends to continue to leverage its strong physician and hospital
relationships to identify and consummate acquisitions. Everest has completed
eight acquisitions to date and will continue to pursue acquisitions to
increase its presence in existing markets and to enter new markets. When
considering acquisitions, the Company evaluates such factors as historical and
projected profitability, local market share, facility utilization,
relationships with physicians and hospitals, market demographics, growth
potential and the availability of qualified clinical personnel. The Company
regularly engages in discussions with potential acquisition candidates. In
addition, Everest currently has a less than 50.1% ownership interest in 16
outpatient dialysis facilities. The Company believes that it has an
opportunity to continue to increase its ownership of many of these facilities.
Since September 30, 1997, the Company has acquired majority ownership of five
facilities, with approximately 440 patients, in which it previously had a
minority-ownership position.
Of the Company's 65 outpatient dialysis facilities, 36 were de novo
developments. The Company believes that its strong physician and hospital
relationships and its significant development experience afford it a
competitive advantage in developing new dialysis facilities. The Company
intends to continue to pursue de novo development opportunities, particularly
in areas where Everest has existing facilities and can take advantage of
geographic clustering.
Increase Same-Market Growth. Everest believes that its strong relationships
with nephrologists and hospitals are instrumental to its ability to accelerate
same-market growth. In addition, Everest believes that its high-quality
service leads to patient satisfaction, which in turn increases patient
referrals. The Company also seeks to increase same-market growth through such
methods as adding new dialysis stations and extending dialysis center hours.
Everest will also continue to add appropriate ancillary services at each of
its facilities, including EPO dosing and home dialysis training. As Everest
identifies new needs, it will work with its regional directors and facility
managers to implement these services in all of its facilities. In fiscal 1997,
the Company's same-market growth in net revenues was approximately 10.5%.
Expand its Contract Services Business. Everest began its Contract Services
business to provide a broader range of extracorporeal services to hospitals
and managed care organizations and to develop a source of revenue
43
that is not directly dependent on government reimbursement. Everest believes
that it has a strong competitive position as the only outsourcing company
currently providing a full portfolio of extracorporeal blood treatment
services, including acute inpatient dialysis, perfusion, apheresis and auto-
transfusion. The Company believes it can sell its broad service portfolio to
its existing customers. Everest intends to expand this business by leveraging
its existing relationships and establishing new relationships in each of its
markets. In addition, the Company intends to continue to acquire
extracorporeal service providers in existing and new markets.
Leverage its Infrastructure and Systems to Increase Margins and Improve
Quality of Service. Everest has built a strong corporate and regional
operating structure, led by senior management and seven regional directors who
are responsible for all financial, quality and teamwork goals. The Company
believes that this infrastructure can support increased patient volumes with
limited incremental expenditures. In addition, Everest's management
information system enables corporate and regional managers to monitor the
quality and outcomes of the services provided at both its outpatient dialysis
facilities and at the hospitals where Contract Services are performed. The
Company intends to continue to leverage its experienced management team and
increase operating efficiencies through standardization of systems and
integration of new centers.
Continue to Foster a Workplace that will Enable the Company to Recruit,
Train and Retain Well-Qualified Employees. Highly qualified employees are
instrumental to Everest's continued delivery of high-quality patient care.
Everest invests considerable resources in the screening, hiring and training
of its employees. Everest's training programs cover such topics as clinical
skills, leadership development, systems utilization and quality programs. In
addition, the Company has developed and is implementing a recertification
program for all of its patient care employees. Everest provides regional
directors and key facility managers with an incentive compensation plan linked
to its financial, quality and teamwork objectives.
CHRONIC DIALYSIS OPERATIONS
Facility Information. The Company operates 65 outpatient dialysis
facilities, including 51 full-service dialysis facilities and 14 centers
exclusively providing home dialysis training and support. The facilities are
located in Illinois (14), Indiana (9), Kansas (1), Kentucky (2), New Jersey
(3), New York (6), Ohio (18), Oklahoma (2), Pennsylvania (1), South Dakota
(2), Texas (6) and Wisconsin (1).
Everest's 51 full-service facilities offer on-site dialysis treatments as
well as home dialysis training and support services. As of June 30, 1998, the
Company operated a total of 842 dialysis stations, most of which are available
16 hours a day, six days a week. As of June 30, 1998, the Company's
utilization rate for its then-existing stations was 77%. 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 14 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.
Organizational Structure. Of the Company's 65 facilities, 33 are operated as
wholly-owned subsidiaries, seven are majority-owned, 16 are minority-owned,
and nine are unaffiliated and operated pursuant to management contracts in New
York, South Dakota, Texas, 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 plus a percentage of revenues; such
compensation does not include any capitation fee. Everest often enters into
joint ventures with physicians to facilitate the development of outpatient
facilities in new and existing markets.
Everest's dialysis facilities are managed by the Company's Executive Vice
President and General Manager, who oversees seven 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
44
teamwork environment. Generally, key managers 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," "--Training and Development" and "Risk Factors--
Dependence on Management and Other Key Personnel."
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 must be
board certified or board eligible in internal medicine 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. See "Risk Factors--
Extensive Government Regulation" and "--Dependence on Physician Referrals and
Other Relationships."
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
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. See "Risk Factors--EPO Reimbursement and
Supply." 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.
CONTRACT SERVICES OPERATIONS
Everest significantly expanded its Contract Services business in 1996 with
the acquisition of three Contract Services providers. 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 June 30, 1998, the Company had contracts with 102 hospitals in 11
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. See "Risk Factors--Dependence on
Management and Other Key Personnel." The Company typically owns or leases the
equipment used in providing these services, such as heart-lung machines,
transfusion machines, dialyzers and apheresis machines and supplies the
necessary disposable accessories for these machines
45
and related equipment. This equipment is usually stored at the hospital, but
is operated and maintained by the Company. Everest operates five 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.
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 similar programs for use in its inpatient
acute dialysis operations.
46
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 and is
being implemented at the remainder of the 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. See
"Risk Factors--Risks Inherent in Growth Strategy" and "--Year 2000
Compliance."
SOURCES OF REVENUE REIMBURSEMENT
The following table provides information regarding the percentage of the
Company's net revenues provided: (i) with respect to chronic dialysis
services, by Medicare, Medicaid and other third-party payors such as indemnity
insurers, managed care companies, hospitals and others; and (ii) with respect
to Contract Services, by hospitals and, to a much lesser extent, other payors:
NINE MONTHS
FISCAL YEAR ENDED ENDED JUNE
SEPTEMBER 30, 30,
-------------------- -------------
PAYOR 1995 1996 1997 1997 1998
----- ------ ------ ------ ------ ------
CHRONIC DIALYSIS:
Medicare................................... 66.0% 66.1% 57.5% 58.1% 48.6%
Medicaid................................... 11.8% 11.6% 8.5% 9.0% 7.2%
Other payors............................... 22.2% 20.0% 20.6% 19.2% 28.5%
CONTRACT SERVICES:
Hospitals and other payors................. -- -- 11.1% 11.1% 13.7%
Management service fees.................... -- 2.3% 2.3% 2.6% 2.0%
------ ------ ------ ------ ------
100.0% 100.0% 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 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" and "Risk Factors--Dependence on Third
Party Reimbursement."
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
47
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 $117 and
$139 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 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. Congress is not required to implement any recommendation,
has not implemented this increase and could either raise or lower the
reimbursement rate. See "Risk Factors--Dependence on Third Party
Reimbursement."
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
48
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. President Clinton's proposed fiscal year 1999 budget
contains a further reduction in reimbursement for EPO from $10.00 to $9.00 per
1,000 units administered. See "Risk Factors--EPO Reimbursement and Supply."
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 licensed 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
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
49
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. See "Risk Factors--Dependence on Third Party Reimbursement."
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. See "Risk Factors--
Competition."
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. The Company competes with other dialysis
providers and hospitals in the provision of acute dialysis services.
Management believes that the competitive factors in the Contract Services
market are primarily cost, quality 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. See
"Risk Factors--Competition."
HUMAN RESOURCES
As of June 30, 1998, the Company had 1,716 employees, including a
professional staff of approximately 643 nurses, social workers, dietitians and
perfusionists, a corporate and regional staff of approximately 197
50
employees and a facilities support staff of approximately 876 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. See "Risk Factors--Dependence on Management
and Other Key Personnel." Medical directors of most 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
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 June 30, 1998, approximately 108 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.
PROPERTIES
The Company operates 65 dialysis centers, all of which are located in leased
facilities ranging from approximately 3,000 to 15,000 square feet. These
leases generally have terms of 10 years and typically contain renewal options.
The Company owns 13,800 square feet of office space in Oak Park, Illinois
which is used for its corporate headquarters. In addition, the Company leases
approximately 22,000 square feet of space in Bellwood, Illinois which houses
the acute dialysis team, corporate training, purchasing and distribution and
medical records. The Company also leases space for its regional offices in
Tucson, Arizona; Panama City, Florida; Dearborn, Michigan; and Houston, Texas.
The regional offices range in size from 230 square feet to approximately 3,500
square feet under leases with expiration dates through December 1998.
The Company considers its physical properties to be in good operating
condition and suitable for the purposes for which they are being used.
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
51
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). See "Risk Factors--Liability
Exposure."
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. See "Risk Factors--Extensive
Government Regulation."
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
52
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 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 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. The proposed rule would make changes 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, would be materially impacted if the proposed
rule were adopted in the form proposed. However, the Company cannot predict
the outcome of the rule making process or whether changes in the safe harbors
rule will affect the Company's position with respect to the federal Anti-
Kickback Law. See "Risk Factors--Extensive Government Regulation."
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
53
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 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. 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
54
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.
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.
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.
Whereas, 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
55
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 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 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 making referrals. 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
56
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 as claims, may be
excluded from Medicare and 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 of 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
57
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 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.
58
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 governmental authority from
which a substantial portion of its revenues are derived would have a material
adverse effect on its operating and financial results.
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. See "Risk Factors--Liability
Exposure."
59
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Craig W. Moore.......... 53 Chairman of the Board of Directors, Chief Executive Officer
Arthur M. Morris, M.D... 58 President and Director
Martin Fox.............. 43 Executive Vice President, General Manager and Director
Michael J. Carbon, M.D.. 58 Senior Vice President and Director
Nicki M. Norris......... 46 Executive Vice President and General Manager
James E. Becks.......... 47 Chief Executive Officer (Contract Services division)
John B. Bourke.......... 50 Chief Financial Officer
Paul Balter, M.D........ 59 Secretary, Treasurer and Director
Thomas Creel............ 50 Vice President of Business Development-Northern U.S.
and Director
Alan Berry.............. 51 Director
George Dunea, M.D....... 65 Director
Ashutosh Gupta, M.D..... 50 Director
Douglas Mufuka, M.D..... 57 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 and
a member of Loyola University Health System Board of Directors since 1996. He
has been in private practice since 1971.
Mr. Fox is the Executive Vice President, General Manager of Managed Care
Business and a director of the Company. Mr. Fox joined Everest in those
capacities 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 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.
60
Ms. Norris is the Executive Vice President and General Manager of the
Company with responsibility for operations of the chronic dialysis centers.
Ms. Norris joined Everest in that capacity in 1996. She is a graduate of the
University of Illinois at Urbana--Champaign where she earned a Bachelor of
Science in Finance and a Masters in Business Administration. She received a
Professional Accounting Certificate from Northwestern University and is a
Certified Public Accountant. Ms. Norris has more than twenty years of business
experience, having worked for Baxter Healthcare Services Corporation
("Baxter"), a subsidiary of Baxter International Inc., and Stone Container
Corporation in managerial positions in the areas of finance, operations,
marketing, strategic planning and human resources. Most recently, Ms. Norris
was Vice President of Business Process Innovation (strategic planning) at
Baxter from 1994 to 1996.
Mr. Becks is Chief Executive Officer of the Company's Contract Services
division 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. Bourke is the Chief Financial Officer of the Company. Mr. Bourke joined
Everest in that capacity in 1996. He is a graduate of Denver University where
he earned his Bachelor of Science, Bachelor of Arts, majoring in Accounting.
Mr. Bourke received his Masters of Management from Northwestern University and
is also a Certified Public Accountant. Mr. Bourke's experience includes ten
years at Arthur Andersen & Company as Senior Audit Manager and, most recently,
fourteen years at George J. Ball, Inc. There he held various accounting,
operational and general management positions, the last of which from 1983 to
1996 was Senior Vice President and Chief Financial Officer for Ball Seed
Company.
Dr. Balter is the 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 Laboratories 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. 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
61
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."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal year
ended September 30, 1997 to the chief executive officer and the four other
most highly compensated executive officers (the "Named Executive Officers") of
the Company:
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION
--------------------------- -------- ------- ------------ ------------
Craig W. Moore, $416,000 $34,894 50,584 $20,283(1)
Chairman and Chief Executive
Officer
Nicki M. Norris, 168,000 75,600 23,500 17,622(2)
Executive Vice President and
General Manager
John B. Bourke, 152,000 72,908 23,500 20,283(1)
Chief Financial Officer
Martin Fox, 205,000 19,479 -- 20,217(3)
Executive Vice President and
General Manager
Thomas Creel, 205,000 19,479 -- 17,147(4)
Vice President of Business
Development--Northern U.S.
- --------
(1) Includes profit sharing plan contributions of $15,533 and 401(k) plan
matching contributions of $4,750.
(2) Includes profit sharing plan contributions of $15,533 and 401(k) plan
matching contributions of $2,089.
(3) Includes profit sharing plan contributions of $15,533 and 401(k) plan
matching contributions of $4,684.
(4) Includes profit sharing plan contributions of $15,533 and 401(k) plan
matching contributions of $1,614.
62
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" and "--Compensation Agreement."
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.
In connection with the acquisition of 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. 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 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.
STOCK OPTION PLANS
Stock Award Plan. Pursuant to the Company's 1996 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 June 30, 1998,
options to purchase a total of 1,198,400 shares of common stock had been
granted under the Plan at an exercise price of $9.10 per share. Such options
vest in four equal increments on each of the first four anniversaries of the
grant date. The Plan includes a provision that upon a change in control the
committee administering the Plan has the discretion to declare all outstanding
options exercisable. Such options expire after
63
a ten-year period, or earlier if an employee is terminated for cause or
voluntarily terminates employment other than through retirement. The options
will become fully exercisable upon termination of employment by reason of
death, disability or retirement. In the case of an employee whose employment
is terminated for a reason other than cause, the Company may in its sole
discretion purchase the option for an amount equal to the aggregate per share
fair market value minus the aggregate per share exercise price.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options by the Company to the Named Executive Officers during the fiscal year
ended September 30, 1997:
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PERCENTAGE OF PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION
SHARES GRANTED TO FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(2)
OPTIONS GRANTED IN FISCAL YEAR BASE PRICE EXPIRATION ---------------
NAME (#)(1) (%) ($/SH) DATE 5%($) 10%($)
- ---- --------------- -------------- ----------- ---------- ------- -------
Craig W. Moore(3)....... 50,584 3.9 9.10 2/5/07 289,340 733,468
Nicki M. Norris......... 23,500 1.8 9.10 2/5/07 134,420 340,750
John B. Bourke.......... 23,500 1.8 9.10 2/5/07 134,420 340,750
Martin Fox.............. -- -- -- -- -- --
Thomas Creel............ -- -- -- -- -- --
- --------
(1) These options, which were originally granted on February 5, 1997, were
subsequently cancelled and replacement options with identical terms were
issued on February 5, 1998 pursuant to the reorganization of the Company.
See "The Company," "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Reorganization" and "Certain
Relationships and Related Transactions--Peak." These options vest in four
equal increments on each of the first four anniversaries of the original
grant date. For a description of other terms of these options, see "--
Stock Option Plans--Stock Award Plans."
(2) Assumes that the fair market value of the common stock as of September 30,
1997 was $9.10 per share, which is equal to the fair market value of the
common stock on February 5, 1997 (the date of grant) as determined by the
Board of Directors.
(3) The options shown for Mr. Moore represent the maximum number of options
indirectly granted to him through Peak Liquidating. The actual number of
options Mr. Moore is entitled to receive will vary depending on the
valuation of certain assets of Peak Liquidating or its predecessor entity.
64
FISCAL YEAR-END OPTION VALUES
The following table contains information regarding the Named Executive
Officers' unexercised options as of September 30, 1997. None of the Named
Executive Officers exercised any options during the fiscal year ended
September 30, 1997:
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AS OF IN-THE-MONEY OPTIONS AS
SEPTEMBER 30, 1997 (#) (1) OF SEPTEMBER 30, 1997 ($)
--------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ --------------- ----------- -------------
Craig W. Moore(2). -- 50,584 -- (3)
Nicki M. Norris... -- 23,500 -- (3)
John B. Bourke.... -- 23,500 -- (3)
Martin Fox........ -- -- -- --
Thomas Creel...... -- -- -- --
- --------
(1) These options were subsequently terminated and replacement options with
identical terms were issued on February 5, 1998 pursuant to the
reorganization of the Company. See "The Company," "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 its predecessor entity.
(3) 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, 1997 has been undertaken.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee or other Board committee
performing similar functions. Each of Craig Moore, Martin Fox and Thomas Creel
participated in deliberations of the Company's board of directors concerning
executive officer compensation. See "Certain Relationships and Related
Transactions." All Founding Directors other than Mr. Moore are also directors
of NANI-IL and NANI-IN.
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."
65
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 "Use of Proceeds."
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
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. In fiscal 1995, 1996 and 1997, and for the
nine months ended June 30, 1998, the Company paid NANI-IL $4,315,000,
$2,369,000, $1,883,000 and $1,314,000 respectively, pursuant to the terms of
the Administrative Services Agreement. For fiscal 1997, NANI-IL also earned a
bonus of $209,362 for services provided under the Administrative Services
Agreement.
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 1995, 1996 and 1997, and for the nine months
ended June 30, 1998, NANI-IL paid the Company $3,558,000, $1,579,000,
$1,295,000 and $1,152,000 respectively, 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
$7,577,096 as of June 30, 1998. 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 December 1999.
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 matured on November 29, 2000 and bore interest 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 "Use
66
of Proceeds." Continental owns and leases dialysis equipment to the Company.
Prior to the acquisition of Continental by the Company, in fiscal 1995, 1996
and 1997, the Company or its subsidiaries paid Continental a total of
$354,385, $417,352 and $377,792, respectively, for interest on such leases.
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 1995, 1996 and 1997, the
Company and its subsidiaries paid ARE $684,562, $791,678 and $872,691,
respectively. For the six months ended March 31, 1998, the Company and its
subsidiaries paid ARE $414,436. In June 1998, the Company purchased ARE's
assets for approximately $4,800,000 in cash.
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 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 each of
fiscal 1995, 1996 and 1997, collectively paid 3M&L $148,980. For the nine
months ended June 30, 1998, the Company and its subsidiaries paid 3M&L
$111,735. Two of the leases are currently in month-to-month renewal periods;
the remaining lease expires in August 1998 and is expected to be renewed.
Security General. An Illinois general partnership, Security General
Partnership ("Security General") is owned collectively by the Founding
Directors and John Bourke, the Company's Chief Financial Officer. Security
General owns a 6.67% interest in Infinity Insurance, Ltd., 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 three policy years were $435,996,
$479,870 and $479,870, respectively.
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 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.
67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of common stock
beneficially owned as of June 30, 1998 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:
NUMBER OF PERCENT
NAME SHARES OWNED OF TOTAL
---- ------------ --------
Peak Liquidating, L.L.C.(1)(2)(3)......................... 2,615,025 19.0%
Arthur M. Morris, M.D.(3)(4).............................. 1,966,901 14.3
Paul Balter, M.D.(3)(4)................................... 824,226 6.0
Michael J. Carbon, M.D.(3)(4)............................. 811,043 5.9
George Dunea, M.D. Revocable Trust(3)(4).................. 811,043 5.9
Ashutosh Gupta, M.D.(3)(4)................................ 811,043 5.9
Douglas Mufuka, M.D.(3)(4)................................ 811,043 5.9
Martin Fox(5)............................................. 797,500 5.8
Thomas Creel(5)........................................... 797,500 5.8
AJ BCA, Ltd.(5)(6)........................................ 780,000 5.7
Craig W. Moore(3)(4)(7)................................... 615,201 4.5
Alan M. Berry(8).......................................... -- --
Nicki M. Norris(8)(9)..................................... 5,875 *
James E. Becks(10)........................................ 11,775 *
John B. Bourke(8)(9)...................................... 5,875 *
All executive officers and directors as a group(11)(12)... 10,883,550 79.2
- --------
*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 615,025 shares which are exercisable within
60 days of the date of this Prospectus.
(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) Subject to the Shareholders Agreement dated as of November 30, 1997. See
"Certain Relationships and Related Transactions--Shareholders
Agreements."
(6) AJ BCA, Ltd. is a nominee of Anthony Unruh.
(7) Does not include options to purchase 50,584 shares indirectly granted to
Mr. Moore through Peak Liquidating.
(8) Excludes participations in value of Peak Liquidating to which such person
may be entitled pursuant to an agreement with members of Peak
Liquidating.
(9) Includes options to purchase 5,875 shares which are exercisable within 60
days of the date of this Prospectus.
(10) Includes options to purchase 11,775 shares which are exercisable within
60 days of the date of this Prospectus.
(11) Includes shares held indirectly through Peak Liquidating.
(12) Includes options to purchase 638,050 shares which are exercisable within
60 days of the date of this Prospectus.
68
DESCRIPTION OF CREDIT FACILITY
In May of 1998, the Company refinanced the Prior Credit Facility with a
series of credit facilities, as described below (referred to herein
collectively as the "New Credit Facility") provided by Harris Trust and
Savings Bank (the "Bank"). A portion of the net proceeds of the Initial
Offering was utilized to repay in full the amounts then outstanding under the
Prior Credit Facility. See "Use of Proceeds."
The New Credit Facility consists of three separate facilities: (i) a $35.0
million revolving credit facility (including a $1.0 million sub-limit for
letters of credit) maturing on May 15, 2001, which may be extended for two
one-year periods at the Bank's discretion (the "Working Capital Facility");
(ii) a $65.0 million acquisition financing facility maturing on May 15, 1999
(the "Acquisition Facility"), which includes the right to convert all or a
portion of the borrowings outstanding thereunder to one or more five-year term
loans (the "Term Loans"); and (iii) a $15.0 million supplemental revolving
credit facility (the "Supplemental Facility") maturing on May 15, 1999. The
total amount drawn under the Acquisition Facility and the Supplemental
Facility may not exceed $65.0 million, and the total drawn under all three
facilities may not exceed $100.0 million.
The Working Capital Facility supports the working capital needs of the
Company and its majority-owned subsidiaries (the "Bank Restricted
Subsidiaries"); the Acquisition Facility may be used to finance acquisitions
and de novo facilities; and the Supplemental Facility enables the Company to
make advances to companies in which it has a less than majority ownership (the
"Bank Unrestricted Subsidiaries"). The New Credit Facility is currently
secured by all existing and future assets of the Company and its Bank
Restricted Subsidiaries, including accounts receivable, inventories, fixed
assets and all non-current assets (including intangibles and trademarks), and
the common stock of the Company's subsidiaries. Each of the three facilities
is cross-defaulted and cross-collateralized with the other two. Loans under
the Working Capital Facility may only be made to the extent of 75% of eligible
accounts receivable that have been outstanding no longer than 120 days. The
New Credit Facility also is secured by the joint and several guarantees of all
Bank Restricted Subsidiaries.
The New Credit Facility provides for an annual fee to the Bank, unused
commitment fees and letter of credit fees. The New Credit Facility bears
interest at LIBOR plus margins ranging from 1.75% to 2.25% in the case of the
Working Capital Facility, and from 2.20% to 2.50% in the case of the
Acquisition Facility and the Supplemental Facility, based on applicable
leverage ratios.
The New 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 New
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
investments, limitations on stock repurchases, and limitations on debt
payments and other distributions, including prepayment or redemption of the
Notes.
The New 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 accounts; (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.
69
DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued as a separate series under an indenture
(the "Indenture"), dated as of May 5, 1998, by and among the Company, the
Subsidiary Guarantors and American National Bank and Trust Company of Chicago,
as Trustee (the "Trustee"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the Trust Indenture Act of 1939, as amended
(the "TIA"), and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the Indenture and Registration Rights Agreement is available from the
Company. The definitions of certain capitalized terms used in the following
summary are set forth below under "--Certain Definitions." For purposes of
this section, references to the "Company" include only Everest Healthcare
Services Corporation, and not its Subsidiaries, and references to interest
includes Additional Interest (as defined under "The Exchange Offer--Purpose
and Effect of the Exchange Offer").
The Private Notes are, and the Exchange Notes will be, general unsecured
obligations of the Company subordinated in right of payment to all existing
and future Senior Indebtedness of the Company, including the Company's
obligations under the New Credit Facility. The Guarantees are and will be
general unsecured obligations of the Subsidiary Guarantors and are and will be
subordinated in right of payment to all existing and future Guarantor Senior
Indebtedness of the Subsidiary Guarantors. As of June 30, 1998, the Company
and its Subsidiaries had an aggregate of approximately $7.2 million of Senior
Indebtedness outstanding (excluding unused commitments of $95.2 million
available under the New Credit Facility). The Company has obtained a New
Credit Facility which has replaced the Prior Credit Facility, provides for
borrowings of up to $100.0 million and is secured by the assets of the Company
and certain of its subsidiaries. The Notes also are and will be structurally
subordinated to all indebtedness and other obligations of each of the
Company's Subsidiaries other than the Subsidiary Guarantors (to the extent of
the assets of such Subsidiary). As of June 30, 1998, Subsidiaries of the
Company that are not Subsidiary Guarantors had approximately $7.4 million of
outstanding liabilities to which the Notes would have been effectively
subordinated. The Indenture permits the incurrence of additional Indebtedness
in the future, including Senior Indebtedness. See "Risk Factors--Subordination
of Exchange Notes; Structural Subordination; Asset Encumbrance," "--Reliance
on Payments from Subsidiaries," and "--Suretyship Defenses."
The Company is a holding company, and substantially all of its operations
are conducted through its Subsidiaries, and the Company, therefore, is
dependent upon the cash flow of its Subsidiaries to meet its debt obligations,
including its obligations under the Notes. While all of the existing wholly-
owned Subsidiaries of the Company are Subsidiary Guarantors, none of the less
than wholly-owned Subsidiaries of the Company are Subsidiary Guarantors, and
future Subsidiaries of the Company may not be Subsidiary Guarantors and may be
restricted in their ability to pay dividends to the Company pursuant to
instruments governing indebtedness of such Subsidiaries. See "Risk Factors--
Reliance on Payments from Subsidiaries" and "--Suretyship Defenses."
Under certain circumstances, the Company will be able to designate any
Subsidiary formed by the Company or acquired by the Company after the original
issuance of the Notes as an Unrestricted Subsidiary. Unrestricted Subsidiaries
will not be Subsidiary Guarantors and will not be subject to most of the
restrictive covenants set forth in the Indenture.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Notes. The Notes
may be presented for registration or transfer and exchange at the offices of
the Registrar, which initially will be the Trustee's corporate trust office.
The Company may change any Paying Agent and Registrar without notice to
holders of the Notes (the "Holders"). The Company will pay principal (and
premium, if any) on the Notes at the Trustee's corporate office in New York,
New York. Except as set forth below under "Book Entry; Delivery and Form--
Same-Day Settlement and Payment," at the Company's option, interest may be
paid
70
at the Trustee's corporate trust office or by check mailed to the registered
address of Holders; provided that, except as set forth below under "Book
Entry; Delivery and Form," all payments of principal, interest, and premium,
if any, with respect to Notes, the Holders of which have given wire transfer
instructions to the Company, will be required to be made by wire transfer of
immediately available next day funds to the accounts specified by the Holders
thereof.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150,000,000, of
which $100,000,000 were issued in the Initial Offering and will mature on May
1, 2008. Additional amounts may be issued in one or more series from time to
time, subject to the limitations set forth under "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness" and the restrictions
contained in the New Credit Facility. Interest on the Notes will accrue at the
rate of 9 3/4% per annum and will be payable semiannually in cash on each May
1 and November 1, commencing on November 1, 1998, to the Persons who are
registered Holders at the close of business on the April 15 and October 15
immediately preceding the applicable interest payment date. Interest on the
Exchange Notes will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from and including the date of
original issuance, May 5, 1998. Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to receive any interest
accrued on the Private Notes. Interest will be computed on the basis of a 360-
day year comprised of twelve 30-day months.
MANDATORY REDEMPTION
Except as set forth below under "--Change of Control" and "--Certain
Covenants--Limitation on Asset Sales," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Notes.
OPTIONAL REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's option,
in whole or in part from time to time, on and after May 1, 2003, at the
following redemption prices (expressed as percentages of the principal amount
thereof) if redeemed during the twelve-month period commencing on May 1 of the
year set forth below, plus, in each case, accrued and unpaid interest thereon,
if any, to the date of redemption (subject to the rights of holders of record
on the relevant record date to receive interest due on the relevant interest
payment date):
YEAR PERCENTAGE
---- ----------
2003.......................... 104.875%
2004.......................... 103.250
2005.......................... 101.625
2006 and thereafter........... 100.000
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to May 1, 2001, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings to redeem up to an
aggregate of 35% of the principal amount of the Notes originally issued at a
redemption price equal to 109.75% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption (subject to the
rights of holders of record on the relevant record date to receive interest
due on the relevant interest payment date); provided that at least 65% of the
aggregate principal amount of the Notes originally issued in the Initial
Offering remain outstanding immediately after the occurrence of any such
redemption. In order to effect the foregoing redemption with the proceeds of
any Public Equity Offering, the Company is required to make such redemption
not more than 60 days after the consummation of any such Public Equity
Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
71
exchange, if any, on which such Notes are listed or, if such Notes are not
then listed on a national securities exchange, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be
redeemed in part; provided, further, that if a partial redemption is made with
the proceeds of a Public Equity Offering, selection of the Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis
or on as nearly a pro rata basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note (subject to DTC procedures). On and
after the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption so long as the Company has deposited with the
Paying Agent funds in satisfaction of the applicable redemption price pursuant
to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Indebtedness, whether outstanding on the Issue Date or
thereafter incurred. Upon any payment or distribution of assets of the Company
of any kind or character, whether in cash, property or securities, to
creditors in an Insolvency or Liquidation Proceeding relating to the Company
or its property, whether voluntary or involuntary, all Obligations due upon
all Senior Indebtedness shall first be paid in full in cash or Cash
Equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Indebtedness, by the Company or any of its Subsidiaries,
before any payment or distribution of any kind or character is made on account
of any Obligations on the Notes, or for the acquisition, by the Company or any
of its Subsidiaries, of any of the Notes for cash or property, except for
Permitted Insolvency Payments. Upon any such Insolvency or Liquidation
Proceeding, any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (other than Permitted
Insolvency Payments), to which the Holders of the Notes or the Trustee would
otherwise be entitled will be paid by the Company or by any receiver, trustee
in bankruptcy, liquidating trustee, agent or other person making such payment
or distribution, or by the Holders of the Notes or by the Trustee if received
by them, directly to the holders of Senior Indebtedness (pro rata to such
holders on the basis of the amounts of Senior Indebtedness held by such
holders) or their Representatives, as their interests may appear, for
application to the payment of the Senior Indebtedness remaining unpaid until
all such Senior Indebtedness has been paid in full, after giving effect to any
concurrent payment, distribution or provision therefor to or for the holders
of Senior Indebtedness.
If either (i) any default occurs and is continuing in the payment when due,
whether at maturity, upon any redemption, by declaration or otherwise, of any
principal of, interest on, reimbursement for drawings under letters of credit
issued as part of, or regularly accruing fees with respect to, any Senior
Indebtedness, or (ii) any default occurs and is continuing with respect to any
Designated Senior Indebtedness resulting in the acceleration of the maturity
of all or any portion of any Designated Senior Indebtedness, no payment of any
kind or character (other than Permitted Insolvency Payments) shall be made by
the Company or any of its Subsidiaries with respect to any Obligations on the
Notes or to acquire any of the Notes for cash or property. In addition, if any
other event of default occurs and is continuing with respect to any Designated
Senior Indebtedness, as such event of default is defined in the instrument
creating or evidencing such Designated Senior Indebtedness, permitting the
holders of such Designated Senior Indebtedness then outstanding to accelerate
the maturity thereof and if the Representative for the respective issue of
Designated Senior Indebtedness gives written notice of the event of default to
the Trustee (a "Default Notice"), then, unless and until all events of default
have been cured or waived or have ceased to exist or the Trustee receives
notice from the Representative for the respective issue of Designated Senior
Indebtedness terminating the Blockage Period (as defined below), during the
179 days after the delivery of such Default Notice (the "Blockage Period"),
neither the Company nor any of its
Subsidiaries shall (x) make any payment of any kind or character (other than
Permitted Insolvency Payments)
72
with respect to any Obligations on the Notes or (y) acquire any of the Notes
for cash or property (other than in exchange for Permitted Insolvency
Payments). Notwithstanding anything herein to the contrary, in no event will a
Blockage Period extend beyond 179 days from the date of the commencement of
the Blockage Period and only one such Blockage Period may be commenced within
any 365 consecutive days. No event of default which existed or was continuing
on the date of the commencement of any Blockage Period with respect to the
Designated Senior Indebtedness shall be, or be made, the basis for
commencement of a second Blockage Period by the Representative of such
Designated Senior Indebtedness whether or not within a period of 365
consecutive days, unless such event of default shall have been cured or waived
for a period of not less than 90 consecutive days (it being acknowledged that
any subsequent action, or any breach of any financial covenants for a period
commencing after the date of commencement of such Blockage Period that, in
either case, would give rise to an event of default pursuant to any provisions
under which an event of default previously existed or was continuing shall
constitute a new event of default for this purpose). The Indenture will
contain other customary subordination provisions regarding turnover of
payments, deferral of subrogation and the like.
By reason of such subordination, in the event of an Insolvency or
Liquidation Proceeding relating to the Company, creditors of the Company who
are not holders of Senior Indebtedness, including the Holders of the Notes,
may recover less, ratably, than holders of Senior Indebtedness. See "Risk
Factors--Subordination of Exchange Notes; Structural Subordination; Asset
Encumbrance."
GUARANTEES
Each Subsidiary Guarantor has fully and unconditionally guaranteed and will
fully and unconditionally guarantee, jointly and severally, to each Holder and
the Trustee, subject to subordination provisions substantially the same as
those described above, the full and prompt payment of principal of and
interest on the Private Notes and Exchange Notes, respectively, and of all
other obligations under the Indenture.
The obligations of each Subsidiary Guarantor under its Guarantee are and
will be limited to the maximum amount as will, after giving effect to all
other contingent and fixed liabilities of such Subsidiary Guarantor
(including, without limitation, any Obligations under the New Credit Facility)
and after giving effect to any collections from or payments made by or on
behalf of any other Subsidiary Guarantor in respect of the obligations of such
other Subsidiary Guarantor under its Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Subsidiary
Guarantor under such Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Subsidiary Guarantor that
makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Subsidiary Guarantor.
The Indebtedness evidenced by each Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) is and will be
subordinated to Guarantor Senior Indebtedness (defined with respect to the
Indebtedness of a Guarantor in the same manner as Senior Indebtedness is
defined with respect to the Company) on the same terms as the Notes are
subordinated to Senior Indebtedness. As of June 30, 1998, there was
approximately $7.2 million of Guarantor Senior Indebtedness. See "--
Subordination" above.
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless, subject to the provisions of the following
paragraph, (i) the Person formed by or surviving any such consolidation or
merger (if other than such Subsidiary Guarantor) assumes all the Obligations
of such Subsidiary Guarantor under the Notes, the Indenture, and the
Registration Rights Agreement pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee; (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists;
(iii) such Subsidiary Guarantor, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction), equal to or greater than the Consolidated
Net Worth of such Subsidiary Guarantor immediately preceding the transaction;
and (iv) the
73
Company would be permitted to incur at least $1.00 of additional Indebtedness
(in addition to Permitted Indebtedness) pursuant to the "Limitation on
Incurrence of Additional Indebtedness" covenant. The requirements of clauses
(i), (iii) and (iv) of this paragraph will not apply in the case of a
consolidation with or merger with or into the Company or another Subsidiary
Guarantor.
The Indenture provides that (a) in the event of a sale or other disposition
of all or substantially all of the assets of any Subsidiary Guarantor, by way
of merger, consolidation or otherwise, or a sale or other disposition of all
of the Capital Stock of any Subsidiary Guarantor to a Person other than the
Company or a Subsidiary Guarantor, or (b) in the event that the Company
designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or such
Subsidiary Guarantor ceases to be a Subsidiary of the Company, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor to a Person other than the Company or a Subsidiary
Guarantor or any such designation) or the entity acquiring the property (in
the event of a sale or other disposition of all of the assets of such
Subsidiary Guarantor) will be released and relieved of any obligations under
its Guarantee; provided that the Net Cash Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "--Change of Control" and "--Certain Covenants--Limitation on
Asset Sales."
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
The New Credit Facility restricts the Company from repurchasing any Notes
and also provides that certain asset sales and change of control events with
respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full all Indebtedness and terminate all
commitments under the New Credit Facility and all other Senior Indebtedness
the terms of which require repayment upon a Change of Control or prohibit a
Change of Control Offer or offer to repay in full and terminate all
commitments under all Indebtedness under the New Credit Facility and all other
such Senior Indebtedness and to repay the Indebtedness owed to each lender
which has accepted such offer or (ii) obtain the requisite consents under the
New Credit Facility and all other Senior Indebtedness to permit the repurchase
of the Notes as provided below. If the Company does not obtain such consent or
repay such borrowings, the Company will remain prohibited from purchasing
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the New Credit Facility and would likely cause an
event of default under any other outstanding Senior Indebtedness. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of Notes. See "Risk Factors--Subordination of
Exchange Notes; Structural Subordination; Asset Encumbrance" and "Description
of Credit Facility."
Within 30 days following the date upon which the Change of Control occurs,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a Note purchased pursuant to
a Change of Control Offer will be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders
74
seeking to accept the Change of Control Offer. In the event the Company is
required to purchase outstanding Notes pursuant to a Change of Control Offer,
the Company expects that it would seek third party financing to the extent it
does not have available funds to meet its purchase obligations. However, there
can be no assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant
liens on its property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the Notes, and there can be no assurance that the Company or the acquiring
party will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction, and the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction that does not constitute a
Change of Control.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of each of the Company and its Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times, and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company (as described in the third paragraph under this caption) and purchases
all Notes validly tendered and not withdrawn under such Change of Control
Offer.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Indenture provides
that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee,
acquire, become liable, contingently or otherwise, with respect to, or
otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness); provided, however, that if
no Default or Event of Default shall have occurred and be continuing at the
time of or as a consequence of the incurrence of any such Indebtedness, the
Company and its Restricted Subsidiaries may incur Indebtedness (including,
without limitation, Acquired Indebtedness) if on the date of the incurrence of
such Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company is greater
75
than 2.0 to 1.0. The accrual of interest and the accretion of original issue
discount shall not constitute the incurrence of Indebtedness.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not cause or permit any of its Restricted Subsidiaries to,
directly or indirectly, (a) declare or pay any dividend or make any
distribution (other than dividends or distributions payable in Qualified
Capital Stock of the Company) on or in respect of shares of the Company's
Capital Stock or any Restricted Subsidiary's Capital Stock, (b) purchase,
redeem or otherwise acquire or retire for value any Capital Stock of the
Company or any Subsidiary of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock, (c) make any
Investment (other than Permitted Investments) or (d) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness subordinated in right of payment to the Notes or
the Guarantees, except a payment of interest or principal at Stated Maturity
(each of the foregoing actions set forth in clauses (a), (b), (c) and (d)
being referred to as a "Restricted Payment"), unless at the time of such
Restricted Payment and immediately after giving effect thereto, (i) no Default
or an Event of Default shall have occurred and be continuing; and (ii) the
Company is able to incur at least $1.00 of additional Indebtedness (in
addition to Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant and (iii) the aggregate amount
of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purposes, if other
than in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) is less
than the sum of: (w) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss)
of the Company earned subsequent to the Issue Date and on or prior to the date
the Restricted Payment occurs (the "Reference Date") (treating such period as
a single accounting period); plus (x) 100% of the aggregate net cash proceeds
received by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and on or
prior to the Reference Date of Qualified Capital Stock of the Company; plus
(y) 100% of the net cash proceeds from the sale of Investments by the Company
(other than Permitted Investments) provided that such Investment was made
after the Issue Date, plus (z) without duplication of any amounts included in
clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock (excluding, in the case of clauses (iii)(x) and (z), any net cash
proceeds from a Public Equity Offering to the extent used to redeem the
Notes).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit: (1) the payment of any dividend within
60 days after the date of declaration of such dividend if the dividend would
have been permitted on the date of declaration; or (2) if no Default or Event
of Default shall have occurred and be continuing, the acquisition of any
shares of Qualified Capital Stock of the Company or payment, redemption,
acquisition or defeasance of Indebtedness subordinated in right of payment to
the Notes or the Guarantees, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company and Refinancing Indebtedness or (ii)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Subsidiary of the Company) of shares of Qualified
Capital Stock of the Company (excluding, in the case of clause (2)(ii), any
net cash proceeds from a Public Equity Offering to the extent used to redeem
the Notes); (3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Refinancing Indebtedness; (4) the payment of any dividend or distribution by a
Restricted Subsidiary of the Company to the Company or a Wholly Owned
Restricted Subsidiary of the Company; (5) the repurchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held
by any member of the Company's (or any of its Restricted Subsidiaries')
management either (a) pursuant to any management equity subscription agreement
or stock option agreement in effect as of the date of the Indenture, or (b)
upon the termination of such person's employment; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Capital
Stock pursuant to clauses (a) and (b) shall not exceed $1.0 million in any
twelve-month period and no Default or Event of Default shall have occurred and
be continuing immediately after such transaction; (6) if no Default or Event
of Default shall have occurred and be continuing, repurchases of Capital Stock
deemed to occur upon the exercise of stock options if such Capital Stock
represents a portion of the exercise price thereof; (7) Investments
76
in, including Contributions to, a Restricted Subsidiary if such Restricted
Subsidiary is not a Foreign Subsidiary, including Investments in, or
Contributions to a Person which becomes a Restricted Subsidiary as a result
thereof and, if such Person is not already a Subsidiary Guarantor, such Person
(a) executes and delivers to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall guarantee all of the Obligations of the Company with respect
to the Indenture and the Notes and (b) delivers to the Trustee an Opinion of
Counsel reasonably satisfactory to the Trustee to the effect that such
supplemental indenture has been duly executed and delivered by such Restricted
Subsidiary and is in compliance with the terms of the Indenture; (8) so long
as no Default or Event of Default shall have occurred and be continuing,
dividends and distributions by a Restricted Subsidiary pro rata to the holders
of its Capital Stock as their interests may appear; (9) the payment of a
preferred return to certain of the equity holders of Tri-State Perfusion, LLC,
pursuant to agreements in effect as of the Issue Date; and (10) the
acquisition of any equity in The Extracorporeal Alliance, L.L.C., pursuant to
the terms of one or more of the Put/Call Agreements dated November 26, 1996,
by and among the Company, The Extracorporeal Alliance, L.L.C., Great Lakes
Perfusion, Inc., Bay Extracorporeal Technologies, Inc., Everest Management,
Inc., and certain other parties signatory thereto with the cash proceeds
actually received by the Company or the Trustee under the terms of the related
Trust Agreement from any life insurance policy insuring the life of the party
whose estate or beneficiary is exercising such put; provided, that any
increase in the annual premiums for such policies over the annual premium in
effect as of the Issue Date shall be deemed to be an "Investment" for purposes
of the Indenture. In determining the aggregate amount of Restricted Payments
made subsequent to the Issue Date in accordance with clause (iii) of the
immediately preceding paragraph, amounts expended pursuant to clauses (1) and
(5) shall be included in such calculation.
Not later than 45 days after the end of each calendar quarter, the Company
shall deliver to the Trustee an Officers' Certificate stating that any
Restricted Payment made during such quarter complies with the Indenture and
setting forth in reasonable detail the basis upon which the required
calculations were computed, which calculations may be based upon the Company's
latest available internal quarterly financial statements.
Limitation on Asset Sales. The Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, consummate an Asset
Sale unless (i) the Company or the applicable Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Company's Board of Directors), (ii) at least
75% of the consideration received by the Company or the Restricted Subsidiary,
as the case may be, from such Asset Sale shall be in the form of cash or Cash
Equivalents and is received at the time of such disposition; provided that the
amount of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet), of the Company or any Restricted
Subsidiary (other than (I) contingent liabilities (except to the extent
reflected (or reserved for) on a balance sheet of the Company or any
Restricted Subsidiary as of the date prior to the date of consummation of such
transaction) and (II) liabilities that are by their terms subordinated to the
Notes or the Guarantees) that are assumed by the transferee of any such assets
and (y) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are converted within
90 days by the Company or such Restricted Subsidiary into cash or Cash
Equivalents (to the extent so received), shall be deemed to be cash or Cash
Equivalents for purposes of this provision; and (iii) upon the consummation of
an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to
apply, the Net Cash Proceeds relating to such Asset Sale within 180 days of
receipt thereof either (A) to prepay any Senior Indebtedness and, in the case
of any Senior Indebtedness under any Credit Facility, effect a permanent
reduction in the availability under such Credit Facility, (B) to make an
investment in properties and assets (other than cash, Cash Equivalents or
inventory) that replace the properties and assets that were the subject of
such Asset Sale or in properties and assets that will be used in a Permitted
Business ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
181st day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each,
a "Net Proceeds Offer Trigger Date"), the portion of such aggregate amount of
Net Cash Proceeds which have not been
77
applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence equal
to the principal amount of the Notes divided by the sum of the principal
amount of the Notes and all Indebtedness constituting Pari Passu Debt (each a
"Net Proceeds Offer Amount") shall be applied by the Company or such
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on
a pro rata basis, that amount of Notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the Notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash or Cash Equivalents (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant. The Company may defer the
Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $5.0 million resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not
just the amount in excess of $5.0 million, shall be applied as required
pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
Person in a transaction permitted under the covenant titled "Merger,
Consolidation and Sale of Assets," the successor corporation shall be deemed
to have sold the properties and assets of the Company and its Subsidiaries not
so transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to such deemed sale as if it were an
Asset Sale. In addition, the fair market value of such properties and assets
of the Company or its Subsidiaries deemed to be sold shall be deemed to be Net
Cash Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets (including,
for purposes of this paragraph only, inventory) and the remainder constitutes
cash or Cash Equivalents and (ii) such Asset Sale is for fair market value;
provided that any consideration not constituting Replacement Assets
(including, for purposes of this paragraph only, inventory) received by the
Company or any of its Subsidiaries in connection with any Asset Sale permitted
to be consummated under this paragraph shall constitute Net Cash Proceeds
subject to the provisions of the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law. To the extent that the
aggregate amount of Notes tendered pursuant to a Net Proceeds Offer is less
than the Net Proceeds Offer Amount, the Company may use any remaining Net
Proceeds Offer Amount for general corporate purposes, and the Net Proceeds
Offer Amount shall return to zero.
The Credit Facility will restrict the Company from repurchasing any Notes
and also provides that certain asset sales and change of control events with
respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions.
The Indenture will provide that, prior to the mailing of the notice referred
to below, but in any event within 30 days following any Net Proceeds Offer
Trigger Date, the Company covenants to (i) repay in full all Indebtedness and
terminate all commitments under the Credit Facility and all other Senior
Indebtedness the terms of which would prohibit the Net Proceeds Offer, or (ii)
obtain the
78
requisite consents under the Credit Facility and all other Senior Indebtedness
to permit the Net Proceeds Offer. If the Company does not obtain such consent
or repay such borrowings, the Company will remain prohibited from purchasing
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Credit Facility and would likely cause an event
of default under any other outstanding Senior Indebtedness. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of Notes. See "Risk Factors--Subordination of
Notes; Structural Subordination; Asset Encumbrance" and "Description of Credit
Facility."
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that the Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or permit to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary of the
Company to (a) pay dividends or make any other distributions on or in respect
of its Capital Stock; (b) make loans or advances or to pay or guarantee any
Indebtedness or other obligation owed to the Company or any other Restricted
Subsidiary of the Company; or (c) transfer any of its property or assets to
the Company or any other Restricted Subsidiary of the Company, except for such
encumbrances or restrictions existing under or by reason of: (1) applicable
law; (2) the Indenture; (3) customary non-assignment provisions of any
contract or any lease governing a leasehold interest of any Subsidiary of the
Company; (4) any instrument governing Acquired Indebtedness, which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person or the properties or assets of the Person so
acquired; (5) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date; (6) purchase money
obligations for property acquired that impose restrictions of the nature
described in clause (4) above on the property so acquired; (7) any instrument
or agreement governing Indebtedness permitted to be incurred under the
Indenture, which is secured by a Lien permitted to be incurred under the
Indenture, which encumbrance or restriction is not applicable to any property
or assets other than the property or assets subject to such Lien; (8) an
agreement governing Indebtedness incurred to Refinance the Indebtedness
issued, assumed or incurred pursuant to an agreement referred to in clause
(2), (4), (5), (6) or (7) above; provided, however, that the provisions
relating to such encumbrance or restriction contained in any such Refinancing
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and
good faith judgment than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (2), (4), (5),
(6) or (7); or (9) any restrictions imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all of the Capital
Stock or property of any Restricted Subsidiary that apply pending the closing
of such sale or disposition.
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Indenture provides that the Company (i) will not, and will
not permit any of its Restricted Subsidiaries to, transfer, convey, sell,
lease or otherwise dispose of any Capital Stock of any Restricted Subsidiary
of the Company to any Person (other than the Company or a Restricted
Subsidiary of the Company), unless both (a) either (x) after giving effect to
such transfer, conveyance, sale, lease or other disposition such Person
remains a Restricted Subsidiary of the Company or (y) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock of
such Restricted Subsidiary and (b) the Net Cash Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
the covenant described above under the caption "Limitation on Asset Sales,"
and (ii) will not permit any Restricted Subsidiary of the Company to issue any
of its Capital Stock (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person, unless after giving
effect to such issuance such Restricted Subsidiary remains a Restricted
Subsidiary of the Company.
79
Notwithstanding the foregoing, the Company may transfer up to 2% of the equity
in Dialysis Specialists of Northeast Ohio, Ltd. pursuant to the terms of the
Operating Agreement of such entity as in effect on the Issue Date.
Limitation on Liens. The Indenture provides that the Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of
any kind against or upon any property or assets of the Company or any of its
Restricted Subsidiaries whether owned on the Issue Date or acquired after the
Issue Date, or any proceeds therefrom, or assign or otherwise convey any right
to receive income or profits therefrom unless (i) in the case of Liens
securing Indebtedness that is expressly subordinate or junior in right of
payment to the Notes, the Notes are secured by a Lien on such property, assets
or proceeds that is senior in priority to such Liens and (ii) in all other
cases, the Notes are equally and ratably secured, except for (A) Liens
existing as of the Issue Date to the extent and in the manner such Liens are
in effect on the Issue Date; (B) Liens securing Senior Indebtedness; (C) Liens
securing Guarantor Senior Indebtedness; (D) Liens in favor of the Company or a
Wholly Owned Restricted Subsidiary of the Company on assets of any Restricted
Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which
is incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with
the provisions of the Indenture; provided, however, that such Liens (x) are no
less favorable to the Holders and are not more favorable to the lienholders
with respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (y) do not extend to or cover any property or assets of the
Company or any of its Subsidiaries not securing the Indebtedness so
Refinanced; and (F) Permitted Liens.
Prohibition on Layering. The Indenture provides that (i) the Company will
not incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is both (a) subordinate or junior in right of payment to any
Senior Indebtedness and (b) senior in any respect in right of payment to the
Notes and (ii) no Subsidiary Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is both (a)
subordinate or junior in right of payment to its Guarantor Senior Indebtedness
and (b) senior in right of payment to its Guarantee.
Merger, Consolidation and Sale of Assets. The Indenture provides that the
Company will not, in a single transaction or series of related transactions,
consolidate or merge with or into any Person, or sell, assign, transfer,
lease, convey or otherwise dispose of (or cause or permit any Subsidiary of
the Company to sell, assign, transfer, lease, convey or otherwise dispose of)
all or substantially all of the Company's assets (determined on a consolidated
basis for the Company and the Company's Subsidiaries) whether as an entirety
or substantially as an entirety to any Person unless: (i) either (1) the
Company shall be the surviving or continuing corporation or (2) the Person (if
other than the Company) formed by such consolidation or into which the Company
is merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and
of the Company's Subsidiaries substantially as an entirety (the "Surviving
Entity") (x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of Columbia and
(y) shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the due
and punctual payment of the principal of, and premium, if any, and interest on
all of the Notes and the performance of every covenant of the Notes, the
Indenture and the Registration Rights Agreement on the part of the Company to
be performed or observed; (ii) immediately after giving effect to such
transaction and the assumption contemplated by clause (i)(2)(y) above
(including giving effect to any Indebtedness and Acquired Indebtedness
incurred or anticipated to be incurred in connection with or in respect of
such transaction), the Company or such Surviving Entity, as the case may be,
(1) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction
and (2) shall be able to incur at least $1.00 of additional Indebtedness (in
addition to Permitted Indebtedness) pursuant to the "Limitation on Incurrence
of Additional Indebtedness" covenant; (iii) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred
and any Lien granted in connection with or in respect of the transaction), no
Default or Event of Default shall have occurred or be continuing; and (iv) the
Company or the Surviving Entity shall have delivered to the Trustee an
Officers'
80
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, sale, assignment, transfer, lease, conveyance or other disposition
and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating
to such transaction have been satisfied.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which
the Company is merged or to which such conveyance, lease or transfer is made
shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under the Indenture and the Notes with the same effect
as if such Surviving Entity had been named as such.
Limitations on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property or the rendering of any service) with,
or for the benefit of, any Affiliate of the Company or its Restricted
Subsidiaries (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under the next succeeding paragraph below and (y)
Affiliate Transactions on terms that are no less favorable to the Company or
such Restricted Subsidiary than those that could reasonably have been obtained
in a comparable transaction at such time on an arm's-length basis from a
Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.0 million shall be
approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or
a series of related Affiliate Transactions related to a common plan) that
involves aggregate payments or other property with a fair market value of more
than $5.0 million, the Company or such Restricted Subsidiary, as the case may
be, shall, prior to the consummation thereof, obtain a favorable opinion as to
the fairness of such transaction or series of related transactions to the
Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the
same with the Trustee. For purposes of calculating the fair market value of
any transaction with or for the benefit of an Article 28 Company, the value of
any investment in any Subsidiary of the Company that engages in transactions
with such Article 28 Company shall be disregarded.
The restrictions set forth in the preceding paragraph shall not apply to,
and the following shall be deemed not to be Affiliate Transactions: (i)
reasonable fees and compensation paid to, and indemnity provided on behalf of,
officers, directors or employees of the Company or any Subsidiary of the
Company as determined in good faith by the Company's Board of Directors; (ii)
transactions exclusively between or among the Company and any of its Wholly
Owned Restricted Subsidiaries or exclusively between or among such Wholly
Owned Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture and in the case of transactions involving Wholly
Owned Restricted Subsidiaries that are Foreign Subsidiaries, such transactions
are on terms no less favorable to the other Wholly Owned Restricted Subsidiary
than those that could reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that is not an
Affiliate of the Company or such Subsidiary; (iii) any agreement as in effect
as of the Issue Date or any amendment thereto or any transaction contemplated
thereby (including pursuant to any amendment thereto) in any replacement
agreement thereto so long as any such amendment or replacement agreement is
not more disadvantageous to the Holders in any material respect than the
original agreement as in effect on the Issue Date; (iv) transactions permitted
by the provisions of the Indenture described under the covenant entitled
"Sales of Accounts Receivable;" (v) Restricted Payments and Permitted
Investments permitted by the Indenture; (vi) contracts pursuant to which the
Company or a Wholly Owned Restricted Subsidiary provides management services
to an Affiliate in exchange for payments in cash or Cash Equivalents, that are
no less favorable to the Company or such Wholly Owned Restricted Subsidiary
than those that could reasonably be obtained in a
81
comparable transaction at such time on an arm's length basis from a Person
that is not an Affiliate of the Company or such Wholly Owned Restricted
Subsidiary; and (vii) leases of employees for payments in cash or Cash
Equivalents that are greater than or equal to the wage and benefit cost of
such employees.
Sale and Leaseback Transactions. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, enter
into any Sale and Leaseback Transaction; provided that the Company or any
Restricted Subsidiary may enter into a Sale and Leaseback Transaction if (i)
the Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such Sale and Leaseback Transaction pursuant to
the covenant described above under the caption "Limitation on Incurrence of
Additional Indebtedness" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "Limitation on
Liens" and (ii) the gross cash proceeds of such sale and leaseback transaction
are at least equal to the fair market value (in the case of gross cash
proceeds in excess of $1.0 million as determined in good faith by the Board of
Directors of such Person and set forth in an Officers' Certificate delivered
to the Trustee) of the property that is the subject of such Sale and Leaseback
Transaction.
Limitation on Restricted and Unrestricted Subsidiaries. The Indenture
provides that the Board of Directors of the Company may, if no Default or
Event of Default shall have occurred and be continuing or would arise
therefrom, designate an Unrestricted Subsidiary to be a Restricted Subsidiary,
provided, however, that (i) any such redesignation shall be deemed to be an
incurrence as of the date of such redesignation by the Company and its
Restricted Subsidiaries of the Indebtedness (if any) of such redesignated
Subsidiary for purposes of the "Limitation on Incurrence of Additional
Indebtedness" covenant above, (ii) unless such redesignated Subsidiary shall
not have any Indebtedness outstanding (other than Permitted Indebtedness), no
such designation shall be permitted if immediately after giving effect to such
redesignation and the incurrence of any such additional Indebtedness (other
than Permitted Indebtedness) the Company could not incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation
on Incurrence of Additional Indebtedness" covenant above.
The Indenture provides that the Board of Directors of the Company also may,
if no Default or Event of Default shall have occurred and be continuing or
would arise therefrom, designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if (i) such designation is at that time permitted
under the "Limitation on Restricted Payments" covenant above, (ii) immediately
after giving effect to such designation, the Company could incur $1.00 of
additional Indebtedness (in addition to Permitted Indebtedness) pursuant to
the "Limitation of Incurrence of Additional Indebtedness" covenant above,
(iii) such Subsidiary meets the requirements of the definition of the term
Unrestricted Subsidiary, and (iv) any Subsidiary of such designated Restricted
Subsidiary is also designated as, and meets the requirements of, an
Unrestricted Subsidiary. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under
the caption "Limitation on Restricted Payments" and setting forth in
reasonable detail the underlying calculations.
The Indenture provides that for purposes of the covenant described under
"Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed
to have been made at the time any Restricted Subsidiary of the Company is
designated as an Unrestricted Subsidiary in an amount (proportionate to the
Company's equity interest in such Subsidiary) equal to the net worth of such
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated as an Unrestricted Subsidiary; (ii) at any date, the aggregate
amount of all Restricted Payments made as Investments since the Issue Date
shall exclude and be reduced by an amount (proportionate to the Company's
equity interest in such Subsidiary) equal to the net worth of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated as a
Restricted Subsidiary, not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of
Investments previously made by the Company and its Restricted Subsidiaries in
such Unrestricted Subsidiary (in each case (i) and (ii), "net worth" is to be
calculated based upon the fair market value of the assets of such Subsidiary
as
82
of any such date of designation); and (iii) any property transferred to or
from an Unrestricted Subsidiary shall be valued at its fair market value at
the time of such transfer.
The Indenture provides that if, at any time, any Unrestricted Subsidiary
would fail to meet the requirements of the definition of the term Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such
date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Limitation on Incurrence
of Additional Indebtedness," the Company shall be in default of such
covenant).
The Indenture provides that Subsidiaries of the Company that are not
designated by the Board of Directors of the Company as Restricted or
Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries of the
Company. Notwithstanding the foregoing, all Subsidiaries of an Unrestricted
Subsidiary will be Unrestricted Subsidiaries.
Business Activities. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, engage in any business
other than Permitted Businesses, except to such extent as would not be
material to the Company and its Restricted Subsidiaries taken as a whole.
Sales of Accounts Receivable. The Company may, and any of its Restricted
Subsidiaries may, sell, at any time and from time to time, all of their
respective accounts receivable to an Accounts Receivable Subsidiary; provided
that (i) the cash received in each sale is not less than 90% of the aggregate
face value of the receivables sold and the remainder of the consideration
received in each such sale is a promissory note (a "Promissory Note") which is
subordinated to no Indebtedness or obligation other than that due to the
financial institution or other entity providing the financing to the Accounts
Receivable Subsidiary with respect to such accounts receivable (a
"Financier"); provided further that the Initial Sale will include all eligible
accounts receivable of the Company and/or its Restricted Subsidiaries that
will be party to such arrangements in existence on the date of the Initial
Sale, (ii) the cash proceeds received from the Initial Sale less reasonable
and customary transaction costs will be deemed to be Net Cash Proceeds and
will be applied in accordance with the covenant entitled "Limitation on Asset
Sales," and (iii) the Company and its Restricted Subsidiaries will sell their
accounts receivable to the Accounts Receivable Subsidiary no less frequently
than on a weekly basis.
The Company (i) will not permit any Accounts Receivable Subsidiary to sell
any accounts receivable purchased from the Company or any of its Restricted
Subsidiaries to any other person except on an arm's-length basis and solely
for consideration in the form of cash or Cash Equivalents, (ii) will not
permit the Accounts Receivable Subsidiary to engage in any business or
transaction other than the purchase, financing and sale of accounts receivable
of the Company and its Restricted Subsidiaries and activities incidental
thereto, (iii) will not permit any Accounts Receivable Subsidiary to incur
Indebtedness in an amount in excess of the book value of such Accounts
Receivable Subsidiary's total assets, as determined in accordance with GAAP,
(iv) will, at least as frequently as monthly, cause the Accounts Receivable
Subsidiary to remit to the Company or the relevant Restricted Subsidiary, as
the case may be, as payment on the Promissory Notes, all available cash or
Cash Equivalents not held in a collection account pledged to a Financier, to
the extent not applied to pay or maintain reserves for reasonable operating
expenses of the Accounts Receivable Subsidiary or to satisfy reasonable
minimum operating capital requirements and (v) will not, and will not permit
any of its Restricted Subsidiaries to, sell accounts receivable to any
Accounts Receivable Subsidiary upon (1) the occurrence of a Default with
respect to the Company and its Restricted Subsidiaries and (2) the occurrence
of certain events of bankruptcy or insolvency with respect to such Accounts
Receivable Subsidiary.
Payments for Consent. The Indenture provides that neither the Company nor
any of its Restricted Subsidiaries will, directly or indirectly, pay or cause
to be paid any consideration, whether by way of interest, fee or otherwise, to
any Holder of any Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the Notes
unless such consideration is offered to be paid or is paid to all Holders of
the Notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
83
Additional Guarantees. The Indenture provides that (i) if the Company or any
of its Restricted Subsidiaries shall, after the date of the Indenture,
transfer or cause to be transferred, including by way of any Investment, in
one or a series of transactions (whether or not related), any assets,
businesses, divisions, real property or equipment having an aggregate fair
market value (as determined in good faith by the Board of Directors) in excess
of $1.0 million to any Restricted Subsidiary that is not a Subsidiary
Guarantor or a Foreign Subsidiary, (ii) if the Company or any of its
Restricted Subsidiaries shall acquire another Restricted Subsidiary other than
a Foreign Subsidiary having total assets with a fair market value (as
determined in good faith by the Board of Directors) in excess of $1.0 million,
or (iii) if any Restricted Subsidiary other than a Foreign Subsidiary shall
incur Indebtedness in excess of $1.0 million, then the Company shall, at the
time of such transfer, acquisition or incurrence, (i) cause such transferee,
acquired Restricted Subsidiary or Restricted Subsidiary incurring Indebtedness
(if not then a Subsidiary Guarantor) to execute a Guarantee of the Obligations
of the Company under the Notes in the form set forth in the Indenture and (ii)
deliver to the Trustee an Opinion of Counsel, in form reasonably satisfactory
to the Trustee, that such Guarantee is a valid, binding and enforceable
obligation of such transferee, acquired Restricted Subsidiary or Restricted
Subsidiary incurring Indebtedness, subject to customary exceptions for
bankruptcy, fraudulent conveyance and equitable principles. Notwithstanding
the foregoing, the Company or any of its Restricted Subsidiaries may make an
Investment (which does not constitute a Permitted Investment) in any
Restricted Subsidiary of the Company without compliance with this covenant,
provided that such Investment is permitted by the covenant described under the
caption, "Limitation on Restricted Payments."
Reports to Holders. The Indenture provides that the Company will deliver to
the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents
and other reports, if any, which the Company is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture
will further provide that, notwithstanding that the Company may not be subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company will file with the Commission, to the extent permitted, and provide
the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA (S) 314(a).
The Indenture will provide that, at the Company's expense, the Company shall
cause an annual report if furnished by it to stockholders generally and each
quarterly or other financial report if furnished by it to stockholders
generally to be filed with the Trustee and mailed to the Holders at their
addresses appearing in the register of Notes maintained by the Registrar at
the time of such mailing or furnishing to stockholders. The Company shall make
such annual, quarterly and other financial reports available to securities
analysts and prospective investors upon request.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes or any amount payable pursuant
to any Guarantee with respect to interest when the same becomes due and
payable and the default continues for a period of 30 days (whether or not
such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes or any amount payable
pursuant to any Guarantee (other than as provided in (i)), when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default
with such notice requirement but without such passage of time requirement);
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(iv) there shall be a default under any Indebtedness of the Company or any
Restricted Subsidiary, whether such Indebtedness now exists or shall
hereinafter be created, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity or
(2) relates to an obligation other than the obligation to pay such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated final maturity and (B) the principal amount of such
Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal at stated final
maturity or the maturity of which has been so accelerated, aggregates $5.0
million or more at any one time outstanding;
(v) one or more judgments (to the extent not covered by insurance and as to
which the insurer has not acknowledged coverage in writing) in an aggregate
amount in excess of $5.0 million shall have been rendered against the
Company or any of its Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable;
(vi) certain events of bankruptcy affecting the Company, any Subsidiary
Guarantor or any of their Significant Subsidiaries; or
(vii) except as permitted by the Indenture, any Guarantee shall cease to
be, or shall be asserted in writing by any Subsidiary Guarantor or the
Company not to be, in full force and effect, and enforceable in accordance
with its terms.
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal
of and accrued interest on all the Notes to be due and payable by notice in
writing to the Company and the Trustee specifying the respective Event of
Default and that it is a "notice of acceleration" (the "Acceleration Notice"),
and the same (i) shall become immediately due and payable or (ii) if there are
any amounts outstanding under the Credit Facility, shall become immediately
due and payable upon the first to occur of an acceleration under the Credit
Facility or 5 business days after receipt by the Company and the
Representative under the Credit Facility of such Acceleration Notice. If an
Event of Default specified in clause (vi) above occurs and is continuing, then
all unpaid principal of, and premium, if any, and accrued and unpaid interest
on all of the outstanding Notes shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due
solely because of the acceleration, (iii) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an Officers' Certificate
and an Opinion of Counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its
consequences, except a Default or Event of Default described in clause (i) or
(ii) of the description of Events of Default.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all
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provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs by reason of
any willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of the
Notes prior to the First Call Date, then the premium specified in the
Indenture for redemption as of the First Call Date shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Notes.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default
or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder, as such, of the Company or
any Subsidiary shall have any liability for any obligations of the Company or
any Subsidiary under the Notes, any Guarantee or the Indenture. Each holder of
the Notes by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes.
This provision does not affect any possible claims under the federal
securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes (and each
Subsidiary Guarantor shall be discharged from any and all obligations with
respect thereto and with respect to its Guarantee) ("Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes,
except for (i) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii)
the rights, powers, trust, duties and immunities of the Trustee and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants (including those relating to a Change of Control
Offer and a Net Cash Proceeds Offer) that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient (without
reinvestment), in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (A) the
Company has received
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from, or there has been published by, the Internal Revenue Service a ruling or
(B) since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under the Indenture or
any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that (A) the
trust funds will not be subject to any rights of holders of Senior
Indebtedness, including, without limitation, those arising under the Indenture
and (B) after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; and (ix) certain other
customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Subsidiary Guarantors and the Trustee,
without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies,
so long as such change does not, in the opinion of the Trustee, adversely
affect the rights of any of the Holders in any material respect. In
formulating its opinion on such matters, the Trustee will be entitled to rely
on such evidence as it deems appropriate, including, without limitation,
solely on an Opinion of Counsel. Other modifications and amendments of the
Indenture may be made with the consent of the Holders of a majority in
principal amount of the then outstanding Notes issued under the Indenture,
except that, without the consent of
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each Holder affected thereby, no amendment may: (i) reduce the amount of Notes
whose Holders must consent to an amendment; (ii) reduce the rate of or change
or have the effect of changing the time for payment of interest, including
defaulted interest, on any Notes; (iii) reduce the principal of or change or
have the effect of changing the fixed maturity of any Notes, or change the
date on which any Notes may be subject to redemption or repurchase, or reduce
the redemption or repurchase price therefor; (iv) make any Notes payable in
money other than that stated in the Notes; (v) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default; (vi) amend,
change or modify in any material respect the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control
or make and consummate a Net Proceeds Offer with respect to any Asset Sale or
modify any of the provisions or definitions with respect thereto; (vii) modify
or change any provision of the Indenture or the related definitions affecting
the subordination or ranking of the Notes or the Guarantees in a manner which
adversely affects the Holders or (viii) release any Subsidiary Guarantor from
any of its obligations under the Guarantee other than in accordance with the
terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes are governed by, and construed
in accordance with, the laws of the State of New York, but without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it by the Indenture,
and use the same degree of care and skill in its exercise as a prudent man
would exercise or use under the circumstances in the conduct of his own
affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the Trustee will be permitted to engage in other transactions; provided
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accounts Receivable Subsidiary" means a newly created, Unrestricted
Subsidiary of the Company (i) which is formed solely for the purpose of, and
which engages in no activities other than activities in connection with,
financing accounts receivable of the Company and/or its Restricted
Subsidiaries, (ii) which is designated by the Board of Directors of the
Company as an Accounts Receivable Subsidiary pursuant to a Board of Directors'
resolution set forth in an Officers' Certificate and delivered to the Trustee,
(iii) that has total assets at the time of such creation and designation with
a book value of $10,000 or less, (iv) which has no Indebtedness other than
Non-Recourse Debt, and (v) with which neither the Company nor any Restricted
Subsidiary of the Company has any contract, agreement, arrangement or
understanding other than contracts, agreements, arrangements and
understandings entered into in the ordinary course of business in connection
with sales of accounts receivable in accordance with the covenant entitled
"Sales of Accounts Receivable" and fees payable in the ordinary course of
business in connection with servicing accounts receivable.
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"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with,
or in anticipation or contemplation of, such Person becoming a Subsidiary of
the Company or such acquisition, merger or consolidation.
"Act" means the Securities Act of 1933, as amended.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (x) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including,
without limitation, contingent liabilities (after giving effect to all other
fixed and contingent liabilities incurred or assumed on such date), but
excluding liabilities under the Guarantee of such Subsidiary Guarantor at such
date and (y) the present fair salable value of the assets of such Subsidiary
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Subsidiary Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on
such date and after giving effect to any collection from any Subsidiary of
such Subsidiary Guarantor in respect of the obligations of such Subsidiary
under the Guarantee), excluding debt in respect of the Guarantee, as they
become absolute and matured.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
provided, that beneficial ownership of 10% or more of the voting Capital Stock
of a Person shall be deemed to be control. The terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Article 28 Company" means an entity organized and operated for the primary
purpose of conducting a Permitted Business and subject to a federal or state
law or regulation that: (i) limits or restricts the types of individuals or
entities that are permitted to hold an ownership or investment interest in
such an entity; and (ii) prohibits the Company and its Subsidiaries from being
able to directly hold an ownership or investment interest in such an entity.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
(x) shall become a Restricted Subsidiary of the Company, or (y) shall be
merged with or into the Company or any Restricted Subsidiary of the Company,
or (b) the acquisition by the Company or any Restricted Subsidiary of the
Company of the assets of any Person (other than a Subsidiary of the Company)
which constitute all or substantially all of the assets of such Person or
comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer for value by the Company or any
of its Restricted Subsidiaries (including any Sale and Leaseback Transaction)
to any Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company of (a) any Capital Stock of any Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary
of the Company; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Subsidiaries receive aggregate consideration of less than $1.0 million; (ii)
sales of accounts receivables to the Accounts Receivable Subsidiary in
accordance with the covenant entitled "Sales of Accounts Receivable," other
than the Initial Sale; and (iii) the sale, lease, conveyance, disposition or
other transfer (w) of the Capital Stock of an Unrestricted Subsidiary, (x) of
all or substantially all of the assets of the Company as permitted under
"Merger, Consolidation and Sale of Assets," (y) involving only cash, Cash
Equivalents or inventory in the ordinary course of business or obsolete
equipment in the ordinary course of business consistent with past practices of
the Company, or (z) involving only the lease or sublease of any assets in the
ordinary course of business.
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"Attributable Debt" in respect of a Sale and Leaseback Transaction means at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such Sale and Leaseback Transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or other entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States government or issued by any
agency or instrumentality thereof and backed by the full faith and credit of
the United States, in each case maturing within one year from the date of
acquisition thereof; (ii) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having the highest
ratings obtainable from both Standard & Poor's Ratings Services ("S&P") and
Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing
no more than one year from the date of creation thereof and, at the time of
acquisition, having the highest rating obtainable from both S&P and Moody's;
(iv) certificates of deposit or bankers' acceptances maturing within one year
from the date of acquisition thereof issued by any bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of
acquisition thereof combined capital and surplus of not less than
$250,000,000; (v) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; and (vi) investments in money market funds which invest substantially
all their assets in securities of the types described in clauses (i) through
(v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole to any Person or group of
related Persons for purposes of Section 13(d) of the Exchange Act (a "Group")
together with any Affiliates thereof (whether or not otherwise in compliance
with the provisions of the Indenture); (ii) the approval by the holders of
Capital Stock of the Company of any plan or proposal for the liquidation or
dissolution of the Company (whether or not otherwise in compliance with the
provisions of the Indenture); (iii) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) in one or more
transactions by any Person or Group other than a Person who is a stockholder
of the Company as of the Issue Date or Group comprised solely of such Persons
(the "Control Group") of either more than 25% of the aggregate ordinary voting
power represented by the issued and outstanding Capital Stock of the Company
or more than 25% of the aggregate issued and outstanding Common Stock of the
Company and such beneficial ownership percentage is greater than the
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beneficial ownership of the Control Group; (iv) Home Dialysis of America, Inc.
or West Suburban Kidney Center, S.C. cease to be a Wholly Owned Restricted
Subsidiary of the Company, or (v) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period, and such replacement shall not have been approved by a vote of at
least a majority of the Board of Directors of the Company then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without
limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
of such Person and its Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business or other transactions the
effect of which has been excluded from Consolidated Net Income), (B)
Consolidated Interest Expense and (C) Consolidated Non-cash Charges less any
non-cash items increasing Consolidated Net Income for such period, all as
determined on a consolidated basis for such Person and its Subsidiaries in
accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges
of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving
effect on a pro forma basis for the period of such calculation to (i) the
incurrence or repayment of any Indebtedness of such Person or any of its
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital or revolving credit
facilities, occurring during the Four Quarter Period or at any time subsequent
to the last day of the Four Quarter Period and on or prior to the Transaction
Date, as if such incurrence or repayment, as the case may be (and the
application of the proceeds thereof), had occurred on the first day of the
Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including
any Person who becomes a Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness and
also including any Consolidated EBITDA (provided that such Consolidated EBITDA
shall be included only to the extent includable pursuant to the definition of
"Consolidated Net Income") attributable to the assets which are the subject of
the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) had occurred on the first day of
the Four Quarter Period. If such Person or any of its Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined thereafter
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date; (2) if
interest on any Indebtedness actually
91
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four Quarter
Period; and (3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense,
plus (ii) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of such Person and its Restricted Subsidiaries (other than
dividends paid in Qualified Capital Stock or dividends to the extent payable
to the Company or its Restricted Subsidiaries) paid, accrued or scheduled to
be paid or accrued during such period (other than in the case of Preferred
Stock of such Person and its Restricted Subsidiaries for which the dividends
are tax deductible for Federal income tax purposes, which shall be included in
Consolidated Fixed Charges without being multiplied by the fraction in (y))
and (y) a fraction, the numerator of which is one and the denominator of which
is one minus the then current effective consolidated federal, state and local
tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, whether paid or
accrued, including without limitation, (a) any amortization of debt discount
and amortization or write-off of deferred financing costs, (b) the net costs
under Interest Swap Obligations, (c) all capitalized interest and (d) the
interest portion of any deferred payment obligation, including with respect to
Attributable Debt; (ii) the aggregate dividend payments of such Person and its
Restricted Subsidiaries for such period with respect to Disqualified Capital
Stock; and (iii) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Subsidiaries for
such period on a consolidated basis (before Preferred Stock (other than
Disqualified Stock) dividend requirements), determined in accordance with
GAAP; provided that there shall be excluded therefrom (a) after-tax gains from
Asset Sales or abandonments of reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains or losses, (c) the net
income of any Person acquired in a "pooling of interests" transaction accrued
prior to the date it becomes a Subsidiary of the referent Person or is merged
or consolidated with the referent Person or any Subsidiary of the referent
Person, (d) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted (or
subject to tax) by a contract, operation of law or otherwise, (e) the net
income of any Person, other than a Restricted Subsidiary of the referent
Person, except to the extent of cash dividends or distributions paid to the
referent Person or to a Restricted Subsidiary of the referent Person by such
Person (subject to the limitation in clause (d)), (f) any restoration to
income of any contingency reserve, except to the extent that provision for
such reserve reduced Consolidated Net Income accrued at any time following the
Issue Date, (g) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during such period
whether or not such operations were classified as discontinued), (h) in the
case of a successor to the referent Person by consolidation or merger or as a
transferee of the referent Person's assets, any earnings of the successor
corporation prior to such consolidation, merger or transfer of assets, (i) any
gain realized in connection with the disposition of any securities other than
Cash Equivalents by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (j) all gains or losses from the cumulative effect of any
change in accounting principles.
"Consolidated Net Worth" means, (A) with respect to any partnership, the
common and preferred partnership equity of such partnership and its
consolidated subsidiaries, as determined on a consolidated basis in accordance
with GAAP, and (B) with respect to any other Person as of any date, the sum of
(i) the consolidated
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equity of the common equityholders of such Person and its consolidated
Subsidiaries as of such date plus (ii) the respective amounts reported on such
Person's balance sheet as of such date with respect to any series of preferred
equity (other than Disqualified Capital Stock) that by its terms is not
entitled to the payment of dividends unless such dividends may be declared and
paid only out of net earnings in respect of the year of such declaration and
payment, but only to the extent of any cash received by such Person upon
issuance of such preferred equity, less (x) all write-ups (other than write-
ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person,
plus (y) all unamortized debt discount and expense and unamortized deferred
charges as of such date, all of the foregoing determined in accordance with
GAAP.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate Consolidated Pooling Expenses, depreciation,
amortization and other non-cash expenses of such Person and its Subsidiaries
reducing Consolidated Net Income of such Person for such period, determined on
a consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires
an accrual of or a reserve relating to possible cash charges or expenditures
for any future or past period).
"Consolidated Pooling Expenses" of any Person means for any period, with
respect to such Person and its Subsidiaries on a consolidated basis, the
transaction or transactions-related expenses for such period in connection
with a pooling of interests transaction, determined in accordance with GAAP,
but only to the extent such expenses would have been capitalized, in
accordance with GAAP, if such transaction had been a purchase transaction.
"Contributions" means any loans, cash advances, capital contributions,
investments or other transfers of assets for either (i) Capital Stock or (ii)
less than fair value by the Company or any of its Restricted Subsidiaries to
any Subsidiary or other Affiliate of the Company other than to a Subsidiary
Guarantor.
"Credit Facility" means the Amended and Restated Credit Agreement, dated as
of May 15, 1997 (referred to herein as the Prior Credit Facility), as amended
(including by the New Credit Facility), among the Company, Harris Trust and
Savings Bank, individually and as Agent, and the lenders which are or become
parties thereto, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing, replacing or
otherwise restructuring (including increasing the amount of available
borrowings thereunder; provided that such increase in borrowings is permitted
by the "Limitation on Incurrence of Additional Indebtedness" covenant above)
all or any portion of the Indebtedness under such agreement or any successor
or replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Senior Indebtedness" means (i) Indebtedness under or in respect
of the Credit Facility and (ii) any other Indebtedness constituting Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount of at least $35,000,000 and is specifically designated in the
instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by the Company.
"Disqualified Capital Stock" means, with respect to any person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is
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exchangeable for Indebtedness, or is redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after
the date on which the Notes mature.
"Eligible Joint Venture" means any Person which meets all of the following
criteria: (a) no Affiliate of the Company or a Restricted Subsidiary (other
than a Restricted Subsidiary of the Company) has an investment in such Person,
(b) such Person is engaged in a Permitted Business, (c) the Company and/or any
of its Restricted Subsidiaries at all times (i) controls, by voting power,
board or management committee membership, or through the provisions of any
applicable partnership, shareholder or other similar agreement or under an
operating, maintenance or management agreement or otherwise, the business
operations of such Person, and (ii) owns at least 20% of the total outstanding
Capital Stock of such Person entitled to participate in distributions in
respect of the earnings, sale or liquidation of such Person, (d) no more than
$100,000 principal amount of the Indebtedness of such Person outstanding at
any one time is not Non-Recourse Debt, and (e) a default or event of default
under the Indebtedness of such Person would not result in a default or event
of default under any Indebtedness of the Company or its Restricted
Subsidiaries, except for Indebtedness permitted pursuant to (d).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of
the Board of Directors of the Company delivered to the Trustee.
"First Call Date" means May 1, 2003.
"Foreign Subsidiary" means any Subsidiary of the Company either (a) which is
organized outside of the United States of America, (b) whose principal
activities are conducted outside of the United States of America or (c) whose
only material assets are Capital Stock in Subsidiaries which are Foreign
Subsidiaries.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Indebtedness" means with respect to any Person, without duplication, (i)
all indebtedness of such Person, whether or not contingent, for borrowed
money, (ii) all indebtedness of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) all Capitalized Lease Obligations of
such Person, (iv) all indebtedness or other obligations of such Person issued
or assumed as the deferred purchase price of property, all conditional sale
obligations and all Obligations under any title retention agreement (but
excluding trade accounts payable and other accrued liabilities arising in the
ordinary course of business that are not in default or overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all indebtedness for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) guarantees and other contingent obligations
in respect of Indebtedness referred to in clauses (i) through (v) above and
clause (viii) below, (vii) all indebtedness of any other Person of the type
referred to in clauses (i) through (vi) which are secured by any lien on any
property or asset of such Person, the amount of such Obligation being deemed
to be the lesser of the fair market value of such property or asset or the
amount of the Obligation so secured, (viii) all indebtedness under Currency
Agreements and Interest Swap Agreements of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price, but excluding accrued dividends, if any. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified
94
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such
price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock. The amount of any Indebtedness (other than
Disqualified Capital Stock) outstanding as of any date shall be (i) the
accreted value thereof, to the extent such Indebtedness does not require
current payments of interest, (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness, (iii) in the case of Currency Agreements and Interest Swap
Agreements, the amount that would appear on the consolidated balance sheet of
the Person in accordance with GAAP and (iv) in the case of any guarantee or
other contingent obligation in respect of Indebtedness of any other Person
shall be deemed to be equal to the maximum amount of such indebtedness, unless
the liability is limited by the terms of such guarantee or contingent
obligation, in which case the amount of such guarantee or other obligation
shall be deemed to equal the maximum amount of such liability.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified
to perform the task for which it is to be engaged.
"Initial Sale" means the first transaction in which accounts receivable are
sold by the Company and/or its Restricted Subsidiaries to an Accounts
Receivable Subsidiary.
"Insolvency or Liquidation Proceedings" means with respect to any Person (i)
any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding relative to
such Person or to the creditors of such Person, as such, or to the assets of
such Person, or (ii) any liquidation, dissolution, reorganization or winding-
up of such Person, whether voluntary or involuntary, or (iii) any assignment
for the benefit of creditors or any other marshaling of assets and liabilities
of such Person.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other Person (including a Subsidiary of the referent Person).
"Investment" shall exclude extensions of trade credit by the Company and its
Subsidiaries on commercially reasonable terms in accordance with normal trade
practices of the Company or such Subsidiary, as the case may be. If the
Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Capital Stock of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Capital Stock of such
Subsidiary not sold or disposed. For the purposes of the "Limitation on
Restricted Payments" covenant, the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments
by the Company, or any of its Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or
distributions in connection with such Investment or any other amounts received
in respect of such Investment; provided that no such payment of dividends or
distributions or receipt of any such other amounts shall reduce
95
the amount of any Investment if such payment of dividends or distributions or
receipt of any such amounts would be included in Consolidated Net Income.
"Issue Date" means May 5, 1998.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Company or any of its Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) income taxes paid or payable after
taking into account any reduction in consolidated income tax liability due to
available tax credits or deductions and any tax sharing arrangements, (c)
repayment of Indebtedness that is required to be repaid in connection with
such Asset Sale, (d) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and retained by
the Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale, (e)
proceeds required to be placed in escrow, provided, that upon the release of
any such proceeds from such escrow to the Company or a Subsidiary of the
Company such released proceeds shall constitute "Net Cash Proceeds" and (f) in
the case of a sale by a Restricted Subsidiary that is not a Wholly Owned
Restricted Subsidiary, the minority interests' proportionate share of such Net
Cash Proceeds.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness, but excluding, in the case of (x) the Accounts Receivable
Subsidiary, warranty claims, indemnity rights and rights of set-off with
respect to accounts receivable that are sold to such Accounts Receivable
Subsidiary, and (y) any Eligible Joint Venture, any amounts loaned by the
Company or any such Restricted Subsidiary to such Eligible Joint Venture for
working capital purposes); (b) is directly or indirectly liable (as a
guarantor or otherwise, except as set forth in (a)); or (c) constitutes the
lender (except as set forth in (a)); (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and (iii) as to which the lenders, except for lenders under
Indebtedness in existence on the Issue Date or instruments governing Acquired
Indebtedness (a) have acknowledged that they do not have recourse to the
holder of the Capital Stock of the debtor or (b) have been notified in writing
that they will not have any recourse to the stock or assets of either the
Company or any of its Restricted Subsidiaries.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Pari Passu Debt" means any Indebtedness of the Company or its Restricted
Subsidiaries which, by its terms, is pari passu in right of payment to the
Notes or the Guarantees.
"Permitted Business" means the business of the Company and its Subsidiaries
as existing on the Issue Date or such other businesses as the Board of
Directors of the Company determines are businesses reasonably related thereto
as evidenced by a Board Resolution.
96
"Permitted Indebtedness" means without duplication, each of the following:
(i) Indebtedness under the Notes and the Indenture;
(ii) Indebtedness under the Guarantees;
(iii) Indebtedness incurred pursuant to the Credit Facility (and the
guarantees thereunder) in an aggregate principal amount at any time
outstanding not to exceed $100,000,000, less the amount of any required
permanent repayments, if any (which are accompanied by a corresponding
permanent commitment reduction) thereunder (excluding any such payments on
the Issue Date or to the extent refinanced at the time of payment);
(iv) other Indebtedness of the Company and its Subsidiaries outstanding
on the Issue Date reduced by the amount of any scheduled amortization
payments or mandatory prepayments when actually paid or permanent
reductions thereon;
(v) Interest Swap Obligations of the Company covering Indebtedness of the
Company or any of its Subsidiaries and Interest Swap Obligations of any
Subsidiary of the Company covering Indebtedness of such Subsidiary;
provided, however, that (x) such Interest Swap Obligations are designed to
protect the Company and its Subsidiaries from fluctuations in interest
rates on Indebtedness incurred in accordance with the Indenture (and are
used for bona fide hedging, and not speculative, purposes); and (y) the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(vi) Indebtedness under Currency Agreements; provided that such Currency
Agreements: (i) are designed to protect against fluctuations in currency
value (and are used for bona fide hedging, and not speculative, purposes)
and (ii) in the case of Currency Agreements which relate to Indebtedness,
such Currency Agreements do not increase the Indebtedness of the Company
and its Subsidiaries outstanding other than as a result of fluctuations in
foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vii) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company
to the Company or to a Wholly Owned Restricted Subsidiary of the Company
for so long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien held
by a Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company; provided that if as of any date any Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company owns or
holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(viii) Indebtedness of a Restricted Subsidiary of the Company permitted
pursuant to clause (7) of the second paragraph of the covenant described
under "Limitation on Restricted Payments" or clause (ix) or (x) of the term
"Permitted Investment";
(ix) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held subject to no Lien;
provided that (a) any Indebtedness of the Company to a Restricted
Subsidiary of the Company is unsecured and subordinated, pursuant to a
written agreement, to the Company's Obligations under the Indenture and the
Notes and (b) if as of any date any Person other than a Restricted
Subsidiary of the Company owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company;
(x) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two business days of incurrence;
(xi) Indebtedness of the Company or any of its Subsidiaries represented
by letters of credit for the account of the Company or such Subsidiary, as
the case may be, in order to provide security for workers'
97
compensation claims, payment obligations in connection with self-insurance
or similar requirements in the ordinary course of business;
(xii) Refinancing Indebtedness;
(xiii) Indebtedness incurred by the Company or any Restricted Subsidiary
of the Company in connection with the purchase or improvement of property
(real or personal) or equipment or other capital expenditures in the
ordinary course of business or consisting of Capitalized Lease Obligations;
provided that at the time of the incurrence thereof, such Indebtedness
which is then outstanding does not exceed $5.0 million;
(xiv) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary, for indemnification, adjustment of purchase price or similar
obligations, in each case, incurred in connection with the disposition of
any business, assets or Restricted Subsidiary, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition; provided that the maximum aggregate liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds actually
received by the Company and the Restricted Subsidiary in connection with
such disposition;
(xv) Obligations in respect of performance bonds and completion
guarantees provided by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business;
(xvi) Guarantees by the Company or a Restricted Subsidiary of the Company
of Indebtedness incurred by the Company or a Restricted Subsidiary of the
Company so long as the incurrence of such Indebtedness by the Company or
any such Restricted Subsidiary of the Company is otherwise permitted by the
terms of the Indenture;
(xvii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $7.5 million at
any one time outstanding.
"Permitted Insolvency Payments" means (i) securities distributed to the
Holders of the Notes in an Insolvency or Liquidation Proceeding pursuant to a
plan of reorganization consented to by each class of the Senior Indebtedness,
but only if all of the terms and conditions of such securities (including,
without limitation, term, tenor, interest, amortization, subordination,
standstills, covenants and defaults), are at least as favorable (and provide
the same relative benefits) to the holders of Senior Indebtedness and to the
holders of any security distributed in such Insolvency or Liquidation
Proceeding on account of any such Senior Indebtedness as the terms and
conditions of the Notes and the Indenture are, and provide to the holders of
Senior Indebtedness, and (ii) payments from a trust established pursuant to
the provisions of the Indenture described under "Satisfaction and Discharge of
the Indenture", provided that payment into such trust was not made either (x)
within 90 days prior to the commencement of an Insolvency or Liquidation
Proceeding, or (y) during any period in which payment on the Notes is blocked
pursuant to the subordination provisions of the Indenture.
"Permitted Investments" means (i) Investments by the Company or any
Subsidiary of the Company in any Person engaged in a Permitted Business that
is or will become immediately after such Investment a Wholly Owned Restricted
Subsidiary of the Company other than a Foreign Subsidiary or that will merge
or consolidate into the Company or a Wholly Owned Restricted Subsidiary of the
Company other than a Foreign Subsidiary; (ii) Investments in the Company by
any Restricted Subsidiary of the Company; provided that any Indebtedness
evidencing such Investment is unsecured and subordinated to the Company's
obligations under the Notes and the Indenture, pursuant to a written agreement
and to the same extent that the Notes are subordinated to Senior Indebtedness;
(iii) investments in cash and Cash Equivalents; (iv) loans and advances to
employees and officers of the Company and its Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $1.0
million at any one time outstanding; (v) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Subsidiaries' businesses and otherwise in compliance with the Indenture; (vi)
Investments in securities of trade creditors or customers received pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers; (vii) Investments made by the
Company or any of its Subsidiaries as a result of consideration received in
98
connection with an Asset Sale made in compliance with the "Limitation on Asset
Sales" covenant; (viii) Investments in an Accounts Receivable Subsidiary
received in consideration of sales of accounts receivable in accordance with
the covenant entitled "Sales of Accounts Receivable"; (ix) Investments by the
Company or any Restricted Subsidiary in a Restricted Subsidiary or an Eligible
Joint Venture in an amount at any one time outstanding not to exceed $5.0
million in the aggregate, so long as that after giving effect to any such
Investment, no Default or Event of Default shall have occurred, and the
Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.5 to
1.0; and (x) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (x) that are at the time outstanding,
not to exceed $10.0 million, so long as that after giving effect to any such
Investment, no Default or Event of Default shall have occurred.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) being contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries, as
the case may be, shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(iv) Liens securing letters of credit issued in the ordinary course of
business consistent with past practice in connection with the items
referred to in clause (iii) or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(v) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(vi) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vii) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(viii) purchase money Liens to finance property or assets of the Company
or any Subsidiary of the Company acquired in the ordinary course of
business; provided, however, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Subsidiary
of the Company, other than the property and assets so acquired and (B) the
Lien securing such Indebtedness shall be created within 90 days of such
acquisition;
(ix) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(x) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
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(xi) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xii) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xiii) Liens securing Indebtedness under Currency Agreements;
(xiv) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company, and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Subsidiary of the Company, and (B) such
Liens do not extend to or cover any property or assets of the Company or of
any of its Subsidiaries, other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Restricted Subsidiary of the Company, and
are no more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Company or a Subsidiary of the Company;
(xv) Liens to secure Attributable Debt that is permitted to be incurred
pursuant to the covenant entitled "Sale and Leaseback Transactions;"
provided that any such Liens shall not extend to or cover any assets of the
Company or any Restricted Subsidiary, other than the assets which are the
subject of the Sale and Leaseback Transaction in which the Attributable
Debt is incurred;
(xvi) leases or subleases granted to others not interfering in any
material respect with the business of the Company or any of its Restricted
Subsidiaries;
(xvii) any interest or title of a lessor in the property subject to any
lease, whether characterized as capitalized or operating other than any
such interest or title resulting from or arising out of a default by the
Company or any of its Restricted Subsidiaries of its obligations under such
lease;
(xviii) Liens arising from filing UCC financing statements for
precautionary purposes in connection with true leases of personal property
that are otherwise permitted under the Indenture and under which the
Company or any of its Restricted Subsidiaries is lessee;
(xix) Liens arising by virtue of any statutory or common law provisions
relating to banker's Liens, rights of setoff or similar rights as to
deposit accounts or other funds maintained with a creditor depositary
institution; and
(xx) Liens in favor of the Trustee and any substantially equivalent Lien
granted to any trustee or similar institution under any indenture governing
Indebtedness permitted to be incurred or outstanding under the Indenture.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, a governmental
agency or political subdivision thereof or other entity.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Public Equity Offering" means an underwritten equity offering, pursuant to
an effective registration statement under the Act, of the Qualified Capital
Stock of the Company, or of any entity of which the Company is a direct or
indirect subsidiary, to the extent the proceeds thereof shall have been
received or contributed to the Company.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
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"Refinancing Indebtedness" means any Refinancing by the Company or any
Subsidiary of the Company of Indebtedness incurred in accordance with the
"Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (iii), (v), (vi), (vii), (x), (xi), (xii) or (xiii) of the
definition of Permitted Indebtedness), in each case that does not (1) result
in an increase in the aggregate principal amount of Indebtedness of such
Person as of the date of such proposed Refinancing (plus the amount of any
premium or penalty required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses
incurred by the Company in connection with such Refinancing) or (2) create
Indebtedness with (A) a Weighted Average Life to Maturity that is less than
the Weighted Average Life to Maturity of the Indebtedness being Refinanced or
(B) a final maturity earlier than the final maturity of the Indebtedness being
Refinanced; provided that (x) if such Indebtedness being Refinanced is solely
Indebtedness of the Company, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company and (y) if such Indebtedness being
Refinanced is subordinate or junior to the Notes or any Guarantee, then such
Refinancing Indebtedness shall have a final maturity date later than 91 days
after the final maturity date of the Notes and shall be subordinate to the
Notes at least to the same extent and in the same manner as the Indebtedness
being Refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness; provided that
if, and for so long as, any Designated Senior Indebtedness lacks such a
representative, then the Representative for such Designated Senior
Indebtedness shall at all times constitute the holders of a majority in
outstanding principal amount of such Designated Senior Indebtedness in respect
of any Designated Senior Indebtedness.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Subsidiary of any property, whether owned by the
Company or any Subsidiary at the Issue Date or later acquired, which has been
or is to be sold or transferred by the Company or such Subsidiary to such
Person or to any other Person from whom funds have been or are to be advanced
by such Person on the security of such Property.
"Senior Indebtedness" means, all Indebtedness and other Obligations
specified below payable directly or indirectly by the Company or any of its
Restricted Subsidiaries (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law), whether outstanding on the Issue Date or
thereafter created, incurred or assumed, by the Company or any of its
Restricted Subsidiaries: (i) the principal of, interest on and all other
Obligations related to the Credit Facility (including without limitation all
loans, letters of credit and other extensions of credit under the Credit
Facility, and all expenses, fees, reimbursements, indemnities and other
amounts owing pursuant to the Credit Facility); (ii) amounts payable in
respect of any Interest Swap Obligations and Currency Agreements; (iii) all
Indebtedness not prohibited by the "Limitation on Incurrence of Additional
Indebtedness" covenant that is not expressly pari passu with or subordinated
to the Notes; and (iv) all permitted Refinancings thereof. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include (a) any Indebtedness of the
Company to a Subsidiary of the Company, (b) Indebtedness to, or guaranteed on
behalf of, any shareholder, director, officer or employee of the Company or
any Subsidiary of the Company (including, without limitation, amounts owed for
compensation), (c) Indebtedness to trade creditors and other amounts incurred
in connection with obtaining goods, materials or services, (d) Indebtedness
represented by Disqualified Capital Stock, (e) any liability for federal,
state, local or other taxes owed or owing by the Company, (f) Indebtedness
incurred in violation of the Indenture provisions set forth under "Limitation
on Incurrence of Additional Indebtedness," (g) Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to the Company and (h) any
Indebtedness which is, by its express terms, subordinated in right of payment
to any other Indebtedness of the Company.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
101
"Stated Maturity" means, with respect to any installment of interest,
accreted value or principal on any series of Indebtedness, the date on which
such payment of interest or principal is due or is scheduled to be paid in the
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest,
accreted value or principal prior to the date originally scheduled for the
payment or accretion thereof.
"Subsidiary" with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means (i) as of the date of the Initial Offering,
Amarillo Acute Dialysis Specialists, L.L.C., Con-Med Supply Company, Inc.,
Continental Health Care, Ltd., Dialysis Specialists of Corpus Christi, L.L.C.,
Dialysis Specialists of South Texas, L.L.C., Dupage Dialysis Ltd., Everest
Management, Inc., Hemo Dialysis of Amarillo L.L.C., Home Dialysis of America,
Inc., Home Dialysis of Dayton, Inc., Lake Avenue Dialysis Center, Inc., Mercy
Dialysis Center, Inc., New York Dialysis Management, Inc., North Buckner
Dialysis Center, Inc., Northwest Indiana Dialysis, Inc., Ohio Valley Dialysis
Center, Inc., and WSKC Dialysis Services, Inc., and (ii) each of the Company's
Subsidiaries that in the future executes a supplemental indenture in which
such Subsidiary agrees to be bound by the terms of the Indenture as a
Subsidiary Guarantor; provided that any Person constituting a Subsidiary
Guarantor as described above shall cease to be a Subsidiary Guarantor when its
respective Guarantee is released in accordance with the terms thereof.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) on the date of such designation
is not party to any agreement, contract, arrangement or understanding with the
Company or any Restricted Subsidiary of the Company unless the terms of any
such agreement, contract, arrangement or understanding are no less favorable
to the Company or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of the Company or such
Restricted Subsidiary; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Capital Stock or (y) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one
director on its board of directors that is not a director or executive officer
of the Company or its Restricted Subsidiaries, and has at least one executive
officer that is not a director or executive officer of the Company or its
Restricted Subsidiaries.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities are
owned by such Person or any Wholly Owned Restricted Subsidiary of such Person.
102
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Private Notes were originally sold by the Company on April 30, 1998 to
the Initial Purchaser pursuant to the Purchase Agreement, dated as of April
30, 1998, by and among the Initial Purchaser, the Company and the Subsidiary
Guarantors (the "Purchase Agreement"). The Initial Purchaser subsequently
placed the Private Notes (i) within the United States to qualified
institutional buyers in reliance on Rule 144A under the Securities Act and
(ii) to a limited number of institutional "accredited investors," within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act, that
agreed in writing to comply with certain transfer restrictions and other
conditions. As a condition to the Purchase Agreement, the Company, the
Subsidiary Guarantors and the Initial Purchaser entered into the Registration
Rights Agreement on the Issue Date pursuant to which the Company agreed, for
the benefit of the holders, that it will at its expense (i) within 45 days
after the Issue Date (the "Filing Date"), file a registration statement on an
appropriate registration form (the "Exchange Offer Registration Statement")
with the Commission with respect to a registered offer (the "Exchange Offer")
to exchange the Private Notes for notes of the Company (the "Exchange Notes"),
guaranteed by the Subsidiary Guarantors, which Exchange Notes will have terms
identical to the Private Notes (except (A) the Exchange Notes will bear a
different CUSIP Number from the Private Notes, (B) the issuance of the
Exchange Notes will have been registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof, and (C) holders of the Exchange Notes will not be entitled to certain
rights of holders of Private Notes under the Registration Rights Agreement)
and (ii) use its best efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act within 120 days
after the Issue Date. Upon the Exchange Offer Registration Statement being
declared effective, the Company and the Subsidiary Guarantors will offer the
Exchange Notes (and the related Guarantees) in exchange for surrender of the
Private Notes (and the related Guarantees). The Company and the Subsidiary
Guarantors will keep the Exchange Offer open for acceptance for not less than
thirty days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the holders of Private Notes. For each of the
Private Notes surrendered pursuant to the Exchange Offer, the holder who
surrendered such Private Note will receive an Exchange Note having a principal
amount equal to that of the surrendered Private Note. Interest on each
Exchange Note will accrue from the Issue Date. Holders whose Private Notes are
accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Private Notes.
Under existing interpretations of the Commission contained in several no-
action letters to third parties, the Exchange Notes (and the related
Guarantees) will be transferable by holders thereof (other than affiliates of
the Company and the Subsidiary Guarantors and persons participating in the
distribution of the Notes) after the Exchange Offer without further
registration under the Securities Act; provided, however, that each Holder
that wishes to exchange its Private Notes for Exchange Notes will be required
to represent (i) that any Exchange Notes to be received by it will be acquired
in the ordinary course of its business, (ii) that it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes in violation of the
Securities Act, (iii) that it is not an "affiliate" (as defined in Rule 405
promulgated under the Securities Act) of the Company or any Subsidiary
Guarantor, (iv) if such Holder is not a broker-dealer, that it is not engaged
in, and does not intend to engage in, the distribution of Exchange Notes and
(v) if such Holder is a broker-dealer (a "Participating Broker-Dealer") that
will receive Exchange Notes for its own account in exchange for Notes that
were acquired as a result of market-making or other trading activities, that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the
Exchange Notes (other than a resale of an unsold allotment from the original
sale of the Private Notes) with the prospectus contained in the Exchange Offer
Registration Statement. The Company and the Subsidiary Guarantors have agreed
to make available, during the period required by the Securities Act, a
prospectus meeting the requirements of the Securities Act for use by
Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements for use in connection with any resale of
Exchange Notes. In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes
103
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or an exemption therefrom is available and complied
with.
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company and the Subsidiary
Guarantors are not permitted to effect an Exchange Offer, (ii) the Exchange
Offer is not consummated within 150 days of the Issue Date, (iii) holders of
unregistered Exchange Notes so request, or (iv) in the case of any Holder that
participates in the Exchange Offer, such Holder does not receive Exchange
Notes on the date of the exchange that may be sold without restriction under
state and federal securities laws (other than due solely to the status of such
Holder as an affiliate of the Company or any Subsidiary Guarantor within the
meaning of the Securities Act), then in each case, the Company and the
Subsidiary Guarantors will (x) promptly deliver to the Holders and the Trustee
written notice thereof and (y) at their sole expense, (a) as promptly as
practicable, and in any event prior to 30 days after such filing obligation
arises, file a shelf registration statement covering resales of the Private
Notes (the "Shelf Registration Statement"), (b) use their best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act on or prior to 90 days after the filing thereof, and (c) use
their best efforts to keep effective the Shelf Registration Statement until
the earlier of two years after the Issue Date or such time as all of the
applicable Notes have been sold thereunder. The Company and the Subsidiary
Guarantors will, in the event that a Shelf Registration Statement is filed,
provide to each Holder copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such Holder when the Shelf Registration
Statement for the Private Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Private Notes. A
Holder that sells Private Notes pursuant to the Shelf Registration Statement
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such Holder (including
certain indemnification rights and obligations).
If the Company or the Subsidiary Guarantors fail to comply with the above
provision or if the Exchange Offer Registration Statement or the Shelf
Registration Statement fails to become effective, then, as liquidated damages,
additional interest (the "Additional Interest") shall become payable in
respect of the Private Notes as follows:
(i) if (A) neither the Exchange Offer Registration Statement nor the
Shelf Registration Statement is filed with the Commission within 45 days
following the Issue Date or (B) notwithstanding that the Company and the
Subsidiary Guarantors have consummated or will consummate an Exchange
Offer, the Company and the Subsidiary Guarantors are required to file a
Shelf Registration Statement and such Shelf Registration Statement is not
filed on or prior to the date required by the Registration Rights
Agreement, then commencing on the day after either such required filing
date, Additional Interest shall accrue on the principal amount of the
Private Notes at a rate of .50% per annum for the first 90 days immediately
following each such filing date, such Additional Interest rate increasing
by an additional .50% per annum at the beginning of each subsequent 90-day
period; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is declared effective by the Commission within 120
days following the Issue Date or (B) notwithstanding that the Company and
the Subsidiary Guarantors have consummated or will consummate an Exchange
Offer, the Company and the Subsidiary Guarantors are required to file a
Shelf Registration Statement and such Shelf Registration Statement is not
declared effective by the Commission on or prior to the 90th day following
the date such Shelf Registration Statement was required to be filed, then,
commencing on the day after either such required effective date, Additional
Interest shall accrue on the principal amount of the Private Notes at a
rate of .50% per annum for the first 90 days immediately following such
date, such Additional Interest rate increasing by an additional .50% per
annum at the beginning of each subsequent 90-day period; or
(iii) if (A) the Company and the Subsidiary Guarantors have not exchanged
Exchange Notes for all Private Notes validly tendered in accordance with
the terms of the Exchange Offer on or prior to the 30th
104
day after the date on which the Exchange Offer Registration Statement was
declared effective or (B) if applicable, the Shelf Registration Statement
has been declared effective and such Shelf Registration Statement ceases to
be effective at any time prior to the second anniversary of the Issue Date
(other than after such time as all Private Notes have been disposed of
thereunder), then Additional Interest shall accrue on the principal amount
of the Private Notes at a rate of .50% per annum for the first 90 days
commencing on (x) the 31st day after such effective date, in the case of
(A) above, or (y) the day such Shelf Registration Statement ceases to be
effective in the case of (B) above, such Additional Interest rate
increasing by an additional .50% per annum at the beginning of each
subsequent 90-day period;
provided, however, that the Additional Interest rate on the Private Notes may
not exceed in the aggregate 1.0% per annum; provided, further, however, that
(1) upon the filing of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Exchange Offer Registration or a Shelf Registration
Statement (in the case of clause (ii) above), or (3) upon the exchange of
Exchange Notes for all Private Notes tendered (in the case of clause (iii) (A)
above), or upon the effectiveness of the Shelf Registration Statement which
had ceased to remain effective (in the case of clause (iii) (B) above),
Additional Interest on the Private Notes as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or (iii)
above will be payable in cash on the same original interest payment dates as
the Private Notes.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Private Notes accepted in the Exchange Offer. Holders may tender some or all
of their Private Notes pursuant to the Exchange Offer. However, Private Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the Exchange Notes bear a different CUSIP
Number from the Private Notes, (ii) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (iii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for an increase in the interest rate on the Private
Notes in certain circumstances relating to the timing of the Exchange Offer,
all of which rights will terminate when the Exchange Offer is terminated. The
Exchange Notes will evidence the same debt as the Private Notes and will be
entitled to the benefits of the Indenture. See "Description of Exchange
Notes."
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Private Notes were outstanding. This Prospectus and the Letter of
Transmittal are being mailed to persons who were Holders of Private Notes on
the close of business on the date of this Prospectus.
Holders of Private Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
105
If any tendered Private Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Private Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 2, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered Holders an announcement thereof, each prior to 9:00 a.m., New York
City time on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner, whether before or after any tender of the
Private Notes. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written
notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes will accrue from the Issue Date, May 5, 1998,
payable semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 1998, at the rate of 9 3/4% per annum. Holders whose
Private Notes are accepted for exchange will be deemed to have waived the
right to receive any interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a Holder of Private Notes may tender such Private Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the
Private Notes and any other required documents, to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the Private Notes, Letter of Transmittal and other required
documents must be completed and received by the Exchange Agent at the address
set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Private Notes may be made by book-
entry transfer in accordance with the procedures described below. Confirmation
of such book-entry transfer must be received by the Exchange Agent prior to
the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the Company
the representations set forth above in the second paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
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THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE
THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Private Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined). In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantees must be by a member firm of the Medallion System
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Private Notes at the book-entry transfer facility, The Depository Trust
Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and, subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Private Notes by causing such Book-Entry
Transfer Facility to transfer such Private Notes into the Exchange Agent's
account with respect to the Private Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the
Private Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Private Notes and withdrawal of tendered
Private Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Private Notes not properly tendered or any Private
Notes the Company's acceptance of which would, in the opinion of counsel for
the Company, be unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Private Notes. The Company's interpretation of the
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terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Private
Notes must be cured within such time as the Company shall determine. Although
the Company intends to notify holders of defects or irregularities with
respect to tenders of Private Notes, neither the Company, the Exchange Agent
nor any other person shall incur any liability for failure to give such
notification. Tenders of Private Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Private
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available, (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Private Notes and the principal amount of Private Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificates(s) representing the Private Notes (or a confirmation of book-
entry transfer of such Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility), and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificates(s) representing all
tendered Private Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Private Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility), and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
ACCEPTANCE OF PRIVATE NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Private Notes
properly tendered and will issue the Exchange Notes promptly after acceptance
of the Private Notes. See "Conditions" below. For purposes of the Exchange
Offer, the Company will be deemed to have accepted properly tendered Private
Notes for exchange when, as and if the Company has given oral or written
notice thereof to the Exchange Agent. For each Private Note accepted for
exchange, the holder of such Private Note will receive an Exchange Note having
a principal amount equal to that of the surrendered Private Note.
In all cases, issuance of Exchange Notes for Private Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Private Notes or a
timely Book-Entry Confirmation of such Private Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal and all other required documents. If any
tendered Private Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Private Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or non-exchanged Private Notes will be returned without expense to the
108
tendering holder thereof (or, in the case of Private Notes tendered by book-
entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry procedures described below, such non-
exchanged Private Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration
or termination of the Exchange Offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received
by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Private Notes to be
withdrawn (the "Depositor"), (ii) identify the Private Notes to be withdrawn
(including the certificate number(s) and principal amount of such Private
Notes, or, in the case of Private Notes transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Private Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Private Notes register the transfer of such Private Notes into the name of the
person withdrawing the tender and (iv) specify the name in which any such
Private Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Private Notes so withdrawn are validly retendered. Any Private
Notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Private Notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or issue Exchange Notes for, any Private
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Private Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by any governmental agency which might materially impair the ability of the
Company or the Subsidiary Guarantors to proceed with the Exchange Offer or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or the Subsidiary Guarantors;
(b) the Exchange Offer violates applicable law or any applicable
interpretation of the staff of the Commission; or
(c) any governmental approval has not been obtained, which approval the
Company and the Subsidiary Guarantors shall deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Private Notes and
return all tendered Private Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Private Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Private Notes (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes which have not been withdrawn. In addition,
the Company has reserved the right, notwithstanding the satisfaction of each
of the foregoing conditions, to terminate or amend the Exchange Offer.
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Private Notes being tendered or accepted for exchange.
EXCHANGE AGENT
American National Bank and Trust Company of Chicago, which also acts as
Trustee under the Indenture, has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for a
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Registered or By Facsimile Transmission By Overnight Courier
Certified Mail American National Bank American National Bank
American National Bank and Trust Company of and Trust
and Trust Company of Chicago Company of Chicago
Chicago
(312) 407-1067 Corporate Trust
Securities
ATTN: Barbara Arndt
Corporate Trust Confirm by Telephone: 1 N. State Street Teller
Redemption Barbara Arndt 9th Floor
Unit (312) 336-9123 Chicago, IL 60670
1 First National Plaza For Information Call: ATTN: Barbara Arndt
9th Floor, Anjali J. Gottreich
Suite 0124 (312) 661-6042
Chicago, IL 60670-0124
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional
solicitations may be made by telegraph, telecopy, telephone or in person by
officers and employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others to
solicit acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Private Notes, which is face value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
will be amortized over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Private Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Private Notes are eligible for resale pursuant
to Rule 144A, to a person
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inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act
in a transaction meeting the requirements of Rule 144A, in accordance with
Rule 144 under the Securities Act, or pursuant to another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), (iii) outside the United States
to a foreign person in a transaction meeting the requirements of Rule 904
under the Securities Act, or (iv) pursuant to an effective registration
statement under the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
Following the consummation of the Exchange Offer, holders of the Private
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Private Notes will not have any further registration rights,
except with respect to a Shelf Registration Statement in the event that a
Shelf Notice is delivered by the Company, and such Private Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity
of the market for such Private Notes could be adversely affected.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in certain "no-action" letters issued to
third parties and unrelated to the Company and the Exchange Offer, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer in exchange
for Private Notes may be offered for resale, resold and otherwise transferred
by holders thereof (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no intention, nor any
arrangement or understanding with any person, to participate in the
distribution of such Exchange Notes in violation of the provisions of the
Securities Act. However, if any holder acquires Exchange Notes in the Exchange
Offer for the purpose of distributing or participating in the distribution of
the Exchange Notes, such holder cannot rely on the position of the staff of
the Commission set forth in such "no-action" letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each Participating Broker-Dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such Participating Broker-Dealer as a result of market-making or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Notes. As contemplated by these "no-
action" letters and the Registration Rights Agreement, each holder accepting
the Exchange Offer is required to make certain representations to the Company
in the Letter of Transmittal. See "--Purpose and Effect of Exchange Offer."
BOOK ENTRY; DELIVERY AND FORM
Except as described below under "--Certificated Securities," the Private
Notes (and the related Guarantees) are represented by one or more permanent
global certificates in definitive, fully registered form (the "Outstanding
Global Notes") and the Exchange Notes will be issued in the form of one or
more permanent global certificates in definitive fully registered form (the
"Exchange Global Notes"). The term "Global Notes" means the Outstanding Global
Notes or the Exchange Global Notes, as the context may require. The
Outstanding Global Notes were deposited on the date of closing of the sale of
the Private Notes, and the Exchange Global Notes will be deposited on the date
of closing of the Exchange Offer, with the Trustee as custodian for The
Depository Trust Company ("DTC"), New York, New York, and registered in the
name of a nominee of DTC, in each case for credit to an account of a direct or
indirect participant as described below. The Outstanding Global Notes are
subject to certain restrictions on transfer set forth therein and bear a
legend regarding such restrictions.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. In addition, transfer of beneficial interests in the
111
Global Notes will be subject to the applicable rules and procedures of DTC and
its direct or indirect participants, which may change from time to time.
Beneficial interests in the Global Notes may not be exchanged for Notes in
certificated form except in the limited circumstances described below. See "--
Certificated Securities."
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
DEPOSITORY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of Participants. The Participants include securities brokers and
dealers (including the Initial Purchaser), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Exchange Global Note, DTC will credit the accounts
of Participants designated by the Initial Purchaser with portions of the
principal amount of the Exchange Global Note and (ii) ownership of such
interests in the Exchange Global Notes will be shown on, and the transfer
ownership thereof will be effected only through, records maintained by DTC
(with respect to Participants) or by Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the
Exchange Global Note). Investors in the Exchange Global Note may hold their
interests therein directly through DTC, if they are Participants in such
system, or indirectly through organizations that are Participants in such
system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a Global Note to such persons may be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of
a person having a beneficial interest in a Global Note to pledge such interest
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the Notes, see "--Certificated Securities."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium and interest on a Global
Note registered in the name of DTC or its nominee will be payable by the
Trustee to DTC or its nominee in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Company and the Trustee
will treat the persons in whose names the Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Note, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Note or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants.
112
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Note as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or its Participants in
identifying the beneficial owners of the Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the Notes for
all purposes.
Interests in the Global Note will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its Participants. Transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants
to whose account DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given direction. However,
if there is an Event of Default under the Indenture, DTC reserves the right to
exchange the Global Note for legended Notes in certificated form, and to
distribute such Notes to its Participants.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Note among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchaser or the Trustee will have any responsibility for the performance by
DTC or their Participants or Indirect Participants of their obligations under
the rules and procedures governing their operations.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in certificated form ("Certificated Securities"). Upon any
such issuance, the Trustee is required to register such Certificated
Securities in the name of, and cause the same to be delivered to, such person
or persons (or the nominee of any thereof). All such certificated Notes would
be subject to the legend requirements described herein under "Transfer
Restrictions." In addition, if (i) the Company notifies the Trustee in writing
that the Depositary is no longer willing or able to act as a depositary and
the Company is unable to locate a qualified successor within 90 days or (ii)
the Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the Global Note Holder of its Global Note,
Notes in such form will be issued to each person that the Global Note Holder
and the Depositary identify as being the beneficial owner of the related
Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
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SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal of, interest and premium, if any, on
the Global Note) be made by wire transfer of immediately available funds to
the accounts specified by the Global Note Holder. With respect to Certificated
Securities, the Company will make all payments of principal of, interest and
premium, if any, on the Notes, by wire transfer of immediately available funds
to the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the Notes
represented by the Global Note are expected to trade in DTC's Same-Day Funds
Settlement System, and any permitted secondary market trading in such Notes
will, therefore, be required by DTC to be settled in immediately available
funds. The Company expects that secondary trading in the Certificated
Securities will also be settled in immediately available funds.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material anticipated federal income tax
consequences of the issuance of Private Notes and the Exchange Offer is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the final, temporary and proposed regulations promulgated thereunder,
and administrative rulings and judicial decisions now in effect, all of which
are subject to change (possibly with retroactive effect) or different
interpretations. The following summary is not binding on the Internal Revenue
Service ("IRS"), and there can be no assurance that the IRS will take a
similar view with respect to the tax consequences described below. No ruling
has been or will be requested by the Company from the IRS on any tax matters
relating to the Private Notes or the Exchange Offer. This discussion is for
general information only and does not purport to address all of the possible
federal income tax consequences or any state, local or foreign tax
consequences of the acquisition, ownership and disposition of the Private
Notes, the Exchange Notes or the Exchange Offer. For purposes of this
discussion regarding "Certain Federal Income Tax Considerations," unless
otherwise specified, the Private Notes and the Exchange Notes are collectively
referred to as the "Notes." This discussion is limited to investors who will
hold the Private Notes and the Exchange Notes as capital assets and does not
address the federal income tax consequences that may be relevant to particular
investors in light of their unique circumstances or to certain types of
investors (such as dealers in securities, insurance companies, financial
institutions, tax-exempt entities, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
"functional currency" is not the United States dollar) who may be subject to
special treatment under federal income tax laws.
EXCHANGE OFFER
The exchange of the Private Notes for Exchange Notes pursuant to the
Exchange Offer should not be treated as an "exchange" because the Exchange
Notes should not be considered to differ materially in kind or extent from the
Private Notes. Rather, the Exchange Notes received by a holder of the Private
Notes should be treated as a continuation of the Private Notes in the hands of
such holder. As a result, there should be no adverse federal income tax
consequences to holders exchanging the Private Notes for the Exchange Notes
pursuant to the Exchange Offer.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means the beneficial owner of a Note
that for U.S. federal income tax purposes is (i) a citizen or resident (as
defined in Section 7701(b) of the Code) of the U.S., (ii) a corporation,
partnership or other entity formed under the laws of the U.S. or any political
subdivision hereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, (iv) in general, a trust
subject to the primary supervision of a court within the U.S. and the control
of a U.S. person as described in Section 7701(a)(30) of the Code, and (v) any
other person whose income or gain with respect to a Note is effectively
connected with the conduct of a U.S. trade or business. A "Non-U.S. Holder" is
any beneficial owner other than a U.S. Holder.
INTEREST
A holder of a Note will be required to report stated interest on the Note as
interest income in accordance with the holder's method of accounting at the
time the interest is accrued or (actually or constructively) received. The
Company expects that the Notes will not be considered to be issued with
original issue discount for tax purposes.
TAX BASIS IN NOTES
A holder's tax basis in a Note will be the holder's purchase price for the
Note. If a holder of a Private Note exchanges the Private Note for an Exchange
Note pursuant to the Exchange Offer, the tax basis of the Exchange
115
Note immediately after such exchange should equal the holder's tax basis in
the Private Note immediately prior to the exchange.
DISPOSITION OF NOTES
The sale, exchange, redemption or other disposition of a Note, except in the
case of an exchange pursuant to the Exchange Offer (see the above discussion),
generally will be a taxable event. A holder generally will recognize gain or
loss equal to the difference between (i) the amount of cash plus the fair
market value of any property received upon such sale, exchange, redemption or
other taxable disposition of the Note (except to the extent attributable to
accrued interest) and (ii) the holder's adjusted tax basis in such debt
instrument. Such gain or loss will be capital gain or loss. The recently
enacted Taxpayer Relief Act of 1997 made certain changes with respect to
taxation of long-term capital gains earned by taxpayers other than a
corporation. In general and subject to certain transition rules, the maximum
tax rate for individual taxpayers on net long-term capital gains (i.e., the
excess of net long-term capital gain over net short-term capital loss) is
lowered to 20% for most assets held for more than 18 months at the time of
disposition. Capital gains on the disposition of assets held for more than one
year and not more than 18 months at the time of disposition will be taxed as
"mid-term gain" at a maximum rate of 28%. A lower rate of 18% will apply after
December 31, 2000 for assets held for more than 5 years. However, the 18% rate
applies only to assets acquired after December 31, 2000 unless the taxpayer
elects to treat an asset held prior to such date as sold for fair market value
on January 1, 2001. In the case of individuals whose ordinary income is taxed
at a 15% rate, the 20% rate for assets held for more than 18 months is reduced
to 10% and the 18% rate for assets held for more than five years is reduced to
8%.
PURCHASERS OF NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE OR DATE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquire Notes other than at par, including those provisions
of the Internal Revenue Code relating to the treatment of "market discount"
and "amortizable bond premium." Any such purchaser should consult its tax
advisor as to the consequences of the acquisition, ownership and disposition
of Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Notes and (2)
the issue price of the Exchange Notes must be withheld and remitted to the
U.S. Treasury. Therefore, each holder should complete and sign IRS Form W-9 so
as to provide the information and certification necessary to avoid backup
withholding. However, certain holders (including, among others, certain
foreign persons) are not subject to these backup withholding and reporting
requirements. To qualify as an exempt foreign recipient, that holder should
complete and sign IRS Form W-8, attesting to that individual's exempt foreign
status. Such statements can be obtained from the Company. For further
information concerning backup withholding and instructions for completing the
IRS Form W-8 and IRS Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the IRS Form
W-8 and IRS Form W-9 if the Notes are held in more than one name), contact the
Company.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to withholding will be
reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder.
116
For purposes of withholding tax on interest discussed below, a Non-U.S.
Holder (as defined above) includes a non-resident fiduciary of an estate or
trust. For purposes of the following discussion, interest and gain on the
sale, exchange or other disposition of a Note will generally be considered to
be "U.S. trade or business income" if such income or gain is (i) effectively
connected with the conduct of a U.S. trade or business or (ii) in the case of
most treaty residents, attributable to a permanent establishment (or, in the
case of an individual, a fixed base) in the U.S.
Stated Interest. Generally, any interest paid to a Non-U.S. Holder of a Note
that is not U.S. trade or business income will not be subject to U.S. federal
income tax if the interest qualifies as "portfolio interest." Generally,
interest on the Notes will qualify as portfolio interest if (i) the Non-U.S.
Holder does not actually or constructively own 10% or more of the total voting
power of all voting stock of the Company and is not a "controlled foreign
corporation" with respect to which the Company is a "related person" within
the meaning of the Code, (ii) the beneficial owner, under penalty of perjury,
certifies that the beneficial owner is not a U.S. person and such certificate
provides the beneficial owner's name and address, (iii) the Non-U.S. Holder is
not a bank receiving interest on an extension of credit made pursuant to a
loan agreement made in the ordinary course of its trade or business, and (iv)
the Notes are in registered form.
An obligation is treated as an obligation in registered form if: (i) the
obligation is registered as to both principal and any stated interest with the
issuer (or its agent) and transfer of the obligation may be effected only by
surrender of the old instrument and either the reissuance by the issuer of the
old instrument to the new holder or the issuance by the issuer of a new
instrument to the new holder; or (ii) the right to principal and interest may
only be transferred through a book entry system maintained by the issuer (or
its agent). The Restricted Global Note is in registered form, has been
deposited with DTC and may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee. Except for
certain circumstances under which certificated notes are issued, beneficial
interests in the Restricted Global Note may only be transferred through the
book-entry system of DTC. If Certificated Securities are issued, such
securities may only be transferred by surrender of the old instrument and
issuance by the Company of a new instrument. See "Book Entry; Delivery and
Form."A withholding agent that has determined that the payee is a foreign
person must determine whether the payee is entitled to a reduced rate of
withholding. The documentation required is documentation that a withholding
agent must be able to associate with a payment upon which it can rely to treat
the payment as made to a foreign person that is the beneficial owner of the
payment. Portfolio interest is exempt from such withholding. A withholding
agent may only rely on the beneficial owner's claim of foreign status absent
actual knowledge or reason to know otherwise. The withholding agent must hold
the documentation prior to payment and must not have been notified by the IRS
that any of the information on the withholding certificate is incorrect or
unreliable. For payments made after 1998, a beneficial owner withholding
certificate is valid only if it is provided on IRS Form W-8 (for payments
before 1999, a substitute form may be provided). An IRS Form W-8 is valid only
if its validity period has not expired, it is signed under penalties of
perjury by the beneficial owner and it contains all of the information
required on the form. The required information is the beneficial owner's name,
permanent resident address, tax identification number (if required), the
country under the laws of which the beneficial owner is created, incorporated
or governed, the classification of the entity, and such other information as
may be required by the regulations. As long as these certification
requirements and the other qualifications mentioned in clauses (i) through
(iii) in the preceding paragraph discussed above are satisfied, interest paid
to Non-U.S. Holders of the Notes should not be subject to U.S. federal income
tax.
The gross amount of payments to a Non-U.S. Holder of interest that does not
qualify for the portfolio interest exemption and that is not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding.
U.S. trade or business income will be taxed at regular U.S. tax rates rather
than the 30% gross rate. In the case of a Non-U.S. Holder that is a
corporation, such U.S. trade or business income may also be subject to the
branch profits tax (which is generally imposed on a foreign corporation on the
actual or deemed repatriation from the U.S. of earnings and profits
attributable to U.S. trade or business income) at a 30% rate. The branch
profits tax may not apply (or may apply at a reduced rate) if a recipient is a
qualified resident of certain countries with which the U.S. has an
117
income tax treaty. To claim the benefit of a tax treaty or to claim exemption
from withholding because the income is U.S. trade or business income, the Non-
U.S. Holder must provide a properly executed IRS Form 1001 or IRS Form 4224
(or such successor forms as the IRS designates), as applicable, prior to the
payment of interest. these forms must be periodically updated. Under recently
issued Treasury Regulations (the "New Regulations"), the required IRS Form
1001 and IRS Form 4224 will be replaced by a new IRS Form W-8. Under the New
Regulations, a Non-U.S. Holder who is claiming the benefits of a treaty may be
required to obtain a U.S. taxpayer identification number and make certain
certifications to the Company. Special procedures are provided in the New
Regulations for payments through qualified intermediaries. Prospective
investors should consult their tax advisors regarding the effect, if any, of
the New Regulations.
Sale, Exchange or Redemption of Notes. Except as described below and subject
to the discussion concerning backup withholding, any gain realized by a Non-
U.S. Holder on the sale, exchange or redemption of a Note generally will not
be subject to U.S. federal income tax, unless (i) such gain is U.S. trade or
business income, (ii) subject to certain exceptions, the Non-U.S. Holder is an
individual who holds the Note as a capital asset and is present in the U.S.
for 183 days or more in the taxable year of the disposition, or (iii) the Non-
U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates (including certain former citizens or
residents of the U.S.).
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and each Non-U.S. Holder any interest that is subject to
withholding, or that is exempt from U.S. withholding tax pursuant to a tax
treaty, or interest that is exempt from U.S. tax under the portfolio interest
exception. Copies of these information returns may also be made available
under the provisions of a specific treaty or agreement to the tax authorities
of the country in which the Non-U.S. Holder resides.
Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments of principal on the Notes by
the Company to a Non-U.S. Holder if the holder certifies as to its Non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its Paying Agent has actual knowledge
that the holder is a U.S. person or that the conditions of any other exemption
are not in fact, satisfied).
The payment of the proceeds from the disposition of Notes to or through the
U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possible backup withholding unless the owner certifies as to its
Non-U.S. Holder status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a Note
to or through a non-U.S. office of a non-U.S. broker that is not a U.S.
related person will not be subject to information reporting or backup
withholding. For this purpose, a "U.S. related person" is (i) a "controlled
foreign corporation" for U.S. federal income tax purposes, (ii) a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment (or for
such part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a U.S. trade or
business, or (iii) with respect to payments made after December 31, 1998, a
foreign partnership that, at any time during its taxable year, is 50% or more
(by income or capital interest) owned by U.S. persons or is engaged in the
conduct of a U.S. trade or business.
In the case of the payment of proceeds from the disposition of Notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, information reporting is required on the payment unless the
broker has documentary evidence in the files that the owner is a Non-U.S.
Holder and the broker has no knowledge to the contrary. Backup withholding
will not apply to payments made through foreign offices of a broker that is
not a U.S. person or a U.S. related person (absent actual knowledge that the
payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
118
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS
OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING
AND DISPOSING OF THE NOTES OF THE COMPANY, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN
APPLICABLE LAWS.
PLAN OF DISTRIBUTION
Except as provided herein, this Prospectus may not be used for an offer to
resell, resale or other transfer of Exchange Notes. There is no existing
market for the Private Notes. No assurance can be given as to the liquidity
of, or trading markets for, the Exchange Notes.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and
subject to the immediately following sentence, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by the holders thereof without
further compliance with the registration and prospectus delivery provisions of
the Securities Act. However, any holder of Private Notes who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the Exchange Notes (i) will not be able to rely on the
interpretation by the staff of the Commission set forth in the above-mentioned
no-action letters, (ii) will not be able to tender its Private Notes in the
Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Private Notes unless such sale or transfer is made pursuant to
an exemption from such requirements.
Each holder of the Private Notes who wishes to exchange Private Notes for
Exchange Notes in the Exchange Offer will be required to represent to the
Company, among other things, (i) that any Exchange Notes to be received by it
will be acquired in the ordinary course of its business, (ii) that at the time
of the commencement of the Exchange Offer, it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes in violation of the
Securities Act, (iii) that it is not an "affiliate" (as defined in Rule 405
promulgated under the Securities Act) of the Company, (iv) if such holder is
not a Participating Broker-Dealer, that it is not engaged in, and does not
intend to engage in, the distribution of the Exchange Notes and (v) if such
holder is a Participating Broker-Dealer that will receive Exchange Notes for
its own account in exchange for Private Notes that were acquired as a result
of market-making or other trading activities, that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal also states that by acknowledging that it will deliver a
prospectus, and by delivering such a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Private Notes) with the Prospectus contained in the
Exchange Offer Registration Statement. The Company and the Subsidiary
Guarantors have agreed to make available, during the period required by the
Securities Act, a prospectus meeting the requirements of the Securities Act
for use by Participating Broker-Dealers and other persons, if any, with
similar prospectus delivery requirements for use in connection with any resale
of such Exchange Notes. In addition, until December 1, 1998 (90 days after the
date of this Prospectus), all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver
this Prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer who holds Private Notes acquired for its
own account as a result of market-making activities or other trading
activities in connection with resales of Exchange Notes received in exchange
for Private Notes.
119
The Company will not receive any proceeds from the exchange of Private Notes
for Exchange Notes, including those exchanged by Participating Broker-Dealers.
Exchange Notes received by broker-dealers for their own account pursuant to
the Exchange Offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the
writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, or at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through broker-dealers who
may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any Exchange Notes. Any broker-
dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any person that participates in the
distribution of such Exchange Notes may be deemed an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such broker-dealers
may be deemed to be underwriting compensation under the Securities Act.
For a period of 90 days after the Expiration Date, the Company will send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any Participating Broker-Dealer that requests such documents in
the Letter of Transmittal. The Company has agreed to pay all expenses
incidental to the Exchange Offer other than discounts or commissions of any
broker-dealers and will indemnify the holders of the Private Notes (including
Participating Broker-Dealers) participating in the Exchange Offer against
certain liabilities, including liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for Private Notes pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in this Prospectus untrue in any material respect or which
requires the making of any changes in this Prospectus in order to make any
statement herein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend the use of
this Prospectus until the Company has amended or supplemented this Prospectus
to correct such misstatement or omission and has furnished copies of the
amended and supplemented Prospectus to such broker-dealer. If the Company
gives any such notice to suspend the use of the Prospectus, it will extend the
90-day period referred to above by the number of days during the period from
and including the date of the giving of such notice up to and including when
broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of Exchange Notes.
The Company has agreed, pursuant to the Registration Rights Agreement, to
pay all expenses incident to the Exchange Offer (other than any underwriting
discounts or commissions), including reasonable fees and disbursements of one
special counsel for all of the Holders of the Notes. In addition, the Company
and the Subsidiary Guarantors agreed to indemnify the holders of the Notes
against certain liabilities.
EXPERTS
The consolidated financial statements of Peak Healthcare, L.L.C. as of and
for the years ended September 30, 1997 and 1996, and the financial statements
of West Suburban Kidney Center, S.C. for the year ended September 30, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Exchange Notes being offered hereby is being passed upon
for the Company by Katten Muchin & Zavis, Chicago, Illinois. Alan Berry, a
partner in Katten Muchin & Zavis, is a director of the Company. See
"Management."
120
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-4 under the Securities Act
with respect to the Exchange Notes offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information, reference is made to the Registration Statement and exhibits
thereto. The information so omitted, including exhibits, may be obtained from
the Commission at its principal office in Washington, D.C. upon the payment of
the prescribed fees, or may be examined without charge at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
1004. In addition, the Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
121
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
Unaudited Condensed Consolidated Balance Sheet at June 30, 1998......... F-2
Unaudited Condensed Consolidated Statements of Operations for the Nine
Months Ended June 30, 1998 and 1997.................................... F-3
Unaudited Consolidated Statement of Stockholders' Equity for the Nine
Months Ended June 30, 1998............................................. F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1998 and 1997.................................... F-5
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-6
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
Report of Independent Auditors.......................................... F-10
Consolidated Balance Sheets at September 30, 1996 and 1997.............. F-11
Consolidated Statements of Operations and Equity Interests for the Years
Ended September 30, 1996 and 1997...................................... F-12
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996 and 1997.......................................................... F-13
Notes to Consolidated Financial Statements.............................. F-14
WEST SUBURBAN KIDNEY CENTER, S.C. AND SUBSIDIARY
Report of Independent Auditors.......................................... F-28
Consolidated Statement of Operations for the Year Ended September 30,
1995................................................................... F-29
Consolidated Statement of Cash Flows for the Year Ended September 30,
1995................................................................... F-30
Notes to Consolidated Financial Statements.............................. F-31
F-1
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 46,328,553
Patient accounts receivable, less allowance of $4,660,044....... 38,204,507
Other current assets............................................ 5,448,282
------------
Total current assets.......................................... 89,981,342
Other assets:
Goodwill, net................................................... 58,169,560
Deferred financing costs, net................................... 5,315,837
Amounts due from affiliates..................................... 12,588,274
Other........................................................... 5,977,364
------------
Total other assets............................................ 82,051,035
Property and equipment, net....................................... 25,909,546
------------
Total assets................................................ $197,941,923
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 8,800,206
Accrued liabilities............................................. 15,939,580
Current portion of long-term obligations........................ 519,255
------------
Total current liabilities..................................... 25,259,041
Senior subordinated notes due 2008................................ 100,000,000
Notes payable to banks............................................ 4,834,206
Notes payable--other.............................................. 7,000,000
Capital lease obligations......................................... 1,808,824
Minority interests................................................ 1,406,956
Stockholders' equity
Common stock $.01 par value, 20,000,000 shares authorized;
12,884,700 shares issued and outstanding....................... 128,847
Additional paid-in capital...................................... 48,643,617
Retained earnings............................................... 8,860,432
------------
Total stockholders' equity.................................... 57,632,896
------------
Total liabilities and stockholders' equity.................. $197,941,923
============
See notes to unaudited condensed consolidated financial statements.
F-2
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
----------- ------------
Net revenues......................................... $82,079,941 $108,228,678
Operating expense:
Patient care costs................................. 58,783,648 69,177,377
General and administrative......................... 11,177,245 20,212,748
Provision for bad debts............................ 638,283 3,522,636
Depreciation and amortization...................... 3,464,788 4,933,199
----------- ------------
Total operating expenses......................... 74,063,964 97,845,960
----------- ------------
Income from operations............................... 8,015,977 10,382,718
Nonoperating income (expense):
Interest expense................................... (2,220,580) (4,942,446)
Interest income.................................... 718,811 1,314,314
Minority interests in (earnings) loss.............. (1,164,692) 319,383
----------- ------------
Income before income taxes and extraordinary item.... 5,349,516 7,073,969
Income taxes......................................... 2,644,797 3,903,983
----------- ------------
Net income before extraordinary item................. 2,704,719 3,169,986
Extraordinary item................................... -- 106,892
----------- ------------
Net income........................................... $ 2,704,719 $ 3,063,094
=========== ============
See notes to unaudited condensed consolidated financial statements.
F-3
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1998
ADDITIONAL
COMMON PAID-IN RETAINED EQUITY
STOCK CAPITAL EARNINGS INTERESTS TOTAL
-------- ----------- ---------- ------------ ------------
Balance at October 1,
1997................... $ -- $ -- $ -- $ 32,998,649 $ 32,998,649
Distributions to
members................ -- -- -- (7,808,831) (7,808,831)
Reorganization.......... 87,500 19,304,980 5,797,338 (25,189,818) --
Acquisition of minority
interests.............. 37,500 26,572,500 -- -- 26,610,000
Issuance of common
stock.................. 3,847 2,766,137 -- -- 2,769,984
Net income.............. -- -- 3,063,094 -- 3,063,094
-------- ----------- ---------- ------------ ------------
Balance at June 30,
1998................... $128,847 $48,643,617 $8,860,432 $ -- $ 57,632,896
======== =========== ========== ============ ============
See notes to unaudited condensed consolidated financial statements.
F-4
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE
30,
--------------------------
1997 1998
------------ ------------
OPERATING ACTIVITIES:
Net income........................................ $ 2,704,719 $ 3,063,094
Adjustments to reconcile net income to net cash
and cash equivalents provided by (used in)
operating activities:
Provision for bad debts......................... 638,283 3,522,636
Depreciation and amortization................... 3,464,788 4,933,199
Minority interests in earnings (loss)........... 1,164,692 (319,383)
Changes in operating assets and liabilities (net
of effect of acquisitions):
Patient and other accounts receivable......... (7,835,841) (7,486,673)
Other assets.................................. (7,674,949) (7,652,554)
Accounts payable, accruals, and other
liabilities.................................. 5,468,633 7,701,923
------------ ------------
Net cash provided by (used in) operating
activities................................. (2,069,675) 3,762,242
INVESTING ACTIVITIES:
Additions to property and equipment............... (5,445,960) (10,270,492)
Acquisition of businesses, net of cash acquired... (5,041,736) (15,792,916)
(Increase) decrease in amounts due from
affiliates....................................... (7,551,729) 101,856
------------ ------------
Net cash used in investing activities....... (18,039,425) (25,961,552)
FINANCING ACTIVITIES:
Proceeds from senior subordinated notes due 2008.. -- 100,000,000
Proceeds from notes payable to banks.............. 24,544,425 49,303,574
Payments on notes payable to banks................ (71,031) (74,227,638)
Payments on other notes payable................... (1,532,189) --
Payments on shareholders notes.................... -- (7,442,467)
Payments on capital leases........................ (963,724) (962,253)
Distributions to members.......................... (101,547) (600,022)
------------ ------------
Net cash provided by financing activities... 21,875,934 66,071,194
------------ ------------
Increase in cash and cash equivalents............. 1,766,834 43,871,884
Cash and cash equivalents at beginning of period.. -- 2,456,669
------------ ------------
Cash and cash equivalents at end of period........ $ 1,766,834 $ 46,328,553
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Fair value of 384,700 shares of common stock
issued in connection with acquisition of
businesses....................................... $ -- $ 2,769,984
Fair value of common stock issued in connection
with the purchase of minority interests in the
reorganization................................... -- 26,610,000
Distribution of notes receivable to members....... -- 7,208,809
See notes to unaudited condensed consolidated financial statements.
F-5
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION AND BASIS OF PRESENTATION
Everest Healthcare II, Inc. ("Everest II") is a newly-formed Delaware
Subchapter C corporation and successor to Peak Healthcare, L.L.C. ("Peak"). On
November 30, 1997, Peak transferred its interests in its wholly-owned
subsidiary, Continental Healthcare, Ltd., to Everest Healthcare Services
Corporation ("Everest") for $2,200,000. The price was comprised of $110,000 in
cash and a note payable in the amount of $2,090,000. As a transfer of
interests among companies under common control, the transfer was made at
historical book value.
Effective November 30, 1997, Peak was reorganized whereby the following
transactions occurred simultaneously. The members in 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 II. The number of shares of common stock of Everest II
received by Peak Liquidating was equal to the number of shares of Everest
Healthcare Services Corporation ("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
Accounting Principles Board Opinion No. 16, "Business Combinations," and
goodwill of approximately $12.4 million was recognized. Upon the consummation
of these transactions, Everest became a wholly-owned subsidiary of Everest II.
2. INTERIM FINANCIAL INFORMATION
The financial information at June 30, 1998 and for the nine months ended
June 30, 1997 and 1998 is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for
a fair presentation of the financial position at such date and the results of
operations and cash flows for those periods. Results of operations for the
nine months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the entire year.
3. BUSINESS COMBINATIONS
In January 1998, the Company acquired the remaining outstanding equity
interests that it previously had not owned in Hemo Dialysis of Amarillo,
L.L.C. ("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 $2.9 million. Goodwill recognized in the
acquisition was approximately $2.5 million.
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 $377,000. Through the purchase, the Company increased its
investment in Mount Auburn from 50% to 80.5%. Prior to the acquisition, the
Mount Auburn investment was accounted for under the equity method of
accounting. Goodwill recognized in the acquisition was approximately $266,000.
In February 1998, the Company acquired the remaining outstanding equity
interests that it previously had not owned in Dialysis Specialist of South
Texas, L.L.C. ("South Texas"), which owns and operates three outpatient and
home dialysis facilities in Corpus Christi, Texas. Prior to the acquisition,
the Company owned a 33.3% interest in South Texas and accounted for the
investment under the equity method of accounting. The
F-6
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchase price of the acquisition was $7.6 million, including costs of the
transaction. The consideration for the purchase price of the acquisition was
financed through the issuance of 179,300 shares of common stock of Everest
Healthcare Services Corporation with a fair value of approximately $1.3
million and cash of approximately $6.3 million. Goodwill recognized in the
acquisition was approximately $7.1 million.
In March 1998, the Company acquired, through its subsidiary, The
Extracorporeal Alliance, L.L.C. ("Alliance"), a 70% interest in Perfusion
Resource Association, L.L.C. ("PRA"), a contract services provider located in
Tampa, Florida. The purchase price of the acquisition, including costs of the
transaction, was approximately $1.4 million. Goodwill recognized in the
acquisition was approximately $1.3 million.
In April 1998, the Company acquired North Buckner Dialysis Center, Inc., a
dialysis service provider located in Dallas, Texas. The purchase price of the
acquisition was approximately $5.1 million, including costs of the
transaction. The consideration for the purchase price of the acquisition was
financed through the issuance of 153,000 shares of common stock of Everest
Healthcare Services Corporation with a fair value of approximately $1.1
million and cash of $4 million. Goodwill recognized in the acquisition was
approximately $4.1 million.
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the allocation of the purchase price of the
acquisitions have been made based upon the estimated fair value of the assets
acquired and liabilities assumed. Goodwill, represented the excess of purchase
price of the acquisitions over the fair value of the net assets acquired, is
amortized over a period of 25 years. The operating results of the acquired
entities are included in the consolidated results of operations of the Company
from the date of acquisition.
4. 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. See "Risk Factors--Reliance on Payments from Subsidiaries" and
"--Suretyship Defenses." 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, joint and several.
F-7
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following sets forth the financial data at June 30, 1998, and for the
nine months then ended:
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Net revenue............ $ 169,905 $ 87,686,258 $20,372,515 $ -- $108,228,678
Patient care costs..... -- 53,781,804 15,395,573 -- 69,177,377
General and administra-
tive expenses......... 2,667,816 15,236,069 2,308,863 -- 20,212,748
Provision for bad
debts................. -- 3,143,377 379,259 -- 3,522,636
Depreciation and amor-
tization.............. 553,418 3,604,671 775,110 4,933,199
------------ ------------ ----------- ------------ ------------
Income (loss) from op-
erations.............. (3,051,329) 11,920,337 1,513,710 -- 10,382,718
Interest (expense) in-
come, net............. (3,514,134) 750,393 (864,391) -- (3,628,132)
Minority interest in
(earnings) loss....... -- 462,746 (143,363) -- 319,383
------------ ------------ ----------- ------------ ------------
Income before income
taxes................. (6,565,463) 13,133,476 505,956 -- 7,073,969
Income tax ............ -- 3,851,726 52,257 -- 3,903,983
Extraordinary item..... -- 106,892 -- -- 106,892
------------ ------------ ----------- ------------ ------------
Net income (loss)...... $ (6,565,463) $ 9,174,858 $ 453,699 $ -- $ 3,063,094
============ ============ =========== ============ ============
BALANCE SHEET DATA:
Assets:
Cash and cash equiva-
lents................. $ 38,190,150 $ 6,113,589 $ 2,024,814 $ -- $ 46,328,553
Patient accounts re-
ceivable and other.... -- 33,835,530 5,842,202 (1,473,225) 38,204,507
Other current assets... -- 4,338,048 1,110,234 -- 5,448,282
Property and equipment,
net................... 4,875,011 18,648,709 2,385,826 -- 25,909,546
Goodwill, net.......... 12,791,628 32,684,374 12,693,558 -- 58,169,560
Amounts due from (due
to) affiliates........ 38,996,023 (22,321,266) (4,086,483) -- 12,588,274
Other assets........... 49,348,959 8,336,011 1,753,079 (48,144,848) 11,293,201
------------ ------------ ----------- ------------ ------------
Total assets........... $144,201,771 $ 81,634,995 $21,723,230 $(49,618,073) $197,941,923
============ ============ =========== ============ ============
Liabilities and Stock-
holders' Equity:
Current liabilities.... $ 3,330,585 $ 19,158,947 $ 4,242,734 $ (1,473,225) $ 25,259,041
Long-term liabilities.. 105,049,206 (158,488) 10,159,268 -- 115,049,986
Total stockholders' eq-
uity.................. 35,821,980 62,634,536 7,321,228 (48,144,848) 57,632,896
------------ ------------ ----------- ------------ ------------
Total liabilities and
stockholders' equity.. $144,201,771 $ 81,634,995 $21,723,230 $(49,618,073) $197,941,923
============ ============ =========== ============ ============
STATEMENT OF CASH FLOWS
DATA:
Operating activities:
Net income (loss)...... $ (6,565,463) $ 9,174,858 $ 453,699 $ -- $ 3,063,094
Adjustments to recon-
cile net income to net
cash
provided by (used in)
operating activities:
Provision for bad
debts................. -- 3,143,377 379,259 -- 3,522,636
Depreciation and amor-
tization.............. 553,418 3,604,671 775,110 -- 4,933,199
Minority interest in
earnings (loss)....... -- (462,746) 143,363 -- (319,383)
Net change in operating
assets and liabilities
(net of effect of ac-
quisitions)........... (7,492,503) 1,105,669 (1,050,470) -- (7,437,304)
------------ ------------ ----------- ------------ ------------
Net cash provided by
(used in) operating
activities............ (13,504,548) 16,565,829 700,961 -- 3,762,242
Investing Activities:
Additions to property
and equipment......... -- (10,270,492) -- -- (10,270,492)
Acquisition of busi-
nesses, net of cash
acquired.............. (15,792,916) -- -- -- (15,792,916)
Increase in amounts due
from affiliates....... -- 101,856 -- -- 101,856
------------ ------------ ----------- ------------ ------------
Net cash used in in-
vesting activities.... (15,792,916) (10,168,636) -- -- (25,961,552)
Financing Activities:
Proceeds from notes
payable............... 149,303,574 -- -- -- 149,303,574
Payments on notes pay-
able.................. (82,632,358) -- -- -- (82,632,358)
Other.................. -- (600,022) -- -- (600,022)
------------ ------------ ----------- ------------ ------------
Net cash provided by
(used in) financing
activities............ 66,671,216 (600,022) -- -- 66,071,194
Increase in cash and
cash equivalents....... 37,373,752 5,797,171 700,961 -- 43,871,884
Cash and cash equiva-
lents at beginning of
period................. 816,398 316,418 1,323,853 -- 2,456,669
------------ ------------ ----------- ------------ ------------
Cash and cash
equivalents at end of
year.................... $ 38,190,150 $ 6,113,589 $ 2,024,814 $ -- $ 46,328,553
============ ============ =========== ============ ============
F-8
EVEREST HEALTHCARE SERVICES CORPORATION (THE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The following sets forth the financial data for the nine months ended June
30, 1997:
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $ -- $ 69,774,734 $12,305,207 $ -- $ 82,079,941
Patient care costs..... -- 50,048,252 8,735,396 -- 58,783,648
General and
administrative
expenses.............. 345,574 9,257,213 1,574,458 -- 11,177,245
Provision for bad
debts................. -- 479,902 158,381 -- 638,283
Depreciation and
amortization.......... -- 2,987,005 477,783 -- 3,464,788
--------- ------------ ----------- ---------- ------------
Income (loss) from
operations............ (345,574) 7,002,362 1,359,189 -- 8,015,977
Interest (expense),
net................... -- (820,598) (681,171) -- (1,501,769)
Minority interests in
earnings.............. -- (1,008,621) (156,071) -- (1,164,692)
--------- ------------ ----------- ---------- ------------
Income (loss) before
income taxes.......... (345,574) 5,173,143 521,947 -- 5,349,516
Income taxes........... -- 2,644,797 -- -- 2,644,797
--------- ------------ ----------- ---------- ------------
Net income (loss)...... $(345,574) $ 2,528,346 $ 521,947 $ -- $ 2,704,719
========= ============ =========== ========== ============
STATEMENT OF CASH FLOWS
DATA:
Operating activities:
Net income (loss)...... $(345,574) $ 2,528,346 $ 521,947 $ -- $ 2,704,719
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Provision for bad
debts................ -- 479,902 158,381 -- 638,283
Depreciation and
amortization......... -- 2,987,005 477,783 -- 3,464,788
Minority interest in
earnings............. -- 1,008,621 156,071 -- 1,164,692
Net change in
operating assets and
liabilities (net of
effect of
acquisitions)........ 897,334 (11,346,010) 406,519 -- (10,042,157)
--------- ------------ ----------- ---------- ------------
Net cash provided by
(used in) operating
activities........... 551,760 (4,342,136) 1,720,701 -- (2,069,675)
Investing Activities:
Additions to property
and equipment........ -- (5,445,960) -- -- (5,445,960)
Acquisition of
businesses, net of
cash acquired........ -- (5,041,736) -- -- (5,041,736)
Increase in amounts
due from affiliates.. -- (7,551,729) -- -- (7,551,729)
--------- ------------ ----------- ---------- ------------
Net cash used in
investing activities. -- (18,039,425) -- -- (18,039,425)
Financing Activities:
Proceeds from notes
payable.............. -- 24,544,425 -- -- 24,544,425
Payments on notes
payable.............. -- (2,566,944) -- -- (2,566,944)
Other................. -- (101,547) -- -- (101,547)
--------- ------------ ----------- ---------- ------------
Net cash provided by
financing activities. -- 21,875,934 -- -- 21,875,934
--------- ------------ ----------- ---------- ------------
Increase in cash and
cash equivalents...... 551,760 (505,627) 1,720,701 -- 1,766,834
Cash and cash
equivalents at
beginning of period... -- -- -- -- --
--------- ------------ ----------- ---------- ------------
Cash and cash
equivalents at end of
period................ $ 551,760 $ (505,627) $ 1,720,701 $ -- $ 1,766,834
========= ============ =========== ========== ============
F-9
REPORT OF INDEPENDENT AUDITORS
Members
Peak Healthcare, L.L.C.
We have audited the accompanying consolidated balance sheets of Peak
Healthcare, L.L.C. and Subsidiaries (the "Company") as of September 30, 1996
and 1997, and the related consolidated statements of operations and equity
interests and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Peak Healthcare, L.L.C. and Subsidiaries at September 30, 1996 and 1997,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young llp
ERNST & YOUNG LLP
Chicago, Illinois
March 13, 1998
F-10
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
------------------------
ASSETS 1996 1997
------ ----------- ------------
(AS RESTATED)
Current assets:
Cash and cash equivalents........................... $ -- $ 2,456,669
Patient accounts receivable, less allowance of
$3,014,000 and $2,791,000.......................... 15,704,736 30,464,607
Other receivables................................... 1,591,871 1,922,716
Medical supplies inventories........................ 1,631,408 2,640,442
Deferred income taxes............................... 1,678,000 --
Prepaid expenses and other.......................... 379,185 787,669
----------- ------------
Total current assets.............................. 20,985,200 38,272,103
Other assets:
Goodwill, net....................................... 22,043,421 32,061,954
Deferred financing costs, net....................... -- 730,508
Amounts due from affiliates......................... 7,919,078 12,690,130
Investments in affiliated companies................. 806,724 827,118
Prepaid pension cost................................ 790,160 790,160
Deferred income taxes............................... 253,000 --
Other............................................... 1,698,365 1,861,501
----------- ------------
Total other assets................................ 33,510,748 48,961,371
Property and equipment:
Leasehold improvements.............................. 6,490,106 7,704,607
Medical equipment................................... 12,596,371 11,940,791
Furniture and fixtures.............................. 4,221,122 7,799,119
Building............................................ -- 140,121
Land................................................ -- 40,048
Construction in progress............................ 87,754 1,917,397
----------- ------------
23,395,353 29,542,083
Less: Accumulated depreciation and amortization..... 13,180,558 14,567,911
----------- ------------
10,214,795 14,974,172
----------- ------------
Total assets.................................... $64,710,743 $102,207,646
=========== ============
LIABILITIES AND EQUITY INTERESTS
--------------------------------
Current liabilities:
Cash overdraft...................................... $ 91,976 $ --
Accounts payable.................................... 4,428,300 6,094,306
Accrued liabilities................................. 5,169,696 9,626,258
Income taxes payable................................ 462,802 --
Deferred income taxes............................... -- 108,000
Notes payable to affiliates......................... 25,040 --
Current portion of long-term debt................... 1,374,868 795,492
Current portion of capital lease obligations........ 918,618 952,779
----------- ------------
Total current liabilities......................... 12,471,300 17,576,835
Notes payable to banks................................ 9,459,278 28,962,778
Notes payable--other.................................. -- 7,000,000
Capital lease obligations, less current portion....... 702,979 630,920
Notes payable to members.............................. 447,294 233,658
Minority interests.................................... 12,756,790 14,804,806
Equity interests...................................... 28,873,102 32,998,649
----------- ------------
Total liabilities and equity interests.......... $64,710,743 $102,207,646
=========== ============
See notes to consolidated financial statements.
F-11
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND EQUITY INTERESTS
YEAR ENDED SEPTEMBER
30,
------------------------
1996 1997
----------- -----------
(AS RESTATED)
Net revenues:
Dialysis services................................... $83,013,309 $99,143,315
Contract services................................... 157,905 14,664,981
----------- -----------
Total net revenues 83,171,214 113,808,296
Operating expenses:
Patient care costs.................................. 54,884,784 72,057,929
General and administrative.......................... 17,462,670 24,710,169
Provision for bad debts............................. 2,523,354 714,166
Depreciation and amortization....................... 3,400,994 4,939,481
----------- -----------
Total operating expenses.......................... 78,271,802 102,421,745
----------- -----------
Income from operations................................ 4,899,412 11,386,551
Nonoperating income (expense):
Interest expense.................................... (1,012,727) (2,961,528)
Interest income..................................... 736,822 813,006
Minority interests in earnings...................... (810,314) (1,600,784)
Gain on curtailment of pension benefits............. 3,043,628 --
Other............................................... 39,288 278,849
----------- -----------
1,996,697 (3,470,457)
----------- -----------
Income before income taxes............................ 6,896,109 7,916,094
Income taxes.......................................... 2,800,000 3,689,000
----------- -----------
Net income............................................ 4,096,109 4,227,094
Equity interests at beginning of year................. 23,150,063 28,873,102
Capital contributions................................. 1,656,425 --
Distribution to members............................... (29,495) (101,547)
----------- -----------
Equity interests at end of year....................... $28,873,102 $32,998,649
=========== ===========
See notes to consolidated financial statements.
F-12
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997
----------- ------------
(AS RESTATED)
OPERATING ACTIVITIES:
Net income.......................................... $ 4,096,109 $ 4,227,094
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for bad debts........................... 2,523,354 714,166
Depreciation and amortization..................... 3,400,994 4,939,481
Gain on sale of assets............................ -- (2,161)
Gain on curtailment of pension benefits........... (3,043,628) --
Deferred income taxes............................. 194,000 531,000
Minority interests in earnings.................... 810,314 1,600,784
Changes in operating assets and liabilities (net
of effect of acquisitions):
Patient and other accounts receivable........... (970,893) (14,321,410)
Medical supply inventories, prepaid expenses,
and other assets............................... 115,083 (2,453,422)
Cash overdraft, accounts payable, and accrued
liabilities.................................... (930,482) 6,515,211
----------- ------------
Net cash provided by operating activities..... 6,194,851 1,750,743
INVESTING ACTIVITIES:
Additions to property and equipment................. (1,441,890) (7,757,161)
Acquisition of businesses, net of cash acquired..... (3,201,756) (5,041,736)
Increase in amounts due from affiliates............. (8,268,297) (4,771,052)
----------- ------------
Net cash (used in) investing activities....... (12,911,943) (17,569,949)
FINANCING ACTIVITIES:
Proceeds from notes payable to banks................ 10,664,369 69,260,975
Proceeds from notes payable to affiliates........... 1,667,425 --
Proceeds from notes payable to members.............. 447,294 --
Payments on notes payable to banks.................. (4,715,734) (50,606,979)
Payments on notes payable to affiliates............. (1,175,522) (25,040)
Payments on capital lease obligations............... (1,797,670) (37,898)
Payments on notes payable to members................ -- (213,636)
Capital contributions............................... 1,656,425 --
Distributions to members............................ (29,495) (101,547)
----------- ------------
Net cash provided by financing activities..... 6,717,092 18,275,875
----------- ------------
Increase in cash and cash equivalents............... -- 2,456,669
Cash and cash equivalents at beginning of year...... -- --
----------- ------------
Cash and cash equivalents at end of year............ $ -- $ 2,456,669
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid................................... $ 2,134,000 $ 2,068,000
Interest paid....................................... 1,262,978 2,706,479
Fair value of common stock of Everest Healthcare
Services Corporation issued for acquisition of
business........................................... 8,891,055 --
Debt issued for acquisition of business............. -- 7,000,000
See notes to consolidated financial statements.
F-13
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
1. BASIS OF PRESENTATION AND RESTATEMENT
Peak Healthcare, L.L.C. ("Peak" or the "Company") was formed, as a limited
liability company, on October 1, 1995. Peak issued its membership units in
exchange for the ownership interests of certain of the owners of seven kidney
dialysis companies and Continental Healthcare, Ltd. ("Continental") on October
1, 1995. West Suburban Kidney Center, S.C. (" WSKC"), was designated as the
accounting acquiror and the transaction was accounted for as a purchase. WSKC
was determined to be the accounting acquiror due to, as of the date of
combination: (i) its fair value represented approximately 65% of the fair
value of the combined companies, (ii) it was the most significant of the
combined companies and (iii) its controlling shareholder obtained the largest
interest holding in the newly-formed company. The entities acquired by WSKC
were New York Dialysis Management, Inc., Northwest Indiana Dialysis Center,
Inc., DuPage Dialysis, Ltd. (d/b/a LaGrange Dialysis Center), Lake Avenue
Dialysis Center, P.C., Ohio Valley Dialysis Center, Inc., and Mercy Dialysis
Center, Inc. Upon completion of this exchange, Peak and the other owners of
the seven kidney dialysis companies contributed their ownership interests in
such companies for common stock of Everest Healthcare Services Corporation
("Everest"), a newly formed company. Upon completion of this transaction, Peak
owned 88% of Everest and 100% of Continental. Peak is a holding company with
no independent assets or operations. All references to the Company, unless
otherwise noted, refer collectively to Peak and its subsidiaries.
In June 1996, Everest issued 2,500,000 shares of its common stock (as
adjusted for its 1,000 for one stock split) for the acquisition of Home
Dialysis of America, Inc. (Note 7), which reduced Peak's ownership in Everest
to approximately 70%.
Upon review of the nature of intangible assets recorded in its various
acquisitions, the Company has concluded that it had incorrectly used a 40 year
life as the blended amortization period for its earlier acquisitions. The
Company has determined that the 25 year amortization period used in its more
recent acquisitions also should have been used for the intangible assets
acquired in the earlier acquisitions. Accordingly, the Company has restated
its financial statements for all prior periods to reflect the shorter
amortization periods. The impact of such restatement was to increase
amortization expense and decrease net income by approximately $216,000 and
$334,000 for the years ended September 30, 1996 and 1997, respectively.
2. EQUITY INTERESTS
Peak was organized on October 1, 1995, under the provisions of the Delaware
Limited Liability Company Act. Under the terms of the Peak operating
agreement, the Company shall continue until December 31, 2045, unless
terminated at an earlier date as provided in the agreement. The Company has
seven classes of interest all having the same rights, preferences, and
obligations except for distributions made from operations or upon liquidation
of the Company. The original issuance of interests in Peak was made to certain
of the owners of the underlying companies described in note 1. Each of these
owners received interests in Peak (in each class) based upon the fair value of
their interests in the underlying companies exchanged. Preferences upon
distribution are set forth below (in order of A through F), with 100% of the
distributions to a specific class of interest being required to be made before
distributions are made to the next class. All interest holders in each class
receive a pro rata share of the distribution to the class of interest.
Interests outstanding and distribution rights are as follows:
CLASS OF INTERESTS DISTRIBUTION
INTEREST OUTSTANDING PREFERENCE
-------- ----------- ------------
A 12,791,939 $12,791,939
B1 2,809,331 2,809,331
B2 3,729,291 3,729,291
C 43,142,803 43,142,803
D 21,626,250 21,626,250
E 86,505,000 86,505,000
F 700 Thereafter
3. NATURE OF BUSINESS
The Company operates in two business segments, as a provider of chronic
dialysis services and as a contract services provider. The operations of the
chronic dialysis segment principally involve the delivery of health care
services, primarily outpatient dialysis treatments. The contract services
segment principally involves acute
F-14
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dialysis, perfusion, apheresis and auto-transfusion treatments for
hospitalized patients. Hospitals pay for these services at contracted rates.
4. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts and transactions
of Peak 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
on a first-in, first-out ("FIFO") basis.
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 seven 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.
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 $591,000
and $2,063,000 at September 30, 1996 and 1997, respectively.
Deferred Financing Costs
Deferred financing costs represents capitalized fees associated with
obtaining financing. The costs are being amortized as interest expense over
the term of the related financing. At September 30, 1997, accumulated
amortization of the deferred financing costs amounted to approximately
$54,000.
Income Taxes
The Company is a limited liability company and, as such, income taxes are
"passed through" to the holders of equity interest. The Company's subsidiaries
include Delaware Subchapter C corporations which are subject to federal,
state, and local income taxes. Deferred income taxes are recognized for the
difference in reporting of certain assets and liabilities for financial
reporting and tax purposes. These temporary differences are determined by
applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect of a change in tax rates is recognized in
the period that includes the enactment date.
Stock Options
The Company, through Everest, has issued 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 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 (Note 12).
F-15
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenue is recognized upon the delivery of health care services. Management
service fee revenue is recognized as services are performed. These fees are
based on contracted rates and are invoiced monthly. The contracted rates are
estimates based upon the cost of services provided such as billing,
accounting, technical support, cash management and facilities management.
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. Actual results could differ from those estimates.
Fair Value of Financial Instruments
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 the prime rate plus 1% and approximate fair value.
The Company estimates the fair value of fixed-rate long-term debt
obligations using the discounted cash flow method with interest rates
currently available for similar obligations. The carrying amounts reported in
the Company's balance sheets for these obligations approximate fair value.
Long-Lived Assets
The Company evaluates its long-lived assets (including related goodwill) on
an ongoing basis. Identifiable intangibles are reviewed for impairment
wherever 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.
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, 1997, the Company maintained cash deposits with certain
financial institutions which were in excess of federally insured limits.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). In addition to net income,
F-16
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
comprehensive income includes items recorded directly to equity. The
provisions of SFAS 130 establish new standards for reporting and displaying
comprehensive income and its components in a full set of financial statements.
Application of the provisions of SFAS 130 is required for fiscal years
beginning after December 15, 1997. The Company is in the process of evaluating
the specific reporting requirements of SFAS 130; however, the adoption of SFAS
130 will have no impact on the Company's consolidated results of operations,
financial position, or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). The provisions of SFAS 131
establish standards for the way companies report information about operating
segments in annual financial statements and require that such companies report
selected information about operating segments in interim financial reports
issued to shareholders. The provisions of SFAS 131 require the disclosure of
segment information be based on a "management approach" whereby disclosures
are made of information that is available and evaluated regularly by the chief
decision makers of the Company in deciding how to allocate resources and
assessing performance. Application of the provisions of SFAS 131 is required
for fiscal years beginning after December 15, 1997. The Company operates in
two business segments; as a provider of chronic dialysis services and as a
contract service provider of extracorporeal services including perfusion,
apheresis, and autotransfusion. The Company is managed as such, and,
therefore, the Company believes that its adoption of SFAS 131 will not have a
material impact on its future disclosure requirements.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS 132
revises the previous disclosure requirements of pension and postretirement
plans. The Statement does not change the recognition or measurement of pension
plans. The Company is evaluating the disclosure requirements of SFAS 132 and
believes that its adoption will not have a material impact on its future
disclosure requirements.
5. NET REVENUES
The Company provides dialysis and other extracorporeal blood treatment
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 to be received from
the various third-party payors. Gross and net revenues for the fiscal years
ended September 30 include the following:
1996 1997
------------ ------------
Medicare/Medicaid............................... $150,350,085 $178,374,063
Other........................................... 24,162,283 17,951,240
------------ ------------
Gross revenues.................................. 174,512,368 196,325,303
Contractual allowances.......................... 93,328,650 84,747,325
------------ ------------
Net revenues.................................... $ 81,183,718 $111,577,978
============ ============
In addition, the Company has included in net revenues, non-patient-related
revenues representing management fees earned for administrative services
performed for unconsolidated affiliated companies and unaffiliated companies.
These revenues amounted to approximately $1,987,000 and $2,230,000 for the
years ended September 30, 1996 and 1997, respectively.
F-17
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INVESTMENTS IN 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, 1996 and 1997, amounted to approximately $807,000 and $827,000,
respectively. The percentages of ownership in these companies range from 25%
to 50%. In addition, the Company has advanced funds to certain of these
companies (Note 13).
SEPTEMBER 30,
-----------------------
1996 1997
----------- -----------
Current assets................................... $ 3,982,642 $ 7,734,591
Non-current assets............................... 2,523,884 5,671,391
Current liabilities.............................. 2,034,269 4,230,407
Non-current liabilities.......................... 2,490,957 7,379,372
Net revenues..................................... 12,266,966 19,993,511
Income from operations........................... 947,649 (220,413)
Net income....................................... 947,649 (299,190)
7. BUSINESS COMBINATIONS
Effective November 1, 1996, Everest purchased an 80% interest in The
Extracorporeal Alliance, LLC ("Alliance"). Alliance performs blood oxygenation
services for hospitalized patients. The purchase price of the acquisition was
approximately $12,042,000, including a $7,000,000 note payable. The
acquisition was accounted for as a purchase, and as such, the results of
operations of Alliance subsequent to the date of acquisition have been
included in the Company's consolidated results of operations. In connection
with the acquisition, the Company recognized goodwill of approximately
$10,815,000. Effective September 1, 1997, Alliance acquired a 51% interest in
Tri-State Perfusion, LLC ("Tri-State"). Alliance acquired its interest in Tri-
State, a newly formed joint venture, in exchange for the use of its expertise
in performing perfusion services as well as to provide additional service
capabilities.
On June 20, 1996, Everest purchased Home Dialysis of America, Inc. ("HDA"),
by issuing 2,500,000 shares of common stock (as adjusted for the 1,000-for-one
stock split), with a fair value of $8,891,000, in exchange for 100% of the
stock of HDA. Goodwill of $7,370,000 was recognized in the acquisition. This
transaction was accounted for as a purchase and, as such, HDA's results of
operations subsequent to the date of acquisition are included in the
consolidated statement of operations.
On July 1, 1996, Everest purchased certain assets and operations of Saint
Anthony Dialysis Centers, LLC for $1,400,000. This transaction was accounted
for as a purchase resulting in the recording of goodwill of $1,331,000.
Results of operations subsequent to the date of acquisition are included in
the consolidated statement of operations.
On August 30, 1996, Everest purchased an 80% interest in Saint Margaret
Mercy Dialysis Centers, LLC. The Company contributed $2,060,000 and the
minority stockholder contributed $419,000 towards the total purchase price of
$2,479,000. This transaction was accounted for as a purchase resulting in the
recording of goodwill of $2,386,000. Results of operations subsequent to the
date of acquisition are included in the consolidated statement of operations.
8. LEASES AND RELATED PARTY TRANSACTIONS
Capital Leases
The Company leases medical equipment, whose terms and conditions qualify the
obligations for treatment as capital leases. The lease agreements require the
Company to pay all maintenance costs. Interest rates on the
F-18
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
leases range from 8.0% to 14.0%. Capital leases included in medical equipment
and related accumulated amortization aggregated to $3,724,767 and $2,000,498,
respectively, at September 30, 1996, and $4,955,720 and $2,161,965,
respectively, at September 30, 1997. Amortization of assets recorded under
capital leases is included with depreciation of property and equipment.
Future minimum payments under these capital leases with initial or remaining
terms of one year or more consisted of the following at September 30, 1997:
1998.......................................................... $1,026,265
1999.......................................................... 552,789
2000.......................................................... 126,768
----------
Total minimum lease payments.................................. 1,705,822
Amounts representing interest................................. 122,123
----------
Present value of minimum lease payments....................... 1,583,699
Less: Current portion......................................... 952,779
----------
$ 630,920
==========
Operating Leases
The Company leases land and building space under operating leases for some
of its dialysis centers, its corporate offices and its supplies warehouse from
ARE Partnership and Three M&L Partnership, related parties with common
ownership. For the years ended September 30, 1996 and 1997, rents of
approximately $871,000 and $952,000, respectively, were paid to these related
parties. Expiration dates for these leases continue through March 2025.
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, 1996 and 1997, approximately $1,619,000 and
$2,072,000, respectively, was recorded as rent expense for such leases.
Expiration dates for these leases continue through July 2005.
Approximate minimum rental payments under operating leases are as follows:
UNAFFILIATED
AFFILIATES ENTITIES TOTAL
---------- ------------ -----------
1998.................................. $ 497,122 $ 1,544,551 $ 2,041,673
1999.................................. 479,466 1,482,256 1,961,722
2000.................................. 410,092 1,364,260 1,774,352
2001.................................. 360,824 1,159,746 1,520,570
2002.................................. 231,733 1,124,390 1,356,123
Thereafter............................ 521,398 18,112,371 18,633,769
---------- ----------- -----------
$2,500,635 $24,787,574 $27,288,209
========== =========== ===========
9. EMPLOYEE BENEFIT PLANS
The Company maintains three defined-benefit pension plans ("defined-benefit
plans"), a money purchase defined-contribution pension plan ("money purchase
plan"), and an employee savings and profit-sharing plan.
The defined-benefit plans cover all employees of the Company and a related
party with common ownership, Nephrology Associates of Northern Illinois, Ltd.
("NANI"), who meet certain eligibility requirements. Retirement benefit
payments are based on years of credited service and average compensation over
the final five
F-19
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years of employment. The funding policy was to contribute annually amounts
which were deductible for federal income tax purposes. Effective May 16, 1996,
all participant benefits in the defined-benefit plans were frozen. The Company
and NANI ceased funding the defined-benefit plans as of May 16, 1996, and no
additional years of benefit service were accrued by plan participants
subsequent to that date. The net assets remaining in the plan have not been
distributed subsequent to May 16, 1996, other than for normal benefits paid to
participants. The Company recognized a curtailment gain of approximately
$3,044,000 relating to this event.
The following table sets forth the funded status of the defined-benefit
plans at September 30:
1996 1997
----------- ----------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits (1996--$4,140,000; 1997--
$6,720,000).................................... $ 4,814,667 $7,370,000
=========== ==========
Projected benefit obligation for service
rendered to date............................... $ 4,814,667 $7,370,000
Plan assets at fair value....................... 6,853,912 7,247,000
----------- ----------
Funded status................................... 2,039,245 (123,000)
Unrecognized net loss (gain).................... (1,249,085) 913,160
----------- ----------
Prepaid pension cost............................ $ 790,160 $ 790,160
=========== ==========
Net periodic pension cost of the defined-benefit plans for the years ended
September 30 included the following components:
1996 1997
----------- ---------
Service cost-benefit earned during the year...... $ 813,773 $ --
Interest cost on projected benefit obligation.... 582,276 510,447
Actual return on plan assets..................... (942,678) (575,573)
Net amortization and deferral.................... 389,237 65,126
----------- ---------
Net pension expense before curtailment........... 842,608 --
Gain resulting from curtailment of pension
benefits........................................ (3,043,628) --
----------- ---------
Net pension income expense....................... $(2,201,020) $ --
=========== =========
Key assumptions used for the defined-benefit plans at September 30 are as
follows:
1996 1997
---- ----
Discount rate................................................. 7.3% 7.3%
Long-term rate of return on assets............................ 9.0 8.4
The assets of the defined-benefit plans primarily consist of mutual funds,
corporate bonds and real estate holdings.
The Company has a money purchase plan that covers substantially all
employees hired prior to July 1, 1987. Prior to fiscal year 1996,
contributions to the money purchase pension plan were equal to 10% of each
eligible participant's compensation. The money purchase plan was amended on
May 16, 1996, to eliminate future contributions.
The employee savings and profit-sharing plan covers substantially all
employees. Under the savings component of this plan, the Company matches 50%
of employee contributions up to a maximum of 6% of
F-20
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
each eligible participant's compensation. The profit-sharing plan component of
this plan became effective on January 1, 1996. Under this component of the
plan, the Company's annual contribution is dependent on various factors,
including the Company's profitability for the fiscal year. Contributions to
the employee savings and profit-sharing plan amounted to approximately
$765,000 and $702,000 for the years ended September 30, 1996 and 1997,
respectively.
10. NOTES PAYABLE
Notes payable to banks consists of the following at September 30:
1996 1997
----------- -----------
Revolving credit facility........................ $ 4,961,000 $11,553,813
Acquisition funding facility..................... 3,600,000 17,276,000
Installment notes................................ 2,273,146 928,457
----------- -----------
10,834,146 29,758,270
Less: Current portion............................ 1,374,868 795,492
----------- -----------
$ 9,459,278 $28,962,778
=========== ===========
The Company has a revolving credit facility which matures on May 15, 2000.
During the year, the revolving credit facility was amended to allow aggregate
borrowings of $15.0 million (previously limited to aggregated borrowings of
$10.0 million). The borrowings are subject to 75.0% of eligible accounts
receivable. Interest is payable at the Company's option of: (i) the bank's
prime rate (8.5% at September 30, 1997); or (ii) LIBOR plus 2.25% (7.97% at
September 30, 1997). Interest on approximately $6.5 million is payable at the
bank's prime rate, and interest on approximately $5.0 million is payable at
LIBOR plus 2.25%. Commitment fees of .375% of the unused portion of the line
of credit are payable quarterly.
The acquisition funding facility was amended during the year to increase
available borrowings from $15.0 million to $35.0 million. Interest is payable
at the Company's option of: (i) the bank's prime rate plus 0.5% (9.0% at
September 30, 1997); or (ii) LIBOR plus 2.5% (8.22% at September 30, 1997). At
September 30, 1997, interest on approximately $5.5 million is payable at the
bank's prime rate plus 0.5%, and interest on approximately $11.8 million is
payable at LIBOR plus 2.5%. The acquisition funding facility matures on May
15, 1998. The Company has the option, on the maturity date, of paying the
outstanding balance on the facility or converting the facility to a term note
requiring 60 monthly installments and bearing interest at the Company's option
of: (i) the bank's prime rate plus 0.5%; or (ii) LIBOR plus 2.5%. The Company
intends to convert the outstanding indebtedness to an installment note.
Commitment fees on the unused balance of the acquisition funding facility of
0.5% are payable quarterly.
The credit agreements covering the revolving credit facility and the
acquisition funding facility contain covenants, which among other things,
require the Company to maintain certain financial ratios and minimum levels of
net worth. The facilities are collateralized by a lien on assets of the
Company. The credit agreements are also secured by an assignment of key-man
life insurance for a period of not less than three years, with the amount of
such insurance to be not less than $10.0 million through December 31, 1997,
$7.5 million thereafter, through and including December 31, 1998, and $5.0
million through December 31, 1999.
On October 31, 1997, the Company entered into a new agreement increasing its
revolving credit facility from $15.0 million to $20.0 million, subject to a
limit of 75.0% of eligible accounts receivable. In addition, the agreement
increases the acquisition financing facility from $35.0 million to $45.0
million. There were no changes in the maturity date, the interest rates, the
commitment fees payable on the unused balance, or the required covenants from
the prior agreement.
F-21
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has entered into various installment notes payable which are
payable through February 1999, and bear interest at rates ranging from 8.75%
to 9.25%. The notes are collateralized by medical equipment.
In connection with the acquisition of Alliance (Note 7), the Company
incurred $7.0 million in notes payable to the former owners of Alliance. The
notes mature on October 31, 2002 and bear interest at the 5-year Treasury Note
rate (as determined on November 1 of each year) plus 3.0% (8.79% as of
September 30, 1997). Interest is payable monthly.
Maturities of notes payable to banks at September 30, 1997 are as follows:
1998......................... $18,071,492
1999......................... 130,439
2000......................... 11,556,339
-----------
$29,758,270
===========
Maturities of notes payable for the year ended September 30, 1998 include
$17,276,000 under the acquisition funding facility. The Company has the
ability and the intent to convert the facility into a term note and, as such,
has classified the entire facility as a long-term liability.
11. INCOME TAXES
At September 30, 1997, the Company has net operating loss carryforwards of
approximately $86,000 that expire through 2008. Utilization of these
carryforwards is restricted due to changes in ownership.
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, 1996 and 1997 were as follows:
1996 1997
---------- -----------
Allowance for uncollectible accounts............. $1,193,000 $ 1,109,000
Accrued vacation................................. 540,000 511,000
Net operating loss carryforwards................. 302,000 29,000
---------- -----------
Total deferred tax assets.................... 2,035,000 1,649,000
Patient accounts receivable basis difference..... -- (1,740,000)
Other............................................ (104,000) (17,000)
---------- -----------
Total deferred tax liabilities............... (104,000) (1,757,000)
---------- -----------
Net deferred tax asset (liability)............... $1,931,000 $ (108,000)
========== ===========
The provision for income tax expense consists of the follows:
1996 1997
---------- ----------
Current:
Federal........................................... $2,106,000 $2,555,000
State............................................. 500,000 603,000
Deferred............................................ 194,000 531,000
---------- ----------
$2,800,000 $3,689,000
========== ==========
F-22
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Federal income taxes at the statutory rate are reconciled with the Company's
income tax provision as follows:
1996 1997
---- ----
Federal statutory rate........................................ 34.0% 34.0%
State income taxes, net of federal benefit.................... 4.4 5.0
Minority interests in earnings................................ 2.8 6.6
Nondeductible goodwill amortization........................... 2.5 5.5
Other, net.................................................... (3.1) (4.5)
---- ----
40.6% 46.6%
==== ====
12. STOCK OPTIONS
Effective January 15, 1997, the Company, through Everest, established the
Everest Healthcare Corporation 1996 Stock Award Plan (the "Plan"). The Plan
permits the granting of options to certain key executive, managerial, and
administrative employees of the Company to purchase shares of Everest's common
stock. The total number of shares reserved and eligible for distribution as
awards under the Plan is 1,500,000. On February 5, 1997, Everest granted
1,209,500 stock options (including 354,100 issued to Peak) pursuant to the
Plan. The stock options have an exercise price of $9.10. The stock option
awards vest ratably over a four-year period in yearly increments of 25%. The
stock options granted expire ten years from the date of grant. In addition,
the Plan contains provisions that restrict the sale of stock obtained through
the exercise of stock options. At September 30, 1997, no options issued under
the Plan were exercisable.
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 $35,000 lower than the net
income reported in the statement of operations for the year ended September
30, 1997.
The following table summarizes the Company's stock options outstanding
(exclusive of stock options held by Peak) at September 30, 1997:
EXERCISE
OPTIONS PRICE
------- --------
Balance at September 30, 1996............................ -- --
Granted.................................................. 855,400 $9.10
Exercised................................................ -- --
Forfeited................................................ -- --
-------
Balance at September 30, 1997............................ 855,400 $9.10
=======
13. 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 equityholders of the Company. Fees charged to affiliates for
services were approximately $1,579,000 and $1,295,000 during the years ended
September 30, 1996 and 1997, respectively, and are included in the
accompanying consolidated statement of operations. In addition, the Company
provides advances to certain affiliates. Amounts due from unconsolidated
affiliates are due upon demand, and the Company believes that it will receive
full repayment. Amounts due from unconsolidated affiliates at September 30,
1996 and 1997, were approximately as follows:
F-23
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996 1997
---------- -----------
Nephrology Associates of Northern Illinois, Ltd.. $7,137,000 $ 7,643,000
Unconsolidated joint ventures.................... 434,000 4,736,000
Others........................................... 348,000 311,000
---------- -----------
$7,919,000 $12,690,000
========== ===========
Nephrology Associates of Northern Illinois, Ltd., an unconsolidated
affiliate substantially owned by the majority equityholders 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 $2,369,000 and $1,883,000 during the years
ended September 30, 1996 and 1997, respectively, and are included in the
accompanying consolidated statement of operations.
The Company earned interest on outstanding balances due from unconsolidated
affiliates of approximately $748,000 and $1,368,000 during the years ended
September 30, 1996 and 1997, respectively.
14. SEGMENT INFORMATION
The following table presents the Company's financial information by its
business segments. Included in the dialysis services segment are revenues from
management fees earned for administrative services.
DIALYSIS CONTRACT
SERVICES SERVICES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Year ended September 30,
1996:
Net revenues............ $83,013,309 $ 157,905 $ -- $ 83,171,214
Depreciation and amorti-
zation................. 3,399,203 1,791 -- 3,400,994
Income from operations.. 4,882,264 17,148 -- 4,899,412
Total assets............ 64,265,311 445,432 -- 64,710,743
Capital expenditures.... 1,298,573 143,317 -- 1,441,890
DIALYSIS CONTRACT
SERVICES SERVICES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Year ended September 30,
1997:
Net revenues............ $99,172,280 $14,664,981 $(28,965) $113,808,296
Depreciation and amorti-
zation................. 4,369,519 569,962 -- 4,939,481
Income from operations.. 10,242,699 1,143,852 -- 11,386,551
Total assets............ 87,033,825 15,173,821 -- 102,207,646
Capital expenditures.... 7,547,556 209,605 -- 7,757,161
15. SUBSEQUENT EVENTS
Effective November 30, 1997, Peak was reorganized whereby the following
transactions occurred simultaneously. The members in 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 II. The number of shares of common stock of Everest II
received by Peak Liquidating was equal to the number of Everest Healthcare
Services Corporation ("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 outstanding, 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 Accounting Principles Board Opinion No. 16, "Business
Combinations," and goodwill of approximately $12.4 million was recognized.
Upon the consummation of these transactions, Everest became a wholly-owned
subsidiary of Everest II.
F-24
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Effective November 30, 1997, Peak transferred its interests in its wholly-
owned subsidiary, Continental Healthcare, Ltd., to Everest for $2,200,000. The
price was comprised of $110,000 in cash and a note payable in the amount of
$2,090,000. As a transfer of interests among companies under common control,
the transfer was made at historical book value.
Effective March 4, 1998, the Company completed the reorganization described
above by merging Everest with and into Everest II. The merger was treated as a
statutory merger under Delaware law. After the merger, Everest II, the
surviving entity, changed its name to "Everest Healthcare Services
Corporation."
16. 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. See "Risk Factors--Reliance on Payments from Subsidiaries" and
"--Securityship Defenses." 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, joint and several.
F-25
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following sets forth the financial data at September 30, 1997 and for the
twelve months then ended:
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $ -- $ 94,991,665 $19,115,941 $ (299,310) $113,808,296
Patient care costs..... -- 58,095,256 13,962,673 -- 72,057,929
General and
administrative
expenses.............. -- 21,776,465 2,933,704 -- 24,710,169
Provision for bad
debts................. -- 578,049 136,117 -- 714,166
Depreciation and
amortization.......... -- 4,158,861 780,620 -- 4,939,481
----------- ------------ ----------- ------------ ------------
Income from operations. -- 10,383,034 1,302,827 (299,310) 11,386,551
Interest (expense)
income, net........... 423,561 (2,199,787) (671,606) 299,310 (2,148,522)
Minority interests in
earnings.............. -- (1,600,784) -- -- (1,600,784)
Other income, net...... -- 278,849 -- -- 278,849
----------- ------------ ----------- ------------ ------------
Income before income
taxes................. 423,561 6,861,312 631,221 -- 7,916,094
Income taxes........... -- 3,689,000 -- -- 3,689,000
----------- ------------ ----------- ------------ ------------
Net income............. $ 423,561 $ 3,172,312 $ 631,221 $ -- $ 4,227,094
=========== ============ =========== ============ ============
BALANCE SHEET DATA:
Assets:
Cash and cash
equivalents........... $ 816,398 $ 316,418 $ 1,323,853 $ -- $ 2,456,669
Patient accounts
receivable and other.. 116,875 28,341,551 3,928,897 -- 32,387,323
Other current assets... -- 5,112,222 945,951 (2,630,062) 3,428,111
Property and equipment,
net................... -- 12,733,522 2,240,650 -- 14,974,172
Goodwill, net.......... -- 19,200,708 12,861,246 -- 32,061,954
Amounts due from (due
to) affiliates........ 5,286,809 17,882,635 (2,680,108) (7,799,206) 12,690,130
Investment in
affiliates............ 19,845,583 828,118 -- (19,846,583) 827,118
Other assets........... -- 2,914,738 467,431 -- 3,382,169
----------- ------------ ----------- ------------ ------------
Total assets........... $26,065,665 $ 87,329,912 $19,087,920 $(30,275,851) $102,207,646
=========== ============ =========== ============ ============
Liabilities and
Stockholders' Equity:
Current liabilities.... -- 15,483,844 3,423,258 (1,330,267) 17,576,835
Long-term liabilities.. 653,758 50,881,785 9,195,620 (9,099,001) 51,632,162
Stockholders' equity... 25,411,907 20,964,283 6,469,042 (19,846,583) 32,998,649
----------- ------------ ----------- ------------ ------------
Total liabilities and
stockholders' equity.. $26,065,665 $ 87,329,912 $19,087,920 $(30,275,851) $102,207,646
=========== ============ =========== ============ ============
STATEMENT OF CASH FLOWS
DATA:
Operating activities:
Net income............. $ 423,561 $ 3,172,312 $ 631,221 $ -- $ 4,227,094
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Provision for bad
debts................ -- 578,049 136,117 -- 714,166
Depreciation and
amortization......... -- 4,158,861 780,620 -- 4,939,481
Deferred income taxes. -- 531,000 -- -- 531,000
Minority interest in
earnings............. -- 1,600,784 -- -- 1,600,784
Gain on sale of
assets............... -- (2,161) (2,161)
Net change in
operating assets and
liabilities (net of
effect of
acquisitions)........ 392,837 (10,428,353) (224,105) -- (10,259,621)
----------- ------------ ----------- ------------ ------------
Net cash provided by
(used in) operating
activities............ 816,398 (389,508) 1,323,853 -- 1,750,743
Investing Activities:
Additions to property
and equipment......... -- (7,757,161) -- -- (7,757,161)
Acquisition of
businesses, net of
cash acquired......... -- (5,041,736) -- -- (5,041,736)
Increase in amounts due
from affiliates....... -- (4,771,052) -- -- (4,771,052)
----------- ------------ ----------- ------------ ------------
Net cash used in
investing activities.. -- (17,569,949) -- -- (17,569,949)
Financing Activities:
Proceeds from notes
payable............... -- 69,260,975 -- -- 69,260,975
Payments on notes
payable............... -- (50,632,019) -- -- (50,632,019)
Other.................. -- (353,081) -- -- (353,081)
----------- ------------ ----------- ------------ ------------
Net cash provided by
financing activities.. -- 18,275,875 -- -- 18,275,875
----------- ------------ ----------- ------------ ------------
Increase in cash and
cash equivalents...... 816,398 316,418 1,323,853 -- 2,456,669
Cash and cash
equivalents at
beginning of year..... -- -- -- -- --
----------- ------------ ----------- ------------ ------------
Cash and cash
equivalents at end of
year.................. $ 816,398 $ 316,418 $ 1,323,853 $ -- $ 2,456,669
=========== ============ =========== ============ ============
F-26
PEAK HEALTHCARE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The following sets forth the financial data at September 30, 1996 and for the
twelve months then ended:
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $ -- $ 82,985,918 $ 584,847 $ (399,551) $ 83,171,214
Patient care costs..... -- 54,462,884 421,900 -- 54,884,784
General and
administrative
expenses.............. -- 17,239,945 222,725 -- 17,462,670
Provision for bad
debts................. -- 2,472,534 50,820 -- 2,523,354
Depreciation and
amortization.......... -- 3,394,384 6,610 -- 3,400,994
----------- ------------ ---------- ------------ ------------
Income (loss) from
operations............ -- 5,416,171 (117,208) (399,551) 4,899,412
Interest (expense)
income, net........... 355,169 (1,013,668) (16,957) 399,551 (275,905)
Minority interests in
earnings.............. -- (810,314) -- -- (810,314)
Gain on curtailment of
pension benefits...... -- 3,043,628 -- -- 3,043,628
Other income (expense),
net................... (581) 39,869 -- -- 39,288
----------- ------------ ---------- ------------ ------------
Income (loss) before
income taxes ......... 354,588 6,675,686 (134,165) -- 6,896,109
Income taxes........... 1,024 2,798,976 -- -- 2,800,000
----------- ------------ ---------- ------------ ------------
Net income (loss)...... $ 353,564 $ 3,876,710 $ (134,165) $ -- $ 4,096,109
=========== ============ ========== ============ ============
BALANCE SHEET DATA:
Assets:
Patient accounts
receivable and other. $ -- $ 16,931,386 $ 365,221 $ -- $ 17,296,607
Other current assets.. -- 7,744,117 98,391 (4,153,915) 3,688,593
Property and
equipment, net....... -- 10,096,510 118,285 -- 10,214,795
Goodwill, net......... -- 19,661,651 2,381,770 -- 22,043,421
Amounts due from
affiliates........... 5,676,680 8,974,338 -- (6,731,940) 7,919,078
Investment in
affiliates........... 19,813,470 807,724 -- (19,814,470) 806,724
Other assets.......... -- 2,741,525 -- -- 2,741,525
----------- ------------ ---------- ------------ ------------
Total assets.......... $25,490,150 $ 66,957,251 $2,963,667 $(30,700,325) $ 64,710,743
=========== ============ ========== ============ ============
Liabilities and
Stockholders' Equity:
Current liabilities... (18,552) 14,823,078 414,075 (2,747,301) 12,471,300
Long-term liabilities. 447,294 28,859,238 2,198,363 (8,138,554) 23,366,341
Total stockholders'
equity............... 25,061,408 23,274,935 351,229 (19,814,470) 28,873,102
----------- ------------ ---------- ------------ ------------
Total liabilities and
stockholders' equity. $25,490,150 $ 66,957,251 $2,963,667 $(30,700,325) $ 64,710,743
=========== ============ ========== ============ ============
STATEMENT OF CASH FLOWS
DATA:
Operating activities:
Net income (loss)...... $ 353,564 $ 3,876,710 $ (134,165) $ -- $ 4,096,109
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Provision for bad
debts................ -- 2,472,534 50,820 -- 2,523,354
Depreciation and
amortization......... -- 3,394,384 6,610 -- 3,400,994
Gain on curtailment of
pension benefits..... -- (3,043,628) -- -- (3,043,628)
Deferred income taxes. -- 194,000 -- -- 194,000
Minority interest in
earnings............. -- 810,314 -- -- 810,314
Net change in
operating assets and
liabilities
(net of effect of
acquisitions)........ (353,564) (1,509,463) 76,735 -- (1,786,292)
----------- ------------ ---------- ------------ ------------
Net cash provided by
operating activities. -- 6,194,851 -- -- 6,194,851
Investing Activities:
Additions to property
and equipment........ -- (1,441,890) -- -- (1,441,890)
Acquisition of
business, net of cash
acquired............. -- (3,201,756) -- -- (3,201,756)
Increase in amounts
due from affiliates.. -- (8,268,297) -- -- (8,268,297)
----------- ------------ ---------- ------------ ------------
Net cash used in
investing activities. -- (12,911,943) -- -- (12,911,943)
Financing Activities:
Proceeds from notes
payable.............. $ -- $ 12,779,088 $ -- $ -- $ 12,779,088
Payments on notes
payable.............. -- (7,688,926) -- -- (7,688,926)
Other................. -- 1,626,930 -- -- 1,626,930
----------- ------------ ---------- ------------ ------------
Net cash provided by
financing activities. -- 6,717,092 -- -- 6,717,092
----------- ------------ ---------- ------------ ------------
Increase in cash and
cash equivalents...... -- -- -- -- --
Cash and cash
equivalents at
beginning of year..... -- -- -- -- --
----------- ------------ ---------- ------------ ------------
Cash and cash
equivalents at end of
year.................. $ -- $ -- $ -- $ -- $ --
=========== ============ ========== ============ ============
F-27
REPORT OF INDEPENDENT AUDITORS
Board of Directors
West Suburban Kidney Center, S.C.
We have audited the accompanying consolidated statements of operations and
cash flows of West Suburban Kidney Center, S.C. and Subsidiary (the "Company")
for the year ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 statements of operations and cash flows referred to
above present fairly, in all material respects, the consolidated results of
operations and cash flows of West Suburban Kidney Center, S.C. and Subsidiary
for the year ended September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young llp
ERNST & YOUNG LLP
Chicago, Illinois
March 13, 1998
F-28
WEST SUBURBAN KIDNEY CENTER, S.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
Net revenues....................................................... $47,275,868
Operating expenses:
Patient care costs............................................... 31,340,348
General and administrative....................................... 12,691,216
Provision for bad debts.......................................... 753,407
Depreciation and amortization.................................... 1,270,833
-----------
Total operating expenses....................................... 46,055,804
-----------
Income from operations............................................. 1,220,064
Nonoperating income (expense):
Interest income.................................................. 354,734
Interest expense................................................. (722,518)
-----------
(367,784)
-----------
Income before income taxes......................................... 852,280
Income taxes....................................................... 325,000
-----------
Net income..................................................... $ 527,280
===========
See notes to consolidated financial statements.
F-29
WEST SUBURBAN KIDNEY CENTER, S.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1995
OPERATING ACTIVITIES:
Net income...................................................... $ 527,280
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for bad debts....................................... 753,407
Depreciation and amortization................................. 1,270,833
Deferred income taxes......................................... 54,000
Loss on sale of equipment..................................... 19,333
Changes in operating assets and liabilities:
Patient and other accounts receivable....................... 1,089,059
Amounts due from affiliates................................. 575,685
Medical supply inventories, prepaid expenses, and other
assets..................................................... 316,058
Cash overdraft, accounts payable, and accrued liabilities... (714,973)
------------
Net cash provided by operating activities................. 3,890,682
INVESTING ACTIVITIES:
Additions to property and equipment............................. (1,580,641)
Proceeds from sale of equipment................................. 380,494
------------
Net cash used in investing activities..................... (1,200,147)
FINANCING ACTIVITIES:
Proceeds from notes payable to banks............................ 41,380,000
Payments on notes payable to banks.............................. (43,153,306)
Payments on capital lease obligations........................... (917,229)
------------
Net cash used in financing activities..................... (2,690,535)
------------
Change in cash and cash equivalents............................. --
Cash and cash equivalents at beginning of year.................. --
------------
Cash and cash equivalents at end of year........................ $ --
============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid................................................... $ 737,456
See notes to consolidated financial statements.
F-30
WEST SUBURBAN KIDNEY CENTER, S.C. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Operations and Basis of Consolidation
West Suburban Kidney Center, S.C. ("Company"), an Illinois corporation, is
engaged principally in providing dialysis services to patients. The
consolidated financial statements include the accounts and transactions of the
Company and its wholly-owned subsidiary, The Lamm Organization, Inc. All
intercompany accounts and transactions are eliminated in consolidation.
Depreciation and Amortization
Depreciation of property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Amortization of capital
leases is computed using the straight-line method over the shorter of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was approximately $1,271,000. The lease payments are
expensed as incurred for income tax purposes.
Revenue Recognition
Revenue is recognized upon the delivery of health care services. Management
service fee revenue is recognized as services are performed. These fees are
based on contracted rates and are invoiced monthly. The contracted rates are
estimates based upon the cost of services provided such as billing,
accounting, technical support, cash management and facilities management.
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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. NET REVENUES
The Company provides dialysis services to certain patients under government-
sponsored programs such as Medicare and Medicaid, and other insurance
reimbursement arrangements. Provision has been made in the financial
statements for the estimated contractual adjustments, representing the
difference between the Company's standard charges for services and the
estimated payments to be received from the various third-party payors. Gross
and net revenues for the year ended September 30, 1995 include the following:
Medicare/Medicaid............................................. $75,147,364
Other......................................................... 20,665,013
-----------
Gross revenues................................................ 95,812,377
Contractual allowances........................................ 52,094,292
-----------
Net revenues.................................................. $43,718,085
===========
In addition, the Company has included approximately $3,558,000 in net
revenues representing management fees earned for administrative services
performed for affiliated companies.
F-31
WEST SUBURBAN KIDNEY CENTER, S.C. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LEASES
Capital Leases
The Company leases medical equipment and furniture from Continental Health
Care, Ltd., an unconsolidated affiliate of the Company (through common
ownership), on terms and conditions that qualify the obligations for treatment
as capital leases. The lease agreements require the Company to pay all
maintenance costs. Amortization of assets recorded under capital leases is
included with depreciation of property and equipment.
Operating Leases
The Company leases land and building space under operating leases for some
of its dialysis centers, its administration building, and its supplies
warehouse from ARE and Three M&L (affiliates of the Company). Additionally,
the Company leases land and building space under operating leases from
nonaffiliated entities for certain of its dialysis facilities. Rent expense of
approximately $311,000 was paid to affiliates of the Company.
4. EMPLOYEE BENEFIT PLANS
The Company and an unconsolidated affiliate substantially owned by the
stockholders of the Company, Nephrology Associates of Northern Illinois, Ltd.
("NANI"), maintain two defined-benefit pension plans (the "Plans") covering
all employees meeting certain eligibility requirements. Generally, the funding
policies are to contribute annually amounts which are deductible for federal
income tax purposes. Retirement benefit payments are based on years of
credited service and average compensation over the final five years of
employment.
Net periodic pension cost of the Plans for the year ended September 30,
1995, included the following components:
Service cost-benefit earned during the period............... $ 946,000
Interest cost on projected benefit obligation............... 511,000
Actual return on plan assets................................ (1,333,000)
Net amortization and deferral............................... 892,000
-----------
Net periodic pension cost................................... $ 1,016,000
===========
The Company's portion of net periodic pension cost included
in the consolidated statement of operations................ $ 904,000
===========
Key assumptions included the weighted-average discount rate used of 7.0% and
an expected rate of return on assets of the Plans of 8.5%.
The Company also maintains a money purchase pension plan covering
substantially all employees hired prior to July 1, 1987. The Company's
contributions to the money purchase pension plan are equal to 10.0% of each
eligible participant's compensation. Approximately $455,000 was expensed
relating to this plan.
The Company also maintains an employee savings plan covering substantially
all employees hired after June 30, 1987. The Company matches 50.0% of employee
contributions to the employee savings plan up to a maximum of 3.0% of each
eligible participant's compensation. $125,000 was expensed relating to this
plan.
F-32
WEST SUBURBAN KIDNEY CENTER, S.C. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
5. INCOME TAXES
Components of income tax for the year ended September 30, 1995, are
summarized as follows:
Current:
Federal........................................................ $205,000
State.......................................................... 66,000
Deferred......................................................... 54,000
--------
$325,000
========
6. RELATED PARTY TRANSACTIONS
The Company provides administrative and purchasing services to several
affiliated companies. The Companies are affiliated through common ownership.
Total management fee revenues from affiliates for these services were
approximately $3,558,000.
The Company earned interest on outstanding balances due from affiliates of
approximately $355,000.
The Company purchases from NANI certain management and physician supervisory
services. Fees incurred for such services totaled approximately $4,315,000 for
the year ended September 30, 1995.
The Company has promissory notes outstanding to an affiliated company. The
notes provide for interest to be paid at the prime rate plus 1%, adjusted on
the first day of each calendar quarter. Interest expense totaled approximately
$169,000.
F-33
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY SUBSIDIARY GUARANTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECU-
RITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY OR ANY SUBSIDIARY GUARANTOR SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PRO-
SPECTUS.
-----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 14
The Company............................................................... 24
Use of Proceeds........................................................... 24
Capitalization............................................................ 25
Unaudited Pro Forma Consolidated Statements of Operations................. 26
Selected Financial Data................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 39
Management................................................................ 60
Certain Relationships and Related Transactions............................ 65
Security Ownership of Certain Beneficial Owners and Management............ 68
Description of Credit Facility............................................ 69
Description of Exchange Notes............................................. 70
The Exchange Offer........................................................ 103
Book Entry; Delivery and Form............................................. 111
Certain Federal Income Tax Considerations................................. 115
Plan of Distribution...................................................... 119
Experts................................................................... 120
Legal Matters............................................................. 120
Available Information..................................................... 121
Index to Consolidated Financial Statements................................ F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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--------------------------
PROSPECTUS
--------------------------
LOGO
OFFER FOR ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE
FOR 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008, REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
BY FACSIMILE:
(312) 407-1067
CONFIRM BY TELEPHONE:
(312) 336-9123
ATTENTION: BARBARA ARNDT
BY OVERNIGHT COURIER:
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
CORPORATE TRUST SECURITIES
1 NORTH STATE STREET TELLER, 9TH FLOOR
CHICAGO, ILLINOIS 60602
ATTENTION: BARBARA ARNDT
BY HAND/MAIL
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
CORPORATE TRUST REDEMPTION UNIT
1 FIRST NATIONAL PLAZA, 9TH FLOOR, SUITE 0124
CHICAGO, ILLINOIS 60670-0124
ATTENTION: BARBARA ARNDT
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any persons, including directors and officers, who
are (or are threatened to be made) parties to any threatened, pending or
completed legal action, suit or proceeding (whether civil, criminal,
administrative or investigative) by reason of their being directors or
officers of the corporation. The indemnity may include expenses, attorneys'
fees, judgments, fines and amounts paid in settlement, provided such sums were
actually and reasonably incurred in connection with the action, suit or
proceeding and provided the director or officer acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the
corporation's best interests and, in the case of criminal proceedings,
provided he had no reasonable cause to believe that his or her conduct was
unlawful. The corporation may indemnify directors and officers in a derivative
action (in which suit is brought by a stockholder on behalf of the
corporation) under the same conditions, except that no indemnification is
permitted without judicial approval if the director or officer is adjudged
liable to the corporation. If the director or officer is successful on the
merits or otherwise in defense of any actions referred to above, the
corporation must indemnify him against the expenses and attorneys' fees he
actually and reasonably incurred.
Article XI of the Company's By-laws provides that the Company shall
indemnify its officers and directors to the fullest extent permitted by
Section 145; provided, however, that the Company shall not be obligated to
indemnify any such director (i) with respect to proceedings, claims or actions
initiated or brought voluntarily by such person and not by way of defense or
brought against such person in response to a proceeding, claim or action by
such person against the Company, or (ii) for any amounts paid in settlement of
an action effected without the prior written consent of the Company to such
settlement or, (iii) if liability was incurred because the director breached
or failed to perform a duty he owes to the Company and the breach or failure
to perform constitutes (a) a willful failure to deal fairly with the Company
or its stockholders in connection with a matter in which the director has a
material conflict of interest, (b) a violation of criminal law, unless the
director had reasonable cause to believe his conduct was lawful or no
reasonable cause to believe his conduct was unlawful, (c) a transaction from
which the director derived an improper personal profit, or (d) willful
misconduct. The termination of a proceeding by judgment, order, settlement or
conviction, or upon a plea of no contest or an equivalent plea, does not, by
itself, create a presumption that indemnification of the director or officer
is not required. A director or officer who seeks indemnification is required
to make a written request to the Company. Such indemnification is not
exclusive of any other right to indemnification provided by law, agreement or
otherwise. The determination as to right to indemnification is required to be
made by a majority vote of a quorum of the Board of Directors consisting of
directors not at the time parties to the same or related proceedings. If a
quorum of disinterested directors cannot be obtained, the determination will
be made by majority vote of a committee duly appointed by the Board of
Directors and consisting solely of two or more directors not at the time
parties to the same or related proceedings. Directors who are parties to the
same or related proceedings may participate in the designation of members of
the committee.
The Company has applied for a policy of insurance, under which the Company
would be entitled to be reimbursed for certain indemnity payments it is
required or permitted to make to directors and officers of the Company.
ITEM 21. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company, as amended.*
3.3 Articles of Organization of Amarillo Acute Dialysis Spe-
cialists, L.L.C.*
II-1
3.4 Operating Agreement of Amarillo Acute Dialysis Special-
ists, L.L.C.*
3.5 Articles of Incorporation of Con-Med Supply Company, Inc.*
3.6 By-laws of Con-Med Supply Company, Inc.*
3.7 Articles of Incorporation of Continental Health Care,
Ltd.*
3.8 By-laws of Continental Health Care, Ltd.*
3.9 Articles of Organization of Dialysis Specialists of Corpus
Christi, L.L.C.*
3.10 Operating Agreement of Dialysis Specialists of Corpus
Christi, L.L.C.*
3.11 Articles of Organization of Dialysis Specialists of South
Texas, L.L.C.*
3.12 Operating Agreement of Dialysis Specialists of South Tex-
as, L.L.C.*
3.13 Articles of Incorporation of DuPage Dialysis, Ltd.*
3.14 By-laws of DuPage Dialysis, Ltd.*
3.15 Certificate of Incorporation of Everest Management, Inc.*
3.16 By-laws of Everest Management, Inc.*
3.17 Articles of Organization of Hemo Dialysis of Amarillo,
L.L.C.*
3.18 Operating Agreement of Hemo Dialysis of Amarillo, L.L.C.*
3.19 Articles of Incorporation of Home Dialysis of America,
Inc.*
3.20 By-laws of Home Dialysis of America, Inc.*
3.21 Articles of Incorporation of Home Dialysis of Dayton,
Inc.*
3.22 By-laws of Home Dialysis of Dayton, Inc.*
3.23 Articles of Incorporation of Lake Avenue Dialysis Center,
Inc.*
3.24 By-laws of Lake Avenue Dialysis Center, Inc.*
3.25 Articles of Incorporation of Mercy Dialysis Center Inc.*
3.26 By-laws of Mercy Dialysis Center, Inc.*
3.27 Articles of Incorporation of New York Dialysis Management,
Inc.*
3.28 By-laws of New York Dialysis Management, Inc.*
3.29 Certificate of Incorporation of North Buckner Dialysis
Center, Inc.*
3.30 By-laws of North Buckner Dialysis Center, Inc.*
3.31 Articles of Incorporation of Northwest Indiana Dialysis,
Inc.*
3.32 By-laws of Northwest Indiana Dialysis, Inc.*
3.33 Articles of Incorporation of Ohio Valley Dialysis Center,
Inc.*
3.34 By-laws of Ohio Valley Dialysis Center, Inc.*
3.35 Articles of Incorporation of WSKC Dialysis Services, Inc.*
3.36 By-laws of WSKC Dialysis Services, Inc.*
3.37 Certificate of Incorporation of Everest New York Holdings,
Inc.*
3.38 By-laws of Everest New York Holdings, Inc.
3.39 Certificate of Incorporation of Everest One IPA, Inc.*
3.40 By-laws of Everest One IPA, Inc.
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.*
II-2
4.2 Purchase Agreement dated April 30, 1998, among the Compa-
ny, the Subsidiary Guarantors and BT Alex. Brown Incorpo-
rated.*
4.3 Registration Rights Agreement dated May 5, 1998, among the
Company, the Subsidiary Guarantors and BT Alex. Brown In-
corporated.*
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 Sav-
ings Bank.*
4.12 Amended and Restated Pledge Agreement, by and among the
Company, the Pledgors (as defined therein) and Harris
Trust and Savings Bank.*
5 Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
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 Novem-
ber 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 Fa-
cilities.+
10.11 Agreement to Amend and Not-to-Compete.+
10.12 Amendment No. 3 to the Agreement to Provide Management
Services for Dialysis Facilities.+
10.13 Medical Asset Purchase Agreement.+
12 Computation of ratio of earnings to fixed charges.
21 Subsidiaries of the Company.*
II-3
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Katten Muchin & Zavis (contained in its opinion
filed as Exhibit 5).
24 Power of Attorney (see signature page).*
25 Statement of eligibility under the Trust Indenture Act of
1939, as amended, on Form T-1 of American National Bank
and Trust Company of Chicago, as Trustee under the Inden-
ture.*
27 Financial Data Schedule.
99.1 Form of Letter of Transmittal for the Exchange Notes.*
99.2 Form of Notice of Guaranteed Delivery for the Exchange
Notes.*
99.3 Letter to Registered Holders and The Depository Trust Com-
pany Participants.*
99.4 Letter to Clients.*
99.5 Instruction to Registered Holder and/or Book Entry Trans-
fer Participant from Beneficial Owner.*
99.6 Guidelines for Certificate of Taxpayer Identification Num-
ber on Substitute Form W-9.*
* Previously filed.
+ Previously filed subject to confidential treatment application.
(b) FINANCIAL STATEMENT SCHEDULES.
Included herein as pages II-26 and II-27.
(c) NOT APPLICABLE.
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Everest Healthcare Services
Corporation
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board, Chief August 24, 1998
____________________________________ Executive Officer
Craig W. Moore (principal executive
officer)
* Director August 24, 1998
____________________________________
Arthur M. Morris, M.D.
* Director August 24, 1998
____________________________________
Martin Fox
* Director August 24, 1998
____________________________________
Michael J. Carbon, M.D.
/s/ John B. Bourke Chief Financial Officer August 24, 1998
____________________________________ (principal financial
John B. Bourke officer and accounting
officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
* Director August 24, 1998
____________________________________
Thomas Creel
* Director August 24, 1998
____________________________________
Alan Berry
* Director August 24, 1998
____________________________________
George Dunea, M.D.
II-5
SIGNATURE TITLE DATE
--------- ----- ----
* Director August 24, 1998
____________________________________
Ashutosh Gupta, M.D.
* Director August 24, 1998
____________________________________
Douglas Mufuka, M.D.
*By: /s/ John B. Bourke
____________________________________
John B. Bourke
Attorney-in-fact
II-6
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Amarillo Acute Dialysis Specialists,
L.L.C
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer August 24, 1998
____________________________________ of the Member (principal
Craig W. Moore executive officer)
/s/ John B. Bourke Chief Financial Officer August 24, 1998
____________________________________ (principal financial
John B. Bourke officer and accounting
officer)
II-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Con-Med Supply Company, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Continental Health Care, Ltd.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-9
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Dialysis Specialists of Corpus
Christi, L.L.C.
/s/ Craig W. Moore
By___________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer August 24, 1998
____________________________________ of the Member (principal
Craig W. Moore executive officer)
/s/ John B. Bourke Chief Financial Officer August 24, 1998
____________________________________ (principal financial
John B. Bourke officer and accounting
officer)
II-10
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Dialysis Specialists of South Texas,
L.L.C.
/s/ Craig W. Moore
By___________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer August 24, 1998
____________________________________ of the Member (principal
Craig W. Moore executive officer)
/s/ John B. Bourke Chief Financial Officer August 24, 1998
____________________________________ (principal financial
John B. Bourke officer and accounting
officer)
II-11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Dupage Dialysis Ltd.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-12
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Everest Management, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-13
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Hemo Dialysis of Amarillo, L.L.C.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer August 24, 1998
____________________________________ of the Member (principal
Craig W. Moore executive officer)
/s/ John B. Bourke Chief Financial Officer August 24, 1998
____________________________________ (principal financial
John B. Bourke officer and accounting
officer)
II-14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Home Dialysis of America, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Home Dialysis of Dayton, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Lake Avenue Dialysis Center, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Mercy Dialysis Center, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
New York Dialysis Management, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
North Buckner Dialysis Center, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Northwest Indiana Dialysis, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-21
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Ohio Valley Dialysis Center, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
WSKC Dialysis Services, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Everest New York Holdings, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF OAK PARK, ILLINOIS ON AUGUST 24, 1998.
Everest One IPA, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board and August 24, 1998
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ John B. Bourke Chief Financial Officer and August 24, 1998
____________________________________ Director (principal
John B. Bourke financial officer and
accounting officer)
* Director August 24, 1998
____________________________________
Paul Balter, M.D.
/s/ John B. Bourke
*By: __________________________
John B. Bourke
Attorney-in-fact
II-25
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Peak Healthcare,
L.L.C. as of September 30, 1997 and 1996, and for the years then ended, and
have issued our report thereon dated March 13, 1998 (included elsewhere in
this Registration Statement). We have also audited the financial statements of
West Suburban Kidney Center, S.C. for the year ended September 30, 1995, and
have issued our report thereon dated March 13, 1998 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 21(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 13, 1998
II-26
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
EVEREST HEALTHCARE SERVICES CORPORATION
(IN THOUSANDS)
ADDITIONS
BALANCE ---------------- BALANCE
AT CHARGED CHARGED AT END
BEGINNING TO TO OTHER OF
OF PERIOD EXPENSE ACCOUNTS RECOVERIES PERIOD
--------- ------- -------- ---------- -------
Everest Healthcare Services
Corporation
Nine months ended June 30,
1998
Deducted from asset accounts:
Allowance for patient
accounts receivable........ $2,791 $3,523 $-- $1,654 $4,660
------ ------ ---- ------ ------
Total..................... $2,791 $3,523 $-- $1,654 $4,660
====== ====== ==== ====== ======
Peak Healthcare, L.L.C.
(Predecessor)
Year ended September 30, 1997
Deducted from asset accounts:
Allowance for patient
accounts receivable........ $3,014 $ 714 $-- $ 937 $2,791
------ ------ ---- ------ ------
Total..................... $3,014 $ 714 $-- $ 937 $2,791
====== ====== ==== ====== ======
Peak Healthcare, L.L.C.
(Predecessor)
Year ended September 30, 1996
Deducted from asset accounts:
Allowance for patient
accounts receivable........ $ -- $2,523 $491 $ -- $3,014
------ ------ ---- ------ ------
Total..................... $ -- $2,523 $491 $ -- $3,014
====== ====== ==== ====== ======
West Suburban Kidney Center,
S.C. (Predecessor)
Year ended September 30, 1997
Deducted from asset accounts:
Allowance for patient
accounts receivable........ $ -- $ 753 $-- $ -- $ 753
------ ------ ---- ------ ------
Total..................... $ -- $ 753 $-- $ -- $ 753
====== ====== ==== ====== ======
II-27
EXHIBIT INDEX
EXHIBIT
NO.
-------
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company, as amended.*
3.3 Articles of Organization of Amarillo Acute Dialysis Special-
ists, L.L.C.*
3.4 Operating Agreement of Amarillo Acute Dialysis Specialists,
L.L.C.*
3.5 Articles of Incorporation of Con-Med Supply Company, Inc.*
3.6 By-laws of Con-Med Supply Company, Inc.*
3.7 Articles of Incorporation of Continental Health Care, Ltd.*
3.8 By-laws of Continental Health Care, Ltd.*
3.9 Articles of Organization of Dialysis Specialists of Corpus
Christi, L.L.C.*
3.10 Operating Agreement of Dialysis Specialists of Corpus Christi,
L.L.C.*
3.11 Articles of Organization of Dialysis Specialists of South Tex-
as, L.L.C.*
3.12 Operating Agreement of Dialysis Specialists of South Texas,
L.L.C.*
3.13 Articles of Incorporation of DuPage Dialysis, Ltd.*
3.14 By-laws of DuPage Dialysis, Ltd.*
3.15 Certificate of Incorporation of Everest Management, Inc.*
3.16 By-laws of Everest Management, Inc.*
3.17 Articles of Organization of Hemo Dialysis of Amarillo, L.L.C.*
3.18 Operating Agreement of Hemo Dialysis of Amarillo, L.L.C.*
3.19 Articles of Incorporation of Home Dialysis of America, Inc.*
3.20 By-laws of Home Dialysis of America, Inc.*
3.21 Articles of Incorporation of Home Dialysis of Dayton, Inc.*
3.22 By-laws of Home Dialysis of Dayton, Inc.*
3.23 Articles of Incorporation of Lake Avenue Dialysis Center,
Inc.*
3.24 By-laws of Lake Avenue Dialysis Center, Inc.*
3.25 Articles of Incorporation of Mercy Dialysis Center Inc.*
3.26 By-laws of Mercy Dialysis Center, Inc.*
3.27 Articles of Incorporation of New York Dialysis Management,
Inc.*
3.28 By-laws of New York Dialysis Management, Inc.*
3.29 Certificate of Incorporation of North Buckner Dialysis Center,
Inc.*
3.30 By-laws of North Buckner Dialysis Center, Inc.*
3.31 Articles of Incorporation of Northwest Indiana Dialysis, Inc.*
3.32 By-laws of Northwest Indiana Dialysis, Inc.*
3.33 Articles of Incorporation of Ohio Valley Dialysis Center,
Inc.*
3.34 By-laws of Ohio Valley Dialysis Center, Inc.*
3.35 Articles of Incorporation of WSKC Dialysis Services, Inc.*
3.36 By-laws of WSKC Dialysis Services, Inc.*
3.37 Certificate of Incorporation of Everest New York Holdings,
Inc.*
EXHIBIT
NO.
-------
3.38 By-laws of Everest New York Holdings, Inc.*
3.39 Certificate of Incorporation of Everest One IPA, Inc.*
3.40 By-laws of Everest One IPA, Inc.*
4.1 Indenture dated as of May 5, 1998, among the Company, the Sub-
sidiary Guarantors and American National Bank and Trust Com-
pany 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 Incorpo-
rated.*
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 Com-
pany, 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 Compa-
ny, the Pledgors (as defined therein) and Harris Trust and
Savings Bank.*
5.1 Opinion of Katten Muchin & Zavis as to the legality of the se-
curities being registered (including consent).
9.1 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, be-
tween the Company and NANI-IL.*
10.7 Management Agreement dated October 1, 1997, between the Com-
pany 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 Facili-
ties.+
10.11 Agreement to Amend and Not-to-Compete.+
10.12 Amendment No. 3 to the Agreement to Provide Management Serv-
ices for Dialysis Facilities.+
EXHIBIT
NO.
-------
10.13 Medical Asset Purchase Agreement.+
12.1 Computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Company.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Katten Muchin & Zavis (contained in its opinion
filed as Exhibit 5).
24.1 Power of Attorney (see signature page).*
25.1 Statement of eligibility under the Trust Indenture Act of
1939, as amended, on Form T-1 of American National Bank and
Trust Company of Chicago, as Trustee under the Indenture.*
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal for the Exchange Notes.*
99.2 Form of Notice of Guaranteed Delivery for the Exchange Notes.*
99.3 Letter to Registered Holders and The Depository Trust Company
Participants.*
99.4 Letter to Clients.*
99.5 Instruction to Registered Holder and/or Book Entry Transfer
Participant from Beneficial Owner.*
99.6 Guidelines for Certificate of Taxpayer Identification Number
on Substitute Form W-9.*
* Previously filed.
+ Previously filed subject to confidential treatment application.