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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
Commission File Number 333-57191
EVEREST HEALTHCARE SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-4045521
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 North Scoville, Oak Park, Illinois 60302
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 386-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(Additional registrants listed on Exhibit A to this cover page.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of December 29, 1999, there was no established public trading market for
the shares of the Common Stock of Everest Healthcare Services Corporation (the
"Company").
As of December 29, 1999, the number of shares outstanding of the Common Stock
of the Company, par value $.001 per share, was 12,819,586.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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EXHIBIT A TO COVER PAGE--ADDITIONAL REGISTRANTS
ACUTE EXTRACORPOREAL SERVICES, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 36-4265964
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CON-MED SUPPLY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3147024
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CONTINENTAL HEALTH CARE, LTD.
(Exact name of registrant as specified in its charter)
Illinois 36-3084746
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
DIALYSIS SPECIALISTS OF TULSA, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1508212
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
DUPAGE DIALYSIS LTD.
(Exact name of registrant as specified in its charter)
Illinois 36-3029873
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE INDIANA, INC.
(Exact name of registrant as specified in its charter)
Indiana 36-3575844
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE OHIO, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1418495
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE TEXAS HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-4321504
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE TEXAS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 36-4321507
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware Applied For
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST NEW YORK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
New York 36-4276708
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST ONE IPA, INC.
(Exact name of registrant as specified in its charter)
New York 13-3988854
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST THREE IPA, INC.
(Exact name of registrant as specified in its charter)
New York 36-4276711
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST TWO IPA, INC.
(Exact name of registrant as specified in its charter)
New York 36-4276710
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
HOME DIALYSIS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0711476
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
MERCY DIALYSIS CENTER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1589773
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
NEW YORK DIALYSIS MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
New York 36-3702390
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
NORTH BUCKNER DIALYSIS CENTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4206319
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
NORTHERN NEW JERSEY DIALYSIS, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 36-4291598
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
WSKC DIALYSIS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2668594
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 North Scoville, Oak Park, Illinois 60302
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 386-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 17
Item 3. Legal Proceedings...................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 19
Item 6. Selected Financial Data................................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk............................. 30
Item 8. Financial Statements and Supplementary Data............................................ 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 30
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 31
Item 11. Executive Compensation................................................................. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 39
Item 13. Certain Relationships and Related Transactions......................................... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 43
EVEREST HEALTHCARE SERVICES CORPORATION
101 North Scoville
Oak Park, Illinois 60302
(708) 386-1000
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PART I
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Form contains certain "forward-looking statements" with respect to
results of operations and businesses of the Company. All statements other than
statements of historical facts included in this Form, including those regarding
market trends, the Company's financial position, business strategy, projected
costs, and plans and objectives of management for future operations, are
forward-looking statements. In general, such statements are identified by the
use of forward-looking words or phrases including, but not limited to,
"intended," "will," "should," "may," "expects," "expected," "anticipates," and
"anticipated" or the negative thereof or variations thereon or similar
terminology. These forward-looking statements are based on the Company's
current expectations. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to be correct. Because forward-
looking statements involve risks and uncertainties, the Company's actual
results could differ materially. See the "Risk Factors" section of the
Company's Registration Statement on Form S-4 (File No. 333-57191) for a
discussion of certain risks applicable to the Company and its business.
ITEM 1. BUSINESS
Overview
Everest Healthcare Services Corporation is a leading provider of dialysis and
other blood treatment services. Founded in 1968 and principally owned by
nephrologists, the Company has a long-standing focus on developing strong
relationships with physicians to provide high-quality patient care. Everest is
the nation's sixth-largest provider of chronic dialysis outpatient services and
serves over 6,400 patients through 68 facilities in 12 states. In addition to
its outpatient dialysis center operations, the Company provides acute dialysis
services through contractual relationships with 30 hospitals in four states.
Everest also contracts with 81 hospitals in 9 states to provide a broad range
of other extracorporeal (outside-the-body) blood treatment services, including
perfusion, apheresis and auto-transfusion ("Contract Services"). Pursuant to
management contracts, Everest provides management services to (i) a physician
practice group comprised of 28 nephrologists, primarily in the Chicago and
northwest Indiana areas, and (ii) certain minority-owned or unaffiliated
dialysis facilities. The Company derived 86.9% of its net revenues for fiscal
1999 from chronic and acute dialysis services, 11.7% from Contract Services and
1.4% from management services.
Everest's dialysis operations were founded in 1968 as a single dialysis
center and grew over the next three decades through a combination of de novo
facility development, acquisitions and internal growth. Everest has completed
19 acquisitions encompassing 34 facilities and developed 34 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 56 full-service outpatient dialysis
centers which provide on-site dialysis services as well as training for home
dialysis patients. Everest also operates 12 home dialysis training and support
centers which provide services and equipment to home dialysis patients.
Capitalizing on its strong hospital and physician relationships and its core
competencies in blood processing, Everest significantly expanded its Contract
Services business with the completion of three acquisitions in fiscal 1997 and
one acquisition in fiscal 1998. The Company believes it is uniquely positioned
as the only company currently offering hospitals an outsourcing solution to all
of their extracorporeal blood treatment needs.
1
Dialysis Industry Overview
End-Stage Renal Disease. End-Stage Renal Disease ("ESRD") is a chronic
medical condition characterized by the irreversible loss of kidney function
which prevents the removal of waste products and excess water from the blood.
ESRD most commonly results from complications associated with diabetes,
hypertension, certain renal and hereditary diseases, old age and other factors.
In order to survive, ESRD patients must receive dialysis treatments for the
rest of their lives or undergo kidney transplantation. The number of kidney
transplants has been limited due to a shortage of suitable donors along with
growth in the number of ESRD patients, the incidence of rejection of
transplanted organs and the unsuitability of many ESRD patients for
transplantation based on age or health.
Therapeutic Approaches for End-Stage Renal Disease. Currently, three
treatment options exist for patients with ESRD: (i) hemodialysis, which is
performed either in an outpatient dialysis facility, a hospital or a patient's
home; (ii) peritoneal dialysis, which is generally performed in the patient's
home; and (iii) kidney transplant surgery.
Hemodialysis uses a dialyzer, or artificial kidney, to remove certain toxins,
fluids and chemicals from the patient's blood. The dialysis machine controls
external blood flow and monitors certain vital signs of the patient. The
screening process involves a semipermeable membrane that divides the dialyzer
into two chambers; while the blood is circulated through one chamber, a
premixed dialysis fluid is circulated through the adjacent chamber. The toxins
and excess fluid contained in the blood cross the membrane into the dialysis
fluid. Hemodialysis treatment is usually performed three times per week for
three to five hours.
Peritoneal dialysis is generally performed by the patient at home and uses
the patient's peritoneal, or abdominal, cavity to eliminate fluids and toxins
in the patient's blood. There are several variations of peritoneal dialysis,
the most common of which are continuous ambulatory peritoneal dialysis ("CAPD")
and continuous cycling peritoneal dialysis ("CCPD"). CAPD utilizes a sterile
dialysis solution which is introduced through a surgically implanted catheter
into the patient's peritoneal cavity. Toxins in the blood continuously cross
the peritoneal membrane into the dialysis solution. After several hours, the
patient drains the used solution and replaces it with fresh solution. CCPD is
performed in a manner similar to CAPD, but utilizes a mechanical device to
cycle dialysis solution while the patient is sleeping or at rest. Patients
treated at home are monitored monthly at a designated full-service outpatient
facility or by a nurse from a home dialysis training and support facility.
Kidney transplantation, when successful, is the most desirable treatment for
patients with ESRD. However, the shortage of suitable donors severely limits
the availability of this surgical procedure as a viable alternative for many
ESRD patients.
New medical therapies that cure or mitigate the primary causative diseases
linked to kidney failure could potentially reduce the ESRD patient population
growth rate. Such new medical therapies include diet control, intensive
diabetes therapy, improved control of hypertension, improved treatment of
causative primary infections and techniques for widening blocked renal
arteries. The Company believes, however, that most of these therapies will only
provide benefits over an extended time horizon and will not, therefore,
significantly reduce the growth of the ESRD patient population in the near
term.
Non-Dialysis Extracorporeal Services Industry Overview
Non-dialysis extracorporeal services include perfusion, apheresis and auto-
transfusion.
Perfusion Services. Cardiovascular perfusion is required during open-heart
surgery to replace the function of the heart and lungs using mechanical
devices. This technique maintains relatively normal physiologic equilibrium
during cardiovascular surgery by providing adequate circulation and
oxygenation. The patient's blood is routed through a system of disposable
extracorporeal circuits that oxygenate, filter, adjust temperature and then
return the blood to the patient.
2
Apheresis Services. Apheresis is the selective removal of a specific
component (plasma, platelets, or white or red blood cells) of a person's blood.
The two general categories of apheresis include: (i) donor apheresis, which is
the removal of a healthy component of the blood from a patient or third-party
donor for subsequent transfusion to a patient; and (ii) therapeutic apheresis,
which is the removal of a diseased or disease-producing component of a
patient's blood in order to arrest a disease process.
The types of donor apheresis include Autologous Peripheral Blood Stem Cell
("PBSC") and Single Donor Platelets ("SDP"). PBSC is a procedure performed on
cancer patients, including those suffering from leukemia, Hodgkins disease and
breast cancer. These patients undergo intensive chemotherapy and/or radiation
to eliminate the patient's bone marrow. Bone marrow regeneration is
accomplished by the reinfusion of stem cells previously collected from the
patient. SDP is a procedure in which platelets are collected from a single
third-party donor and reinfused into a patient whose platelets have been
depleted through blood loss, cancer, or cancer treatment. Therapeutic apheresis
selectively removes unwanted substances from the blood. These substances
include toxins, metabolic residues and plasma components implicated in disease.
Auto-Transfusion Services. Auto-transfusion is performed during surgery to
collect, filter, clean and reinfuse the patient's own blood as an alternative
to using donor blood. An auto-transfusion device may be utilized in a variety
of surgical procedures, such as open-heart, vascular or orthopedic surgery,
which typically entail blood loss of more than two units. Auto-transfusion
reduces the risks of transfusion error and infection associated with outside
donor blood.
Chronic Dialysis Operations
Facility Information. The Company operates 68 outpatient dialysis facilities,
including 56 full-service dialysis facilities and 12 centers exclusively
providing home dialysis training and support. The facilities are located in
Illinois (14), Indiana (9), Kansas (1), Kentucky (2), New Jersey (5), New York
(8), Ohio (15), Oklahoma (2), Pennsylvania (1), South Dakota (2), Texas (8) and
Wisconsin (1).
Everest's 56 full-service facilities offer on-site dialysis treatments as
well as home dialysis training and support services. As of September 30, 1999,
the Company operated a total of 939 dialysis stations, most of which are
available 16 hours a day, six days a week. As of September 30, 1999, the
Company's utilization rate for its then-existing stations was 80%. Each full-
service facility has patient examination rooms, staff areas and offices, water
treatment areas and amenities such as color televisions for the patients.
Everest also operates 12 facilities that exclusively provide the necessary
equipment, supplies, training and support services to those patients who prefer
and are able to receive their treatments at home.
Organizational Structure. Of the Company's 68 facilities, 45 are operated as
wholly-owned subsidiaries, seven are majority-owned, nine are minority-owned,
and seven are unaffiliated and operated pursuant to management contracts in New
York, South Dakota, Ohio and New Jersey.
The terms of these management contracts vary, but they generally extend for
five years with renewal options. Everest's compensation under these agreements
typically consists of a fixed fee plus a percentage of revenues; such
compensation does not include any capitation fee. From time to time Everest has
entered into joint ventures with physicians to facilitate the development of
outpatient facilities in new and existing markets and may again in the future.
Everest's dialysis facilities are managed by the Company's Executive Vice
President and Chief Operating Officer, Dialysis Services, who oversees nine
regional directors. The regional directors manage the operations of the
facilities in their respective regions and are responsible for staffing,
quality outcomes and regional profitability. Each facility has a facility
manager who reports to the regional director. Facility managers are responsible
for facility staffing, quality outcomes, patient satisfaction results, facility
profitability and promoting and maintaining a strong teamwork environment.
Generally, key managers and staff are eligible to receive incentives based upon
the achievement of certain quality measurements, patient satisfaction results,
financial performance goals and teamwork objectives. See "--Human Resources,"
and "--Training and Development."
3
The Company has an expert team of dialysis specialists assigned to assist
each patient in designing a program to fit the patient's lifestyle and to help
patients and families adjust to the changes in their lives. Each team generally
consists of: (i) a nephrologist who oversees the medical care; (ii) a nurse who
assesses the medical condition and coordinates and implements the program;
(iii) a nutritionist who customizes the diet; (iv) a social worker who helps
the family with lifestyle changes and financial planning; and (v) technicians
who provide much of the routine patient care.
Everest's medical directors and local and regional management teams market
the Company's outpatient dialysis services to hospitals, physicians, patients,
health plans and the community at large. In marketing its services, the Company
emphasizes its excellent reputation and tradition of providing high-quality,
consistent patient care, as well as its patient outcomes and the cost savings
that these outcomes can provide.
Physician Relationships. The Company believes that its physician
relationships are a key factor in the success of its dialysis facilities. As
required by the Medicare ESRD program, each of the Company's dialysis
facilities is supervised by a qualified medical director who is a physician.
The medical director at each facility is responsible for patient care and
relationships with referring physicians. Generally, medical directors are board
certified in internal medicine and nephrology and have at least twelve months
of training or experience in the care of patients at ESRD centers. In all
cases, the Company's medical directors refer patients to the Company's centers.
In most cases, the medical director is the sole or substantial source of
referrals to the centers served.
Ancillary Services. In addition to dialysis services, ESRD patients require a
significant amount of ancillary services. The Company has developed a number of
ancillary services to complement its dialysis services to boost patient
satisfaction and to improve quality, facility growth and profitability. The
most significant of the Company's ancillary services is the administration of
Erythropoietin ("EPO") upon a physician's prescription. As the kidney
deteriorates, it loses the ability to regulate the red blood cell count,
causing anemia. EPO is a bio-engineered protein that stimulates the production
of red blood cells and is used in connection with all forms of dialysis to
treat anemia. A majority of the ESRD population requires EPO. Additionally, the
Company interacts with kidney centers nationwide to arrange treatments for
patients traveling in other areas and for non-Everest patients visiting areas
where Everest has facilities.
Contract Services Operations
Everest significantly expanded its Contract Services business with the
acquisition of three and one Contract Services providers in fiscal 1997 and
1998, respectively. Everest believes that it can build on its core competencies
in blood processing to market extracorporeal blood services through its
existing relationships and that it can use relationships developed in its
Contract Services business to market dialysis services. The Contract Services
business also provides the Company with a business that is not directly
dependent on government reimbursement.
As of September 30, 1999, the Company had contracts with 81 hospitals in 9
states. Everest acts as the exclusive provider of extracorporeal blood services
for most of these hospitals. Contracts with customer hospitals generally
provide for a portfolio of services including professional staffing, disposable
supplies, inventory management services, clinical quality management services,
and capital equipment. The professional staffing required by the contracts may
include a perfusionist, a registered nurse, or a technician, who are on-call 24
hours a day. The Company typically owns or leases the equipment used in
providing these services, such as heart-lung machines, transfusion machines,
and apheresis machines and supplies the necessary disposable accessories for
these machines and related equipment. This equipment is usually stored at the
hospital, but is operated and maintained by the Company. Everest operates
regional offices in Florida, Illinois, Indiana, Michigan and Texas, where the
Company provides centralized support services for Contract Services.
The Company markets its extracorporeal services to hospital administrators,
physicians, operating room directors and blood banks. Sales contacts result
from referrals from physicians, vendors, current customers and
4
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 corresponding programs for use in its inpatient acute
dialysis operations.
Management Information Systems
The Company maintains comprehensive management information systems for
financial systems and for patient care, quality assurance and outcome tracking
purposes, and is continually developing and upgrading such systems. The
Company's Client Tracking System, which keeps a record of each of the Company's
5
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.
Sources of Revenue Reimbursement
The following table provides information regarding the percentage of the
Company's net revenues provided with respect to: (i) chronic and acute dialysis
services, by Medicare, Medicaid and other third-party payors such as indemnity
insurers, managed care companies, hospitals and others; (ii) Contract Services,
by hospitals and, to a much lesser extent, other payors; and (iii) management
fees earned through services performed under contract.
Fiscal year ended September 30,
--------------------------------
Payor 1997 1998 1999
----- ---------- ---------- ----------
Chronic and Acute Dialysis:
Medicare............................... 57.5% 47.7% 49.9%
Medicaid............................... 8.5% 7.4% 7.3%
Other payors........................... 19.2% 30.6% 29.7%
Contract Services:
Hospitals and other payors............. 12.3% 12.5% 11.7%
Management Service Fees 2.5% 1.8% 1.4%
---------- ---------- ----------
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."
Assuming an ESRD patient is eligible for participation in the Medicare
program, the commencement date of Medicare benefits for ESRD patients electing
in-center hemodialysis (and not entering into a self-care training program) is
dependent on several factors. For ESRD patients 65 years of age or older and
already enrolled in the Medicare program due to age entitlement, Medicare
coverage for ESRD services begins immediately. ESRD patients under 65 years of
age who are not covered by an employer group health plan (for example, the
uninsured, those covered by Medicaid and those covered by an individual health
insurance policy) must wait until the first day of the third month after the
month in which a renal dialysis treatment program begins. During this three
month period, the patient, Medicaid or private insurers are responsible for
payment. In the case of the individual covered by private insurance, such
responsibility is limited to the terms of the policy with the patient being
responsible for the balance. ESRD patients under 65 years of age who are
covered by an employer group health plan must wait 30 or 33 months after
commencing dialysis treatments (depending on whether the patient has entered
into a self-care training program) before Medicare becomes the primary payor.
During the 30 to 33-month period, the employer group health plan is responsible
for payment at its negotiated rate or, in the absence of such a rate, at the
company's usual and customary rates, and the patient is responsible for
deductibles and co-payments applicable under the terms of the employer group
health plan.
If an ESRD patient elects to enter into a self-care training program or home
dialysis training program during the first three months of dialysis, the three-
month waiting period is waived. In this case, if the patient
6
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. The Balanced Budget Refinement Act of 1999 would update the
composite rate for payment by 1.2% for renal dialysis services furnished in
2000 and an additional 1.2% for such services furnished in 2001.
On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA
approved Medicare reimbursement for EPO's use by dialysis patients. EPO
stimulates the production of red blood cells and is beneficial in the treatment
of anemia, with the effect of reducing or eliminating the need for blood
transfusions for dialysis patients.
From June 1, 1989 through December 31, 1990, the Medicare ESRD program
reimbursed for EPO at the fixed rate of $40.00 per administration of EPO in
addition to the dialysis facility's allowable composite rate for dosages of up
to 9,999 units per administration. For higher dosages, an additional $30.00 per
EPO administration was allowed. Effective January 1, 1991, the Medicare
allowable prescribed rate for EPO was changed to $11.00 per 1,000 units,
rounded to the nearest 100 units. Subsequently, legislation was enacted to
reduce the Medicare prescribed rate for EPO by $1.00 to $10.00 per 1,000 units
after December 31, 1993.
7
In September 1997, HCFA promulgated a policy that would deny Medicare
reimbursement for EPO where a patient's proportion of red blood cells to total
blood volume exceeds an average of 36.5% during a 90-day period. That rule was
modified effective March 10, 1998, to provide that, if a doctor provides
medical justification for the prescription, Medicare will continue to reimburse
for EPO even if a patient's red blood cell count exceeds the maximum level
otherwise allowed for reimbursement. Further, even if no medical justification
is provided, the reimbursement will be reduced rather than denied, to an amount
equal to the lower of the actual EPO dosage administered or 80% of the
allowable dosage for the previous month.
Medicaid Reimbursement. The Company is a certified ESRD Medicaid provider in
all states in which it does business. Medicaid programs are state-administered
programs partially funded by the federal government. These programs are
intended to provide coverage for patients whose income and assets fall below
state-defined levels or who are otherwise uninsured. The programs also serve as
supplemental insurance programs for the Medicare co-insurance portion and
provide certain coverage (e.g., oral medications) that is not provided by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverage without any co-insurance amounts. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon levels of income or
assets.
Private Reimbursement. Everest derives a portion of its revenues from
reimbursement provided by non-governmental third-party payors. A substantial
portion of third-party health insurance in the U.S. is now furnished through
some type of managed care plan, including HMOs. Managed care plans are
increasing their market share, and this trend may accelerate as a result of the
merger and consolidation of providers and payors in the health care industry,
as well as discussions among members of Congress and the executive branch
regarding ways to increase the number of Medicare and Medicaid beneficiaries
served through managed care plans.
The Company generally is reimbursed for dialysis treatments at higher rates
by non-governmental payors than by governmental payors. However, managed care
plans are becoming more aggressive in selectively contracting with a smaller
number of providers willing to furnish services for lower rates and subject to
a variety of service restrictions. For example, managed care plans and
traditional indemnity third-party payors increasingly are demanding alternative
fee structures, such as capitation arrangements whereby a provider receives a
fixed payment per month per enrollee and bears the risk of loss if the costs of
treating such enrollee exceed the capitation payment. These market forces are
creating downward pressure on the reimbursement that Everest receives for its
services and products.
Everest's ability to secure favorable rates with indemnity and managed care
plans has largely been due to the relatively small number of ESRD patients
enrolled in any single HMO. By regulation, ESRD patients have been prohibited
from joining an HMO unless they are otherwise eligible for Medicare coverage,
due to age or disability, and are members of a managed care plan when they
first experience kidney failure. HCFA has implemented a pilot project in which
several managed care companies were allowed to recruit ESRD patients beginning
in 1997 and which, if successful, could result in the opening of the ESRD
treatment market to many managed care companies thereafter. As Medicare HMO
enrollments increase and the number of ESRD patients in managed care plans also
increases, managed care plans may have increased leverage in negotiating lower
rates. In addition, an HMO may contract with another provider for, or may have
tighter utilization controls with respect to, certain ancillary services
typically provided by Everest to ESRD patients, which could limit Everest's
revenues from such services.
As managed care companies expand their market share and gain greater
bargaining power vis-a-vis health care providers, there may be increasing
pressure to reduce the amounts paid for outpatient dialysis services and
products. These trends could be accelerated if future changes to the Medicare
ESRD program require private payors to assume a greater percentage of the cost
of care given to dialysis patients. Everest believes that the historically
higher rates of reimbursement paid by non-governmental payors may not be
maintained at such levels. Everest is presently seeking to expand the portion
of its revenues attributable to non-governmental
8
private payors. However, if substantially more patients join managed care plans
or such plans reduce reimbursement levels, Everest's business and results of
operations could be materially adversely affected.
Competition
Dialysis Services Market. The dialysis industry is fragmented and highly
competitive, particularly with respect to competition for the acquisition of
existing dialysis centers. Because, in most cases, the prices of dialysis
services and products in the U.S. are directly or indirectly regulated by
Medicare, competition for patients is based primarily on quality and
accessibility of service and the ability to obtain referrals from physicians
and hospitals. Certain of the Company's competitors in the dialysis services
market have greater financial resources than the Company and compete with the
Company for the acquisition of centers in markets targeted by the Company.
Competition for acquisitions has increased the costs of acquiring dialysis
facilities. There is no assurance that the Company can continue to compete
effectively with existing and new competitors.
Competition for recruiting qualified physicians to act as medical directors
is intense. In addition, the Company may experience competition from the
establishment of a facility by a former medical director or referring
physician. In cases where the Company has acquired a facility from one or more
physicians, or where one or more physicians own interests in facilities as
partners or co-shareholders with the Company, such physicians are generally
required to agree to refrain from owning interests in competing facilities for
various periods. Substantially all physicians who provide medical director
services to the Company have also executed non-competition agreements. Such
non-competition agreements may not be enforceable in certain jurisdictions.
Contract Services Market. The Contract Services market is also fragmented and
highly competitive. The Company estimates there are approximately 3,000
perfusionists practicing in the U.S., the majority of whom are employed by
hospitals, with the balance practicing as sole proprietors or employed by
companies offering perfusion services. Most hospitals requiring perfusion
services use their own staff to provide such services and equipment and, as
such, are the largest source of competition for the Company. The Company also
competes in regional markets with other independent providers of perfusion
services and with perfusionists in private practice. The Company's principal
competitor in the perfusion services market is Baxter International Inc. The
Company competes with hospitals and blood banks in the provision of apheresis
and auto-transfusion services. Management believes that the competitive factors
in the Contract Services market are primarily cost, quality and breadth of
service. Certain of the Company's competitors in the Contract Services market
have greater financial resources than the Company. There can be no assurance
that Everest will be able to compete effectively with its competitors or that
additional competitors with greater resources will not enter the Company's
markets.
Human Resources
As of September 30, 1999, the Company had 1,724 employees, including a
professional staff of approximately 657 nurses, social workers, dietitians and
perfusionists, a corporate and regional staff of approximately 239 employees
and a facilities support staff of approximately 828 employees. The Company also
contracts with numerous health care professionals, including physicians,
nurses, social workers, dietitians, perfusionists and technicians who are not
employees of Everest. Medical directors of the Company's dialysis facilities
are independent contractors rather than employees of the Company, although some
medical directors are employees of either Nephrology Associates of Northern
Illinois Ltd. ("NANI-IL") or Nephrology Associates of Northern Indiana, P.C.
("NANI-IN"), each of which is owned by directors, officers and/or shareholders
of the Company. In these cases, professional service fees for the medical
directors are paid by the Company to NANI-IL and NANI-IN for medical director
services performed for such corporations' dialysis units. See "Certain
Relationships and Related Transactions." In the majority of cases, however, the
fees are payable directly by the Company to the medical directors (or their
physician practices) pursuant to individually negotiated contracts.
9
Perfusionists generally enter into written agreements with the Company which
specify their duties and establish their compensation. Such agreements are
terminable by either party on advance written notice.
As of September 30, 1999, 110 of the Company's employees were members of
unions. The Company believes that its relationships with its employees are
good.
Training and Development
The Company believes that its dialysis patient care staff, Contract Services
professionals, facility managers and regional directors represent its most
valuable corporate assets. Accordingly, Everest devotes substantial efforts and
resources to recruiting, training and retaining these individuals. The
Company's training emphasizes teamwork to facilitate an environment based upon
skilled individuals working together to provide high-quality care. The Company
trains its patient care staff and requires that such employees undertake
continuing education and meet with trainers who provide ongoing competency
testing. If such testing reveals skills that are below the level required for a
specific employee, the Company implements further training as required.
Liability Insurance
The Company maintains property and general liability insurance, professional
liability insurance and other insurance coverage in amounts deemed adequate by
management based upon historical claims and the nature and risks of the
business. The Company's property, casualty and worker's compensation insurance
is provided by an affiliated entity. See "Certain Relationships and Related
Transactions." The Company's professional liability insurance would provide
coverage, subject to policy limits, in the event the Company is held liable in
a lawsuit for professional malpractice against a physician, however, there can
be no assurance that future claims will not exceed applicable insurance
coverage, that malpractice and other liability insurance will be available at a
reasonable cost or that the Company will be able to maintain adequate levels of
malpractice insurance and other liability insurance in the future or that the
insurers will not be successful in denying claims. Physicians practicing at the
dialysis facilities are required to maintain their own malpractice insurance.
However, the Company maintains coverage for the activities of its medical
directors (but not for their individual private medical practices).
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
10
has acquired. There can be no assurance that previous operating practices of
the Company or the entities it has acquired will not be reviewed and challenged
by governmental regulators or that the Company will not be liable for such
practices.
Federal Fraud and Abuse
The Company's operations are subject to the illegal remuneration provisions
of the Social Security Act (sometimes referred to as the "Anti-Kickback Law")
that impose criminal and civil sanctions on persons who knowingly and willfully
solicit, offer, receive or pay any remuneration, whether directly or
indirectly, in return for, or to induce, the referral of a patient for
treatment, or, among other things, the ordering, purchasing, or leasing, of
items or services that may be paid for in whole or in part by Medicare,
Medicaid or other federal health care programs. Additionally, federal
enforcement officials may attempt to impose civil false claims liability with
respect to claims resulting from an Anti-Kickback Law violation. Violations of
the federal Anti-Kickback Law are punishable by criminal penalties, including
imprisonment, fines and exclusion of the provider from future participation in
the Medicare or Medicaid programs. Civil penalties for violation of the federal
Anti-Kickback Law include assessments of $50,000 per improper claim for payment
plus three times the amount of such claim, as well as suspension from future
participation in Medicare and Medicaid. While the federal Anti-Kickback Law
expressly prohibits transactions that have traditionally had criminal
implications, such as kickbacks, rebates or bribes for patient referrals, its
language has been construed broadly and has not been limited to such obviously
wrongful transactions. Court decisions state that, under certain circumstances,
the Anti-Kickback Law is also violated where any part of the purpose (as
opposed to the "primary" or "material" purpose) of a payment is to induce
referrals. Congress has frequently considered federal legislation that would
expand the federal Anti-Kickback Law to include the same broad prohibitions to
all situations involving the inducement of referrals, regardless of payor
source.
In July 1991, November 1992 and January 1996, the Secretary of Health and
Human Services ("HHS") published regulations that create exceptions or "safe
harbors" for certain business transactions. Transactions that satisfy the
criteria under applicable safe harbors will be deemed not to violate the
federal Anti-Kickback Law. Transactions that do not satisfy all elements of a
relevant safe harbor do not necessarily violate the statute, although such
transactions may be subject to scrutiny by enforcement agencies. The Company
seeks to structure its various business arrangements to satisfy as many safe
harbor elements as possible under the circumstances, although many of the
Company's arrangements do not satisfy all of the elements of a safe harbor.
Although the Company has never been challenged under the Anti-Kickback Law, and
the Company believes that it complies in all material respects with the federal
Anti-Kickback Law and all other applicable related laws and regulations, there
can be no assurance that the Office of Inspector General or other governmental
agency will not take a contrary position or that the Company will not be
required to change its practices or will not experience a material adverse
effect as a result of any such challenge or any sanction that might be imposed.
In recent years, new legislation and amendments to the existing federal fraud
and abuse laws have strengthened the government's enforcement powers, and there
has been a significant increase in the number of health care fraud and abuse
investigations and prosecutions. Some of these new investigations and
prosecutions scrutinize practices that have been widely utilized by health care
providers in the past. The Company is unable to predict whether the enforcement
agencies will ultimately prevail in their stepped-up enforcement activities or
what impact these enforcement activities may ultimately have on the
interpretation of the federal fraud and abuse laws.
On July 21, 1994, the Secretary of HHS proposed a rule that would modify the
original set of safe harbor provisions to give greater clarity to the rule's
original intent. Those rules were published in final form on November 19, 1999.
The final rule makes modifications to the safe harbors on personal services,
management contracts, investment interests, and space rentals, among others.
The Company does not believe that its current operations, as set forth above,
are materially impacted by the final rule.
11
Physician Ownership. A significant portion of the Company's issued stock is
presently owned or controlled by physicians. The Company has also issued stock
options to various individuals, including many of its medical directors.
Additionally, many of the Company's outpatient dialysis centers are owned on a
joint-venture basis between the Company, or one of its wholly owned
subsidiaries, and local physicians. Because many of these physicians refer
patients to the Company's facilities, the federal Anti-Kickback Law could be
found to apply to referrals by such physicians to the Company's facilities.
However, the Company believes these ownership relationships are in material
compliance with the federal Anti-Kickback Law. The Company believes that the
value of stock issued and options granted to physicians has been consistent
with the fair market value of assets transferred to, or services performed by
such physicians for the Company, and there is no intent to induce referrals to
the Company's facilities. There is a safe harbor for certain investments in
non-publicly traded entities such as the Company, and the Company believes that
its physician ownership and investment relationships meet some of the criteria
for this safe harbor. However, these relationships do not satisfy all of the
criteria for the safe harbor and there can be no assurance that these
relationships will not subject the Company to investigation or prosecution by
enforcement agencies.
Medical Director Relationships. The conditions for coverage under the
Medicare ESRD program mandate that treatment at a dialysis center be under the
general supervision of a medical director who is a licensed physician.
Additionally, the medical director must be board certified or board eligible in
internal medicine or pediatrics and have had at least 12 months of experience
or training in the care of patients at ESRD centers. The medical directors
engaged by the Company typically exceed the Medicare requirements and are
generally board certified nephrologists. The Company has engaged medical
directors at each of its centers under contracts with physicians or their group
practices. The compensation of the medical directors and other physicians under
contract with the Company is separately negotiated and generally depends upon
competitive factors in the local market, the physician's professional
qualifications and responsibilities and the size of the center. The aggregate
compensation of the medical directors and other physicians under contract with
the Company is generally fixed in advance for periods of one year or more by
written agreement, is set to reflect the fair market value of the services
rendered and does not take into account the volume or value of patients
referred to the Company's facilities. Because in all cases the medical
directors and the other physicians under contract with the Company refer
patients to the Company's centers, the federal Anti-Kickback Law could be found
to apply. However, the Company believes that its contractual arrangements with
these physicians are in material compliance with the federal Anti-Kickback Law.
The Company seeks to comply with the requirements of the personal services and
management contract safe harbor when entering into agreements with its medical
directors and other physicians. See "Certain Relationships and Related
Transactions--NANI-IL and NANI-IN."
Acute Inpatient Dialysis Services. Under the Company's acute inpatient
dialysis service arrangements, the Company agrees to provide a hospital with
supervised emergency and acute dialysis services, including qualified nursing
and technical personnel, technical services, supplies, and, in many cases,
equipment. Because physicians under contract with the Company, or who have an
ownership interest in the Company and/or its affiliates, may refer patients to
hospitals with which the Company has an acute dialysis service arrangement, the
federal Anti-Kickback Law could be found to apply, However, the Company
believes that its contractual arrangements with hospitals for acute inpatient
dialysis services are in material compliance with the federal Anti-Kickback
Law. In all instances, the Company seeks to comply with the requirements of the
personal services and management contract and equipment lease safe harbors when
entering into agreements or contracts for acute inpatient dialysis services.
The Health Insurance Portability and Accountability Act of 1996. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") was enacted in
August 1996 and substantively changed federal fraud and abuse laws by expanding
their reach to all federal health care programs, establishing new bases for
exclusions and mandating minimum exclusion terms, creating an additional
exception to the anti-kickback penalties for risk-sharing arrangements,
requiring the Secretary of HHS to issue advisory opinions, increasing civil
money penalties to $10,000 (formerly $2,000) per item or service and
assessments to three times (formerly twice) the amount claimed, creating a
specific health care offense and related health fraud crimes, and
12
expanding investigative authority and sanctions applicable to health care
fraud. It also prohibits provider payments which could be deemed an inducement
to patient selection of a provider.
In addition to establishing minimum periods of exclusion from government
health programs, the statute authorizes exclusion of an individual with a
direct or indirect ownership or control interest in a sanctioned entity if the
individual "knows or should know" of the activity leading to the conviction or
exclusion of the entity or where the individual is an officer or managing
employee of the entity. Significantly, the law expands criminal sanctions for
health care fraud involving any governmental or private health benefit program,
including freezing of assets and forfeiture of property traceable to commission
of a health care offense.
Balanced Budget Act of 1997. In August 1997, President Clinton signed the
Balanced Budget Act of 1997 ("BBA") which contains sweeping adjustments to both
the Medicare and Medicaid programs, as well as further expansion of the fraud
and abuse laws. Specifically, the BBA created a civil monetary penalty for
violations of the federal anti-kickback statute whereby violations will result
in damages equal to three times the amount involved as well as a penalty of
$50,000 per violation. In addition, the new provisions expanded the exclusion
requirements so that any person or entity convicted of three health care
offenses is automatically excluded from federally funded health care programs
for life. Individuals or entities convicted of two offenses are subject to
mandatory exclusion of 10 years, while any provider or supplier convicted of
any felony may be denied entry into the Medicare program by the Secretary of
HHS if deemed to be detrimental to the best interests of the Medicare program
or its beneficiaries.
The BBA also provides that any person or entity that arranges or contracts
with an individual or entity that has been excluded from a federally funded
health care program will be subject to civil monetary penalties if the
individual or entity "knows or should have known" of the sanction. In addition,
the BBA requires HCFA to issue advisory opinions in response to inquiries as to
whether physician referrals for designated health services are prohibited by
the Stark law (hereinafter described).
Finally, the BBA creates a Medicare+Choice Program that is designed to
provide a variety of options to Medicare beneficiaries, almost all of whom may
enroll in a Medicare+Choice Plan. The options include provider sponsored
organizations, coordinated care plans, HMOs with and without point of service
options involving out-of-network providers, and medical savings accounts
offered as a demonstration project.
Stark Law
The federal prohibition against self-referral amendments to the Social
Security Act (commonly known as the "Stark" provisions) restricts physician
referrals for certain "designated health services" to entities with which a
physician or an immediate family member has a "financial relationship." The
Stark law was enacted by Congress in two parts, and is commonly referred to
individually as "Stark I" and "Stark II." The Stark I legislation, which became
effective in 1992, was only applicable to clinical laboratory services. The
Stark II legislation, which became effective January 1, 1995, expanded the
self-referral prohibition from only clinical laboratory services to all
"designated health services." Under the Stark provisions, an entity is
prohibited from claiming payment under the Medicare or Medicaid programs for
services rendered pursuant to a prohibited referral and is liable for the
refund of amounts received pursuant to prohibited claims. The Stark provisions
also set forth certain reporting requirements that require entities providing
services to Medicare beneficiaries to report certain ownership arrangements to
the Secretary of HHS. In addition to being obligated to refund any payments
received in violation of the Stark provisions, entities can also incur civil
penalties of up to $15,000 per improper claim, $10,000 per day for each day
that the entities fail to comply with the reporting obligations, and can be
excluded from participation in the Medicare and Medicaid programs.
A "financial relationship" under Stark is defined as an ownership or
investment interest in an entity by a physician (or an immediate family
member), or a compensation arrangement between a physician (or an immediate
family member) and an entity. The Company has entered into compensation
agreements with its medical directors or their respective professional
corporations for the services such physicians provide as
13
medical directors. Additionally, a number of physicians own shares of the
Company or its joint ventures, and options to purchase shares of stock in the
Company. Accordingly, physicians that have entered into such arrangements with
the Company, including its medical directors, may be deemed to have a
"financial relationship" with the Company for purposes of Stark.
For purposes of Stark, "designated health services" include, among other
things: clinical laboratory services; parenteral and enteral nutrients,
equipment and supplies; prosthetics, orthotics, prosthetic devices and
supplies; physical and occupational therapy services; outpatient prescription
drugs; durable medical equipment and supplies; radiology services (including
MRI, CAT scans and ultrasound services); radiation therapy services and
supplies; home health services; and inpatient and outpatient hospital services.
Dialysis is not a designated health service under Stark. However, the
definition of "designated health services" includes items and services that are
components of dialysis or that may be provided to a patient in connection with
dialysis, if such items and services are considered separately rather than
collectively as dialysis. Under the final Stark I regulations published in
August 1995, HCFA provided an exception from Stark I for clinical laboratory
services reimbursed under the Medicare "composite rate" for dialysis. The
Company believes it likely that, when final Stark II regulations are published,
they will contain a similar exception for the various dialysis related items
that fall within the definition of "designated health services," but that are
reimbursed under the composite rate for dialysis. However, there can be no
assurance that HCFA will adopt such a position.
On January 9, 1998, HCFA issued proposed Stark II regulations (the "1998
Proposed Regulations"). The 1998 Proposed Regulations provide that EPO and
other outpatient drugs used in connection with dialysis treatments, and home
health services and supplies used in home dialysis services are not considered
"designated health services" for purposes of Stark II. There can be no
assurance, however, that final Stark II regulations will adopt such a position.
With respect to the other items and services provided by the Company that are
likely to be deemed to be "designated health services" subject to the Stark II
prohibition, the language of the Stark II amendments and the Stark I final
regulations suggest that the Company will not be permitted to offer, or seek
reimbursement for, such services in the absence of a Stark II exception.
Because physicians under contract with the Company may refer patients to
hospitals with which the Company has a Contract Services arrangement, Stark II
may be interpreted to apply to the Company's Contract Services arrangements
with hospitals. However, Stark II contains exceptions for certain equipment
rental, personal services and fair market value arrangements and the Company
believes that most of its Contract 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.
14
However, because of its broad language, Stark II may be interpreted to apply
to certain of the Company's operations. Consequently, Stark II may require the
Company to restructure certain existing compensation agreements with its
medical directors, or, in the alternative, to refuse to accept referrals for
designated health services from certain physicians. Moreover, since Stark II
prohibits Medicare or Medicaid reimbursement of items or services provided
pursuant to a prohibited referral, and imposes substantial civil monetary
penalties on entities which present or cause to be presented claims for
reimbursement in such cases, the Company could be required to repay amounts
reimbursed for items and services that HCFA determines to have been furnished
in violation of Stark II, and could be subject to substantial civil monetary
penalties, either or both of which could have a material adverse effect on the
Company's operations and financial results and condition. The Company believes
that if Stark II is interpreted to apply to the Company's operations, it is
likely that the Company will be able on a prospective basis to bring its
financial relationships with referring physicians into material compliance with
the provisions of Stark II, including relevant exceptions. However, prospective
compliance would not affect amounts or penalties determined to be owed for past
conduct, and there can be no assurance that such prospective compliance, if
possible, would not have a material adverse effect on the Company.
The Company's certificate of incorporation (the "Certificate") has certain
provisions which are designed to comply with the requirements of the Stark Law.
The Certificate provides that if the holder of the Company's stock or an
immediate family member of the holder is a physician, then the stock will
represent no investment or ownership interest in any entity to which such
physician has made or is in a position to make referrals for designated health
services. The Certificate also contains dividend and transfer policies which
are designed to cure potential violations of the Stark Law which would occur
should a physician with an investment or ownership interest in the Company make
referrals to an entity and indirectly derive financial gain from such
activities. The transfer policies have the additional function of subjecting
future holders of the Company's stock to the same restrictions being imposed
upon current holders.
Other Regulation
False Claims. The Company is also subject to federal and state laws
prohibiting an individual or entity from knowingly and willfully presenting
claims for payment (by Medicare, Medicaid and certain other third-party payors)
that contain false or fraudulent information. These laws provide for both
criminal and civil penalties. Furthermore, providers found to have submitted
claims which they knew or should have known were false or fraudulent, or for
items or services that were not provided, may be excluded from Medicare and
Medicaid participation, required to repay previously collected amounts, and/or
subject to substantial civil monetary penalties, resulting in the possibility
of substantial financial penalties for small billing errors repeated over a
large number of claims, as each individual error may be deemed to be a separate
violation of the False Claims Act. Although false claim violations are
generally subject to investigation and prosecution by the applicable
governmental agency, violations of the federal False Claim Act can also be the
subject of Qui Tam (or whistle blower) litigation. In Qui Tam situations,
certain individuals with knowledge of False Claim Act violations can bring
suit, on behalf of the federal government, for such violations. As a "reward"
for bringing successful Qui Tam cases, Qui Tam plaintiffs are entitled to a
significant percentage of any penalties ultimately recovered by the federal
government as a result of the violations prosecuted in the Qui Tam action. The
number of health care Qui Tam cases is growing, and these cases increasingly
involve arguments that a violation of the Anti-Kickback and Stark Laws could
constitute a false claim under the federal False Claims Act, and thus subject
health care providers to Qui Tam actions for alleged Anti-Kickback and Stark
Law violations.
Although dialysis centers are generally reimbursed by Medicare based on
prospective composite rates, the submission of Medicare cost reports and
requests for payment by dialysis centers are covered by these laws. The Company
believes that it has procedures to ensure the accurate completion of cost
reports and requests for payment. However, there can be no assurance that cost
reports or requests for payment filed by the Company will be materially
accurate or will not be subject to challenge under these laws. Furthermore,
there can be no assurance that cost reports or payment requests previously
submitted by any of the entities that the Company
15
has acquired will not be challenged under these laws. Any such challenges,
including any related sanctions which might be assessed, could have a material
adverse effect on the Company.
State Anti-Kickback Provisions. Many states have enacted statutes prohibiting
health care providers from providing kickbacks or other forms of remuneration
to individuals, including physicians, who induce, or refer patients, to the
provider. Many of these laws have proscriptions similar to the Anti-Kickback
Law, but apply more broadly to all patients, and not just those entitled to
reimbursement under Medicare, Medicaid or other federal health care programs.
The Company has no reason to believe that any of its arrangements with
physicians are not in material compliance with such state laws. However, given
the recent enactment of such state laws, there is an absence of definitive
interpretive guidance in many areas and there can be no assurance that one or
more of the practices of the Company or any of its acquired entities might not
be subject to challenge under such state laws. If one or more of such state
laws is interpreted to apply to the Company and the Company is determined to be
liable for violations of such state laws, the application of such state laws
could have a material adverse effect on the Company.
State Self-Referral Provisions. Numerous states have enacted statutes
prohibiting physicians from holding financial interests in various types of
medical centers or providers to which they refer patients. Many of these laws
have proscriptions similar to the Stark law, but apply more broadly to all
patients, and not just those entitled to reimbursement under the Medicare and
Medicaid programs. The Company has no reason to believe that any of its
arrangements with physicians are not in material compliance with such state
laws. However, given the recent enactment of such state laws, there is an
absence of definitive interpretive guidance in many areas and there can be no
assurance that one or more of the practices of the Company or any of its
acquired entities might not be subject to challenge under such state laws. If
one or more of such state laws is interpreted to apply to the Company and the
Company is determined to be liable for violations of such state laws, the
application of such state laws could have a material adverse effect on the
Company.
State Laws Regarding Provision of Medicine and Insurance. Although the
Company currently has a number of arrangements with insurance companies and
HMOs, these relationships do not account for a significant portion of the
Company's revenues. Notwithstanding these current arrangements, as the managed
care environment evolves, or if there is a legislative change requiring
Medicare ESRD beneficiaries to obtain their care through a managed care
arrangement, such as an HMO, the Company may be forced to revise its current
operations, structure and/or practices to adapt to such an environment. Such
changes may include the development of quasi-managed care entities that could
deliver both dialysis treatment and related physician services through an
integrated system that would share in the financial risk of the integrated
services it 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
16
may bring radical changes in the financing and regulation of the health care
industry, which could have a material adverse effect on the Company.
Other Regulations. The Company's operations are subject to various state
hazardous waste disposal laws. Those laws, as currently in effect, do not
classify most of the waste produced during the provision of dialysis services
to be hazardous, although disposal of non-hazardous medical waste is also
subject to regulation. OSHA regulations require employers of workers who are
occupationally subject to blood or other potentially infectious materials to
provide those workers with certain prescribed protections against blood-borne
pathogens. These regulatory requirements apply to all health care centers,
including dialysis centers, and require employers to make a determination as to
which employees may be exposed to blood or other potentially infectious
materials and to have in effect a written exposure control plan. In addition,
employers are required to provide hepatitis B vaccinations, personal protective
equipment, infection control training, post-exposure evaluation and follow-up,
waste disposal techniques and procedures, and engineering and work practice
controls. Employers are also required to comply with certain record-keeping
requirements. The Company believes that it is in material compliance with the
foregoing laws and regulations.
Some states have established certificate of need ("CON") programs regulating
the establishment or expansion of health care centers, including dialysis
centers. In those states where CON laws apply to dialysis centers, the Company
is required to go through a regulatory process that generally requires the
identification and documentation of "need" for dialysis services, prior to
being able to establish or expand its dialysis operations. The existence of CON
laws and their application by regulatory agencies could have a material impact
on the Company's ability to expand its dialysis operations in those states with
CON requirements.
There can be no assurance that in the future the Company's business
arrangements, past or present, will not be the subject of an investigation or
prosecution by a federal or state governmental authority. Such investigation
could result in any, or any combination, of the penalties discussed above
depending upon the agency involved and such investigation and prosecution. None
of the Company's business arrangements with physicians, vendors, patients or
others have been the subject of investigation by any governmental authority.
The Company monitors legislative developments and would seek to restructure a
business arrangement if the Company determined that one or more of its business
relationships placed it in material noncompliance with applicable law. The
Company believes that in the near future the health care service industry will
continue to be subject to substantial regulation at the federal and state
levels, the scope and effect of which cannot be predicted by the Company. Any
loss by the Company of its various federal certifications, its authorization to
participate in the Medicare and Medicaid programs or its licenses under the
laws of any state or other governmental authority from which a substantial
portion of its revenues are derived would have a material adverse effect on its
operating and financial results.
ITEM 2. PROPERTIES
The Company operates 68 dialysis centers, five of which are located in owned
facilities and the remainder of which are located in leased facilities. Such
facilities range from approximately 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 28,000 square feet of space in Bellwood, Illinois which houses
corporate training, purchasing, biomedical, billing, facilities management and
medical records. The Company also leases space for its regional offices in
Tucson, Arizona; Panama City, Florida; Dearborn, Michigan; and Westchester,
Illinois. The regional offices range in size from 230 square feet to
approximately 4,600 square feet under leases with expiration dates through
March 31, 2003.
The Company considers its physical properties to be in good operating
condition and suitable for the purposes for which they are being used.
17
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment. The Company believes
it will be covered by malpractice insurance with respect to these claims and
does not believe that the ultimate resolution of pending proceedings will have
a material adverse effect on the Company. However, claims against the Company,
regardless of their merit or eventual outcome, could require management to
devote time to matters unrelated to the operation of the Company's business,
and may also have a material adverse effect on the Company's ability to attract
patients or expand its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
18
- - --------------------------------------------------------------------------------
PART II
- - --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company.
During fiscal 1999, the Company made no sales of its unregistered securities.
On May 5, 1998, the Company sold (the "Initial Offering") its $100 million 9
3/4% Senior Subordinated Notes due 2008, Series A (the "Private Notes"). On
October 2, 1998, the Company delivered in exchange (the "Exchange") for the
Private Notes its $100 million 9 3/4% Senior Subordinated Notes due 2008,
Series B (the "Notes"). The net proceeds to the Company from the Initial
Offering were $95.2 million, after deducting the initial purchaser's discount
and offering expenses. The Company used $48.4 million of the net proceeds to
repay indebtedness under the Company's prior credit facility (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. $7.2 million of the net
proceeds were used to repay loans made to the Company by certain of its
shareholders. $5.1 million of these loans bore interest at the prime rate plus
1% per annum and matured at various times throughout 1998. $2.1 million of
these loans bore interest at the prime rate plus 1% per annum and matured on
November 29, 2000. The Company used $19.2 million of net proceeds to acquire a
management services agreement and $4.7 million to acquire land and buildings.
The Company used approximately $10.0 million to acquire controlling interests
in four dialysis facilities. Additionally, the Company used the remaining $5.7
million of the net proceeds for working capital purposes.
ITEM 6. 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. In
October 1995, the Predecessor and six affiliated companies were combined to
create the Company. These financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto
included elsewhere in this Report.
Predecessor The Company
----------- -------------------------------------
Fiscal year ended September 30,
-------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- -------- -------- --------
(in thousands)
Statement of Operations
Data:
Net revenues............... $47,276 $83,171 $113,808 $147,475 $184,918
Patient care costs......... 33,454 58,854 81,913 102,644 131,634
General and administrative
expenses.................. 10,577 13,494 14,855 23,286 24,328
Special Charges............ -- -- -- -- 22,959
Provision for bad debts ... 754 2,523 714 2,727 7,360
Depreciation and
amortization.............. 1,271 3,401 4,940 6,927 10,479
------- ------- -------- -------- --------
Income (loss) from
operations................ 1,220 4,899 11,386 11,891 (11,842)
Interest expense, net...... (368) (276) (2,148) (5,932) (11,084)
Equity in earnings of
affiliates................ -- -- -- 1,784 586
Minority interests in
earnings.................. -- (810) (1,601) (516) (843)
Gain on curtailment of
pension benefits.......... -- 3,044 -- -- --
Other income, net.......... -- 39 279 -- --
------- ------- -------- -------- --------
Income (loss) before income
taxes and cumulative
effect of change in
accounting................ 852 6,896 7,916 7,227 (23,183)
Income tax expense
(benefit)................. 325 2,800 3,689 3,541 (6,827)
------- ------- -------- -------- --------
Income (loss) before
cumulative effect of
change in accounting...... 527 4,096 4,227 3,686 (16,356)
Cumulative effect of change
in accounting............. -- -- -- -- 615
------- ------- -------- -------- --------
Net income (loss).......... $ 527 $ 4,096 $ 4,227 $ 3,686 $(16,971)
======= ======= ======== ======== ========
Balance Sheet Data:
Working capital............ $ 6,911 $ 8,514 $ 20,412 $ 36,965 $ 34,611
Total assets............... 20,937 64,711 102,208 196,395 196,273
Long-term liabilities...... 5,146 23,366 51,632 111,333 123,790
Stockholders' equity....... 7,434 28,873 32,999 58,256 41,285
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the more
detailed information contained in the Consolidated Financial Statements and
notes thereto appearing elsewhere in this Report.
Overview
Everest is a leading provider of dialysis and other blood treatment services.
Founded in 1968 and principally owned by nephrologists, the Company has a long-
standing focus on developing strong relationships with physicians to provide
high-quality patient care. The Company is the nation's sixth-largest provider
of chronic dialysis outpatient services and serves approximately 6,400 patients
through 68 facilities in 12 states. Everest also contracts with 81 hospitals in
9 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 28 nephrologists, primarily in the Chicago and northwest Indiana
areas, and (ii) certain minority-owned or unaffiliated dialysis facilities. For
fiscal 1999, the Company derived 86.9% of its net revenues from chronic and
acute dialysis services, 11.7% from Contract Services and 1.4% from management
services.
Sources of Revenues
The Company's net revenues from chronic and acute dialysis services are
derived from: (i) in-center dialysis and home dialysis services including drugs
and supplies and acute dialysis services performed in hospitals; and (ii)
contracts with hospital-based programs. The majority of the Company's in-center
and home dialysis services are paid for under the Medicare ESRD program in
accordance with rates established by HCFA. Additional payments are provided by
other third-party payors (particularly by employer group health plans during
the first thirty months of treatment), generally at rates higher than those
reimbursed by Medicare. Everest is currently seeking to expand the portion of
its revenues attributable to non-government payors by entering into contracts
with managed care companies and other private payors. Because dialysis is an
ongoing, life-sustaining therapy used to treat a chronic condition, utilization
of the Company's chronic dialysis services is generally predictable and not
subject to seasonal or economic fluctuations. ESRD patients may receive up to
156 dialysis treatments per year; however, due to hospitalization and no shows
the Company's average number of treatments per patient per year is 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 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
During fiscal 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. ("HDA LLC"), 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
20
Company's interest was increased from 50.0% to 80.5%); and (iii) Dialysis
Specialists of South Texas, L.L.C. ("DSST"), which owns three outpatient and
home dialysis facilities in Corpus Christi, Texas (the Company's interest was
increased from 33.3% to 100.0%). In addition, effective April 1, 1998, the
Company acquired 100.0% of North Buckner Dialysis Center, Inc. ("North
Buckner"), which owns one outpatient dialysis facility in Dallas, Texas. 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. ("EDS"), a corporation formed
for this purpose under the laws of the State of New York, and which is owned by
Craig Moore and Paul Balter, M.D., owners of the Company. The parties have made
the 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. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations.")
During Fiscal 1999, the Company acquired additional equity in five entities
in which it previously held a minority interest: (i) Dialysis Specialists of
Topeka, Inc., which owns one outpatient and home dialysis facility in Topeka,
Kansas (the Company's interest was increased from 25% to 75%); (ii) Dialysis
Specialists of Central Cincinnati, Ltd. ("DSCCL"), which owns one outpatient
and home dialysis facility in Norwood, Ohio (the Company's interest was
increased from 37.9% to 100.0%); (iii) Home Dialysis of Fairfield, Inc.
("Fairfield"), which owns one outpatient and home dialysis facility in
Fairfield, Ohio (the Company's interest was increased from 50.0% to 100.0%);
(iv) Home Dialysis of Columbus, Inc ("Columbus"), which owns two outpatient and
home dialysis facilities in Columbus, Ohio (the Company's interest was
increased from 49.0% to 100.0%); (v) Dialysis Specialists of Tulsa, Inc., which
owns one outpatient and home dialysis facility in Tulsa, Oklahoma (the
Company's interest was increased from 33.33% to 100.0%). Additionally, during
Fiscal 1999 the Company acquired a 100.0% interest in Englewood Dialysis
Facility L.L.C., which owns one outpatient and home dialysis facility in
Englewood, New Jersey (the Company previously had no equity interest in this
facility). These acquisitions represent 120 stations and approximately 639
patients in the aggregate.
In November 1999, the Company acquired a 100.0% interest in Western New York
Artificial Kidney Center, Inc. through its Article 28 Company, which owns three
outpatient dialysis facilities in the Buffalo, New York area (the Company
previously had no equity interest in these facilities). This acquisition
represents 45 stations and approximately 241 patients in the aggregate.
In December 1999, the Company acquired a 100.0% interest in St. Clare
Dialysis Center located in Dover, New Jersey (the Company previously had no
equity interests in these facilities). This acquisition represents 12 stations
and approximately 65 patients.
21
Acquisitions of dialysis and Contract Services providers have been recorded
under purchase accounting with the purchase price being principally allocated
to fixed assets, accounts receivable and inventory based on respective
estimated fair market values at the date of acquisition. Any excess of the
purchase price over the fair value of identifiable assets (including
identifiable intangible assets) is allocated to goodwill, which is amortized
over 25 years. The results of these acquisitions have been included in the
results of operations from their respective acquisition dates. The Company
regularly evaluates the potential acquisition of, and holds discussions with,
various potential acquisition candidates; as a general rule, the Company does
not intend to publicly announce such acquisitions until a definitive agreement
has been reached.
De Novos
During Fiscal 1999, the Company commenced operations in three De Novo
facilities: (1) Madiera Dialysis Center, which is comprised of one outpatient
dialysis facility in Madiera, Ohio; (2) Corpus Christi Central Dialysis Center,
which is comprised of one outpatient and home dialysis facility in Corpus
Christi, Texas (3) Terrell Dialysis Center, which is comprised of one
outpatient dialysis facility in Terrell, Texas. These De Novos represent 33
stations and approximately 74 patients in the aggregate.
Reorganization
In November 1997, in order to simplify its ownership structure and better
position the Company for future growth, the shareholders of the Company entered
into a series of related transactions. Prior to such transactions, the Founding
Directors, who collectively owned approximately 70% of the equity in the
Company, held their equity interest through a limited liability company.
Following these transactions, the Founding Directors now directly hold
approximately 55% of the equity in the Company, and collectively own all of the
membership interests in Peak Liquidating, which in turn owns approximately 15%
of the equity in the Company. See "Certain Relationships and Related
Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."
Consolidations
Effective as of June 30, 1999, in a transaction consummated by the Company to
simplify tax reporting, Northwest Indiana Dialysis Center, Inc. and Lake Avenue
Dialysis Center, Inc., were merged with and into Ohio Valley Dialysis Center,
Inc. ("Ohio Valley"), in a statutory merger with Ohio Valley being the
surviving entity, and the name of Ohio Valley was changed to Everest Healthcare
Indiana, Inc.
Effective as of September 30, 1999, in a transaction consummated by the
Company to simplify tax reporting, Dialysis Specialists of Central Cincinnati,
Ltd., Home Dialysis of Columbus, Inc., and Home Dialysis of Dayton, Inc. were
merged with and into Home Dialysis of Fairfield, Inc. ("Fairfield"), in a
statutory merger with Fairfield being the surviving entity, and the name of
Fairfield was changed to Everest Healthcare Ohio, Inc.
Effective as of October 31, 1999, in a series of transactions consummated by
the Company to simplify tax reporting, Dialysis Specialists of South Texas,
L.L.C., Hemo Dialysis of Amarillo, L.L.C., Amarillo Acute Dialysis Specialists,
L.L.C. and Dialysis Specialists of Corpus Christi, L.L.C., were merged with and
into North Buckner Dialysis Center Inc. ("North Buckner") in a statutory merger
with North Buckner being the surviving entity, and the assets of North Buckner
were contributed to Everest Healthcare Texas, L.P. ("New LP"), a newly formed
limited partnership. New LP is owned by North Buckner (its 1% general partner)
and Everest Healthcare Texas Holding Corp. (its 99% limited partner) a newly
formed, wholly-owned subsidiary of North Buckner.
22
Results of Operations
The following table sets forth for the periods indicated the Company's
results of operations:
Fiscal years ended
September 30,
----------------------------
1997 1998 1999
-------- -------- --------
(in thousands)
Net revenues............................ $113,808 $147,475 $184,918
Patient care costs...................... 81,913 102,644 131,634
General and administrative expenses..... 14,855 23,286 24,328
Special charges......................... -- -- 22,959
Provision for bad debts................. 714 2,727 7,360
Depreciation and amortization........... 4,940 6,927 10,479
-------- -------- --------
Income (loss) from operations........... 11,386 11,891 (11,842)
Interest expense, net................... (2,148) (5,932) (11,084)
Equity in earnings of affiliates........ -- 1,784 586
Minority interests in earnings.......... (1,601) (516) (843)
Other income, net ...................... 279 -- --
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting............................. 7,916 7,227 (23,183)
Income tax expense (benefit)............ 3,689 3,541 (6,827)
-------- -------- --------
Income (loss) before cumulative effect
of change in accounting................ 4,227 3,686 (16,356)
Cumulative effect of change in
accounting............................. -- -- 615
-------- -------- --------
Net income (loss)....................... $ 4,227 $ 3,686 $(16,971)
======== ======== ========
The following table sets forth for the periods indicated certain statement of
operations items expressed as a percentage of net revenues for such periods:
Fiscal years ended September 30,
----------------------------------
1997 1998 1999
---------- ---------- ----------
Net revenues............................. 100.0% 100.0% 100.0%
Patient care costs....................... 72.0 69.6 71.2
General and administrative expenses...... 13.0 15.8 13.2
Special charges.......................... -- -- 12.4
Provision for bad debts.................. 0.7 1.9 4.0
Depreciation and amortization............ 4.3 4.7 5.6
---------- ---------- ----------
Income (loss) from operations............ 10.0 8.0 (6.4)
Interest expense, net.................... (1.9) (4.0) (6.0)
Equity in earnings of affiliates......... -- 1.2 0.3
Minority interests in earnings........... (1.4) (0.3) (0.4)
Other income, net........................ 0.2 -- --
---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in
accounting.............................. 6.9 4.9 (12.5)
Income tax expense (benefit)............. 3.2 2.4 (3.6)
---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting.................... 3.7 2.5 (8.9)
Cumulative effect of change in
accounting.............................. -- -- 0.3
---------- ---------- ----------
Net income (loss)........................ 3.7% 2.5% (9.2)%
========== ========== ==========
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September
30, 1998
Net Revenues. Net revenues increased $37.4 million or 25.4% to $184.9 million
for fiscal 1999 from $147.5 million for fiscal 1998. Approximately $11.8
million of the increase was attributable to an increase in the number of
treatments at existing dialysis facilities, a shift in revenues by payor and an
increase in the average net revenue per treatment to approximately $236 for
fiscal 1999 from $229 for fiscal 1998. Of the remaining $25.6 million of the
increase, approximately $20.6 million resulted from the acquisition of 12
23
dialysis facilities in fiscal 1999 and fiscal 1998 and the acquisition of
Contract Services businesses in fiscal 1998. Approximately $3.2 million was
attributable to revenues generated pursuant to de novo facilities opened by the
Company in fiscal 1998 and 1999 and approximately $2.4 million was attributable
to same store growth in the contract services business.
Patient Care Costs. Patient care costs consist of costs directly related to
the care of patients, including direct and indirect labor, drugs and other
medical supplies and operational costs of the facilities. Patient care costs
have been adjusted to also reflect the indirect costs of supporting the
facilities such as bio-med and staff education. Patient care costs increased
$29.0 million or 28.3% to $131.6 million for fiscal 1999 from $102.6 million
for fiscal 1998. Approximately $9.7 million of the increase was attributable to
the increase in the number of treatments at the existing dialysis facilities.
Of the remaining increase, $15.5 million is from the opening of de novo
facilities in fiscal 1998 and 1999 and the acquisition of 12 facilities in
fiscal 1999 and fiscal 1998, and approximately $2.5 million was attributable to
the acquisition of Contract Services businesses in fiscal 1998.
General and Administrative Expenses. General and administrative expenses
increased $1.0 million or 4.3% to $24.3 million for fiscal 1999 from $23.3
million for fiscal 1998. The increase was attributable to the growth of the
corporate infrastructure, including the expansion of information systems,
increased professional fees and increased administrative labor costs.
Special Charges. The Company recorded approximately $23.0 million of charges
during fiscal 1999. These amounts have been expensed as special charges and
include $22.4 million in impairment of long-lived assets and $600 in severance
costs.
The impairment of long-lived assets included (i) a $20.5 million write down
of goodwill and other intangible assets, (ii) a $1.4 million write-off of
advances to, and other assets of, certain of the Company's joint ventures and
(iii) the write-down of $500 of fixed assets to fair value. The write-off of
goodwill and other intangible assets was the result of a deterioration in the
profitability and cash flows of certain acquired operations. The deterioration
was due, in part, to continued contractual adjustments and other reductions in
anticipated revenues. As a result of this deterioration, the Company evaluated
the long-lived assets of effected businesses for impairment to determine the
amount of the assets that were not recoverable. As a result of this evaluation,
the Company recorded a write down of these assets based upon the amount by
which the carrying value of the assets exceeded their fair values as determined
on a discounted cash flows basis. Certain of the Company's joint ventures
encountered similar deterioration in the current fiscal year. As a result, the
Company recorded a write-off of certain advances to and other assets of these
companies.
The severance costs to two executives of the Company related to amounts that
were due under the individuals' employment contract upon separating from the
Company.
Provision for Bad Debts. Provision for bad debts increased $4.7 million or
174.1% to $7.4 million for fiscal 1999 from $2.7 for fiscal 1998. The increase
was due to a deterioration of the Company's days sales outstanding of patient
receivables as well as an overall increase in patient receivables due to
increased treatments.
Depreciation and Amortization. Depreciation and amortization increased
approximately $3.6 million or 52.2% to $10.5 million for fiscal 1999 from $6.9
million for fiscal 1998. The increase was due to increased amortization of
goodwill as a result of business acquisitions (including the purchase of
minority interests) and to increased depreciation expense as a result of fixed
asset purchases and denovo developments.
Income from Operations. Income from operations decreased $23.7 million or
200% to a loss of $11.8 million for fiscal 1999 from income of $11.9 million
for fiscal 1998. Accordingly, income from operations as a percentage of net
revenues decreased to (6.4)% for fiscal 1999 as compared to 8.0% for fiscal
1998 due to the factors discussed above.
24
Interest Expense, Net. Interest expense, net increased $5.2 million or 88.1%
to $11.1 million for fiscal 1999 from $5.9 million for fiscal 1998. The
increase was primarily attributable to a full year of interest expense
recognized on the Senior Subordinated Notes in fiscal 1999 versus only five
months of interest expense recognized in fiscal 1998.
Equity in Earnings of Affiliates. Equity in earnings of affiliates represents
the Company's portion of earnings in unconsolidated joint ventures. The Company
recognized equity in earnings of affiliates of approximately $586 in fiscal
1999, and $1.8 million in fiscal 1998. This decrease is primarily due to the
Company's acquisition of the interest not previously owned in four joint
ventures during fiscal 1999, which were previously minority owned, and the
increase from minority ownership (25%) to majority ownership (75%) in one other
entity.
Minority Interests in Earnings. Minority interests in earnings represents the
proportionate equity interests of other partners in the Company's entities that
are not wholly owned. The minority interests in earnings increased
approximately $327 to $843 in fiscal 1999 as compared to $516 in fiscal 1998.
Income Taxes. Income taxes decreased approximately $10.3 million to a tax
benefit of $6.8 million in fiscal 1999 from a tax expense of $3.5 million in
fiscal 1998 as a result of the factors discussed above.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September
30, 1997
Net Revenues. Net revenues increased $33.7 million or 29.6% to $147.5 million
for fiscal 1998 from $113.8 million for fiscal 1997. Approximately $18.4
million of the increase was attributable to an increase in the number of
treatments at existing dialysis facilities, a shift in revenues by payor and an
increase in the average net revenue per treatment to approximately $229 for
fiscal 1998 from $220 for fiscal 1997. The shift in revenues by payor and the
increase in the net revenue per treatment were associated with the commercial
price increase that went into effect in July 1997. This was offset by an
increase in the contractual allowance of approximately $3.0 million. The
contractual allowance represents the Company's estimate of potential
adjustments to invoiced amounts. Of the remaining $18.3 million of the
increase, approximately $4.8 million resulted from the acquisition of Contract
Services businesses in fiscal 1997 and $13.5 million was attributable to the
opening of de novo facilities in fiscal 1997 and 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
have been adjusted to reflect the indirect costs of supporting the facilities
such as bio-med and staff education. Patient care costs increased $20.7 million
or 25.3% to $102.6 million for fiscal 1998 from $81.9 million for fiscal 1997.
Approximately $7.4 million of the increase was attributable to the increase in
the number of treatments at the existing dialysis facilities. Of the remaining
increase, $8.8 million is from the opening of de novo facilities in fiscal 1997
and 1998 and the acquisition of six facilities in fiscal 1998, and
approximately $4.5 million was attributable to the acquisition of Contract
Services businesses in fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased $8.4 million or 56.4% to $23.3 million for fiscal 1998 from $14.9
million for fiscal 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 $2.0 million or
285.7% to $2.7 million for fiscal 1998 from $714 for fiscal 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 $2.0 million or 40.8% to $6.9 million for fiscal 1998 from $4.9
million for fiscal 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.
25
Income from Operations. Income from operations increased $500 or 4.4% to
$11.9 million for fiscal 1998 from $11.4 million for fiscal 1997. Income from
operations as a percentage of net revenues decreased to 8.0% for fiscal 1998 as
compared to 10.0% for fiscal 1997 due to the factors discussed above.
Interest Expense, Net. Interest expense, net increased $3.8 million or 181.0%
to $5.9 million for fiscal 1998 from $2.1 million for fiscal 1997. The increase
was primarily attributable to an increase in the average debt outstanding of
approximately $48.6 million to $74.1 million in fiscal 1998 as compared to
$25.5 million in fiscal 1997. The increase is due to the issuance of Senior
Subordinated Notes May 5, 1998.
Equity in Earnings of Affiliates. Equity in earnings of affiliates represents
the Company's portion of earnings in unconsolidated joint ventures. The Company
recognized equity in earnings of affiliates of approximately $1.8 million in
fiscal 1998. In fiscal 1997, the joint venture entities were start up in nature
and as such, the Company did not recognize any earnings. Whereas, in fiscal
1998, the operations matured and started to produce income.
Minority Interests in Earnings. In November 1997, the Company acquired the
minority interests in Everest, and therefore, there is no minority interest
expense relating to minority interests in Everest subsequent to the
acquisition. Accordingly, minority interest expense decreased $1.1 million or
68.8% to $516 for fiscal 1998 from $1.6 million in fiscal 1997.
Income Taxes. Income taxes remained constant at approximately $3.6 million
for fiscal 1998 and fiscal 1997. This was mainly due to an increase in the
effective tax rate to approximately 49% for fiscal 1998 as compared to 46.6%
for fiscal 1997 due to an increase in non-deductible goodwill amortization
expense associated with acquisitions.
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. 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 consists of Karen Graminga-Warren, Director of
Technology and Chief Information Officer, and representatives from all major
areas of the Company. The task force meets weekly. The Company has hired four
consultants that devote full time 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 implemented a plan with six stages, as
follows: (i) awareness, (ii) inventory, (iii) impact analysis, (iv)
remediation, (v) testing and (vi) implementation.
"Awareness" involves the education of our employees and is an ongoing process
that will continue past January 2000. "Inventory" involves taking stock of our
systems, a process that is underway and progressing through each unit and
corporate office. "Impact analysis" involves determining which items are not
Year 2000 compliant and how they will affect the Company's business.
"Remediation" is the process of determining what to do with non-compliant
items. Options are to fix the problem, replace the item with new software or
equipment or retire the item. "Testing" involves verifying that the fixed or
replaced item is now Year 2000 compliant. "Implementation" is the process of
placing the tested item into production. All phases were completed as of
December 29, 1999.
Contingency planning is completed for dialysis units and corporate offices.
The Company's plan includes patient education, the establishment of a disaster
committee, list of units and when they are dialyzing, a plan to have all units
checked on January 1, 2000 for operational readiness and a plan to insure that
all units alert local
26
utilities to their medical status. The Corporate office will be checked at
12:30 a.m. on January 1, 2000 for status. A Year 2000 help desk will be manned
from January 1, 2000 to January 5, 2000. The help desk will have a listing of
all critical employee numbers, vendors numbers, utilities numbers and scenarios
to follow. Each dialysis unit must perform a series of tests as indicated on a
standard checklist and fax the results of such tests to the Year 2000 help desk
for evaluation no later than 11:00 am January 1, 2000. Units that have not
forwarded such information to the help desk within the allotted time will be
contacted to ensure that all tests were performed and to ensure the results of
such tests are adequate. Each unit has been supplied a primary and secondary
contact person for the purpose of assisting the units in the testing and to
forward the results of such testing.
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.
2. Accounting package. This system is Year 2000 compliant.
3. Interim accounting package for Contract Services. This package is Year
2000 compliant.
4. Physician billing. The Company installed a new billing system which is
Year 2000 compliant.
5. Facilities billing. This system is Year 2000 compliant.
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 completed a full review of the Year 2000 compliance of its
non-information technology systems (i.e., embedded technology such as micro-
controllers).
The total amount the Company has expended on Year 2000 issues are as follows:
Consultants................................................... $ 900,000
Hardware...................................................... 300,000
Software...................................................... 100,000
Bio-Med Embedded Technology................................... 100,000
----------
Total..................................................... $1,400,000
==========
Approximately 90% of the Year 2000 budget was spent through the fourth quarter
of fiscal 1999. The Company has and is funding Year 2000 expenditures through
its working capital.
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. HCFA has imposed certain Year 2000 readiness obligations on
providers, including the Company. Although the Company is compliant with those
obligations, news reports have indicated that various agencies of the federal
government may have difficulty becoming fully Year 2000 compliant before the
year 2000. A consideration of worst case scenarios and contingency plans to
deal with those scenarios have been determined by the Task Force. Such plans
include transmission of Medicare billings in paper form as opposed to
electronic form which could result in processing delays and, hence, remittance
delays.
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.
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
27
working capital requirements. At September 30, 1999, the Company's working
capital was $34.6 million as compared to $36.9 million at September 30, 1998.
The Company's net cash provided by operating activities was $4.9 million for
the twelve months ended September 30, 1999. Cash provided by operating
activities consists of net income increased by non-cash expenses such as
depreciation, amortization and the provision for bad debts and adjusted by the
changes in components of working capital, primarily receivables, payables and
accrued expenses. The Company's net cash used in investing activities was $26.5
million for the twelve months ended September 30, 1999. The Company's principal
sources and uses of cash consist of investing activities related to purchases
of new equipment and leasehold improvements for existing dialysis centers, the
purchase of majority interests in five dialysis centers and the purchase of one
independent dialysis facility and a decrease in net advances due from
affiliated entities. Net cash provided by financing activities was
approximately $12.4 million for the twelve months ended September 30, 1999. The
primary sources and uses of cash from financing activities were net borrowings
or repayments under the Prior Credit Facility.
The Company does not have any current material commitments for capital
expenditures.
On June 30, 1999, the Company refinanced its Prior Credit Facility with
Harris Trust and Savings Bank as agent bank, the same commercial bank that
provided the Prior Credit Facility. The new Credit Facility consists of three
separate facilities: (i) the $35.0 million Revolving Credit Facility maturing
on June 30, 2002; (ii) $65.0 million Acquisition Credit Facility maturing on
June 15, 2005, which includes the requirement to convert all of the borrowings
outstanding thereunder on each of June 30, 2000, 2001 and 2002 to one or more
seven-year term loans with balloon payments due on June 15, 2005 (the "Term
Loans"); and (iii) the $40.0 million Year 2000 Credit Facility, available from
January 1, 2000 through June 30, 2000, to finance government related accounts
receivable which are unpaid due to difficulties related to the year 2000. The
total amount drawn under the Credit Facility may not exceed $140.0 million. The
Credit Facility contains operating and financial covenants, including, without
limitation, requirements to maintain leverage and debt service coverage ratios
and minimum tangible net worth. In addition, the Credit Facility includes
customary covenants relating to the delivery of financial statements, reports,
notices and other information, access to information and properties,
maintenance of insurance, payment of taxes, maintenance of assets, nature of
business, corporate existence and rights, compliance with applicable laws,
including environmental laws, transactions with affiliates, use of proceeds,
limitation on indebtedness, limitations on liens, limitations on certain
mergers and sales of assets, limitations on stock repurchases, and limitation
on debt payments and other distributions including prepayment or redemption of
the Company's Senior Subordinated Notes due 2008. The Credit Facility contains
certain events of default after expiration of applicable grace periods,
including defaults relating to: (i) nonpayment of principal, interest, fees or
other amounts; (ii) violation of covenants; (iii) material inaccuracy of
representations and warranties; (iv) bankruptcy; (v) material judgments; (vi)
certain ERISA liabilities; and (vii) actual or asserted invalidity of any loan
documents.
Effective as of October 8, 1999 and December 21, 1999, the new Credit
Facility was amended. In addition to approving certain acquisitions by the
Company, the October amendment permits the Company to capitalize and provide
working capital to certain affiliates of the Company which own or operate a
segment of the business in jurisdictions where, pursuant to the laws of such
jurisdictions, the Company itself is not qualified to own or operate such
segments of the business. The December amendment modified the cash leverage
ratio, fixed charge coverage ratio and definition of EBITDA under the Credit
Facility in connection with the charge recognized by the Company in fiscal 1999
of approximately $23 million, which charge was taken in connection with the
write down by the Company of goodwill and other intangible assets. See, "--
Results of Operations--Special Charges." In connection with the December
amendment, the Company paid Harris Trust and Savings Bank a fee of $525,000.
In November 1996, the Company issued notes in the aggregate principal amount
of $7.0 million as part of the purchase price for its acquisition of The
Extracorporeal Alliance. The notes bear interest at a variable rate equal to
the five-year Treasury note rate plus three percent and mature on October 31,
2002.
28
A significant component of the Company's growth strategy is the acquisition
and development of dialysis centers and the acquisition of Contract Services
businesses. The Company believes that the existing cash and funds from
operations, together with funds available under the 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.
Impact of Inflation
A substantial portion of the Company's net revenues is subject to
reimbursement rates that are regulated by the federal government and do not
automatically adjust for inflation. The Company is unable to increase the
amount it receives for the services provided by its dialysis businesses that
are reimbursed under the Medicare composite rate. Increased operating costs due
to inflation, such as labor and supply costs, without a corresponding increase
in reimbursement rates, may adversely affect the Company's earnings in the
future. However, part of the Company's growth strategy is to acquire additional
Contract Services businesses which are not directly dependent on reimbursement
from government agencies. The Company believes that the effect of inflation is
further mitigated by a recent change in current governmental health care laws
that extends the coordination of benefits period for ESRD patients who are
covered by an employer group health plan from 18 to 21 months to 30 to 33
months before Medicare becomes the primary payor. In addition, the Balanced
Budget Refinement Act of 1999 would update the composite rate for payment by
1.2% for renal dialysis services furnished in 2000 and an additional 1.2% for
such services furnished in 2001.
Recent Developments
Effective June 28, 1999 John B. Bourke resigned as the Chief Financial
Officer of the Company. Effective October 15, 1999 Mr. Bourke ceased to be
employed by the Company. See "Executive Compensation--Employment Agreements"
for a discussion of the Company's severance arrangement with Mr. Bourke.
Mr. Bourke was replaced by Lawrence D. Damron.
Effective October 31, 1999 certain of the Company's subsidiaries which
operate facilities in the State of Texas were consolidated and reorganized. See
"--Consolidations."
In October 1999 and December 1999 the Company amended and restated its credit
facility. See "--Liquidity and Capital Resources" for a discussion of the
material terms of these amendments.
Effective November 5, 1999 Nicki M. Norris resigned as the Executive Vice
President and General Manager of the Company. See "Executive Compensation--
Employment Agreements" for a discussion of the Company's severance arrangement
with Ms. Norris. Ms. Norris was replaced by Paul Zabetakis, M.D., whose title
with the Company is Executive Vice President and Chief Operating Officer,
Dialysis Services.
The Company and Paul Zabetakis, M.D. entered into an Employment Agreement
effective November 15, 1998. Pursuant to an Option Agreement dated November 15,
1999 Dr. Zabetakis was granted an option to purchase 60,000 shares of the
Company's common stock at a purchase price of $13.05 per share. The option was
granted under the Company's 1999 Stock Award Plan. 25% of the total options
granted under such agreement shall become vested and exercisable on each of the
first four anniversaries of the grant date.
In November and December 1999, respectively, the Company acquired a 100%
interest in Western New York Artificial Kidney Center, Inc. and St. Clare
Dialysis Center. See "--Acquisitions."
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in hedging or other market structure derivative
trading activities. Additionally, the Company's debt obligations are primarily
fixed-rate in nature and, as such, are not sensitive to changes in interest
rates. The Company does not believe that its market risk financial instruments
on September 30, 1999 would have a material effect on future operations or cash
flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule of the Company are annexed to this
Report. An index to such materials appears on page F-1.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
- - --------------------------------------------------------------------------------
PART III
- - --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
- - ---- --- --------
Craig W. Moore.......... 55 Chairman of the Board of Directors, Chief Executive Officer
Arthur M. Morris, M.D... 60 President and Director
Martin P. Fox........... 45 Senior Vice President of Strategic Development and Director
Michael J. Carbon,
M.D.................... 59 Senior Vice President and Director
Paul Zabetakis, M.D..... 52 Executive Vice President and Chief Operating Officer, Dialysis Services
James E. Becks.......... 49 Chief Executive Officer, Contract Services
Lawrence D. Damron...... 53 Chief Financial Officer
Paul Balter, M.D........ 60 Chief Medical Officer, Secretary, Treasurer and Director
Thomas D. Creel......... 52 Vice President of Business Development-Northern U.S. and Director
Alan M. Berry........... 55 Director
George Dunea, M.D....... 66 Director
Ashutosh Gupta, M.D..... 52 Director
Douglas Mufuka, M.D..... 59 Director
Mr. Moore is Chairman of the Board of Directors and Chief Executive Officer
of the Company. He has served in those capacities since 1995. Mr. Moore joined
Everest in 1986 as an Executive Vice President. He holds a Bachelor of Arts in
Business and Finance from Adrian College and completed the Institute for
Management at Northwestern University in 1976. He has worked for U.S. Steel
Corporation, American Hospital Supply Corporation and Baxter Healthcare
Corporation in a variety of management assignments including Division President
of American Micro-Surgery Specialties. He served four years in the U.S. Navy as
a line officer. Mr. Moore is a member of the Board of Directors of Biologic
Systems Corporation.
Dr. Morris is the President and a director of the Company. Dr. Morris joined
Everest in 1971. He received his medical degree from the State University of
New York at Buffalo in 1965 and completed a Fellowship in Renal Disease at
Rush-Presbyterian-St. Luke's Hospital in Chicago in 1971. Dr. Morris was board
certified in Internal Medicine in 1971 and in Nephrology in 1972. He has been
on the Board of Directors of the National Kidney Foundation of Illinois since
1973. From 1979 to 1981, he served as Chairman of the ESRD Network 15. In 1984
Dr. Morris was appointed by Governor Thompson to serve on the State of Illinois
Renal Disease Advisory Council, on which he continues to serve. Dr. Morris is a
Fellow in the American College of Physicians, has been a member of the board of
trustees at West Suburban Hospital Medical Center since 1990. He has been in
private practice since 1971.
Mr. Fox is the Senior Vice President of Strategic Development and a director
of the Company. Mr. Fox joined Everest in 1996. He is a graduate of Northern
Arizona University where he earned a Bachelor of Science in Accounting and is a
Certified Public Accountant. Mr. Fox has over ten years of management
experience in the dialysis industry. He began his career in the dialysis
industry as the Chief Financial Officer of Southwest Kidney Institute and
later, beginning in 1992, was named Chief Executive Officer of HDA. Mr. Fox is
a former treasurer of the National Renal Administrators Association.
Dr. Carbon is the Senior Vice President and a director of the Company. Dr.
Carbon joined Everest in 1979. Dr. Carbon received his M.D. from the University
of Illinois in 1965. He completed his fellowship in both Internal Medicine in
1970 and Nephrology in 1971 from the University of Miami, Miami, Florida.
Dr. Carbon served in the U.S. Army Medical Corps from 1966 to 1968. Dr. Carbon
has been in private practice since 1971 specializing in nephrology and
hypertensive disease. Dr. Carbon has been a board member of
31
Central DuPage Hospital since 1994 and formerly served as president of the
hospital's medical staff. He is chief operating officer of NANI-IL and NANI-IN
and medical director of the Company's Contract Services business.
Dr. Zabetakis is the Executive Vice President and Chief Operating Officer of
the Company's Dialysis Services business with responsibility for operations of
the chronic dialysis centers. Dr. Zabetakis joined Everest in this capacity in
November of 1999. Previously, he had served various other roles with the
Company including Vice-Chairman--Quality Improvement Committee, Medical
Director--Peritoneal Dialysis, and Medical Director for Renal Disease
Management Services. Dr. Zabetakis received his undergraduate degree from
Washington and Jefferson College in Washington, Pennsylvania and received his
Doctorate of Medicine from the University of Tennessee College of Medicine in
Memphis. Dr. Zabetakis completed his Fellowship in Nephrology at Yale
University School of Medicine. Dr. Zabetakis also has been a practicing
physician in Nephrology at Lenox Hill Hospital in New York City where he was
also the Associate Chief of Nephrology and the Director of Home Peritoneal
Dialysis.
Mr. Becks is Chief Executive Officer of the Company's Contract Services
business and has served in that capacity since 1996. Mr. Becks joined Everest
in 1989. Mr. Becks is a registered nurse and a graduate of Northwestern
University where he earned a Bachelor of Science Degree. Mr. Becks served in
the U.S. Navy following which he worked for American V. Mueller, a division of
American Hospital Supply Corp., in a variety of sales, marketing, and
management assignments including Vice President of Business Development. Mr.
Becks was previously (from 1989 to 1996) a General Manager of the Company's
Continental Healthcare affiliate.
Mr. Damron is the Chief Financial Officer of the Company. Mr. Damron joined
the Company in June 1999. Mr. Damron received his Bachelor of Arts degree in
economics from the University of Cincinnati and his Masters of Arts degree in
international relations from University of Southern California. Mr. Damron
received his Masters of Business Administration from Harvard University and is
also a Certified Public Accountant. Mr. Damron served as senior accountant at
Price Waterhouse from 1975 to 1980 when he left to join American Hospital
Supply Corporation. Mr. Damron had a number of successively more responsible
positions at American Hospital Supply Corporation, which was acquired by Baxter
International in 1985. Mr. Damron spent 12 years in a number of key management
positions at Baxter International including his last position as Treasurer of
Baxter. Mr. Damron most recently held the position of Senior Vice President,
Finance and Treasurer at Evanston Northwestern Healthcare.
Dr. Balter is the Chief Medical Officer, Secretary/Treasurer and a director
of the Company. He also serves as chairman of the Company's Corporate Quality
Improvement Committee. Dr. Balter joined Everest in 1971. Dr. Balter received
his M.D. from Yale University in 1965 and completed his renal fellowship there
in 1969. He served as a nephrologist in the U.S. Army from 1969 to 1971, and
served in the only hemodialysis unit in Vietnam from 1970 to 1971. Dr. Balter
was board certified in Internal Medicine in 1972 and in Nephrology in 1974.
Dr. Balter specializes in systems applications of quality assurance. He has
been in private practice since 1971.
Mr. Creel has been a member of the board of directors of Everest since 1997.
Mr. Creel received his Bachelor of Arts degree from the University of South
Florida. Following two years in the U.S. Army, Mr. Creel began his sales career
in health care with Parke-Davis Pharmaceutical Co. He later joined Baxter
Healthcare Renal Division where he became Vice President of Sales and Service--
U.S. He was one of the founders of Home Dialysis of America, Inc., where he
served since 1992 as Managing Director of Business Development and Operations.
Since June of 1996, Mr. Creel has been the Vice President of Business
Development--North for Everest.
Mr. Berry has been a member of the board of directors of Everest since 1996.
Mr. Berry received his Bachelor of Science degree in 1966 from the University
of Wisconsin and a Juris Doctor degree in 1969 from Boston University. Mr.
Berry is a Partner in the law firm of Katten Muchin Zavis in Chicago, Illinois,
which he joined in 1974. He currently serves on the Board of Directors of the
National Kidney Foundation of Illinois.
32
Mr. Berry also serves on the board of directors of each of Abrix Group, Health
Care Management Consultants and MedOpSys.
Dr. Dunea has been a member of the board of directors of Everest since 1990.
He received his medical degree from University of Sydney Medical School in 1957
and completed nephrology fellowships at the Cleveland Clinic in 1965 and at
Presbyterian St. Luke's and University of Illinois Hospitals in 1966. Dr. Dunea
was board certified in Internal Medicine in 1973 and in Nephrology in 1974.
Since 1969 he has served as the Chairman of the Department of Nephrology-
Hypertension at the Cook County Hospital, a Professor of Clinical Medicine at
the Chicago campus of the University of Illinois College of Medicine and the
Scientific Director of the Hektoen Institute. In addition to an extensive
background of scientific publications including articles, book chapters and
books, Dr. Dunea serves as the editor of Kidney and the coordinating editor of
International Journal of Artificial Organs. Dr. Dunea is a Fellow in the Royal
College of Physicians (London and Edinburgh) and the Royal Society of Medicine
(London).
Dr. Gupta has been a member of the Board of Directors of the Company since
1987. Dr. Gupta received his medical degree at the University of Delhi in
Delhi, India in 1970, and completed his nephrology fellowship at the University
of Chicago in 1978. Dr. Gupta was board certified in Internal Medicine in 1981
and in Nephrology in 1988. His professional memberships include the American
Society of Nephrology, the International Society of Nephrology and the American
Medical Association. He has been in private practice in Internal Medicine and
Nephrology since 1978. Dr. Gupta is a fellow of the American College of
Physicians and serves as an associate editor of Kidney.
Dr. Mufuka has been a member of the board of directors of Everest since 1987.
He received his medical degree from the State University of New York in
Syracuse, New York in 1973 and completed his Nephrology Fellowship at
Northwestern University Medical Center in 1978. Dr. Mufuka is board certified
in Internal Medicine. His professional memberships include the American Society
of Nephrology, International Society of Nephrology, the American Medical
Association and the American College of Physicians. In addition, Dr. Mufuka is
a current director of WSKC Dialysis Services, Inc. He has been in private
practice since 1978.
There is no family relationship among any of the officers and directors.
Messrs. Creel and Fox are each entitled to a seat on the Board of Directors
pursuant to a Shareholders Agreement. See "Certain Relationships and Related
Transactions--Shareholders Agreements."
33
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal years
ended September 30, 1999, 1998 and 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 for the Fiscal Years Ended September 30
Annual Long Term
Compensation Compensation
------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
--------------------------- ---- -------- ------- ----------- ------------
Craig W. Moore,
Chairman and Chief Executive Officer.......... 1999 $430,000(1) $ -- -- $13,104(2)
1998 416,000(1) 62,000 -- 19,540(2)
1997 416,000(1) 34,984 50,584 20,283(2)
Nicki M. Norris,
Executive Vice President and General Manager.. 1999 $182,000 $ -- -- $12,982(3)
1998 177,000 75,600 -- 18,221(3)
1997 168,000 75,600 23,500 17,622(3)
Lawrence D. Damron(4)
Chief Financial Officer....................... 1999 $ 61,462 $ -- 70,000 $ --
1998 -- -- -- --
1997 -- -- -- --
John B. Bourke,
Chief Financial Officer....................... 1999 $197,000 $ -- -- $12,181(5)
1998 170,000 72,908 -- 19,474(5)
1997 152,000 72,908 23,500 20,283(5)
Martin Fox,
Executive Vice President and General Manager.. 1999 $205,000(1) $ -- -- $13,104(6)
1998 205,000(1) 19,479 -- 21,242(6)
1997 205,000(1) 19,479 -- 20,217(6)
Thomas Creel,
Vice President of Business Development--
Northern U.S.................................. 1999 $205,000(1) $ -- -- $13,056(7)
1998 205,000(1) 19,479 -- 17,583(7)
1997 205,000(1) 19,479 -- 17,147(7)
- - --------
(1) Does not include compensation for service as a director of the Company.
Director compensation is set forth below.
(2) Includes profit sharing contributions of $8,104, $15,533 and $15,533 in
fiscal 1999, 1998 and 1997, respectively and 401(k) plan matching
contributions of $5,000, $4,007 and $4,750 in fiscal 1999, 1998 and 1997,
respectively.
(3) Includes profit sharing contributions of $8,104, $15,533 and $15,533 in
fiscal 1999, 1998 and 1997, respectively and 401(k) plan matching
contributions of $4,879, $2,688 and $2,089 in fiscal 1999, 1998 and 1997,
respectively. Ms. Norris resigned from the Company effective November 5,
1999.
(4) Mr. Damron was hired by the Company as its Chief Financial Officer,
effective June 28, 1999.
34
(5) Includes profit sharing contributions of $8,104, $15,533 and $15,533 in
fiscal 1999, 1998 and 1997, respectively and 401(k) plan matching
contributions of $4,077, $3,941 and $4,750 in fiscal 1999, 1998 and 1997,
respectively. Mr. Bourke resigned from his position as the Company's Chief
Financial Officer effective June 28, 1999. Effective October 15, 1999 Mr.
Bourke ceased to be employed by the Company.
(6) Includes profit sharing contributions of $8,104, $15,533 and $15,533 in
fiscal 1999, 1998 and 1997, respectively and 401(k) plan matching
contributions of $5,000, $5,709 and $4,684 in fiscal 1999, 1998 and 1997,
respectively.
(7) Includes profit sharing contributions of $8,104, $15,533 and $15,533 in
fiscal 1999, 1998 and 1997, respectively and 401(k) plan matching
contributions of $4,952, $2,050 and $1,614 in fiscal 1999, 1998 and 1997,
respectively.
Certain executive officers of the Company, including Drs. Morris, Carbon and
Balter, are compensated by NANI. The Company pays fees to NANI for medical
director and other services provided by these physicians and other NANI
employees. See "Certain Relationships and Related Transactions--NANI-IL and
NANI-IN."
Director Compensation
The Company has quarterly directors' meetings and pays each of its 10
directors $8,000 per year. Certain directors also provide consulting services
to the Company through NANI. See "Certain Relationships and Related
Transactions--NANI-IL and NANI-IN."
Employment Agreements
The Company and Mr. Moore entered into an employment agreement effective
January 1, 1997 and continuing on a year-to-year basis thereafter, subject to
termination by either party on 48 hours' notice. The agreement provides for an
annual salary of $440,000 in addition to health insurance, disability insurance
and other standard benefits. If the agreement is terminated by the Company for
any reason or by Mr. Moore for any reason upon at least 45 days' prior notice,
Mr. Moore will be entitled to severance pay in the amount of $598,833, as well
as life, health and disability insurance and other benefits for nine months
after the termination date. The agreement contains restrictive covenants that
prohibit Mr. Moore from competing with the Company for a period of two years
following his termination of employment. Pursuant to Company policy, Mr. Moore
is entitled to a personal expense account, funded from a portion of his salary,
to be used for legitimate business expenses, provided that all monies not used
in the account at each year end will be returned to Mr. Moore.
The Company and Mr. Damron entered into an employment agreement dated June
28, 1999. The contract covers a five-year period from the effective date,
subject to prior termination upon the employee's resignation or death (or, at
the option of the Company, upon the employee's permanent disability). The
agreement calls for a base salary at the rate of $235,000 per year (or a
greater amount as determined by the Board in its discretion), in addition to
bonus compensation, insurance and certain other benefits including a possible
success bonus of $400,000 if the Company is sold before September 30, 2002, and
if Mr. Damron is employed by the Company at such time. In connection with his
employment Mr. Damron also recieved options to purchase 70,000 shares of common
stock of the Company at an exercise price of $13.05 per share. The agreement
also provides for a two-year post termination covenant not to compete.
In connection with Mr. Bourke's resignation from his position as the
Company's Chief Financial Officer effective June 28, 1998 and the cessation of
his employment with the Company effective as of October 15, 1999, Mr. Bourke
will receive severance pay substantially as set forth in his Employment
Agreement with the Company dated as of August 10, 1998. In addition, the
Company agreed to accelerate the vesting of 5,875 of Mr. Bourke's options
granted under the Stock Option Agreement between him and the Company dated
March 5, 1998, which options would otherwise have vested on February 5, 2000.
Pursuant to his Employment Agreement, Mr. Bourke will not be able to compete
with the business of the Company for two years from October 15, 1999.
35
In connection with Ms. Norris' resignation effective as of November 5, 1999,
Ms. Norris will receive severance pay substantially as set forth under her
Employment Agreement with the Company dated August 10, 1998. In addition, the
Company agreed to accelerate the vesting of 5,875 of Ms. Norris' options
granted under the Stock Option Agreement between her and the Company dated
March 5, 1998, which options would otherwise have vested on February 5, 2000.
Pursuant to her Employment Agreement, Ms. Norris will not be able to compete
with the business of the Company for two years from November 5, 1999.
In connection with the acquisition of Home Dialysis of America, Inc. ("HDA"),
the Company entered into employment agreements with Messrs. Fox and Creel. Each
of these agreements was effective June 20, 1996 and provides for an initial
term of three years, subject to (i) an automatic two-year extension if certain
revenue goals are achieved, and (ii) two-year extensions from time to time at
the option of the Company. Messrs. Fox and Creel are each entitled to receive
an annual salary of $205,000 for the first five years. 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
Pursuant to the Company's 1998 Stock Award Plan (the "Plan"), the Company has
granted to certain employees and medical directors options to purchase shares
of the Company's common stock. As of September 30, 1999, options to purchase a
total of 526,500 shares of common stock had been granted and are outstanding
under the Plan at an exercise price of $7.50 per share, options to purchase a
total of 1,185,300 shares of common stock had been granted and are outstanding
under the Plan at an exercise price of $9.10 per share, and options to purchase
a total of 271,681 shares of common stock had been granted under the Plan at an
exercise price of $13.05 per share. Such options vest in four equal increments
on each of the first four anniversaries of their respective grant dates. Such
options expire after a ten-year period, or earlier if an employee is terminated
for cause or voluntarily terminates employment other than through retirement.
The options will become fully exercisable upon termination of employment by
reason of death, disability or retirement or upon a change of control of the
Company. In the case of an employee whose employment is terminated for a reason
other than cause, the Company may in its sole discretion purchase the option
for an amount equal to the aggregate per share fair market value minus the
aggregate per share exercise price.
Option Grants in Last Fiscal Year
There were 70,000 stock options granted by the Company to the Named Executive
Officer plus 65,181 stock options granted to other employees during the fiscal
year ended September 30, 1999. In connection with the reorganization of the
Company, certain options granted in a prior period were reissued.
36
Fiscal Year-End Option Values
The following table contains information regarding the Named Executive
Officers' unexercised options as of September 30, 1999. None of the Named
Executive Officers exercised any options during the fiscal year ended September
30, 1999:
Number of Shares Underlying Value of Unexercised in-the-
Unexercised Options as of Money Options as of September
September 30, 1999 (#) (1) 30, 1999 ($)
------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - ---- ----------- ------------- ----------- -------------
Craig W. Moore(2)....... 25,292 25,292 -- (8)
Nicki M. Norris(3)...... 11,750 11,750(6) -- (8)
Lawrence D. Damron(4)... -- 70,000 -- (8)
John B. Bourke(5)....... 11,750 11,750(7) -- (8)
Martin Fox.............. -- -- -- --
Thomas Creel............ -- -- -- --
- - --------
(1) These options were originally issued in February 1997 and were subsequently
terminated and replaced by options with identical terms on February 5, 1998
pursuant to the reorganization of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--
Reorganization" and "Certain Relationships and Related Transactions--Peak."
(2) The options shown for Mr. Moore represent the maximum number of options
indirectly granted to him through Peak Liquidating. The actual number of
options Mr. Moore is entitled to receive will vary depending on the
valuation of certain assets of Peak Liquidating or Peak.
(3) Ms. Norris resigned from the Company effective November 5, 1999.
(4) Mr. Damron was hired by the Company as its Chief Financial Officer
effective June 28, 1999.
(5) Mr. Bourke resigned from his position as the Company's Chief Financial
Officer effective June 28, 1999. Mr. Bourke ceased to be employed by the
Company effective October 15, 1999.
(6) Includes options to purchase 5,875 shares, which options were accelerated
in connection with Ms. Norris' resignation after September 30, 1990. The
remaining 5,875 options were cancelled in connection with her resignation.
(7) Includes options to purchase 5,875 shares, which options were accelerated
in connection with Mr. Bourke's resignation after September 30, 1990. The
remaining 5,875 options were cancelled in connection with his resignation.
(8) 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, 1999 has been undertaken.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors, consisting of Craig
Moore, Martin Fox and Doctors Morris, Carbon and Balter, recommends to the
Board the policies that govern the annual and long-term compensation of the
executive officers of the Company. Mr. Moore and Mr. Fox do not participate in
decisions affecting their own compensation.
Compensation Policies Toward Executive Officers. The Compensation Committee
aims to provide competitive levels of compensation that relate compensation
with the Company's annual and long-term performance goals, reward above average
corporate performance, recognize individual initiative and achievements, and
assist the Company in attracting and retaining qualified executives. The
Compensation Committee attempts to achieve these objectives through a
combination of base salary, stock options, and cash bonus awards. In making its
determination, the Compensation Committee utilizes outside information to
obtain compensation information concerning comparable companies in the dialysis
and blood services industry.
Base Salary. The base salaries for the Named Executive Officers were governed
by the terms of their respective employment agreements with the Company.
37
Incentive Stock Options. Stock options are granted to executive officers and
other employees of the Company as a means of providing long-term incentives.
The Compensation Committee believes that stock options encourage increased
performance by the Company's employees, including its officers, and align the
interests of the Company's employees with the interests of the Company's
stockholders. Mr. Lawrence Damron received 70,000 stock options in fiscal 1999.
Cash Bonus Awards. The Compensation Committee considers on an annual basis
whether to pay cash bonuses to some or all of the Company's employees,
including the Company's executive officers.
Chief Executive Officer's Compensation. The base salary for Mr. Moore
($416,000) for fiscal 1999 was governed by the terms of an employment agreement
effective January 1, 1997. See "--Employment Agreements." Mr. Moore received no
stock options or cash bonus during fiscal 1999.
COMPENSATION COMMITTEE
Arthur M. Morris, M.D.
Paul Balter, M.D.
Michael J. Carbon, M.D.
Craig W. Moore
Martin Fox
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of common stock
beneficially owned as of December 29, 1999 by: (i) each person who is known by
the Company to beneficially own more than 5% of the outstanding common stock;
(ii) each director of the Company; (iii) each Named Executive Officer; and (iv)
all directors and executive officers of the Company as a group. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. The number of shares beneficially owned by a person and
the percentage ownership of that person includes shares of common stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of December 29, 1999.
Number of Percent
Shares of
Name Owned Total
---- --------- -------
Peak Liquidating, L.L.C.(1)(2)(3).................... 2,792,075 20.5%
Arthur M. Morris, M.D.(3)(4)(5)(6)................... 1,966,901 15.3
Paul Balter, M.D.(3)(4)(5)........................... 824,226 6.4
Michael J. Carbon, M.D.(3)(4)(5)..................... 811,043 6.3
George Dunea, M.D. Revocable Trust(3)(4)(5).......... 811,043 6.3
Ashutosh Gupta, M.D.(3)(4)(5)........................ 811,043 6.3
Douglas Mufuka, M.D.(3)(4)(5)........................ 811,043 6.3
Fox-McCarthy Family Limited Partnership,
L.L.P.(7)(8)........................................ 797,500 6.2
AJ BCA, Ltd.(7)(9)................................... 780,000 6.1
Craig W. Moore(3)(4)(10)............................. 615,201 4.8
Thomas Creel(7)...................................... 532,366 4.2
Paul Zabetakis, M.D.................................. 125,000 *
James E. Becks(11)................................... 35,325 *
Nicki M. Norris(12)(13).............................. 17,625 *
John B. Bourke(12)(14)............................... 17,625 *
Alan M. Berry(12).................................... -- --
Lawrence D. Damron................................... -- --
All executive officers and directors as a
group(15)(16)....................................... 11,748,016 86.3
- - --------
* 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 792,075 shares which are exercisable within
60 days of December 29, 1999.
(3) Subject to the Shareholders Agreement dated as of November 30, 1997 and
the Restricted Stock Agreement dated as of November 30, 1997. See "Certain
Relationships and Related Transactions--Shareholders Agreements."
(4) Does not include shares beneficially owned by Peak Liquidating, of which
shares the members of Peak Liquidating share voting and dispositive
control and may be deemed to be beneficial owners.
(5) Does not include options to purchase shares indirectly granted through
Peak Liquidating.
39
(6) Includes 1,000,000 shares held by KC Partners, a nominee of Dr. Morris and
966,901 shares held by the Arthur M. Morris, M.D. Revocable Trust.
(7) Subject to the Shareholders Agreement dated as of November 30, 1997. See
"Certain Relationships and Related Transactions--Shareholders Agreements."
(8) The Fox Revocable Trust (the "Fox Trust") is the general partner of Fox-
McCarthy Family Limited Partnership, L.L.P. Martin P. Fox is a trustee of
the Fox Trust.
(9)AJ BCA, Ltd. is a nominee of Anthony Unruh.
(10) Includes 1,532 shares held by each of (i) Lauren Moore and (ii) Jeffrey
Moore, and 612,137 shares held by Moore Investments, LLC.
(11) Includes options to purchase 35,325 shares which are exercisable within 60
days of December 29, 1999.
(12) Excludes participations in value of Peak Liquidating to which such person
may be entitled pursuant to an agreement with members of Peak Liquidating.
(13) Includes options to purchase 17,625 shares exercisable within 60 days of
December 29, 1999. Ms. Norris resigned from the Company on November 5,
1999.
(14) Includes options to purchase 17,625 shares exercisable within 60 days of
December 29, 1999. Mr. Bourke resigned from his position as the Company's
Chief Financial Officer effective June 28, 1999. Mr. Bourke ceased to be
employed by the Company effective October 15, 1999.
(15) Includes shares held indirectly through Peak Liquidating.
(16) Includes options to purchase 862,650 which are exercisable within 60 days
of December 29, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is subject to various actual and potential conflicts of interest
arising out of its relationships and related transactions with the Company's
directors and officers and other entities controlled by them. While the Company
believes these transactions generally provide for financial terms that would be
obtainable from an unaffiliated third party, the agreements and transactions
described below were not the result of arm's-length negotiations.
Peak. In November 1997, in order to simplify its ownership structure and
better position the Company for future growth, the shareholders of the Company
entered into a series of related transactions. See "Management's Discussion and
Analysis--Reorganization" and "Security Ownership of Certain Beneficial Owners
and Management." Peak sold Continental Healthcare, Ltd. ("Continental") to the
Company. See "--Continental Healthcare." The members of Peak (Arthur Morris,
Paul Balter, Michael Carbon, Douglas Mufuka, Ashutosh Gupta, George Dunea and
Craig W. Moore, referred to herein as the "Founding Directors") contributed
their membership interests in Peak to a new limited liability company, Peak
Liquidating, in exchange for all of its outstanding membership interests. Peak
Liquidating contributed all of its interest in Peak to a newly formed
corporation, Everest Healthcare II, Inc. ("EHII"), in exchange for common stock
of EHII. The shareholders of Everest Healthcare Services Corporation other than
Peak exchanged all of their shares for shares of EHII, and Peak Liquidating
distributed to its members approximately 55% of the outstanding common stock of
EHII. Peak was then liquidated. In March 1998, Everest Healthcare Services
Corporation was merged with and into EHII, which changed its name to "Everest
Healthcare Services Corporation."
Peak Notes. Through 1995, the Founding Directors advanced funds to the
Company's predecessor evidenced by promissory notes which the Founding
Directors contributed to Peak in 1995. The Founding Directors also contributed
funds to Peak which were advanced to Everest. The aggregate principal amount of
these advances (the "Peak Notes") was $5,118,809. In connection with the 1997
reorganization, the Peak Notes (together with the note issued in connection
with the purchase of Continental described below) were distributed by Peak to
the Founding Directors individually (in the principal amount of (i) $767,822
each to Drs. Morris, Balter, Carbon, Dunea, Gupta and Mufuka, and (ii) $511,877
to Mr. Moore). The Peak Notes bore interest at the prime rate plus 1% per annum
and matured at various times throughout 1998. The Company repaid the Peak Notes
with a portion of the net proceeds of the Initial Offering. See "Market for
Registrant's Common Equity and Related Stockholder Matters."
40
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. Additionally, individual NANI physicians have their
Everest medical director fees paid directly to NANI. In fiscal 1999, the total
of the above fees paid to NANI-IL was $2,173,000.
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 1999, NANI-IL paid the Company $1,536,000 pursuant
to the terms of the Management Agreement.
Each of the above-described agreements between the Company and NANI-IL is for
a period of five years, renewable for consecutive one-year periods thereafter.
After the initial five-year period which will end on October 1, 2002, the
agreements may be terminated upon 90 days' notice by either party. NANI-IL also
has an outstanding loan payable to the Company of approximately $6,811,000 plus
short-term working capital advances of approximately $720,000 outstanding as of
September 30, 1999. 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 was to mature on November 29, 2000 with interest to be paid
at the prime rate plus 1% per annum. The Company repaid such note with a
portion of the net proceeds of the Initial Offering. See "Market for
Registrant's Common Equity and Related Stockholder Matters." Continental owns
and leases dialysis equipment to the Company.
ARE Partnership. The Founding Directors, together with Sandra Gadson and
Thomas Golubski, two shareholders of the Company, are also partners in ARE
Partnership, an Illinois general partnership ("ARE"). Prior to June 1998, ARE
owned real property and improvements which it leased to the Company and certain
of its subsidiaries, and which are used primarily for the corporate
headquarters and certain dialysis facilities. In fiscal 1998 the Company and
its subsidiaries paid ARE $491,519 under the leases. In June 1998, the Company
and its Subsidiaries purchased substantially all of ARE's assets, for an
aggregate purchase price of approximately $4,800,000. In July 1999, one of the
parcels of real property was sold by the Company for a loss of approximately
$70,000.
41
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 fiscal 1999, collectively paid
3M&L $149,000. All leases are currently in month-to-month renewal periods.
Security General. An Illinois general partnership, Security General
Partnership ("Security General") is owned collectively by the Founding
Directors and John Bourke, the Company's Chief Financial Officer. Security
General owns a 6.67% interest in Infinity Insurance, Ltd., ("Infinity") an
entity which provides property and casualty and workers compensation insurance
to the Company and its subsidiaries. The annual premiums paid by the Company
and its subsidiaries to Infinity in the last policy year were $1,233,000.
Shareholders Agreements. The Shareholders Agreement, dated as of November 30,
1997, by and among EHII, Peak Liquidating, the Founding Directors and Martin
Fox, individually, and as agent for the HDA shareholders, Thomas Creel, Paul
Zabetakis, M.D. and Anthony Unruh (collectively, the "HDA Shareholders"),
established certain rights and restrictions with respect to the management of
the Company and the voting and transfer of the Company's common stock. A five
member voting committee was established consisting of Craig Moore, Arthur
Morris, M.D., Michael Carbon, M.D. and Paul Balter, M.D., and one designee of
the HDA Shareholders, Martin Fox. The members of the Voting Committee, aside
from the designee of the HDA Shareholders, are obligated to vote in accordance
with any other agreements among the Founding Directors, including the Operating
Agreement of Peak Liquidating described below. Decisions of the Voting
Committee are binding upon the remaining shareholders signatory to the
agreement. The agreement also sets forth various share transfer restrictions.
Upon the termination of an HDA Shareholder's employment with the Company, each
share held by such HDA Shareholder is subject to repurchase by, in order of
priority, the other HDA Shareholders, Peak Liquidating, the Founding Directors
and the Company.
Under a Restricted Stock Agreement dated as of November 30, 1997 by and among
the Founding Directors and the Company, and the Operating Agreement of Peak
Liquidating, the Founding Directors have agreed to vote their shares together
with respect to certain corporate transactions or events including mergers,
dispositions, a public offering, other issuances of securities, distributions,
indebtedness and liens, liquidation and related party transactions. The
approval of Dr. Morris is required for any sale of Peak Liquidating to a third
party, or any sale of the Company to a third party for consideration less than
a specified amount. In addition, the approval of Dr. Morris and two other
voting members is required for a merger or consolidation of the Company, a
disposition of more than 10% of its stock, a public offering and certain other
specified events.
All shareholders of the Company, other than Paul Zabetakis, Anthony Unruh and
the Company's directors, are party to one or more restricted stock agreements
which grant the Company a right of first refusal with respect to any proposed
transfer of Company shares by such shareholders. Such restricted stock
agreements also grant the Company a repurchase right upon the occurrence of
certain events. Such restricted stock agreements also contain provisions
requiring the shareholder to cooperate and consent to any sale of the Company
to a third party.
Thomas D. Creel. Pursuant to a redemption agreement effective as of October
19, 1999, the Company redeemed 65,134 shares of common stock formerly held by
Mr. Creel for an aggregate redemption price of approximately $850,000.
Dialysis Specialists of Central Cincinnati, Ltd. Effective February 18, 1999,
the Company's wholly-owned subsidiary, Home Dialysis of America, Inc. ("HDA")
purchased 62.1% of the membership units of Dialysis Specialists of Central
Cincinnati, Ltd. ("DSCCL") for an aggregate purchase price of approximately
$5.5 million. The transaction increased HDA's percentage ownership in DSCCL
from 37.9% to 100%. In connection with the transaction, 9.5% of the membership
units of DSCCL were purchased from S-F Holdings, Inc., which entity is wholly-
owned by a grantor trust, with Sandy Fritzsch as trustee and as sole
beneficiary, for an aggregate purchase price of approximately $845,400. Ms.
Fritzsch is an employee of the Company.
42
- - --------------------------------------------------------------------------------
PART IV
- - --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and schedule (Schedule II; Valuation &
Qualifying Accounts) filed as part of this report are listed in the
accompanying Index to Financial Statements and Schedule.
(b) The exhibits filed as a part of this report are listed in the
accompanying Index to Exhibits.
(c) A report on Form 8-K was filed on July 28, 1999 reporting: (i) the hiring
of Lawrence D. Damron as Chief Financial Officer; (ii) the amendment and
restatement of the Credit Agreement; (iii) the consolidation of the Company's
Indiana entities; and (iv) the acquisition of Englewood Dialysis Facility,
L.L.C.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
December, 1999.
Everest Healthcare Services
Corporation
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board, December 29, 1999
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ Arthur M. Morris Director December 29, 1999
____________________________________
Arthur M. Morris, M.D.
/s/ Martin P. Fox Director December 29, 1999
____________________________________
Martin P. Fox
/s/ Michael J. Carbon Director December 29, 1999
____________________________________
Michael J. Carbon, M.D.
/s/ Lawrence D. Damron Chief Financial Officer December 29, 1999
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
/s/ Paul Balter Director December 29, 1999
____________________________________
Paul Balter, M.D.
/s/ Thomas D. Creel Director December 29, 1999
____________________________________
Thomas D. Creel
/s/ Alan M. Berry Director December 29, 1999
____________________________________
Alan M. Berry
/s/ George Dunea Director December 29, 1999
____________________________________
George Dunea, M.D.
/s/ Ashutosh Gupta Director December 29, 1999
____________________________________
Ashutosh Gupta, M.D.
/s/ Douglas Mufuka Director December 29, 1999
____________________________________
Douglas Mufuka, M.D.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
December, 1999.
Con-Med Supply Company, Inc.
Continental Health Care, Ltd.
Dialysis Specialists of Tulsa, Inc.
Dupage Dialysis, Ltd. Everest
Healthcare Indiana, Inc. Everest
Healthcare Ohio, Inc. Everest
Healthcare Texas Holding Corp.
Everest Management, Inc. Everest
New York Holdings, Inc. Everest One
IPA, Inc. Everest Three IPA, Inc.
Everest Two IPA, Inc. Home Dialysis
of America, Inc. Mercy Dialysis
Center, Inc. New York Dialysis
Management, Inc. North Buckner
Dialysis Center, Inc. WSKC Dialysis
Services, Inc.
/s/ Craig W. Moore
By: ________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board, Chief December 29, 1999
____________________________________ Executive Officer
Craig W. Moore (principal executive
officer)
/s/ Lawrence D. Damron Chief Financial Officer December 29, 1999
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer) and a Director
/s/ Paul Balter Director December 29, 1999
____________________________________
Paul Balter
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
December, 1999.
Acute Extracorporeal Services,
L.L.C.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer December 29, 1999
____________________________________ (principal executive
Craig W. Moore officer)
/s/ Lawrence D. Damron Chief Financial Officer December 29, 1999
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
Home Dialysis of America, Inc.
/s/ Craig W. Moore Sole Member December 29,
By:____________________________ 1999
Craig W. Moore Chairman and
Chief Executive Officer
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
December, 1999.
Everest Healthcare Texas, L.P.
/s/ Craig W. Moore
By: _____________________________
Craig W. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer December 29, 1999
____________________________________ (principal executive
Craig W. Moore officer)
/s/ Lawrence D. Damron Chief Financial Officer December 29, 1999
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
North Buckner Dialysis Center, Inc.
/s/ Craig W. Moore General Partner December 29,
By:____________________________ 1999
Craig W. Moore Chairman and
Chief Executive Officer
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
December, 1999.
Northern New Jersey Dialysis, L.L.C.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer December 29, 1999
____________________________________ (principal executive
Craig W. Moore officer)
/s/ Lawrence D. Damron Chief Financial Officer December 29, 1999
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
Everest Healthcare Services Corporation
/s/ Craig W. Moore Sole Member December 29,
By: ___________________________ 1999
Craig W. Moore
Chairman and Chief Executive
Officer
48
EXHIBIT INDEX
EXHIBIT
NO.
-------
**2.1 Plan and Agreement of Merger dated June 28, 1999 by and
between Ohio Valley Dialysis Centers, Inc., Northwest Indiana
Dialysis Centers, Inc. and Lake Avenue Dialysis Centers, Inc.
2.2 Certificate of Merger and Agreement of Merger dated September
30, 1999 by and between Home Dialysis of Fairfield, Inc., Home
Dialysis of Columbus, Inc., Home Dialysis of Dayton, Inc. and
Dialysis Specialists of Central Cincinnati, Ltd.
2.3 Agreement and Plan of Merger dated October 31, 1999 by and
between North Buckner Dialysis Center, Inc., Hemo Dialysis of
Amarillo, LLC, Dialysis Specialists of South Texas, LLC,
Amarillo Acute Dialysis Specialists, LLC and Dialysis
Specialists of Corpus Christi, LLC.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company, as amended.
*3.3 Articles of Incorporation of Con-Med Supply Company, Inc.
*3.4 By-laws of Con-Med Supply Company, Inc.
*3.5 Articles of Incorporation of Continental Health Care, Ltd.
*3.6 By-laws of Continental Health Care, Ltd.
*3.7 Articles of Incorporation of DuPage Dialysis, Ltd.
*3.8 By-laws of DuPage Dialysis, Ltd.
*3.9 Certificate of Incorporation of Everest Management, Inc.
*3.10 By-laws of Everest Management, Inc.
*3.11 Articles of Incorporation of Home Dialysis of America, Inc.
*3.12 By-laws of Home Dialysis of America, Inc.
*3.13 Articles of Incorporation of Home Dialysis of Dayton, Inc.
*3.14 By-laws of Home Dialysis of Dayton, Inc.
*3.15 Articles of Incorporation of Mercy Dialysis Center Inc.
*3.16 By-laws of Mercy Dialysis Center Inc.
*3.17 Articles of Incorporation of New York Dialysis Management,
Inc.
*3.18 By-laws of New York Dialysis Management, Inc.
*3.19 Certificate of Incorporation of North Buckner Dialysis Center,
Inc.
*3.20 By-laws of North Buckner Dialysis Center, Inc.
*3.21 Articles of Incorporation of Ohio Valley Dialysis Center,
Inc.(1)
*3.22 By-laws of Ohio Valley Dialysis Center, Inc.(1)
*3.23 Articles of Incorporation of WSKC Dialysis Services, Inc.
*3.24 By-laws of WSKC Dialysis Services, Inc.
*3.25 Certificate of Incorporation of Everest New York Holdings,
Inc.
*3.26 By-laws of Everest New York Holdings, Inc.
*3.27 Certificate of Incorporation of Everest One IPA, Inc.
*3.28 By-laws of Everest One IPA, Inc.
49
EXHIBIT
NO.
-------
+3.29 Certificate of Incorporation of Everest Two IPA, Inc.
+3.30 By-laws of Everest Two IPA, Inc.
+3.31 Certificate of Incorporation of Everest Three IPA, Inc.
+3.32 By-laws of Everest Three IPA, Inc.
+3.33 Certificate of Formation of Acute Extracorporeal Services,
L.L.C.
***3.34 Articles of Incorporation of Home Dialysis of Fairfield,
Inc.(2)
***3.35 Code of Regulations of Home Dialysis of Fairfield, Inc.(2)
+++3.36 Certificate of Incorporation of Dialysis Specialists of Tulsa,
Inc.
+++3.37 By-laws of Dialysis Specialists of Tulsa, Inc.
+++3.38 Certificate of Formation of Northern New Jersey Dialysis,
L.L.C.
3.39 Certificate of Incorporation of Everest Healthcare Texas
Holding Corp.
3.40 By-laws of Everest Healthcare Texas Holding Corp.
3.41 Certificate of Limited Partnership of Everest Healthcare
Texas, L.P.
3.42 Limited Partnership Agreement of Everest Healthcare Texas,
L.P.
*4.1 Indenture dated as of May 5, 1998, among the Company, the
Subsidiary Guarantors and American National Bank and Trust
Company of Chicago, as Trustee.
*4.2 Purchase Agreement dated April 30, 1998, among the Company,
the Subsidiary Guarantors and BT Alex. Brown Incorporated.
*4.3 Registration Rights Agreement dated May 5, 1998, among the
Company, the Subsidiary Guarantors and BT Alex. Brown
Incorporated.
*4.4 Form of Exchange Note (included in Exhibit 4.1).
*4.5 Form of Guarantee (included in Exhibit 4.1).
*4.6 Second Amended and Restated Credit Agreement dated as of May
18, 1998, among the Company, Harris Trust and Savings Bank,
and the Lenders identified therein.
*4.7 Revolving Credit Note, between the Company and Harris Trust
and Savings Bank.
*4.8 Acquisition Financing Note, between the Company and Harris
Trust and Savings Bank.
*4.9 Supplemental Revolving Credit Note, between the Company and
Harris Trust and Savings Bank.
*4.10 Amended and Restated Security Agreement, by and among the
Company, the Debtors (as defined therein) and Harris Trust and
Savings Bank.
*4.11 Amended and Restated Guaranty Agreement, by and among the
Guarantors (as defined therein) and Harris Trust and Savings
Bank.
*4.12 Amended and Restated Pledge Agreement, by and among the
Company, the Pledgors (as defined therein) and Harris Trust
and Savings Bank.
***4.13 Supplemental Indenture dated as of June 18, 1998, between
Everest New York Holdings, Inc. and American National Bank and
Trust Company of Chicago, as trustees (the "Trustee").
***4.14 Supplemental Indenture dated as of June 18, 1998, between
Everest One IPA, Inc., and the Trustee.
***4.15 Supplemental Indenture dated as of December 1, 1998, between
Everest Two IPA, Inc. and the Trustee.
50
EXHIBIT
NO.
-------
***4.16 Supplemental Indenture dated as of December 1, 1998, between
Everest Three IPA and the Trustee.
***4.17 Supplemental Indenture dated as of December 1, 1998, between
Acute Extracorporeal Services, L.L.C. and the Trustee.
***4.18 Supplemental Indenture dated as of February 28, 1999, between
Dialysis Specialists of Central Cincinnati, Ltd. and the
Trustee.
***4.19 Supplemental Indenture dated as of March 1, 1999, between Home
Dialysis of Fairfield, Inc. and the Trustee.
***4.20 Supplemental Indenture dated as of March 1, 1999, between Home
Dialysis of Columbus, Inc. and the Trustee.
***4.21 Third Amendment to Second Amended and Restated Credit
Agreement.
+++4.22 Supplemental Indenture dated as of April 30, 1999 between
Dialysis Specialists of Tulsa, Inc. and the Trustee.
+++4.23 Supplemental Indenture dated as of June 30, 1999 between
Northern New Jersey Dialysis, L.L.C. and the Trustee.
+++4.24 Amended and Restated Credit Agreement.
4.25 Supplemental Indenture dated as of October 31, 1999 between
Everest Healthcare Texas, L.P., and American National Bank and
Trust Company of Chicago, as Trustee.
4.26 Supplemental Indenture dated as of October 31, 1999 between
Everest Healthcare Texas Holding Corp. and American National
Bank and Trust Company of Chicago, as Trustee.
4.27 First Amendment to Amended and Restated Credit Agreement dated
as of October 8, 1999.
4.28 Second Amendment to Amended and Restated Credit Agreement
dated as of December 21, 1999.
*9 Restricted Stock Agreement dated as of November 30, 1997.
*10.1 Employment Agreement with Craig W. Moore dated January 1,
1997.
*10.2 Employment Agreement with Martin Fox dated June 20, 1996.
*10.3 Employment Agreement with Thomas Creel dated June 20, 1996.
*10.4 Stock Award Plan dated January 15, 1997.
*10.5 Peak Liquidating, L.L.C. Operating Agreement dated November
30, 1997.
*10.6 Administrative Services Agreement dated October 1, 1997,
between the Company and NANI-IL.
*10.7 Management Agreement dated October 1, 1997, between the
Company and NANI-IL.
*10.8 Shareholders Agreement dated as of November 30, 1997.
*10.9 Form of Individual Restricted Stock Agreements.
*10.10 Agreement to Provide Management Services for Dialysis
Facilities.
*10.11 Agreement to Amend and Not-to-Compete.
*10.12 Amendment No. 3 to the Agreement to Provide Management
Services for Dialysis Facilities.
51
EXHIBIT
NO.
-------
*10.13 Medical Asset Purchase Agreement.
++10.14 Employment and Non-Competition Agreement with John B. Bourke
dated August 10, 1998.
++10.15 Employment and Non-Competition Agreement with James E. Becks
dated August 10, 1998.
++10.16 Employment and Non-Competition Agreement with Nicki M. Norris
dated August 10, 1998.
++10.17 1998 Stock Award Plan.
+++10.18 Employment Agreement of Lawrence D. Damron.
10.19 Employment Agreement effective November 15, 1999 by and
between Paul Zabetakis, M.D. and the Company.
12 Computation of ratio of earnings to fixed charges.
21 Subsidairies of the Company.
27 Financial Data Schedule.
- - --------
*Previously filed with the Securities and Exchange Commission as an Exhibit to
the registrants' Registration Statement on Form S-4, File No. 333-57191,
and incorporated herein by reference.
**Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999.
***Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1999.
+Incorporated herein by reference to the Company's Quarterly Report on Form 10-
Q for the period ended December 31, 1998.
++Incorporated herein by reference to the Company's Annual Report on Form 10-K
for the period ended September 30, 1998.
+++Incorporated herein by reference to the Company's Report on Form 8-K filed
July 28, 1999.
(1) The name of Ohio Valley Dialysis Center, Inc. has been changed to Everest
Healthcare Indiana, Inc.
(2) The name of Home Dialysis of Fairfield, Inc. has been changed to Everest
Healthcare Ohio, Inc.
52
EVEREST HEALTHCARE SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1997, 1998 and 1999
Report of Independent Auditors.............................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Everest Healthcare Services Corporation
We have audited the accompanying consolidated balance sheets of Everest
Healthcare Services Corporation and subsidiaries (the Company) as of September
30, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with 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 Everest Healthcare Services Corporation and subsidiaries at September 30,
1998 and 1999, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Effective October 1, 1998, the Company adopted the provisions of AICPA
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," (SOP 98-5). The effect of the adoption of SOP 98-5 was to record a
charge for the cumulative effect of change in accounting of $615,000.
Chicago, Illinois
December 22, 1999
F-2
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
September 30,
-----------------
1998 1999
-------- --------
ASSETS
- - ------
Current assets:
Cash and cash equivalents................................. $ 12,526 $ 3,381
Patient accounts receivable, less allowance of $8,781 and
$11,119.................................................. 39,174 47,411
Refundable income taxes................................... 2,417 3,008
Other receivables......................................... 2,971 3,006
Medical supplies inventories.............................. 2,812 3,542
Deferred income taxes..................................... 3,152 5,150
Prepaid expenses and other................................ 719 311
-------- --------
Total current assets.................................... 63,771 65,809
Property and equipment, net................................. 27,735 31,665
Goodwill, net............................................... 58,815 73,448
Deferred financing costs, net............................... 6,112 6,563
Other intangible assets, net................................ 20,335 2,671
Investments in and advances to affiliated companies......... 18,333 8,902
Deferred income taxes....................................... -- 5,998
Other assets................................................ 1,294 1,217
-------- --------
$196,395 $196,273
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Accounts payable.......................................... $ 8,845 $12,824
Accrued liabilities....................................... 16,849 17,206
Current portion of long-term debt......................... 606 801
Current portion of capital lease obligations.............. 506 367
-------- --------
Total current liabilities............................... 26,806 31,198
Long term debt, less current portion ....................... 108,147 121,653
Capital lease obligations, less current portion............. 311 402
Deferred income taxes....................................... 1,500 --
Minority interests.......................................... 1,375 1,735
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares
authorized; 12,884,720 shares issued and outstanding..... 13 13
Additional paid-in capital................................ 55,171 55,171
Retained earnings (accumulated deficit)................... 3,072 (13,899)
-------- --------
Total stockholders' equity.............................. 58,256 41,285
-------- --------
$196,395 $196,273
======== ========
See notes to consolidated financial statements.
F-3
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Years ended September 30,
----------------------------
1997 1998 1999
-------- -------- --------
Net revenues.................................... $113,808 $147,475 $184,918
Operating expenses:
Patient care costs............................ 81,913 102,644 131,634
General and administrative.................... 14,855 23,286 24,328
Special charges............................... -- -- 22,959
Provision for bad debts....................... 714 2,727 7,360
Depreciation and amortization................. 4,940 6,927 10,479
-------- -------- --------
Total operating expenses.................... 102,422 135,584 196,760
-------- -------- --------
Income (loss) from operations................... 11,386 11,891 (11,842)
Nonoperating income (expense):
Interest expense.............................. (2,961) (7,884) (12,567)
Interest income............................... 813 1,952 1,483
Equity in earnings of affiliates.............. -- 1,784 586
Minority interests in earnings................ (1,601) (516) (843)
Other......................................... 279 -- --
-------- -------- --------
(3,470) (4,664) (11,341)
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting................. 7,916 7,227 (23,183)
Income tax expense (benefit).................... 3,689 3,541 (6,827)
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting.................................. 4,227 3,686 (16,356)
Cumulative effect of change in accounting ...... -- -- 615
-------- -------- --------
Net income (loss)............................... $ 4,227 $ 3,686 $(16,971)
======== ======== ========
See notes to consolidated financial statements.
F-4
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share and per share data)
Retained
Additional Earnings
Common Paid-In (Accumulated Equity
Stock Capital Deficit) Interests Total
------ ---------- ------------ --------- -------
Balance at October 1,
1996...................... $-- $ -- $ -- $ 28,873 $28,873
Distributions to members... -- -- -- (102) (102)
Net income................. -- -- -- 4,227 4,227
---- ------- -------- -------- -------
Balance at September 30,
1997...................... -- -- -- 32,998 32,998
Distributions to members... -- -- -- (7,808) (7,808)
Net income October 1, 1997
to
November 30, 1997......... -- -- -- 614 614
Reorganization............. 9 25,795 -- (25,804) --
Acquisition of minority
interests................. 4 26,606 -- -- 26,610
Issuance of common stock
for acquisitions.......... -- 2,770 -- -- 2,770
Net income December 1, 1997
to September 30, 1998..... -- -- 3,072 -- 3,072
---- ------- -------- -------- -------
Balance at September 30,
1998...................... 13 55,171 3,072 -- 58,256
Net loss................... -- -- (16,971) -- (16,971)
---- ------- -------- -------- -------
Balance at September 30,
1999...................... $ 13 $55,171 $(13,899) $ -- $41,285
==== ======= ======== ======== =======
See notes to consolidated financial statements.
F-5
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except share and per share data)
Years ended September 30,
-----------------------------
1997 1998 1999
-------- --------- --------
Operating activities
Net income (loss).............................. $ 4,227 $ 3,686 $(16,971)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for bad debts...................... 714 2,727 7,360
Depreciation and amortization................ 4,940 6,927 10,479
Special charges.............................. -- -- 22,959
Cumulative effect of change in accounting.... -- -- 615
Deferred income taxes........................ 531 (1,760) (10,163)
Equity in earnings of affiliates............. -- (1,784) (586)
Minority interests in earnings............... 1,601 516 843
Changes in operating assets and liabilities
(net of effect of acquisitions):
Patient and other accounts receivable...... (14,321) (13,550) (1,981)
Medical supply inventories, prepaid
expenses, and other assets................ (1,554) (33) (8,159)
Accounts payable, accrued liabilities, and
other liabilities......................... 6,515 10,575 541
-------- --------- --------
Net cash provided by operating activities...... 2,653 7,304 4,937
Investing activities
Capital expenditures........................... (7,757) (12,164) (6,888)
Acquisition of intangible assets............... -- (19,507) --
Acquisition of businesses, net of cash
acquired...................................... (5,042) (17,371) (26,158)
(Increase) decrease in amounts due from
affiliates.................................... (4,771) (3,954) 6,569
-------- --------- --------
Net cash used in investing activities.......... (17,570) (52,996) (26,477)
Financing activities
Proceeds from long term debt................... 69,261 191,531 60,316
Payments on long term debt..................... (50,846) (129,194) (46,954)
Payments on capital lease obligations.......... (38) (766) (516)
Deferred financing costs....................... (901) (5,210) (451)
Distributions to members....................... (102) (600) --
-------- --------- --------
Net cash provided by financing activities...... 17,374 55,761 12,395
-------- --------- --------
Increase (decrease) in cash and cash
equivalents................................... 2,457 10,069 (9,145)
Cash and cash equivalents at beginning of
year.......................................... -- 2,457 12,526
-------- --------- --------
Cash and cash equivalents at end of year....... $ 2,457 $ 12,526 $ 3,381
======== ========= ========
See notes to consolidated financial statements.
F-6
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1998 and 1999
(in thousands, except for share and per share data)
1. Basis of Presentation and Reorganization
Peak Healthcare, L.L.C. (Peak) was formed, as a limited liability company, on
October 1, 1995. Effective November 30, 1997, Peak was reorganized whereby the
following transactions occurred simultaneously. The members of Peak contributed
all of their interests in Peak for an equal number of membership interests in
Peak Liquidating, L.L.C. (Peak Liquidating), a newly formed limited liability
company. The operating agreement and number and classes of interests of Peak
Liquidating were identical to Peak. Upon the exchange, Peak Liquidating, the
sole member of Peak, contributed its interests in Peak for shares of common
stock of Everest Healthcare II, Inc, (Everest II) a newly-formed subchapter C
Corporation. The number of shares of common stock of Everest II received by
Peak Liquidating was equal to the number of shares of Everest held by Peak. The
number and class of authorized shares of Everest II upon formation was
identical to that of Everest. Following the exchange, Peak was liquidated. Upon
the consummation of these transactions, Everest II issued shares of common
stock, representing approximately 30% of the shares of the Company, to the
minority interest holders in Everest in exchange for their shares of Everest
common stock. The acquisition of minority interest was treated as a purchase in
accordance with generally accepted accounting principles and goodwill of
approximately $12,400 was recognized. Upon the consummation of these
transactions, Everest became a wholly owned subsidiary of Everest II. In March
1998, Everest was merged into Everest II. Upon the merger, Everest II (the
surviving entity) changed its name to Everest Healthcare Services Corporation.
All references hereinafter to Everest or the Company refer to Everest
Healthcare Services Corporation, its subsidiaries and its predecessors.
2. Nature of Business
The Company provides dialysis services to patients with chronic kidney
failure, also known as end-stage renal disease ("ESRD"). As of September 30,
1999, the Company provided dialysis and ancillary services to approximately
6,100 patients through 64 outpatient dialysis centers in 12 states. In addition
to its outpatient dialysis center operations, the Company provides acute
dialysis services through contractual relationships with 30 hospitals in four
states. The Company also operates a business providing extracorporeal services
through contractual relationships with 81 hospitals in 9 states.
3. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts and transactions
of Everest Healthcare Services Corporation and its subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation. The
Company also performs certain administrative services under management
agreements with affiliated and unaffiliated entities. The Company does not have
a controlling financial interest in the entities for which it has management
contracts and, as such, the Company does not consolidate these entities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Medical Supplies Inventories
Medical supplies inventories consist of drugs, supplies, and parts used in
treatments and are stated at the lower of cost or market. Cost is determined
principally on a first in, first out (FIFO) basis.
F-7
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Medical
equipment and furniture and fixtures are depreciated over five to 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. Depreciation and amortization expense was $3,485, $4,213,
and $6,610 for the years ended September 30, 1997, 1998, and 1999,
respectively.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired in the Company's business combinations. The
amounts are being amortized over the estimated remaining economic lives of 25
years. Accumulated amortization of goodwill amounted to approximately $4,334
and $7,032 at September 30, 1998 and 1999, respectively.
Other Intangible Assets
Other intangible assets is comprised primarily of a management service
agreement and covenants not to compete. The management service agreement is
being amortized over a period of 25 years. The covenants not to compete are
being amortized over the periods of the agreements (See Note 9). Accumulated
amortization of the covenants not to compete was approximately $13 and $224 at
September 30, 1998 and 1999, respectively.
Deferred Financing Costs
The costs of obtaining financing are capitalized and are being amortized as
interest expense over the term of the related financing. Accumulated
amortization was $386 and $893 as of September 30, 1998 and 1999, respectively.
Income Taxes
Deferred taxes have been recognized for the tax consequences of temporary
differences by applying the enacted statutory income tax rates applicable to
future years of differences between the financial statement carrying amounts
and the tax bases of the existing assets and liabilities. Deferred taxes have
been recognized for the timing of these differences for financial reporting and
income tax reporting purposes.
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). In accordance with APB 25, compensation expense is recognized based
upon the excess of fair value of the underlying stock over the option exercise
price on the measurement date, the date at which both the exercise price and
the number of shares to be issued are known. The Company has elected to
continue to measure compensation expense under the provisions of APB 25;
however, in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" (SFAS 123), an estimate of the
fair value of the stock options has been made by the Company to determine the
pro forma effect on earnings had the provisions of SFAS 123 been applied in the
financial statements (see Note 14).
Revenue Recognition
Net revenue is recorded at the estimated net realizable amount from Medicare,
Medicaid, commercial insurers and other third-party payors for services
rendered. The Medicare and Medicaid programs reimburse the
F-8
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
company at amounts that are different from the Company's established rates.
Contractual adjustments under these programs represent the difference between
the amounts billed for these services and the amounts that are reimbursable by
third-party payors. A summary of the basis for reimbursement with these payors
follows:
Medicare. The Company is reimbursed by the Medicare program predominantly on
a prospective payment system for dialysis services. Under the prospective
payment system, each facility receives a composite rate per treatment that is
adjusted to account for geographic differences in the cost of labor. Drugs and
other ancillary services are reimbursed on a fee for service basis.
Medicaid. Medicaid is a state administered program with reimbursements
varying by state. The Medicaid programs administered in each state, in which
the Company operates, reimburse the Company predominantly on a prospective
payment system for dialysis services rendered.
Other Payors. Other payments from patients, commercial insurers and other
third-party payors are received pursuant to a variety of reimbursement
arrangements, which are generally higher than those payments received from the
Medicare and Medicaid programs.
Reimbursements from Medicare and Medicaid at established rates approximated
66.0%, 55.1% and 57.2% of net revenues for the years ended September 30, 1997,
1998 and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. 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 prime plus 1% and approximate fair value. The fair value of the
Company's 9 3/4% Senior Subordinated Notes, Series B was $93 million at
September 30, 1999 based upon trading in the public debt market.
Long-Lived Assets
The Company evaluates its long-lived assets (including goodwill) on an
ongoing basis. Identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
related asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
undiscounted cash flows expected to be generated by the asset. If the asset is
determined to be impaired, the impairment recognized is measured by the amount
by which the carrying value of the asset exceeds its fair value as determined
on a discounted cash flows basis.
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
F-9
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 1999, the Company maintained cash deposits with
certain financial institutions which were in excess of federally insured
limits.
New Accounting Standards
Effective October 1, 1998, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities (SOP 98-5)." SOP 98-5 requires
that costs related to start up activities be expensed as incurred. Prior to
adoption of SOP 98-5, the Company capitalized certain external costs related to
the establishment of new dialysis facilities. The effect of adoption of SOP 98-
5 was to record a charge for the cumulative effect of an accounting change of
$615, to expense costs that had been previously capitalized. There were no
income tax implications to the write-off as these amounts are not deductible
for income tax purposes.
In March, 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The provisions of
SOP 98-1 establish guidance on accounting for the costs incurred related to
internal use software. The provisions of SOP 98-1 specifically address the
accounting for the costs related to designing, developing, obtaining and
modifying and/or implementing internal use software. SOP 98-1 requires that
companies capitalize qualifying costs incurred during the application
development stage. All other costs incurred in connection with an internal use
software project are to be expensed as incurred. Application of the provisions
of SOP 98-1 will be required for fiscal year 2000. The Company believes that
the adoption of SOP 98-1 will not have a material impact on its results of
operations.
Reclassifications
Certain reclassifications have been made to prior years' financial statements
to conform to the 1999 presentation.
4. Net Revenues
The Company provides dialysis and perfusion services to certain patients
under government-sponsored programs such as Medicare and Medicaid, as well as
other insurance reimbursement arrangements. Provision has been made in the
financial statements for the estimated contractual adjustment, representing the
difference between the Company's standard charges for services and the
estimated payments from the various third-party payors. Gross and net patient
service revenues for the years ended September 30 include the following:
1997 1998 1999
-------- -------- --------
Medicare/Medicaid............................. $ 75,113 $ 81,406 $105,840
Other payors.................................. 121,212 77,328 103,289
-------- -------- --------
Gross revenues................................ 196,325 158,734 209,129
Contractual allowances........................ 84,747 14,144 26,736
-------- -------- --------
Net patient revenues.......................... 111,578 144,590 182,393
Management fee revenues....................... 2,230 2,885 2,525
-------- -------- --------
Total net revenues............................ $113,808 $147,475 $184,918
======== ======== ========
F-10
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Investments In and Advances to Affiliated Companies
The Company uses the equity method of accounting for its investments in the
common stock of various companies. Investments in these companies at September
30, 1998, and 1999, amounted to approximately $1,690, and $868 respectively.
Additionally, the Company had approximately $16,643 and $8,034 of advances due
from affiliates as of September 30, 1998 and 1999, respectively (see Note 15).
The percentages of ownership in these companies range from 10% to 50%.
Aggregate balance sheet information of these companies at September 30 is as
follows:
1998 1999
------- ------
Current assets............................................ $11,543 $3,674
Noncurrent assets......................................... 4,250 1,285
Current liabilities....................................... 9,929 1,062
Noncurrent liabilities.................................... 2,429 2,106
Aggregate statement of income information of these companies is as follows
for the year ended September 30:
1997 1998 1999
------- ------- -------
Net revenues.................................... $19,994 $24,063 $10,341
Income (loss) from operations................... (220) 4,466 2,924
Net income (loss)............................... (29) 3,473 869
6. Business Combinations
Effective September 1, 1997, the Extracorporeal Alliance, LLC (Alliance), an
80% owned subsidiary of the Company, 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. In accordance with the purchase agreement, Alliance must remit
annually to the prior owners the first $323,000 of net income through September
30, 2002.
In January 1998, the Company acquired the remaining outstanding equity
interests in Hemo Dialysis of Amarillo, LLC (Amarillo), an outpatient and home
dialysis facility located in Amarillo, Texas. Prior to the acquisition, the
Company owned a 30% interest in Amarillo and accounted for the investment under
the equity method of accounting. The purchase price of the acquisition,
including costs of the transaction, was approximately $2,900. Goodwill
recognized in the acquisition was approximately $2,500.
In January 1998, the Company increased its investment in Home Dialysis of
Mount Auburn, Inc. (Mount Auburn), a home dialysis facility located in
Cincinnati, Ohio, in exchange for the issuance of 52,399 shares of common stock
of Everest Healthcare Services Corporation with a fair value of approximately
$377. Through the purchase, the Company increased its investment in Mount
Auburn from 50% to 80.5% and recognized goodwill of $266. Prior to the
acquisition, the Mount Auburn investment was accounted for under the equity
method of accounting.
In February 1998, the Company acquired the remaining outstanding equity
interests in Dialysis Specialist of South Texas, LLC (South Texas), which owns
and operates three outpatient and home dialysis facilities in Corpus Christi,
Texas. Prior to the acquisition, the Company owned a 33% interest in South
Texas and
F-11
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounted for the investment under the equity method of accounting. The
purchase price of the acquisition was $7,600, including costs of the
transaction. The consideration for the purchase was financed through the
issuance of 179,300 shares of common stock of Everest Healthcare Services
Corporation with a fair value of approximately $1,300 and cash of approximately
$6,300. Goodwill recognized in the acquisition was approximately $7,100.
In March 1998 Alliance acquired a 70% interest in Perfusion Resource
Association LLC (PRA), a contract services provider located in Tampa, Florida.
The purchase price of the acquisition, including costs of the transaction, was
approximately $1,400. Goodwill recognized in the acquisition was approximately
$1,300.
In April 1998, the Company acquired North Buckner Dialysis Center, a dialysis
service provider located in Dallas, Texas. The purchase price of the
acquisition was approximately $5,100, including costs of the transaction. The
consideration for the purchase price of the acquisition was financed through
the issuance of 153,021 shares of common stock of Everest Healthcare Services
Corporation with a fair value of approximately $1,100 and cash of $4,000.
Goodwill recognized in the acquisition was approximately $4,100.
In February 1999, the Company acquired the remaining outstanding equity
interest in Dialysis Specialists of Central Cincinnati, Ltd. (Central
Cincinnati), an outpatient dialysis facility located in Norwood, Ohio. Prior to
the acquisition, the Company owned a 37.9% interest in Central Cincinnati and
accounted for the investment under the equity method of accounting. The
purchase price, including costs of the transaction, was approximately $5,600.
Goodwill recognized in the acquisition was approximately $4,800.
In February 1999, the Company increased its investment in Dialysis
Specialists of Topeka, Inc. (Topeka) from 25% to 75%. Topeka is an outpatient
dialysis facility located in Topeka, Kansas. Prior to the acquisition, the
Topeka investment was accounted for under the equity method of accounting. The
purchase price, including costs of the transaction, was approximately $1,300.
Goodwill recognized in the acquisition was approximately $600.
In March 1999, the Company acquired the remaining outstanding equity interest
in Home Dialysis of Fairfield, Inc. (Fairfield), a home dialysis facility
located in Fairfield, Ohio. Prior to the acquisition, the Company owned a 50%
interest in Fairfield and accounted for the investment under the equity method
of accounting. The purchase price, including costs of the transaction, was
approximately $2,800. Goodwill recognized in the acquisition was approximately
$1,900.
In March 1999, the Company acquired the remaining outstanding equity interest
in Home Dialysis of Columbus, Inc. (Columbus), an outpatient dialysis facility
and a home dialysis facility located in Columbus, Ohio. Prior to the
acquisition, the Company owned a 49% interest in Columbus and accounted for the
investment under the equity method of accounting. The purchase price, including
costs of the transaction, was approximately $500. Goodwill recognized in the
acquisition was approximately $500.
In May 1999, the Company acquired the remaining outstanding equity interest
in the Dialysis Specialists of Tulsa, Inc. (Tulsa), an outpatient dialysis
facility located in Tulsa, Oklahoma. Prior to this transaction, the Company
owned a 33% interest in Tulsa, and accounted for the investment under the
equity method of accounting. The purchase price, including the costs of the
transaction, was approximately $4,400. Goodwill recognized in the acquisition
was approximately $3,600.
In July 1999, the Company purchased certain assets and operations of
Englewood Dialysis Facility, LLC an outpatient dialysis facility located in
Englewood, New Jersey. The purchase price, including costs of the transaction,
was approximately $10,000. This transaction was accounted for as a purchase
which resulted in the recording of goodwill of approximately $7,000 and
covenant not to compete of $931.
F-12
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the excess of the purchase price over the fair value
of identifiable assets (including identifiable intangible assets) is allocated
to goodwill and other identifiable intangibles. The consolidated financial
statements include the operating results of each business from the respective
dates of acquisition.
7. Leases and Related Party Transactions
Capital Leases
Property under capital leases included within property and equipment at
September 30 are as follows:
1998 1999
------ ------
Furniture and fixtures..................................... $1,423 $ 605
Medical equipment.......................................... 6,914 3,576
------ ------
8,337 4,181
Less: Accumulated depreciation............................. 5,880 2,899
------ ------
$2,457 $1,282
====== ======
Interest rates on the capital lease obligations ranged from 8.0% to 14.0%.
Future minimum lease payments under capital leases with initial or remaining
terms of one year or more consisted of the following at September 30, 1999:
2000................................................................ $367
2001................................................................ 242
2002................................................................ 167
2003................................................................ 55
----
Total minimum lease payments........................................ 831
Amounts representing interest....................................... 62
----
Present value of minimum lease payments............................. 769
Less: Current portion............................................... 367
----
$402
====
Operating Leases
Prior to June 1998, the Company leased land and building space under
operating leases for some of its dialysis centers and its corporate offices
from ARE Partnership and Three M&L Partnership, related parties with common
ownership. In June 1998, the Company purchased the land and buildings from ARE
Partnership. For the years ended September 30, 1997 and 1998, rents of
approximately $952 and $616, respectively, were paid to these related parties.
For the year ended September 30, 1999, rents of approximately $149 were paid to
Three M&L Partnership, which leases are in month-to-month renewal periods.
Additionally, the Company leases land and building space under operating
leases from unaffiliated entities for certain of its dialysis facilities. For
the years ended September 30, 1997, 1998, and 1999, approximately $2,072,
$5,067, and $4,286, respectively, were recorded as rent expense for such
leases. Expiration dates for these leases continue through 2009.
F-13
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum rental commitments under non-cancelable operating leases with
terms in excess of one year are as follows:
2000.............................................................. $ 4,590
2001.............................................................. 4,021
2002.............................................................. 3,676
2003.............................................................. 3,481
2004.............................................................. 3,299
2005 and thereafter............................................... 11,733
-------
$30,800
=======
8. Property and Equipment
Property and equipment consist of the following at September 30:
1998 1999
------- -------
Leasehold improvements................................ $12,818 $20,116
Medical equipment..................................... 16,263 18,654
Furniture and fixtures................................ 8,652 10,804
Software.............................................. 1,092 2,386
Building.............................................. 4,892 4,082
Land.................................................. 328 216
Construction-in-progress.............................. 2,536 1,235
------- -------
Less: Accumulated depreciation and amortization....... 46,581 57,493
18,846 25,828
------- -------
$27,735 $31,665
======= =======
9. Other Intangible Assets
Other intangibles consist of the following at September 30:
1998 1999
------- ------
Management service agreement.............................. $17,598 $ --
Covenants not to compete.................................. 1,909 2,632
Other..................................................... 828 39
------- ------
$20,335 $2,671
======= ======
Management Service Agreement
Pursuant to a management service agreement, New York Dialysis Management,
Inc. (NYDM), a wholly owned subsidiary of the Company, had been managing
dialysis facilities located in the Bronx, New York for Montefiore Medical
Center (MMC). In July, 1998, the Company exercised its right to purchase MMC's
license to operate in the state of New York for a purchase price of $19,500
including transaction costs of $291. The operating license was purchased by
Everest Dialysis Services, Inc. (EDS), a newly-formed corporation formed for
this purpose under the laws of the State of New York. EDS is affiliated with
the Company as it is owned by two of the Company's stockholders. The Company
entered into a management service agreement with EDS to operate the facilities
for a period of 40 years and which allows the Company to retain the earnings
from the operation of the facilities. In addition to the operating license, the
Company also received a covenant not to
F-14
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compete from MMC. The purchase price was allocated $17,598 and $1,909 to the
management service agreement and covenant not to compete, respectively. During
fiscal 1999, the Company wrote down the amount allocated to the management
service agreement due to impairment of such asset (See Note 12).
10. Accrued Expenses
Accrued expenses consist of the following at September 30:
1998 1999
------- -------
Compensation and benefits................................ $ 8,089 $ 7,374
Reimbursements to third party payors..................... 2,256 3,221
Interest................................................. 3,955 4,063
Professional fees........................................ 1,752 753
Other.................................................... 797 1,795
------- -------
$16,849 $17,206
======= =======
11. Long-Term Debt
Long-term debt consists of the following at September 30:
1998 1999
-------- --------
9 3/4% senior subordinated notes due 2008, Series B... $100,000 $100,000
Acquisition funding facility.......................... -- 13,916
Acquisition term notes................................ 7,000 7,000
Installment notes payable............................. 1,753 1,538
-------- --------
108,753 122,454
Less: Current maturities.............................. 606 801
-------- --------
$108,147 $121,653
======== ========
9 3/4% Senior Subordinated Notes due 2008, Series B
On May 5, 1998, the Company completed a private placement issuance of
$100,000 in principal amount of 9 3/4% Senior Subordinated Notes due 2008 (the
Offering). The Offering was made to qualified institutional buyers pursuant to
Rule 144A of the Securities and Exchange Commission (SEC). Effective September
2, 1998 the Company registered the senior subordinated notes with the SEC. Upon
the effectiveness of the registration, the Company exchanged 9 3/4% Senior
Subordinated Notes due 2008, Series B for the notes sold in the Offering.
The 9 3/4% Senior Subordinated Notes, Series B (the Notes) mature on May 1,
2008. Interest is payable semi-annually in arrears each November 1 and May 1,
commencing November 1, 1998. On or after May 1, 2003, the Notes may be redeemed
at the option of the Company, in whole or in part, at specified redemption
prices plus accrued and unpaid interest:
Redemption
Year Price
---- ----------
2003........................................................... 104.875%
2004........................................................... 103.250%
2005........................................................... 101.625%
2006 and thereafter............................................ 100.000%
F-15
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, at any time on or prior to May 1, 2001, the Company may, subject
to certain requirements, redeem up to $35,000 aggregate principal amount of the
Notes with the net cash proceeds of one or more public equity offerings, at a
price equal to 109.75% of the principal amount to be redeemed plus accrued and
unpaid interest. In the event of a change in control, the Company would be
required to offer to repurchase the Notes at a price equal to 101.0% of the
principal amount plus accrued and unpaid interest.
The Notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior debt and are guaranteed by the
Company's wholly-owned subsidiaries (the Guarantor Subsidiaries). Each of the
Guarantor Subsidiaries' guarantees of the Notes are full, unconditional, and
joint and several. The Company may incur additional indebtedness, including
borrowings under its Credit Facility (see below), subject to certain
limitations. See Note 20 for financial information as of September 30, 1997,
1998 and 1999.
The indenture under which the Notes were issued contains certain covenants
that were met at September 30, 1999.
Credit Facilities
On June 30, 1999, the Company refinanced its prior credit facility (the
"Prior Credit Facility"). The new credit facility (the "Credit Facility")
consists of three separate facilities; a revolving credit facility, an
acquisition credit facility and a Year 2000 credit facility.
The revolving credit facility of $35,000, including letters of credit of up
to $650, matures on June 30, 2002 (the "Revolving Credit Facility"). The
borrowings on the Revolving Credit Facility are limited to 75% of eligible
accounts receivable and up to 50% of eligible inventory. Interest is payable at
the Company's option of either the higher of the bank's prime rate (8.25% at
September 30, 1999) or the Federal Funds rate plus 1/2 of 1%, plus 0.00%-1.00%,
or the London Interbank Offered Rate (LIBOR) (5.90% at September 30, 1999) plus
2.00-2.75%. Commitment fees of 0.50% of the unused portion of the Revolving
Credit Facility are payable quarterly. No amounts were drawn on the revolving
credit facility at September 30, 1999.
The acquisition credit facility of $65,000 matures on June 15, 2005 (the
"Acquisition Credit Facility"). Under the Acquisition Credit Facility, all of
the borrowings outstanding thereunder on each of June 30, 2000, 2001 and 2002
must be converted to one or more seven-year term loans with balloon payments
due on June 15, 2005. Interest is payable at the Company's option of either the
higher of the bank's prime rate or the Federal Funds rate plus 1/2 of 1%, plus
0.25%-1.25%, or LIBOR plus 2.25%-3.00%. Commitment fees of 0.75% of the unused
portion of the Acquisition Credit Facility are payable quarterly. At September
30, 1999, the Company had outstanding approximately $13,900 under the
acquisition credit facility.
The Year 2000 credit facility of $40,000 is available from January 1, 2000
through June 30, 2000 (the "Year 2000 Credit Facility"). The purpose of the
Year 2000 Credit Facility is to finance government related accounts receivable
which are unpaid due to difficulties related to the year 2000. Interest is
payable at the Company's option of either the higher of the bank's prime rate
or the Federal Funds rate plus 1/2 of 1%, plus 0.00%-1.00%, or LIBOR plus
2.00%-2.75%. Commitment fees of 0.50% of the unused portion of the Year 2000
Credit Facility are payable quarterly.
The Credit Facilities contain covenants, which among other things require the
Company to maintain certain financial ratios and minimum levels of net worth.
As of September 30, 1999, the Company was in technical default under the
Company's Credit Facility. As of December 22, 1999, the Company obtained the
necessary amendments and waivers to cure the defaults on its Credit Facility.
The Credit Facility, including any interest rate hedging transactions, are
collateralized by a lien on all of the assets of the Company.
F-16
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquisition Term Notes
In connection with the acquisition of Alliance (Note 7), the Company incurred
$7,000 in notes payable to the former owners of Alliance. These notes mature on
October 31, 2002, and bear interest at the 5-year Treasury Note rate (6.0% as
of September 30, 1999) (as determined on November 1 of each year) plus 3.0%.
Interest is payable monthly.
Installment Notes Payable
The Company has entered into various installment notes payable which are
payable to a vendor of medical equipment through September 2002, and bear
interest at 9.5% per annum. The notes are collateralized by medical equipment.
Annual Maturities
Maturities of long term debt at September 30, 1999, are as follows:
2000............................................................. $ 801
2001............................................................. 634
2002............................................................. 103
2003............................................................. 7,000
2004............................................................. --
2005 and thereafter.............................................. 113,916
--------
$122,454
========
12. Special Charges
The Company recorded approximately $23,000 of charges during fiscal 1999.
These amounts have been expensed as special charges and include $22,400 in
impairment of long-lived assets and $600 in severance costs.
The impairment of long-lived assets included (i) a $20,500 writedown of
goodwill and other intangible assets, (ii) a $1,400 write-off of advances to,
and other assets of, certain of the Company's joint ventures and (iii) the
writedown of $500 of fixed assets to fair value. The write-off of goodwill and
other intangible assets was the result of a deterioration in the profitability
and cash flows of certain acquired operations. The deterioration was due, in
part, to continued contractual adjustments and other reductions in anticipated
revenues. As a result of this deterioration, the Company evaluated the long-
lived assets that were not recoverable. As a result of this evaluation, the
Company recorded a write down of these assets based upon the amount by which
the carrying value of the assets exceeded their fair values as determined on a
discounted cash flow basis. Certain of the Company's joint ventures encountered
similar deterioration in the current fiscal year. As a result, the Company
recorded a write-off of certain advances to and other assets of these
companies.
The severance costs to two executives of the Company related to amounts that
were due under the individuals' employment contract upon separating from the
Company.
F-17
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred income taxes at September 30 were as follows:
1998 1999
------- -------
Allowance for uncollectible accounts.................... $ 2,347 $ 4,709
Tax deductible goodwill amortization.................... -- 6,496
Accrued vacation........................................ 792 965
Net operating loss carryforwards........................ 29 29
Other................................................... -- 170
------- -------
Total deferred tax assets............................... 3,168 12,369
------- -------
Patient accounts receivable basis difference............ (1,384) (959)
Other................................................... (132) --
------- -------
Total deferred tax liabilities.......................... (1,516) (959)
------- -------
Net deferred tax asset.................................. $ 1,652 $11,410
======= =======
Income taxes consist of the following at September 30:
1997 1998 1999
------ ------ -------
Current:
Federal......................................... $2,555 $4,120 $ 2,580
State........................................... 603 1,181 756
Deferred.......................................... 531 (1,760) (10,163)
------ ------ -------
$3,689 $3,541 $(6,827)
====== ====== =======
Federal income taxes at the statutory rate are reconciled with the Company's
income tax provision at September 30 as follows:
1997 1998 1999
---- ---- -----
Federal statutory rate................................ 34.0% 34.0% (34.0)%
State income taxes, net of federal benefit............ 5.0 7.0 (4.3)
Nondeductible goodwill amortization................... 5.5 10.1 9.4
Other, net............................................ 2.1 (2.1) 0.2
---- ---- -----
46.6% 49.0% (28.7)%
==== ==== =====
F-18
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Stock Options
The Company has stock options outstanding as follows:
Exercise
Options Price
--------- ----------
Balance at September 30, 1996...................... 526,500 $ 7.50
Granted............................................ 1,229,600 9.10
---------
Balance at September 30, 1997...................... 1,756,100 7.50-9.10
Granted............................................ 140,000 13.05
Forfeitures........................................ (31,200) 9.10
---------
Balance at September 30, 1998...................... 1,864,900 7.50-13.05
Granted............................................ 135,181 13.05
Forfeitures........................................ (16,600) 9.10-13.05
---------
Balance at September 30, 1999...................... 1,983,481
=========
Included in the stock options outstanding are 526,500 stock options issued on
October 1, 1995 and 354,100 stock options issued in 1997 to the CEO of the
Company. In connection with the reorganization on November 30, 1997, these
880,600 stock options were assigned to Peak Liquidating, LLC (a shareholder of
the Company) and, as such, have been reflected as outstanding in all periods
subsequent to their original grant. The 526,500 options were issued upon the
formation of the Company and are currently exercisable. The remaining 1,456,981
options outstanding were issued under the Everest Healthcare Services
Corporation 1996 Stock Award Plan (the 1996 Plan). The 1996 Plan permits the
granting of stock options to certain key executive, managerial, and
administrative employees of the Company to purchase shares of the Company's
common stock. The stock options awarded vest ratably over a four year period in
25% increments. The stock options awarded expire ten years from the date of
grant. Of the stock options outstanding under the 1996 Plan, 602,000 are
exercisable at September 30, 1999.
In connection with the Company's reorganization, the Company cancelled all
stock options outstanding and subsequently reissued them under the Everest
Healthcare Services Corporation 1998 Stock Award Plan (the 1998 Plan). The 1998
Plan contains the same provisions as the 1996 Plan and the reissuance of stock
options had no effect on the options previously issued.
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25), as permitted in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). Had
the provisions of SFAS 123 been used in the calculation of compensation expense
(calculated using the minimum value method for nonpublic companies), pro forma
net income would have been approximately $211 and $254 lower than the net
income reported in the statement of operations for the years ended September
30, 1998 and 1999, respectively.
F-19
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Related Party Transactions
The Company provides administrative and purchasing services to several of its
unconsolidated affiliates, all of which are owned, or substantially owned, by
the majority equity holders of the Company. Fees charged to affiliates for
services were approximately $1,295, $1,939, and $998 during the years ended
September 30, 1997, 1998, and 1999, 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 at September 30 were as follows:
1998 1999
------- -------
Nephrology Associates of Northern Illinois, Ltd.......... $ 8,409 $ 7,526
Unconsolidated Joint Ventures............................ 8,209 483
Others................................................... 25 25
------- -------
$16,643 $ 8,034
======= =======
Nephrology Associates of Northern Illinois, Ltd., an unconsolidated affiliate
substantially owned by the majority equity holders of the Company, provides
management and physician supervisory services to the Company's outpatient
maintenance dialysis operations. Total fees incurred for such services amounted
to approximately $1,883, $1,536, and $1,536 during the years ended September
30, 1997, 1998, and 1999, respectively, and are included in the accompanying
consolidated statement of operations.
The Company earned interest on outstanding balances due from unconsolidated
affiliates of approximately $1,368, $1,261, and $904 during the years ended
September 30, 1997, 1998, and 1999, respectively.
16. Significant Vendor
For the years ended September 30, 1997 and 1998, purchases from two vendors
accounted for 49% and 46% of total purchases, respectively. For the year ended
September 30, 1999, purchases from one vendor accounted for 40% of total
purchases.
17. Supplemental Cash Flow Information
The following table provides supplemental cash flow data in addition to the
information provided in the consolidated statements of cash flows for the years
ended September 30:
1997 1998 1999
------ ------- ------
Cash paid for:
Income taxes.......................................... $2,068 $ 7,176 $3,263
Interest.............................................. 2,706 4,246 12,459
Supplemental disclosure of non-cash activity:
Fair value of common stock issued in business
acquisitions........................................... -- 2,770 --
Debt issued for acquisition of business................. 7,000 -- --
Fair value of common stock issued in connection with the
acquisition of minority interests...................... -- 26,610 --
Distribution of notes receivable to members............. -- 7,209 --
F-20
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Reportable Segments
The Company has two reportable segments: Dialysis Services and Contract
Services. The Company's Dialysis Services segment consists of 68 outpatient
dialysis treatment centers which primarily provide outpatient chronic dialysis
treatments and 30 hospital based treatment centers that provide acute dialysis
treatments. The Company's Contract Services segment provides perfusion,
apheresis, and autotransfusion treatments in 81 hospitals.
The Company evaluates performance and allocates resources based upon profit
or loss before income taxes and extraordinary items. The reportable segment's
accounting policies are the same as those described in the summary of
significant accounting policies (see Note 3). The Company's reportable segments
are independent operating divisions that are managed separately. All
intercompany costs are eliminated.
Contract
Dialysis Services Total
-------- -------- --------
As of and for the year ended September 30, 1999:
Revenues........................................ $163,228 $21,690 $184,918
Interest expense................................ 4 755 759
Depreciation and amortization................... 7,989 786 8,775
Equity in earnings of unconsolidated
subsidiaries................................... 586 -- 586
Special charges................................. 20,827 -- 20,827
Segment profit (loss)........................... (6,120) 779 (5,341)
Segment assets.................................. 141,659 18,855 160,514
Investments in and advances to affiliated
entities....................................... 868 1,239 2,107
Expenditures for long-lived assets.............. 30,952 430 31,382
As of and for the year ended September 30, 1998:
Revenues........................................ $129,017 $18,458 $147,475
Interest expense................................ 246 790 1,036
Depreciation and amortization................... 5,170 602 5,772
Equity in earnings of unconsolidated
subsidiaries................................... 1,784 -- 1,784
Segment profit (loss)........................... 14,788 (66) 14,722
Segment assets.................................. 122,765 18,935 141,700
Investments in and advances to affiliated
entities....................................... 1,690 -- 1,690
Expenditures for long-lived assets.............. 42,547 1,695 44,242
As of and for the year ended September 30, 1997:
Revenues........................................ $100,097 $13,711 $113,808
Interest expense................................ 787 723 1,510
Depreciation and amortization................... 3,890 545 4,435
Segment profit (loss)........................... 11,536 (186) 11,350
Segment assets.................................. 87,599 21,297 108,896
Investments in and advances to affiliated
entities....................................... 827 -- 827
Expenditures for long-lived assets.............. 7,215 5,041 12,256
A reconciliation of the reportable segments to consolidated income (loss)
before income taxes and cumulative effect of change in accounting and
consolidated assets are as follows:
F-21
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 1998 1999
-------- -------- --------
Profit (loss):
Total profit (loss) for reportable segments...... $ 11,350 $ 14,722 $ (5,341)
Unallocated amounts:
Elimination of corporate administrative expense.. 8,025 14,486 15,345
Interest expense................................. (1,451) (6,848) (11,808)
Depreciation and amortization.................... (505) (1,155) (1,704)
Special charges.................................. -- -- (2,132)
Interest income.................................. 813 1,952 1,483
Corporate expenses............................... (10,316) (15,930) (19,026)
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in accounting... $ 7,916 $ 7,227 $(23,183)
======== ======== ========
Assets:
Total assets for reportable segments............. $108,896 $141,700 $160,514
Elimination of intercompany accounts............. (43,966) (41,796) (37,040)
Unallocated assets............................... 37,827 96,491 72,799
-------- -------- --------
Consolidated assets.......................... $102,757 $196,395 $196,273
======== ======== ========
Other significant items as disclosed within the reportable segments are
reconciled to the consolidated totals as follows:
Other Significant Items:
Segment
Totals Adjustments Consolidated
------- ----------- ------------
For the year ended September 30, 1999
Interest expense............................ $ 759 $11,808 $12,567
Depreciation and amortization............... 8,775 1,704 10,479
Special charges............................. 20,827 2,132 22,959
Interest income............................. -- 1,483 1,483
Investments in and advances to affiliated
entities................................... 2,107 6,795 8,902
Expenditures for long-lived assets.......... 31,382 1,664 33,046
For the year ended September 30, 1998
Interest expense............................ $ 1,036 $ 6,848 $ 7,884
Depreciation and amortization............... 5,772 1,155 6,927
Interest income............................. -- 1,952 1,952
Investments in and advances to affiliated
entities................................... 1,690 16,643 18,333
Expenditures for long-lived assets.......... 44,242 4,800 49,042
For the year ended September 30, 1997
Interest expense............................ $ 1,510 $ 1,451 $ 2,961
Depreciation and amortization............... 4,435 505 4,940
Interest income............................. -- 813 813
Investments in and advances to affiliated
entities................................... 827 -- 827
Expenditures for long-lived assets.......... 12,257 542 12,799
19. Other Financial Information
The Company is a holding company with no independent assets or operations.
Therefore, the Company relies primarily upon payment from its subsidiaries for
the funds necessary to meet its obligations, including the payment of interest.
The ability of the subsidiaries to fund the obligations is subject to
significant restrictions, will be dependent upon the earnings of the
subsidiaries, and will be subject to applicable laws and approval by the
subsidiaries. Full separate statements of the Guarantor Subsidiaries have not
been presented as the guarantors are wholly owned subsidiaries of the Company.
Management does not believe that inclusion of such financial statements would
be material to investors. The guarantees of the Guarantor Subsidiaries are
full, unconditional, and joint and several.
F-22
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth the financial data at September 30, 1999 and for the
year then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Operations
Data
Net revenues............ $ -- $149,203 $35,715 $ -- $184,918
Patient care costs...... -- 105,075 26,559 -- 131,634
General and
administrative
expenses............... 19,703 2,439 2,186 -- 24,328
Special charges......... 2,132 20,548 279 -- 22,959
Provision for bad
debts.................. -- 6,176 1,184 -- 7,360
Depreciation and
amortization........... 2,600 6,496 1,383 -- 10,479
-------- -------- ------- -------- --------
Income (loss) from
operations............. (24,435) 8,469 4,124 -- (11,842)
Interest income
(expense), net......... (10,328) 271 (1,027) -- (11,084)
Equity in earnings of
affiliate.............. -- 586 -- -- 586
Minority interests in
earnings............... (153) (286) (404) -- (843)
-------- -------- ------- -------- --------
Income (loss) before
income taxes expense
and cumulative effect
of change in
accounting............. (34,916) 9,040 2,693 -- (23,183)
Income tax expense
(benefit).............. (14,030) 5,875 1,328 -- (6,827)
-------- -------- ------- -------- --------
Income (loss) before
cumulative effect of
change in accounting... (20,886) 3,165 1,365 -- (16,356)
Cumulative effect of
change in accounting... 341 126 148 -- 615
-------- -------- ------- -------- --------
Net income (loss)....... $(21,227) $ 3,039 $ 1,217 $ -- $(16,971)
======== ======== ======= ======== ========
Balance Sheet Data
Assets:
Cash (overdraft) and
cash equivalents...... $ (55) $ 828 $ 2,608 $ -- $ 3,381
Patient accounts and
other receivables .... 10,891 36,226 7,174 (866) 53,425
Other current assets... 192 7,579 1,232 -- 9,003
Property and equipment,
net................... 5,598 23,499 2,568 -- 31,665
Goodwill, net.......... 12,596 46,164 14,688 -- 73,448
Investments in and
advances to affiliated
companies............. 73,703 4,474 1,056 (70,331) 8,902
Other assets........... 13,293 1,884 1,272 -- 16,449
-------- -------- ------- -------- --------
Total assets........... $116,218 $120,654 $30,598 $(71,197) $196,273
======== ======== ======= ======== ========
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities.... $ 10,201 $ 16,156 $ 5,761 $ (920) $ 31,198
Long-term liabilities.. 114,336 (4,130) 13,584 -- 123,790
Total stockholders'
equity (deficit)...... (8,319) 108,628 11,253 (70,277) 41,285
-------- -------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit)............. $116,218 $120,654 $30,598 $(71,197) $196,273
======== ======== ======= ======== ========
F-23
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Cash Flows
Data
Operating activities:
Net income (loss)....... $(21,227) $ 3,039 $1,217 $-- $(16,971)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Provision for bad
debts................. -- 6,176 1,184 -- 7,360
Depreciation and
amortization.......... 2,600 6,496 1,383 -- 10,479
Special Charges........ 2,132 20,548 279 -- 22,959
Cumulative effect of
accounting change..... 341 126 148 -- 615
Deferred income taxes.. (10,163) -- -- -- (10,163)
Equity in earnings of
subsidiaries.......... -- (586) -- -- (586)
Minority interests in
earnings.............. 153 286 404 -- 843
Net change in operating
assets and liabilities
(net of effect of
acquisitions)......... (26,689) 19,285 (2,195) -- (9,599)
-------- ------- ------ ---- --------
Net cash provided by
(used in) operating
activities............ (52,853) 55,370 2,420 -- 4,937
Investing activities:
Additions to property
and equipment......... (1,828) (3,661) (1,399) -- (6,888)
Acquisition of
businesses, net of
cash acquired......... -- (25,408) (750) -- (26,158)
(Increase) decrease in
amounts due from
affiliates............ 30,430 (24,643) 782 -- 6,569
-------- ------- ------ ---- --------
Net cash provided by
(used in) investing
activities............ 28,602 (53,712) (1,367) -- (26,477)
Financing activities:
Proceeds from notes
payable............... 60,316 -- -- -- 60,316
Payments on notes
payable............... (46,400) (554) -- -- (46,954)
Other.................. (451) (516) -- -- (967)
-------- ------- ------ ---- --------
Net cash provided by
(used in) financing
activities............ 13,465 (1,070) -- -- 12,395
-------- ------- ------ ---- --------
Increase (decrease) in
cash and cash
equivalents............ (10,786) 588 1,053 -- (9,145)
Cash (overdraft) and
cash equivalents at
beginning of year...... 10,731 240 1,555 -- 12,526
-------- ------- ------ ---- --------
Cash (overdraft) and
cash equivalents at end
of year................ $ (55) $ 828 $2,608 $-- $ 3,381
======== ======= ====== ==== ========
F-24
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth the financial data at September 30, 1998 and for the
year then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Operations
Data
Net revenues............ $ -- $118,926 $28,549 $ -- $147,475
Patient care costs...... -- 81,141 21,503 -- 102,644
General and
administrative
expenses............... 4,509 15,985 2,792 -- 23,286
Provision for bad
debts.................. -- 2,462 265 -- 2,727
Depreciation and
amortization........... 595 5,184 1,148 -- 6,927
-------- -------- ------- -------- --------
Income (loss) from
operations............. (5,104) 14,154 2,841 -- 11,891
Interest expense, net... (3,727) (1,025) (1,180) -- (5,932)
Equity in earnings of
affiliates............. -- 1,784 -- -- 1,784
Minority interests in
earnings............... (315) (237) 36 -- (516)
-------- -------- ------- -------- --------
Income (loss) before
income tax expense..... (9,146) 14,676 1,697 -- 7,227
Income tax expense...... -- 3,368 173 -- 3,541
-------- -------- ------- -------- --------
Net income (loss)....... $ (9,146) $ 11,308 $ 1,524 $ -- $ 3,686
======== ======== ======= ======== ========
Balance Sheet Data
Assets:
Cash and cash
equivalents............ $ 10,731 $ 240 $ 1,555 $ -- $ 12,526
Patient accounts and
other receivables...... 50 37,971 7,299 (758) 44,562
Other current assets.... -- 5,598 1,085 -- 6,683
Property and equipment,
net.................... 5,128 20,241 2,366 -- 27,735
Goodwill, net........... 13,149 31,320 14,346 -- 58,815
Investments in and
advances to affiliated
companies.............. 83,588 1,690 -- (66,945) 18,333
Other assets............ 5,646 20,973 1,647 (525) 27,741
-------- -------- ------- -------- --------
Total assets............ $118,292 $118,033 $28,298 $(68,228) $196,395
======== ======== ======= ======== ========
Liabilities and
Stockholders' Equity
Current liabilities..... $ 5,384 $ 18,474 $ 3,706 $ (758) $ 26,806
Long-term liabilities... 100,000 17,854 14,759 (21,280) 111,333
Total stockholders'
equity................. 12,908 81,705 9,833 (46,190) 58,256
-------- -------- ------- -------- --------
Total liabilities and
stockholders' equity... $118,292 $118,033 $28,298 $(68,228) $196,395
======== ======== ======= ======== ========
F-25
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Statement of Cash Flows
Data
Operating activities:
Net income (loss)....... $ (9,146) $ 11,308 $ 1,524 $-- $ 3,686
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Provision for bad
debts.................. -- 2,462 265 -- 2,727
Depreciation and
amortization........... 595 5,184 1,148 -- 6,927
Deferred income taxes... -- (1,760) -- -- (1,760)
Equity in earnings of
affiliates............. -- (1,784) -- -- (1,784)
Minority interests in
(earnings) loss........ 315 237 (36) -- 516
Net change in operating
assets and liabilities
(net of effect of
acquisitions).......... (1,702) 667 (1,973) -- (3,008)
--------- -------- ------- ---- ---------
Net cash provided by
(used in) operating
activities............. (9,938) 16,314 928 -- 7,304
Investing activities:
Capital expenditures.... (4,834) (6,633) (697) -- (12,164)
Acquisition of
intangible assets...... -- (19,507) -- -- (19,507)
Acquisition of
businesses, net of cash
acquired............... -- (17,371) -- -- (17,371)
Increase (decrease) in
amounts due from
affiliates............. (32,112) 28,158 -- -- (3,954)
--------- -------- ------- ---- ---------
Net cash used in
investing activities... (36,946) (15,353) (697) -- (52,996)
Financing activities:
Proceeds from long term
debt................... 191,531 -- -- -- 191,531
Payments on long term
debt................... (128,922) (272) -- -- (129,194)
Other................... (5,810) (766) -- -- (6,576)
--------- -------- ------- ---- ---------
Net cash provided by
(used in) financing
activities............. 56,799 (1,038) -- -- 55,761
--------- -------- ------- ---- ---------
Increase (decrease) in
cash and cash
equivalents............ 9,915 (77) 231 -- 10,069
Cash and cash
equivalents at
beginning of year...... 816 317 1,324 -- 2,457
--------- -------- ------- ---- ---------
Cash and cash
equivalents at end of
year................... $ 10,731 $ 240 $ 1,555 $-- $ 12,526
========= ======== ======= ==== =========
F-26
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth the financial data at September 30, 1997 and for the
year then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Statement of Operations
Data
Net revenues............ $-- $94,991 $19,116 $(299) $113,808
Patient care costs...... -- 66,377 15,536 -- 81,913
General and
administrative
expenses............... -- 13,494 1,361 -- 14,855
Provision for bad
debts.................. -- 578 136 -- 714
Depreciation and
amortization........... -- 4,159 781 -- 4,940
---- ------- ------- ----- --------
Income from operations.. -- 10,383 1,302 (299) 11,386
Interest (expense)
income, net............ 424 (2,200) (671) 299 (2,148)
Minority interests in
earnings............... -- (1,601) -- -- (1,601)
Other income, net....... -- 279 -- -- 279
---- ------- ------- ----- --------
Income before income tax
expense................ 424 6,861 631 -- 7,916
Income tax expense...... -- 3,689 -- -- 3,689
---- ------- ------- ----- --------
Net income ............. $424 $ 3,172 $ 631 $ -- $ 4,227
==== ======= ======= ===== ========
Statement of Cash Flows
Data
Operating activities:
Net income ........... $424 $ 3,172 $ 631 $ -- $ 4,227
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Provision for bad
debts.............. -- 578 136 -- 714
Depreciation and
amortization....... -- 4,159 781 -- 4,940
Deferred income
taxes.............. -- 531 -- -- 531
Minority interests
in earnings........ -- 1,601 -- -- 1,601
Net change in
operating assets
and liabilities
(net of effect of
acquisition)....... 392 (9,528) (224) -- (9,360)
---- ------- ------- ----- --------
Net cash provided by
operating
activities......... 816 513 1,324 -- 2,653
Investing activities:
Additions to property
and equipment........ -- (7,757) -- -- (7,757)
Acquisition of
businesses, net of
cash acquired........ -- (5,042) -- -- (5,042)
Increase in amounts
due from affiliates.. -- (4,771) -- -- (4,771)
---- ------- ------- ----- --------
Net cash used in
investing
activities........... -- (17,570) -- -- (17,570)
Financing activities:
Proceeds from long
term debt............ -- 69,261 -- -- 69,261
Payments on long term
debt................. -- (50,846) -- -- (50,846)
Other................. -- (1,041) -- -- (1,041)
---- ------- ------- ----- --------
Net cash provided by
financing
activities........... -- 17,374 -- -- 17,374
---- ------- ------- ----- --------
Increase in cash and
cash equivalents....... 816 317 1,324 -- 2,457
Cash and cash
equivalents at
beginning of year...... -- -- -- -- --
---- ------- ------- ----- --------
Cash and cash
equivalents at end of
year................... $816 $ 317 $ 1,324 $ -- $ 2,457
==== ======= ======= ===== ========
F-27
SCHEDULE II
Valuation & Qualifying Accounts
Everest Healthcare Services Corporation
(in thousands)
Balance Balance
at Charged Charged at End
Beginning to to Other of
of Period Expense Accounts Recoveries Period
--------- ------- -------- ---------- -------
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
====== ====== ======= ====== =======
Year ended September 30, 1998
Deducted from asset accounts:
Allowance for patient accounts
receivable.................... $2,791 $2,727 $ 5,558 $2,295 $ 8,781
------ ------ ------- ------ -------
Total........................ $2,791 $2,727 $ 5,558 $2,295 $ 8,781
====== ====== ======= ====== =======
Year ended September 30, 1999
Deducted from asset accounts:
Allowance for patient accounts
receivable.................... $8,781 $7,360 $(5,022) $ -- $11,119
------ ------ ------- ------ -------
Total........................ $8,781 $7,360 $(5,022) $ -- $11,119
====== ====== ======= ====== =======
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