UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
148 West State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of August 12, 1996: 31,939,939
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION....................................... 1
Item 1. Financial Statements................................... 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 7
PART II. OTHER INFORMATION.......................................... 12
Item 1. Legal Proceedings...................................... 12
Item 2. Changes in Securities.................................. 12
Item 3. Defaults Upon Senior Securities........................ 12
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Item 5. Other Information...................................... 12
Item 6. Exhibits and Reports on Form 8-K....................... 12-15
SIGNATURES........................................................... 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, September 30,
1996 1995
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 70,626 $ 10,387
Accounts receivable, net of allowance for
doubtful accounts of $9,674 at June 30,
1996 and $6,179 at September 30, 1995 144,036 101,124
Cost report receivables 31,413 26,271
Inventory 16,872 9,601
Other current assets 34,062 43,674
--------- ---------
Total current assets 297,009 191,057
--------- ---------
Property, plant and equipment 375,628 294,769
Accumulated depreciation (62,240) (51,108)
--------- ---------
313,388 243,661
Goodwill and other intangibles, net 196,119 114,947
Other assets 71,832 50,724
--------- ---------
TOTAL ASSETS $ 878,348 $ 600,389
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 64,163 $ 52,522
Current installments of long-term debt 2,512 2,539
Income taxes payable 2,735 1,882
--------- ---------
Total current liabilities 69,410 56,943
--------- ---------
Long-term debt 295,897 308,052
Deferred income taxes 6,586 8,698
Deferred gain and other liabilities 6,217 5,149
Shareholders' Equity:
Common stock, par value $.02, authorized
60,000,000 shares, issued and outstanding,
31,981,680 and 31,936,079 at June 30, 1996;
22,081,267 and 22,035,666 at
September 30, 1995 476 294
Additional paid-in capital 411,677 155,927
Retained earnings 88,328 65,569
--------- ---------
500,481 221,790
Less treasury stock, at cost (243) (243)
--------- ---------
Total shareholders' equity 500,238 221,547
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 878,348 $ 600,389
========= =========
See accompanying notes to condensed consolidated financial statements.
-1-
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
-----------
Three Months Ended
June 30,
1996 1995
---- ----
Net revenues:
Basic healthcare services $ 85,846 $ 69,701
Specialty medical services 78,347 48,188
Management services and other, net 8,643 8,070
-------------- --------------
Total net revenues 172,836 125,959
Operating expenses:
Salaries, wages and benefits 80,919 62,009
Other operating expenses 52,786 34,978
General corporate expense 6,515 4,449
Debenture conversion expense 155 ---
Depreciation and amortization 6,648 5,003
Lease expense 4,086 3,657
Interest expense, net 6,125 4,976
-------------- --------------
Earnings before income taxes and
extraordinary item 15,602 10,887
Income taxes 5,511 4,002
-------------- --------------
Earnings before extraordinary item 10,091 6,885
Extraordinary item, net of tax --- (1,923)
-------------- --------------
Net income $ 10,091 $ 4,962
============== ==============
Per common share data:
Primary
Earnings excluding debenture
conversion expense and
extraordinary item, net of tax $ .37 $ .30
Debenture conversion expense --- ---
Extraordinary item, net of tax --- (.08)
Net income $ .37 $ .22
Weighted average shares of
Common Stock and equivalents 27,507,276 22,635,350
Fully diluted
Earnings excluding ebenture
conversion expense and
extraordinary item, net of tax $ .35 $ .28
Debenture conversion expense --- ---
Extraordinary item, net of tax --- (.07)
Net income $ .35 $ .21
Weighted average shares of
Common Stock and equivalents 31,108,391 28,387,825
See accompanying notes to condensed consolidated financial statements.
-2-
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
-----------
Nine Months Ended
June 30,
--------
1996 1995
---- ----
Net revenues:
Basic healthcare services $ 241,107 $ 206,073
Specialty medical services 193,347 128,333
Management services and other, net 25,900 20,059
--------------- ---------------
Total net revenues 460,354 354,465
Operating expenses:
Salaries, wages and benefits 223,244 175,612
Other operating expenses 132,180 99,778
General corporate expense 17,617 12,730
Debenture conversion expense 1,245 ---
Depreciation and amortization 17,883 13,987
Lease expense 11,948 10,388
Interest expense, net 19,104 14,369
--------------- ---------------
Earnings before income taxes and
extraordinary item 37,133 27,601
Income taxes 13,374 10,093
--------------- ---------------
Earnings before extraordinary item 23,759 17,508
Extraordinary item, net of tax --- (1,923)
--------------- ---------------
Net income $ 23,759 $ 15,585
================ ===============
Per common share data:
Primary
Earnings excluding debenture
conversion expense and
extraordinary item, net of tax $ .96 $ .78
Debenture conversion expense (.03) ---
Extraordinary item, net of tax --- (.09)
Net income $ .93 $ .69
Weighted average shares of Common
Stock and equivalents 25,438,335 22,556,985
Fully diluted
Earnings excluding debenture
conversion expense and
extraordinary item $ .91 $ .72
Debenture conversion expense (.03) ---
Extraordinary item, net of tax --- (.06)
Net income $ .88 $ .66
Weighted average shares of Common
Stock and equivalents 29,358,861 28,284,792
See accompanying notes to condensed consolidated financial statements.
-3-
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
-----------
Nine Months Ended
June 30,
--------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 23,759 15,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Charges (credits) included in operations not
requiring funds:
Provision for deferred taxes 3,343 2,902
Depreciation and amortization 17,883 13,987
Amortization of deferred gain (345) (345)
Debenture conversion expense 1,245 ---
Extraordinary item, net of tax --- 1,923
Changes in assets and liabilities excluding effects
of acquisitions:
Increase in accounts receivable (16,348) (16,425)
Increase in cost report receivables (6,418) (8,000)
Increase in inventory (2,207) (492)
(Increase) decrease in other current assets (9,012) 1,562
Increase (decrease) in accounts payable and
accrued expenses 3,144 (4,265)
Increase (decrease) in income taxes payable (816) 759
-------------- ------------
Total adjustments (9,531) (8,394)
-------------- ------------
Net cash provided by operating activities 14,228 7,191
-------------- ------------
Cash flows from investing activities:
Capital expenditures (26,151) (19,681)
Cash paid, net-- acquisitions (140,816) (8,194)
Deferred and other long-term asset
additions, net (8,856) (10,376)
Increase in trustee-held funds (50) (490)
-------------- ------------
Net cash used in investing activities (175,873) (38,741)
-------------- ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 211,250 ---
Stock issuance costs (9,248) ---
Net borrowings under bank credit facility 20,300 19,600
Repayment of long-term debt (1,673) (101,353)
Proceeds from issuance of long-term debt --- 119,700
Debenture conversion expense (1,245) ---
Proceeds from exercise of common stock
options 2,500 981
Debt issuance costs --- (3,600)
-------------- ------------
Net cash provided by financing activities $ 221,884 35,328
-------------- ------------
Net increase in cash and cash equivalents $ 60,239 3,778
-------------- ------------
Cash and cash equivalents:
Beginning of the period 10,387 3,817
End of the period $ 70,626 7,595
-------------- ------------
Supplemental disclosure of cash flow information:
Interest paid $ 22,755 15,818
-------------- ------------
Income taxes paid $ 12,451 9,509
============== ============
See accompanying notes to condensed consolidated financial statements.
-4-
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's annual report for the fiscal year ended
September 30, 1995. The information furnished is unaudited but reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial information for the periods shown. Such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results expected for the full year.
2. Earnings Per Share
Primary and fully-diluted earnings per share are based on the weighted
average number of common shares outstanding and the dilutive effect of stock
options, convertible debentures and other common stock equivalents.
3. Pro Forma Financial Information
In July 1996, the Company and Geriatric and Medical Companies, Inc.
("GEMC") entered into an agreement providing for the merger of GEMC into a
wholly-owned subsidiary of Genesis. The merger, and a related transaction with
an affiliate of GEMC, will add 19 long-term care facilities and eight
residential care and independent living facilities with approximately 3,500 beds
and certain ancillary businesses to Genesis. Under the terms of the merger
agreement, unanimously approved by the board of directors of both companies,
GEMC shareholders would receive $5.75 per share in cash for each GEMC share. The
purchase price of GEMC stock is approximately $91,000,000 and the total value of
the transaction, including approximately $132,000,000 of assumed debt, is
approximately $223,000,000. The Company expects to fund the cash portion of the
transaction through its bank credit facility. Consummation of the transaction is
expected in the fourth quarter of calendar 1996, and is subject to normal
closing conditions, regulatory approvals and GEMC shareholder approval.
In July 1996, the Company acquired the outstanding stock of National
Health Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center
Corporation, EIDOS, Inc. and Versalink, Inc. (collectively, "National Health").
Prior to the closing of the stock acquisitions, an affiliate of a financial
institution purchased nine of the eldercare centers for $67,700,000 and
subsequently leased the centers to a subsidiary of Genesis under operating lease
agreements. The balance of the total consideration paid to National Health was
funded with available cash ($51,800,000) and assumed debt ($7,900,000). National
Health owns six eldercare centers in Florida with 863 beds, leases four
eldercare centers in Florida with 368 beds, owns five eldercare centers in
Virginia with 851 beds, and leases one eldercare center in Connecticut with 120
beds. National Health also provides enteral nutrition and rehabilitation therapy
services to the eldercare centers which it owns and leases. In addition,
National Health manages four eldercare centers in Colorado with 283 beds
pursuant to an agreement which expires in October 1997.
In June 1996, the Company acquired the outstanding stock of NeighborCare
Pharmacies, Inc. ("NeighborCare"), a privately held institutional pharmacy,
infusion therapy and retail pharmacy business based in Baltimore, Maryland.
Total consideration was approximately $57,250,000,
-5-
comprised of approximately $47,250,000 in cash and 312,744 shares of Genesis
common stock.
On November 30, 1995, the Company acquired all of the issued and
outstanding stock and partnership interests of McKerley Health Care Centers,
Inc., McKerley Health Care Center - Concord, Inc., McKerley Health Facilities
and McKerley Health Care Center - Concord, L.P. (collectively, the "McKerley
Entities"). The Company acquired the outstanding stock and partnership interests
of the McKerley Entities for approximately $68,700,000, including assumed debt
and after giving effect to the funds placed in escrow by the principals as
described below. An additional $6,000,000 of purchase price is payable if
certain financial objectives are achieved through October 1997. The transaction
was financed with borrowings under the Company's bank credit facility.
Pursuant to certain agreements executed on November 30, 1995, the
Company directly or through one or more subsidiaries, agreed to provide certain
services to the principals during the period ending November 30, 1998, and the
principals agreed to make certain lease payments on behalf of the Company with
respect to certain lease obligations of the McKerley Entities. As security for
the principals' or their affiliates' obligation to make the required payments as
they become due, the principals placed approximately $6,500,000 in an account
with a third party escrow agent.
The following unaudited pro forma statement of operations information
gives effect to the GEMC, National Health, NeighborCare and McKerley
transactions described above as though they had occurred at the beginning of the
periods presented, after giving effect to certain adjustments, including
amortization of goodwill, additional depreciation expense, increased interest
expense on debt related to the acquisitions and related income tax effects. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the acquisitions occurred at the
beginning of the periods presented.
(In thousands, except per share data)
Nine Months Ended
June 30, June 30,
Pro Forma Statement of Operations Information: 1996 1995
---- ----
Total net revenues $ 710,790 $ 654,092
Net income before extraordinary item and debenture
conversion expense 26,433 19,115
Primary earnings per share before extraordinary
item and debenture conversion expense 1.03 .83
Fully diluted earnings per share before
extraordinary item and debenture conversion
expense .96 .77
-6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its
efforts on providing an expanding array of specialty medical services to elderly
customers. The delivery of these services was originally concentrated in the
eldercare centers owned and leased by the Company, but now also includes managed
eldercare centers, independent healthcare facilities, outpatient clinics and
home health care.
The Company generates revenues from three sources: basic healthcare
services, specialty medical services and management services. The Company
includes in basic healthcare services revenues all room and board charges from
its customers at its owned and leased eldercare centers. Specialty medical
services include all revenues from providing rehabilitation therapies,
institutional pharmacy and medical supply services, subacute care programs, home
health care, physician services, and other specialized services. Management
services include fees earned for management of eldercare centers, development
of life care communities and revenues from the group purchasing, staff
replacement and vending businesses.
Genesis delivers its services through three divisions. The largest, in
terms of revenues, is Genesis ElderCare Centers, which at June 30, 1996 included
68 owned and leased eldercare centers. The second, Genesis ElderCare Services,
provides specialty medical services to all centers owned, leased or managed by
Genesis as well as to over 500 independent healthcare providers. The third,
Genesis ElderCare Network Services, manages 39 eldercare centers.
Certain Transactions
In July 1996, the Company and Geriatric and Medical Companies, Inc.
("GEMC") entered into an agreement providing for the merger of GEMC into a
wholly-owned subsidiary of Genesis. The merger, and a related transaction with
an affiliate of GEMC, will add 19 long-term care facilities and eight
residential care and independent living facilities with approximately 3,500 beds
and certain ancillary businesses to Genesis. Under the terms of the merger
agreement, unanimously approved by the board of directors of both companies,
GEMC shareholders would receive $5.75 per share in cash for each GEMC share. The
purchase price of GEMC stock is approximately $91,000,000 and the total value of
the transaction, including approximately $132,000,000 of assumed debt, is
approximately $223,000,000. The Company expects to fund the cash portion of the
transaction through its bank credit facility. Consummation of the transaction is
expected in the fourth quarter of calendar 1996, and is subject to normal
closing conditions, regulatory approvals and GEMC shareholder approval.
In August 1996, the Company acquired the outstanding stock of Diane
Morgan & Associates and an affiliate. The purchase price was $3,820,000 of which
$3,300,000 was paid from available cash at closing and the balance of the
consideration was in the form of notes issued to the principals.
In July 1996, the Company acquired the outstanding stock of National
Health Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center
Corporation, EIDOS, Inc. and Versalink, Inc. (collectively, "National Health").
Prior to the closing of the stock acquisitions, an affiliate of a financial
institution purchased nine of the eldercare centers for $67,700,000 and
subsequently leased the centers to a subsidiary of Genesis under operating lease
agreements. The balance of the total consideration paid to National
-7-
Health was funded with available cash ($51,800,000) and assumed debt
($7,900,000). National Health owns six eldercare centers in Florida with 863
beds, leases four eldercare centers in Florida with 368 beds, owns five
eldercare centers in Virginia with 851 beds, and leases one eldercare center in
Connecticut with 120 beds. National Health also provides enteral nutrition and
rehabilitation therapy services to the eldercare centers which it owns and
leases. In addition, National Health manages four eldercare centers in Colorado
with 283 beds pursuant to an agreement which expires in October 1997.
In June 1996, the Company acquired the outstanding stock of
NeighborCare, a privately held institutional pharmacy, infusion therapy and
retail pharmacy business based in Baltimore, Maryland. Total consideration was
approximately $57,250,000, comprised of approximately $47,250,000 in cash and
312,744 shares of Genesis common stock.
In March 1996, the Company sold four eldercare centers and a pharmacy in
Indiana for approximately $22,250,000.
In March 1996, the Company acquired for total consideration of
approximately $31,900,000, including the payment of assumed debt, the remaining
approximately 71% joint venture interests of four eldercare centers in Maryland
and the remaining 50% joint venture interest of an eldercare center in Florida
which had been acquired as part of the Meridian Transaction (the "Partnership
Interest Purchase").
In March 1996, the Company entered into a strategic alliance with
Doctors Community Hospital, a 250-bed acute care hospital in Maryland, pursuant
to which the Company sold to an affiliate of the hospital a 51% interest in
Magnolia Gardens Center, a 104-bed eldercare center for approximately
$2,900,000. As part of this transaction, the Company entered into a long-term
agreement to manage the center.
In January 1996, the Company acquired the speech therapy, occupational
therapy and physical therapy services businesses of Medical and Rehab Support
Services, Inc., Professional Rehabilitation Network, Inc. and Health Services
Network, Inc. (collectively, "Therapy Companies") for approximately $9,300,000.
The Therapy Companies provide these services in the Company's Baltimore,
Maryland/ Washington, D.C. market. The acquisition was financed with borrowings
under the Company's bank credit facilities.
Prior to January 1, 1996, the Company provided management, development
and marketing services to life care communities operated by Adult Community
Total Services, Inc. ("ACTS"), a Pennsylvania non-profit corporation, pursuant
to a management agreement which was to expire in April 1998. Effective January
1, 1996, Genesis restructured its relationship with ACTS. Under the revised
arrangement, Genesis was paid a $2,000,000 restructuring fee and will no longer
manage the ACTS life care communities. Genesis will continue to provide
development services for a fee in an amount equal to five percent of the total
cost of developing and completing facilities developed by ACTS. The development
portion of the contract has been extended to December 2002 and Genesis is
guaranteed a minimum annual development fee of approximately $1,500,000 per
year. Genesis also continues to provide certain ancillary services to the ACTS
communities.
-8-
In November 1995, the Company acquired McKerley Health Care Centers,
Inc. and certain related entities (collectively, "McKerley") for total
consideration of approximately $68,700,000. The transaction also provides for up
to an additional $6,000,000 of contingent consideration payable upon the
achievement of certain financial objectives through October 1997. McKerley owns
or leases 15 eldercare centers in New Hampshire and Vermont with a total of
1,535 beds and operates a home healthcare company. The acquisition was financed
with borrowings under the Company's bank credit facilities.
Results of Operations
Three months ended June 30, 1996 compared to three months ended June 30,
1995.
The Company's total net revenues for the quarter ended June 30, 1996
were $172,836,000 compared to $125,959,000 for the quarter ended June 30, 1995,
an increase of $46,877,000, or 37%. Basic healthcare services increased
$16,145,000, or 23% due principally to the acquisition of the McKerley Entities,
the purchase of the remaining partnership interests of five eldercare centers in
March 1996 (which was partially offset by the sale of four eldercare centers in
Indiana), a shift in payor mix from Medicaid to Medicare and rate increases.
Specialty medical services increased $30,159,000, or 63%, of which approximately
$17,222,000 is due primarily to the acquisitions of NeighborCare and the Therapy
Companies, with the remainder due to volume growth in the institutional
pharmacy, medical supply and contract therapy divisions, and an increase in the
relative acuity levels of patients in our owned and leased eldercare centers.
Specialty medical service revenue per patient day in the health centers division
increased 17% to $30.99 in the quarter ended June 30, 1996 as compared to $26.55
for the same quarter in the prior year due primarily to treatment of higher
acuity patients. Management services and other income increased $573,000, or 7%.
Service related business revenues (group purchasing and staff replacement
services) increased approximately $600,000 in the three months ended June 30,
1996 as compared to the corresponding period in the prior year. Transactional
and other net revenues, including a gain on the sale of an investment, in the
three months ended June 30, 1996, increased approximately $900,000 as compared
to the corresponding period in the prior year while management fees recognized
from the management of facilities owned by others decreased $900,000 in the
three months ended June 30, 1996 as compared to the corresponding period in the
prior year.
The Company's operating expenses before debenture conversion expense,
depreciation, amortization and lease expense were $140,220,000 in the quarter
ended June 30, 1996 compared to $101,436,000 in the comparable prior period, an
increase of $38,784,000, or 38%, which was due primarily to the acquisitions of
the McKerley Entities and NeighborCare, an increase in cost of goods sold
related to increased sales of specialty medical services and inflationary wage
and benefit increases.
In the quarter ended June 30, 1996, the Company converted approximately
$8,800,000 of Debentures. In connection with the early conversion of the
Debentures, the Company paid approximately $155,000 representing the prepayment
of interest to converting debenture holders. The non-recurring cash payment is
presented as debenture conversion expense in the result of operations for the
three months ended June 30, 1996. The conversion of a portion of the outstanding
Debentures improves the Company's leverage and provides the Company with the
ability to borrow under its revolving credit facilities at lower rates.
Interest expense increased $1,149,000 or 23%. This increase reflects
increased debt levels used to fund acquisitions and operations and a higher
average prevailing interest rate due to the issuance of $120,000,000 of 9.75%
Senior Subordinated Debentures due 2005 partially offset by the repayment of
approximately $115,480,000 of indebtedness in June 1996 from a part of the net
proceeds of the Company's equity offering and interest income generated from
investment of the remaining net proceeds.
Nine months ended June 30, 1996 compared to Nine months ended June 30,
1995.
The Company's total net revenues for the nine months ended June 30, 1996
were $460,354,000 compared to $354,465,000 for the nine months ended June 30,
1995, an increase of $105,889,000 or 30%. Basic healthcare services increased
$35,034,000 or 17%, which is primarily due to the acquisition of the McKerley
Entities and the purchase of the remaining partnership interests of five
eldercare centers in March 1996 (which was partially offset by the sale of five
eldercare centers in Massachusetts in September 1995), and
-9-
the sale of four eldercare centers in Indiana in March 1996, along with a shift
in payor mix from Medicaid to Medicare and rate increases. Specialty medical
service revenue increased $65,014,000 or 51%, of which approximately
$30,005,000 is due to acquisitions, with the remainder due to other volume
growth in the institutional pharmacy, medical supply and contract therapy
divisions. Specialty medical service revenue per patient day in the health
centers division increased 21% to $29.38 in the nine months ended June 30, 1996
as compared to $24.31 for the same period in the prior year due primarily to
treatment of higher acuity patients. Management services and other income
increased $5,841,000 or 29% primarily due to an increase in service related
business revenues (group purchasing and staff replacement services) of
approximately $1,700,000 and an increase in transactional gains of approximately
$3,700,000. Transactional and other activity in the nine months ended June 30,
1996 included gains recognized in connection with the sale of an investment, the
sale of four eldercare centers and a pharmacy in Indiana and the sale of a
majority interest in one eldercare center in Maryland.
The Company's operating expenses before debenture conversion expense,
depreciation, amortization and lease expense were $373,041,000 compared to
$288,120,000 in the comparable prior period, an increase of $84,921 or 29%,
which was due to the acquisition of the McKerley Entities, the NeighborCare
transaction, an increase in cost of goods sold related to increased specialty
medical service revenues, and inflationary wage and benefit increases.
In the nine months ended June 30, 1996 the Company converted
approximately $42,300,000 of its 6% Convertible Senior Subordinated Debentures
(the Debentures) due 2003. In connection with the early conversion of the
Debentures, the Company paid approximately $1,245,000 representing the
prepayment of interest to converting debenture holders. The non-recurring cash
payment is presented as debenture conversion expense in the results of
operations for the nine months ended June 30, 1996.
Interest expense increased $4,735,000 or 33%. This increase reflects
increased debt levels used to fund acquisitions and a higher average prevailing
interest rate due to the issuance of $120,000,000 of 9.75% Senior Subordinated
Debentures due 2005 partially offset by the repayment of approximately
$115,480,000 of indebtedness in June 1996 from a part of the net proceeds of the
Company's equity offering and interest income generated from investment of the
remaining net proceeds.
Liquidity and Capital Resources
Working capital increased to $227,599,000 at June 30, 1996 from
$134,114,000 at September 30, 1995 due primarily to cash raised in the May 1996
equity offering which was not used to repay indebtedness. Accounts receivable
increased to $144,036,000 at June 30, 1996 from $101,124,000 at September 30,
1995. Approximately $14,300,000 of this increase relates to accounts receivables
purchased as a part of the NeighborCare acquisition, approximately $4,800,000 of
this increase relates to accounts receivables purchased as part of the
acquisition of the McKerley Entities, approximately $3,000,000 relates to
accounts receivables purchased as part of the acquisition of the Therapy
Companies in January 1996, approximately $3,800,000 relates to the Partnership
Interest Purchase, and the remaining $17,012,000 relates primarily to the
continuing shift in business mix to specialty medical services including the
specialty medical businesses acquired during fiscal 1995. Days of revenue in
accounts receivable increased to 75 from 72 during this period.
In May 1996, the Company completed an offering of 6,500,000 shares of
Common Stock at $32.50 per share, resulting in net proceeds of $202,280,000. The
Company used the net proceeds from the offering to repay a portion of amounts
outstanding under its bank credit facilities and for working capital purposes.
In March 1996, the Company sold four eldercare centers and a pharmacy in
Indiana for approximately $22,250,000. The Company used the net proceeds from
the sale to repay a portion of its revolving credit facility.
-10-
In November 1995, the Company received in cash approximately $18,000,000
in connection with the September 1995 sale of five facilities in Massachusetts.
The Company used the proceeds from the sale to repay a portion of the revolving
credit facility.
The Company's cash flow from operations for the nine months ended June
30, 1996 was $14,228,000 compared to $7,191,000 for the nine months ended June
30, 1995.
In August 1996, the Company amended and restructured its credit facility
to provide for the termination of its $100,000,000 acquisition credit facility
and to create an $85,000,000 lease financing facility. The lease financing
facility bears interest of a floating into equal, at the Company's option, to
prime rate or LIBOR plus 1.09% and the Company's $200,000,000 revolving credit
facility bears interest at a floating rate equal, at the Company's option, to
prime rate or LIBOR plus 1.25%. Amounts outstanding under the revolving credit
facility in September 1998 convert to a term loan that provides for equal annual
amortization payable quarterly. At June 30, 1996, $86,800,000 was outstanding
under the revolving credit facility and there were no amounts outstanding under
the acquisition credit facility. The Company used the borrowings under the
acquisition credit facility to fund the acquisition of the McKerley Entities,
the Partnership Interest Purchase, and the Therapy Companies. The credit
facilities are secured by the stock of the Company's subsidiaries and first
priority liens on the Company's accounts receivable, inventory and all other
personal property.
In June 1995, the Company completed an offering of $120,000,000 of 9
3/4% Senior Subordinated Notes due 2005 resulting in net proceeds of
approximately $115,800,000. The Company used $100,000,000 of the net proceeds
from the offering to repay in full the term loan component of the credit
facility and the remaining net proceeds to repay a part of the revolving portion
of the credit facility.
The Company believes that its liquidity needs can be met by expected
operating cash flow and availability of borrowings under its bank credit
facilities. At August 10, 1996, $86,600,000 was outstanding under the credit
facility, and $13,200,000 was outstanding under letters of credit issued under
the credit facilities resulting in $100,200,000 of availability under the
revolving credit facility.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles, and the number of calendar days
in a given quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs
are especially sensitive to inflation and resulting marketplace labor shortages.
To date, the Company has offset its increased operating costs by increasing
charges for its services and expanding its services. Genesis has also
implemented cost control measures to limit increases in operating costs and
expenses but cannot predict its ability to control such operating cost increases
in the future.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
3.1 Amendment to Bylaws
10.1(1) Stock Purchase Agreement, dated April 21,
1996, by and among Genesis Health
Ventures, Inc., a Pennsylvania corporation
and NeighborCare Pharmacies, Inc., a
Maryland corporation, Professional
Pharmacy Services, Inc., a Maryland
corporation, Medical Services Group, Inc.,
a Maryland corporation, CareCard, Inc., a
Maryland corporation, Transport Services,
Inc., a Maryland corporation, Michael G.
Bronfein, Jessica Bronfein, Stanton G.
Ades, Renee Ades, The Chase Manhattan
Bank, N.A. and PPS Acquisition Corp., a
Maryland corporation and a wholly-owned
subsidiary of Genesis Health Ventures,
Inc.
10.2(2) Purchase Agreement, dated May 3, 1996, by
and among Mark E. Hamister, Oliver C.
Hamister, George E. Hamister, Julia L.
Hamister, The George E. Hamister Trust,
The Oliver C. Hamister Trust, National
Health Care Affiliates, Inc., Oak Hill
Health Care Center, Inc., Derby Nursing
Center Corporation, Delaware Avenue
Partnership, EIDOS, Inc., VersaLink Inc.,
certain other individuals and Genesis
Health Ventures, Inc.
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(1) Incorporated by reference to Form 8-K of Genesis dated April 21, 1996
(2) Incorporated by reference to Form 8-K of Genesis dated May 3, 1996
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10.3(3) Purchase Agreement Addendum, dated July
24, 1996, by and among Mark E. Hamister,
Oliver C. Hamister, George E. Hamister,
Julia L. Hamister, The George E. Hamister
Trust, The Oliver C. Hamister Trust,
National Health Care Affiliates, Inc., Oak
Hill Health Care Center, Inc., Derby
Nursing Center Corporation, Delaware
Avenue Partnership, EIDOS, Inc., VersaLink
Inc., certain other individuals and
Genesis Health Ventures, Inc.
10.4 Second Amendment and Waiver to Loan
Documents by and among Genesis Health
Ventures, Inc. and certain of its
Subsidiaries and Mellon Bank, N.A., as
agent
10.5 Letter dated July 24, 1996 from Genesis
Health Ventures, Inc. and certain of its
Subsidiaries to Mellon Bank, N.A., as
agent, Terminating Acquisition Credit
Agreement
10.6 Guaranty and Agreement of Suretyship
Regarding Obligations of Lessee and
Affiliates from Genesis Health Ventures,
Inc. and its Material Subsidiaries, Dated
as of July 24, 1996
10.7 Guaranty and Agreement of Suretyship from
Genesis Health Ventures, Inc. and its
Material Subsidiaries, Dated as of July
24, 1996
10.8 Lease and Agreement, Dated as of July 24,
1996, between Mellon Financial Services
Corporation #4, as Lessor, and Genesis
Eldercare Properties, Inc., as Lessee
10.9 Participation Agreement, Dated as of July
24, 1996, among Genesis Eldercare
Properties, Inc., as Lessee, Mellon
Financial Services Corporation #4, as
Lessor, Persons Named on Schedule I, as
Lenders, and Mellon Bank, N.A. not in its
individual capacity except as expressly
stated therein, but solely as Agent
11. Computation of Earnings per Share
27. Financial Data Schedule
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(3) Incorporated by reference to Form 8-K of Genesis dated July 26, 1996
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(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated
April 21, 1996, reporting an agreement by the Company to
acquire the outstanding stock of NeighborCare for
consideration of approximately $57,250,000, including
assigned debt.
The Company filed a Current Report on Form 8-K, dated May
3, 1995, reporting the agreement of the Company to
acquire National Health Care Affiliates, Inc. and related
entities which included the following financial
statements:
Audited Combined Financial Statements as of and
for the year ended December 31, 1995.
On May 21, 1996, the Company filed a Current Report on
Form 8-K/A Number 3, dated November 30, 1995, amending
the Company's report of its acquisition of McKerley
Health Care Centers, Inc. and related entities to include
the following financial information of businesses
acquired:
Consolidating Balance Sheet of McKerley Entities
as of December 31, 1994.
Consolidating Income Statement of McKerley
Entities for the year ended December 31, 1994.
Financial Statements and Other Financial
Information (Audited) McKerley Health Care
Centers, Inc. Years ended December 31, 1994 and
1993.
Financial Statements and Other Financial
Information (Audited) McKerley Health Facilities
for the period from March 11, 1994 (date of
initial occupancy) to December 31, 1994.
Financial Statements and Other Financial
Information (Audited) McKerley Health Care
Center-Concord Limited Partnership Years ended
December 31, 1994 and 1993.
Financial Statements and Other Financial
Information (Reviewed) McKerley Pleasant View,
Inc. Years ended December 31, 1994 and 1993.
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Consolidated Balance Sheet of McKerley Entities
as of November 30, 1995.
Consolidated Income Statement of McKerley
Entities for the eleven months ended November 30,
1995.
Consolidating Balance Sheet of McKerley Entities
as of November 30, 1995.
Consolidating Income Statement of McKerley
Entities for the eleven months ended November 30,
1995.
Balance Sheet and Income Statement (Unaudited)
McKerley Health Care Centers, Inc. Eleven months
ended November 30, 1995.
Balance Sheet and Income Statement (Unaudited)
McKerley Health Facilities Eleven months ended
November 30, 1995.
Balance Sheet and Income Statement (Unaudited)
McKerley Health Care Center-Concord Limited
Partnership Eleven months ended November 30,
1995.
Balance Sheet and Income Statement (Unaudited)
McKerley Pleasant View, Inc. Eleven months ended
November 30, 1995.
Pro Forma Financial Information.
Pro Forma Condensed Consolidated Income
Statement for the year ended September 30,
1995 and six months ended March 31, 1996.
Pro Forma Condensed Consolidated Balance
Sheet as of September 30, 1995.
The Company filed a Current Report on Form 8-K, dated
June 5, 1996, reporting the Company's acquisition of
NeighborCare Pharmacies, Inc. and related entities for
consideration of approximately $57,250,000.
The Company filed a Current Report on Form 8-K, dated
July 26, 1996, reporting the Company's acquisition of
National Health Care Affiliates, Inc. and related
entities for consideration of approximately $59,800,000.
Prior to the acquisition, an affiliate of a financial
institution purchased nine eldercare centers owned by
National Health for approximately $67,700,000 and
subsequently leased the centers to a subsidiary of
Genesis under the terms of operating lease agreements.
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SIGNATURES
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 thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: August 14, 1996 /s/ George V. Hager, Jr.
------------------------
George V. Hager, Jr.
Senior Vice President and Chief Financial Officer
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