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 (FEE REQUIRED) FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of Registrant as specified in its charter)
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148 West State Street
Pennsylvania Kennett Square, PA 19348 06-1132947
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
- ------------------------------------------ ---------------------------------------- ----------------------------------------
(610) 444-6350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.02 per share New York Stock Exchange
6% Convertible Senior Subordinated Debentures due 2003 New York Stock Exchange
9 3/4% Senior Subordinated Debentures due 2005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (i) 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, and (ii) 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. |_|
The aggregate market value of voting stock held by non-affiliates of
the Registrant is $626,558,991 (1). As of December 13, 1996, 32,002,486 shares
of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Proxy Statement to be filed in connection with
its 1997 Annual Meeting are incorporated by reference in Part III of this
Report. Certain exhibits to the Company's Current Report on Forms 8-K and 8-K/A
dated July 11, 1996, May 3, 1996, April 21, 1996, November 30, 1995, August 18,
1995, November 30, 1993, September 19, 1993, Registration Statement on Form S-1
(File No. 33-4007), Registration Statement on Form S-1 (File No. 33-51670),
Registration Statement on Form S-3 (File No. 33-9350) and Registration Statement
on Form S-4 (File No. 333-15267) Annual Reports on Form 10-K for the fiscal
years ended September 30, 1995, 1994, 1993 and 1992, and Quarterly Reports on
Form 10-Q for the fiscal quarters ended March 31, 1996 and March 31, 1994, Form
S-8 dated May 15, 1995, and Form 8-A dated May 11, 1995 are incorporated by
reference as Exhibits in Part IV of this Report.
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(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount of
Common Stock held by officers, directors and shareholders owning in excess of
10% of the Company's Common Stock, multiplied by the last reported sale price
for the Company's Common Stock on December 13, 1996. The information provided
shall in no way be construed as an admission that any officer, director or 10%
shareholder in the Company may or may not be deemed an affiliate of the Company
or that he/it is the beneficial owner of the shares reported as being held by
him/it, and any such inference is hereby disclaimed. The information provided
herein is included solely for recordkeeping purposes of the Securities and
Exchange Commission.
INDEX
PAGE
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS................... 1
ITEM 1: BUSINESS
General ........................................................... 4
Basic Healthcare Services.......................................... 5
Specialty Medical Services......................................... 5
Management Services and Other...................................... 7
Managed Care Initiatives........................................... 7
Recent Transactions................................................ 8
Revenue Sources.................................................... 8
Marketing........................................................... 9
Personnel...........................................................10
Employee Training and Development...................................10
Governmental Regulation.............................................11
Competition.........................................................12
Insurance.......................................................... 13
ITEM 2: PROPERTIES......................................................... 14
ITEM 3: LEGAL PROCEEDINGS.................................................. 14
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 14
ITEM 4.1: EXECUTIVE OFFICERS............................................... 15
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................ 17
ITEM 6: SELECTED FINANCIAL DATA............................................ 18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 20
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 26
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 45
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 46
ITEM 11: EXECUTIVE COMPENSATION............................................ 46
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 46
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 46
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.... 46
Cautionary Statement Regarding Forward Looking Statements
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" such
as statements concerning Medicare and Medicaid programs and the Company's
ability to meet its liquidity needs and control costs; certain statements
contained in "Business" such as statements concerning strategy, government
regulation, Medicare and Medicaid programs, managed care initiatives, and recent
transactions and competition; certain statements in "Legal Proceedings" and
certain statements in the Notes to Consolidated Financial Information, such as
certain of the Pro Forma Adjustments; and other statements contained herein
regarding matters that are not historical facts are forward looking statements
(as such term is defined in the Securities Act of 1933) and because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
those discussed below.
Certain Financial Considerations. The Company has substantial indebtedness
and, as a result, significant debt service obligations. As of September 30,
1996, after giving pro forma effect to the GMC Transaction and the 1996 Note
Offering (as such items are defined in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Certain Transactions") and the
use of proceeds therefrom, the Company would have had approximately $594,000,000
of long-term indebtedness which would have represented approximately 54% of its
total capitalization. The degree to which the Company is leveraged could have
important consequences, including the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations may be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
the funds available to the Company for its operations; (iii) certain of the
Company's borrowings are and will continue to be at variable rates of interest,
which causes the Company to be vulnerable to increases in interest rates; and
(iv) certain of the Company's indebtedness contains financial and other
restrictive covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of assets
and minimum net worth requirements. Failure by the Company to comply with such
covenants may result in an event of default which, if not cured or waived, could
have a material adverse effect on the Company.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
Although the Company's cash flow from its operations has been sufficient to meet
its debt service obligations in the past, there can be no assurance that the
Company's operating results will continue to be sufficient for payment of the
Company's indebtedness. The Company also has significant long-term operating
lease obligations with respect to certain of its eldercare centers.
Risk of Adverse Effect of Healthcare Reform. In addition to extensive
existing government healthcare regulation, there are numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted, or what effect such proposals would have on
the Company's business. Aspects of certain of these healthcare proposals, such
as reductions in funding of the Medicare and Medicaid programs, potential
changes in reimbursement regulations by the Health Care Financing Administration
("HCFA"), enhanced pressure to contain healthcare costs by Medicare, Medicaid
and other payors and permitting greater state flexibility in the administration
of Medicaid, could adversely affect the Company. There can be no assurance that
currently proposed or future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare programs or
regulations will not have a material adverse effect on the Company. Concern
about the potential effects of the proposed reform measures has contributed to
the volatility of prices of securities of companies in healthcare and related
industries, including the Company, and may similarly affect the price of the
Company's securities in the future. See "Business -- Governmental Regulation."
1
Regulation. The federal government and all states in which the Company
operates regulate various aspects of the Company's business. In particular, the
development and operation of eldercare centers and the provision of healthcare
services are subject to federal, state and local laws relating to the delivery
and adequacy of medical care, distribution of pharmaceuticals, equipment,
personnel, operating policies, fire prevention, rate-setting and compliance with
building codes and environmental laws. Eldercare centers are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with various standards, their continued licensing under state law, certification
under the Medicare and Medicaid programs and continued participation in the
Veterans Administration program and the ability to participate in other third
party programs. The Company is also subject to inspection regarding record
keeping and inventory control. Possible sanctions for failing to comply with
various standards include monetary fines, ban on admissions, suspension of
payments and loss of license. The failure to obtain or renew any required
regulatory approvals or licenses could adversely affect the continued expansion
of the Company and could prevent it from offering its existing services.
Many states have adopted Certificate of Need or similar laws which generally
require that the appropriate state agency approve certain acquisitions and
determine that a need exists for certain bed additions, new services and capital
expenditures or other changes prior to beds and/or new services being added or
capital expenditures being undertaken. To the extent that Certificates of Need
or other similar approvals are required for expansion of Company operations,
either through center acquisitions or expansion or provision of new services or
other changes, such expansion could be adversely affected by the failure or
inability to obtain the necessary approvals, changes in the standards applicable
to such approvals and possible delays and expenses associated with obtaining
such approvals.
The Company is also subject to federal and state laws which govern financial
and other arrangements between healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. These laws include the federal "Stark legislations" which
prohibit, with limited exceptions, the referral of patients for certain
services, including home health services, physical therapy and occupational
therapy, by a physician to an entity in which the physician has an ownership
interest and the federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of remuneration
in return for the referral of Medicare and Medicaid patients or the purchasing,
leasing, ordering or arranging for any goods, facility services or items for
which payment can be made under Medicare and Medicaid. The federal government,
private insurers and various state enforcement agencies have increased their
scrutiny of providers, business practices and claims in an effort to identify
and prosecute fraudulent and abusive practices. In addition, the federal
government has issued recent fraud alerts concerning nursing services, double
billing, home health services and the provision of medical supplies to nursing
facilities; accordingly, these areas may come under closer scrutiny by the
government. See "Business -- Governmental Regulation." Furthermore, some states
restrict certain business relationships between physicians and other providers
of healthcare services. Many states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs and
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
From time to time, the Company has sought guidance as to the interpretation of
these laws; however, there can be no assurance that such laws will ultimately be
interpreted in a manner consistent with the practices of the Company.
2
Payment by Third Party Payors. For the years ended September 30, 1996, 1995,
and 1994, respectively, the Company derived approximately 39%, 38% and 41% of
its patient service revenue from private pay sources, 25%, 21% and 16% from
Medicare and 36%, 41% and 43% from various state Medicaid agencies. Both
governmental and private third party payors have employed cost containment
measures designed to limit payments made to healthcare providers such as the
Company. Those measures include the adoption of initial and continuing recipient
eligibility criteria which may limit payment for services, the adoption of
coverage and duration criteria which limit the services which will be reimbursed
and the establishment of payment ceilings which set the maximum reimbursement
that a provider may receive for services. Furthermore, government payment
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all of
which may materially increase or decrease the rate of program payments to the
Company for its services. There can be no assurance that payments under
governmental and private third party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs. In addition, there can be no assurance that centers owned, leased or
managed by the Company, or the provision of services and supplies by the
Company, now or in the future will initially meet or continue to meet the
requirements for participation in such programs. The Company could be adversely
affected by the continuing efforts of governmental and private third party
payors to contain the amount of reimbursement for healthcare services. In an
attempt to limit the federal budget deficit, there have been, and the Company
expects that there will continue to be, a number of proposals to limit Medicare
and Medicaid reimbursement for healthcare services. In certain states there have
been proposals to eliminate the distinction in Medicaid payment for skilled
versus intermediate care services and to establish a case mix prospective
payment system pursuant to which the payment to a facility for a patient is
based upon the patient's condition and need for services. The Company cannot at
this time predict whether any of these proposals will be adopted or, if adopted
and implemented, what effect, if any, such proposals will have on the Company.
In addition, private payors, including managed care payors, increasingly are
demanding discounted fee structures or the assumption by healthcare providers of
all or a portion of the financial risk through prepaid capitation arrangements.
Efforts to impose reduced allowances, greater discounts and more stringent cost
controls by government and other payors are expected to continue. See "Business
- -- Revenue Sources."
Competition. The healthcare industry is highly competitive. The Company
competes with a variety of other companies in providing eldercare services.
Certain competing companies have greater financial and other resources and may
be more established in their respective communities than the Company. Competing
companies may offer newer or different centers or services than the Company and
may thereby attract the Company's customers who are either presently residents
of its eldercare centers or are otherwise receiving its eldercare services. See
"Business -- Competition."
Risks Associated with Proposed Acquisitions and Acquisition Strategy. The
Company has recently completed several acquisitions of eldercare businesses. The
Company also intends to pursue additional acquisitions in the future. There can
be no assurance that the Company will be able to realize expected operating and
economic efficiencies from its recent acquisitions or from any future
acquisitions or that such acquisitions will not adversely affect the Company's
results of operations or financial condition. In addition, there can be no
assurance that the Company will be able to locate suitable acquisition
candidates in the future, consummate acquisitions on favorable terms or
successfully integrate newly acquired businesses with the Company's operations.
The consummation of acquisitions likely will result in the incurrence or
assumption by the Company of additional indebtedness.
3
PART I
BUSINESS
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania
corporation. As used herein, unless the context otherwise requires, "Genesis" or
the "Company" refers to Genesis Health Ventures, Inc. and subsidiaries.
Genesis is a leading provider of healthcare and support services to the
elderly. The Company has developed the Genesis ElderCare(SM) delivery model of
integrated healthcare networks to provide cost-effective, outcome-oriented
services to the elderly. Through these integrated healthcare networks, Genesis
provides basic healthcare and specialty medical services to more than 75,000
customers in four regional markets in the Eastern United States in which over
3,000,000 people over the age of 65 reside. The networks include 148 eldercare
centers with approximately 20,000 beds; 18 primary care physician clinics;
approximately 93 physicians, physician assistants and nurse practitioners; 12
institutional pharmacies and four medical supply distribution centers serving
over 46,000 beds; 21 community based pharmacies; certified rehabilitation
agencies providing services through over 326 contracts; and seven home
healthcare agencies. Genesis has concentrated its eldercare networks in four
geographic regions in order to achieve operating efficiencies, economies of
scale and significant market share. The four geographic markets that Genesis
principally serves are: New England Region (Massachusetts/Connecticut/New
Hampshire); Midatlantic Region (Greater Philadelphia/Delaware Valley);
Chesapeake Region (Southern Delaware/Eastern Shore of Maryland; Baltimore,
Maryland/Washington D.C./Virginia); and Southern Region (Central Florida).
Genesis eldercare services focus on the central medical and physical issues
facing the more medically demanding elderly. By integrating the talents of
physicians with case management, comprehensive discharge planning and, where
necessary, home support services, the Company provides cost-effective care
management to achieve superior outcomes and return customers to the community.
The Company believes that its orientation toward achieving improved customer
outcomes through its eldercare networks has resulted in increased utilization of
specialty medical services, high occupancy of available beds, enhanced quality
payor mix and a broader base of repeat customers. Specialty medical services
revenues have increased at a compound annual rate of 53% from the fiscal year
ended September 30, 1992 to the fiscal year ended September 30, 1996 and
comprise 43% of the Company's revenues for the fiscal year ended September 30,
1996. Specialty medical services typically generate higher profit margins than
basic healthcare services and are less capital intensive.
The Company's growth strategy is to enhance its existing eldercare networks,
establish new eldercare networks in markets it deems attractive and broaden its
array of high margin specialty medical services through internal development and
selected acquisitions. Consistent with its strategy, the Company has made
selected acquisitions of eldercare centers and rehabilitation, pharmacy,
physician services and home healthcare companies.
The Company's long-term strategy is to provide comprehensive eldercare
services, in collaboration with other providers, on a prepaid basis in a managed
care environment. The Company has undertaken several initiatives to position
itself to compete in a managed care environment. These initiatives include: (i)
establishing a managed care division to pursue and administer contracts with
managed care organizations, develop clinical care protocols and monitor the
delivery and utilization of medical care; (ii) developing a clinical
administration and healthcare management information system to monitor and
measure clinical and patient-outcome data; (iii) establishing the Genesis
ElderCare(SM) brand name to increase awareness of the Company's eldercare
services in the healthcare market; (iv) seeking strategic alliances with other
healthcare providers to broaden the Company's continuum of care; and (v)
creating an independent eldercare advisory board to formulate new and innovative
approaches in the delivery of care.
4
Basic Healthcare Services
Genesis operates 148 eldercare centers (75 wholly-owned, three jointly-owned,
34 leased and 36 managed) located in 12 states. The centers offer three levels
of care for their customers: skilled, intermediate and personal. Skilled care
provides 24-hour per day professional services of a registered nurse;
intermediate care provides less intensive nursing care; and personal care
provides for the needs of customers requiring minimal supervision and
assistance. Each eldercare center is supervised by a licensed healthcare
administrator and employs a Medical Director to supervise the delivery of
healthcare services to residents and a Director of Nursing to supervise the
nursing staff. The Company maintains a corporate quality assurance program to
monitor regulatory compliance and to enhance the standard of care provided in
each center.
In addition to programs to meet the healthcare needs of its customers, all
Genesis eldercare centers offer a variety of quality of life programs. These
include the Intergenerational Learning Program that enables residents to
function both as students and as instructors in programs with community schools,
as well as The Magic Mix Program that provides a supervised setting in which
children of working parents can interact with residents of the centers after
school. These programs have received recognition at both local and national
levels.
In eight of its eldercare centers, the Company operates Genesis ElderCare
Focus programs which are dedicated to meeting the special medical, emotional and
psychological needs of Alzheimer's patients. The Focus programs were developed
in conjunction with the Dementia Research Clinic at the Johns Hopkins University
School of Medicine. These units provide an environment that is designed or
modified to assist those with cognitive loss. Clinical experts have experienced
significant success and produced benefits to customers served in both
Alzheimer's day services and dedicated residential units.
The following table sets forth, for the periods indicated, information
regarding the Company's average number of beds in service and the average
occupancy levels at its eldercare centers.
1996 1995 1994
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Average Beds in Service (1)(2)
Owned and Leased Facilities 9,429 8,268 7,530
Managed and Jointly-Owned Facilities 5,030 5,158 4,532
Occupancy Based on Average Beds in Service
Owned and Leased Facilities 93% 92% 92%
Managed and Jointly-Owned Facilities 93% 95% 93%
(1) Excludes beds in facilities which were unavailable for occupancy due
to renovations.
(2) Does not include 24 facilities acquired in the October 1996 GMC
Transaction. See "Business - Recent Transactions"
Specialty Medical Services
The Company emphasizes the delivery of specialty medical services which
typically requires smaller capital investment and generates higher profit
margins than providing basic healthcare services. The Company provides the
specialty medical services described below.
5
Institutional Pharmacy and Medical Supply Services. The Company provides
pharmacy and other services including infusion therapy and medical supplies and
equipment to eldercare centers it operates, as well as to independent healthcare
providers by contract. The pharmacy services provided in these settings are
tailored to meet the needs of the institutional customer. These services include
highly specialized packaging and dispensing systems, computerized medical
records processing and 24-hour emergency services. The Company's institutional
pharmacy and medical supply services were developed to provide the products and
support services required in the healthcare market. Institutional pharmacy
services are designed to help assure quality of care and to control costs at the
facilities served. Medical supply services are designed to assure availability
and control through maintenance of a comprehensive inventory, extensive delivery
services and special ordering and tracking systems. The Company also provides
pharmacy consulting services to assure proper and effective drug therapy. The
Company provides these services through 12 pharmacies (of which three are
jointly-owned) and four distribution centers located in its various market
areas. Approximately 81% of the sales attributable to pharmacy operations in
Fiscal 1996 were generated through external contracts with independent
healthcare providers with the balance attributable to centers operated by the
Company.
Rehabilitation Therapy. The Company provides an extensive range of
rehabilitation therapy services, including speech pathology, physical therapy
and occupational therapy through seven certified rehabilitation agencies in all
four of its regional market concentrations. These services are provided by over
1,000 licensed rehabilitation therapists and assistants employed by Genesis to
substantially all of the eldercare centers the Company operates, as well as by
contract to healthcare facilities operated by others.
Subacute Care Programs. The Company has established and actively markets
programs for elderly and other customers who require subacute levels of medical
care. These programs include ventilator care, intravenous therapy, post-surgical
recovery, respiratory management, orthopedic or neurological rehabilitation,
terminal care and various forms of coma, pain and wound management. Private
insurance companies and other third party payors, including certain state
Medicaid programs, have recognized that treating customers requiring subacute
medical care in centers such as those operated by Genesis is a cost-effective
alternative to treatment in an acute care hospital. The Company provides such
care at rates that the Company believes are substantially below the rates
typically charged by acute care hospitals for comparable services.
Physician Services. The Company employs or has consulting arrangements with
approximately 93 physicians, physician assistants and nurse practitioners to
provide physician services at certain of its eldercare centers. These
physicians, physician assistants and nurse practitioners provide a range of
services, including direct patient care, the design and administration of
clinical programs, such as the Company's subacute care program, as well as
traditional medical director and utilization review services. The Company
compensates these employees and consultants for services rendered and, where
appropriate, bills directly for such services. The Company believes that the
involvement of these physicians in the Company's eldercare centers provides a
significant competitive advantage. These physicians direct the operations of 18
free-standing physician clinics, as well as Functional Evaluation and Treatment
Units in 17 of its eldercare centers. The purpose of each of these units is to
provide a comprehensive assessment and treatment plan for all new admissions to
the center. The process is directed by a physician specializing in gerontology
and involves an intensive evaluation in which social service professionals,
clinical staff and the customer and the customer's family participate. The
Company believes that this program reduces average lengths of stay and increases
discharge-to-home rates. The Company also believes the Functional Evaluation and
Treatment Units enhance its reputation for providing quality care and result in
improved occupancy rates, as well as improve its ability to attract subacute and
other high acuity customers.
Home Healthcare Services. The Company provides home healthcare services to
customers in its markets through seven certified home health agencies owned by
the Company. The Company currently provides these services in all of its
geographic markets other than Central Florida and has been granted Certificates
of Need to begin providing services in Central Florida. The services offered
include skilled nursing care, physical, occupational and speech therapy, medical
social services and home health aide services. The Company's focus is on
providing infusion therapy, total parenteral nutrition, ventilator care and
peritoneal dialysis. The Company owns a one-sixth interest in the Visiting
Nurses Association in Maryland ("VNA"), an organization which is one of the
largest providers of home healthcare services in Maryland. Excluding VNA, the
Company provided approximately 79,200 home healthcare visits in Fiscal 1996.
6
Management Services and Other
Management Services. The Company provides management services to 41 eldercare
centers (including its three jointly-owned centers) pursuant to management
agreements that provide generally for the Company's day-to-day responsibility
for the operation and management of the centers. In turn, Genesis receives
management fees, depending on the agreement, computed as either an overall fixed
fee, a fixed fee per customer, a percentage of net revenues of the center plus
an incentive fee, or a percentage of gross revenues of the center with some
incentive clauses. The various management agreements, including option periods,
terminate between 1997 and 2012.
In March 1996, the Company entered into a strategic alliance with Doctors
Community Hospital, a 250-bed acute hospital in Maryland. As part of this
transaction, the Company entered into a long-term agreement to manage the
hospital's subacute care center and a jointly-owned eldercare center.
Prior to January 1, 1996, the Company also provided management, development
and marketing services to 15 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 earned 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 $1,500,000. Genesis also
continues to provide certain ancillary services to the ACTS communities.
Group Purchasing. The Company's subsidiary, The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), is one of the largest group purchasing
companies in the mid-Atlantic region. Tidewater provides purchasing and shared
service programs specially designed to meet the needs of eldercare centers and
other long-term care facilities. Tidewater's services are contracted to
approximately 1,350 members with over 150,000 beds in 31 states and the District
of Columbia.
Managed Care Initiatives
The Company has undertaken several initiatives to position itself to compete
effectively on a prepaid basis in a managed care environment. In January 1995,
the Company established a Managed Care division which currently consists of 55
employees. The Managed Care division is responsible for pursuing and
administering contracts with managed care organizations, developing clinical
care protocol and monitoring the delivery and utilization of medical care. The
Company has begun to develop a clinical administration and healthcare management
information system to monitor and measure clinical and patient outcome data for
use by healthcare providers and the Company. The Company is also seeking
strategic alliances with selected providers in order to further the continuum of
care, increase market share and customer acceptance and create strategic
affiliations for negotiating with payors in a managed care environment. In
addition to these initiatives, the Company has consolidated its core business
under the Genesis ElderCare(SM) brand name in an effort to increase the
Company's visibility among current and potential customers, payors and other
healthcare providers. The Company has also created an independent eldercare
advisory board composed of individuals with distinguished credentials in
geriatric care to formulate new and innovative approaches in the delivery of
care. See "Cautionary Statements Regarding Forward Looking Statements."
7
Recent Transactions
GMC Transaction. The following describes the businesses of Geriatric and
Medical Companies, Inc. ("GMC") which were acquired by the Company effective
October 1, 1996. The GMC entities are now wholly-owned subsidiaries of the
Company.
GMC provides care to the eldercare population through its pharmacy,
rehabilitative therapies, ambulance transportation, contract management,
diagnostic services and home care businesses located in Pennsylvania and New
Jersey. GMC operates 19 eldercare and five residential care facilities with a
total of approximately 3,300 beds. In 1996, GMC employed approximately 6,000
full and part-time employees, of which approximately 2,000 are covered by
collective bargaining agreements. In 1996, the allocation of GMC customer
revenues was approximately 67% Medicaid, 14% Medicare and 19% private pay and
other sources. The average occupancy of GMC owned beds in service was
approximately 92%.
Presbyterian Agreement. In November 1996, the Company signed a letter
agreement, subject to additional documentation, to provide management services
for, and enter into an affiliation agreement with, NewCourtland, Inc.
("NewCourtland"), a wholly owned subsidiary of the Presbyterian Foundation of
Philadelphia (the "Foundation"), a non-profit organization. Under the terms of
the agreement, Genesis will become the exclusive third-party manager of eight
eldercare facilities with 1,687 beds located in Philadelphia and throughout the
Delaware Valley. Genesis will provide specialty medical services, including
pharmacy and rehabilitation therapy to the NewCourtland facilities. The
agreement provides that Genesis will enter into management agreements with the
facilities to commence no later than February 1, 1997. The historical annual
revenues of the facilities were in excess of $80 million for the fiscal year
ended June 30, 1996. Additionally, NewCourtland will enter into an affiliation
arrangement with Genesis ElderCare(SM) Network. Genesis will receive the
exclusive right to manage any facility that may be acquired or developed by
NewCourtland. Currently, NewCourtland retains a purchase option for four
additional facilities with 514 beds and annual revenues in excess of $20
million.
In addition to the management and affiliation agreements, Genesis and the
Foundation have agreed to commit equally to guarantees to facilitate the
refinancing of certain long-term care facilities; capital improvements; and
working capital. See "Cautionary Statements Regarding Forward Looking
Statements."
Revenue Sources
The Company derives its basic healthcare and specialty medical revenue from
private pay sources, state Medicaid programs and Medicare. The Company
classifies payments from persons or entities other than the government as
private pay and other revenue. The private pay and other classification also
includes revenues from commercial insurers, health maintenance organizations and
other charge-based payment sources. Blue Cross and Veterans Administration
payments are included in private pay and other revenues and are made pursuant to
renewable contracts negotiated with these payors.
Medicare is a federally funded and administered health insurance program that
consists of Parts A and B. Participation in Part B is voluntary and is funded in
part through the payment of premiums. Benefits under Part A include inpatient
hospital services, skilled nursing in an eldercare center and medical services
such as physical, speech and occupational therapy, certain pharmaceuticals and
medical supplies. Part B provides coverage for physician services. Part B also
reimburses for medical services with the exception of pharmaceutical services.
Medicare benefits are not available for intermediate and custodial levels of
care; however, medical and physician services furnished to such patients may be
reimbursable under Part B. Under the Part A reimbursement methodology, each
eldercare center receives an interim payment during the year which is adjusted
to reflect actual allowable direct and indirect costs of services based on the
submission of a cost report at the end of each year. For services not billed
through each eldercare center, the Company's specialty medical operations bill
Medicare directly for nutritional support services, infusion therapy, certain
medical supplies and equipment, physician services and certain therapy services
as provided. Medicare payments for these services may be based on reasonable
cost charges or a fixed-fee schedule determined by Medicare.
8
Medicaid is the state administered reimbursement program that covers both
skilled and intermediate long-term care. Although Medicaid programs vary from
state to state, typically they provide for payment for services including
nursing facility services, physician's services, therapy services and
prescription drugs, up to established ceilings, at rates based upon cost
reimbursement principles. Reimbursement rates are typically determined by the
state from cost reports filed annually by each center, on a prospective or
retrospective basis. In a prospective system, a rate is calculated from
historical data and updated using an inflation index. The resulting prospective
rate is final, but in some cases may be adjusted pursuant to an audit. In this
type of payment system, center cost increases during the rate year do not affect
payment levels in that year. In a retrospective system, final rates are based on
reimbursable costs for that year. An interim rate is calculated from previously
filed cost reports, and may include an inflation factor to account for the time
lag between the final cost report settlement and the rate period. Consequently,
center cost increases during any year may affect revenues in that year. Certain
states are scheduled to convert, or have recently converted, from a
retrospective system, which generally recognizes only two or three levels of
care, to a case mix prospective pricing system, pursuant to which payment to a
center for patient services directly considers the individual patient's
condition and need for services. The effect, if any, of such a payment system on
the Company is unclear. The Company employs specialists in reimbursement at the
corporate level to monitor both Medicaid and Medicare regulatory developments to
comply with all reporting requirements and to insure appropriate payments.
The following table reflects the allocation of customer service revenues
among these sources of revenue.
1996 1995 1994 1993 1992
----- ---- ---- ---- ----
Private pay and other 39% 38% 41% 42% 41%
Medicaid 36 41 43 44 47
Medicare 25 21 16 14 12
-- -- -- -- --
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
See "Cautionary Statements Regarding Forward Looking Statements."
Marketing
Marketing for eldercare centers is focused at the local level and is
conducted primarily by the center administrator and its admissions director who
call on referral sources such as doctors, hospitals, hospital discharge
planners, churches and various community organizations. Besides actively
soliciting admissions from these sources, the Company's marketing objective is
to maintain public awareness of the eldercare center and its capabilities. The
Company takes advantage of its regional concentrations in its marketing efforts,
where appropriate, through consolidated marketing programs which benefit more
than one center.
Genesis markets specialty medical services to its managed eldercare centers,
as well as to independent healthcare providers, in addition to providing such
services to its owned and leased eldercare centers. The Company markets its
rehabilitation therapy and institutional pharmacy and medical supply services
through a direct sales force which primarily calls on eldercare centers,
hospitals, clinics and home health agencies. The corporate business development
department, through regional managers, markets the Company's subacute program
directly to insurance companies, managed care organizations and other third
party payors. In addition, the marketing department supports the eldercare
centers in developing promotional materials and literature focusing on the
Company's philosophy of care, services provided and quality clinical standards.
See "Governmental Regulation" below for a discussion of the federal and state
laws which limit financial and other arrangements between healthcare providers.
9
In February 1996, the Company announced a consolidation of its core business
under the name Genesis ElderCareSM. The Genesis ElderCare logo and trademark
have been featured in a series of print advertisements in publications serving
the regional markets in which the Company operates. The Company's marketing of
Genesis ElderCare is aimed at increasing awareness among decision makers in key
professional and business audiences. The Company is using advertising to promote
its brand name in trade, professional and business publications and to promote
services directly to consumers.
Personnel
At November 30, 1996, Genesis employed over 28,000 people, including
approximately 19,200 full-time and 8,800 part-time employees. Approximately 22%
of these employees are physicians and nursing and professional staff.
The Company currently has collective bargaining agreements which relate to 34
facilities including eight managed eldercare centers. The agreements expire at
various dates from 1997 through 2000 and cover approximately 3,000 employees.
The Company believes that its relationship with its employees is generally good.
Employee Training and Developmentg
Genesis believes that nursing and professional staff retention and
development has been and continues to be a critical factor in the successful
operation of the Company. In response to this challenge, a compensation program
which provides for annual merit reviews as well as financial and quality of care
incentives has been implemented to promote center staff motivation and
productivity and to reduce turnover rates. Management believes that the
Company's wage rates for professional nursing staff are commensurate with market
rates. The Company also provides employee benefit programs which management
believes, as a package, exceed industry standards. The Company has not
experienced any significant difficulty in attracting or retaining qualified
personnel.
In addition, Genesis has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized by
the Company through a variety of in-house programs as well as a tuition
reimbursement program. The Company has established, company-wide, the Genesis
Nursing Assistant Specialist Program. This program is offered on a joint basis
with community colleges. Classes are held on the employees' time, last for
approximately six months and provide advanced instruction in nursing care. The
Company pays the tuition. When all of the requirements for class participation
have been met through attendance, discussion and examinations, the nurse aide
graduates and is awarded the title of Nursing Assistant Specialist and receives
a salary adjustment. The Company has maintained a retention rate of 75% since
1988 of the nurses aide graduates. Over 1,300 nurse aides have graduated from
the Genesis Nursing Assistant Specialist Program and received an increase in
salary. As the nurse aide continues through the career ladder, the Company
continues to provide incentives. At the next level, Senior Nursing Assistant
Specialist, the employee receives another increase in salary and additional
tuition reimbursement of up to $2,250 toward becoming a Licensed Practical Nurse
("LPN") or Registered Nurse ("RN") and at the Senior Nursing Assistant
Specialist Coordinator level, tuition reimbursement increases to a maximum of
$3,000 per year towards a nursing degree.
The Company began a junior level management and leadership training program
in 1990 referred to as the Pilot Light Program. The target audience for this
training is RN's and LPN's occupying charge nurse positions within the Company's
nursing centers as well as junior level managers throughout the Genesis
networks. Over 475 participants have graduated from this program.
In addition, a flexible RN associate degree program has been established to
meet the needs of those employees who cannot attend nursing school on a
full-time basis. The program is conducted jointly with local community colleges
and Regents College in New York. The program combines self-study, flexible class
scheduling, mentoring and tutoring by Genesis professional nursing staff. This
format allows for a self-paced RN degree. Currently, there are approximately 18
Genesis employees enrolled in this program, which the Company believes is the
first of its kind in the United States.
10
Governmental Regulation
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. The Company's eldercare centers are
subject to certain federal statutes and regulations and to statutory and
regulatory licensing requirements by state and local authorities. All Genesis
eldercare centers are currently so licensed. In addition, eldercare centers are
subject to various local building codes and other ordinances.
All of the Company's eldercare centers and healthcare services, to the extent
required, are licensed under applicable law. All eldercare centers and
healthcare services, or practitioners providing the services therein, are
certified or approved as providers under one or more of the Medicaid, Medicare
or Veterans Administration programs. Licensing, certification and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. State and local agencies survey all eldercare centers on a regular
basis to determine whether such centers are in compliance with governmental
operating and health standards and conditions for participation in government
sponsored third party payor programs. The Company believes that its centers are
in substantial compliance with the various Medicare and Medicaid regulatory
requirements applicable to them. However, in the ordinary course of its
business, the Company receives notices of deficiencies for failure to comply
with various regulatory requirements. Genesis reviews such notices and takes
appropriate corrective action. In most cases, Genesis and the reviewing agency
will agree upon the measures to be taken to bring the center into compliance
with regulatory requirements. In some cases or upon repeat violations, the
reviewing agency may take various adverse actions against a center, including
the imposition of fines, temporary suspension of admission of new patients to
the center, suspension or decertification from participation in the Medicare or
Medicaid programs and, in extreme circumstances, revocation of a center's
license. These actions may adversely affect the eldercare centers' ability to
continue to operate, the ability of the Company to provide certain services, and
eligibility to participate in the Medicare, Medicaid or Veterans Administration
programs or to receive payments from other payors. Additionally, actions taken
against one center may subject other centers under common control or ownership
to adverse measures, including loss of licensure or eligibility to participate
in Medicare and Medicaid programs. Certain of the Company's centers have
received notices in the past from state agencies that, as a result of certain
alleged deficiencies, the agency was taking steps to decertify the centers from
participation in Medicare and Medicaid programs. In all cases, such deficiencies
were remedied before any centers were decertified.
All but nine of the Genesis eldercare centers provide skilled nursing
services and are currently certified to receive benefits provided under Medicare
for these services. Additionally, all Genesis eldercare centers are currently
certified to receive benefits under Medicaid. Both initial and continuing
qualifications of an eldercare center to participate in such programs depend
upon many factors including accommodations, equipment, services, patient care,
safety, personnel, physical environment, and adequate policies, procedures and
controls.
Under the various Medicaid programs, the federal government supplements funds
provided by the participating states for medical assistance to "medically
indigent" persons. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
traditionally they have provided for the payment of certain expenses, up to
established limits, at rates based generally on cost reimbursement principles.
Most states in which Genesis operates have adopted Certificate of Need or
similar laws which generally require that a state agency approve certain
acquisitions and determine that the need for certain bed additions, new
services, and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other
changes, or the expenditure of capital. State approvals are generally issued for
a specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
centers, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the center's license
and adverse reimbursement action.
11
The Company is also subject to federal and state laws which govern financial
and other arrangements between healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. These laws include the "anti-kickback" provisions of the
federal Medicare and Medicaid programs, which prohibit, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration (including any kickback, bribe or rebate) directly or indirectly in
return for or to induce the referral of an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. These laws
also include the "Stark legislations" which prohibit, with limited exceptions,
the referral of patients by physicians for certain services, including home
health services, physical therapy and occupational therapy, to an entity in
which the physician has an ownership interest. In addition, some states restrict
certain business relationships between physicians and other providers of
healthcare services. Many states prohibit business corporations from providing,
or holding themselves out as a provider of medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of licensure
or eligibility to participate in reimbursement programs and civil and criminal
penalties. These laws vary from state to state, are often vague and have seldom
been interpreted by the courts or regulatory agencies. From time to time, the
Company has sought guidance as to the interpretation of these laws; however,
there can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company. Although the Company has
contractual arrangements with some healthcare providers to which the Company
pays fees for services rendered or products provided, the Company believes that
its practices are not in violation of these laws. The Company cannot accurately
predict whether enforcement activities will increase or the effect of any such
increase on its business. There have also been a number of recent federal and
state legislative and regulatory initiatives concerning reimbursement under the
Medicare and Medicaid programs. In particular, the federal government has issued
recent fraud alerts concerning double billing, homehealth services and the
provisions of medical suppliers. Accordingly, it is anticipated that these areas
may come under closer scrutiny by the government. The Company cannot accurately
predict the impact of any such initiatives. See "Cautionary Statements
Regarding Forward Looking Statements."
Competition
The Company competes with a variety of other companies in providing
healthcare services. Certain competing companies have greater financial and
other resources and may be more established in their respective communities than
the Company. Competing companies may offer newer or different centers or
services than the Company and may thereby attract the Company's customers who
are either presently residents of its eldercare centers or are otherwise
receiving its healthcare services.
The Company operates eldercare centers in 12 states. In each market, the
Company's eldercare centers may compete for customers with rehabilitation
hospitals, subacute units of hospitals, skilled or intermediate nursing centers
and personal care or residential centers which offer comparable services to
those offered by the Company's centers. Certain of these providers are operated
by not-for-profit organizations and similar businesses which can finance capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company. In competing for customers, a center's local
reputation is of paramount importance. Referrals typically come from acute care
hospitals, physicians, religious groups, other community organizations, health
maintenance organizations and the customer's families and friends. Members of a
customer's family generally actively participate in selecting an eldercare
center. Competition for subacute patients is intense among hospitals with
long-term care capability, rehabilitation hospitals and other specialty
providers and is expected to remain so in the future. Important competitive
factors include the reputation in the community, services offered, the
appearance of a center and the cost of services. See "Cautionary Statements
Regarding Forward Looking Statements."
12
Genesis competes in providing specialty medical services with a variety of
different companies. Generally, this competition is national, regional and local
in nature. The primary competitive factors in the specialty medical services
business are similar to those in the eldercare center business and include
reputation, the quality of clinical services, responsiveness to patient needs,
and the ability to provide support in other areas such as third party
reimbursement, information management and patient record-keeping. See
"Cautionary Statements Regarding Forward Looking Statements."
Insurance
Genesis carries property and general liability insurance, professional
liability insurance, and medical malpractice insurance coverage in amounts
deemed adequate by management. However, there can be no assurance that any
current or future claims will not exceed applicable insurance coverage. Genesis
also requires that physicians practicing at its eldercare centers carry medical
malpractice insurance to cover their individual practice.
13
ITEM 2: PROPERTIES
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by the Company as of November 30, 1996.
Wholly-Owned Jointly-Owned Leased Managed
Centers Centers Centers Centers Total
--------------- --------------- --------------- --------------- ---------------
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
------- ---- ------- ---- -------- ---- -------- ---- ------- ----
Maryland ..... 12 1,958 2 206 9 1,326 4 706 27 4,196
Pennsylvania . 18 2,542 1 105 -- -- 7 802 26 3,449
Florida ...... 4 598 -- -- 10 1,231 13 1,404 27 3,233
New Jersey ... 14 1,836 -- -- 2 404 4 676 20 2,916
Massachusetts 8 1,092 -- -- -- -- 5 606 13 1,698
New Hampshire 7 650 -- -- 6 608 -- -- 13 1,258
Virginia ..... 2 421 -- -- 4 670 -- -- 6 1,091
Connecticut .. 4 615 -- -- 1 120 -- -- 5 735
Delaware ..... 4 504 -- -- -- -- 1 158 5 662
North Carolina -- -- -- -- -- -- 2 340 2 340
Vermont ...... 2 256 -- -- -- -- -- -- 2 256
West Virginia -- -- -- -- 2 180 -- -- 2 180
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Totals .. 75 10,472 3 311 34 4,539 36 4,692 148 20,014
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Excludes beds in facilities which were unavailable for occupancy due to
renovations. The above table excludes 4 eldercare centers in Colorado with 283
beds which the Company is providing management services until December 31, 1996.
ITEM 3: LEGAL PROCEEDINGS
Genesis is a party to litigation arising in the ordinary course of business.
Genesis does not believe the results of such litigation, even if the outcome is
unfavorable to the Company, would have a material adverse effect on its
financial position. See "Cautionary Statements Regarding Forward Looking
Statements."
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
ITEM 4.1: EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company.
Name Age Position
---- --- --------
Michael R. Walker 48 Chairman and Chief Executive Officer
Richard R. Howard 47 President, Chief Operating Officer and Director
David C. Barr 46 Executive Vice President
John F. DePodesta 52 Senior Vice President- Law and Public Policy
George V. Hager, Jr. 40 Senior Vice President and Chief Financial Officer
Edward B. Romanov, Jr. 45 Senior Vice President- Development
Maryann Timon 43 Senior Vice President - Managed Care
Edward J. Boeggeman 49 Vice President and Controller
Kenneth R. Kuhnle 41 Vice President and Treasurer
Marc D. Rubinger 47 Vice President and Chief Information Officer
Michael R. Walker is the founder of the Company and has served as Chairman
and Chief Executive Officer of the Company since its inception. In 1981, Mr.
Walker co-founded Health Group Care Centers ("HGCC"). At HGCC, he served as
Chief Financial Officer and, later, as President and Chief Operating Officer.
Prior to its sale in 1985, HGCC operated nursing homes with 4,500 nursing beds
in 12 states. From 1978 to 1981, Mr. Walker was the Vice President and Treasurer
of AID Healthcare Centers, Inc. ("AID"). AID, which owned and operated 20
nursing centers, was co-founded in 1977 by Mr. Walker as the nursing home
division of Hospital Affiliates International. Mr. Walker holds a Master of
Business Administration degree from Temple University and a Bachelor of Arts in
Business Administration from Franklin and Marshall College. Mr. Walker serves on
the Board of Directors of Renal Treatment Centers, Inc. and the Board of
Trustees of Universal Health Realty & Income Trust.
Richard R. Howard has served as a director of the Company since its inception
and as Chief Operating Officer since June 1986. He joined the Company in
September 1985 as Vice President of Development. Mr. Howard's background in
healthcare includes two years as the Chief Financial Officer of HGCC. Mr.
Howard's experience also includes over ten years with Fidelity Bank,
Philadelphia, Pennsylvania and one year with Equibank, Pittsburgh, Pennsylvania.
Mr. Howard is a graduate of the Wharton School, University of Pennsylvania,
where he received a Bachelor of Science degree in Economics in 1971.
David C. Barr has served as Executive Vice President of the Company since
October 1988. Prior to joining Genesis, Mr. Barr was a principal of a private
consulting firm, Kane Maiwurm Barr, Inc., which provided management consulting
for small and medium-sized firms. Prior to forming this firm, he served as
Executive Vice President of Allegheny Beverage Corporation, a service
conglomerate. During 1984 and 1985, Mr. Barr served withEquibank, Pittsburgh,
Pennsylvania, where he held several positions including Executive Vice President
of Corporate Banking. Mr. Barr graduated in 1972 from the University of Miami
with a Bachelor of Science degree in Accounting.
John F. DePodesta joined the Company as Senior Vice President, Law and Public
Policy in January 1996. Mr. DePodesta was previously a partner and currently is
of-counsel in the law firm of Pepper, Hamilton & Scheetz. In addition to his
position with the Company, Mr. DePodesta currently serves as the Executive Vice
President, Law and Regulatory Affairs, and Director of Primus
Telecommunications, Inc., and the Chairman of the Board of Iron Road Railways,
Incorporated, both of which he co-founded in 1994. Mr. DePodesta received a
Bachelor of Arts degree from Harvard College in 1966 and his Juris Doctor from
the University of Pennsylvania Law School in 1969. Pepper, Hamilton & Scheetz
performs outside legal services for the Company.
15
George V. Hager, Jr. has served the Company as Senior Vice President and
Chief Financial Officer since February 1994. Mr. Hager joined the Company in
July 1992 as Vice President and Chief Financial Officer. Mr. Hager was
previously partner in charge of the healthcare practice for KPMG Peat Marwick
LLP in the Philadelphia office. Mr. Hager began his career at KPMG Peat Marwick
LLP in 1979 and has over 15 years of experience in the healthcare industry. Mr.
Hager received a Bachelor of Arts degree in Economics from Dickinson College in
1978 and a Master of Business Administration degree from Rutgers Graduate School
of Management. He is a certified public accountant and a member of the AICPA and
PICPA.
Edward B. Romanov, Jr. has served as Senior Vice President, Development since
May 1992. From June 1990 through April 1, 1995, Mr. Romanov served as a
financial consultant to the Company pursuant to a Consulting and Services
Agreement between the Company and American Community Environments Corporation of
which he is an employee. Mr. Romanov was founder and President of WesTerra
Construction, WesTerra Capital Company and WesTerra Development, through which
Mr. Romanov developed and financed real estate projects. Mr. Romanov holds both
a Master of Business Administration and a Bachelor of Science degree from Lehigh
University.
Maryann Timon has served as Senior Vice President for Managed Care since May
1996. From January 1995 through May 1996 she served as Corporate Vice President
of the Managed Care Division. Ms. Timon joined the Company in December 1990 to
form and serve as President of a wholly-owned subsidiary, Healthcare Services
Network. Ms. Timon was previously President of Mercy Ventures, Inc., a
five-company healthcare specialty group owned by Mercy Medical Center in
Baltimore, Maryland. Ms. Timon has 25 years of experience providing eldercare
healthcare services. Ms. Timon received an Associate Degree in Applied Science
in Nursing in 1973 from the State University of New York at Canton, a Bachelor
of Science Degree in Nursing in 1976 from the State University of New York at
Utica/Rome and a Master of Gerontological Nursing Degree in 1978 from the
University of Rochester.
Edward J. Boeggeman has served as Vice President and Corporate Controller of
the Company since December 1993. He joined Genesis in January 1993 as Controller
of Genesis Health Centers. Mr. Boeggeman has over twenty years of experience in
the healthcare industry, including four years with KPMG Peat Marwick LLP from
1979 to 1983. Prior to joining Genesis, he served in various accounting
positions including Assistant Controller, Controller and Vice President of
Financial Affairs at a teaching hospital, academic medical center and community
hospital, all within the Greater Philadelphia area. Mr. Boeggeman received a
Bachelor of Arts degree in Accounting from Villanova University in 1973 and is a
certified public accountant.
Kenneth R. Kuhnle has served as Vice President and Treasurer of the Company
since February 1990. He joined Genesis in October 1988 as Reimbursement
Director, which includes responsibility for monitoring government programs as
well as third party reimbursement planning and maximization. Mr. Kuhnle served
as Reimbursement Manager for Beverly Enterprises, owners and operators of
long-term care centers, from January 1986 to October 1988 and as Medicare
Auditor for Aetna Life Insurance Company from November 1982 to December 1985. He
received a Bachelor of Science degree in Business Administration from Temple
University in 1979. Mr. Kuhnle serves as President of the Delaware Healthcare
Facilities Association and President of the Worcester chapter of the
Massachusetts Federation of Nursing Homes.
Marc D. Rubinger has served as Vice President and Chief Information Officer
since November 1995. Prior to joining the Company, Mr. Rubinger served as
General Manager-Decision Support Systems of Shared Medical Systems. From 1975
through 1986, Mr. Rubinger was with Ernst & Young in their national healthcare
consulting practice, most recently as a partner. Mr. Rubinger received a
Bachelor of Arts degree in Bioscience from Binghamton University in 1971 and a
Masters of Health Administration and Planning from The George Washington
University in 1973.
16
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The following table indicates the high and low sale prices per share, as
reported on the New York Stock Exchange.
Calendar Year High Low
------------- ------- -----
1996
First Quarter.................... $30.12 $23.50
Second Quarter................... $33.75 $27.12
Third Quarter.................... $31.12 $21.25
Fourth Quarter *................. $30.37 $22.00
1995
First Quarter.................... $21.67 $ 19.00
Second Quarter................... $21.33 $ 17.33
Third Quarter.................... $24.83 $ 18.17
Fourth Quarter................... $25.00 $ 19.00
* Through December 19, 1996
As of December 19, 1996, 34,900,863 shares of Common Stock were held of
record by 589 shareholders. The Company has not paid any cash dividends on its
Common Stock since its inception and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. Certain of the
Company's outstanding loans contain covenants which limit the Company's ability
to declare dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On June 5, 1996, the Company issued 312,744 shares of its common stock to
Michael and Jessica Bronfein and Stanton and Renee Ades, in consideration of the
Company's purchase of Professional Pharmacies, Inc. as part of the NeighborCare
Transaction. The shares were not registered under the Securities Act. The
Company believes that the shares were exempt from registration under Section 402
of the Securities Act.
17
ITEM 6: SELECTED FINANCIAL DATA
September 30,
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
(in thousands, except per share data)
Net revenues $671,469 $486,393 $388,616 $219,809 $196,253
Operating income before capital costs* 128,269 93,253 69,373 38,129 35,597
Earnings before income taxes, extraordinary
items, cumulative effect of an accounting
change and debenture conversion expense 59,331 40,296 27,710 18,903 12,443
Earnings before extraordinary items,
cumulative effect of an accounting
change and debenture conversion expense 37,966 25,531 17,691 11,909 7,710
Net income 37,169 23,608 17,673 11,909 7,433
Per common share data (fully diluted): **
Earnings before extraordinary items
cumulative effect of an accounting
change and debenture conversion expense $1.31 $ 1.03 $ 0.84 $ 0.67 $ 0.53
Net income 1.29 0.97 0.84 0.67 0.51
Weighted average shares of common stock
and equivalents 31,130 28,452 24,820 17,929 14,495
- -------------------------------------------------------------------------------------------------------------------------
Financial Measurements
Operating income before capital costs*
as a percent of revenue 19.1% 19.2% 17.8% 17.3% 18.1%
Earnings before income taxes, extraordinary
items, cumulative effect of an accounting
change and debenture conversion expense
as a percent of revenue 8.8% 8.3% 7.1% 8.6% 6.3%
Return*** (before interest)
on average assets employed 8.2% 7.0% 6.2% 7.6% 7.2%
Return*** on average shareholders' equity 11.6% 12.3% 11.6% 11.4% 11.4%
Long-term debt to equity ratio .66 1.4 1.3 .67 .97
Operating Data
Payor mix (as a percent of patient service revenue):
Private and other 39% 38% 41% 42% 41%
Medicare 25% 21% 16% 14% 12%
Medicaid 36% 41% 43% 44% 47%
Average owned/leased health center beds 9,429 8,268 7,530 4,686 4,871
Occupancy percentage 92.6% 91.9% 91.9% 94.6% 96.0%
Specialty medical revenue per patient day-
health centers division $ 29.94 $ 25.06 $ 17.80 $ 16.79 $ 14.35
18
Specialty medical revenues-health
services division
(in thousands) $254,663 $154,833 $109,452 $ 63,790 $ 40,210
Average managed life care units and
health center beds 5,030 10,374 9,922 6,203 5,680
Average full-time equivalent personnel 16,325 12,180 8,623 3,810 3,782
Balance Sheet Data (in thousands)
Working capital $155,491 $132,274 $ 66,854 $ 50,081 $ 31,986
Total assets $950,669 600,389 511,698 236,978 188,677
Long-term debt $338,933 308,052 250,807 83,842 80,170
Shareholders' equity $514,608 221,548 195,466 125,348 82,703
- -------------------------------------------------------------------------------
* Capital costs include depreciation and amortization, lease expense , interest
expense and debenture conversion expense.
** Reflects a three for two stock dividend on the common stock effective March
29, 1996.
*** Before extraordinary items, cumulative effect of an accounting change and
debenture conversion expense.
Please refer to Management's Discussion and Analysis of Financial Condition for
a description of significant transactions.
- -------------------------------------------------------------------------------
19
ITEM 7: 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 geriatric
patients. 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 and other. The Company
includes in basic healthcare services revenues all room and board charges for
its eldercare 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 and other include fees earned for management of eldercare centers,
other service related businesses and transactional revenues.
Genesis delivers its services principally through three divisions. The largest,
in terms of revenues, is Genesis ElderCare Centers (formerly Genesis Health
Centers), which at September 30, 1996 included 85 owned and leased eldercare
centers. The second, Genesis ElderCare Services (formerly Genesis Health
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 (formerly Genesis Management
Resources), manages 39 eldercare centers.
Certain Transactions
Effective October 1, 1996, subsequent to the fiscal year end, Geriatric &
Medical Companies, Inc. ("GMC") merged with a wholly-owned subsidiary of Genesis
(The "GMC Transaction"). Under the terms of the merger agreement, GMC
shareholders received $5.75 per share in cash for each share of GMC stock. The
total consideration paid, including assumed indebtedness of approximately
$132,000,000, is approximately $223,000,000. The merger was financed in part
with approximately $121,250,000 in net proceeds from an offering of 9 1/4%
Senior Subordinated Notes issued in October 1996. The remaining consideration
was financed through borrowings under the Company's bank credit facility. The
GMC Transaction added to Genesis 24 owned eldercare centers with approximately
3,300 beds. GMC also operates businesses which provide a number of ancillary
healthcare services including ambulance services; respiratory therapy, infusion
therapy and enteral therapy; distribution of durable medical equipment and home
medical supplies; and information management services.
In September 1996, the Company acquired $7,500,000 of convertible preferred
stock of Doctors Health System, Inc. ("Doctors Health"), an independent
physician owned and controlled integrated delivery system and practice
management company. An additional $2,500,000 of convertible preferred stock may
be purchased before December 31, 1996. The convertible preferred stock carries
an 8% cumulative dividend and is convertible into common stock, and if converted
would represent an approximate 10% ownership interest in Doctors Health. Also,
the Company is committed to purchase an additional $10,000,000 of convertible
preferred stock upon Doctors Health's achievement of certain operational and
financial benchmarks. The additional investment, if made and converted to common
stock, would raise the Company's ownership interest to approximately 20%.
20
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 and an
$85,000,000 lease financing facility. The balance of the total consideration
paid to National Health was funded with available cash of $51,800,000 and
assumed indebtedness of $7,900,000. National Health added 16 eldercare centers
in Florida , Virginia and Connecticut with approximately 2,200 beds to Genesis.
National Health also provides enteral nutrition and rehabilitation therapy
services to the eldercare centers which it owns and leases.
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, 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 (The "Indiana Transaction").
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 (the
"Partnership Interest Purchase").
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 Healthcare Rehab Services,
Inc. (collectively, "Therapy Companies") for approximately $9,300,000. The
Therapy Companies provide these services in the Company's Chesapeake region.
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 earned 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.
Genesis also continues to provide certain ancillary services to the ACTS
communities.
On November 30, 1995, the Company acquired McKerley Health Care Centers
("McKerley") for total consideration of approximately $68,700,000. The
transaction (the "McKerley 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 geriatric
care facilities 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 credit facility and assumed indebtedness.
On September 30, 1995, the Company sold for $19,570,000 and simultaneously
entered into a three-year contract to manage five facilities totaling 606 beds
to the AGE Institute of Massachusetts ("AIMASS"). The Company extended
approximately $18,000,000 of financing in connection with the sale, which was
repaid in full in Fiscal 1996.
In August 1995, the Company entered into a software license agreement for a
clinical operating system with Health Data Systems, Inc. The total commitment
under the license agreement is $12,000,000. The Company has estimated the cost
to install the system and related hardware, not including amounts paid for the
software license, to be approximately $18,000,000.
21
On April 1, 1995, the Company acquired TherapyCare Systems, L.P. ("Therapy
Care") for approximately $7,000,000. TherapyCare provided physical therapy,
occupational therapy and speech therapy to 73 long term care facilities
throughout Pennsylvania.
Fiscal 1996 Compared to Fiscal 1995
The Company's total net revenues for fiscal year ended September 30, 1996
("Fiscal 1996") were $671,469,000 compared to $486,393,000 for the fiscal year
ended September 30, 1995 ("Fiscal 1995"), an increase of $185,076,000 or 38%.
Basic healthcare services increased $69,895,000 or 25%, approximately
$41,652,000 of which is due to the McKerley Transaction, National Health
transaction and the Partnership Interest Purchase in March 1996 (which was
partially offset by the sale of five eldercare centers in the AIMASS transaction
in September 1995 and the Indiana Transaction in March 1996), with the remainder
due to a shift in payor mix from Medicaid to Medicare and rate increases.
Specialty medical services revenue increased $110,101,000 or 61%, of which
approximately $57,000,000 is due to acquisitions, with the remainder due to
other volume growth in the institutional pharmacy, medical supply and contract
therapy divisions and increased acuity in the health centers division. Specialty
medical service revenue per patient day in the health centers division increased
19% to $29.94 in Fiscal 1996 compared to $25.06 in Fiscal 1995 primarily due to
treatment of higher acuity patients. Management services and other income
increased $5,080,000 or 18%. This increase is primarily due to an increase in
service related business revenues (group purchasing and staff replacement
services) of approximately $3,500,000 and an increase in transactional gains of
approximately $2,600,000. Transactional and other activity in Fiscal 1996
included net gains recognized in connection with the sale of an investment, the
Indiana Transaction and the sale of a majority interest in one eldercare center
in Maryland.
The Company's operating expenses before debenture conversion expense,
depreciation, amortization, lease expense and interest expense were $543,200,000
for Fiscal 1996 compared to $393,139,000 for Fiscal 1995, an increase of
$150,061,000 or 38%, of which approximately $84,335,000 was due to the McKerley
Transaction, Neighbor Care transaction and National Health transaction, and
the remaining $65,726,000 is attributed to an increase in cost of goods sold
related to increased specialty medical service revenues, and inflationary wage
and benefit increases.
During Fiscal 1996, the Company converted approximately $42,500,000 of its 6%
Senior Subordinated Convertible Debentures due 2003 ("the Debentures"). In
connection with the early conversion of a portion 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.
Depreciation and amortization expense increased to $25,374,000 in Fiscal 1996
from $18,793,000 in Fiscal 1995 as a result of Fiscal 1996 acquisitions and
capital expenditures.
Lease expense increased to $18,638,000 in Fiscal 1996 from $13,798,000 in Fiscal
1995 of which approximately $2,000,000 is related to the McKerley Transaction
and $1,600,000 is related to the National Health transaction.
Interest expense increased $4,560,000 or 22%. This increase reflects increased
debt levels used to fund acquisitions and a higher average prevailing interest
rate due to the June 1995 issuance of $120,000,000 of 9 3/4% Notes.
Fiscal 1995 Compared to Fiscal 1994
The Company's total net revenues for Fiscal 1995 were $486,393,000 compared to
$388,616,000 for the fiscal year ended September 30, 1994 ("Fiscal 1994"), an
increase of $97,777,000 or 25%. Basic healthcare services increased $37,857,000
or 16% of which approximately $20,500,000 is due to the Meridian transaction
included in the entire period in Fiscal 1995 as compared to ten months in Fiscal
1994, approximately $3,400,000 is due to two facilities which were leased in
Fiscal 1995 that were managed for a part of Fiscal 1994 and the remaining
increase is due to providing care to higher acuity patients and to rate
increases. Specialty medical services revenue increased $54,609,000 or 43% of
which approximately $6,000,000 is due to the Meridian transaction, approximately
$13,000,000 is due to acquisitions during Fiscal 1995 and the remainder is due
to other volume growth in the institutional pharmacy, medical supply and
contract therapy divisions and increased acuity in the health centers division.
Specialty medical service revenue per patient day in the health centers division
increased 41% to $25.06 in Fiscal 1995 compared to $17.80 in Fiscal 1994
primarily due to treatment of higher acuity patients. Management services and
other income increased $5,311,000 or 23%. This increase is primarily due to the
management contracts and other unrelated businesses acquired in the Meridian
transaction as well as inflationary rate increases. The number of geriatric care
facilities under management contracts increased from 31 at September 30, 1994 to
35 at September 30, 1995.
22
The Company's operating expenses before depreciation, amortization, lease
expense and interest expense were $393,139,000 for Fiscal 1995 compared to
$319,243,000 for Fiscal 1994, an increase of $73,896,000 or 23%. Salaries, wages
and benefits increased $45,076,000 or 23% of which approximately $14,500,000
relates to the Meridian transaction, approximately $2,100,000 related to two
facilities leased in Fiscal 1995 that were managed for a part of Fiscal 1994 and
the remainder is due to the impact of acquisitions and growth in the
institutional pharmacy, medical supply and contract therapy divisions.
Other operating expenses increased $28,885,000 or 26% of which approximately
$8,500,000 is due to the Meridian transaction and the remainder is due to
increased sales in the pharmacy and medical supply divisions.
Depreciation and amortization expense increased from $14,982,000 in Fiscal 1994
to $18,793,000 in Fiscal 1995 primarily due to the Meridian transaction.
Lease expense increased from $11,376,000 in Fiscal 1994 to $13,798,000 in Fiscal
1995 of which $1,000,000 is related to the Meridian transaction, $500,000 is due
to two facilities that were leased in Fiscal 1995 that were managed for a part
of Fiscal 1994 and the remainder is due to new leases as a result of growth of
the health services division and inflationary rate increases
Interest expense increased $5,061,000 or 33%. This increase in interest expense
was due to increased debt used to finance the Meridian transaction outstanding
for the entire period in Fiscal 1995 compared to ten months in the prior year,
borrowings under the revolving credit agreement and a higher average interest
rate due to the issuance of $120,000,000 9 3/4% Senior Subordinated Notes in
June 1995.
In connection with the early repayment of debt and the restructuring and
amendment of its bank credit facility, the Company recorded an extraordinary
loss of approximately $1,923,000 to write off unamortized, deferred financing
fees.
Liquidity and Capital Resources
Working capital increased to $155,491,000 at September 30, 1996 from
$132,274,000 at September 30, 1995. Accounts receivable increased to
$141,716,000 at September 30, 1996 from $101,123,000 at September 30, 1995.
Approximately $35,100,000 of this increase relates to accounts receivables
purchased as part of the fiscal 1996 acquisitions, including the National Health
transaction, NeighborCare transaction, McKerley transaction, the January 1996
acquisition of Therapy Companies, and the Partnership Interest Purchase. The
remaining increase of $5,493,000 relates primarily to the continuing shift in
business mix to specialty medical services including the specialty medical
business acquired during Fiscal 1995. Days of revenue in accounts receivable
decreased from 70 to 62 during this period as a result of improved collections
and collection processes. Cost report receivables increased approximately
$15,304,000 primarily due to an increase in Medicare revenues which are
reimbursed on a retrospective cost basis. Included in this increase is
approximately $8,311,000 related to estimated Medicare reimbursement for costs
that exceeded routine cost limitations. The Company's cash flow from operations
for Fiscal 1996 was $36,232,000 compared to $11,188,000 for Fiscal 1995,
primarily as a result of improved receivable collections and collection
processes. Investing activities for the year ended September 30, 1996 include
$38,645,000 of capital expenditures primarily related to betterments and
expansion of eldercare centers, construction of pharmacy and medical supply
distribution sites and investment in data processing hardware and software. The
decrease in the balance of current portion of notes receivable from $18,493,000
at September 30, 1995 to $419,000 at September 30, 1996 relates to cash received
of approximately $18,000,000 related to financing extended by the Company in
Fiscal 1995 in connection with the sale of five facilities in Massachusetts to
AIMASS. The Company used the proceeds to repay a portion of its Credit Facility.
The increase in the non-current portion of notes receivable and other
investments from $29,879,000 at September 30, 1995 to $92,574,000 at September
30, 1996 is primarily due to the Company extending a 10-1/4%, $45,000,000
mortgage loan and a 13%, $10,000,000 working capital loan to refinance the bank
indebtedness of 11 managed eldercare centers in Florida and to eliminate the
Company's guarantee of $18,500,000 of such indebtedness.
23
In November 1996, the Company called for redemption the then outstanding 6%
Convertible Senior Subordinated Debentures (the "Debentures") at a redemption
price equal to 104.2% of the principal amount. The Debenture holders had the
option to tender Debentures at the redemption price or to covert the Debentures
into Common Stock at a conversion price of $15.104 per share. All of the
Debentures were converted to Common Stock. In connection with the early
conversion of a portion of the Debentures during Fiscal 1996, the Company paid
approximately $1,245,000 representing the prepayment of interest to debenture
holders. The non-recurring cash payment is presented as debenture conversion
expense in the statement of operations.
In October 1996, subsequent to fiscal year end, the Company completed an
offering of $125,000,000 9 1/4% Senior Subordinated Notes due 2006. The Company
used the net proceeds of approximately $121,250,000 together with borrowings
under the Credit Facility, to pay the cash portion of the purchase price of the
GMC Transaction, to repay certain debt assumed as a result of the GMC
Transaction and to repurchase GMC accounts receivable which were previously
financed.
In October 1996, the Company entered into an agreement with the lenders of the
Credit Facility to increase the revolving credit facility to $300,000,000 and
the lease financing facility to $150,000,000 and to release liens on accounts
receivable, inventory and personal property. The revolving credit facility bears
interest at a floating rate equal, at the Company's option, to prime rate or
LIBOR plus a margin up to 1.5%. The lease financing facility bears interest at a
floating rate equal, at the Company's option, to prime rate or LIBOR plus a
margin up to 1.5%. The Company used the borrowings under the credit facility to
fund the McKerley Transaction, the Partnership Interest Purchase and the
acquisition of the Therapy Companies.
In May 1996, the Company completed an offering of 6,500,000 shares of Common
Stock at $32.50 per share (the "1996 Equity Offering"), 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 credit facilities and to
finance the National Health and NeighborCare transactions.
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 Credit Facility.
Certain of the Company's outstanding loans contain covenants which, without the
prior consent of the lenders, limit certain activities of the Company. Such
covenants contain limitations relating to the merger or consolidation of the
Company and the Company's ability to secure indebtedness, make guarantees, grant
security interests and declare dividends. In addition, the Company must maintain
certain minimum levels of cash flow, and debt service coverage, and must
maintain certain liabilities to net worth. Under these loans, the Company is
restricted from paying cash dividends on the Common Stock, unless certain
conditions are met. The Company has not declared or paid any cash dividends on
its Common Stock since its inception.
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which has adversely impacted the
Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Implementation of the Company's
strategy to expand specialty medical services to independent providers should
reduce the impact of changes in the Medicare and Medicaid reimbursement programs
on the Company as a whole. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative rulings
and interpretations which may further affect payments made under those programs.
Further, the federal and state governments may reduce the funds available under
those programs in the future or require more stringent utilization and quality
reviews of eldercare centers.
The Company believes that its liquidity needs can be met by expected operating
cash flow and availability of borrowings under its credit facilities. At
December 6, 1996, $289,350,000 was outstanding under the revolving credit
facility and the lease financing facility, and approximately $143,874,000 was
available under the credit facilities after giving effect to $16,776,000 in
outstanding letters of credit issued under the credit facilities.
24
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 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. See
"Cautionary Statements Regarding Forward Looking Statements."
25
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors
Genesis Health Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Genesis Health
Ventures, Inc. and subsidiaries as of September 30, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Genesis Health
Ventures, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations, and their cash flows for each of the years in the
three-year period ended September 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 7 to the Consolidated Financial Statements, Genesis Health
Ventures, Inc. and subsidiaries adopted the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, in 1994.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
November 20, 1996,
26
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Balance Sheets
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Assets ( in thousands except share data)
Current assets:
Cash and equivalents $ 12,763 $ 10,388
Investments in marketable securities 5,517 3,455
Accounts receivable, net of allowance for doubtful accounts
of $11,131 in 1996 and $6,179 in 1995 141,716 101,123
Cost report receivables 41,575 26,271
Inventory 17,051 9,601
Current portion of notes receivable 419 18,493
Prepaid expenses and other current assets 13,680 19,886
- ---------------------------------------------------------------------------------------------------------------
Total current assets 232,721 189,217
- ---------------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net 350,929 244,671
Notes receivable and other investments 92,574 29,879
Other long-term assets 24,595 20,825
Goodwill and other intangibles, net 249,850 115,797
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 950,669 $ 600,389
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 33,781 $ 19,401
Accrued expenses 15,331 13,951
Current installments of long-term debt 3,720 2,539
Accrued Compensation 18,630 13,656
Interest 5,342 5,513
Income taxes payable 426 1,883
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 77,230 56,943
- ---------------------------------------------------------------------------------------------------------------
Long-term debt 338,933 308,052
Deferred income taxes 13,812 8,698
Deferred gain and other long-term liabilities 6,086 5,148
Shareholders' equity:
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 31,981,393 and 31,935,792 at September 30, 1996;
22,081,267 and 22,035,666 at September 30, 1995 640 294
Additional paid-in capital 411,472 155,927
Retained earnings 102,739 65,570
Treasury stock, at cost (243) (243)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 514,608 221,548
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 950,669 $ 600,389
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
27
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Statements of Operations
Year ended September 30,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Net revenues:
Basic healthcare services $ 348,016 $ 278,121 $ 240,264
Specialty medical services 290,428 180,327 125,718
Management services and other, net 33,025 27,945 22,634
- -----------------------------------------------------------------------------------------------------------
Total net revenues 671,469 486,393 388,616
- -----------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 315,494 237,610 192,534
Other operating expenses 201,866 137,945 109,059
General corporate expense 25,840 17,585 17,650
Depreciation and amortization 25,374 18,793 14,982
Lease expense 18,638 13,798 11,376
Interest expense, net 24,926 20,366 15,305
Debenture conversion expense 1,245 - -
- -----------------------------------------------------------------------------------------------------------
Earnings before income taxes, extraordinary items and
cumulative effect of a change in accounting principle 58,086 40,296 27,710
Income taxes 20,917 14,765 10,019
- -----------------------------------------------------------------------------------------------------------
Earnings before extraordinary items and cumulative
effect of a change in accounting principle 37,169 25,531 17,691
Extraordinary items, net of tax - (1,923) (553)
Cumulative effect of a change in accounting principle - - 535
- -----------------------------------------------------------------------------------------------------------
Net income $ 37,169 $ 23,608 $ 17,673
- -----------------------------------------------------------------------------------------------------------
Per common share data:
Primary:
Earnings before extraordinary items and cumulative
effect of a change in accounting principle $ 1.35 $ 1.13 $ 0.89
Net income $ 1.35 $ 1.05 $ 0.89
Weighted average shares of common stock and
equivalents 27,491,765 22,587,037 19,930,828
- -----------------------------------------------------------------------------------------------------------
Fully diluted:
Earnings before extraordinary items and cumulative
effect of a change in accounting principle $ 1.29 $ 1.03 $ 0.84
Net income $ 1.29 $ 0.97 $ 0.84
Weighted average shares of common stock and
equivalents 31,130,045 28,452,436 24,819,711
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
28
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Statements of Shareholders' Equity
Additional
(Dollars in thousands) Common paid-in Retained Treasury
stock capital earnings stock Total
- -------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1993 $ 247 $101,273 $ 24,289 $ (460) 125,349
Issuance of additional common stock,
net of issuance costs 43 51,572 - - 51,615
Issuance of shares from Treasury - - - 100 100
Exercise of common stock options 1 728 - - 729
1994 net earnings - - 17,673 - 17,673
- -------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 291 153,573 41,962 (360) 195,466
- -------------------------------------------------------------------------------------------------------------------
Issuance of additional common stock - 621 - - 621
Issuance of shares from Treasury - - - 117 117
Exercise of common stock options and
issuance of stock bonus awards 3 1,733 - - 1,736
1995 net earnings - - 23,608 - 23,608
- -------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 294 155,927 65,570 (243) 221,548
- -------------------------------------------------------------------------------------------------------------------
Issuance of additional common stock,
net of issuance costs 136 211,529 - - 211,665
Conversion of Debentures 42 41,676 - - 41,718
Exercise of common stock options 5 2,503 - - 2,508
Effect of stock dividend 163 (163) - - -
1996 net earnings - - 37,169 - 37,169
- -------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 640 $411,472 $102,739 $ (243) $514,608
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
29
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Year ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 37,169 $ 23,608 $ 17,673
Adjustments to reconcile net income to
net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes 5,114 (1,270) 4,483
Depreciation and amortization 25,374 18,793 14,982
Amortization of deferred gain (460) (460) (319)
Debenture conversion expense 1,245 - -
Extraordinary loss - 1,923 553
Cumulative effect of a change in accounting principle - - (535)
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable (6,256) (25,564) (15,485)
Cost reports receivable (15,647) (15,065) (1,770)
Inventory (2,061) (3,176) (937)
Prepaid expenses and other current assets 1,955 3,035 (6,705)
Accounts payable and accrued expenses (7,758) 7,235 4,419
Accrued compensation and interest (949) 1,258 4,558
Income taxes payable (1,494) 871 (354)
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustments (937) (12,420) 2,890
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 36,232 11,188 20,563
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investments in marketable securities (2,062) (3,455) -
Capital expenditures (38,645) (24,719) (18,784)
Payments for acquisitions, net of cash acquired (215,874) (8,194) (214,306)
Proceeds from dispositions of facilities 21,521 - -
Notes receivable and other investment additions, net (42,113) (23,074) -
Other long term asset (additions) dispositions (7,872) 9,971 (9,274)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (285,045) (49,471) (242,364)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings (repayments) under working
capital revolving credit 50,799 30,100 (10,200)
Repayment of long term debt (2,539) (102,451) (26,060)
Proceeds from issuance of long-term debt - 119,700 125,000
Proceeds from issuance of convertible debentures - - 86,250
Debt issuance costs - (4,331) (5,051)
Proceeds from issuance of common stock 211,250 100 52,048
Stock issuance costs (9,585) - (433)
Debenture conversion expense (1,245) - -
Stock options exercised 2,508 1,736 523
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 251,188 44,854 222,077
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 2,375 6,571 276
Cash and equivalents
Beginning of year 10,388 3,817 3,541
End of year $ 12,763 $ 10,388 $ 3,817
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Interest paid $ 24,926 $ 18,175 $ 12,085
Income taxes paid $ 22,374 $ 13,037 $ 5,159
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
30
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Genesis Health
Ventures, Inc. and its wholly-owned subsidiaries (the Company or Genesis). All
significant intercompany accounts and transactions have been eliminated in
consolidation. All dollars, except per share amounts, and shares are expressed
in thousands. All other amounts are expressed in whole numbers. Certain prior
year balances have been reclassified to conform with current year presentation.
Business
The Company provides a broad range of healthcare services to the geriatric
population, principally within four geographic markets in the eastern United
States. These services include basic healthcare services traditionally provided
in eldercare centers; specialty medical services, such as rehabilitation
therapy, institutional pharmacy and medical supply services, community-based
pharmacies and subacute care; and management services to independent geriatric
care providers.
Property, Plant and Equipment
Land, land improvements, buildings, and equipment are stated at cost. Subsequent
additions are recorded at cost. Depreciation of land improvements, buildings and
equipment is calculated on the straight-line method over their estimated useful
lives that range from three years to 35 years.
Expenditures for maintenance and repairs necessary to maintain property and
equipment in efficient operating condition are charged to operations. Costs of
additions and betterments are capitalized. Interest costs associated with
construction or renovation are capitalized in the period in which they are
incurred.
Inventories
Inventories, consisting of drugs and supplies, are stated at the lower of cost
or market. Cost is determined primarily on the first-in, first-out (FIFO)
method.
Contractual Adjustments
Patient revenues are recorded based on standard charges applicable to all
patients. Under Medicare, Medicaid, and other cost-based reimbursement programs,
each facility is reimbursed for services rendered to covered program patients as
determined by reimbursement formulas. The differences between established
billing rates and the amounts reimbursable by the programs and patient payments
are recorded as contractual adjustments and deducted from revenues.
Retroactively calculated third-party contractual adjustments are accrued on an
estimated basis in the period the related services are rendered. Revisions to
estimated contractual adjustments are recorded based upon audits by third-party
payors, as well as other communications with third-party payors such as desk
reviews, regulation changes and policy statements. These revisions are made in
the year such amounts are determined.
31
Cash Equivalents
Short-term investments which have a maturity of ninety days or less at
acquisition are considered cash equivalents.
Investments in Marketable Securities
Investments in marketable securities available for sale are recorded at their
fair market value, with any unrealized gains or losses recognized as a component
of shareholders' equity, until realized.
Deferred Financing Costs
Financing costs have been deferred and are being amortized on a straight-line
basis over the term of the related debt. Deferred financing costs, net of
accumulated amortization of $3,009 and $1,313, and included in other long term
assets were $8,056 and $8,584 at September 30, 1996 and 1995, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair market value
of net assets acquired and is amortized on a straight-line basis from ten to
forty years. Goodwill, net of accumulated amortization of $11,900 and $6,200,
was $254,000 and $119,000 at September 30, 1996 and 1995, respectively. Goodwill
is reviewed for impairment whenever events or circumstances provide evidence
that suggest that the carrying amount of goodwill may not be recoverable. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance can be recovered through projected
undiscounted future cash flows.
Income Taxes
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109) was adopted by the Company in 1994. Under Statement 109,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Provision is made for deferred income taxes applicable to temporary differences
between financial statement and taxable income.
Earnings Per Share
Primary earnings per share is based on the average number of shares of common
stock outstanding during the period and the dilutive effect of stock options and
other common stock equivalents. Fully diluted earnings per share reflect the
conversion of the Convertible Senior Subordinated Debentures due 2003 as if such
conversion had occurred on the date of issuance and the related interest expense
had not been incurred.
Effective March 29, 1996, the Company issued a three for two stock dividend on
its common stock. Share and per share information in the accompanying
consolidated financial statements have been adjusted accordingly.
Use of Estimates
Management of the Company has made a number of estimates relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
32
New Accounting Pronouncements
In March, 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Statement 121 provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both to
assets to be held and used and assets to be disposed of. The Company is required
to adopt Statement 121 for the year ending September 30, 1997. The Company
believes the adoption of Statement 121 will not have a material impact on its
consolidated financial statements.
In October, 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation". Statement 123 allows companies the option to retain the current
accounting approach for recognizing stock-based expense in the financial
statements or to adopt a new accounting method based on the estimated fair value
of employee stock options. Companies that do not follow the new fair value based
method will be required to provide expanded disclosures in the footnotes. The
Company is required to adopt Statement 123 for the year ending September 30,
1997. The Company expects to continue applying its current accounting approach
and upon adoption will present the required footnote disclosures.
(2) Acquisitions/Dispositions
Effective October 1, 1996, subsequent to the fiscal year end, Geriatric &
Medical Companies, Inc. ("GMC") merged with a wholly-owned subsidiary of Genesis
(The "GMC Transaction"). Under the terms of the merger agreement, GMC
shareholders received $5.75 per share in cash for each share of GMC stock. The
total consideration paid, including assumed indebtedness of approximately
$132,000, is approximately $223,000. The merger was financed in part with
approximately $121,250 in net proceeds from an offering of 9 1/4% Senior
Subordinated Notes issued in October of 1996. The remaining consideration was
financed through borrowings under the Company's bank credit facility. The GMC
Transaction, will add to Genesis 24 owned eldercare centers with approximately
3,300 beds. GMC also operates businesses which provide a number of ancillary
healthcare services including ambulance services; respiratory therapy, infusion
therapy and enteral therapy; distribution of durable medical equipment and home
medical supplies; and information management services.
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 and subsequently leased the
centers to a subsidiary of Genesis under operating lease agreements and an
$85,000 lease financing facility. The balance of the total consideration paid to
National Health was funded with available cash of $51,800 and assumed
indebtedness of $7,900. National Health added 16 eldercare centers in Florida,
Virginia and Connecticut with approximately 2,200 beds to Genesis. National
Health also provides enteral nutrition and rehabilitation therapy services to
the eldercare centers which it owns and leases
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, comprised of approximately
$47,250 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. The net sale proceeds were used to repay indebtedness
under the Company's credit facility.
In March 1996, the Company acquired for total consideration of approximately
$31,900, 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.
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 Healthcare Rehab Services,
Inc. (collectively, "Therapy Companies") for approximately $9,300. The Therapy
Companies provide these services in the Company's Chesapeake region. The
acquisition was financed with borrowings under the Company's bank credit
facilities.
33
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 earned a $2,000 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. Genesis also continues
to provide certain ancillary services to the ACTS communities.
On November 30, 1995, the Company acquired McKerley Health Care Centers
("McKerley") for total consideration of approximately $68,700. The transaction
also provides for up to an additional $6,000 of contingent consideration payable
upon the achievement of certain financial objectives through October 1997.
McKerley owns or leases 15 geriatric care facilities in New Hampshire and
Vermont with a total of 1,535 beds and operates a home healthcare company. The
acquisition was financed with long term debt.
On September 30, 1995, the Company sold, and simultaneously entered into a
three-year management contract to manage , five facilities totaling 606 beds to
the AGE Institute of Massachusetts ("AIMASS") for $19,570. The Company extended
approximately $18,000 of financing in connection with the sale, which was
repaid in full in Fiscal 1996.
On April 1, 1995, the Company acquired TherapyCare Systems, L.P. ("Therapy
Care") for approximately $7,000. TherapyCare provided physical therapy,
occupational therapy and speech therapy to 73 long term care facilities
throughout Pennsylvania.
The following unaudited pro forma statement of operations information gives
effect to the National Health, NeighborCare and McKerley transactions described
above as though they had occurred on October 1, 1994, after giving effect to
certain adjustments, including amortization of goodwill, additional depreciation
expense, increased interest expense on debt related to the acquisition and
related income tax effects. In addition, the following pro forma information
entitled "1996 Including GMC" incorporates the pro forma effect of the GMC
Transaction had it, and the previously described transactions, occurred on
October 1, 1995. 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 respective fiscal years.
Year Ended
September 30,
1996
Including
GMC 1996 1995
- --------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
Total net revenues $983,633 $788,437 $682,360
Earnings before debenture conversion
expense and extraordinary item 46,993 44,591 33,894
Net income 46,196 43,794 31,971
Primary earnings per share before
debenture conversion expense and
extraordinary item 1.48 1.40 1.15
Fully diluted earnings per share before
debenture conversion expense and
extraordinary item 1.40 1.33 1.07
- --------------------------------------------------------------------------------
34
(3) Property, Plant and Equipment
Property, plant and equipment at September 30, 1996 and 1995 consist of the
following:
September 30,
1996 1995
- --------------------------------------------------------------------------------
Land $ 23,517 $ 17,606
Land improvements 4,565 3,193
Buildings 301,216 219,637
Equipment 67,124 46,196
Construction in progress 20,344 9,147
- --------------------------------------------------------------------------------
416,766 295,779
Less accumulated depreciation 65,837 51,108
- --------------------------------------------------------------------------------
Net property, plant and equipment $350,929 $244,671
- --------------------------------------------------------------------------------
(4) Long-term Debt
Long-term debt at September 30, 1996 and 1995 was as follows:
September 30,
1996 1995
- -------------------------------------------------------------------------------
Secured-due 1997 to 2034;
6.75% to 10.00% (weighted average interest
rate 1996-7.43%; 1995-8.22%) $147,359 $101,138
Unsecured-due 1997 to 2008;
5.50%% to 11.00% (weighted average interest
rate 1996-9.71%; 1995-9.6%) 151,815 123,524
Convertible Senior Subordinated
Debentures due 2003-6% 43,762 86,250
- --------------------------------------------------------------------------------
342,936 310,912
Less:
-Debt discount, net of amortization 283 321
-Current installments and short-term borrowings 3,720 2,539
- --------------------------------------------------------------------------------
$338,933 $308,052
- --------------------------------------------------------------------------------
At September 30, 1996 and 1995, the Company's long-term debt consisted of
approximately $120,350 and $66,500 of floating rate debt based on prime or LIBOR
with weighted average interest rates of 6.87% and 7.19%, respectively. At
September 30, 1996 and 1995, the Company's long-term debt consisted of
approximately $222,586 and $244,412 of fixed rate debt with weighted average
interest rates of 8.62% and 8.30%, respectively.
In October 1996, the Company entered into an agreement with the lenders of the
bank credit facility to increase the revolving credit facility to $300,000 and
the lease financing facility to $150,000 and to release liens on accounts
receivable, inventory and personal property. The revolving credit facility bears
interest at a floating rate equal, at the Company's option, to prime rate or
LIBOR plus a margin up to 1.5%. The lease financing facility bears interest at a
floating rate equal, at the Company's option, to prime rate or LIBOR plus a
margin up to 1.5%. The revolving credit facility is secured by the stock of the
Company's subsidiaries.
In October 1996, subsequent to fiscal year end, the Company completed an
offering of $125,000 9 1/4% Senior Subordinated Notes due 2006. The Company used
the net proceeds of approximately $121,250, together with borrowings under the
bank credit facility, to pay the cash portion of the purchase price of the GMC
Transaction, to repay certain debt assumed as a result of the GMC Transaction
and to repurchase GMC accounts receivable which were previously financed.
35
In November 1996, subsequent to the fiscal year end, the Company called for
redemption the then outstanding 6% Convertible Senior Subordinated Debentures
(the Debentures) at a redemption price equal to 104.2% of the principal amount.
The Debenture holders had the option to tender Debentures at the redemption
price or to convert the Debentures into common stock at a conversion price of
$15.104 per share. In connection with the early conversion of a portion of the
Debentures converted during fiscal 1996, the Company paid approximately $1,245
representing the prepayment of interest to converting debenture holders. The
non-recurring cash payment is presented as debenture conversion expense in the
statement of operations.
In June 1995, the Company completed an offering of $120,000 of 9 3/4 % Senior
Subordinated Notes due 2005 (the Notes). Interest is payable on the Notes on
June 15 and December 15 of each year commencing December 15, 1995. The Notes are
redeemable at the option of the Company in whole or in part, at any time, on or
after June 15, 2000 at a redemption price initially equal to 104.05% of the
principal amount and decreasing annually thereafter. The Company used the net
proceeds from the Notes offering to repay a portion of the bank credit facility.
At September 30, 1996, sinking fund requirements and installments of long-term
debt, excluding the Debentures, are as follows:
Year ending Principal
September 30, Amount
- --------------------------------------------------------------------------------
1997 $ 3,720
1998 4,313
1999 3,468
2000 2,772
2001 2,498
Thereafter $ 282,403
- --------------------------------------------------------------------------------
In June 1996, the Company entered into an interest rate swap agreement with a
financial institution. The agreement is for a term of five years and a notional
amount of $20,000 whereby the Company will make quarterly payments at a floating
rate based on six month LIBOR (5.75% at September 30, 1996) and receive
quarterly payments at a fixed rate of 6.86%.
Interest of $1,191 in 1996, $457 in 1995 and $405 in 1994, was capitalized in
connection with facility construction and renovations.
During fiscal 1995 and 1994, the Company recorded extraordinary losses, net of
tax, of $1,923 and $553, respectively related to the early retirement of debt.
The Company is restricted from declaring any dividends or authorizing any other
distribution on account of ownership of its capital stock unless certain
conditions are met.
(5) Leases and Lease Commitments
The Company leases certain facilities and equipment under operating leases.
Future minimum payments for the next five years under operating leases at
September 30, 1996 were as follows:
Year ending Minimum
September 30, payments
- --------------------------------------------------------------------------------
1997 $ 25,891
1998 21,751
1999 20,544
2000 17,566
2001 16,980
- --------------------------------------------------------------------------------
36
Excluded from the future minimum lease payments above in the year 2001 is
approximately $67,000 related to a residual value guarantee due under the lease
financing facility in connection with the National Health transaction.
The Company has an option to purchase seven leased eldercare care facilities at
the end of their ten year lease term in 2003 for $59,000.
(6) Patient Service Revenue
The distribution of net patient service revenue by class of payor for the years
ended September 30, 1996, 1995 and 1994 was as follows:
Year ended September 30,
Class of payor 1996 1995 1994
- --------------------------------------------------------------------------------
Private pay and other $251,244 $175,206 $148,946
Medicaid 229,838 185,612 156,894
Medicare 157,362 97,630 60,142
- --------------------------------------------------------------------------------
$638,444 $458,448 $365,982
The above revenue amounts are net of third-party contractual allowances of
$122,136, $98,495, and $81,545 in 1996, 1995 and 1994, respectively.
The Company has recorded cost report receivables from third-party payors (i.e.,
Medicare and Medicaid) of $41,575 and $26,271 at September 30, 1996 and 1995,
respectively. These amounts at September 30, 1996 are due primarily from
Massachusetts ($8,579), Pennsylvania ($5,710) and Medicare ($28,576) for the
1994 through 1996 cost reporting periods.
37
(7) Income Taxes
As discussed in Note 1, the Company adopted Statement 109 as of October 1, 1993.
The cumulative effect of this change in accounting for income taxes of $535 is
determined as of October 1, 1993 and is reported separately in the consolidated
statement of operations for the year ended September 30, 1994. As a result of
applying Statement 109, earnings before income taxes for the years ended
September 30, 1996, 1995 and 1994 were decreased $390 due to the effects of
adjustments for prior purchase business combinations. Prior years financial
statements have not been restated to apply the provisions of Statement 109.
Total income tax expense for the years ended September 30, 1996 1995 and 1994
was as follows:
Year ended September 30,
1996 1995 1994
- ------------------------------------------------------------------------------
Income from continuing operations $20,917 $14,765 $10,019
Extraordinary item - (1,130) (325)
- ------------------------------------------------------------------------------
Total $20,917 $13,635 $ 9,694
- ------------------------------------------------------------------------------
The components of the provision for income taxes for the years ended September
30, 1996, 1995 and 1994 were as follows:
Year ended September 30,
1996 1995 1994
- ------------------------------------------------------------------------------
Current:
Federal $14,508 $13,484 $ 4,769
State 1,295 2,551 767
- ------------------------------------------------------------------------------
15,803 16,035 5,536
- ------------------------------------------------------------------------------
Deferred:
Federal 4,595 (650) 3,973
State 519 (620) 510
- ------------------------------------------------------------------------------
5,114 (1,270) 4,483
- ------------------------------------------------------------------------------
Total $20,917 $14,765 $10,019
- ------------------------------------------------------------------------------
38
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to net income before income taxes and
extraordinary items as a result of the following:
Year ended September 30,
1996 1995 1994
- --------------------------------------------------------------------------------------
Computed "expected"
tax expense $ 20,330 $ 14,104 $ 9,699
-Increase (reduction) in income taxes
resulting from:
-State and local income-taxes, net of federal
tax benefit 1,179 1,255 830
Amortization of goodwill 235 197 154
Targeted jobs credits - (528) (600)
Tax exempt interest (770) - -
Other, net (57) (263) (64)
- --------------------------------------------------------------------------------------
Total income tax expense $ 20,917 $ 14,765 $ 10,019
- --------------------------------------------------------------------------------------
The sources of the differences between consolidated earnings for financial
statement purposes and tax purposes and the tax effects are as follows:
Year ended September 30,
1996 1995 1994
- --------------------------------------------------------------------------------------
Excess tax depreciation expense versus book
depreciation $ 1,157 $ 1,064 $ 1,007
Excess tax gain versus
book gain (895) (2,879) (302)
Amortization of deferred
-gain on sale and leaseback 49 103 128
Utilization of net operating loss
- carryforward (600) - -
Targeted jobs credit
carryforward - - 446
Accrued liabilities
and reserves 676 (501) (1,713)
Goodwill 3,661 920 3,790
Alternative minimum
tax credit - - 1,192
Prepaid Rent 1,146 - -
Other (80) 23 (65)
- --------------------------------------------------------------------------------------
Net deferred tax
provision $ 5,114 $(1,270) $ 4,483
- --------------------------------------------------------------------------------------
39
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1996
and 1995 are presented below:
- ---------------------------------------------------------------------------
Deferred Tax Assets September 30,
1996 1995
- --------------------------------------------------------------------------
Accounts receivable $ 1,411 $ 1,303
Accrued compensation 601 532
Amortization of deferred gain 247 297
Goodwill 414 4,075
Net operating loss carryforwards 4,000 2,600
Other, net 13 24
- --------------------------------------------------------------------------
Deferred tax assets 6,686 8,831
Valuation allowance (3,400) (2,600)
- --------------------------------------------------------------------------
Net deferred tax assets 3,286 6,231
- --------------------------------------------------------------------------
Deferred Tax Liabilities
- --------------------------------------------------------------------------
Goodwill and other intangibles (6,590) (6,590)
Depreciation (8,535) (8,272)
Accrued liabilities and reserves (828) -
Prepaid rent (1,146) -
Other, net - (67)
- --------------------------------------------------------------------------
Total deferred tax liability (17,099) (14,929)
- --------------------------------------------------------------------------
Net deferred liability $(13,813) $ (8,698)
- --------------------------------------------------------------------------
At September 30, 1996 and 1995, the Company has state net operating loss
carryforwards (net of federal tax benefit) of $4,000 and $2,600, respectively.
The related deferred tax assets are available to reduce future state income
taxes payable, subject to applicable carryforward rules and limitations. Due to
these limitations, the Company has established valuation allowances of $3,400
and $2,600 at September 30, 1996 and 1995, respectively. The net operating loss
carryforwards expire in years 1997 through 2002. Management believes that by
using prudent and feasible tax planning strategies it would realize
approximately $600 of the state net operating losses prior to expiration.
(8) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 1996 and 1995 consist of
the following:
September 30,
1996 1995
- --------------------------------------------------------------------------
Mortgage notes and other notes receivable $76,092 $17,823
Investments in non marketable securities 14,050 5,000
Investments in unconsolidated
partnerships and joint ventures 2,432 7,056
- --------------------------------------------------------------------------
$92,574 $29,879
- --------------------------------------------------------------------------
Mortgage notes and other notes receivable at September 30, 1996 bear interest at
rates ranging from 7 1/2% to 13% and mature at various times ranging from 1997
to 2006. Approximately $64,525 of the mortgage notes and other notes are secured
by first or second mortgage liens on underlying facilities and personal
property, accounts receivable, inventory and or gross facility receipts, as
defined.
40
In 1996, the Company extended a 10 1/4%, $45,000 mortgage loan and a 13%,
$10,000 working capital loan to refinance the bank indebtedness of 11 managed
eldercare centers in Florida and to eliminate the Company's guarantee of $18,500
of such indebtedness. The Company extended its existing management agreement
for these Florida eldercare centers through 2006.
In addition to the $10,000 working capital loan described above, the Company has
agreed to provide third parties with $6,900 of working capital lines of credit.
The unused portion of working capital lines of credit was $2,216 at September
30, 1996.
In September, 1996 the Company acquired $7,500 of convertible preferred stock of
Doctors Health System, Inc. ("Doctors Health"), an independent physician owned
and controlled integrated delivery system and practice management company. An
additional $2,500 of convertible preferred stock may be purchased before
December 31, 1996. The preferred stock carries an 8% cumulative dividend and is
convertible into common stock, and if converted would represent an approximate
10% ownership interest in Doctors Health. Also, the Company is committed to
purchase an additional $10,000 of convertible preferred stock upon Doctors
Health's achievement of certain operational and financial benchmarks. The
additional investment, if made and converted to common stock would raise the
Company's ownership interest to approximately 20%. Investments in such non
marketable securities are carried at cost.
Investments in unconsolidated partnerships and joint ventures are accounted for
under the equity method.
(9) Other Long-Term Assets
Other long-term assets at September 30, 1996 and 1995 consist of the following:
September 30,
1996 1995
- ----------------------------------------------------------------------------
Deferred financing fees, net $ 8,056 $ 8,584
Property deposits and funds held in escrow 6,765 3,488
Funds held by trustee 1,692 1,121
Other 8,082 7,632
- ----------------------------------------------------------------------------
$24,595 $ 20,825
- ----------------------------------------------------------------------------
(10) Management Services and Other Income, Net
Included in management services and other income, net were the following:
Year ended September 30,
1996 1995 1994
- ----------------------------------------------------------------------------
Fees earned in connection
with management agreements $18,227 $19,214 $15,564
Service related businesses 9,023 5,523 4,836
Transactional items, net 5,775 3,208 2,234
- ----------------------------------------------------------------------------
$33,025 $27,945 $22,634
- ----------------------------------------------------------------------------
41
(11) Stock Option Plans
The Company has two stock option plans (the "Employee Plan" and the "Directors
Plan"). Under the Employee Plan, 3,750,000 shares of common stock were reserved
for issuance to employees including officers and directors. Generally, the
options granted in the Employee Plan become exercisable over a 5 year period and
expire 10 years from the date of grant. All options granted under the Employee
Plan have been at the fair market value of the common stock on the date of
grant.
Option Price Available
per Share Outstanding Exercisable for Grant
- ---------------------------------------------------------------------------------------------
Balance at
-September 30, 1994 $2.22-$17.00 1,610,103 730,605 76,467
- ---------------------------------------------------------------------------------------------
Authorized - - - 1,050,000
Granted 19.67-20.25 740,625 - (740,625)
Became
Exercisable - - 400,692 -
Exercised 5.33-16.83 (204,585) (204,585) -
Cancelled - (51,975) - 51,975
- ---------------------------------------------------------------------------------------------
Balance at
-September 30, 1995 2.22-20.25 2,094,168 926,712 437,817
- ---------------------------------------------------------------------------------------------
Authorized - - - 750,000
Granted 19.50-31.87 1,010,998 (1,010,998)
Became
Exercisable - - 509,070 -
Exercised 5.33-20.25 (275,455) (275,455) -
Cancelled - (136,269) - 136,269
- ---------------------------------------------------------------------------------------------
Balance at
-September 30, 1996 2.22-31.87 2,693,442 1,160,327 313,088
- ---------------------------------------------------------------------------------------------
(12) Retirement Plan
The Company has a defined contribution plan covering all employees having 1,000
hours or more of service and one year of service in a plan year. Employees'
contributions to the plan may be matched by the Company based on years of
service. During the plan years ended December 31, 1996 and 1995, the Company
accrued a match of 50% of employee contributions up to 3% of the employee's
annual gross salary. During the plan year ended December 31, 1994 the Company
match was 50% of employee contributions up to 2% of employee's annual gross
salary.
Additionally, the Plan provides for discretionary employer contributions, in the
form of Company common stock and/or cash, based on profits of the Company. The
Company recorded retirement plan expense for the 401(k) match and the
discretionary contribution of approximately $1,877, $1,128, and $959 for the
years ended September 30, 1996, 1995 and 1994, respectively.
Certain employees of NeighborCare and National Health participate in separate
plans qualified under Section 401(k) of the Internal Revenue Code. Beginning
January 1, 1997, these plans will be merged into the Genesis Health Ventures,
Inc. Retirement Plan.
(13) Commitments and Contingencies
The Company has guaranteed $10,614 of indebtedness of others.
42
In August 1995, the Company entered into a software license agreement for a
clinical operating system. The total commitment under the license agreement is
$12,000 of which the Company has paid $3,500. The license agreement provides for
a refund of amounts paid in the event the software does not meet the acceptance
requirements as defined in the license agreement. The Company has estimated the
cost to install the system and related hardware, not including amounts paid for
the software license, to be approximately $18,000 over the next three years, of
which approximately $5,900 has been expended through September 30, 1996
The Company is self insured for the majority of its workers' compensation and
health insurance claims. The Company's maximum exposure is $500 per occurrence
for workers' compensation and $75 per year, per participant for health
insurance. The Company has elected to reinsure $490 in excess of the first $10
per occurrence for workers' compensation claims, through its wholly-owned
captive insurance company, Liberty Health Corp., LTD. The Company carries excess
insurance with commercial carriers for losses above $500 per workers'
compensation claim, and $75 per participant for health insurance. The provision
for estimated workers' compensation and health insurance claims includes
estimates of the ultimate costs for both reported claims and claims incurred but
not reported.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for guarantees, loan commitments and
letters of credit is represented by the dollar amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet financial instruments. The Company
does not anticipate any material losses as a result of these commitments.
Genesis is a party to litigation arising in the ordinary course of business.
Genesis does not believe the results of such litigation, even if the outcome is
unfavorable to the Company, would have a material adverse effect on its
consolidated financial position or results of operations.
(14) Fair Value of Financial Instruments
The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), cost report receivables,
prepaid expenses and other current assets, accounts payable, accrued expenses,
accrued compensation, accrued interest and income taxes payable approximates
fair value because of the short-term maturity of these instruments.
The Company also believes the carrying value of mortgage notes and other notes
receivable, and non marketable debt securities approximate fair value based upon
the discounted value of expected future cash flows using interest rates at which
similar investments would be made to borrowers with similar credit quality and
for the same remaining maturities.
It was not practicable to estimate the fair value of investments in non
marketable equity securities, or unconsolidated partnerships and joint ventures.
The fair value of interest rate swap agreements is the estimated amount the
Company would receive or pay to terminate the swap agreement at the reporting
date, taking into account current interest rates. The estimated amount the
Company would pay to terminate it's interest rate swap agreement outstanding at
September 30, 1996 is $94.
The fair value of the Company's commitments to provide working capital lines of
credit and certain financial guarantees is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
Since the Company has not charged fees for currently outstanding commitments
there is no fair value of such financial instruments.
43
The fair value of the Company's fixed rate long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. At September
30, 1996 and 1995, the carrying value of fixed rate debt of $222,586 and
$244,412, respectively approximates market value.
The fair value of the Company's floating rate debt approximates its fair value.
(15) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows:
Fully-diluted
Earnings Earnings Per
Before Share before
Debenture Debenture
Conversion Conversion
Expense Expense
and and Fully-diluted
Total Net Extraordinary Net Extraordinary Earnings
Revenues Item Income Item Per Share
- -------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1995 $132,778 $6,556 $5,858 $.25 $.23
March 31, 1996 154,739 7,810 7,810 .30 .30
June 30, 1996 172,836 10,190 10,091 .35 .35
September 30, 1996 211,115 13,410 13,410 .40 .40
- -------------------------------------------------------------------------------------------------------------------
$671,469 $37,966 $37,169 $1.31 $1.29
- -------------------------------------------------------------------------------------------------------------------
Quarter ended:
- -------------------------------------------------------------------------------------------------------------------
December 31, 1994 $111,553 $ 4,810 $ 4,810 $ .21 $ .21
March 31, 1995 116,953 5,813 5,813 .24 .24
June 30, 1995 125,959 6,885 4,962 .28 .21
September 30, 1995 131,928 8,023 8,023 .31 .31
- -------------------------------------------------------------------------------------------------------------------
$486,393 $25,531 $23,608 $1.03 $0.97
- -------------------------------------------------------------------------------------------------------------------
44
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
45
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 1997 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K, except information
concerning certain Executive Officers of the Company which is set forth in Item
4.1 of this Report.
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1997 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGMENT
Incorporated by reference from the Company's 1997 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1997 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1996 and 1995
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 1996, 1995, and 1994
All other schedules not listed have been omitted since the
required information included in the financial statements or the notes thereto,
or is not applicable or required.
46
(a)(3) Exhibits
No. Description
2.1(1) Agreement and Plan of Reorganization, dated September 19, 1993, by
and among Genesis Health Ventures, Inc., a Pennsylvania corporation
("Genesis"), MI Acquisition Corporation, a Pennsylvania corporation
and a wholly-owned subsidiary of Genesis, MHC Acquisition
Corporation, a Pennsylvania corporation and a wholly-owned subsidiary
of Genesis, PEI Acquisition Corporation, a Pennsylvania corporation
and a wholly-owned subsidiary of Genesis, TW Acquisition Corporation,
a Pennsylvania corporation and a wholly-owned subsidiary of Genesis,
SRS Acquisition, a Pennsylvania corporation and a wholly-owned
subsidiary of Genesis, Meridian Healthcare, Inc., a Maryland
corporation, Meridian Inc., a Maryland corporation ("MI"), Pharmacy
Equities, Inc., a Maryland corporation, The Tidewater Healthcare
Shared Services Group, Inc., a Maryland corporation, Staff
Replacement Services, Inc., a Maryland corporation, Michael J. Batza,
Jr., Edward A. Burchell, Earl L. Linehan, Roger C. Lipitz and Arnold
I. Richman (collectively the "Reorganization Agreement").
2.2(2) Amended and Restated Amendment to Reorganization Agreement dated
November 23, 1993.
2.3(3) Agreement made as of the 18th day of August, 1995 by and among
Genesis Health Ventures, Inc., a Pennsylvania corporation, and
Accumed, Inc., a New Hampshire corporation, McKerley Health Care
Centers, Inc., a New Hampshire corporation, McKerley Health Care
Center-Concord, Inc., a New Hampshire corporation, McKerley Health
Facilities, a New Hampshire general partnership and McKerley Health
Care Center-Concord, L.P., a New Hampshire limited partnership
(collectively, the "Purchase Agreement").
2.4(4) Amendment Number One to Purchase Agreement dated November 30, 1995.
2.5(15) 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.
2.6(15) Merger Agreement, dated April 21, 1996, by and among Professional
Pharmacies, Inc., Genesis Health Ventures, Inc. and PPS Acquisition
Corp.
2.7(16) 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.
2.8(16) 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.
2.9(18) Agreement and Plan of Merger, dated as of July 11, 1996, by and among
Genesis Health Ventures, Inc., a Pennsylvania corporation, G
Acquisition Corporation, a Delaware corporation, and Geriatric &
Medical Companies, Inc., a Delaware corporation.
3.1(5) The Company's Amended and Restated Articles of Incorporation.
3.2(5) The Company's Amended and Restated Bylaws.
3.3(10) Amendment to the Company's Articles of Incorporation, as filed on
March 11, 1994, with the Department of State, Commonwealth of
Pennsylvania.
4.1(2) Indenture dated as of November 30, 1993, between the Company and
First Fidelity Bank, N.A., Pennsylvania.
4.2(5) Specimen of Common Stock Certificate.
4.3(6) Specimen of the Company's First Mortgage Bonds (Series A) due 2007.
4.4(7) Indenture of Mortgage and Deed of Trust, dated as of September 1,
1992, by and among the Company, Delaware Trust Company and
Richard N. Smith.
4.5(8) Specimen of the Company's 6% Convertible Senior Subordinated
Debentures due 2003.
4.6(2) Indenture dated as of November 30, 1993, between the Company and
First Fidelity Bank, N.A., Pennsylvania.
4.7(13) Rights Agreement between Genesis Health Ventures, Inc. and Mellon
Securities Trust Company.
4.8(17) Indenture dated as of June 15, 1995 between the Company and
Delaware Trust Company.
4.9(17) Specimen of the Company's 9-3/4% Senior Subordinated Debentures
due 2005.
4.10(19) Indenture dated as of October 7, 1996 between the Company and First
Union National Bank
4.11(19) Specimen of the Company's 9-1/4% Senior Subordinated Notes due 2006.
47
+10.1(5) The Company's Employee Retirement Plan, adopted January 1, 1989,
as amended and related Retirement Plan Trust Agreement,
+10.2(12) The Company's 1985 Amended and Restated Stock Option Plan.
+10.3(9) Amended and Restated Employment Agreement between the Company and
Michael R. Walker dated April 1, 1994.
+10.4(5) Employment Agreement between the Company and Richard R. Howard dated
April 1, 1991.
+10.5(9) Letter Amendment to Employment Agreement of Richard R. Howard, dated
April 6, 1994.
+10.6(5) Employment Agreement between the Company and David C. Barr, Dated
April 1, 1991.
+10.7(9) Letter Amendment to Employment Agreement of David C. Barr, dated
April 6, 1994.
+10.8(5) Lease Agreement, dated October 1, 1990, between Salisbury Medical
Office Building General Partnership ("SMOBGP") and Team
Rehabilitation, Inc.
+10.9(5) Lease Agreement, dated October 1, 1989, between SMOBGP and Genesis
Immediate Med Center, Inc.
+10.10(5) Purchase Agreement, dated October 1, 1987, among SMOBGP, Genesis
Pharmacy, Inc. and Genesis Immediate Med Center, Inc. relating to the
purchase of the assets, property and business of Salisbury Pharmacy
and Salisbury Immediate Med Center.
+10.11(5) Lease, dated October 1, 1989, between SMOBGP and ASCO, relating to
the Salisbury Regional Health Center.
+10.12(11) Ground Lease Agreement dated as of June 26, 1993, by and between GHV
Associates and the Company.
+10.13(11) Lease, dated January 1, 1995, between GHV Associates and the Company,
Team Rehabilitation, Inc. and Genesis Physician Services, Inc.
10.14(5) Guaranty, dated August 31, 1988, by the Company of Genesis Properties
Limited Partnership Letter of Credit obligations.
10.15(5) Second Amended and Restated Registration Agreement, dated April 1,
1991, among the Company, the holders of the Company's Series A
Convertible Preferred Stock, the holders of the Company's Series C
Convertible Preferred Stock, the holders of the Company's Series D
Convertible Preferred Stock, holders of the Company's Series F
Convertible Preferred Stock, and certain holders of the Company's
common stock.
48
10.16(5) Agreement and Plan of Merger, dated March 29, 1991, among the
Company, Genesis Acquisition Company and Concord Healthcare
Corporation.
+10.17(5) Agreement, dated April 19, 1991, between Nazem & Company, III, L.P.
and the Company.
+10.18(6) The Company's 1992 Stock Option Plan for Non-Employee Directors.
+10.19(6) The Company's Incentive Compensation Program.
+10.20(6) The Company's Execuflex Plan, dated as of January 1, 1992, and
related Trust Agreement, dated December 10, 1991.
+10.21(6) Agreements, dated June 16, 1990, February 6, 1991 and August 15,
1991, by and among the Company, Edward Romanov, Jr., American
Community Environments Corporation and Total Care Systems, Inc.
+10.22(7) Agreement, dated August 19, 1992, by and among the Company, American
Community Environments Corporation and Edward B. Romanov, Jr.
49
+10.23(9) Promissory Note dated September 6, 1994, from Samuel H. Howard to the
Company.
+10.24(2) Lease Agreement, dated as of November 30, 1993, by and between
Charlesmead Associates Limited Partnership, a Maryland limited
partnership, and MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.25(2) Option Agreement, dated November 30, 1993, by and among the Sellers
identified therein, Charlesmead Associates Limited Partnership, a
Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.26(2) Lease Agreement, dated as of November 30, 1993, by and between Cherry
Hill Meridian Limited Partnership, a Maryland limited partnership,
and MHC Acquisition Corporation, now known as Meridian Healthcare,
Inc., a Pennsylvania corporation.
+10.27(2) Option Agreement, dated November 30, 1993, by and among the Sellers,
as indicated therein, Cherry Hill Meridian Limited Partnership, a
Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.28(2) Lease Agreement, dated as of November 30, 1993, by and between
Corsica Hills Associates Limited Partnership and MHC Acquisition
Corporation, now known as Meridian Healthcare, Inc., a Pennsylvania
corporation.
+10.29(2) Option Agreement, dated November 30, 1993, by and among the Sellers,
as identified therein, Corsica Hills Associates Limited Partnership,
a Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.30(2) Lease Agreement, dated as of November 30, 1993, by and between
Heritage Associates Limited Partnership, a Maryland limited
partnership, and MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.31(2) Option Agreement, dated November 30, 1993, by and among the Sellers,
as identified therein, Heritage Associates Limited Partnership, a
Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.32(2) Lease Agreement, dated as of November 30, 1993, by and between
Multi-Medical Meridian Limited Partnership, a Maryland limited
partnership, and MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.33(2) Option Agreement, dated November 30, 1993, by and among the Sellers,
as identified therein, Multi-Medical Meridian Limited Partnership, a
Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.34(2) Lease Agreement, dated as of November 30, 1993, by and between
Severna Associates Limited Partnership, a Maryland limited
partnership, and MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.35(2) Option Agreement, dated November 30, 1993, by and among the Sellers,
as identified therein, Severna Associates Limited Partnership, a
Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
50
+10.36(2) Lease Agreement, dated as of November 30, 1993, by and between
Westfield Meridian Limited Partnership, a Maryland limited
partnership, and MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.37(2) Option Agreement, dated November 30, 1993, by and among the Sellers,
as identified therein, Westfield Meridian Limited Partnership, a
Maryland limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.38(11) Management Agreement, dated June 15, 1987, between Brendenwood MRC
Limited Partnership and Meridian Health, Inc. (f/k/a Meridian, Inc.).
+10.39(11) Lease dated January 5, 1989, as amended, by and between Towson
Building Associates Limited Partnership and Meridian Healthcare, Inc.
+10.40(11) Sublease dated November 30, 1993. By and between Meridian Healthcare,
Inc. and Fairmount Associates, Inc.
51
+10.41(14) Agreement to Purchase Partnership Interests, made as of March 1,
1996, by and among Meridian Health, Inc., Fairmont Associates, Inc.
and MHC Holding Company.
10.42(14) Purchase and Sale Agreement, dated January 16, 1996, by and among
Genesis Health Ventures of Indiana, Inc. and Hallmark Healthcare
Limited Partnership, as seller, and Hunter Acquisitions, L.L.C., as
purchaser.
10.43 Guaranty and Agreement of Suretyship Regarding Obligations of Lessee
and Affiliates from Genesis Health Ventures, Inc. and its Material
Subsidiaries, Dated as of October 7, 1996
10.44 Guaranty and Agreement of Suretyship from Genesis Health Ventures,
Inc. and its Material Subsidiaries, Dated as of October 7, 1996
10.45 Amended and Restated Lease and Agreement, Dated as of October 7,
1996, between Mellon Financial Services Corporation #4, as Lessor,
and Genesis Eldercare Properties, Inc., as Lessee
10.46 Amended and Restated Participation Agreement, Dated as of October 7,
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
10.47 Management and Affiliation Agreement, dated as of August 31, 1996, by
and between Genesis ElderCare Network Services, Inc., the Company and
AGE Institute of Florida, Inc.
10.48 Acquisition Loan and Security Agreement, dated as of August 31, 1996,
between Genesis Health Ventures, Inc. and AGE Institute of Florida,
Inc.
10.49 Working Capital Loan and Security Agreement, dated as of August 31,
1996, between Genesis Health Ventures, Inc. and AGE Institute of
Florida, Inc.
10.50 Second Amended and Restated Credit Agreement dated as of October 7,
1996 by and among Genesis Health Ventures, Inc. and certain of its
subsidiaries, as Borrowers of the institutions identified herein as
Lenders, Mellon Bank, N.A. as Issuer of Letters of Credit, Mellon
Bank, N.A. as Administrative Agent and Co-Syndication Agent,
Citibank, N.A. as Co-Syndication Agent and other co-agents specified
therein.
52
11 Computation of Per Share Earnings.
21 Subsidiaries of the Company
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
- ------------------------
+ Management contract or compensatory plan or arrangement
(1) Incorporated by reference to the Company's Form 8-K dated September 19,
1993.
(2) Incorporated by reference to the Company's Form 8-K dated November 30,
1993.
(3) Incorporated by reference to the Company's Form 8-K dated August 18, 1995.
(4) Incorporated by reference to the Company's Form 8-K dated November 30,
1995.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-40007).
(6) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-51670).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(12) Incorporated by reference to the Company's Form S-8 dated May 15, 1995.
(13) Incorporated by reference to the Company's Form 8-A dated May 11, 1995.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(15) Incorporated by reference to Form 8-K, as amended, dated April 21, 1996.
(16) Incorporated by reference to Form 8-K/A dated May 3, 1996.
(17) Incorporated by reference to Form S-3, dated June 20, 1995 (File No.
33-9350).
(18) Incorporated by reference to Form 8-K, as amended, dated July 11, 1996.
(19) Incorporated by reference to Form S-4, dated October 31, 1996 (File No.
333-15267).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-KA dated July 11, 1996 reporting
the agreement by the Company to acquire Geriatric and Medical Companies which
did not include financial statements.
53
The Company filed a Current Report on Form 8-K dated July 26, 1996 reporting
the agreement by the Company to acquire the outstanding stock of National
Health Care Affiliates, Inc., Oak Hill Health Center, Inc., Derby Nursing Center
Corporation, EIDOS, Inc. and Versalink, Inc. which included the following
financial statements:
National Health Care Affiliates, Inc. and Related Entities -- Audited
Combined Financial Statements for the year ended December 31, 1995
Report of Independent Auditors
Combined Balance Sheet
Combined Statement of Earnings
Combined Statement of Owners' Equity
Combined Statement of Cash Flows
Notes to Combined Financial Statements
National Health Care Affiliates, Inc. and Related Entities -- Unaudited
Combined Financial Statements for the Quarter Ended March 31, 1996
Combined Balance Sheet
Combined Statement of Earnings
Combined Statement of Cash Flows
54
Independent Auditors' Report
The Board of Directors
Genesis Health Ventures, Inc.
Under date of November 20, 1996, we reported on the consolidated balance sheets
of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1996, as contained in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule in the Form
10-K. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion such schedule when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 20, 1996
55
Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 1996, 1995 and 1994
(Dollars in thousands)
Balance at Charged Balance at
Beginning Charged to to Other End of
Description of Period Operations Accounts (1) Deductions (2) Period
- ----------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996:
Allowance for
Doubtful Accounts $6,179 4,382 4,748 4,178 $11,131
====== ====== ====== ====== =======
Year Ended September 30, 1995:
Allowance for
Doubtful Accounts $4,553 3,013 503 1,890 $ 6,179
====== ====== ====== ====== =======
Year Ended September 30, 1994:
Allowance for
Doubtful Accounts $2,089 3,440 1,662 2,638 $ 4,553
====== ====== ====== ====== =======
(1) - Represents amounts related to acquisitions
(2) - Represents amounts written off as uncollectible
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
its behalf on December 23, 1996 by the undersigned duly authorized.
Genesis Health Ventures, Inc.
By: /S/ Michael R. Walker
------------------------------------
Michael R. Walker,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on December 23, 1996.
Signature Capacity
- --------- --------
/S/ Michael R. Walker
- ------------------------------
Michael R. Walker Chairman and Chief Executive Officer
/S/ Richard R. Howard
- ------------------------------
Richard R. Howard President, Chief Operating
Officer and Director
/s/ Samuel H. Howard
- ------------------------------
Samuel H. Howard Director
/s/ Allen R. Freedman
- ------------------------------
Allen R. Freedman Director
/s/ Roger C. Lipitz
- ------------------------------
Roger C. Lipitz Director
/s/ Stephen E. Luongo
- ------------------------------
Stephen E. Luongo Director
/s/ Alan B. Miller
- ------------------------------
Alan B. Miller Director
/s/ Fred F. Nazem
- ------------------------------
Fred F. Nazem Director
/S/ George V. Hager Jr.
- ------------------------------
George V. Hager, Jr. Chief Financial Officer (Principal
Accounting Officer)