UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
148 West State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of May 9, 1997: 35,006,495 shares of common stock outstanding
TABLE OF CONTENTS
Page
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS..........................................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................2
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................................8
Part II OTHER INFORMATION
Item 1. Legal Proceedings...............................................................14
Item 2. Changes in Securities...........................................................14
Item 3. Defaults Upon Senior Securities.................................................14
Item 4 Submission of Matters to a Vote of Security Holders.............................14
Item 5. Other Information...............................................................14
Item 6 Exhibits and Reports on Form 8-K................................................14
SIGNATURES .......................................................................................16
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 Medicaid and Medicare programs and the
Company's ability to meet its liquidity needs and control costs; certain
statements in Notes to Condensed Consolidated Financial Statements, such as
certain Pro Forma Adjustments; and other statements contained herein regarding
matters which 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:
1. The Company's substantial indebtedness and significant debt service
obligations.
2. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
3. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of the
Company.
4. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a number
of potentially adverse consequences, such as the imposition of fines,
temporary suspension of admission of patients, restrictions on the ability
to acquire new facilities, suspension or decertification from Medicaid or
Medicare programs, and, in extreme cases, revocation of a facility's license
or the closure of a facility, including as a result of unauthorized
activities by employees.
5. The occurrence of changes in the mix of payment sources utilized by the
Company's customers to pay for the Company's services.
6. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
7. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and
changes in the regulatory system, such as changes in certificate of need
laws, in the states in which the Company operates or anticipates operating
in the future that facilitate such competition.
8. The Company's ability to identify suitable acquisition candidates, to
consummate or complete development projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
These and other factors have been discussed in more detail in the Company's
periodic reports including its Annual Report on Form 10K for the fiscal year
ended September 30, 1996.
1
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
March 31, September 30,
- ------------------------------------------------------------------------------------------------------------------
1997 1996
==================================================================================================================
Assets (Unaudited)
Current assets:
Cash and equivalents $ 13,835 $ 12,763
Accounts receivable, net of allowance for doubtful accounts of
$36,531 at March 31, 1997 and $11,131 at September 30, 1996 196,987 141,716
Cost report receivables 54,360 41,575
Inventory 24,866 17,051
Prepaid expenses and other current assets 30,092 19,616
- -----------------------------------------------------------------------------------------------------------------
Total current assets 320,140 232,721
- -----------------------------------------------------------------------------------------------------------------
Property, plant, and equipment 633,540 416,766
Accumulated depreciation (77,879) (65,837)
- -----------------------------------------------------------------------------------------------------------------
555,661 350,929
Notes receivable and other investments 104,729 92,574
Other long-term assets 33,083 24,595
Deferred tax assets 10,624 --
Goodwill and other intangibles, net 316,976 249,850
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,341,213 $ 950,669
=================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 114,321 $ 73,084
Current installments of long-term debt 6,493 3,720
Income taxes payable 7,923 426
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 128,737 77,230
- -----------------------------------------------------------------------------------------------------------------
Long-term debt 618,564 338,933
Deferred income taxes -- 13,812
Deferred gain and other long-term liabilities 10,946 6,086
Shareholders' equity:
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,260,207 and 35,214,606 at March 31, 1997;
31,981,393 and 31,935,792 at September 30, 1996 699 640
Additional paid-in capital 455,322 411,472
Retained earnings 127,188 102,739
Treasury stock, at cost (243) (243)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 582,966 514,608
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,341,213 $ 950,669
=================================================================================================================
See accompanying notes to condensed consolidated financial statements
2
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
Three months
ended March 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996
==================================================================================================================
Net revenues:
Basic healthcare services $ 136,825 $ 83,066
Specialty medical services 124,488 61,811
Management services and other, net 11,950 9,862
- -------------------------------------------------------------------------------------------------------------------
Total net revenues 273,263 154,739
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 130,395 77,283
Other operating expenses 84,886 41,798
General corporate expense 9,907 6,262
Depreciation and amortization 10,620 6,087
Lease expense 7,244 4,068
Interest expense, net 8,960 6,939
- -------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 21,251 12,302
Income taxes 7,757 4,492
- -------------------------------------------------------------------------------------------------------------------
Net income $ $13,494 $ 7,810
===================================================================================================================
Per common share data:
Primary:
Net income $ 0.37 $ 0.31
Weighted average shares of common stock and equivalents 36,372,903 25,306,685
- -------------------------------------------------------------------------------------------------------------------
Fully diluted:
Net income $ 0.37 $ 0.30
Weighted average shares of common stock and equivalents 36,374,693 28,797,732
===================================================================================================================
See accompanying notes to condensed consolidated financial statements
3
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
Six months
ended March 31,
- ---------------------------------------------------------------------------------------------------------------
1997 1996
===============================================================================================================
Net revenues:
Basic healthcare services $ 270,917 $ 155,260
Specialty medical services 238,667 115,001
Management services and other, net 22,223 17,256
- ---------------------------------------------------------------------------------------------------------------
Total net revenues 531,807 287,517
- ---------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 255,450 142,325
Other operating expenses 165,018 79,394
General corporate expense 19,529 11,101
Depreciation and amortization 20,101 11,235
Lease expense 14,182 7,861
Interest expense, net 18,155 12,979
Debenture conversion expense - 1,090
- ---------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item 39,372 21,532
Income taxes 14,370 7,864
- ---------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 25,002 13,668
Extraordinary item, net of tax (553) -
- ---------------------------------------------------------------------------------------------------------------
Net income $ 24,449 $ 13,668
===============================================================================================================
Per common share data:
Primary:
Earnings before extraordinary item $ 0.71 $ 0.55
Extraordinary item (0.02) -
Net income $ 0.69 0.55
Weighted average shares of common stock and equivalents 35,285,093 24,730,819
- --------------------------------------------------------------------------------------------------------------
Fully diluted:
Earnings before extraordinary item $ 0.70 $ 0.53
Extraordinary item (0.02) -
Net income $ 0.68 0.53
Weighted average shares of common stock and equivalents 36,262,863 28,816,719
==============================================================================================================
See accompanying notes to condensed consolidated financial statements
4
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended
March 31,
1997 1996
=======================================================================================================================
Cash flows from operating activities:
Net income $ 24,449 $ 13,668
Adjustments to reconcile net income to
net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes 3,592 1,966
Depreciation and amortization 20,101 11,235
Amortization of deferred gain (230) (230)
Debenture conversion expense - 1,090
Extraordinary item 553 -
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (27,363) (7,519)
Cost reports receivable (5,907) (6,941)
Inventory (5,236) (1,548)
Prepaid expenses and other current assets (5,069) (10,932)
Accounts payable and accrued expenses 6,983 5,355
Income taxes payable 6,522 1,508
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments (6,054) (6,016)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 18,395 7,652
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (33,778) (12,776)
Payments for acquisitions, net of cash acquired (233,665) (93,316)
Notes receivable and other investment and asset additions, net (11,025) (11,653)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (278,468) (117,745)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings under working capital revolving credit 140,783 107,200
Repayment of long term debt (1,955) (322)
Proceeds from issuance of long-term debt 125,000 -
Debt issuance costs (3,750) -
Debenture conversion expense - (1,090)
Common stock options exercised 1,067 1,716
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 261,145 107,504
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 1,072 (2,589)
Cash and equivalents
Beginning of period 12,763 10,387
End of period $ 13,835 $ 7,798
=======================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 14,533 $ 11,876
Income taxes paid $ 6,873 $ 12,005
=======================================================================================================================
See accompanying notes to condensed consolidated financial statements
5
GENESIS HEATLH VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's annual report for the fiscal year ended
September 30, 1996. The information furnished is unaudited but reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial information for the periods shown. Such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results expected for the full year.
2. Earnings Per Share
Primary and fully-diluted earnings per share are based on the weighted
average number of common shares outstanding and the dilutive effect of stock
options, convertible debentures and other common stock equivalents.
3. Long-Term Debt
In March 1997, the Company amended its credit facility to increase the
revolving credit facility from $300,000,000 to $375,000,000 (the "Revolving
Credit Facility"). In October 1996, the Company entered into an agreement with
the lenders to increase the Revolving Credit Facility from $200,000,000 to
$300,000,000 and the lease financing facility from $85,000,000 to $150,000,000
(the "Lease Financing Facility") 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%.
In October 1996, the Company completed an offering of $125,000,000
9 1/4% Senior Subordinated Notes due 2006 (the "1996 Note Offering"). The
Company used the net proceeds of approximately $121,250,000 together with
borrowings under the Revolving Credit Facility, to pay the cash portion of the
purchase price of the GMC Transaction (defined below), to repay certain debt
assumed as a result of the GMC Transaction and to repurchase GMC (defined below)
accounts receivable which were previously financed.
4. Pro Forma Financial Information
Effective October 1, 1996, 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 the 1996 Note Offering. The remaining consideration was
financed through borrowings under the Company's Revolving Credit Facility. The
GMC Transaction added to Genesis 24 owned eldercare centers with approximately
3,300 beds. GMC also operated businesses which provided 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 connection with the
GMC Transaction, the Company has preliminarily recorded approximately
$63,700,000 of goodwill, which is being amortized on a straight-line basis over
lives ranging from 20 to 40 years, and approximately $25,300,000 of deferred tax
assets available to reduce future income taxes, which are included net in
deferred tax assets on the balance sheet. Management believes it is more likely
than not that such deferred tax assets will be realized.
6
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 the 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
provided enteral nutrition and rehabilitation therapy services to the eldercare
centers which it owned and leased.
In June 1996, the Company acquired the outstanding stock of
NeighborCare Pharmacies, Inc. and its related entities (collectively,
"NeighborCare"), a privately held institutional pharmacy, infusion therapy and
retail professional 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.
On November 30, 1995, the Company acquired McKerley Health Care
Centers, Inc. and its related entities (collectively, "McKerley") for total
consideration of approximately $68,700,000. The transaction (the "McKerley
Transaction") also provided for up to an additional $6,000,000 of contingent
consideration payable upon the achievement of certain financial objectives
through October 1997, of which approximately $4,000,000 was paid in February
1997, and $2,000,000 of which remains contingent consideration. McKerley added
15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds to
Genesis. McKerley also operated a home healthcare company. The acquisition was
financed with borrowings under the Revolving Credit Facility and assumed
indebtedness.
The following unaudited proforma statement of operations information
gives effect to the GMC, National Health, NeighborCare and McKerley transactions
described above as though they had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including amortization of
goodwill, additional depreciation expense, increased interest expense on debt
related to the acquisitions and related income tax effects. The proforma
financial information does not necessarily reflect results of operations that
would have occurred had the acquisitions occurred at the beginning of the period
presented.
(In thousands, except per share data)
Six Months
Ended
Pro Forma Statement of Operations Information: March 31, 1996
Total net revenues $ 473,086
Net income 20,857
Primary earnings per share $ 0.66
Fully diluted earnings per share $ 0.63
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its
efforts on providing an expanding array of specialty medical and community-based
services to the elderly. 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, community-based
pharmacies, subacute care programs, home health care, physician services, and
other specialized services. Management services and other include fees earned
for management of eldercare centers, development of life care communities and
revenues from the group purchasing, staff replacement and vending businesses,
and transactional revenues.
Certain Transactions
Effective January 1, 1997, the Company entered into an agreement to
provide management services for NewCourtland, Inc. ("NewCourtland"), a wholly
owned subsidiary of The Presbyterian Foundation for Philadelphia (the
"Presbyterian Foundation"), a non-profit organization. Under the terms of the
agreement, Genesis will provide management services to eight eldercare centers
with 1,844 beds located throughout the Delaware Valley.
Effective October 1, 1996, 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 common 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 "1996 Note Offering"). The remaining consideration was
financed through borrowings under the Company's revolving credit facility (the
"Revolving Credit Facility"). The GMC Transaction added to Genesis 24 owned
eldercare centers with approximately 3,300 beds. GMC also operated businesses
which provided 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 $67,700,000 and
subsequently leased the centers to a subsidiary of Genesis under a $150,000,000
lease financing facility (the "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
8
Connecticut with approximately 2,200 beds to Genesis. National Health also
provided enteral nutrition and rehabilitation therapy services to the eldercare
centers which it owned and leased.
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.
On November 30, 1995, the Company acquired McKerley Health Care
Centers, Inc. and its related entities (collectively, "McKerley") for total
consideration of approximately $68,700,000. The transaction (the "McKerley
Transaction") also provided for up to an additional $6,000,000 of contingent
consideration payable upon the achievement of certain financial objectives
through October 1997, of which approximately $4,000,000 was paid in February
1997, and $2,000,000 of which remains contingent consideration. McKerley added
15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds to
Genesis. McKerley also operated a home healthcare company. The acquisition was
financed with borrowings under the Revolving Credit Facility and assumed
indebtedness.
Results of Operations
Three months ended March 31, 1997 compared to three months ended March 31, 1996.
The Company's total net revenues for the quarter ended March 31, 1997
were $273,263,000 compared to $154,739,000 for the quarter ended March 31, 1996,
an increase of $118,524,000 or 77%. Basic healthcare services increased
$53,759,000 or 65% of which approximately $31,600,000 is attributed to the GMC
Transaction, approximately $14,500,000 is attributed to the National Health
transaction, and the remaining increase of approximately $7,700,000 is primarily
due to providing care to higher acuity patients and to rate increases. Specialty
medical services revenue increased $62,677,000 or 101% of which approximately
$14,500,000 is attributed to the GMC Transaction, approximately $18,100,000 is
due to the NeighborCare Pharmacies transaction, approximately $5,800,000 is
attributed to the National Health transaction, and the remaining increase of
approximately $24,300,000 is primarily 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 services
revenue per patient day in the health centers division increased 19% to $34.58
in the quarter ended March 31, 1997 compared to $29.04 in the quarter ended
March 31, 1996 primarily due to treatment of higher acuity patients. Management
services and other income increased $2,088,000 or 21%. This increase is
primarily due to approximately $3,000,000 of other service related business
acquired in GMC Transaction, approximately $750,000 earned in connection with
the management agreement with the Presbyterian Foundation, offset by
approximately $2,000,000 of other transactional revenues earned in the quarter
ended March 31, 1996 which included the sale of non-core assets.
The Company's operating expenses before depreciation, amortization,
lease expense, and interest expense were $225,188,000 for the quarter ended
March 31, 1997 compared to $125,343,000 for quarter ended March 31, 1996, an
increase of $99,845,000 or 80%, of which approximately $74,300,000 is due to the
impact of acquisitions and the remaining increase of approximately $25,500,000
is attributed to growth in the institutional pharmacy, medical supply and
contract therapy divisions.
Increased depreciation and amortization, and lease expense are
primarily attributed to the GMC Transaction, the National Health transaction,
and the NeighborCare transaction.
Interest expense increased $2,021,000 or 29%. This increase was
primarily due to additional borrowings used to finance recent acquisitions,
including the 1996 Note Offering used to finance the GMC Transaction, offset by
the repayment of debt associated with proceeds of $202,280,000 from the May 1996
equity offering, and offset by the conversion of 6% Convertible Senior
Subordinated Debentures (the Debentures).
9
Six months ended March 31, 1997 compared to six months ended March 31, 1996.
The Company's total net revenues for the six months ended March 31,
1997 were $531,807,000 compared to $287,517,000 for the six months ended March
31, 1996, an increase of $244,290,000 or 85%. Basic healthcare services
increased $115,657,000 or 74% of which approximately $64,500,000 is attributed
to the GMC Transaction, approximately $29,500,000 is attributed to the National
Health transaction, approximately $9,900,000 is due primarily to the inclusion
of the eldercare centers acquired in the McKerley Transaction for the full six
months in 1997 versus four months in the prior year and the remaining increase
of approximately $11,800,000 is due to providing care to higher acuity patients
and to rate increases. Specialty medical services revenue increased $123,666,000
or 108% of which approximately $28,300,000 is attributed to the GMC Transaction,
approximately $36,100,000 is due to the NeighborCare Pharmacies transaction,
approximately $10,800,000 is attributed to the National Health transaction,
approximately $1,500,000 is due to the inclusion of the eldercare centers
acquired in the McKerley Transaction for the full six months in 1997 versus four
months in the prior year, and the remaining increase of approximately
$47,000,000 is primarily 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 10% to $31.49 in the six months ended
March 31, 1997 compared to $28.51 in the six months ended March 31, 1996
primarily due to treatment of higher acuity patients. Management services and
other income increased $4,967,000 or 29%. This increase is primarily due to
approximately $6,000,000 of other service related business acquired in GMC
Transaction, approximately $750,000 earned in connection with the Company
management agreement with the Presbyterian Foundation, offset by approximately
$2,000,000 of other transactional revenues earned in the quarter ended March 31,
1996 which included the sale of non-core assets.
The Company's operating expenses before depreciation, amortization,
lease expense, interest expense and excluding debenture conversion expense were
$439,997,000 for the six months ended March 31, 1997 compared to $232,820,000
for six months ended March 31, 1996, an increase of $207,177,000 or 89%, of
which approximately $156,500,000 is due to the impact of acquisitions and the
remaining increase of approximately $50,700,000 is attributed to growth in the
institutional pharmacy, medical supply and contract therapy divisions.
Increased depreciation and amortization, and lease expense are
primarily attributed to the GMC Transaction, the National Health transaction,
the NeighborCare transaction and the McKerley Transaction.
Interest expense increased $5,176,000 or 40%. This increase in interest
expense was primarily due to additional borrowings used to finance recent
acquisitions, including the 1996 Note Offering used to finance the GMC
Transaction, offset by the repayment of debt associated with proceeds of
$202,280,000 from the May 1996 equity offering, and offset by the conversion of
6% Convertible Senior Subordinated Debentures.
In the quarter ended December 31, 1995 the Company converted
approximately $33,500,000 of the Debentures due 2003. In connection with the
early conversion of the Debentures, the Company paid approximately $1,090,000
representing the prepayment of interest to converting debenture holders. The
non-recurring cash payment is presented as debenture conversion expense in the
results of operations for the six months ended March 31, 1996.
In connection with the early repayment of debt and the restructuring
and amendment of the Revolving Credit Facility in the quarter ended December 31,
1996, the Company recorded an extraordinary item (net of tax) of approximately
$553,000 to write off unamortized deferred financing fees.
10
Liquidity and Capital Resources
Working capital increased to $191,403,000 at March 31, 1997 from
$155,491,000 at September 30, 1996. Accounts receivable increased to
$196,987,000 at March 31, 1997 from $141,716,000 at September 30, 1996.
Approximately $34,800,000 of this increase relates to the GMC acquisition, while
the remaining approximately $20,500,000 relates primarily to the continuing
shift in business mix to specialty medical services including the acquisition of
NeighborCare in fiscal 1996. The allowance for doubtful accounts increased
approximately $25,400,000, primarily as a result of reserves provided in
connection with the GMC Transaction. Days revenue in accounts receivable
remained unchanged at 65 days during the quarter ended March 31, 1997 versus the
quarter end December 31, 1996, (68 days excluding GMC). The Company's cash flow
from operations for the six months ended March 31, 1997 provided cash of
$18,395,000 compared to $7,652,000 for the six months ended March 31, 1996. The
increase in positive cash flow from operations in the quarter ended March 31,
1997 versus the quarter ended December 31, 1996 is primarily attributed to
increased earnings and improved collection of cost report receivables.
Investing activities for the six months ended March 31, 1997 include
approximately $33,800,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers, the purchase of additional
corporate office space and investment in data processing hardware and software.
In March 1997, the Company amended its credit facility to increase the
Revolving Credit Facility from $300,000,000 to $375,000,000. In October 1996,
the Company entered into an agreement with the lenders to increase the Revolving
Credit Facility from $200,000,000 to $300,000,000 and the Lease Financing
Facility from $85,000,000 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%.
In February 1997, the Company made a payment of approximately
$4,000,000 for contingent consideration in connection with the McKerley
Transaction. In January 1997, the Company acquired $2,500,000 of convertible
preferred stock of Doctors Health System Inc., ("Doctors Health") an independent
physician owned and controlled integrated delivery system and practice
management company. The convertible preferred stock carries an 8% cumulative
dividend and is convertible into common stock. To date, the Company has
purchased $10,000,000 of Doctors Health convertible preferred stock that, if
converted, would represent an approximate 10% ownership interest in Doctors
Health. The Company is committed to purchase an additional $5,000,000 of
convertible preferred stock upon Doctors Health's achievement of certain
operational and financial benchmarks. Also, the Company is committed to lend
Doctors Health up to $5,000,000 at 11%, of which approximately $3,325,000 has
been loaned to date.
In connection with the GMC Transaction, the Company has preliminarily
recorded approximately $63,700,000 of goodwill, which is being amortized on a
straight-line basis over lives ranging from 20 to 40 years, and approximately
$25,300,000 of deferred tax assets available to reduce future income taxes,
which are included net in deferred tax assets on the balance sheet. Management
believes it is more likely than not that such deferred tax assets will be
realized.
In November 1996, the Company called for redemption the then
outstanding 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 at a conversion price of $15.104
per share. All of the approximately $43,800,000 of remaining Debentures
outstanding were converted to Common Stock in the quarter ended December 31,
1996. In the quarter ended December 31, 1995, the Company converted
approximately $33,500,000 of Debentures. The conversions improved the Company's
leverage and provides the Company with the ability to borrow under its revolving
credit facilities at lower rates.
11
In October 1996, the Company completed the 1996 Note Offering. The
Company used the net proceeds of approximately $121,250,000 together with
borrowings under the Revolving 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.
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 ratios of 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 May 9, 1997, approximately $335,000,000 was outstanding under the Revolving
Credit Facility and Lease Financing Facility, and approximately $171,000,000 was
available under the credit facilities after giving effect to approximately
$19,000,000 in outstanding letters of credit issued under the credit facilities.
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.
12
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). This
statement simplifies the standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement of all
entities with complex capital structures. SFAS 128 also requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
Had SFAS 128 been adopted in the first quarter of fiscal 1997, basic and diluted
EPS would have been computed for the three and six-months ended March 31, 1997
as follows (in thousands, except per share amounts):
Per Share
Income Shares Amount
(Three months ended March 31, 1997)
Basic EPS
Net Income $ 13,494 35,168 $0.38
Incremental shares from
assumed exercise of
dilutive stock options - 1,207 -
---------- ---------- -------
Diluted EPS
Net Income $ 13,494 36,375 $0.37
========== ========== =======
(Six months ended March 31, 1997)
Basic EPS
Income before
extraordinary item $ 25,002 34,273 $0.73
Extraordinary item (553) (0.02)
---------- ---------- -------
Net Income $ 24,449 34,273 $0.71
Diluted EPS
Effect of assumed
conversion of debt 303 884 -
Incremental shares from
assumed exercise of
dilutive stock options - 1,012 -
---------- ---------- -------
Net Income $ 24,752 36,169 0.68
Extraordinary item 553 0.02
---------- ---------- -------
Net Income before
extraordinary item $ 25,305 36,169 $0.70
========== ========== =======
13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
On March 6, 1997, the Company held its Annual Meeting of
Shareholders (the "Annual Meeting"). Proxies were solicited
for the Annual Meeting pursuant to Regulation 14 of the
Securities Exchange Act of 1934.
At the Annual Meeting the following matters were voted on: (i)
Stephen E. Luongo and Michael R. Walker were elected to serve
on the Board of Directors of the Company for three-year terms
and until their respective successors are duly elected and
qualified, each receiving 31,634,231 votes for their election
and 235,454 against their election (with 3,031,178 broker
non-votes and abstentions); and (ii) an amendment to the
Company's 1985 Amended and Restated Employee Stock Option Plan
increasing the number of shares which may be issued under the
plan to 4,500,000 shares was approved by a vote of 29,004,964
for the amendment and 2,735,980 votes against the amendment
(with 3,159,178 broker non-votes and abstentions).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1 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.
10.2 Second Amendment to Amended and Restated
Participation Agreement dated March 7, 1997 among
Genesis Eldercare Properties, Inc., as lessee, Mellon
Financial Services Corporation #4, as lessor; various
financial institutions as lenders and Mellon Bank
N.A., a national banking association as Agent for
Lessor and the Lenders.
14
10.3 Amendment No. 1 to Second Amended and Restated Credit
Agreement, dated as of March 7, 1997 by and among
Genesis Health Ventures, Inc. and certain
subsidiaries as Borrowers and Mellon Bank N.A. Issuer
of Letters of Credit, Mellon Bank N.A. as
Administrator Agent and Co-Syndication Agent,
Citibank, N.A. as Co-Syndication Agent, and other
Co-Agents.
10.4 Employment Agreement by and between Michael R. Walker
and Genesis Health Ventures, Inc., dated April 1,
1997
10.5 The Company's Amended and Restated Employee Stock
Option Plan
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: May 14, 1997 /s/ George V. Hager, Jr.
-------------------------------------------------
George V. Hager, Jr.
Senior Vice President and Chief Financial Officer
16