SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of Registrant as specified in its charter)
101 East 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
------------------- -----------------------------------------
Common Stock, par value $.02 per share 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 $281,820,464 (1). As of December 14, 1998, 35,227,558 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 1999 Annual Meeting are incorporated by reference in Part III of this
Report. Certain exhibits to the Company's Current Report on Form 8-K and 8-K/A
dated October 10, 1997, July 11, 1996, May 3, 1996, November 30, 1995, August
18, 1995, November 30, 1993 and 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), Registration
Statement on Form S-4 (File No. 333-15267), Registration Statement on Form S-4
(File No. 333-58221), Registration Statement on Form S-8 (File No. 333-53043),
Annual Reports on Form 10-K for the fiscal years ended September 30, 1996, 1995,
1993 and 1992, and Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1998, March 31, 1997, March 31, 1996 and March 31, 1994, Registration
Statement on Form 8-A dated May 11, 1995, Filing on Schedule 13D on May 6, 1998
and the Tender Offer Statement on Schedule 14D-1 filed by Genesis Eldercare
Corp. on June 20, 1997 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 14, 1998.
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 Statements Regarding Forward Looking Statements 2
ITEM 1: BUSINESS
General ..............................................................8
Basic Healthcare Services.............................................9
Specialty Medical Services............................................9
Management Services and Other........................................10
Strategic ClinicalInitiatives........................................11
Revenue Sources......................................................11
Marketing............................................................13
Personnel............................................................14
Employee Training and Development....................................14
Governmental Regulation..............................................15
Competition..........................................................16
Insurance............................................................17
ITEM 2: PROPERTIES...........................................................18
ITEM 3: LEGAL PROCEEDINGS....................................................18
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................19
ITEM 4.1: EXECUTIVE OFFICERS.................................................20
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS......................................22
ITEM 6: SELECTED FINANCIAL DATA..............................................23
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................25
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................40
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................63
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................63
ITEM 11: EXECUTIVE COMPENSATION..............................................63
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......63
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................63
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K......63
Cautionary Statements Regarding Forward Looking Statements
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" such as statements concerning
Medicare and Medicaid programs, the Company's ability to meet its liquidity
needs and control costs and expected future capital expenditure requirements,
the Company's arrangements with ElderTrust and the expected effects of the
Vitalink Transaction, PPS (as defined) and Year 2000 compliance, certain
statements contained in "Business" such as statements concerning strategy,
government regulation and Medicare and Medicaid programs, certain statements in
the Notes to Consolidated Financial Statements, such as certain of the pro forma
adjustments; and other statements contained herein regarding matters that are
not historical facts are forward-looking statements within the meaning of the
Securities Act. 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 the following: the Company's substantial
indebtedness and significant debt service obligations; the Company's ability to
secure the capital and the related cost of such capital necessary to fund future
growth; changes in the United States healthcare system and other changes in
applicable governmental regulations, including PPS, that might affect the
Company's profitability; the Company's continued ability to operate in a heavily
regulated environment and to satisfy regulatory authorities; the occurrence of
changes in the mix of payment sources utilized by the Company's patients to pay
for the Company's services; the adoption of cost containment measures;
competition in the Company's industry; 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; the impact on the Company's information technology
systems and the availability and cost of personnel trained in the Year 2000
compliance area, and the failure of the Company's payors, suppliers and other
third parties to respond to the Company's inquiries as to whether the systems
and equipment supplied to the Company are compliant and adequately remediate
Year 2000 issues; and changes in general economic conditions.
Substantial Leverage and Debt Service; Restrictions on Indebtedness
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of September 30, 1998, the Company had approximately
$1,358,595,000 of long-term indebtedness which represented 61% of its total
capitalization. The degree to which the Company is leveraged could have
important consequences, including, but not limited to the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be limited or
impaired; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations; (iii)
the Company's operating flexibility with respect to certain matters is limited
by covenants contained in certain debt agreements which limit the ability of the
Company and its subsidiaries with respect to the incurrence of additional
indebtedness and entering into sale and leaseback transactions or other loans,
investments or guarantees, the creation of liens, the payment of dividends and
sales of assets and set forth minimum net worth requirements; (iv) the Company's
degree of leverage may make it more vulnerable to economic downturns and less
competitive, may reduce its flexibility in responding to changing business and
economic conditions and may limit its ability to pursue other business
opportunities, to finance its future operations or capital needs, and to
implement its business strategy; and (v) certain of the Company's borrowings are
and will continue to be at variable rates of interest, which exposes the Company
to the risk of greater interest rates.
Required payments of principal and interest on the Company's indebtedness are
expected to be financed from its cash flow from operations. The Company's
ability to make scheduled payments of the principal of, to pay interest on or to
refinance its indebtedness depends on the future performance of the Company's
business, which will in turn be subject to financial, business, economic and
other factors affecting the business and operations of the Company, including
factors beyond its control, such as prevailing economic conditions. There can be
no assurances that cash flow from operations will be sufficient to enable the
Company to service its debt and meet its other obligations. If such cash flow is
insufficient, the Company may be required to refinance all or a portion of its
existing debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any such sales of
assets or additional financing could be achieved. The Company also has
significant long-term operating lease obligations with respect to certain of its
eldercare centers.
2
Risk of Adverse Effect of Healthcare Reform; Medicare Prospective Payment System
In recent years, a number of laws have been enacted that have effected major
changes in the health care system, both nationally and at the state level. The
Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into law on
August 5, 1997, seeks to achieve a balanced federal budget, by, among other
things, reducing federal spending on the Medicare and Medicaid programs. With
respect to Medicare, the law mandated establishment of a prospective payment
system ("PPS") for Medicare skilled nursing facilities ("SNFs") under which
facilities will be paid a federal per diem rate for most covered nursing
facility services (including pharmaceuticals).
Pursuant to the Balanced Budget Act, commencing with cost reporting periods
beginning on July 1, 1998, PPS began to be phased in for skilled nursing
facilities at a per diem rate for all covered Part A skilled nursing facility
services as well as many services for which payment may be made under Part B
when a beneficiary who is a resident of a skilled nursing facility receives
covered skilled nursing facility care. The consolidated per diem rate is
adjusted based upon the resource utilization group ("RUG") which relates to the
patient's diagnosis. In addition to covering skilled nursing facility services,
this consolidated payment will also cover rehabilitation and non-rehabilitation
ancillary services. Physician services, certain nurse practitioner and physician
assistant services, among others, are not included in the per diem rate. For the
first three cost reporting periods beginning on or after July 1, 1998, the per
diem rate will be based on a blend of a facility-specific rate and a federal per
diem rate. In subsequent periods, and for facilities first receiving payments
for Medicare services on or after October 1, 1995, the federal per diem rate
will be used without any facility specific blending.
The Balanced Budget Act requires consolidated billing for skilled nursing
facilities. Under the Balanced Budget Act, the skilled nursing facility must
submit all Medicare claims for Part A and Part B services received by its
residents on a consolidated bill with the exception of physician, nursing,
physician assistant and certain related services, even if such services were
provided by outside suppliers. Medicare will pay the skilled nursing facilities
directly for all services on the consolidated bill and outside suppliers of
services to residents of the skilled nursing facilities must collect payment
from the skilled nursing facility. Although consolidated billing was scheduled
to begin July 1, 1998 for all services, it has been delayed until further notice
for beneficiaries in a Medicare Part A stay in a skilled nursing facility not
yet using PPS for the Medicare Part A stay. There can be no assurance that the
Company will be able to provide skilled nursing services at a cost below the
established Medicare level.
Congress continues to focus on efforts to curb the growth of federal spending on
health care programs such as Medicare and Medicaid through changes in the
payment methodology such as PPS. Congress' efforts have not been limited to
skilled nursing facilities, but have and will most likely include other industry
services. For example, the Balanced Budget Act also required that a prospective
payment system for home health services be implemented.
Effective April 10, 1998, regulations were adopted by the Health Care Financing
Administration, which revise the methodology for determining the reasonable cost
for contract therapy services, including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. Under the regulations, the
reasonable costs for contract therapy services are limited to
geographically-adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect.
3
The Balanced Budget Act also repealed the "Boren Amendment" federal payment
standard for Medicaid payments to nursing facilities effective October 1, 1997.
The Boren Amendment required Medicaid payments to certain health care providers
to be reasonable and adequate in order to cover the costs of efficiently and
economically operated healthcare facilities. States must now use a public notice
and comment period in order to determine rates and provide interested parties a
reasonable opportunity to comment on proposed rates and the justification for
and the methodology used in calculating such rates. There can be no assurances
that budget constraints or other factors will not cause states to reduce
Medicaid reimbursement to nursing facilities and pharmacies or that payments to
nursing facilities and pharmacies will be made on timely basis. The law also
grants greater flexibility to states to establish Medicaid managed care projects
without the need to obtain a federal waiver. Although these waiver projects
generally exempt institutional care, including nursing facilities and
institutional pharmacy services, no assurances can be given that these projects
ultimately will not change the reimbursement system for long-term care,
including pharmacy services from fee-for-service to managed care negotiated or
capitated rates. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies.
In July 1998, the Clinton Administration issued a new initiative to promote the
quality of care in nursing homes. This initiative includes, but is not limited
to (i) increased enforcement of nursing home safety and quality regulations;
(ii) increased federal oversight of state inspections of nursing homes; (iii)
prosecution of egregious violations of regulations governing nursing homes; (iv)
the publication of nursing home survey results on the Internet; and (v)
continuation of the development of the Minimum Data Set ("MDS"), a national
automated clinical data system. Accordingly, with this new initiative, it may
become more difficult for eldercare facilities to maintain licensing and
certification. The Company may experience increased costs in connection with
maintaining its licenses and certifications as well as increased enforcement
actions. In addition, beginning January 1, 1999, outpatient therapy services
furnished by a skilled nursing facility to a resident not under a covered Part A
stay or to non-residents who receive outpatient rehabilitation services will be
paid according to the Medicare Physician Fee Schedule.
While the Company has prepared certain estimates of the impact of PPS, it is not
possible to fully quantify the effect of the recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Company's business. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Accordingly, there can be no
assurance that the impact of PPS will not be greater than estimated or that
these legislative changes or any future healthcare legislation will not
adversely affect the business of the Company.
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 and other providers of
healthcare services, including pharmacies, are subject to periodic inspection by
governmental and other authorities to assure continued compliance with various
standards, their continued licensing under state law, and to the extent
applicable, 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. The failure to obtain
any required regulatory approvals or licenses by a provider could result in
actions such as, but not limited to, where applicable, the denial of
reimbursement, the imposition of fines, temporary suspension of admission of new
patients to facilities, suspension or decertification from the Medicaid or
Medicare program, restrictions on the ability to acquire providers or expand
existing facilities and, in extreme cases, revocation of the facility's license
or closure of a facility. There can be no assurance that the facilities or
providers owned, leased or managed by the Company, or the provision of services
and supplies by the Company, will meet or continue to meet the requirements for
participation in the Medicaid or Medicare programs or that state licensing
authorities will not adopt changes or new interpretations of existing laws that
would adversely affect the Company.
4
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 or provider 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. In addition, in most states the reduction of beds or
the closure of a facility requires the approval of the appropriate state
regulatory agency and if the Company were to reduce beds or close a facility,
the Company could be adversely impacted by a failure to obtain or a delay in
obtaining such approval.
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 a financial
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 Company is also
subject to laws applicable to federal government contracts generally, such as
the False Claims Act, which establishes liability for anyone making false
statements to get a claim paid by the federal government. 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.
In the ordinary course of business, the Company's facilities receive notices of
deficiencies following surveys for failure to comply with various regulatory
requirements. From time to time, survey deficiencies have resulted in various
penalties against certain providers and the Company. These penalties have
included, but have not been limited to, monetary fines, temporary bans on the
admission of new patients, decertifications and the placement of restrictions on
the Company's ability to obtain or transfer Certificates of Need in certain
states. Additionally, actions taken against one provider may subject eldercare
centers under common control or ownership to adverse measures, including loss of
licensure, loss of eligibility to participate in reimbursement programs and
inability to expand or acquire new centers. There can be no assurance that
future actions by state regulators will not result in penalties or sanctions
which could have a material adverse effect on the Company.
5
Dependence on Reimbursement by Third Party Payors
For the years ended September 30, 1998, 1997, and 1996, respectively, the
Company derived approximately 45%, 39% and 39% of its patient service revenue
from private pay sources, 20%, 24% and 25% from Medicare and 35%, 37% and 36%
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 PPS under Medicare, the repeal of the Boren
Amendment requiring Medicaid payments to be reasonable and adequate, 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. The Company's
financial condition and results of operations may be affected by the revenue
reimbursement process, which in the Company's industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled. The majority of the third party payor
balances are settled within two or three years following the provision of
services. The Company's financial condition and results of operations may also
be affected by the timing of reimbursement payments and rate adjustments from
third party payors. 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 actions taken or proposals made 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 the extent to which these proposals will be adopted
or, if adopted and implemented, what effect, if any, such proposals will have on
the Company. 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."
Managed care organizations and other third party payors have continued to
consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage of
the United States population are increasingly served by a small number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate the Company as a preferred provider and/or engage
the Company's competitors as a preferred or exclusive provider, the Company's
business could be materially adversely affected. 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.
For certain specialty medical services covered by the Medicare program, the
Company is reimbursed for its direct costs plus an allocation of indirect costs
up to a regional limit. As the Company expands its specialty medical services,
the costs of care for these patients are expected to exceed the regional
reimbursement limits. As a result, the Company has submitted and will be
required to submit, further exception requests to recover the excess costs from
Medicare. There is no assurance the Company will be able to recover such excess
costs under pending or any future requests. The failure to recover these excess
costs in the future will adversely affect the Company's financial position and
results of operations. When PPS is fully implemented, the Company will no longer
be reimbursed on a cost basis under the Medicare program.
6
The Company is subject to periodic audits by Medicare and Medicaid programs, and
the paying agencies for these programs have various rights and remedies against
the Company if they assert that the Company has overcharged the programs or
failed to comply with program requirements. Such payment agencies could seek to
require the Company to repay any overcharges or amounts billed in violations of
program requirements, or could make deductions from future amounts due to the
Company. Such agencies could also impose fines, criminal penalties or program
exclusions. Private pay sources also reserve rights to conduct audits and make
monetary adjustments. See "Risk of Adverse Effect of Healthcare Reform; Medicare
Prospective Payment System" and "Regulation".
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 customers of its eldercare
centers or are otherwise receiving its eldercare services. As a result of the
Vitalink Transaction, HCR-Manor Care, a publicly traded owner of eldercare
centers that competes with the Company in certain markets, owns 586,240 shares
of Genesis Series G Cumulative Convertible Preferred Stock (the "Genesis
Preferred") which are convertible at the option of the holder into approximately
7,880,000 shares of the Company's Common Stock. Pursuant to the Vitalink Service
Contracts, the Company's NeighborCare pharmacy operations provide services to
HCR-Manor Care constituting approximately ten percent of the net revenues of
NeighborCare. See "Business - Competition."
Risks Associated with Recent Acquisitions and Acquisition Strategy
The Company has recently completed several acquisitions of eldercare businesses.
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.
Year 2000 Compliance
The failure of the Company or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in interruptions
of normal business work operations. The Company's potential risks include: (i)
the inability to deliver patient care related services in the Company's
facilities and / or in non-affiliated facilities; (ii) the delayed receipt of
reimbursement from the federal or state governments, private payors or
intermediaries, (iii) the failure of security systems, elevators, heating
systems or other operational systems and equipment at the Company's facilities
and (iv) the inability to receive critical equipment and supplies from vendors.
Each of these events could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Compliance".
7
PART I
ITEM 1: 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.
Information included herein which describes the Company's operations after
October 10, 1997 (e.g. markets served, facilities information, personnel)
includes the Multicare operations; information included herein describing the
Company's historical results prior to October 10, 1997 (e.g.
occupancy rates and revenue sources) does not include the Multicare operations.
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 175,000 customers,
including approximately 40,000 customers who are residents in eldercare
facilities. Genesis operates primarily in five regional markets in which over
11,100,000 people over the age of 65 reside. The networks include 326 eldercare
centers with approximately 42,200 beds; nine primary care physician clinics;
approximately 85 physicians, physician assistants and nurse practitioners; 11
medical supply distribution centers serving over 1,000 eldercare centers with
over 80,000 beds; an integrated NeighborCare(SM) pharmacy operation with over
$900,000,000 in annualized revenues, including 79 long-term care pharmacies
serving approximately 263,000 institutional beds; 34 community-based
pharmacies; infusion therapy services; and certified rehabilitation agencies
providing services through over 600 contracts. The Company also provides
diagnostic and hospitality services in selected markets and operates a group
purchasing organization. Genesis has concentrated its eldercare networks in five
geographic regions in order to achieve operating efficiencies, economies of
scale and significant market share. The five geographic markets that Genesis
principally serves are: New England Region (Massachusetts/Connecticut/New
Hampshire/Vermont/Rhode Island); Midatlantic Region (Greater
Philadelphia/Delaware Valley); Chesapeake Region (Southern Delaware/Eastern
Shore of Maryland/Baltimore, Maryland/Washington D.C./Virginia); Southern Region
(Central Florida); and Allegheny Region (West Virginia/Western
Pennsylvania/Eastern Ohio/Illinois/Wisconsin). The Company believes that it is
the largest operator of eldercare center beds in the states of New Hampshire,
Massachusetts, New Jersey, Pennsylvania, Maryland and West Virginia.
The Company's 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 believes it 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
56% from the fiscal year ended September 30, 1994 to the fiscal year ended
September 30, 1998 and comprise 52% of the Company's revenues for the fiscal
year ended September 30, 1998. Specialty medical services typically generate
higher profit margins than basic healthcare services and are less capital
intensive.
The Company's long-term 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, and investments in, eldercare centers and
rehabilitation and pharmacy companies, including the August 28, 1998 Vitalink
Transaction. The Company has undertaken several initiatives to position itself
to compete in the current healthcare environment. These initiatives include: (i)
establishing a strategic division to develop clinical care protocols and monitor
the delivery and utilization of medical care; (ii) developing a clinical
administration and healthcare management information system; (iii) establishing
and marketing the Genesis ElderCare(SM) brand name and establishing Genesis
ElderCare (SM) toll-free telephone lines along with other trademarks, 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.
8
Basic Healthcare Services
Genesis operates 302 eldercare centers located in 16 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 during the respective fiscal years.
1998 1997 1996
- ---------------------------------------------------------------------------------------
Average Beds in Service: (1)
Owned and Leased Facilities 15,137 15,132 9,429
Managed and Jointly-Owned Facilities 24,234 6,101 5,030
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 91% 93%
Managed and Jointly-Owned Facilities 92% 92% 93%
- ---------------------------------------------------------------------------------------
(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
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.
9
Institutional Pharmacy and Medical Supply Services. The Company, through its
NeighborCare (SM) pharmacy subsidiaries which have over $900,000,000 in
annualized revenues, 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 79
institutional pharmacies (of which one is jointly-owned) and 11 distribution
centers located in its various market areas. In addition, the Company operates
34 community-based pharmacies which are located in or near medical centers,
hospitals and physician office complexes. The community-based pharmacies provide
prescription and over-the-counter medications and certain medical supplies, as
well as personal service and consultation by licensed professional pharmacists.
Approximately 89% of the sales attributable to all pharmacy operations in Fiscal
1998 were generated through external contracts with independent healthcare
providers with the balance attributable to centers owned or leased 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
five of its regional market concentrations. These services are provided by
approximately 1,800 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.
Other Services. The Company employs or has consulting arrangements with
approximately 85 physicians, physician assistants and nurse practitioners who
are primarily involved in designing and administering clinical programs and
directing patient care. The Company also provides an array of other specialty
medical services in certain parts of its eldercare networks, including portable
x-ray and other diagnostic services; home healthcare services; and hospitality
services such as dietary, housekeeping, laundry, plant operations and facilities
management services.
Management Services and Other
Management Services. The Company provides management services to 189 eldercare
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 1999 and 2017. The
Company has extended various mortgage and other loans to certain facilities
under management contract. See "Notes to Consolidated Financial Statements -
Footnote 9 Notes Receivable and Other Investments."
10
Genesis provides development services for a fee in an amount equal to five
percent of the total cost of developing and completing facilities developed by
Adult Community Total Services, Inc. The contract extends through December 2002
and Genesis is guaranteed a minimum annual development fee of $1,500,000.
Group Purchasing. The Company's subsidiary, The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), is one of the largest group purchasing
companies in the Midatlantic 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 2,200 members with over 236,000 beds in 44 states and the District
of Columbia.
Strategic Clinical Initiatives
The Company has undertaken several initiatives to position itself to compete
effectively in the current healthcare environment. The Company has established a
strategic division which is responsible for developing clinical care protocol
and monitoring the delivery and utilization of medical care. The Company has
also developed 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 established toll-free telephone lines and
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.
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. The private pay rates charged
by the Company are influenced primarily by the rates charged by other providers
in the local market and by Medicaid and Medicare reimbursement rates. Specialty
medical revenues are usually reimbursed under casualty and health insurance
coverages. The acuity levels for these insurance patients are generally higher
and require additional staff and increased utilization of facility resources,
resulting in higher payment rates. Individual cases are either negotiated on a
case by case basis with the insurer or the rates are prescribed through managed
care contract provisions.
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. Subject to certain limitations, 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.
11
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 or other providers. There can be no assurances that
adjustments from Medicare or Medicaid audits will not have a material adverse
effect on the Company.
Pursuant to the Balanced Budget Act, commencing with cost reporting periods
beginning on July 1, 1998, PPS began to be phased in for skilled nursing
facilities at a per diem rate for all covered Part A skilled nursing facility
services as well as many services for which payment may be made under Part B
when a beneficiary who is a resident of a skilled nursing facility receives
covered skilled nursing facility care. The consolidated per diem rate is
adjusted based upon the RUG. In addition to covering skilled nursing facility
services, this consolidated payment will also cover rehabilitation and
non-rehabilitation ancillary services. Physician services, certain nurse
practitioner and physician assistant services, among others, are not included in
the per diem rate. For the first three cost reporting periods beginning on or
after July 1, 1998, the per diem rate will be based on a blend of a facility
specific rate and a federal per diem rate. In subsequent periods, and for
facilities first receiving payments for Medicare services on or after October 1,
1995, the federal per diem rate will be used without any facility specific
blending.
The Balanced Budget Act also required consolidated billing for skilled nursing
facilities. Under the Balanced Budget Act, the skilled nursing facility must
submit all Medicare claims for Part A and Part B services received by its
residents with the exception of physician, nursing, physician assistant and
certain related services, even if such services were provided by outside
suppliers. Medicare will pay the skilled nursing facilities directly for all
services on the consolidated bill and outside suppliers of services to residents
of the skilled nursing facilities must collect payment from the skilled nursing
facility. Although consolidated billing was scheduled to begin July 1, 1998 for
all services, it has been delayed until further notice for beneficiaries in a
Medicare Part A stay in a skilled nursing facility not yet using PPS for the
Medicare Part B Stay.
Under the Part A reimbursement methodology applicable to periods prior to the
implementation of PPS, 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. As the Company is reimbursed for its direct costs plus an allocation
of indirect costs up to a regional limit, to the extent that the Company expands
its specialty medical services, the costs of care for these patients is expected
to exceed the regional reimbursement limits. As a result, the Company has
submitted and will be required to submit further exception requests to recover
such excess costs under pending or any requests from Medicare. There can be no
assurances that the Company will be able to recover such excess costs under
pending or future requests. The failure to recover these excess costs in the
future would adversely affect the Company's financial position and results of
operations. Medicare payments for these services may be based on reasonable cost
charges or a fixed-fee schedule determined by Medicare.
12
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. Moreover, the Balanced Budget Act also repealed
the Boren Amendment which required Medicaid payments to nursing facilities to be
"reasonable and adequate" to cover the costs of efficiently and economically
operated facilities. Under the Balanced Budget Act, states must now use a public
notice and comment process for determining Medicaid rates, rate methodology and
justifications. It is unclear what the impact of the Balanced Budget Act will
have on the Company. 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.
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------
Private pay and other 45% 39% 39% 38% 41%
Medicaid 35 37 36 41 43
Medicare 20 24 25 21 16
- ---------------------------------------------------------------------------
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. In addition to those efforts, 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, leased and affiliated 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" for a discussion of the federal and
state laws which limit financial and other arrangements between healthcare
providers.
13
In Fiscal 1996, the Company announced a consolidation of its core business under
the name Genesis ElderCare (SM). The Genesis ElderCare logo and service mark
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, including
the Company's toll free ElderCare Lines, to promote its brand name in trade,
professional and business publications and to promote services directly to
consumers.
The consumer advertising effort was significantly increased beginning in January
1998 to build awareness of the Genesis ElderCare brand among family caregivers
and elders living in the community. The advertising effort, which is
concentrated in the Company's key geographic markets, uses television, consumer
magazines, and direct mail to motivate consumers who need any of the Company's
services to call one of the Company's regional toll-free ElderCare Lines where
they are directed to the appropriate resource.
Personnel
At November 30, 1998, Genesis and its subsidiaries (including Multicare)
employed over 45,000 people, including approximately 34,500 full-time and 10,000
part-time employees. Approximately 20% of these employees are physicians and
nursing and professional staff. Approximately 15,000 of these employees are
employed by Multicare.
The Company currently has collective bargaining agreements which relate to 61
facilities, including 27 facilities operated by Multicare. The agreements expire
at various dates from 1998 through 2001 and cover approximately 5,000 employees.
In addition, certain of the Company's facilities have been subject to an
aggressive union organizing campaign. The Company believes that its relationship
with its employees is generally good.
Employee Training and Development
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 nurses aide
graduates and is awarded the title of Nursing Assistant Specialist and receives
a salary adjustment. The Company has maintained a retention rate of 77% since
1990 of the nurses aide graduates. Approximately 1,450 nurses 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.
14
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 800 participants have graduated from this program.
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 provider, 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 providers 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. Except as described below, in
all cases, such deficiencies were remedied before any providers were
decertified. On July 14, 1998, the Company announced that it received notice
from NewCourtland, owner of eight nursing centers in the Philadelphia area, of
the termination of its management agreements for these centers effective July
31, 1998. This notice follows the revocation on June 25, 1998 of the operating
license at one of the NewCourtland Centers. The center had a long-standing
history of regulatory compliance difficulties dating back many years prior to
Genesis' management.
All but 30 of the Genesis eldercare owned and leased centers provide skilled
nursing services and are currently certified to receive benefits provided under
Medicare for these services. Additionally, all Genesis and Multicare 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.
15
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.
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 a financial 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, home health services and the
provision of medical supplies to nursing facilities. 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. As a result of the Vitalink Transaction, HCR-Manor Care, a publicly
traded owner of eldercare centers that competes with the Company in certain
markets, owns 586,240 shares of Genesis Preferred which are convertible at the
option of the holder into approximately 7,880,000 shares of the Company's Common
Stock. Pursuant to the Vitalink Service Contracts, the Company's NeighborCare
pharmacy operations provide services to HCR-Manor Care constituting
approximately ten percent of the net revenues of NeighborCare.
16
The Company operates eldercare centers in 16 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.
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.
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 practices.
17
ITEM 2: PROPERTIES
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Genesis as of November 30, 1998. Included
in Managed Centers are 116 jointly-owned facilities with 13,271 beds. Member
Centers consist of independently owned facilities that, for a fee, have access
to many of the resources and capabilities of the Genesis Eldercare Networks,
including participation in Genesis' managed care contracts, preferred provider
arrangements and group purchasing arrangements. These centers typically purchase
an array of ancillary services from Genesis.
Wholly-Owned
Centers Member Centers Leased Centers Managed Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
- -----------------------------------------------------------------------------------------------------------------
Pennsylvania 16 2,228 5 645 4 503 30 4,100 55 7,476
Massachusetts 8 1,092 1 123 1 100 39 5,138 49 6,453
Maryland 13 2,089 11 2,041 7 990 6 907 37 6,027
New Jersey 12 1,571 1 178 4 616 26 3,630 43 5,995
Florida 4 598 - - 12 1,409 12 1,308 28 3,315
Connecticut 4 615 1 190 1 120 13 1,866 19 2,791
West Virginia - - - - 2 180 23 1,983 25 2,163
Virginia 2 421 1 200 4 670 2 175 9 1,466
New Hampshire 8 808 - - 5 440 - - 13 1,248
Delaware 4 522 4 539 - - 1 158 9 1,219
Ohio - - - - - - 14 1,128 14 1,128
Illinois - - - - - - 10 968 10 968
Wisconsin - - - - - - 7 941 7 941
Rhode Island - - - - - - 3 373 3 373
North Carolina - - - - - - 2 340 2 340
Vermont 2 256 - - - - 1 58 3 314
- -----------------------------------------------------------------------------------------------------------------
Totals 73 10,200 24 3,916 40 5,028 189 23,073 326 42,217
- -----------------------------------------------------------------------------------------------------------------
The Company believes that all of its centers are well maintained and are in a
suitable condition for the conduct of its business.
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."
On or after April 29, 1998, certain shareholders of Vitalink Pharmacy Services,
Inc. ("Vitalink") (the "Plaintiffs") filed four separate actions in Delaware
state court against Vitalink, certain of its officers and directors (the
"Individual Defendants"), Genesis and HCR-Manor Care (collectively, the
"Defendants") alleging, among other things, that Vitalink, the Individual
Defendants and HCR-Manor Care breached certain duties owed to the Plaintiffs in
connection with the Merger Agreement and certain of the transactions
contemplated thereby, and that Genesis has knowingly aided and abetted that
alleged breach (the "Stockholders Litigation"). In their complaints, the
Plaintiffs sought damages and preliminary and permanent relief to enjoin the
Defendants for consummating the Merger and Memorandum of Understanding pursuant
to which they agreed in principle, subject to the execution of a written
Stipulation of Settlement and approval by the court, to settle the Stockholders
Litigation by (a) allowing the Series G Cumulative Convertible Preferred Stock,
par value $.01 per share (the "Genesis Preferred") received by the Vitalink
minority stockholders in connection with the Merger to become freely
transferable beginning August 28, 1999 and (b) including certain additional
disclosures in the proxy statement/prospectus related to the Vitalink
Transaction.
18
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 26, 1998, the Company held a Special Meeting of its shareholders.
Proxies were solicited and the Special Meeting held to consider and act upon the
following matters:
(1) The Merger Agreement, and the transactions contemplated thereby, including
the issuance of shares of Genesis Preferred received 19,480,818 votes for
approval, 366,318 against approval and 133,571 abstentions.
(2) The authorization of the Genesis Board, in its discretion, to vote upon
such other business as may properly come before the Special Meeting and any
adjournment or postponement thereof, including, without limitation, a
motion to adjourn the Special Meeting to another time or place for the
purpose of soliciting additional proxies in order to approve and adopt the
transactions contemplated by the Merger Agreement or otherwise received
14,241,042 votes for approval, 4,480,914 against approval and 1,284,751
abstentions.
19
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 50 Chairman and Chief Executive Officer
Richard R. Howard 49 Vice Chairman and Director
David C. Barr 48 Vice Chairman and Chief Operating Officer
Michael G. Bronfein 43 President, NeighborCare Pharmacies
George V. Hager, Jr. 42 Senior Vice President and Chief Financial Officer
Maryann Timon 45 Senior Vice President, Managed Care
Marc D. Rubinger 49 Senior Vice President and Chief Information Officer
Barbara J. Hauswald 39 Vice President and Treasurer
James V. McKeon 34 Vice President and Corporate Controller
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 has served as
Chairman of the Board of Trustees of ElderTrust since its inception in January
1998.
Richard R. Howard has served as a director of the Company since its inception,
as Vice President of Development from September 1985 to June 1986, as President
and Chief Operating Officer from June 1986 to April 1997, as President from
April 1997 to November 1998 and as Vice Chairman since November 1998. 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, as Chief Operating Officer since April 1997 and as Vice Chairman
since November 1998. 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 with Equibank, 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.
Michael G. Bronfein joined the Company in June 1996 as the President of
NeighborCare, which was acquired by Genesis in June 1996. Prior to joining
NeighborCare in 1991, Mr. Bronfein held the position of Senior Vice President
and Head of Commercial Finance Lending for Signet Banking Corporation in
Maryland, Virginia and Washington, D.C. In addition to his position with the
Company, Mr. Bronfein serves as the Chairman of the Board of Health Objects
Corporation and on the National Board of Advisors - University of Maryland
School of Pharmacy. Mr. Bronfein received a Bachelors of Science Degree in
Accounting from the University of Baltimore. He is a certified public accountant
and is a member of the AICPA and MACPA.
20
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.
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.
Marc D. Rubinger has served as Senior Vice President and Chief Information
Officer since April 1997. From November 1995 to April 1997, Mr. Rubinger served
as Vice President and Chief Information Officer. 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.
Barbara J. Hauswald has served as Vice President and Treasurer since April 1998.
Prior to joining the Company, Ms. Hauswald served as First Vice President in the
Health Care Banking Department of Mellon Bank N.A. Ms. Hauswald has over 16
years of commercial banking experience. She received a Bachelor of Science
degree in Commerce in 1981 from the University of Virginia.
James V. McKeon has served as Vice President and Corporate Controller of Genesis
since April 1997. Mr. McKeon joined the Company in June 1994 as Director of
Financial Reporting and Investor Relations and served as Vice President of
Finance and Investor Relations from November 1995 to April 1997. From September
1986 until June 1994, Mr. McKeon was employed by KPMG Peat Marwick LLP, most
recently as Senior Manager. He received a Bachelor of Science degree in
Accountancy from Villanova University in 1986. Mr. McKeon is a certified public
accountant and a member of the AICPA and PICPA.
21
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
1998
First Quarter $39.75 $24.88
Second Quarter $28.38 $21.25
Third Quarter $25.50 $11.06
Fourth Quarter * $15.00 $7.81
1997
First Quarter $37.87 $28.25
Second Quarter $37.50 $25.38
Third Quarter $39.75 $32.38
Fourth Quarter $39.75 $21.75
* Through December 14, 1998
As of December 14, 1998, 35,227,558 shares of Common Stock were held of record
by 722 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" and "Financial Statements".
22
ITEM 6: SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
Statement of Operations Data
(in thousands, except per share data)
Net revenues $1,405,305 $1,099,823 $ 671,469 $486,393 $388,616
Operating income before capital costs* 134,690 184,868 127,024 93,253 69,373
Earnings (loss) before income taxes,
extraordinary items and cumulative effect
of an accounting change (30,479) 75,232 58,086 40,296 27,710
Earnings (loss) before extraordinary items
and cumulative effect of an accounting
change (22,321) 48,144 37,169 25,531 17,691
Net income (loss) available to common shareholders (25,900) 47,591 37,169 23,608 17,673
Per common share data (Diluted):
Earnings (loss) before extraordinary items
and cumulative effect of an accounting
change $ (0.68) $ 1.34 $ 1.29 $ 1.03 $ 0.84
Net income (loss) available to
common shareholders (0.74) 1.33 1.29 0.97 0.84
Weighted average shares of common stock and
equivalents 35,159 36,120 31,058 28,307 24,747
- -----------------------------------------------------------------------------------------------------------------
Financial Measurements
Operating income before capital costs * as a
percent of revenue 9.6% 16.8% 18.9% 19.2% 17.8%
Earnings (loss) before income taxes,
extraordinary items and cumulative effect
of an accounting change as a percent of
revenue (2.2%) 6.8% 8.6% 8.3% 7.1%
Return ** (before interest) on average
assets employed 2.8% 5.7% 6.9% 7.0% 6.2%
Return** on average shareholders' equity (3.8%) 8.4% 11.4% 12.3% 11.6%
Long-term debt to equity ratio 1.55 1.07 .66 1.4 1.3
- -----------------------------------------------------------------------------------------------------------------
Operating Data
Payor Mix (as a percent of patient service
revenue)
Private pay and other 45% 39% 39% 38% 41%
Medicare 20% 24% 25% 21% 16%
Medicaid 35% 37% 36% 41% 43%
Average owned/leased eldercare center beds 15,137 15,132 9,429 8,268 7,530
Occupancy Percentage 91.5% 91.0% 92.6% 91.9% 91.9%
Specialty medical revenue per patient day -
eldercare centers $ 37.57 $ 33.84 $ 29.94 $ 25.06 $ 17.80
Specialty medical revenues - eldercare
services (in thousands) $ 664,486 $ 432,752 $254,663 $154,833 $109,452
Average managed life care units and health
center beds 24,234 6,101 5,030 10,374 9,992
Average full-time equivalent personnel 37,708 27,700 16,325 12,180 8,623
- -----------------------------------------------------------------------------------------------------------------
23
SELECTED FINANCIAL DATA, continued
1998 1997 1996 1995 1994
Balance Sheet Data (in thousands)
Working capital $ 305,718 $ 226,930 $155,491 $132,274 $66,854
Total assets 2,627,368 1,434,113 950,669 600,389 511,698
Long-term debt 1,358,595 651,667 338,933 308,052 250,807
Shareholders' equity $ 875,072 $ 608,021 $514,608 $221,548 $195,466
* Capital costs include depreciation and amortization, lease expense and
interest expense.
** Before extraordinary items and cumulative effect of an accounting change.
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of significant transactions.
24
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 elderly customers.
The delivery of these services was originally concentrated in the eldercare
centers owned and leased by the Company, but now also includes managed eldercare
centers, independent healthcare facilities, outpatient clinics and home health
care.
The Company generates revenues from three sources: basic healthcare services,
specialty medical services and management services and other. The Company
includes in basic healthcare services revenues all room and board charges for
its eldercare customers at its 113 owned and leased eldercare centers. Specialty
medical services include all revenues from providing rehabilitation therapies,
institutional pharmacy and medical supply services. Management services and
other include fees earned for management of eldercare centers, other service
related businesses and transactional revenues.
Certain Transactions
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
to receive (i) .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Genesis Preferred"), (ii) $22.50 in cash,
or (iii) a combination of cash and shares of Genesis Preferred (collectively,
the " Merger Consideration"). The Merger Consideration paid to stockholders of
Vitalink to acquire their shares (including shares which may have been issued
upon the exercise of outstanding options) was $590,200,000, of which 50% was
paid in cash and 50% in Genesis Preferred. The Genesis Preferred has a face
value of approximately $295,100,000 and an initial dividend of 5.9375% and
generally is not transferable without the consent of the Company. The Genesis
Preferred is convertible into Genesis common stock, par value $.02 per share
(the "Common Stock"), at $37.20 per share and it may be called for conversion
after April 26, 2001, provided the price of Common Stock reaches certain trading
levels and after April 26, 2002, subject to a market-based call premium.
Vitalink's total net revenues for the fiscal years ended May 31, 1997 and 1998,
were $274,000,000 and $494,000,000, respectively. As a result of the merger,
Genesis assumed approximately $87,000,000 of indebtedness Vitalink had
outstanding. The cash portion of the purchase price was funded through
borrowings under the Credit Facility. See " Liquidity and Capital Resources."
Pursuant to four agreements with HCR-Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR-Manor Care (the
"Service Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR-Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004, subject to annual renewals
provided therein.
25
New Courtland
On July 14, 1998, the Company announced that it received notice from
NewCourtland, Inc. ("NewCourtland"), owner of eight nursing centers in the
Philadelphia area, of the termination of its management agreements for these
centers effective July 31, 1998. This notice follows the revocation on June 25,
1998 of the operating license at one of the NewCourtland centers. The center had
a long-standing history of regulatory compliance difficulties dating back many
years prior to Genesis' management. The Company believes that the termination
notice was inappropriate and has instituted suit against NewCourtland and other
related parties to recover unpaid balances due Genesis, the estimated future
operating profits of the terminated management agreements, as well as
consequential damages. The annualized revenue from the contracts is
approximately $3,800,000.
ElderTrust Transactions
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Genesis received an
additional $14,000,000 from the sale of a loan and two additional assisted
living facilities and the recoupment of amounts advanced and expenses incurred
in connection with the formation of ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000,000 which has been
deferred and is being amortized over the ten year term of the lease contracts
with ElderTrust. Additionally, ElderTrust has funded approximately $13,200,000
of a $15,100,000 commitment to finance the development and expansion of three
additional assisted living facilities. Genesis repaid a portion of the revolving
credit component of the Credit Facility with the proceeds from these
transactions. In September 1998, the Company sold its leasehold rights and
option to purchase seven eldercare facilities acquired in its November 1993
acquisition of Meridian Healthcare, Inc. to ElderTrust for $44,000,000,
including $35,500,000 in cash and an $8,500,000 note. As part of the
transaction, Genesis will continue to sublease the facilities for ten years with
an option to extend the lease until 2018 at an initial annual lease obligation
of approximately $10,000,000. The transaction resulted in a gain of
approximately $43,700,000 which has been deferred and is being amortized over
the ten year lease term of the lease contracts with ElderTrust. The Company also
anticipates entering into transactions with ElderTrust in the future.
Multicare Transaction
In October 1997, Genesis ElderCare Corp., a Delaware Corporation owned 43.6% by
Genesis and the remainder by The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired The Multicare
Companies, Inc. ("Multicare"), pursuant to a tender offer (the "Tender Offer")
and the merger (the "Merger" or the "Multicare Transaction"). Multicare is in
the business of providing eldercare and specialty medical services in selected
geographic regions. Included among the operations acquired by Genesis ElderCare
Corp. are operations relating to the provision of (i) eldercare services
including skilled nursing care, assisted living, Alzheimer's care and related
support activities traditionally provided in eldercare facilities, (ii)
specialty medical services consisting of (1) sub-acute care such as ventilator
care, intravenous therapy and various forms of coma, pain and wound management
and (2) rehabilitation therapies such as occupational, physical and speech
therapy and stroke and orthopedic rehabilitation and (iii) management services
and consulting services to eldercare centers.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for
its services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of (i) $1,991,666 and (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare will be paid by Multicare. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 subject to adjustment (the "Therapy Purchase") and a stock purchase
agreement (the "Pharmacy Purchase Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis acquired all of the outstanding capital
stock and limited partnership interests of certain subsidiaries of Multicare
that are engaged in the business of providing institutional pharmacy services to
third parties for $50,000,000 (the "Pharmacy Purchase"), subject to adjustment.
The Company completed the Pharmacy Purchase effective January 1, 1998. The
Company completed the Therapy Purchase in October 1997.
26
In addition, Genesis, Cypress, TPG and Nazem entered into an agreement (the
"Put/Call Agreement") pursuant to which, among other things, Genesis has the
option, on the terms and conditions set forth in the Put/Call Agreement to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter,
at a price determined pursuant to the terms of the Put/Call Agreement. Cypress,
TPG and Nazem have the option, on the terms and conditions set forth in the
Put/Call Agreement, to require Genesis to purchase (the "Put") such Genesis
ElderCare Corp. common stock commencing on October 9, 2002 and for a period of
one year thereafter, at a price determined pursuant to the Put/Call Agreement.
Genesis Eldercare Corp. paid approximately $1,492,000,000 to (i) purchase the
Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
incurred in connection with the completion of the Tender Offer, Merger and the
financing transactions in connection with therewith, (iii) refinance certain
indebtedness of Multicare and (iv) make certain cash payments to employees. Of
the funds required to finance the foregoing, approximately $745,000,000 were
furnished as capital contributions by the Genesis Eldercare Corp. from the sale
of its common stock to Cypress, TPG, Nazem and Genesis. Cypress, TPG and Nazem
purchased shares of Genesis ElderCare Corp. common stock for a purchase price of
$210,000,000, $199,500,000 and $10,500,000, respectively, and Genesis purchased
shares of Genesis ElderCare Corp. common stock for a purchase price of
$325,000,000 in consideration for 43.6% of the common stock of Genesis ElderCare
Corp. The balance of the funds necessary to finance the foregoing came from (i)
the proceeds of loans from a syndicate of lenders in the aggregate amount of
$525,000,000 and (ii) $246,800,000 of bridge financing which was refinanced upon
completion of the sale of 9% Senior Subordinated Notes due 2007 sold by a
subsidiary of Genesis Eldercare Corp. on August 11, 1997.
Geriatric & Medical Companies, Inc.
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, was 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 then
existing 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.
National Health Care Affiliates, Inc.
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 a
then existing $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.
27
NeighborCare Pharmacies, Inc.
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.
McKerley Health Care Centers, Inc.
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 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 $4,000,000 was paid in
February 1997. McKerley added to Genesis 15 geriatric care facilities in New
Hampshire and Vermont with a total of 1,535 beds. McKerley also operates a home
healthcare company. The acquisition was financed with borrowings under the bank
credit facilities and assumed indebtedness.
Other Transactions
At September 30, 1998, the Company held $10,000,000 of convertible preferred
stock of Doctors Health, Inc. ("Doctors Health"), an independent physician owned
and controlled integrated delivery system and practice management company based
in Maryland. The convertible preferred stock, which is accounted for under the
cost method, 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 loaned to Doctors Health $5,500,000 through
December 1998 at an annual interest rate of 11%. On November 16, 1998, a
voluntary petition for Chapter 11 bankruptcy was filed by Doctors Health. In the
fourth quarter of 1998, the Company wrote-off its investments in Doctors Health.
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").
Fiscal 1998 Compared to Fiscal 1997
The Company's total net revenues for fiscal year ended September 30, 1998
("Fiscal 1998") were $1,405,305,000 compared to $1,099,823,000 for the fiscal
year ended September 30, 1997 ("Fiscal 1997") an increase of $305,482,000 or
28%. Basic healthcare services increased $4,892,000 or 1%, of which
approximately $17,292,000 is due to providing care to higher acuity patients and
rate increases, offset by $12,400,000 from the termination of operations by
Genesis of three leased eldercare centers in September 1997. Specialty medical
services revenue increased $234,159,000 or 47% of which approximately
$46,600,000 is attributed to the August 1998 Vitalink Transaction, approximately
$80,598,000 is attributed to the Multicare pharmacy business acquired effective
January 1998, approximately $21,548,000 is attributed to the purchase of the
Multicare rehabilitation therapy business acquired in October 1997, and the
remaining increase of approximately $98,413,000 is primarily due to other volume
growth in the institutional pharmacy, medical supply and contract therapy
divisions and increased acuity in the eldercare centers. This increase was
offset by approximately $6,500,000, $3,300,000 and $3,200,000 as a result of the
4th quarter of Fiscal 1997 deconsolidation of the Company's physician services
business, the termination of the operations of three leased eldercare centers in
September 1997 and the April 1998 government mandated implementation of salary
equivalency billing for rehabilitation therapy, respectively. Specialty medical
service revenue per patient day in the Company's eldercare centers increased 11%
to $37.57 in the twelve months ended September 30, 1998 compared to $33.84 in
the twelve months ended September 30, 1997 primarily due to treatment of higher
acuity patients. Management services and other income increased $66,431,000 or
140%. This increase is primarily due to approximately $42,200,000 of management
fee revenue earned from the management of the operations of the Multicare
business and approximately $24,200,000 of other revenue growth, including
capitated revenue earned under a contract with Blue Cross / Blue Shield of
Maryland (BCBSMD).
28
The Company's operating expenses before depreciation, amortization, lease
expense and interest expense were $1,270,615,000 for the twelve months ended
September 30, 1998 compared to $914,955,000 for twelve months ended September
30, 1997, an increase of $355,660,000 or 39%, of which approximately $14,100,000
is due to the direct operating costs incurred to service the Multicare
management contracts, approximately $39,200,000 is due to the August 1998
acquisition of Vitalink Pharmacies, approximately $63,900,000 is due to the
January 1998 acquisition of the Multicare pharmacy operations, approximately
$18,600,000 is due to the October 1997 acquisition of the Multicare
rehabilitation therapy business, approximately $19,800,000 is due to charges
incurred in connection with capitation costs under a contract with BCBSMD,
approximately $20,700,000 is attributed principally to write-offs included in
other operating expenses for uncollectible receivables and other assets of
eldercare centers previously owned or managed by the Company, approximately
$80,700,000 is attributed to an increase in the Company's loss on impairment of
assets in the current fiscal year versus the prior fiscal year and the remaining
increase of approximately $118,500,000 is attributed to growth in the
institutional pharmacy, medical supply and contract therapy divisions, as well
as increased costs in information technology systems, community-based programs,
marketing campaigns and the overhead costs of servicing the Multicare management
contracts. This increase is offset by approximately $7,800,000 and $12,000,000
as a result of the deconsolidation of the Company's physician services business
beginning in the fourth quarter of 1997 and the termination of operations of
three leased eldercare centers in September 1997, respectively.
Due to specific events occurring in the fourth quarter of Fiscal 1998 and a
focus on core business operations in response to PPS, the Company recorded
non-cash charges before income taxes of approximately $116,000,000, of which
approximately $24,000,000 relates to the impairment of one eldercare center and
certain non-core businesses, including the Company's ambulance business and
certain non-core Medicare home health operations; approximately $43,000,000
relates to investments in owned eldercare centers and other assets the Company
believes are impaired as a result of PPS; approximately $23,000,000 relates to
impaired investments in eldercare centers previously owned or managed by the
Company; and approximately $26,000,000 relates to the Company's investment in
Doctors Health, a medical care management company in the Company's Chesapeake
region.
In the fourth quarter of Fiscal 1997, the Company completed an evaluation of its
physician service business and announced its intentions to restructure this
business. In connection with the plan and selected asset impairments, the
Company recorded a fourth quarter pretax charge of approximately $5,700,000. In
addition, the Company reached an agreement with BCBSMD to insure, through a
sub-capitation agreement, the health care benefits of approximately 7,000
members of BCBSMD's Care First Medicare product. The Company recorded a
liability and pretax impairment loss of approximately $5,000,000 to accrue for
the estimated loss inherent in the agreement. The asset impairment charge also
included a pretax charge of approximately $4,300,000 related to the write-off of
selected assets deemed unrecoverable.
Increased depreciation and amortization expense of $10,439,000 is attributed to
the amortization of goodwill, fixed assets and deferred financing costs in
connection with the Company's investment in Multicare, the Pharmacy Purchase and
the Therapy Purchase, the Vitalink Transaction, as well as depreciation of
increased investments in information systems, offset by decreased depreciation
expense of seven properties formerly owned by Genesis and now leased from
ElderTrust.
29
Lease expense increased $2,595,000 due to additional lease expense of seven
properties formerly owned by Genesis and now leased from ElderTrust, offset by
the termination of operations of three leased eldercare centers in September
1997.
Interest expense increased $42,985,000 or 110%. This increase in interest
expense was primarily due to additional borrowings used to finance the Company's
investment in Multicare, the Pharmacy Purchase and the Therapy Purchase, the
Vitalink Transaction and an increase in the Company's weighted average borrowing
rate on the Credit Facility. This increase is offset by interest savings as a
result of the repayment of indebtedness from proceeds received in connection
with the ElderTrust Transaction.
In connection with the early repayment of debt in the quarters ended December
31, 1998 and 1997, the Company recorded an extraordinary loss, net of tax of
approximately $1,924,000 ($3,030,000 before tax) and $553,000 ($871,000 before
tax), respectively, to write-off unamortized deferred financing fees.
Fiscal 1997 Compared to Fiscal 1996
The Company's total net revenues for fiscal year ended September 30, 1997 were
$1,099,823,000 compared to $671,469,000 for the fiscal year ended September 30,
1996 ("Fiscal 1996"), an increase of $428,354,000 or 64%. Basic healthcare
services increased $201,947,000 or 58%, of which approximately $132,800,000 is
attributable to the GMC Transaction, approximately $45,800,000 is attributable
to the inclusion of the eldercare centers acquired in the National Health
transaction, for the full twelve months in 1997 versus three months in the prior
year, approximately $9,900,000 is due to the inclusion of the eldercare centers
acquired in the McKerley Transaction for the full twelve months in 1997 versus
ten months in the prior year, and the remaining increase of approximately
$14,600,000 is due to providing care to higher acuity patients and to rate
increases. This increase was offset by approximately $1,200,000 due to the
termination of operations of three leased eldercare centers in September 1997
and a decline in overall census. Specialty medical services revenue increased
$211,954,000 or 73% of which approximately $47,300,000 is attributed to the GMC
Transaction, approximately $16,800,000 is due to the inclusion of the eldercare
centers acquired in the National Health transaction for the full twelve months
in 1997 versus three months in the prior year, approximately $42,200,000 is
attributed to the inclusion of the NeighborCare Pharmacies transaction for the
full twelve months in 1997 versus five months in 1996, approximately $1,500,000
is due to the inclusion of the eldercare centers acquired in the McKerley
Transaction for the full twelve months in 1997 versus ten months in the prior
year, and the remaining increase of approximately $106,900,000 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.
This increase was offset by approximately $2,400,000 and $300,000 as a result of
the 4th quarter of Fiscal 1997 deconsolidation of the Company's physician
services business and the termination of the operations of three leased
eldercare centers in September 1997, respectively. Specialty medical service
revenue per patient day in the health centers division increased 13% to $33.84
in the twelve months ended September 30, 1997 compared to $29.94 in the twelve
months ended September 30, 1996 primarily due to treatment of higher acuity
patients. Management services and other income increased $14,453,000 or 44%.
This increase is primarily due to other service business acquired in the GMC
Transaction, offset by other transactional revenues earned in the twelve months
ended September 30, 1996 which included gains recognized in connection with the
sale of an investment, the sale of four eldercare centers and a pharmacy in
Indiana and the sale of a majority interest in one eldercare center in Maryland.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and debenture conversion expense were $914,955,000 for
the twelve months ended September 30, 1997 compared to $543,200,000 for twelve
months ended September 30, 1996, an increase of $371,755,000 or 68%, which is
principally due to the impact of acquisitions, growth in the institutional
pharmacy, medical supply and contract therapy divisions and due to a $15,000,000
asset impairment charge recorded in the fourth quarter of Fiscal 1997. In the
fourth quarter of Fiscal 1997, the Company completed an evaluation of its
physician service business and announced its intentions to restructure this
business, including the closure and possible sale of free standing service
sites, the restructuring of physician compensation arrangements and the
termination of certain staff. In connection with the plan and selected asset
impairments, the Company recorded a fourth quarter pretax charge of
approximately $5,700,000. In addition, the Company reached an agreement with
BCBSMD to insure, through a sub-capitation agreement, the health care benefits
of approximately 7,000 members of BCBSMD's Care First Medicare product. As a
result, the Company has recorded a liability and pretax impairment charge of
approximately $5,000,000 to accrue for the estimated loss inherent in the
agreement. The impairment charge also included a pretax charge of approximately
$4,300,000 related to the write-off of selected assets deemed unrecoverable.
30
Increased depreciation and amortization, and lease expense are primarily
attributed to the assets acquired in the GMC Transaction, the National Health
transaction, the NeighborCare transaction and the McKerley Transaction.
Interest expense increased $14,177,000 or 57%. 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 the Company's 6% Convertible
Senior Subordinated Debentures.
In connection with the early repayment of debt and the restructuring and
amendment of the Company's bank credit facility in the quarter ended December
31, 1996, the Company recorded an extraordinary item net of tax of approximately
$553,000 ($871,000 before tax) to write off unamortized deferred financing fees.
Liquidity and Capital Resources
General
Working capital increased $78,788,000 to $305,718,000 at September 30, 1998 from
$226,930,000 at September 30, 1997. Accounts receivable increased approximately
$170,894,000 during this period, of this increase approximately $6,500,000
relates to business acquired in the Therapy Purchase, approximately $18,700,000
relates to business acquired in the Pharmacy Purchase, approximately $87,833,000
relates to business acquired in the Vitalink Transaction, while the remaining
approximately $57,861,000 relates primarily to the continuing shift in business
mix to specialty medical services, particularly the home medical equipment and
infusion therapy lines of business, which typically have a longer collection
period. Days revenue in accounts receivable increased one day to 70 days versus
the quarter ended June 30, 1998. The Company's cash flow from operations for the
twelve months ended September 30, 1998 was approximately $77,955,000 compared to
approximately $53,354,000 for the twelve months ended September 30, 1997,
principally due to growth in operations and working capital management.
Investing activities for the twelve months ended September 30, 1998 include
approximately $56,663,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data processing
hardware and software. During the twelve months ended September 30, 1998, other
long term assets increased approximately $42,182,000, principally due to
approximately $20,000,000 of net financing and other transaction related costs
incurred in connection with the Multicare Transaction, the Pharmacy Purchase,
the Therapy Purchase and the Vitalink Transaction; approximately $14,000,000 of
subordinated management fees due from Multicare and approximately $3,400,000 of
increased property deposits principally from newly leased eldercare centers. At
September 30, 1998, notes receivable and other investments declined
approximately $61,100,000 compared to September 30, 1997, principally due to the
restructuring and repayment of a $45,000,000 mortgage loan and a $10,000,000
working capital loan with 11 managed eldercare centers in Florida, the
impairment write-off of the Company's $10,000,000 convertible preferred stock
investment and a $5,000,000 note receivable with Doctors Health, offset by an
$8,500,000 note extended to ElderTrust in connection with the sale of leasehold
rights and an option to purchase seven eldercare centers.
31
The Vitalink and ElderTrust Transactions
The total consideration paid to stockholders of Vitalink to acquire their shares
(including shares which may have been issued upon the exercise of outstanding
options) was $590,200,000, of which 50% was paid in cash and 50% in Genesis
Preferred. As a result of the merger, Genesis assumed approximately $87,000,000
of indebtedness Vitalink had outstanding. The Genesis Preferred has a face value
of approximately $295,100,000 and an initial dividend of 5.9375% and generally
is not transferable without the consent of the Company. The Genesis Preferred is
convertible into Common Stock at $37.20 per share and it may be called for
conversion after April 26, 2001, provided the price of Common Stock reaches
certain levels and after April 26, 2002, subject to a market-based call premium.
Vitalink's total net revenues for the fiscal years ended May 31, 1997 and 1998,
were $274,000,000 and $494,000,000, respectively. The cash portion of the
purchase price was funded through borrowings under the Credit Facility.
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Genesis received an
additional $14,000,000 from the sale of a loan and two additional assisted
living facilities and the recoupment of amounts advanced and expenses incurred
in connection with the formation of ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000,000 which has been
deferred and is being amortized over the ten year term of the lease contracts
with ElderTrust. Additionally, ElderTrust has funded approximately $13,200,000
of a $15,100,000 commitment to finance the development and expansion of three
additional assisted living facilities. Genesis repaid a portion of the revolving
credit component of its Credit Facility with the proceeds from these
transactions. In September 1998, the Company sold its leasehold rights and
option to purchase seven eldercare facilities acquired in its November 1993
acquisition of Meridian Healthcare, Inc. to ElderTrust for $44,000,000,
including $35,500,000 in cash and an $8,500,000 note. As part of the
transaction, Genesis will continue to sublease the facilities for ten years with
an option to extend the lease until 2018 at an initial annual lease obligation
of approximately $10,000,000. The transaction resulted in a gain of
approximately $43,700,000 which has been deferred and is being amortized over
the ten year lease term of the lease contracts with ElderTrust. The Company also
anticipates entering into transactions with ElderTrust in the future.
Credit Facility
Genesis entered into a credit agreement pursuant to which the lenders provided
Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the
"Credit Facility") for the purpose of: refinancing certain existing indebtedness
of Genesis; funding interest and principal payments on the facilities and
certain remaining indebtedness; funding permitted acquisitions; funding Genesis'
commitments in connection with the Vitalink Transaction; and funding Genesis'
and its subsidiaries' working capital for general corporate purposes, including
fees and expenses of the transactions. The Credit Facility consists of three
$200,000,000 term loans (collectively, the "Term Loans"), a $650,000,000
revolving credit loan (the "Revolving Facility"), which includes one or more
Swing Loans (collectively, the "Swing Loan Facility") in integral principal
multiples of $500,000 up to an aggregate unpaid principal amount of $15,000,000.
The Term Loans amortize in quarterly installments beginning in Fiscal 1998
through 2005, of which $24,419,000 is payable in Fiscal 1999. The Term Loans
consist of (i) a $200,000,000 six year term loan (the "Tranche A Term
Facility"); (ii) a $200,000,000 seven year term loan (the "Tranche B Term
Facility"); and (iii) a $200,000,000 eight year term loan (the "Tranche C Term
Facility"). The Revolving Facility becomes payable in full on September 30,
2003. The third amendment to the Credit Facility, dated December 15, 1998, made
the financial covenants for certain periods less restrictive, permitted the
proceeds of subordinated debt offerings to repay indebtedness under the
Revolving Facility and increased the interest rates applying to the Term Loans
and the Revolving Facility. The revised financial covenants reflect the impact
of PPS and the non-cash charges in the fourth quarter of 1998.
32
The Credit Facility is secured by a first priority security interest in all of
the stock, partnership interests and other equity of all of Genesis' present and
future subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries. Loans under the Credit Facility bear, at
Genesis' option, interest at the per annum Prime Rate as announced by the
administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin that is dependent upon a certain financial covenant test. Loans
under the Tranche A Term Facility and Revolving Facility bear interest at an
annual rate of .75% for Prime Rate loans and 2.5% (8.14% at September 30, 1998)
for LIBO Rate loans. Loans under the Tranche B Term Facility bear interest at an
annual rate of 1.25% for Prime Rate loans and 3.0% (8.64% at September 30, 1998)
for LIBO Rate loans. Loans under the Tranche C Term Facility bear interest at an
annual rate of 1.5% for Prime Rate loans and 3.25% (8.89% at September 30, 1998)
for LIBO Rate loans. Loans under the Swing Loan Facility bear interest at the
Prime Rate unless otherwise agreed to by the parties. Subject to meeting certain
financial covenants, the above referenced interest rates are reduced.
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of Genesis and its subsidiaries to dispose of assets, incur
additional indebtedness, make loans and investments, pay dividends, engage in
mergers or consolidations, engage in certain transactions with affiliates and
change control of capital stock, and to make capital expenditures; prohibit the
ability of Genesis and its subsidiaries to prepay debt to other persons, make
material changes in accounting and reporting practices, create liens on assets,
give a negative pledge on assets, make acquisitions and amend or modify
documents; causes Genesis and its affiliates to maintain the Management
Agreement, the Put/Call Agreement, as defined, and corporate separateness; and
will cause Genesis to comply with the terms of other material agreements, as
well as comply with usual and customary covenants for transactions of this
nature.
In December 1998, the Company issued $125,000,000, 9 7/8% Senior Subordinated
Notes due 2009. Interest on the notes are payable semi-annually on January 15
and July 15 of each year, commencing July 15, 1999. Approximately $59,950,000 of
the net proceeds were used to repay portions of the Tranche A, B and C Term
Facilities and approximately $59,950,000 of the net proceeds were used to repay
a portion of the Revolving Facility.
The Multicare Transaction
In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare Corp.
Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and
for a period of 270 days thereafter, at a price determined pursuant to the terms
of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the
terms and conditions set forth in the Put/Call Agreement, to require Genesis to
purchase (the "Put") such Genesis ElderCare Corp. common stock commencing on
October 9, 2002 and for a period of one year thereafter, at a price determined
pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis
ElderCare Corp. common stock, plus a portion of the Genesis pharmacy business
(the "Calculated Equity Value"). The Calculated Equity Value will be determined
based upon a multiple of Genesis ElderCare Corp.'s earnings before interest,
taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR")
after deduction of certain liabilities, plus a portion of the EBITDAR related to
the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend
on whether the Put or the Call is being exercised. Any payment to Cypress, TPG
or Nazem under the Call or the Put may be in the form of cash or Genesis common
stock at Genesis' option.
33
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. common stock
will be determined on the basis set forth in the Put/Call Agreement which
provides generally for additional Calculated Equity Value of Genesis ElderCare
Corp. to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of
the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress,
TPG or Nazem; and any payment to Cypress, TPG or Nazem will be limited to
Cypress' TPG's or Nazem's share of the Calculated Equity Value based upon a
formula set forth in the terms of the Put/Call Agreement.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis, an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement, dated
October 9, 1997, by and among the Company, Genesis ElderCare Corp., Cyrpess, TPG
and Nazem, and Management Agreement and to control the sale or liquidation of
Genesis ElderCare Corp. In the event of such sale, the proceeds from such sale
will be distributed among the parties as contemplated by the formula for the Put
option exercise price and Cypress, TPG and Nazem will retain a claim against
Genesis for the difference, if any, between the proceeds of such sale and the
put option exercise price. In the event of a bankruptcy or change of control of
Genesis, the option price shall be payable solely in cash provided any such
payment will be subordinated to the payment of principal and interest under the
Credit Facility.
Legislative and Regulatory Issues
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 or other providers. There can be no assurances that
adjustments from Medicare or Medicaid audits will not have a material adverse
effect on the Company.
Pursuant to the Balanced Budget Act commencing with cost reporting periods
beginning on July 1, 1998, PPS began to be phased in for skilled nursing
facilities at a per diem rate for all covered Part A skilled nursing facility
services as well as many services for which payment may be made under Part when
a beneficiary who is a resident of a skilled nursing facility receives covered
skilled nursing facility care. The consolidated per diem rate is adjusted based
upon the RUG. In addition to covering skilled nursing facility services, this
consolidated payment will also cover rehabilitation and non-rehabilitation
ancillary services. Physician services, certain nurse practitioner and physician
assistant services, among others, are not included in the per diem rate. For the
first three cost reporting periods beginning on or after July 1, 1998, the per
diem rate will be based on a blend of a facility specific-rate and a federal per
diem rate. In subsequent periods, and for facilities first receiving payments
for Medicare services on or after October 1, 1995, the federal per diem rate
will be used without any facility specific blending.
The Balanced Budget Act also required consolidated billing for skilled nursing
facilities. Under the Balanced Budget Act, the skilled nursing facility must
submit all Medicare claims for Part A and Part B services received by its
residents with the exception of physician, nursing, physician assistant and
certain related services, even if such services were provided by outside
suppliers. Medicare will pay the skilled nursing facilities directly for all
services on the consolidated bill and outside suppliers of services to residents
of the skilled nursing facilities must collect payment from the skilled nursing
facility. Although consolidated billing was scheduled to begin July 1, 1998 for
all services, it has been delayed until further notice for beneficiaries in a
Medicare Part A stay in a skilled nursing facility not yet using PPS and for the
Medicare Part B stay. There can be no assurance that the Company will be able to
provide skilled nursing services at a cost below the established Medicare level.
34
Effective April 10, 1998, regulations were adopted by the Health Care Financing
Administration, which revise the methodology for determining the reasonable cost
for contract therapy services, including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. Under the regulations, the
reasonable costs for contract therapy services are limited to
geographically-adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect.
The Balanced Budget Act also repealed the Boren Amendment federal payment
standard for Medicaid payments to Medicaid nursing facilities effective October
1, 1997. The Boren Amendment required Medicaid payments to certain health care
providers to be reasonable and adequate in order to cover the costs of
efficiently and economically operated health care facilities. States must now
use a public notice and comment period in order to determine rates and provide
interested parties a reasonable opportunity to comment on proposed rates and the
justification for and the methodology used in calculating such rates. There can
be no assurance that budget constraints or other factors will not cause states
to reduce Medicaid reimbursement to nursing facilities and pharmacies or that
payments to nursing facilities and pharmacies will be made on timely basis. The
law also grants greater flexibility to states to establish Medicaid managed care
projects without the need to obtain a federal waiver. Although these waiver
projects generally exempt institutional care, including nursing facilities and
institutional pharmacy services, no assurances can be given that these projects
ultimately will not change the reimbursement system for long-term care,
including pharmacy services from fee-for-service to managed care negotiated or
capitated rates. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies.
In July 1998, the Clinton Administration issued a new initiative to promote the
quality of care in nursing homes. This initiative includes, but is not limited
to (i) increased enforcement of nursing home safety and quality regulations;
(ii) increased federal oversight of state inspections of nursing homes; (iii)
prosecution of egregious violations of regulations governing nursing homes; (iv)
the publication of nursing home survey results on the Internet; and (v)
continuation of the development of the Minimum Data Set ("MDS"), a national
automated clinical data system. Accordingly, with this new initiative, it may
become more difficult for eldercare facilities to maintain licensing and
certification. The Company may experience increased costs in connection with
maintaining its licenses and certifications as well as increased enforcement
actions. In addition, beginning January 1, 1999, outpatient therapy services
furnished by a skilled nursing facility to a resident not under a covered Part A
stay or to non-residents who receive outpatient rehabilitation services will be
paid according to the Medicare Physician Fee Schedule.
Anticipated Impact of Healthcare Reform
Based upon the Company's recent experience with 11 eldercare centers which it
manages that transitioned to PPS effective July 1, 1998 and based upon the
Company's ongoing budget process for its fiscal year ending September 30, 1999,
the Company believes that the impact of PPS on the Company's future earnings is
likely to be greater than originally anticipated by management due to various
factors, including lower than anticipated Medicare per diem revenues, lower than
anticipated Medicare Part B revenues caused by a census shift to Medicare
patients having a greater length of stay, higher than expected ancillary costs
at the centers due to expanded services covered in the Medicare Part A rates,
lower than anticipated routine cost reductions and lower than expected revenues
for contract therapy services.
35
Based upon assumptions, the Company estimates that the adverse revenue impact of
PPS in Fiscal 1999 will be approximately $28,000,000 on the Genesis centers and
approximately $18,000,000 on the Multicare centers. In each of Fiscal 2000-2002,
the Company estimates the adverse revenue impact of PPS on its Genesis centers
will approximate an additional $8,000,000. The Company estimates that the
adverse revenue impact of PPS on the Multicare eldercare centers will be
approximately an additional $13,000,000 in Fiscal 2000 and an additional
$5,000,000 in each of Fiscal 2001 and 2002. The Genesis eldercare centers began
implementation of PPS on October 1, 1998 and the majority of the Multicare
eldercare centers will begin implementation of PPS on January 1, 1999. The
actual impact of PPS on the Company's earnings in Fiscal 1999 will depend on
many variables which can not be quantified at this time, including regulatory
changes, patient acuity, patient length of stay, Medicare census, referral
patterns, ability to reduce costs and growth of ancillary business.
Other
In October 1996, 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 Geriatric and Medical Companies (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 December 1997, the Company purchased approximately 1,000,000 long-term call
options on the Company's Common Stock. The Company's Board of Directors approved
the purchase of up to 1,500,000 call options. The call options are purchased by
the Company in privately negotiated transactions designated to take advantage of
attractive share price levels, as determined by the Company's management, in
compliance with covenants governing existing financing arrangements. The timing
and the terms of the transactions, including maturities, will depend on market
conditions, the Company's liquidity and covenant requirements under its
financing arrangements, and other considerations. The Board of Directors also
approved a Senior Executive Stock Ownership Program. Under the terms of the
program, certain of the Company's current senior executive employees will be
required to own shares of the Company's Common Stock having a market value based
upon a multiple of the executive's salary. Each executive is required to own the
shares within three years of the date of the adoption of the program. Subject to
applicable laws, the Company may lend funds to one or more of the senior
executive employees for his or her purchase of the Company's Common Stock. As of
September 30, 1998, the Company loaned approximately $3,000,000 to senior
executive employees to purchase the Company's Common Stock.
Certain of the Company's other 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.
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 9, 1998, approximately $1,084,800,000 was outstanding under the Credit
Facility, and approximately $50,600,000 was available under the Credit Facility
after giving effect to approximately $16,700,000 in outstanding letters of
credit issued under the Credit Facility.
36
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."
Year 2000 Compliance
The Company has implemented a process to address its Year 2000 compliance
issues. The process includes (i) an inventory and assessment of the compliance
of the essential systems and equipment of the Company and of year 2000 mission
critical suppliers, customers, and other third parties, (ii) the remediation of
non-compliant systems and equipment, and (iii) contingency planning. The Company
is in the process of conducting its inventory, assessment and remediation of its
information technology ("IT") systems, equipment and non-IT systems and
equipment (embedded technology) and has completed approximately 70% of its
internal inventory and assessment and approximately 30% of the systems and
equipment of critical suppliers, customers and other third parties.
With respect to the Year 2000 compliance of critical third parties, the Company
derives a substantial portion of its revenues from the Medicare and Medicaid
programs. Congress' General Accounting Office ("GAO") recently concluded that it
is highly unlikely that all Medicare systems will be compliant on time to ensure
the delivery of uninterrupted benefits and services into the Year 2000. While
the Company does not receive payments directly from Medicare, but from
intermediaries, the GAO statement is interpreted to apply as well to these
intermediaries. The Company intends to actively confirm the Year 2000 readiness
status for each intermediary and to work cooperatively to ensure appropriate
continuing payments for services rendered to all government-insured patients.
The Company is remediating its critical IT and non-IT systems and equipment. The
Company has also begun contingency planning in the event that essential systems
and equipment fail to be Year 2000 compliant. The Company is planning to be Year
2000 complaint for all its essential systems and equipment by September 30,
1999, although there can be no assurance that it will achieve its objective by
such date or by January 1, 2000, or that such potential non-compliance will not
have a material adverse effect on the Company's business, financial condition or
results of operations. In addition there can be no assurance that all of the
Company's critical suppliers and other third parties will be Year 2000 complaint
by January 1, 2000, or that such potential non-compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $1,000,000, of which
approximately $500,000 has been spent through September 30, 1998. The Company's
Year 2000 efforts are ongoing and its overall plan and cost estimations will
continue to evolve, as new information becomes available. The Company's analysis
of its Year 2000 issues is based in part on information from third party
suppliers; there can be no assurance that such information is accurate or
complete.
The failure of the Company or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in interruptions
of normal business work operations. The Company's potential risks include (i)
the inability to deliver patient care related services in the Company's
facilities and / or in non-affiliated facilities, (ii) the delayed receipt of
reimbursement from the Federal or State governments, private payors, or
intermediaries, (iii) the failure of security systems, elevators, heating
systems or other operational systems and equipment of the Company's facilities
and (iv) the inability to receive critical equipment and supplies from vendors.
Each of these events could have a material adverse affect on the Company's
business, results of operations and financial condition.
37
Contingency plans for the Company's Year 2000-related issues continue to be
developed and include, but are not limited to, identification of alternate
suppliers, alternate technologies and alternate manual systems. The Company is
planning to have contingency plans completed for essential systems and equipment
by June 30, 1999; however, there can be no assurance that it will meet this
objective by such date or by January 1, 2000.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Company or to products or services
offered by the Company, is also intended to be "Year 2000 Readiness Disclosure"
as such term is defined in the Year 2000 Act.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board, (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement is effective
for fiscal years beginning after December 15, 1997, or the Company's fiscal year
end September 30, 1999. The Company plans to adopt this accounting standard as
required. The adoption of this standard will have no material impact on the
Company's earnings, financial condition or liquidity, but will require the
Company to classify items other than comprehensive income in the financial
statements and display the accumulated balance of other comprehensive income
separately in the equity section of the balance sheet.
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"). Statement 131 supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting of a Business Enterprise, and establishes
new standards for reporting information about operation segments in annual
financial statements and requires selected information about operating segments
in interim financial reports. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Statement 131 is effective for years beginning after December 15,
1997, or the Company's fiscal year end September 30, 1999. This statement
affects reporting in financial statements only and will have no impact on the
Company's results of operations, financial condition or liquidity.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("Statement 98-1"). Once the capitalization criteria
of Statement 98-1 have been met, external directs costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the internal-use computer software project (to the extent
of the time spent directly on the project); and interest costs incurred when
developing computer software for internal use should be capitalized. Training
costs and data conversion costs, should be expensed as incurred. Statement 98-1
is effective for financial statements for fiscal years beginning after December
15, 1998, with earlier application encouraged. The Company adopted the
provisions of Statement 98-1 in its fiscal year ended September 30, 1998.
38
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities (the "Statement").
The Statement requires costs of start-up activities, including organizational
costs, to be expensed as incurred. Start-up activities are defined as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting businesses in a new territory, conducting business with a
new process in an existing facility, or commencing a new operation. The
Statement is effective for fiscal years beginning after December 15, 1998 or the
Company's fiscal year ending September 30, 2000. The Company currently estimates
the adoption of the Statement will result in a charge of approximately
$1,500,000, net of tax, which will be recorded as a cumulative effect of a
change in accounting principle.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters beginning after June 15, 1999. The Company intends to adopt
this accounting standard as required. The adoption of this standard is not
expected to have a material impact on the Company's earnings or financial
position.
39
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Genesis Health
Ventures, Inc. and subsidiaries as of September 30, 1998 and 1997 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
December 15, 1998
40
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Assets (in thousands except share and per share data)
Current assets:
Cash and equivalents $ 4,902 $ 11,651
Investments in marketable securities 26,658 14,729
Accounts receivable, net of allowance for doubtful accounts
of $73,719 in 1998 and $39,418 in 1997 376,023 205,129
Cost report receivables 62,257 60,865
Inventory 63,760 25,568
Prepaid expenses and other current assets 40,579 34,495
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 574,179 352,437
- ------------------------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net 596,562 578,397
Notes receivable and other investments 47,623 108,714
Other long-term assets 73,904 31,722
Investments in unconsolidated affiliates 344,567 2,887
Goodwill and other intangibles, net 990,533 359,956
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $2,627,368 $1,434,113
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 49,712 $ 8,273
Accounts payable 80,980 47,547
Accrued expenses 59,474 33,835
Accrued compensation 59,371 23,116
Accrued interest 18,924 12,736
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 268,461 125,507
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,358,595 651,667
Deferred income taxes 72,828 37,745
Deferred gains and other long-term liabilities 52,412 11,173
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 590,253 issued and outstanding at September 30, 1998 6 -
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,225,731 and 35,180,130 at September 30, 1998;
35,117,075 and 35,071,474 at September 30, 1997 704 702
Additional paid-in capital 749,491 457,232
Retained earnings 124,430 150,330
Net unrealized gain on marketable securities 684 -
Treasury stock, at cost (243) (243)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 875,072 608,021
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,627,368 $1,434,113
====================================================================================================================================
See accompanying notes to consolidated financial statements
i
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Net revenues:
Basic healthcare services $ 554,855 $ 549,963 $ 348,016
Specialty medical services 736,541 502,382 290,428
Management services and other, net 113,909 47,478 33,025
- ---------------------------------------------------------------------------------------------------------------------------------
Total net revenues 1,405,305 1,099,823 671,469
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 597,513 512,317 315,494
Other operating expenses 525,106 346,599 201,866
General corporate expense 53,179 41,039 25,840
Loss on impairment of assets 94,817 15,000 -
Depreciation and amortization 52,385 41,946 25,374
Lease expense 31,182 28,587 18,638
Interest expense, net 82,088 39,103 24,926
Debenture conversion expense - - 1,245
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, equity in net income
of unconsolidated affiliates and extraordinary items (30,965) 75,232 58,086
Income taxes (8,158) 27,088 20,917
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in net income of unconsolidated
affiliates and extraordinary items (22,807) 48,144 37,169
Equity in net income of unconsolidated affiliates 486 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary items (22,321) 48,144 37,169
Extraordinary items, net of tax (1,924) (553) -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (24,245) 47,591 37,169
Preferred stock dividend 1,655 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders (25,900) 47,591 37,169
=================================================================================================================================
Per common share data:
Basic
Earnings (loss) before extraordinary items $ (0.68) $ 1.39 $ 1.40
Net income (loss) $ (0.74) $ 1.38 $ 1.40
Weighted average shares of common stock and equivalents 35,159,195 34,557,874 26,541,980
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted
Earnings (loss) before extraordinary items $ (0.68) $ 1.34 $ 1.29
Net income (loss) $ (0.74) $ 1.33 $ 1.29
Weighted average shares of common stock and equivalents 35,159,195 36,119,820 31,058,214
=================================================================================================================================
See accompanying notes to consolidated financial statements
ii
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Series G
cumulative
convertible Additional
(Dollars in thousands) Common preferred paid-in Retained
stock stock capital earnings
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $294 $ - $155,927 $ 65,570
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of additional common stock,
net of issuance costs 136 - 211,529 -
Conversion of Debentures 42 - 41,676 -
Exercise of common stock options 5 - 2,503 -
Effect of stock split 163 - (163) -
1996 net earnings - - - 37,169
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $640 $ - $411,472 $102,739
- -----------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 4 - 2,815 -
Conversion of Debentures 58 - 42,945 -
1997 net earnings - - - 47,591
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $702 $ - $457,232 $150,330
- -----------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 2 - 1,587 -
Purchase of common stock call options - - (4,442) -
Issuance of Series G Cumulative Convertible Preferred Stock - 6 295,114 -
Net unrealized gain on marketable securities - - - -
1998 net loss - - - (25,900)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $704 $ 6 $749,491 $124,430
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain on
(Dollars in thousands) marketable Treasury
securities stock Total
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $ - $(243) $221,548
- ---------------------------------------------------------------------------------------------------------------
Issuance of additional common stock,
net of issuance costs - - 211,665
Conversion of Debentures - - 41,718
Exercise of common stock options - - 2,508
Effect of stock split - - -
1996 net earnings - - 37,169
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ - $(243) $514,608
- ---------------------------------------------------------------------------------------------------------------
Exercise of common stock options - - 2,819
Conversion of Debentures - - 43,003
1997 net earnings - - 47,591
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ - $(243) $608,021
- ---------------------------------------------------------------------------------------------------------------
Exercise of common stock options - - 1,589
Purchase of common stock call options - - (4,442)
Issuance of Series G Cumulative Convertible Preferred Stock - - 295,120
Net unrealized gain on marketable securities 684 - 684
1998 net loss - - (25,900)
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $684 $(243) $875,072
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
iii
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) $(25,900) $ 47,591 $ 37,169
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes (8,158) 21,023 5,114
Depreciation and amortization 52,385 41,946 25,374
Amortization of deferred gains and debt premiums (1,700) (858) (460)
Loss on impairment of assets 94,817 15,000 -
Equity in net income of unconsolidated affiliates (486) - -
Debenture conversion expense - - 1,245
Extraordinary items, net of tax 1,924 553 -
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable (57,882) (41,801) (6,256)
Cost reports receivable (1,469) (17,447) (15,647)
Inventory (4,942) (5,938) (2,061)
Prepaid expenses and other current assets (4,989) (4,529) 1,955
Accounts payable and accrued expenses 7,192 1,618 (8,707)
Income taxes payable 27,163 (3,804) (1,494)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 103,855 5,763 (937)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 77,955 53,354 36,232
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of marketable securities (22,764) (27,022) (3,909)
Proceeds on maturity or sale of marketable securities 10,835 17,809 1,847
Capital expenditures (56,663) (61,102) (38,645)
Payments for acquisitions, net of cash acquired (400,576) (257,837) (215,874)
Investments in unconsolidated affiliates (344,081) - -
Proceeds from assets sold, net 91,495 - 21,521
Reductions in notes receivable and other investments 52,410 1,943 6,913
Additions to notes receivable and other investments (15,947) (14,747) (49,026)
Other long term asset additions, net (15,446) (7,816) (7,871)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (700,737) (348,772) (285,044)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving credit facility 100,500 176,683 50,798
Repayment of long term debt and payment of sinking fund requirments (69,540) (7,946) (2,539)
Proceeds from issuance of long-term debt 611,243 126,500 -
Debt issuance costs (23,317) (3,750) -
Purchase of common stock call options (4,442) - -
Proceeds from issuance of common stock - - 211,250
Stock issuance costs - - (9,585)
Debenture conversion expense - - (1,245)
Stock options exercised 1,589 2,819 2,508
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 616,033 294,306 251,187
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (6,749) (1,112) 2,375
Cash and equivalents
Beginning of year 11,651 12,763 10,388
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 4,902 $ 11,651 $ 12,763
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 85,557 $ 40,869 $ 24,926
Income taxes paid (recovered) (31,370) 12,357 22,374
Non-cash financing activity - issuance of Genesis
Series G Cumulative Convertible Preferred Stock $ 295,120 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
iv
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.
Investments in unconsolidated affiliated companies, owned 20% to 50% inclusive,
are stated at cost of acquisition plus the Company's equity in undistributed net
income (loss) since acquisition. The change in the equity in net income (loss)
of these companies is reflected as a component of net income or loss on the
Consolidated Statement of Operations.
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 the current year presentation.
Business
The Company provides a broad range of healthcare services to the geriatric
population, principally within five 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.
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 customer 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.
Cash Equivalents
Short-term investments which have a maturity of ninety days or less at
acquisition are considered cash equivalents.
Investments in Marketable Securities
Marketable securities, which comprises fixed interest securities and money
market funds are considered to be available for sale and accordingly are
reported at fair value with unrealized gains and losses reported as a separate
component of shareholders' equity, net of related tax effects. Fair values for
fixed interest securities are based on quoted market prices.
A decline in the market value of any security below cost that is deemed other
than temporary is charged to earnings, resulting in the establishment of a new
cost basis for the security.
Premiums and discounts on fixed interest securities are amortized or accreted
over the life of the related security as an adjustment to yield using the
straight-line method. Realized gains and losses for securities classified as
available for sale are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
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.
Property, Plant and Equipment
Land, land improvements, buildings, and equipment are stated at cost.
Depreciation is calculated on the straight-line method over estimated useful
lives of 20-35 years for land improvements and buildings, and three to fifteen
years for equipment, furniture, fixtures and information systems. 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.
The Company records impairment losses on long-lived assets including property,
plant and equipment used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
41
Deferred Financing Costs
Financing costs have been deferred and are being amortized on a straight-line
basis, which approximates the effective interest method, over the term of the
related debt. Deferred financing costs, net of accumulated amortization of
$8,705 and $4,972 were $29,566 and $12,939 at September 30, 1998 and 1997,
respectively, and are included in other long term assets.
Goodwill and Other Intangibles
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, before accumulated amortization of $29,900 and $20,900,
was $1,000,100 and $371,900 at September 30, 1998 and 1997, respectively.
Goodwill and other intangibles increased in 1998 principally as a result of the
purchase of Vitalink Pharmacy Services, Inc. (approximately $606,000, subject to
finalization), the purchase of the Multicare rehabilitation services business
(approximately $20,000, subject to finalization), the purchase of the Multicare
pharmacy business (approximately $35,000, subject to finalization), offset by
non-cash asset impairment write-offs (approximately $34,000). 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.
The Company records impairment losses on long-lived assets including goodwill
and other intangibles used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
With respect to the carrying value of the excess of cost over net asset value of
purchased facilities and other intangible assets, the Company determines on a
quarterly basis whether an impairment event has occurred by considering factors
such as the market value of the asset; a significant adverse change in legal
factors or in the business climate; adverse regulatory action; a history of
operating or cash flow losses; or a projection of continuing losses associated
with an operating entity. The carrying value of excess cost over net asset value
of purchased facilities and other intangible assets will be evaluated if the
facts and circumstances suggest that it has been impaired. If this evaluation
indicates that the value of the asset will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, an impairment loss is calculated based on excess of the
carrying amount of the asset over the asset's fair value.
42
Income Taxes
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
In the first quarter of 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("Statement 128").
Statement 128, which makes the standards for computing earnings per share more
comparable to international standards, replaces the presentation of primary and
fully diluted earnings per share with a presentation of basic and diluted
earnings per share. Statement 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement of all entities
with complex capital structures. The Company has restated its earnings per share
data for the twelve months ended September 30, 1997 and 1996 to conform to the
provisions of Statement 128. The following table sets forth the computation of
basic and diluted earnings per share applicable to common shares:
(amounts are in thousands except per share data): Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
-----------------------------------------------
Basic Earnings (Loss) Per Share:
Income (loss) before extraordinary items $(23,976) $48,144 $37,169
Extraordinary items (1,924) (553) -
-----------------------------------------------
Net income (loss) $(25,900) $47,591 $37,169
-----------------------------------------------
-----------------------------------------------
Weighted Average Shares 35,159 34,558 26,542
-----------------------------------------------
Earnings (loss) per share before extraordinary items $ (0.68) $ 1.39 $ 1.40
Loss per share - extraordinary items (0.05) (0.02) -
-----------------------------------------------
Earnings (loss) per share $ (0.74) $ 1.38 $ 1.40
-----------------------------------------------
Diluted Earnings (Loss) Per Share:
Income (loss) before extraordinary items $(23,976) $48,144 $37,169
Extraordinary items (1,924) (553) -
-----------------------------------------------
Net income (loss) $(25,900) $47,591 $37,169
Adjustments to net income (loss) for interest
expense, amortization and other costs related to the
assumed conversion of convertible debentures - 303 2,812
-----------------------------------------------
Adjusted net income (loss) $(25,900) $47,894 $39,981
-----------------------------------------------
Weighted Average Shares & Common Stock Equivalents:
Weighted average shares 35,159 34,558 26,542
Dilutive effect of unexercised stock options - 1,125 884
Convertible debenture shares - 437 3,632
-----------------------------------------------
Total 35,159 36,120 31,058
-----------------------------------------------
Earnings (loss) per share before extraordinary items $ (0.68) $ 1.34 $ 1.29
Loss per share - extraordinary items (0.05) (0.02) -
-----------------------------------------------
Earnings (loss) per share $ (0.74) $ 1.33 $ 1.29
-----------------------------------------------
43
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board, (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement is effective
for fiscal years beginning after December 15, 1997, or the Company's fiscal year
ended September 30, 1999. The Company plans to adopt this accounting standard as
required. The adoption of this standard will have no material impact on the
Company's earnings, financial condition or liquidity, but will require the
Company to classify items of comprehensive income in the financial statements
and display the accumulated balance of other comprehensive income separately in
the equity section of the balance sheet.
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"). Statement 131 supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting of a Business Enterprise, and establishes
new standards for reporting information about operation segments in annual
financial statements and requires selected information about operating segments
in interim financial reports. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Statement 131 is effective for years beginning after December 15,
1997, or the Company's fiscal year end September 30, 1999. This statement
affects reporting in financial statements only and will have no impact on the
Company's results of operations, financial condition or liquidity.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("Statement 98-1"). Once the capitalization criteria
of Statement 98-1 have been met, external directs costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the internal-use computer software project (to the extent
of the time spent directly on the project); and interest costs incurred when
developing computer software for internal use should be capitalized. Training
costs and data conversion costs, should be expensed as incurred. Statement 98-1
is effective for financial statements for fiscal years beginning after December
15, 1998, with earlier application encouraged. The Company adopted the
provisions of Statement 98-1 in its fiscal year ended September 30, 1998.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities (the "Statement").
The Statement requires costs of start-up activities, including organizational
costs, to be expensed as incurred. Start-up activities are defined as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting businesses in a new territory, conducting business with a
new process in an existing facility, or commencing a new operation. The
Statement is effective for fiscal years beginning after December 15, 1998 or the
Company's fiscal year ending September 30, 2000. The Company currently estimates
the adoption of the Statement will result in a charge of approximately $1,500,
net of tax, which will be recorded as a cumulative effect of a change in
accounting principle.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters beginning after June 15, 1999. The Company intends to adopt
this accounting standard as required. The adoption of this standard is not
expected to have a material impact on the Company's earnings or financial
position.
44
(2) Acquisitions/Dispositions
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
to receive (i) .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Genesis Preferred"), (ii) $22.50 in cash,
or (iii) a combination of cash and shares of Genesis Preferred (collectively,
the "Merger Consideration"). The Merger Consideration paid to stockholders of
Vitalink to acquire their shares (including shares which may have been issued
upon the exercise of outstanding options) was $590,200, of which 50% was paid in
cash and 50% in Genesis Preferred. The Genesis Preferred has a face value of
approximately $295,100 and an initial dividend of 5.9375% and generally is not
transferable without the consent of the Company. The Genesis Preferred is
convertible into Genesis common stock, par value $.02 per share (the "Common
Stock"), at $37.20 per share and it may be called for conversion after April 26,
2001, provided the price of Common Stock reaches certain trading levels and
after April 26, 2002, subject to a market-based call premium. Vitalink's total
net revenues for the fiscal years ended May 31, 1997 and 1998, were $274,000 and
$494,000, respectively. As a result of the merger, Genesis assumed approximately
$87,000 of indebtedness Vitalink had outstanding. The cash portion of the
purchase price was funded through borrowings under the Credit Facility, as
defined. The Vitalink Transaction is being accounted for under the purchase
method and the related goodwill is being amortized over a forty year period.
Pursuant to four agreements with HCR-Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR-Manor Care (the
"Services Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR-Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004, subject to annual renewals
provided therein.
Multicare Transaction
In October 1997, Genesis ElderCare Corp., a Delaware Corporation owned 43.6% by
Genesis and the remainder by The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired The Multicare
Companies, Inc. ("Multicare"), pursuant to a tender offer (the "Tender Offer")
and the merger (the "Merger" or the "Multicare Transaction"). Multicare is in
the business of providing eldercare and specialty medical services in selected
geographic regions. Included among the operations acquired by Genesis ElderCare
Corp. are operations relating to the provision of (i) eldercare services
including skilled nursing care, assisted living, Alzheimer's care and related
support activities traditionally provided in eldercare facilities, (ii)
specialty medical services consisting of (1) sub-acute care such as ventilator
care, intravenous therapy and various forms of coma, pain and wound management
and (2) rehabilitation therapies such as occupational, physical and speech
therapy and stroke and orthopedic rehabilitation and (iii) management services
and consulting services to eldercare centers.
45
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for
its services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of (i) $1,992 and (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare will be paid by Multicare. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000 subject to adjustment (the "Therapy Purchase") and a stock purchase
agreement (the "Pharmacy Purchase Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis acquired all of the outstanding capital
stock and limited partnership interests of certain subsidiaries of Multicare
that are engaged in the business of providing institutional pharmacy services to
third parties for $50,000 (the "Pharmacy Purchase"), subject to adjustment. The
Company completed the Pharmacy Purchase effective January 1, 1998, which was
accounted for under the purchase method and the related goodwill is being
amortized over forty years. The Therapy Purchase was completed in October 1997
and is accounted for under the purchase method with the related goodwill
amortized over twenty years.
In addition, Genesis, Cypress, TPG and Nazem entered into an agreement (the
"Put/Call Agreement") pursuant to which, among other things, Genesis has the
option, on the terms and conditions set forth in the Put/Call Agreement to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter,
at a price determined pursuant to the terms of the Put/Call Agreement. Cypress,
TPG and Nazem have the option, on the terms and conditions set forth in the
Put/Call Agreement, to require Genesis to purchase (the "Put") such Genesis
ElderCare Corp. common stock commencing on October 9, 2002 and for a period of
one year thereafter, at a price determined pursuant to the Put/Call Agreement.
Genesis Eldercare Corp. paid approximately $1,492,000 to (i) purchase the shares
pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses incurred
in connection with the completion of the Tender Offer, Merger and the financing
transactions in connection therewith, (iii) refinance certain indebtedness of
Multicare and (iv) make certain cash payments to employees. Of the funds
required to finance the foregoing, approximately $745,000 were furnished as
capital contributions by the Genesis Eldercare Corp. from the sale of its common
stock to Cypress, TPG, Nazem and Genesis. Cypress, TPG and Nazem purchased
shares of Genesis ElderCare Corp. common stock for a purchase price of $210,000,
$199,500 and $10,500, respectively, and Genesis purchased shares of Genesis
ElderCare Corp. common stock for a purchase price of $325,000 in consideration
for 43.6% of the common stock of Genesis ElderCare Corp. The balance of the
funds necessary to finance the foregoing came from (i) the proceeds of loans
from a syndicate of lenders in the aggregate amount of $525,000 and (ii)
$246,800 of bridge financing which was refinanced upon completion of the sale of
9% Senior Subordinated Notes due 2007 sold by a subsidiary of Genesis ElderCare
Corp. on August 11, 1997.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis
ElderCare Corp. common stock, plus a portion of the Genesis pharmacy business
(the "Calculated Equity Value"). The Calculated Equity Value will be determined
based upon a multiple of Genesis ElderCare Corp.'s earnings before interest,
taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR")
after deduction of certain liabilities, plus a portion of the EBITDAR related to
the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend
on whether the Put or the Call is being exercised. Any payment to Cypress, TPG
or Nazem under the Call or the Put may be in the form of cash or Genesis Common
Stock at Genesis' option.
46
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. common stock
will be determined on the basis set forth in the Put/Call Agreement which
provides generally for additional Calculated Equity Value of Genesis ElderCare
Corp. to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of
the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress,
TPG or Nazem; and any payment to Cypress, TPG or Nazem will be limited to
Cypress' TPG's or Nazem's share of the Calculated Equity Value based upon a
formula set forth in the terms of the Put/Call Agreement.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis, an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement, dated
October 9, 1997, by and among the Company, Genesis ElderCare Corp., Cyrpess, TPG
and Nazem, and the Management Agreement and to control the sale or liquidation
of Genesis ElderCare Corp. In the event of such sale, the proceeds from such
sale will be distributed among the parties as contemplated by the formula for
the Put option exercise price and Cypress, TPG and Nazem will retain a claim
against Genesis for the difference, if any, between the proceeds of such sale
and the put option exercise price. In the event of a bankruptcy or change of
control of Genesis, the option price shall be payable solely in cash provided
any such payment will be subordinated to the payment of principal and interest
under the Credit Facility.
Geriatric & Medical Companies, Inc.
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, was 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, 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. The acquisition was accounted for as a purchase with the related
goodwill being amortized over a period of forty years.
National Health Care Affiliates
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 a then
existing $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. The acquisition was
accounted for as a purchase, with the related goodwill being amortized over 40
years.
47
NeighborCare Pharmacies, Inc.
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. The acquisition was
accounted for as a purchase, with the related goodwill being amortized over 40
years. .
McKerley Health Care
On November 30, 1995, the Company acquired McKerley Health Care Centers
("McKerley") for total consideration of approximately $68,700. The transaction
(the "McKerley Transaction") also provided for up to an additional $6,000 of
contingent consideration payable upon the achievement of certain financial
objectives through October 1997, of which $4,000 was paid in February 1997.
McKerley added to Genesis 15 geriatric care facilities in New Hampshire and
Vermont with a total of 1,535 beds. McKerley also operates a home healthcare
company. The acquisition was financed with borrowings under the Credit Facility
and assumed indebtedness. The acquisition was accounted for as a purchase, with
the related goodwill being amortized over 40 years.
Other Transactions
In December 1997, the Company purchased approximately 1,000,000 long-term call
options on the Company's Common Stock. The Company's Board of Directors approved
the purchase of up to 1,500,000 call options. The call options are purchased by
the Company in privately negotiated transactions designated to take advantage of
attractive share price levels, as determined by the Company's management, in
compliance with covenants governing existing financing arrangements. The timing
and the terms of the transactions, including maturities, will depend on market
conditions, the Company's liquidity and covenant requirements under its
financing arrangements, and other considerations. The Board of Directors also
approved a Senior Executive Stock Ownership Program. Under the terms of the
program, certain of the Company's current senior executive employees will be
required to own shares of the Company's Common Stock having a market value based
upon a multiple of the executive's salary. Each executive is required to own the
shares within three years of the date of the adoption of the program. Subject to
applicable laws, the Company may lend funds to one or more of the senior
executive employees for his or her purchase of the Company's Common Stock. As of
September 30, 1998, the Company loaned approximately $3,000,000 to senior
executive employees to purchase the Company's 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. The acquisition
was accounted for as a purchase.
48
The following unaudited pro forma statement of operations information
gives effect to the Multicare Transaction, the Therapy Purchase, the Pharmacy
Purchase and the Vitalink Transaction described above as though they had
occurred on October 1, 1996, 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. 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.
(Unaudited) 1998 1997
- ------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
- ------------------------------------------------------------------------------
Total net revenues $1,878,622 $1,718,010
Earnings (loss) before extraordinary item (31,068) 34,793
Net income (loss) available to common shareholders (32,992) 34,240
Diluted earnings (loss) per common share before
extraordinary item (0.88) 0.96
Diluted earnings (loss) per common share $ (0.94) $ 0.95
- ------------------------------------------------------------------------------
(3) Investments in Marketable Securities
Marketable securities at September 30, 1998 consist of the following:
Amortized Unrealized Fair
cost gains Value
------------------------------------------
U.S Treasury Notes $ 3,102 $ 36 $ 3,138
Mortgage backed securities 12,016 809 12,825
Corporate bonds 6,651 197 6,848
Money market funds 3,837 10 3,847
------------------------------------------
$25,606 $1,052 $26,658
------------------------------------------
Marketable securities at September 30, 1997 consist of the following:
Amortized Unrealized Unrealized Fair
cost gains losses Value
------------------------------------------------------
U.S Treasury Bills $ 942 $ - $ - $ 942
U.S. Treasury Notes 2,094 - (17) 2,077
Mortgage backed securities 11,496 169 (5) 11,660
Money market funds 50 - - 50
------------------------------------------------------
$14,582 $169 $(22) $14,729
------------------------------------------------------
49
Fixed interest securities held at September 30, 1998 and 1997 mature as follows:
1998 1997
----------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
----------------------------------------------------
Due in one year or less $ 3,001 $ 3,015 $ 1,439 $ 1,440
Due after 1 year through 5 years 8,187 8,427 6,904 7,045
Due after 5 years through 10 years 8,999 9,712 6,189 6,194
Due after 10 years 1,582 1,657 - -
----------------------------------------------------
$21,769 $22,811 $14,532 $14,679
----------------------------------------------------
Actual maturities may differ from stated maturities because borrowers have the
right to call or prepay certain obligations with or without prepayment
penalties. There were no significant realized gains or losses in 1998, 1997 or
1996.
(4) Property, Plant and Equipment
Property, plant and equipment at September 30, 1998 and 1997 consist of the
following:
September 30,
1998 1997
- --------------------------------------------------------------------------
Land $ 39,244 $ 38,163
Land improvements 5,656 5,064
Buildings 451,440 471,520
Equipment, furniture and fixtures 180,632 120,734
Construction in progress 40,778 36,456
- --------------------------------------------------------------------------
717,750 671,937
Less accumulated depreciation (121,188) (93,540)
- --------------------------------------------------------------------------
Net property, plant and equipment $596,562 $578,397
- --------------------------------------------------------------------------
(5) Long-term Debt
Long-term debt at September 30, 1998 and 1997 was as follows:
September 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------
Secured - due 1999 to 2034;
7.38% to 11.60% (weighted average interest rate 1998 - 8.47%;
1997 - 7.76%) $1,151,292 $ 401,484
Unsecured - due 1999 to 2008
6.64% to 11.00% (weighted average interest rate 1998 - 9.44%;
1997 - 9.43%) 251,915 252,670
- ------------------------------------------------------------------------------------------------------------
1,403,207 654,154
Plus:
Debt premium, net of amortization 5,482 6,032
Less:
Debt discount, net of amortization (382) (246)
Current installments and short-term borrowings (49,712) (8,273)
- ------------------------------------------------------------------------------------------------------------
1,358,595 $651,667
- ------------------------------------------------------------------------------------------------------------
At September 30, 1998 and 1997, the Company's long-term debt included
approximately $1,032,889 and $300,000 of floating rate debt based on Prime or
LIBO Rate with weighted average interest rates of 8.36% and 7.10%, respectively.
At September 30, 1998 and 1997, the Company's long-term debt consisted of
approximately $370,318 and $354,154 of fixed rate debt with weighted average
interest rates of 9.40% and 9.42%, respectively.
50
Genesis entered into a credit agreement pursuant to which the lenders provided
Genesis and its subsidiaries a credit facility totaling $1,250,000 (the "Credit
Facility") for the purpose of: refinancing certain existing indebtedness of
Genesis; funding interest and principal payments on the facilities and certain
remaining indebtedness; funding permitted acquisitions; funding Genesis'
commitments in connection with the Vitalink Transaction; and funding Genesis'
and its subsidiaries' working capital for general corporate purposes, including
fees and expenses of the transactions. The Credit Facility consists of three
$200,000 term loans (collectively, the "Term Loans"), a $650,000 revolving
credit loan (the "Revolving Facility") which includes one or more Swing Loans
(collectively, the "Swing Loan Facility") in integral principal multiples of
$500 up to an aggregate unpaid principal amount of $15,000. The Term Loans
amortize in quarterly installments beginning in Fiscal 1998 through 2005, of
which $24,419 is payable in Fiscal 1999. The Term Loans consist of (i) a
$200,000 six year term loan (the "Tranche A Term Facility"); (ii) a $200,000
seven year term loan (the "Tranche B Term Facility"); and (iii) a $200,000 eight
year term loan (the "Tranche C Term Facility"). The Revolving Facility becomes
payable in full on September 30, 2003. The third amendment to the Credit
Facility, dated December 15, 1998, made the financial covenants for certain
periods less restrictive, permitted the proceeds of subordinated debt offerings
to repay indebtedness under the Revolving Facility and increased the interest
rates applying to the Term Loans and the Revolving Facility. The revised
financial covenants reflect the impact of PPS and the non-cash charges in the
fourth quarter of 1998.
The Credit Facility is secured by a first priority security interest in all of
the stock, partnership interests and other equity of all of Genesis' present and
future subsidiaries (including Genesis Elder Care Corp.) other than the stock of
Multicare and its subsidiaries. Loans under the Credit Facility bear, at
Genesis' option, interest at the per annum Prime Rate as announced by the
administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin that is dependent upon a certain financial covenant test. The
following interest rates reflect the impact of the third amended credit facility
entered into subsequent to fiscal year end. Loans under the Tranche A Term
Facility and Revolving Facility bear interest at an annual rate of .75% for
Prime Rate loans and 2.5% for LIBO Rate loans (8.14% at September 30, 1998).
Loans under the Tranche B Term Facility bear interest at an annual rate of 1.25%
for Prime Rate loans and 3.0% for LIBO Rate loans (8.64% at September 30, 1998).
Loans under the Tranche C Term Facility bear interest at an annual rate of 1.5%
for Prime Rate loans and 3.25% for LIBO Rate loans (8.89% at September 30,
1998). Loans under the Swing Loan Facility bear interest at the Prime Rate
unless otherwise agreed to by the parties. Subject to meeting certain financial
covenants, the above referenced interest rates are reduced.
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of Genesis and its subsidiaries to dispose of assets, incur
additional indebtedness, make loans and investments, pay dividends, engage in
mergers or consolidations, engage in certain transactions with affiliates and
change control of capital stock, and to make capital expenditures; prohibit the
ability of Genesis and its subsidiaries to prepay debt to other persons, make
material changes in accounting and reporting practices, create liens on assets,
give a negative pledge on assets, make acquisitions and amend or modify
documents; causes Genesis and its affiliates to maintain the Management
Agreement, the Put/Call Agreement, as defined, and corporate separateness; and
will cause Genesis to comply with the terms of other material agreements, as
well as comply with usual and customary covenants for transactions of this
nature.
In December 1998, subsequent to the fiscal year end, the Company issued
$125,000, 9 7/8% Senior Subordinated Notes due 2009. Interest on the notes are
payable semi-annually on January 15 and July 15 of each year, commencing July
15, 1999. The Company expects that approximately $59,950 of the net proceeds
will be used to repay portions of the Tranche A, B and C Term Facilities and
approximately $59,950 of the net proceeds will be used to repay a portion of the
Revolving Facility.
In October 1996, the Company completed an offering of $125,000 9 1/4% Senior
Subordinated Notes due 2006. Interest is payable on April 1 and October 1 of
each year. The Company used the net proceeds of approximately $121,250, 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.
51
In November 1996, the Company called for redemption of 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 1996 statement of operations.
In June 1995, the Company completed an offering of $120,000 of 9 3/4 % Senior
Subordinated Notes due 2005. Interest is payable on the notes on June 15 and
December 15 of each year. 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 Credit Facility.
At September 30, 1998, sinking fund requirements and installments of long-term
debt are as follows:
Principal
Year ending September 30, Amount
- -----------------------------------------------------------------------
1999 $ 49,712
2000 48,883
2001 38,874
2002 44,376
2003 574,117
Thereafter $652,345
- -----------------------------------------------------------------------
The Company enters into interest rate swap agreements to manage interest costs
and risks associated with changing interest rates. These agreements generally
convert underlying variable-rate debt based on LIBO Rates into fixed-rate debt.
At September 30, 1998, the notional principal amount of these agreements totaled
$1,100,000 with a net fixed notional amount of $370,000 whereby the Company made
quarterly payments at a weighted average fixed rate of 5.00% and received
quarterly payments at floating rates based on three month LIBO Rate
(approximately 5.64% at September 30, 1998). At September 30, 1997, the notional
principal amount of these agreements totaled $400,000 whereby the Company made
quarterly payments at a weighted average fixed rate of 5.45% and received
payments at a floating rate based on three month LIBO Rate (approximately 5.78%
at September 30, 1997).
Interest of $3,526 in 1998, $2,156 in 1997 and $1,191 in 1996, was capitalized
in connection with facility construction, systems development and renovations.
During fiscal 1998 and 1997, the Company recorded extraordinary losses, net of
tax, of $1,924 and $553, respectively related to the early retirement of debt.
The Company is restricted from declaring any dividends on its Common Stock or
authorizing any other distribution on account of ownership of its capital stock
unless certain conditions are met.
52
(6) 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, 1998 were as follows:
Minimum
Year ending September 30, Payment
- ---------------------------------------------------------------------
1999 $40,545
2000 35,712
2001 32,550
2002 25,674
2003 $24,002
- ---------------------------------------------------------------------
Excluded from the future minimum lease payments above in the year 2001 is
approximately $78,600 related to a residual value guarantee due under a lease
financing facility.
On January 30, 1998, Genesis completed deleveraging transactions with
ElderTrust, a newly formed Maryland healthcare real estate investment trust.
Genesis, a co-registrant on the ElderTrust initial public offering, received
approximately $78,000 in proceeds from the sale and leaseback of 13 properties
to ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000 which has been deferred
and is being amortized over the ten year term of the lease contracts with
ElderTrust. In September 1998, the Company sold its leasehold rights and option
to purchase seven eldercare facilities acquired in its November 1993 acquisition
of Meridian Healthcare, Inc. to ElderTrust for $44,000, including $35,500 in
cash and an $8,500 note. As part of the transaction, Genesis will continue to
sublease the facilities for ten years with an option to extend the lease until
2018 at an initial annual lease obligation of approximately $10,000. The
transaction resulted in a gain of approximately $43,700 which has been deferred
and is being amortized over the ten year lease term of the lease contracts with
ElderTrust.
(7) Patient Service Revenue
The distribution of net patient service revenue by class of payor for the years
ended September 30, 1998, 1997 and 1996 was as follows:
Year ended September 30,
Class of payor 1998 1997 1996
- ------------------------------------------------------------------------
Private pay and other $ 581,128 $ 414,187 $251,244
Medicaid 451,989 385,313 229,838
Medicare 258,279 252,845 157,362
- ------------------------------------------------------------------------
$1,291,396 $1,052,345 $638,444
- ------------------------------------------------------------------------
The above revenue amounts are net of third-party contractual allowances of
$278,804, $213,250 and $122,136, in 1998, 1997 and 1996, respectively. The
Company has recorded cost report receivables from third-party payors (i.e.,
Medicare and Medicaid) of $62,257 and $60,865 at September 30, 1998 and 1997,
respectively. These amounts at September 30, 1998 are due primarily from
Massachusetts ($17,700), Pennsylvania ($5,700), Florida ($2,400) and Medicare
($35,600) for the 1994 through 1998 cost reporting periods. The Company recorded
bad debt expense of $18,016, $12,615 and $4,382 in 1998, 1997 and 1996,
respectively.
53
(8) Income Taxes
Total income tax expense (benefit) for the years ended September 30, 1998, 1997
and 1996 was as follows:
Year ended September 30,
1998 1997 1996
- --------------------------------------------------------------------------------
Income (loss) before extraordinary item $(8,158) $27,088 $20,917
Extraordinary item (1,106) (318) -
- --------------------------------------------------------------------------------
Total $(9,264) $26,770 $20,917
- --------------------------------------------------------------------------------
The components of the provision (benefit) for income taxes for the years ended
September 30, 1998, 1996 and 1995 were as follows:
Year ended September 30,
1998 1997 1996
- ---------------------------------------------------------------
Current:
Federal $ - $ 5,370 $14,508
State - 695 1,295
- ---------------------------------------------------------------
$ - $ 6,065 $15,803
- ---------------------------------------------------------------
Deferred:
Federal $(7,163) $20,781 $ 4,595
State (995) 242 519
- ---------------------------------------------------------------
$(8,158) $21,023 $ 5,114
- ---------------------------------------------------------------
Total $(8,158) $27,088 $20,917
- ---------------------------------------------------------------
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,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Computed "expected" tax expense (benefit) $(10,838) $26,331 $20,330
Increase (reduction) in income taxes resulting from :
State and local income taxes (benefit), net of
federal tax benefits (463) 364 1,179
Amortization of goodwill 3,840 693 235
Targeted jobs tax credits (1,073) (300) -
Tax exempt interest - - (770)
Other, net 376 - (57)
- ----------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (8,158) $27,088 $20,917
- ----------------------------------------------------------------------------------------------------------
54
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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Excess tax depreciation expense versus book
depreciation $ 973 $ 2,525 $1,157
Excess tax gains versus book gains (7,275) (200) (895)
Amortization of deferred gain on sale and leaseback - - 49
Utilization of net operating loss carryforward - 200 (600)
Accrued liabilities and reserves 820 15,000 676
Goodwill 3,689 3,575 3,661
Prepaid rent - - 1,146
Net operating loss (6,128) - -
Other (237) (77) (80)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax provision $(8,158) $21,023 $5,114
- -----------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1998
and 1997 are presented below:
September 30,
1998 1997
- --------------------------------------------------------------------------
Deferred Tax Assets
Accounts receivable $ - $ 5,480
Accrued compensation 444 601
Amortization of deferred gain - 47
Debt premium 2,144 2,144
Accrued liabilities and reserves 11,225 7,966
Net operating loss carryforwards 10,128 4,000
Other, net 1,017 -
- --------------------------------------------------------------------------
Deferred tax assets 24,958 20,238
- --------------------------------------------------------------------------
Valuation allowance (3,400) (3,400)
- --------------------------------------------------------------------------
Net deferred tax assets 21,558 $16,838
- --------------------------------------------------------------------------
Deferred Tax Liabilities
Accounts receivable (3,464) -
Goodwill and other intangibles (39,861) (10,695)
Depreciation (50,242) (43,888)
Accrued liabilities and reserves (819) -
- --------------------------------------------------------------------------
Total deferred tax liability (94,386) (54,583)
- --------------------------------------------------------------------------
Net deferred tax liability $(72,828) $(37,745)
- --------------------------------------------------------------------------
The deferred tax assets related to state net operating loss carryforwards are
available to reduce future state income taxes payable, subject to applicable
carryforward rules and limitations. Due to these limitations, the Company has
established a valuation allowance of $3,400. The net operating loss
carryforwards expire in years 1999 through 2002.
55
(9) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 1998 and 1997 consist of
the following:
September 30,
1998 1997
- -------------------------------------------------------------------------------
Mortgage notes and other notes receivable $41,011 $ 92,164
Investments in non marketable securities 6,612 16,550
- -------------------------------------------------------------------------------
$47,623 $108,714
- -------------------------------------------------------------------------------
Mortgage notes and other notes receivable at September 30, 1998 bear interest at
rates ranging from 7 1/2% to 10% and mature at various times ranging from 1999
to 2006. Approximately $30,869 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.
At September 30, 1997 and 1998, the Company held $10,000 of convertible
preferred stock of Doctors Health, Inc. ("Doctors Health"), an independent
physician owned and controlled integrated delivery system and practice
management company based in Maryland. The convertible preferred stock, which is
accounted for under the cost method, 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 loaned to Doctors
Health $5,000 at an annual interest rate of 11%. On November 16, 1998, a
voluntary petition for Chapter 11 bankruptcy was filed by Doctors Health. In the
fourth quarter of 1998, the Company wrote-off its investment in and loan to
Doctors Health.
During the twelve months ended September 30, 1998, notes receivable and other
investments declined approximately $61,100 principally due to the restructuring
and repayment of a $45,000 mortgage loan and a $10,000 working capital loan with
11 managed eldercare centers in Florida, the impairment write-off of the
Company's convertible preferred stock investment and note receivable with
Doctors Health, offset by an $8,500 note extended to ElderTrust in connection
with the sale of leasehold rights and an option to purchase seven eldercare
centers.
The Company has agreed to provide third parties, including facilities under
management contract, with $21,944 of working capital lines of credit. The unused
portion of working capital lines of credit was $8,322 at September 30, 1998.
(10) Other Long-Term Assets
Other long-term assets at September 30, 1998 and 1997 consist of the following:
September 30,
1998 1997
- ---------------------------------------------------------------------------------------
Deferred financing fees, net $29,567 $12,939
Subordinated management fees receivable from Multicare 14,048 -
Property deposits and funds held in escrow 10,764 7,056
Funds held by trustee 1,415 1,661
Other, net 18,110 10,066
- ---------------------------------------------------------------------------------------
$73,904 $31,722
- ---------------------------------------------------------------------------------------
56
(11) Management Services and Other Income, Net
Included in management services and other income, net were the following:
Year ended September 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Fees earned in connection with management agreements $ 64,178 $18,959 $18,227
Service related businesses 27,809 28,043 9,023
Capitation revenue and transactions with acute care
providers 21,922 - -
Transactional items, net - 476 5,775
- ----------------------------------------------------------------------------------------------------------
$113,909 $47,478 $33,025
- ----------------------------------------------------------------------------------------------------------
In 1998, approximately $42,200 of management fees were earned in connection with
the management of the Multicare operations.
(12) Stock Option Plans
The Company has two stock option plans (the "Employee Plan" and the "Directors
Plan"). Under the Employee Plan, 6,250,000 shares of common stock were reserved
for issuance to employees including officers and directors. Options granted in
the Employee Plan prior to fiscal 1997 generally become excercisable over a five
year period, while options granted subsequent to fiscal 1996 vest 25% in the
year of the grant and 25% over each of the next three years. The options granted
in the Employee Plan 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. Presented below is a summary of the Employee Plan for the
three years ended September 30, 1998.
Option Price Available
per Share Outstanding Exercisable for Grant
- --------------------------------------------------------------------------------------------------------------
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) -
Canceled - (136,269) - 136,269
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $2.22 - $31.87 2,693,442 1,160,327 313,088
- --------------------------------------------------------------------------------------------------------------
Authorized - - - 750,000
Granted $25.00 - $35.25 933,672 - (933,672)
Became Exercisable - - 695,087 -
Exercised $5.33 - $32.88 (191,774) (191,774) -
Canceled - (13,515) - 13,515
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $2.22 - $35.25 3,421,825 1,663,640 142,931
- --------------------------------------------------------------------------------------------------------------
Authorized - - - 1,750,000
Granted $27.12 - $28.75 1,056,905 - (1,056,905)
Became Exercisable - - 757,849 -
Exercised $5.33 - $32.88 (75,052) (75,052) -
Canceled - (249,190) - 249,190
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $2.22 - $35.25 4,154,488 2,346,437 1,085,216
- --------------------------------------------------------------------------------------------------------------
57
In March 1992, the Company adopted, and in February 1993, the shareholders
approved, the Directors Plan. Pursuant to the Directors Plan, options may be
granted for an aggregate of 225,000 shares of common stock. The Directors Plan
terminates ten years after its approval by the shareholders. At September 30,
1998, there were 106,500 options outstanding and excercisable at grant prices
ranging from $7.33 to $35.25.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", and
applies APB Opinion No. 25 in accounting for its plans and, accordingly, has not
recognized compensation cost for stock option plans in its financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date consistent with the provisions of Statement 123, the Company's net
income (loss) would have been changed to the proforma amounts indicated below:
September 30,
1998 1997
- --------------------------------------------------------------------------------
Net income (loss) - as reported $(25,900) $47,591
Net income (loss) - pro forma (31,469) 38,955
Net income (loss) per share - as reported (diluted) (0.74) 1.32
Net income (loss) per share - pro forma (diluted) $ (0.90) $ 1.08
- --------------------------------------------------------------------------------
The fair value of stock options granted in 1998 and 1997 is estimated at the
grant date using the Black-Scholes option-pricing model with the following
assumptions for 1998 and 1997: dividend yield of 0% (1997 and 1998); expected
volatility of 56.17% (1998) and 37.3% (1997); a risk-free return of 5.9% (1997
and 1998); and expected lives of approximately 7 years (1998) and 8 years
(1997).
The following table summarizes information for stock options of the Employee
Plan and the Director Plan outstanding at September 30, 1998:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------
$ 1.00 - $10.00 412,419 3.10 $ 6.54 412,419 $ 6.54
$10.01 - $15.00 91,325 4.40 10.63 91,325 10.63
$15.01 - $20.00 604,925 5.70 16.89 537,425 16.81
$20.01 - $25.00 1,015,775 6.80 23.08 568,588 23.01
$25.01 - $30.00 1,741,594 8.50 28.94 644,985 29.08
$30.01 - $35.00 75,000 7.70 31.88 50,000 31.88
$35.01 - $40.00 319,950 8.00 35.25 148,195 35.25
- ------------------------------------------------------------------------------------------------
4,260,988 7.00 $23.80 2,452,937 $20.94
- ------------------------------------------------------------------------------------------------
(13) Retirement Plan
The Company's retirement plan (the "Retirement Plan") is a cash deferred
profit-sharing plan covering all of the employees of the Company (other than
certain employees covered by a collective bargaining agreement) who have
completed at least 1,000 hours of service and twelve months of employment. Under
the 401(k) component, each employee may elect to contribute a portion of his or
her current compensation up to the maximum permitted by the Internal Revenue
Code or 15% (or for more highly compensated employees 2%) of such employee's
annual compensation. The Company may make a matching contribution each year as
determined by the Board of Directors. The Board of Directors may establish this
contribution at any level each year, or may omit such contribution entirely.
58
The Company match since January 1995 has been based on years of service. For an
employee who has completed six years of service prior to the beginning of the
calendar year, he/she receives a match of $0.75 per $1.00 of contribution up to
4% of his/her salary. Therefore, if this employee contributes 4% or more of
his/her salary, the Company contributes 3% of his/her salary. If the employee
contributes less than 4%, the Company contributes $0.75 per $1.00 of
contribution.
If an employee has not completed six years of service, he/she is matched $0.50
per $1.00 of contribution up to 2% of his/her salary. Therefore, if this
employee contributes 2% or more of his/her salary, the Company contributes 1% of
his/her salary. If the employee contributes less than 2%, the Company
contributes $0.50 per $1.00 of contribution.
Under the profit sharing provisions of the Retirement Plan, the Company may make
an additional employer contribution as determined by the Board of Directors each
year. The Board of Directors may establish this contribution at any level each
year, or may omit such contribution entirely. It is the Company's intent that
employer contributions under the profit sharing provisions of the Retirement
Plan are to be made 50% in the form of Common Stock and 50% in cash, and are to
be made only if there are sufficient profits to do so. Profit sharing
contributions are allocated among the accounts of participants in the proportion
that their annual compensation bears to the aggregate annual compensation of all
participants. All employee contributions to the Retirement Plan are 100% vested.
Company contributions are vested in accordance with a schedule that generally
provides for vesting after five years of service with the Company (any
non-vested amounts that are forfeited by participants are used to reduce the
following year's contribution by the Company).
The Company recorded retirement plan expense for the 401(k) match and the
discretionary contribution of approximately $7,484, $3,516 and $1,877 for the
years ended September 30, 1998, 1997 and 1996, respectively.
(14) Commitments and Contingencies
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 the first $500 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 has guaranteed $14,195 of indebtedness of facilities under
management contract. 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.
59
(15) Loss on Impairment of Assets
Due to specific events occurring in the fourth quarter of Fiscal 1998 and a
focus on core business operations in response to the Medicare Prospective
Payment System ("PPS"), the Company recorded non-cash charges before income
taxes of approximately $116,000, of which approximately $24,000 relates to the
impairment of one eldercare center and certain non-core businesses, including
the Company's ambulance business and certain non-core Medicare home health
operations; approximately $43,000 relates to investments in owned eldercare
centers and other assets the Company believes are impaired as a result of PPS;
approximately $23,000 relates to impaired investments in eldercare centers
previously owned or managed by the Company; and approximately $26,000 relates to
the Company's investment in Doctors Health, a medical care management company in
the Company's Chesapeake region. Approximately $95,000 of the non-cash
impairment charges are reflected in the Statement of Operations as loss on
impairment of assets and approximately $21,000 are included in other operating
expenses.
In the fourth quarter of Fiscal 1997, the Company completed an evaluation of its
physician service business and announced its intentions to restructure this
business, including the closure and possible sale of free standing service
sites, the restructuring of physician compensation arrangements and the
termination of certain staff. In connection with the plan and selected asset
impairments, the Company recorded a fourth quarter pretax charge of
approximately $5,700. In addition, the Company reached an agreement with BCBSMD
to insure, through a sub-capitation agreement, the health care benefits of
approximately 7,000 members of BCBSMD's Care First Medicare product. As a
result, the Company has recorded a liability and pretax impairment charge of
approximately $5,000 to accrue for the estimated loss inherent in the agreement.
The impairment charge also included a pretax charge of approximately $4,300
related to the write-off of selected assets deemed unrecoverable.
(16) 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 and accrued interest 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.
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 its interest rate swap agreements outstanding at
September 30, 1998 and 1997 is approximately $29,685 and $2,052, respectively.
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.
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, 1998 and 1997, the carrying value of fixed rate debt of $370,318 and
$354,154, respectively, approximates market value.
The fair value of the Company's floating rate debt approximates its fair value.
60
(17) Summary Financial Information of Unconsolidated Affiliates
The following unaudited summary financial data for the Multicare Companies is as
of and for the twelve months ended September 30, 1998. Multicare is the
Company's only significant unconsolidated affiliate.
- -------------------------------------------------------------------
Total assets $1,698,955
Long-term debt 725,194
Total liabilities 965,718
Revenues 695,633
Net income $ 238
- -------------------------------------------------------------------
In 1998, the Company earned approximately $42,200 of management fees in
connection with the management of the Multicare operations and approximately
$30,900 of ancillary revenue in connection with services provided to Multicare
eldercare centers.
(18) Certain Significant Risks and Uncertainties
The following information is provided in accordance with the AICPA Statement of
Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
In recent years, a number of laws have been enacted that have effected major
changes in the health care system, both nationally and at the state level. The
Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into law on
August 5, 1997, seeks to achieve a balanced federal budget, by, among other
things, reducing federal spending on the Medicare and Medicaid programs. With
respect to Medicare, the law mandated establishment of PPS for Medicare skilled
nursing facilities under which facilities will be paid a federal per diem rate
for most covered nursing facility services (including pharmaceuticals).
While the Company has prepared certain estimates of the impact of PPS, it is not
possible to fully quantify the effect of the recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Company's business. Accordingly, there can be no assurance
that the impact of PPS will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect the business of the Company.
61
(19) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows:
Diluted
Earnings
Earnings (Loss) Per Diluted
(Loss) Before Share Before Earnings
Total Net Extraordinary Net Income Extraordinary (Loss)
Revenues Item (Loss) Item Per Share
- ---------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1997 $ 302,565 $ 12,822 $ 10,898 $ 0.36 $ 0.31
March 31, 1998 344,299 14,568 14,568 0.41 0.41
June 30, 1998 352,526 15,991 15,991 0.45 0.45
September 30, 1998 405,915 (67,357) (67,357) (1.92) (1.92)
- ---------------------------------------------------------------------------------------------------------------
$1,405,305 $(23,976) $(25,900) $(0.68) $(0.74)
Quarter ended:
December 31, 1996 $ 258,544 $ 11,508 $ 10,955 $ 0.33 $ 0.32
March 31, 1997 273,263 13,494 13,494 0.37 0.37
June 30, 1997 284,463 15,556 15,556 0.43 0.43
September 30, 1997 283,553 7,586 7,586 0.21 0.21
- ---------------------------------------------------------------------------------------------------------------
$1,099,823 $48,144 $ 47,591 $ 1.34 $ 1.33
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) per share was calculated for each three month and the twelve
month period on a stand alone basis. As a result, the sum of the earnings per
share for the four quarters does not equal the earnings per share for the twelve
months. The fourth quarter of 1998 includes non-cash charges of approximately
$116,000 (see Note 15).
62
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 1999 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 1999 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 MANAGEMENT
Incorporated by reference from the Company's 1999 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 1999 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 1998, 1997, and 1996. All other schedules not
listed have been omitted since the required information is
included in the financial statements or the notes thereto, or is
not applicable or required.
63
(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(13) 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(13) Merger Agreement, dated April 21, 1996, by and among
Professional Pharmacies, Inc., Genesis Health Ventures, Inc.
and PPS Acquisition Corp.
2.7(14) 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(14) 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.
64
2.9(16) Agreement and Plan of Merger, dated as of July 11, 1996, by and
among Genesis Health Ventures, Inc., a Pennsylvania
corporation, Acquisition Corporation, a Delaware corporation,
and Geriatric & Medical Companies, Inc., a Delaware
corporation.
2.10(20) Stock Purchase Agreement dated October 10, 1997 among Genesis
Health Ventures, Inc., The Multicare Companies, Inc., Concord
Health Group, Inc., Horizon Associates, Inc., Horizon Medical
Equipment and Supply, Inc., Institutional Health Services,
Inc., Care4 L.P., Concord Pharmacy Services, Inc., Compass
Health Services, Inc. and Encare of Massachusetts, Inc.
2.11(20) Asset Purchase Agreement dated October 11, 1997 among Genesis
Health Ventures, Inc., The Multicare Companies, Inc., Health
Care Rehab Systems, Inc., Horizon Rehabilitation, Inc.,
Progressive Rehabilitation Centers, Inc., and Total
Rehabilitation Centers, L.L.C.
2.12(20) Agreement and Plan of Merger dated June 16, 1997 by and among
Genesis ElderCare Corp., Genesis ElderCare Acquisition Corp.,
Genesis Health Ventures, Inc., and the Multicare Companies,
Inc.
2.13(21) Agreement and Plan of Merger dated April 26, 1998, by and among
Genesis Health Ventures, Inc., V Acquisition Corp. and Vitalink
Pharmacy Services, Inc.
2.14(21) Amendment Number One to the Plan of Merger dated as of July 7,
1998.
3.1(5) The Company's Amended and Restated Articles of Incorporation.
3.2(24) The Company's Amended and Restated Bylaws.
3.3(9) Amendment to the Company's Articles of Incorporation, as filed
on March 11, 1994, with the Secretary of the Commonwealth of
Pennsylvania.
3.4 Amendment to the Company's Articles of Incorporation, as filed
on August 26, 1998, with the Secretary of the 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(12) Rights Agreement between Genesis Health Ventures, Inc. and
Mellon Securities Trust Company.
4.6(15) Indenture dated as of June 15, 1995 between the Company and
Delaware Trust Company.
4.7(15) Specimen of the Company's 9-3/4% Senior Subordinated Debentures
due 2005.
65
4.8(17) Indenture dated as of October 7, 1996 between the Company and
First Union National Bank.
4.9(17) Specimen of the Company's 9-1/4% Senior Subordinated Notes due
2006.
4.10 Rights Agreement by and between the Company and Manor Care Inc.
dated April 26, 1998.
4.11 Indenture dated as of December 23, 1998 between the Company and
the Bank of New York.
4.12 Specimen of the Company's 9-7/8% Senior Subordinated Debentures
due 2009 (Attached as Exhibit A-1 to the Indenture dated
December 23, 1998 between the Company and the Bank of New York
attached hereto as Exhibit 4.11)
+10.1(5) The Company's Employee Retirement Plan, adopted January 1,
1989, as amended and restated Retirement Plan Trust Agreement.
+10.2(22) The Company's Amended and Restated Stock Option Plan.
+10.3(5) Lease Agreement, dated October 1, 1990, between Salisbury
Medical Office Building General Partnership ("SMOBGP") and Team
Rehabilitation, Inc.
+10.4(5) Lease Agreement, dated October 1, 1989, between SMOBGP and
Genesis Immediate Med Center, Inc.
+10.5(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.
+10.6(5) Lease, dated October 1, 1989, between SMOBGP and ASCO, relating
to the Salisbury Regional Health Center.
+10.7(19) Ground Lease Agreement dated as of June 26, 1993, by and
between GHV Associates and the Company.
+10.8(9) Lease, dated January 1, 1995, between GHV Associates and the
Company, Team Rehabilitation, Inc. and Genesis Physician
Services, Inc.
+10.9(5) Agreement, dated April 19, 1991, between Nazem & Company, III,
L.P. and the Company.
+10.10(6) The Company's 1992 Stock Option Plan for Non-Employee
Directors.
+10.11(6) The Company's Incentive Compensation Program.
+10.12(6) The Company's Execuflex Plan, dated as of January 1, 1992, and
related Trust Agreement, dated December 10, 1991.
+10.13(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.
66
+10.14(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.
+10.15(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.
+10.16(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.
+10.17(6) 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.
+10.18(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.
+10.19(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.
+10.20(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.
+10.21(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
+10.22(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.
+10.23(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.
+10.24(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.
+10.25(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.
67
+10.26(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.
+10.27(9) Management Agreement, dated June 15, 1987, between Brendenwood
MRC Limited Partnership and Meridian Health, Inc. (f/k/a
Meridian, Inc.).
+10.28(9) Lease dated January 5, 1989, as amended, by and between Towson
Building Associates Limited Partnership and Meridian
Healthcare, Inc.
+10.29(9) Sublease dated November 30, 1993, by and between Meridian
Healthcare, Inc. and Fairmount Associates, Inc.
+10.30(12)Agreement to Purchase Partnership Interests, made as of March 1
1996, by and among Meridian Health, Inc., Fairmont Associates,
Inc. and MHC Holding Company
10.31(12) 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.
10.32(17) 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
10.33(17) Guaranty and Agreement of Suretyship from Genesis Health
Ventures, Inc. and its Material Subsidiaries, dated as of
October 7, 1996.
10.34(17) 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.
10.35(17) 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
10.36(17) 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.
10.37(17) Acquisition Loan and Security Agreement, dated as of August 31,
1996, between Genesis Health Ventures, Inc. and AGE Institute
of Florida, Inc.
10.38(17) 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.
10.39(10) Amended and Restated Lease Agreement dated as of October 7,
1996 between Mellon Financial Services Corporation #4, as
Lessor, and Genesis ElderCare Properties, Inc., as lessee.
68
10.40(10) Second Amendment to Amended and Restated Participation
Agreement dated March 7, 1998 among Genesis ElderCare
Properties, Inc., as lessee, Mellon Financial Services
Corporation #4, as lessor; various financial institutions as
lendors and Mellon Bank N.A., a national banking association
as Agent for Lessor and the Lendors.
10.41(10) Amendment No. 2 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.
10.42(19) Third Amended and Restated Credit Agreement dated October 9,
1997 to Genesis Health Ventures, Inc. from Mellon Bank, N.A.,
Citicorp USA, Inc., First Union National Bank and NationsBank,
N.A.
10.43(19) Credit Agreement dated October 14, 1997 to The Multicare
Companies, Inc. from Mellon Bank, N.A., Citicorp USA, Inc.,
First Union National Bank and NationsBank, N.A.
+10.44(20) Management Agreement dated October 9, 1997 among The Multicare
Companies, Inc., Genesis Health Ventures, Inc. and Genesis
ElderCare Network Services, Inc.
10.45(19) Stockholders' Agreement dated October 9, 1997 among Genesis
ElderCare Corp., The Cypress Group L.L.C., TPG Partners II,
L.P., Nazem, Inc. and Genesis Health Ventures, Inc.
10.46(19) Put/Call Agreement dated October 9, 1997 among The Cypress
Group, L.L.C., TPG Partners, II, L.P., Nazem, Inc. and Genesis
Health Ventures, Inc.
10.47(19) Letter Agreement dated June 16, 1997 between Genesis Health
Ventures, Inc. and Sterns Associates.
10.48(23) Assignment and Assumption Agreement among Genesis Health
Ventures, Inc., Capital Corp. and AGE Institute of Florida.
10.49(23) Amended and Restated Promissory Note among Genesis Health
Ventures, Inc. and, ET Capital Corp. and AGE Institute of
Florida.
10.50(27) Master Agreement for Infusion Therapy Products and Services,
dated June 1, 1991.
10.51(26) Amendment to the Master Agreement for Infusion Therapy
Products and Services, as amended on September 19, 1997 and
April 26, 1998.
10.52(27) Master Pharmacy Consulting Agreement, dated June 1, 1991 and
amended on September 19, 1997 and April 26, 1998
+10.53(26) Amendment to the Master Pharmacy Consulting Agreement, dated
May 31, 1991 amended on September 19, 1997 and April 26, 1998.
10.54(27) Amendment to the Master Pharmacy Services Consulting
Agreement, as amended on September 19, 1997 and April 26,
1998.
10.55(27) Master Agreement for Pharmacy Services, dated June 1, 1991 and
amended on September 19, 1997 and April 26, 1998.
69
10.56(26) Amendments to the Master Agreement for Pharmacy Services, as
amended on September 19, 1997 and April 26, 1998.
+10.57 Employment Agreement between the Company and Michael R. Walker
dated August 12, 1998.
+10.58 Employment Agreement between the Company and George V. Hager
dated August 12, 1998.
+10.59 Employment Agreement between the Company and Richard R. Howard
dated August 12, 1998.
+10.60 Employment Agreement between the Company and David C. Barr
dated August 12, 1998.
+10.61 Employment Agreement between the Company and Michael G.
Bronfein dated November 11, 1998.
+10.62 Employment Agreement between the Company and Maryann Timon
dated November 11, 1998.
+10.63 Employment Agreement between the Company and Marc. D. Rubinger
dated November 11, 1998.
+10.64 1998 Non-Qualified Employee Stock Option Plan.
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 Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
(11) Incorporated by reference to the Company's Form 8-A dated May 11, 1995.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(13) Incorporated by reference to Form 8-K, as amended, dated May 3, 1996.
(14) Incorporated by reference to Form S-3, dated June 20, 1995 (File No.
33-9350).
(15) Incorporated by reference to Form 8-K, as amended, dated July 11, 1996.
(16) Incorporated by reference to Form S-4, dated October 31, 1996 (File
No.333-15267).
70
(17) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference to the Tender Offer Statement on Schedule 14D-1
filed by Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp. on
June 20, 1997.
(19) Incorporated by reference to Amendment No. 7 to the Tender Offer Statement
on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare
Acquisition Corp. on June 20, 1997.
(20) Incorporated by reference to Genesis Health Ventures, Inc.'s Current Report
on Form 8-K dated October 10, 1997.
(21) Incorporated by reference to Form S-4, dated June 30, 1998 (File No.
333-58221)
(22) Incorporated by reference to Form S-8, dated May 19, 1998 (File No.
333-53043)
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(25) Incorporated by reference to Schedule 13D dated May 6, 1998.
(26) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form 10-K
dated August 31, 1998 (File No. 001-12729)
(27) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form
S-1/A, dated February 29, 1992 (File No. 33-43261)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K and Form 8-K/A dated August
28, 1998, reporting the consummation of an Agreement and Plan of Merger
(the "Merger Agreement") with Vitalink Pharmacy Services, Inc.
("Vitalink"), the reports contain certain financial statements regarding
Vitalink and its subsidiaries and pro forma financial information regarding
the combined entities.
71
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.
Under date of December 15, 1998, we reported on the consolidated balance sheets
of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 1998 and
1997, 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, 1998, as contained in the Genesis Health Ventures, Inc. annual
report on Form 10-K for the year 1998. 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, presents fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
December 15, 1998
72
Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 1998, 1997 and 1996
(Dollars in thousands)
Charged to
Balance at Other Balance at
Beginning Charged to Accounts Deductions End of
Description of Period Operations (1) (2) Period
- -------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1998
Allowance for Doubtful Accounts $39,418 18,016 36,497 20,212 $73,719
Year Ended September 30, 1997
Allowance for Doubtful Accounts $11,131 12,615 27,563 11,891 $39,418
Year Ended September 30, 1996
Allowance for Doubtful Accounts $ 6,179 4,382 4,748 4,178 $11,131
(1) Represents amounts related to acquisitions
(2) Represents amounts written off as uncollectible
73
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 Amendment No 1 to its
Report to be signed on its behalf on December 23, 1998 by the undersigned duly
authorized.
Genesis Health Ventures, Inc.
By: /s/ George V. Hager, Jr.
----------------------------
George V. Hager, Jr.,
Senior Vice President and Chief Financial 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, 1998.
Signature Capacity
/s/ Michael R. Walker
- -------------------------
Michael R. Walker Chairman and Chief Executive Officer
/s/ Richard R. Howard
- -------------------------
Richard R. Howard Vice Chairman and Director
Jack R. Anderson
- -------------------------
Jack R. Anderson Director
Samuel H. Howard
- -------------------------
Samuel H. Howard 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/ George V. Hager, Jr.
- -------------------------
George V. Hager, Jr. Chief Financial Officer
(Principal Accounting Officer)
74