SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
[ ] 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 and non-voting common stock held
by non-affiliates of the Registrant is $94,229,235(1). As of December 16, 1999,
48,634,444 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by us with the SEC under the Exchange Act
are incorporated in this annual report by this reference:
SEC Filings Period
- --------------------------------------- ----------------------------
Certain portions of our Proxy Statement To be filed in connection
into Part III of this Report with our 2000 Annual Meeting
- ------------
(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 16, 1999.
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
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Cautionary Statements Regarding Forward Looking Statements ....................1
PART I
ITEM 1: BUSINESS
General ..............................................................5
Pharmacy and Medical Supply Services..................................6
Inpatient Services....................................................6
Other Services........................................................7
Revenue Sources.......................................................7
Marketing............................................................11
Personnel............................................................11
Employee Training and Development....................................12
Governmental Regulation..............................................12
Competition in the Healthcare Services Industry......................15
Insurance............................................................15
ITEM 2: PROPERTIES...........................................................16
ITEM 3: LEGAL PROCEEDINGS....................................................17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................18
ITEM 4.1: EXECUTIVE OFFICERS.................................................19
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS....................................21
ITEM 6: SELECTED FINANCIAL DATA..............................................22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................23
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........39
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................40
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................74
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................74
ITEM 11: EXECUTIVE COMPENSATION..............................................74
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......74
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................74
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K......74
Cautionary Statements Regarding Forward Looking Statements
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our ability
to meet our liquidity needs, scheduled debt and interest payments and
expected future capital expenditure requirements, and to control
costs; the expected effects of government regulation on reimbursement
for services provided and on the costs of doing business; and the
expected effects of the "Year 2000" problem;
o certain statements contained in "Business" concerning strategy;
government regulations and the Medicare and Medicaid programs;
o certain statements in the Notes to Consolidated Financial Statements
concerning pro forma adjustments; and
o certain statements in "Legal Proceedings" regarding the effects of
litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our substantial indebtedness and significant debt service
obligations;
o our ability or inability to secure the capital and the related cost
of the capital necessary to fund future growth;
o the impact of health care reform, including the Medicare Prospective
Payment System ("PPS"), and the adoption of cost containment measures
by the federal and state governments;
o the adoption of cost containment measures by other third party
payors;
o the impact of government regulation, including our ability to operate
in a heavily regulated environment and to satisfy regulatory
authorities;
o the occurrence of changes in the mix of payment sources utilized by
our patients to pay for our services;
o competition in our industry;
o our ability to consummate or complete development projects or to
profitably operate or successfully integrate enterprises into our
other operations;
o the "Year 2000 problem", including the possible failure of our
payors, suppliers and other third parties to adequately remediate
Year 2000 issues; and
o changes in general economic conditions.
There can be no assurances that the cash flow from our operations will be
sufficient to enable us to service our substantial indebtedness and meet our
other obligations.
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 1999, we had approximately $1,484,510,000 of
long-term indebtedness, excluding the current portion of indebtedness of
$37,126,000, which represented 72% of our total capitalization. We also have
significant long-term operating lease obligations with respect to certain of our
eldercare centers and other sites of service. The degree to which we are
leveraged could have important consequences, including, but not limited to the
following:
1
o our ability to obtain additional financing in the future for working
capital, capital expenditures or other purposes may be limited or
impaired;
o a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available to us for our
operations;
o our operating flexibility is limited by restrictions contained in
some of our debt agreements which set forth minimum net worth
requirements and/or limit our ability to incur additional
indebtedness, to enter into other financial transactions and to pay
dividends;
o our degree of leverage may make us more vulnerable to industry
downturns and less competitive, may reduce our flexibility in
responding to changing business and industry conditions and may limit
our ability to pursue other business opportunities, to finance our
future operations or capital needs, and to implement our business
strategy; and
o certain of our borrowings are and will continue to be at variable
rates of interest, which exposes us to the risk of greater interest
rates.
We expect to satisfy required payments of principal and interest on our
indebtedness from our cash flow from operations. Our ability to generate
sufficient cash flows from operations depends on a number of internal and
external factors affecting our business and operations, including factors beyond
our control, such as prevailing industry conditions. There can be no assurances
that cash flow from operations will be sufficient to enable us to service our
debt and meet our other obligations. If such cash flow is insufficient, we may
be required to refinance and/or restructure all or a portion of our existing
debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing or restructuring would be possible or that
any such sales of assets or additional financing could be achieved. Also, the
ability of our Multicare affiliate to meet its obligations is dependent upon its
ability to consummate certain asset sales. There can be no assurances that such
asset sales will be consummated by Multicare. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Limitations on reimbursement including the implementation of the Medicare
Prospective Payment System and other health care reforms may adversely affect
our business.
We receive revenues from Medicare, Medicaid, private insurance, long-term care
facilities which utilize our specialty medical services, self-pay eldercare
facility residents, and other third party payors. The health care industry is
experiencing a strong trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services to be provided by us.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System pursuant to
the Balanced Budget Act of 1997, as modified by the Medicare Balanced
Budget Refinement Act; and
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
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While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect our business. These changes may also adversely affect long term care
facilities which are customers of our specialty medical businesses, such as
pharmacy and rehabilitation therapy services, which may, in turn, adversely
affect such businesses. There can be no assurance that payments under
governmental and private third party payor programs will be timely, 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. Our financial condition and results of operations may be affected
by the revenue reimbursement process, which in our industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled. See "Business - Revenue Sources" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Extensive regulation by the federal and state governments may adversely affect
our costs of doing business.
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, reimbursement, licensure and
certification of eldercare centers and pharmacy operations, controlled
substances and health planning. Compliance with such regulatory requirements, as
interpreted and amended from time to time, can increase operating costs and
thereby adversely affect the financial viability of our business. Failure to
comply with current or future regulatory requirements could also result in the
imposition of various remedies including (with respect to inpatient services)
fines, restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of a facility or site of
service.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. See "Business Government Regulation."
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
Changes in applicable laws and regulations, or new interpretations of existing
laws and regulations, could have a material adverse effect on reimbursement,
certification or licensure of our nursing facilities, pharmacies or other
aspects of our business, including eligibility for participation in federal and
state programs, costs of doing business, or the levels of reimbursement from
governmental or private sources. We cannot predict the content or impact of
future legislation and regulations affecting us. There can be no assurance that
regulatory authorities will not adopt changes or new interpretations of existing
regulations that could adversely affect us. See "Business - Revenue Sources" and
"Business -- Government Regulation."
We face intense competition in our business.
The healthcare industry is highly competitive. We compete with a variety of
other companies in providing eldercare services, many of which have greater
financial and other resources and may be more established in their respective
communities than us. Competing companies may offer newer or different centers or
services than us and may thereby attract our customers who are either presently
customers of our eldercare centers or are otherwise receiving our eldercare
services.
In addition, as a result of the Vitalink Transaction, HCR Manor Care, a publicly
traded owner of eldercare centers that competes with us, owns 586,240 shares of
Genesis Series G Cumulative Convertible Preferred Stock. That stock is
convertible at the option of HCR Manor Care into approximately 7,880,000 shares
of our Common Stock. Certain service contracts (the "Service Contracts") permit
3
our NeighborCare pharmacy operations to provide services to HCR Manor Care
constituting approximately ten percent and five percent of the net revenues of
NeighborCare(sm) and Genesis, respectively. These Service Contracts are the
subject of certain litigation. See "Business - Competition, " "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of operations -Certain Transactions-Vitalink Transaction."
We may experience adverse effects because of risks associated with our
acquisitions.
During the past several years, we acquired several eldercare and pharmacy
businesses. There can be no assurance that we will be able to realize expected
operating and economic efficiencies from our recent acquisitions or from any
future acquisitions or that such acquisitions will not adversely affect our
results of operations or financial condition. In addition, there can be no
assurance that we will be able to successfully integrate newly acquired
businesses with our operations.
The "Year 2000 problem" may adversely affect us.
If our efforts to address Year 2000 compliance issues (as defined in the
Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000
Act")) were not successful, or if the systems of our suppliers are not
compliant, we may be unable to engage in normal business activities for a
period of time after January 1, 2000. Our potential risks include:
o the inability to deliver patient care related services;
o the delayed receipt of reimbursement from the federal or state
governments, or other payors;
o the failure of security systems, elevators, heating systems or other
operational systems and equipment;
o the inability to obtain critical equipment and supplies from vendors;
and,
o the loss of existing or potential clients and damage to our
reputation in the industry.
Each of these events could have a material adverse effect on our business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."
4
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,"
the "Company," "we," "our" or "us" refers to Genesis Health Ventures, Inc. and
subsidiaries. The following discussion of our operations after October 10, 1997
(e.g. markets served, facilities information, personnel) includes the Multicare
operations; to the extent that the discussion includes our operations prior to
October 10, 1997 (e.g. occupancy rates and revenue sources) it does not include
the Multicare operations.
Genesis is a leading provider of healthcare and support services to the elderly.
We have developed the Genesis ElderCare(SM) delivery model of integrated
healthcare networks to provide cost-effective, outcome-oriented services to the
elderly. Genesis provides eldercare in the eastern United States through a
network of skilled nursing and assisted living centers. Genesis provides long
term care support services nationwide including pharmacy, medical equipment and
supplies, rehabilitation, group purchasing, consulting and facility management.
Through these integrated healthcare networks, Genesis provides inpatient,
pharmacy, medical supply and other healthcare services to approximately 700,000
customers, including approximately 41,000 customers who are residents in
eldercare facilities. The networks include 368 eldercare centers with
approximately 45,000 beds; 19 medical supply distribution centers serving over
1,000 eldercare centers with over 80,000 beds; an integrated NeighborCare(SM)
pharmacy and medical supply operation with over $980,000,000 in annual revenues,
including 69 long-term care pharmacies serving approximately 238,000
institutional beds; 34 community-based pharmacies; infusion therapy services;
and certified rehabilitation agencies providing services through over 600
contracts. We also provide diagnostic and hospitality services in selected
markets and operate a group purchasing organization.
In order to achieve operating efficiencies, economies of scale and significant
market share, Genesis has concentrated its eldercare networks in five geographic
regions in which over 14,500,000 people over the age of 65 reside. 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/New Jersey); Chesapeake Region
(Southern Delaware/Eastern Shore of Maryland/Baltimore, Maryland/Washington
D.C./Virginia); Southern Region (Central Florida); and Allegheny/Midwest
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, we believe we provide cost-effective care
management to achieve superior outcomes and return customers to the community.
We believe that our orientation toward achieving improved customer outcomes
through our 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.
We have undertaken several initiatives to position the Company to compete in the
current healthcare environment. These initiatives include:
o the development of clinical care protocols and monitor the delivery
and utilization of medical care;
5
o 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 our eldercare
services in the healthcare market;
o seeking strategic alliances with other healthcare providers to
broaden our continuum of care; and
o creating an independent eldercare advisory board to formulate new and
innovative approaches in the delivery of care.
Since we began operations, we have focused our efforts on providing an expanding
array of specialty medical services to elderly customers. We generate revenues
primarily from two segments: pharmacy and medical supply services; and inpatient
services; however, we also derive revenue from other sources.
Pharmacy and Medical Supply Services
Genesis provides pharmacy and medical supply services through its
NeighborCare(SM) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of prescription and non prescription pharmaceuticals, infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, 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. NeighborCare provides institutional pharmacy products and
services to the elderly, chronically ill and disabled in long-term care and
alternate sites settings, including skilled nursing facilities, assisted living
facilities, residential and independent living communities and the home. We also
provide pharmacy consulting services to assure proper and effective drug
therapy. We provide these services through 69 institutional pharmacies (one is
jointly-owned) and 19 medical supply distribution centers located in our various
market areas. In addition, we operate 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 91% of the
sales attributable to all pharmacy operations in the twelve months ended
September 30, 1999 were generated through external contracts with independent
healthcare providers with the balance attributable to centers owned or leased by
us, including the jointly owned Multicare centers.
Inpatient Services
Genesis owns, leases or manages 339 eldercare centers (including 49 standalone
assisted living facilities and 14 transitional care units) located in 16 states.
Our skilled nursing 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 engages the services of a
Medical Director to supervise the delivery of healthcare services to residents
and a Director of Nursing to supervise the nursing staff. We maintain a
corporate quality assurance program to monitor regulatory compliance and to
enhance the standard of care provided in each center.
Genesis 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
6
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. We provide such care at rates that we believe are substantially
below the rates typically charged by acute care hospitals for comparable
services.
The following table sets forth, for the periods indicated, information regarding
our average number of beds in service and the average occupancy levels at our
eldercare centers during the respective fiscal years.
1999 1998 1997
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Average Beds in Service: (1)
Owned and Leased Facilities 15,522 15,137 15,132
Managed and Jointly-Owned Facilities 23,984 24,234 6,101
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 91% 91%
Managed and Jointly-Owned Facilities 90% 92% 92%
----------------------------------------------------------------------------------------------------------------
(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
Other Services
Rehabilitation Therapy. We provide an extensive range of rehabilitation therapy
services, including speech pathology, physical therapy and occupational therapy,
through seven certified rehabilitation agencies in all five of our regional
market concentrations. These services are provided by approximately 2,600
licensed rehabilitation therapists and assistants employed or contracted by
Genesis to substantially all of the eldercare centers we operate, as well as by
contract to healthcare facilities operated by others.
Management Services. We provide management services to 230 eldercare centers
pursuant to management agreements that provide generally for our 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, are scheduled to terminate between 2000 and 2017. We have 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."
Group Purchasing. We jointly own and operate The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), 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 2,750 members with over 271,500 beds in 44 states and the District
of Columbia.
Other Services. We employ or have consulting arrangements with approximately 112
physicians, physician assistants and nurse practitioners who are primarily
involved in designing and administering clinical programs and directing patient
care. We also provide an array of other specialty medical services in certain
parts of our eldercare network, including portable x-ray and other diagnostic
services; home healthcare services; consulting services and hospitality services
such as dietary, housekeeping, laundry, plant operations and facilities
management services.
Revenue Sources
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, other third party payors and long term care facilities which utilize
our specialty medical services. The health care industry is experiencing the
effects of the federal and state governments trend toward cost containment, as
7
government and other third party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with providers. These
cost containment measures, combined with the increasing influence of managed
care payors and competition for patients, generally have resulted in reduced
rates of reimbursement for services provided by us.
The sources and amounts of our patient revenues will be determined by a number
of factors, including licensed bed capacity and occupancy rate of our centers,
the mix of patients and the rates of reimbursement among payors. Changes in the
case mix of the patients as well as payor mix among private pay, Medicare, and
Medicaid will significantly affect our profitability.
Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title
XVIII of the Social Security Act), known as "Medicare," has made available to
nearly every American 65 years of age and older a broad program of health
insurance designed to help the nation's elderly meet hospital and other health
care costs. Health insurance coverage has been extended to certain persons under
age 65 qualifying as disabled and those having end-stage renal disease. Medicare
includes three related health insurance programs: (i) hospital insurance ("Part
A"); and (ii) supplementary medical insurance ("Part B"); and (iii) a managed
care option for beneficiaries who are entitled to Part A and enrolled in Part B
("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently
administered by fiscal intermediaries (for Part A and some Part B services) and
carriers (for Part B) under the direction of the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS").
Medicaid (Title XIX of the Social Security Act) is a federal-state cooperative
program, whereby, 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 determined in accordance with each state's regulations. Most
states pay prospective rates, and have some form of acuity adjustment.
Medicare and Medicaid are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially affect the timing and/or levels of
payments to us for our services.
We are subject to periodic audits by the Medicare and Medicaid programs, which
have various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements. Such
rights and remedies may include requiring the repayment of any amounts alleged
to be overpayments or in violation of program requirements, or making deductions
from future amounts due to us. Such programs may also impose fines, criminal
penalties or program exclusions. Other payor sources also reserve rights to
conduct audits and make monetary adjustments.
The Balanced Budget Act of 1997 (the "1997 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. Most
significantly, under the 1997 Act, nursing facilities are reimbursed under a
prospective payment system ("PPS") which commenced with a facility's first cost
reporting period beginning on or after July 1, 1998. PPS is being phased in over
a three-year period and has an adverse impact on the Medicare revenues of many
skilled nursing facilities. PPS reimbursement is based largely on a nursing
facility's costs for the services it provided to Medicare beneficiaries in the
1994-1995 base year. Under PPS, nursing facilities are paid a
predetermined amount per patient, per day (per diem) based on the anticipated
costs of treating patients. The per diem rate is determined by classifying each
patient into a resource utilization group ("RUG") using the information gathered
during the minimum data set ("MDS") assessment. There is a separate per diem
rate for each of the RUG classifications. The per diem rate also covers
rehabilitation and non-rehabilitation ancillary services.
8
Facilities that did not receive any Medicare payments prior to October 1, 1995
are reimbursed one hundred percent (100%) based on the federal per diem rates
beginning with their first cost reporting period on or after July 1, 1998. For
nursing facilities that received Medicare payments before October 1, 1995, there
is a three-year transition period. During the transition period, the per diem
rates are comprised of a blend between a "facility-specific" rate and a
"federal" (prospective) rate, as follows: (a) for the first cost reporting
period, the "facility specific" percentage is seventy-five percent (75%) and the
federal per diem percentage is 25%. These percentages change to fifty/fifty
(50%-50%) and to twenty-five/seventy-five (25%-75%) for the second and third
cost reporting periods. The facility-specific rate is based on the costs for
certain Medicare-covered services that the facility provided during its base
year, which is the facility's first cost reporting period beginning after
September 30, 1994. The facility specific rate is updated by the "nursing
facility market basket increase," minus one percent, through federal fiscal year
1999, and by the full market basket increase thereafter. The federal rate is
wage and case mix adjusted, and within each metropolitan statistical area and
rural area within each state, there is a federal rate for each RUG
classification.
The 1997 Act also affected amounts paid to NeighborCare for pharmacy and medical
supply products and services. Reimbursement for certain products covered under
Medicare Part B is limited to 95% of the "average wholesale price." Also,
pricing has become a more important consideration in the selection of pharmacy
providers since the advent of PPS.
Also, Congress included provisions in the 1997 Act that would require nursing
facilities to submit all claims for all Medicare-covered services that their
residents receive, both Medicare Part A and Part B, even if such services are
provided by outside suppliers, including but not limited to pharmacy and
rehabilitation therapy providers, except for certain excluded services
("Consolidated Billing"). The 1997 Act initially required Consolidated Billing
to be effective on July 1, 1998, with a transition period through December 31,
1998 for those nursing facilities lacking the systems and billing capability to
comply. However, in a final rule issued in July 1999, HCFA announced that all
skilled nursing facilities must begin Consolidated Billing as of the date the
facility shifts to PPS, for those residents who are in a covered Part A stay.
Outside suppliers of services to residents of the facility must collect payment
from the facility. For those skilled nursing facility residents who are not in a
covered Part A stay (for example, residents who have exhausted their available
days of coverage under the Part A nursing facility benefit), the final rule
postponed Consolidated Billing indefinitely.
In November 1999, the Medicare Balanced Budget Refinement Act ("Refinement Act")
was passed in Congress. The Refinement Act addresses certain reductions in
Medicare reimbursement caused by the 1997 Act, including:
o For covered skilled nursing facility services furnished on or after
April 1, 2000, and before October 1, 2000 (or a later date if HCFA
does not complete certain mandated reviews of current RUG
weightings), for 15 RUG categories, the federal per diem rate will be
increased by 20%;
o For fiscal years 2001 and 2002, the federal per diem rates shall be
increased by an additional 4%;
o For cost report years beginning on or after January 1, 2000,
skilled nursing facilities may waive the PPS transition period and
elect to receive 100% of the federal per diem rate;
o Through the cost reporting period beginning in October, 2000, certain
specific services (such as prostheses and chemotherapy drugs) may be
reimbursed separately from and in addition to the federal per diem
rate; and,
o The elimination of the $1,500 cap on rehabilitation therapy services
provided under Medicare Part B.
9
The 1997 Act repealed the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities effective October 1, 1997. The Boren
Amendment required that Medicaid payments to certain health care providers 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 1997 Act
also grants greater flexibility to states to establish Medicaid managed care
projects without the need to obtain a federal waiver. Although these 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 methodology for nursing facility
services or pharmacy services from fee-for-service to managed care negotiated or
capitated rates. We anticipate that federal and state governments will continue
to review and assess alternative health care delivery systems and payment
methodologies.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by HCFA and applicable federal law. In
most states, pharmacy services are priced at the lower of "usual and customary"
charges or cost (which generally is defined as a function of average wholesale
price and may include a profit percentage) plus a dispensing fee. Certain states
have "lowest charge legislation" or " most favored nation provisions" which
require NeighborCare to charge Medicaid no more that its lowest charge to other
consumers in the state.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of the 1997 Act, the Refinement
Act, the interpretation or administration of such legislation or other
legislation which affects our business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that
these changes will not adversely affect our business.
In addition, Congress and state governments continue to focus on efforts to curb
spending on health care programs such as Medicare and Medicaid. Such efforts
have not been limited to skilled nursing facilities, but have and will most
likely include other services provided by us, including pharmacy and therapy
services. We 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 us. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue.
Managed care organizations and other third party payors have continued to
increase their influence over the delivery of healthcare services. Consequently,
the healthcare needs of a large percentage of the United States population are
increasingly served by a relatively small number of managed care organizations
and other third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate us or choose not to utilize us as a provider,
and/or engage our competitors as a preferred or exclusive provider, our 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.
The following table reflects the allocation of customer service revenues among
these sources of revenue.
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Private pay and other 47% 45% 39% 39% 38%
Medicaid 39 35 37 36 41
Medicare 14 20 24 25 21
- ------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
- ------------------------------------------------------------------------------------------------
See "Business - Government Regulation."
10
Marketing
Marketing for eldercare centers is focused at the local level and is conducted
primarily by the center administrator and its admissions director, with support
from a dedicated regional marketing staff, who call on referral sources such as
doctors, hospitals, hospital discharge planners, churches and various community
organizations. In addition to those efforts, our marketing objective is to
maintain public awareness of the eldercare center and its capabilities. We take
advantage of our regional concentrations in our 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. We market our
rehabilitation therapy and institutional pharmacy, medical supply and other
services through a direct sales force which primarily calls on eldercare
centers, hospitals, clinics and home health agencies.
The corporate managed care department, through regional managers, markets our
services 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.
In 1996, we announced a consolidation of our 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 we operate. Our marketing of Genesis ElderCare is
aimed at increasing awareness among decision makers in key professional and
business audiences. We are using advertising, including our toll free ElderCare
Lines, to promote our brand name in trade, professional and business
publications and to promote services directly to consumers.
Personnel
At November 30, 1999, Genesis and its subsidiaries (including Multicare)
employed over 48,000 people, including approximately 34,500 full-time and 13,500
part-time employees. Approximately 18% of these employees are physicians and
nursing and professional staff. Approximately 15,100 of these employees are
employed by Multicare.
We currently have 66 facilities that are covered by, or are negotiating,
collective bargaining agreements, including 31 facilities operated by Multicare.
The agreements expire at various dates from 2000 through 2003 and cover
approximately 5,200 employees. Although we have been subject to an aggressive
union organizing campaign by the Service Employees International Union ("SEIU"),
we have experienced little impact at the facility level. Only three additional
non-union facilities have voted for SEIU representation. We believe that our
relationship with our employees is generally good.
The healthcare industry has at times experienced a shortage of qualified
healthcare personnel. We compete with other healthcare providers and with
non-healthcare providers for both professional and non-professional employees.
While we have been able to retain the services of an adequate number of
qualified personnel to staff our facilities appropriately and maintain our
standards of quality care, there can be no assurance that continued shortages
will not in the future affect our ability to attract and maintain an adequate
staff of qualified healthcare personnel. A lack of qualified personnel at a
facility could result in significant increases in labor costs at such facility
or otherwise adversely affect operations at such facility. Any of these
developments could adversely affect our operating results or expansion plans.
11
Employee Training and Development
Genesis believes that nursing and professional staff retention and development
has been and continues to be a critical factor in our successful operation. 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 our wage rates for professional nursing
staff are commensurate with market rates. We also provide employee benefit
programs which management believes, as a package, exceed industry standards. We
have 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
through a variety of in-house programs as well as a tuition reimbursement
program. We have established, company-wide, the Genesis Nursing Assistant
Specialist Program, which is offered on a joint basis with community colleges.
Classes are held on the employees' time, at our cost, last for approximately six
months and provide advanced instruction in nursing care. 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. We have
maintained a retention rate of 77% since 1990 of the nurses aide graduates.
Approximately 1,650 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, we continue 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 $2,500
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. Similar program are currently under development for both pharmacy
technicians and nursing assistants who work in the assisted living environment.
We 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
1,050 participants have graduated from this program.
Government Regulation
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. For our eldercare centers, this regulation relates, among other
things, to the adequacy of physical plant and equipment, qualifications of
personnel, standards of care and operational requirements. For pharmacy and
medical supply products and services, this regulation relates, among other
things, to operational requirements, reimbursement, documentation, licensure,
certification and regulation of controlled substances. Compliance with such
regulatory requirements, as interpreted and amended from time to time, can
increase operating costs and thereby adversely affect the financial viability of
our business. Failure to comply with current or future regulatory requirements
could also result in the imposition of various remedies including fines,
restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of the facility.
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:
o increased enforcement of nursing home safety and quality regulations;
o increased federal oversight of state inspections of nursing homes;
12
o prosecution of egregious violations of regulations governing nursing
homes;
o the publication of nursing home survey results on the Internet;
o in certain cases, immediate imposition of sanctions without any grace
period to correct problems;
o imposition of civil monetary penalties for each instance of "serious
or chronic violation;" and,
o federal and state officials focused enforcement on nursing homes
within chains that have a record of non-compliance with federal
rules.
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
All of our eldercare centers and healthcare services, to the extent required,
are licensed under applicable law. All skilled nursing centers and healthcare
services, or practitioners providing the services therein, are certified or
approved as providers under one or more of the Medicaid and Medicare programs.
Generally, assisted living centers are not eligible to be certified under
Medicare or Medicaid. Licensing, certification and other applicable standards
vary from jurisdiction to jurisdiction and are revised periodically. State and
local agencies survey all skilled nursing 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. We believe that our eldercare centers and other sites of
service are in substantial compliance with the various Medicare, Medicaid and
state regulatory requirements applicable to them. However, in the ordinary
course of our business, we receive 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
but not limited to:
o the imposition of fines;
o suspension of payments for new admissions to the center;
o in extreme circumstances, decertification from participation in the
Medicare or Medicaid programs and revocation of a center's license.
These actions may adversely affect a centers' ability to continue to operate,
the ability to provide certain services, and / or eligibility to participate in
the Medicare or Medicaid 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 remedies. Certain of our centers have
received notices in the past from state and federal 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. However, except as
discussed below, all such centers have taken appropriate corrective action such
that they were not decertified from the program(s).
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 was
approximately $3,800,000.
In March, 1999, the Company voluntarily closed a center in the state of Florida
following notice of possible decertification from Florida's regulatory agency.
13
We believe that the agency's actions were inappropriate and caused the center to
lose its economic viability which, in our opinion, necessitated the closing of
the center. In addition, a Multicare center in West Virginia was decertified
from the Medicare and Medicaid programs in 1999, but was immediately reinstated.
All of our owned and leased skilled nursing centers are currently certified to
receive benefits provided under Medicare for these services. Additionally, all
Genesis and Multicare skilled nursing centers are currently certified to receive
benefits under Medicaid. Both initial and continuing qualifications of a skilled
nursing 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. Assisted
living facilities are not eligible to be certified under Medicare or Medicaid.
Many 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.
We are 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:
o 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; and
o the "Stark laws" 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, we have 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 our practices.
Although we have contractual arrangements with some healthcare providers to
which we pay fees for services rendered or products provided, we believe that
our practices are not in violation of these laws. We cannot accurately predict
whether enforcement activities will increase or the effect of any such increase
on our 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
14
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.
We cannot accurately predict the impact of any such initiatives. See "Cautionary
Statements Regarding Forward Looking Statements" and "Business - Revenue
Sources."
Competition in the Healthcare Services Industry
We compete 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 us. Competing companies
may offer newer or different centers or services than us and may thereby attract
our customers who are either presently residents of our eldercare centers or are
otherwise receiving our healthcare services.
As a result of the Vitalink Transaction, HCR Manor Care, a publicly traded owner
of eldercare centers that competes with us in certain markets, owns 586,240
shares of Genesis Series G Cumulative Convertible Preferred Stock (the "Series G
Preferred") which are convertible at the option of the holder into approximately
7,880,000 shares of our Common Stock. Pursuant to certain service contracts (the
"Service Contracts"), our NeighborCare pharmacy operations provide services to
HCR Manor Care constituting approximately five percent and ten percent of the
net revenues of Genesis and NeighborCare, respectively. These Service Contracts
are the subject of certain litigation. See "Legal Proceedings"
We operate eldercare centers in 16 states. In each market, our 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 our
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 us. In competing for
customers, a center's local reputation is of paramount importance. Referrals
typically come from acute care hospitals; physicians; religious groups; health
maintenance organizations; the customer's families and friends; and other
community organizations.
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 pharmacy, medical supply and other 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 cost of services; the
quality of clinical services; responsiveness to customer 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.
15
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, 1999. Included
in the center count are 49 standalone assisted living facilities with 3,493
units and 18 skilled nursing facilities with 552 assisted living units. Certain
properties are leased by the respective operating entities from third parties.
The inability of the Genesis to make rental payments under these leases could
result in loss of the leased property through eviction or other proceedings.
Certain leases do not provide for non disturbance from the mortgagee of the fee
interest in the property and consequently each such lease is subject to
termination in the event that the mortgage is foreclosed following a default by
the owner. Included in Managed Centers are 130 jointly-owned facilities with
14,557 beds / assisted living units, including the Multicare centers. Also
included in Managed Centers are 19 transitional care units with 587 beds located
in hospitals principally in the state of Massachusetts. Member Centers consist
of independently owned facilities that, for a fee, have access to many of the
resources and capabilities of the Genesis Eldercare Network,(sm) including
participation in Genesis' managed care contracts, preferred provider
arrangements and group purchasing arrangements. These centers typically purchase
an array of services from Genesis.
Wholly-Owned Leased Managed Member
Centers Centers Centers Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
- ----------------------------------------------------------------------------------------------------------------------------------
Pennsylvania 17 2,430 4 471 34 4,459 6 765 61 8,125
New Jersey 11 1,726 4 652 30 3,863 4 622 49 6,863
Massachusetts 8 1,025 1 112 63 5,728 - - 72 6,865
Maryland 13 2,084 7 990 8 1,095 13 2,470 41 6,639
Florida 6 822 7 921 11 1,228 1 120 25 3,091
Connecticut 4 615 - - 14 1,717 - - 18 2,332
West Virginia - - 2 180 23 1,970 - - 25 2,150
Delaware 4 504 - - 4 439 3 449 11 1,392
Virginia 2 362 4 595 2 175 1 200 9 1,332
New Hampshire 8 811 5 466 1 90 - - 14 1,367
Ohio - - - - 14 1,128 - - 14 1,128
Illinois - - - - 11 1,036 - - 11 1,036
Wisconsin - - - - 8 952 - - 8 952
Vermont 2 256 - - 2 119 - - 4 375
Rhode Island - - - - 3 365 - - 3 365
North Carolina - - - - 2 340 - - 2 340
District of Columbia - - - - - - 1 189 1 189
- ----------------------------------------------------------------------------------------------------------------------------------
Totals 75 10,635 34 4,387 230 24,704 29 4,815 368 44,541
- ----------------------------------------------------------------------------------------------------------------------------------
We anticipate Multicare will sell 28 eldercare centers with approximately 2,700
beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year
2000. We may manage these facilities subsequent to the sale. There can be no
assurances that the sale transactions will be consummated.
We have 3 owned and 109 leased pharmacy and medical supply locations in 41
states.
We believe that all of our physical properties are well maintained and are in a
suitable condition for the conduct of our business.
16
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 us, would have a material adverse effect on our financial
position. See "Cautionary Statements Regarding Forward Looking Statements."
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services
(d/b/a NeighborCare(sm)), a subsidiary of Genesis, filed multiple lawsuits
requesting injunctive relief and compensatory damages against HCR Manor Care,
Inc. and two of its subsidiaries and principals. The lawsuits arise from HCR
Manor Care's threatened termination of two long term pharmacy services contracts
effective June 1, 1999. Vitalink filed a complaint against HCR Manor Care and
two of its subsidiaries in Baltimore City, Maryland circuit court. Genesis filed
a complaint against HCR Manor Care and two of its subsidiaries and principals in
federal district court in Delaware including, among other counts, securities
fraud. Vitalink has also instituted an arbitration action in Maryland. Vitalink
is also seeking an injunction preventing HCR Manor Care's threatened termination
of two of its long term pharmacy service contracts and a declaration that it has
a right to provide pharmacy, infusion therapy and related services to all of HCR
Manor Care's facilities. Genesis and Vitalink seek over $100,000,000 in
compensatory damages and enforcement of a 10-year non-competition clause.
Genesis acquired Vitalink from Manor Care in August 1998. In 1991, Vitalink and
Manor Care entered into long term master pharmacy agreements which gave Vitalink
the right to provide pharmacy services to all facilities owned or licensed by
Manor Care and its affiliates. In 1998, the terms of the pharmacy service
agreements were extended to September, 2004. Under the two master service
agreements, Genesis and Vitalink receive revenues at the rate of approximately
$100,000,000 per year. By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Claims relating to the master service
agreements with the Arbitration matter. Until such time as a final decision is
rendered in said Arbitration, the parties have agreed to maintain the master
service agreements in full force and effect. Genesis still maintains its
Delaware federal court complaint. On July 26, 1999, NeighborCare, through its
Maryland counsel, filed an additional complaint against Omnicare Inc. and
Heartland Healthcare (a joint venture between Omnicare and HCR Manor Care)
seeking injunctive relief and compensatory and punitive damages. The complaint
includes counts for tortious interference with Vitalink's contractual rights
under its three exclusive long term service contracts with HCR Manor Care. On
August 27, 1999 Manor Care Inc., a wholly owned subsidiary of HCR Manor Care
Inc., filed a lawsuit against Genesis in federal district court in Delaware
based upon Section 11 and Section 12 of the Securities Act. Manor Care Inc.
alleges that in connection with the sale of the Genesis Series G Preferred Stock
issued as part of the purchase price to acquire Vitalink, Genesis failed to
disclose or made misrepresentations related to the effects of the conversion to
the prospective pay system, the restructuring of the Multicare joint venture,
the impact of the acquisition of Multicare, the status of Genesis labor
relations, Genesis' ability to declare dividends on the Series G Preferred Stock
and information relating to the ratio of combined fixed charges and preference
dividends to earnings. Manor Care Inc. seeks, among other things, compensatory
damages and recission of the purchase of the Series G Preferred Stock.
On December 22, 1999 Manor Care filed a lawsuit against Genesis and others in
the United States District Court for the Western District of Ohio. Manor Care
alleges, among other things, that the Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred") and Series I Senior
Convertible Exchangeable Participating Cumulative Preferred Stock (the "Series I
Preferred") were issued in violation of the terms of the Series G Preferred and
the Rights Agreement dated as of April 26, 1998 between Genesis and Manor Care.
Manor Care seeks, among other things, damages and rescission or cancellation of
the Series H and Series I Preferred.
17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 11, 1999, we held a Special Meeting of our shareholders. Proxies
were solicited and the Special Meeting held to consider and act upon the
following matters:
o To approve an amendment to Genesis' articles of incorporation
increasing the number of authorized shares of common stock from
60,000,000 to 200,000,000 shares and creating a class of non-voting
common stock;
o To approve, in connection with the restructuring of the joint venture
relating to our ownership of The Multicare Companies, Inc. and in
accordance with the rules of The New York Stock Exchange, the
issuance of the following securities:
o 12,500,000 shares of our voting common stock;
o warrants to purchase 2,000,000 shares of our voting common stock;
o 24,369 shares of our Series H Senior Convertible Participating
Cumulative Preferred Stock, which is initially convertible into
27,850,590 shares of our voting common stock; and
o 17,631 shares of our Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, which is initially
convertible into 20,149,410 shares of our non-voting common stock.
These securities were proposed to be issued in transactions described in the
proxy statement dated October 14, 1999 in connection with the Restructuring
Agreement. In exchange for these securities Genesis received, among other
things, $50,000,000 in additional equity capital. . (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Transactions - Multicare Transaction and its Restructuring").
All matters were approved at the Shareholders' Meeting on November 11, 1999.
18
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 51 Chairman and Chief Executive Officer
Richard R. Howard 50 Vice Chairman and Director
David C. Barr 49 Vice Chairman
George V. Hager, Jr. 43 Executive Vice President and Chief Financial Officer
Maryann Timon 46 Senior Vice President, Managed Care
Marc D. Rubinger 50 Senior Vice President and Chief Information Officer
Richard Pell, Jr. 51 Senior Vice President, Administration and Chief Compliance Officer
Barbara J. Hauswald 40 Vice President and Treasurer
James V. McKeon 35 Vice President and Corporate Controller
Michael R. Walker is the founder of Genesis and has served as Chairman and Chief
Executive Officer of Genesis 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 one of our directors since our 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 Genesis 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.
George V. Hager, Jr. has served us as Executive Vice President and Chief
Financial Officer since May, 1999 and Senior Vice President and Chief Financial
Officer since February 1994. Mr. Hager joined Genesis in July 1992 as Vice
President and Chief Financial Officer. Mr. Hager was previously partner in
charge of the healthcare practice for KPMG LLP in the Philadelphia office. Mr.
Hager began his career at KPMG LLP in 1979 and has over 20 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.
19
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 Genesis 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 Genesis, 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.
Richard Pell, Jr. has served as Senior Vice President-Administration and Chief
Compliance Officer of Genesis since April 1998. Mr. Pell oversees the following
areas: Human Resources, Law, Government Relations, Public Relations, Marketing
and Corporate Support Services. Prior to joining Genesis, Mr. Pell was the
Director of the Veterans Affairs Medical Center in Martinsburg, West Virginia
and Chief of Staff for the Department of Veterans Affairs for the previous nine
years. He received a Bachelor of Science Degree in Economics from the University
of Pennsylvania in 1970 and a Masters Degree in Health Care Administration from
the Mt. Sinai School of Medicine, City University of New York in 1975.
Barbara J. Hauswald has served as Vice President and Treasurer since April 1998.
Prior to joining Genesis, 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 us 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 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.
20
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
1999
First Quarter $9.50 $3.50
Second Quarter $7.69 $3.00
Third Quarter $4.00 $1.88
Fourth Quarter * $2.94 $1.94
1998
First Quarter $39.75 $24.88
Second Quarter $28.38 $21.25
Third Quarter $25.50 $11.06
Fourth Quarter $15.00 $7.00
* Through December 16, 1999
As of December 16, 1999, 48,634,444 shares of Common Stock were held of record
by 772 shareholders. In addition, there was 590,189 outstanding shares of Series
G Preferred Stock which are convertible into 7,932,796 shares of Common Stock;
24,369 shares of Series H Preferred Stock which are convertible into 27,850,590
shares of Common Stock; and 17,631 shares of Series I Preferred Stock which are
convertible into 20,149,410 shares of non-voting Common Stock. 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. At September 30, 1999 there were
approximately $15,100,000 of accrued but unpaid dividends on the Series G
Preferred. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements".
21
ITEM 6: SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
Statement of Operations Data
(in thousands, except per share data)
Net revenues $1,866,426 $1,405,305 $1,099,823 $ 671,469 $ 486,393
Operating income before capital costs* 85,879 134,690 184,868 127,024 93,253
Earnings (loss) before income tax expense
(benefit) and extraordinary items (332,661) (32,134) 75,232 58,086 40,296
Earnings (loss) before extraordinary items (287,950) (23,976) 48,144 37,169 25,531
Net income (loss) available to common shareholders
(290,050) (25,900) 47,591 37,169 23,608
Per common share data (Diluted):
Earnings (loss) before extraordinary items $ (8.11) $ (0.68) $ 1.34 $ 1.29 $ 1.03
Net income (loss) available to common shareholders (8.17) (0.74) 1.33 1.29 0.97
Weighted average shares of common stock and
equivalents 35,485 35,159 36,120 31,058 28,307
- ------------------------------------------------------------------------------------------------------------------------------
Other Financial Data
Operating income before capital costs * as a
percent of revenue 4.6% 9.6% 16.8% 18.9% 19.2%
Capital expenditures (in thousands) $ 77,943 $ 56,663 $ 61,102 $38,645 $ 24,719
Long-term debt to equity ratio 2.53 1.55 1.07 .66 1.4
- ------------------------------------------------------------------------------------------------------------------------------
Operating Data
Payor Mix (as a percent of patient service
revenue)
Private pay and other 47% 45% 39% 39% 38%
Medicare 14% 20% 24% 25% 21%
Medicaid 39% 35% 37% 36% 41%
Average owned/leased eldercare center beds 15,522 15,137 15,132 9,429 8,268
Occupancy Percentage 90.7% 91.5% 91.0% 92.6% 91.9%
Average managed life care units and eldercare
center beds 23,984 24,234 6,101 5,030 10,374
Average full-time equivalent personnel 40,500 37,708 27,700 16,325 12,180
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (in thousands)
Working capital $ 235,704 $ 243,461 $ 166,065 $ 113,916 $ 105,994
Total assets 2,429,914 2,627,368 1,434,113 950,669 600,389
Long-term debt 1,484,510 1,358,595 651,667 338,933 308,052
Shareholders' equity $ 587,890 $ 875,072 $ 608,021 $ 514,608 $ 221,548
* Capital costs include depreciation and amortization, lease expense and
interest expense.
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of significant transactions.
22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Since we began operations in July 1985, we have focused our efforts on providing
an expanding array of specialty medical services to elderly customers. We
generate revenues primarily from two sources: pharmacy and medical supply
services, and inpatient services however, we also derive revenue from other
sources.
We provide pharmacy and medical supply services through our NeighborCare(SM)
pharmacy subsidiaries. Included in pharmacy and medical supply service revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. We
provide these services through 69 institutional pharmacies (one is
jointly-owned) and 19 medical supply distribution centers located in our various
market areas. In addition, we operate 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. NeighborCare purchases
substantially all of its pharmaceuticals, approximately $540,000,000 annually,
through Cardinal Health, Inc. under a five year contract which commenced in May
of 1999. NeighborCare has other sources of supply available to it and has not
experienced difficulty obtaining pharmaceuticals or other supplies used in the
conduct of its business. Approximately 91% of the sales attributable to all
pharmacy operations in the twelve months ended September 30, 1999 were generated
through external contracts with independent healthcare providers with the
balance attributable to centers owned or leased by us, including the jointly
owned Multicare centers.
We include in inpatient service revenue all room and board charges and ancillary
service revenue for our eldercare customers at our 109 owned and leased
eldercare centers.
We include the following in other revenues: rehabilitation therapy, management
fees, capitation fees, consulting services, homecare services, physician
services, transportation services, diagnostic services, hospitality services,
group purchasing fees and other healthcare related services.
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:
o .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Series G Preferred"),
o $22.50 in cash, or
o a combination of cash and shares of Series G 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 Series G
Preferred.
23
At September 30, 1999 there were approximately $15,100,000 in dividends in
arrears on the Series G Preferred which are recorded on the accompanying balance
sheet as other long-term liabilities. The holders of the Series G Preferred are
entitled to be paid in additional shares of Series G Preferred to the extent
that dividends are not declared and paid or funds continue not to be legally
available for the payment of dividends after four consecutive quarterly periods,
as defined.
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. See "Legal Proceedings".
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put / call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis
ElderCare Corp. common stock at a price determined pursuant to the Put/Call
Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as
defined below) 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 (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"). The Company
completed the Pharmacy Purchase effective January 1, 1998. The Company completed
the Therapy Purchase in October 1997.
24
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock, (the "Series H Preferred") which was
issued to Cypress, TPG and Nazem, or their affiliated investment
funds, in proportion to their respective investments in Genesis
ElderCare Corp., and
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, (the "Series I Preferred")
which was issued to Cypress, TPG and Nazem, or their affiliated
investment funds, in proportion to their respective investments in
Genesis ElderCare Corp.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis common stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an irrevocable
proxy to vote their shares of common stock of Genesis ElderCare Corp.
on all matters to be voted on by shareholders, including the election
of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
25
o omit the requirement that specified significant actions receive the
approval of at least one designee of each of Cypress, TPG and
Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
o provide that Genesis may appoint 100% of the members of the operating
committee of the board of directors of Genesis ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis common stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which would
constitute a change in control, as defined in the Restructuring
Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of, any class of Genesis' capital
stock.
26
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part or a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the restructuring transaction, Genesis accounted for its investment in
Multicare using the equity method of accounting. Upon consummation of the
restructuring transaction, Genesis will consolidate the financial results of
Multicare since Genesis will have managerial, operational and financial control
of Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses will be consolidated at
their recorded historical amounts and the financial impact of transactions
between Genesis and Multicare will be eliminated in consolidation. The non-
Genesis shareholders' remaining 56.4% interest in Multicare will be carried as
minority interest based on their proportionate share of Multicare's historical
book equity. For so long as there is a minority interest in Multicare, the
minority shareholders' proportionate share of Multicare's net income or loss
will be recorded through adjustment to minority interest.
In connection with the restructuring transaction, Genesis intends to record a
non-cash charge of approximately $420,000,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred.
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 $15,100,000
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, we
sold our leasehold rights and option to purchase seven eldercare facilities
acquired in our 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. We also anticipate entering into transactions with ElderTrust in the
future.
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.
27
Fiscal 1999 Compared to Fiscal 1998
Our total net revenues for the fiscal year ended September 30, 1999 ("Fiscal
1999") were $1,866,426,000 compared to $1,405,305,000 for the fiscal year ended
September 30, 1998 ("Fiscal 1998"), an increase of $461,121,000 or 33%. Pharmacy
and medical supply service revenue increased $502,556,000 to $927,334,000 from
$424,778,000, of which approximately $453,324,000 is attributed to the added
revenues as a result of the Vitalink Transaction, approximately $20,720,000 is
attributed to the added revenues as a result of the Multicare Pharmacy Purchase,
and the remainder is primarily due to other volume growth in the institutional,
medical supply and community-based pharmacies. Inpatient service revenue
declined $37,278,000 or 5% to $704,105,000 from $741,383,000. Of this decline,
approximately $2,693,000 is attributed to the revenues of an eldercare center
located in Florida that was closed in March 1999, $5,036,000 is attributed to
the revenues of a Pennsylvania eldercare center for which the lease was
terminated in July 1998 and approximately $42,740,000 is attributed to dilution
in the Company's Medicare rate following our October 1, 1998 implementation of
PPS. These decreases in inpatient service revenue are offset by the positive
impact of rate increases of other payor categories and changes in payor mix.
Under PPS, the average Medicare rate per day was reduced to approximately $302
per patient day during the twelve months ended September 30, 1999 compared to
approximately $390 per patient day for the comparable period last year. There
were 544,997 Medicare patient days during the twelve months ended September 30,
1999 compared to 491,493 for the comparable period last year. Total patient days
declined 63,009 to 4,938,051 during Fiscal 1999 compared to 5,001,060 during
Fiscal 1998. The decline in overall census is principally attributed to 17,462
patient days at the closed Florida eldercare center, 29,733 patient days at the
Pennsylvania eldercare center for which the lease was terminated and the
remaining decline of 15,814 patient days is attributed to a net drop in overall
occupancy. Other revenue declined from $239,144,000 to $234,987,000, or
$4,157,000. This decline is primarily due to reduced rehabilitation service
revenue following our implementation of PPS and the January 1, 1999
implementation of PPS by many of our external rehabilitation customers,
including the Multicare eldercare centers. Additionally, we had reduced
management fees as a result of the termination of eight management contracts and
the negative impact of PPS on the net revenues of the managed eldercare centers.
These declines in other revenue were offset by increases in other service
related business.
Our operating expenses before depreciation, amortization, lease expense, and
interest expense were $1,780,547,000 for the twelve months ended September 30,
1999 compared to $1,270,615,000 for the comparable period in the prior year, an
increase of $509,932,000 or 40%, of which approximately $391,304,000 is
attributed to the added operating expenses as a result of the Vitalink
Transaction, approximately $14,707,000 is attributed to the added operating
expenses as a result of the Multicare Pharmacy Purchase, approximately
$51,565,000 is attributed to an increase in the impairment of assets and other
charges (see discussion and table below), and the remaining increase of
$59,234,000 is attributed to inflationary increases, growth in the institutional
pharmacy, medical supply and contract therapy divisions, capitated expenses, as
well as increased costs of community-based programs. These increases are offset
by reduced operating expenses of approximately $2,273,000 attributed to the
closed Florida eldercare center and $4,605,000 to the Pennsylvania eldercare
center for which the lease was terminated.
In accordance with SFAS 121, we record impairment losses on long-lived assets,
including goodwill, when events and circumstances indicate that long-lived
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.
The profitability and liquidity of Genesis and the long term care industry have
been adversely impacted by PPS. The current and projected losses of certain
eldercare centers operating under PPS indicate that these assets are impaired.
We estimated the fair value of these assets by using a multiple of their
operating cash flow based upon market comparisons of similar assets recently
sold or currently under negotiations to sell. After performing this evaluation,
we concluded that the carrying value of certain eldercare centers, including
goodwill and property, plant and equipment, exceeded their fair value by
approximately $9,000,000.
28
In addition to long-lived assets, we performed an evaluation of all of our
assets, contracts, operations and employment arrangements. As a result of this
evaluation, we concluded that the adverse impact of PPS on our liquidity and
profitability necessitated exiting certain businesses and projects. We fully
reserved the carrying value of our transportation business, exited the
operations of six leased eldercare centers at the end of their lease terms,
abandoned certain investments in information systems, recorded the
exit costs of a capitation contract in our Chesapeake region and wrote off
certain unrecoverable development project costs as well as other unrecoverable
assets. In addition, the ability of certain former customers of ours to repay
amounts due for services rendered is less likely due to the adverse impact of
PPS on their liquidity and profitability. As a result, we wrote down certain
notes receivable, advances, trade and third party receivables, due to and from
formerly owned and managed facilities. Also, we entered into the restructuring
of the Multicare joint venture and amended our senior bank credit facility
resulting in, legal and other professional fees. The following table
summarizes the before tax impact of the charges in Fiscal 1999:
Exit costs and write-off of unrecoverable assets of one owned eldercare center
to be sold, and six leased eldercare centers closed or no longer under lease
and an investment in a respiratory services company $ 24,100,000
Investments in information systems abandoned 13,000,000
Exit costs and write-down of the remaining assets of the transportation business 12,700,000
Impairment of long-lived assets of six eldercare centers under SFAS 121 9,000,000
Unrecoverable development project costs 5,600,000
Cost to exit a capitation contract 5,000,000
-------------
Subtotal - terminated operations, discontinued businesses and asset impairments 69,400,000
-------------
Uncollectible trade receivables due to customer bankruptcy or other
liquidity issues 17,800,000
Third party appeal issues deemed uncollectible 17,100,000
Costs to restructure the Multicare joint venture and amend the Company's senior
bank credit facility 11,000,000
Other charges, including severance costs 13,870,000
-------------
Subtotal - Uncollectible accounts, restructuring and other 59,770,000
-------------
Notes receivable, advances, trade receivables and third party settlement receivables,
due from or to businesses formerly owned or managed deemed uncollectible 37,900,000
-------------
Total (included in operating expenses) $ 167,070,000
-------------
Due to specific events occurring in the fourth quarter of Fiscal 1998 and a
focus on core business operations in response to PPS, we recorded non-cash
charges before income taxes of approximately $115,505,000, of which
approximately $24,000,000 related to the impairment of one eldercare center and
certain non-core businesses, including our transportation business and certain
non-core Medicare home health operations; approximately $43,000,000 related to
investments in owned eldercare centers and other assets we believe are impaired
as a result of PPS; approximately $23,000,000 related to impaired investments in
eldercare centers previously owned or managed by us; and approximately
$26,000,000 related to our investment in Doctors Health, a medical care
management company in our Chesapeake region.
Increased depreciation and amortization expense of $22,570,000 is attributed to
the depreciation of fixed assets and amortization of goodwill and deferred
financing costs in connection with the Multicare Pharmacy Purchase and the
Vitalink Transaction, as well as incremental depreciation expense from capital
additions made since September 30, 1998.
Interest expense increased $37,132,000 or 45%. This increase in interest expense
is primarily due to additional borrowings used to finance the Multicare Pharmacy
Purchase, the Vitalink Transaction and increased working capital and capital
borrowings. This increase is partially offset by interest savings as a result of
the repayment of indebtedness from proceeds received in connection with the
ElderTrust Transactions.
29
Equity in net income (loss) of unconsolidated affiliates declined $178,721,000
to a loss of $178,235,000 in Fiscal 1999 from income of $486,000 in Fiscal 1998.
Approximately $164,133,000 of this decline is due to the recognition of our
43.6% share of after tax charges recorded by Multicare related to the write-down
of long-lived assets, including goodwill, pursuant to FAS 121. In part,
Multicare's January 1, 1999 implementation of PPS and changes in other
government regulation has precluded it from achieving operating profits at
levels that existed prior to the Multicare Transaction. The remaining decline is
principally due to Multicare's declining earnings as a result of PPS.
In connection with the early repayment and restructuring of debt in the quarters
ended December 31, 1998 and 1997, we recorded an extraordinary loss, net of tax
of approximately $1,799,000 ($2,902,000 before tax) and $1,924,000 ($3,030,000
before tax), respectively, to write-off unamortized deferred financing fees. In
connection with the defeasance of certain municipal bonds in the quarter ended
March 31, 1999 we recorded an extraordinary loss, net of tax of approximately
$301,000 ($474,000 before tax).
In Fiscal 1999, we accrued $19,477,000 of dividends on the Series G Preferred
issued in August of 1998 in connection with the Vitalink Transaction. In Fiscal
1998 approximately $1,655,000 were accrued from the date of issuance through
September 30, 1998. Approximately $15,145,000 of Series G Preferred dividends
are accrued and unpaid at September 30, 1999.
Fiscal 1998 Compared to Fiscal 1997
Our total net revenues in 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%. Pharmacy and medical supply service revenue
increased $182,960,000 to $424,778,000 from $241,818,000, of which approximately
$46,600,000 is attributed to the added revenues as a result of the August 1998
Vitalink Transaction, approximately $80,598,000 is attributed to the added
revenues as a result of the Multicare Pharmacy Purchase, and the remainder is
primarily due to other volume growth in the institutional, medical supply and
community-based pharmacies. Inpatient service revenue increased $29,530,000 or
4% to $741,383,000 from $711,853,000. Of this increase, approximately $9,782,000
is attributed to the revenues of two eldercare centers acquired in 1998 and
approximately $35,821,000 is due to the positive impact of rate increases in all
payor categories, changes in payor mix and increased occupancy. These increases
are offset by a decline in revenue of approximately $16,100,000 related to the
termination of operations by Genesis of three leased eldercare centers in
September 1997. Total patient days increased 10,759 to 5,001,060 during the
twelve months ended September 30, 1998 compared to 4,990,301 during the
comparable period last year. The increase in census is principally attributed to
an increase in overall occupancy. Other revenue increased to $239,144,000 in
Fiscal 1998 from $146,152,000 in Fiscal 1997, an increase of $92,992,000. Of
this increase, approximately $21,548,000 is attributed to the revenues of the
Multicare rehabilitation therapy business acquired in October 1997,
approximately $42,200,000 is due to management fee revenue earned from the
management of the Multicare operations and approximately $29,244,000 is due to
revenue growth in rehabilitation therapy revenue, other service related business
and capitated revenue under a contract with Blue Cross / Blue Shield of Maryland
("BCBSMD").
Our operating expenses before depreciation, amortization, lease expense and
interest expense were $1,270,615,000 for in Fiscal 1998 compared to $914,955,000
in Fiscal 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 us, approximately $80,700,000
is attributed to an increase in our 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
30
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 our 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, we recorded non-cash
charges before income taxes of approximately $115,505,000, of which
approximately $24,000,000 relates to the impairment of one eldercare center and
certain non-core businesses, including our transportation business and certain
non-core Medicare home health operations; approximately $43,000,000 relates to
investments in owned eldercare centers and other assets we believe are impaired
as a result of PPS; approximately $23,000,000 relates to impaired investments in
eldercare centers previously owned or managed by us; and approximately
$26,000,000 relates to our investment in Doctors Health, a medical care
management company in Genesis' Chesapeake region.
In the fourth quarter of Fiscal 1997, we completed an evaluation of our
physician service business and announced our intention to restructure this
business. In connection with the plan and selected asset impairments, we
recorded a fourth quarter pretax charge of approximately $5,700,000. In
addition, we 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. We 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 our 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.
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 our
investment in Multicare, the Pharmacy Purchase and the Therapy Purchase, the
Vitalink Transaction and an increase our 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, we 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.
31
Liquidity and Capital Resources
General
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 1999, we had approximately $1,484,510,000 of
long-term indebtedness, excluding the current portion of indebtedness of
$37,126,000, which represented 72% of our total capitalization. The degree to
which we are leveraged could have important consequences, including, but not
limited to the following:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be
limited or impaired;
o a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on indebtedness,
thereby reducing the funds available to us for our operations;
o our operating flexibility is limited by restrictions contained in
some of our debt agreements which limit our ability to incur
additional indebtedness and enter into other financial transactions,
to pay dividends, and set forth minimum net worth requirements;
o our degree of leverage may make us more vulnerable to industry
downturns and less competitive, may reduce our flexibility in
responding to changing business and industry conditions and may limit
our ability to pursue other business opportunities, to finance our
future operations or capital needs, and to implement our business
strategy; and
o certain of our borrowings are and will continue to be at variable
rates of interest, which exposes us to the risk of higher interest
rates.
Required payments of principal and interest on our indebtedness is expected to
be satisfied by our cash flow from operations. Our ability to generate
sufficient cash flows from operations depends on a number of internal and
external factors affecting our business and operations, including factors beyond
our control, such as prevailing industry conditions. There can be no assurances
that cash flow from operations will be sufficient to enable us to service our
debt and meet our other obligations. If such cash flow is insufficient, we may
be required to refinance and/or restructure all or a portion of our existing
debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing or restructuring would be possible or that
any such sales of assets or additional financing could be achieved. Also, the
ability of our Multicare affiliate to meet its obligations is dependent upon its
ability to consummate certain asset sales. There can be no assurances that such
asset sales will be consummated by Multicare. We also have significant long-term
operating lease obligations with respect to certain of our sites of service,
including eldercare centers.
Operating cash flow will depend upon our ability to effect cost reduction
initiatives and to reduce our investment in working capital. We believe that
operating cash flow, which is expected to be augmented by planned refinancing
transactions, will be sufficient to meet our future obligations. However, there
can be no assurances that the cash flow from our operations will be sufficient
to enable us to service our substantial indebtedness and meet our other
obligations.
Working capital decreased $7,757,000 to $235,704,000 at September 30, 1999 from
$243,461,000 at September 30, 1998. Days revenue in accounts receivable
increased approximately 2 days to 72 days during the quarter ended September 30,
1999 compared to the quarter ended September 30, 1998. Accounts payable and
accrued expenses increased during the twelve months ended September 30, 1999,
due to the timing of routine operating payments including, among other things,
interest costs. As a result of lower earnings and the timing of payments,
Genesis' cash flow from operations for the twelve months ended September 30,
1999 was approximately $43,557,000 compared to approximately $77,955,000 for the
twelve months ended September 30, 1998. At September 30, 1999, included in
accounts receivable were approximately $11,600,000 due from HCR Manor Care,
approximately $12,200,000 due from Mariner Health Group, Inc. and approximately
$20,400,000 due from our Multicare affiliate for the provision of certain
ancillary services rendered.
32
Investing activities for the twelve months ended September 30, 1999 include
approximately $77,943,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data processing
hardware and software. Of the capital expenditures, approximately $23,524,000
relates to the construction, renovation and expansion of five assisted living
facilities. The cash used to finance investments in unconsolidated affiliates of
approximately $16,000,000 during the twelve months ended September 30, 1999
represents our limited partnership investment in four assisted living properties
with which we have entered into a management contract, and two joint venture
assisted living properties under development which we will manage upon
completion of construction. To date, we have financed approximately $17,720,000
of the construction costs of the two assisted living properties under
development. Over the next twelve months, the joint venture partnerships are
expected to refinance the construction costs with outside financing. There can
be no assurances that such refinancing transactions will be completed.
Credit Facility and Other Debt
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries a credit facility
totaling $1,250,000,000 (the "Credit Facility") for the purpose of: refinancing
and funding interest and principal payments of certain existing indebtedness;
funding permitted acquisitions and funding Genesis' and its subsidiaries'
working capital for general corporate purposes, including fees and expenses of
transactions. The fourth amended and restated credit agreement made the
financial covenants for certain periods less restrictive; required minimum
assets sales and generally reallocated the proceeds thereof among the Tranche II
Facility (defined below), the Revolving Facility (defined below) and the Term
Loans (defined below); permitted the restructuring of the Put / Call Agreement,
as defined; and increased the interest rates applying to the Term Loans and the
Revolving Facility. Additionally, the fourth amended and restated credit
agreement provides for $40,000,000 of additional borrowing capacity, (the
"Tranche II Facility") subject to the satisfaction of certain conditions, which
have been satisfied. The asset sales required by the Credit Facility total
$12,000,000 by December 31, 1999, $37,000,000 by June 30, 2000 and $40,000,000
by December 31, 2000. Genesis has satisfied the requirement through December 31,
1999 and has transactions in process to satisfy the majority of the aggregate
requirement through December 31, 2000.
The Credit Facility consists of three term loans with original balances of
$200,000,000 each (collectively, the "Term Loans"), and a $650,000,000 revolving
credit loan (the "Revolving Facility") and a $40,000,000 Tranche II Facility.
The Term Loans amortize in quarterly installments through 2005, of which
$28,670,000 is payable in Fiscal 2000. The loans consist of
o an original six year term loan maturing in September 2003 with an
outstanding balance of $116,834,000 at September 30, 1999 (the
"Tranche A Term Facility");
o an original seven year term loan maturing in September 2004 with an
outstanding balance of $152,520,000 at September 30, 1999 (the
"Tranche B Term Facility"); and
o an original eight year term loan maturing in June 2005 with an
outstanding balance of $152,156,000 at September 30, 1999 (the
"Tranche C Term Facility").
o The Revolving Facility, with an outstanding balance of $613,500,000
at September 30, 1999, becomes payable in full on September 30, 2003.
33
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, and also by first priority security interests
(subject to certain exceptions) in all personal property, including inventory,
accounts receivable, equipment and general intangibles. Mortgages on certain of
Genesis' subsidiaries' real property were also granted. 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 (the "Annual Applicable Margin") that is
dependent upon a certain financial ratio test. Loans under the Tranche A Term
Facility and Revolving Facility have an Annual Applicable Margin of 1.50% for
Prime Rate loans and 3.25% for LIBO Rate loans (an effective rate of 8.76% at
September 30, 1999). Loans under the Tranche B Term Facility have an Annual
Applicable Margin of 1.75% for Prime Rate loans and 3.50% for LIBO Rate loans
(an effective rate of 9.01% at September 30, 1999. Loans under the Tranche C
Term Facility have an Annual Applicable Margin of 2.00% for Prime Rate loans and
3.75% for LIBO Rate loans (an effective rate of 9.26% at September 30, 1999).
Subject to meeting certain financial ratios, 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 certain agreements
including the Management Agreement and the Put/Call Agreement (as amended), 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, we 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.
Certain of our other outstanding loans contain covenants which, without the
prior consent of the lenders, limit certain of our activities. Such covenants
contain limitations relating to the merger or consolidation of Genesis and our
ability to secure indebtedness, make guarantees, grant security interests and
declare dividends. In addition, we 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, we are restricted from paying cash dividends on
the Common Stock, unless certain conditions are met. We have not declared or
paid any cash dividends on our Common Stock since our inception.
The Multicare Restructuring
In connection with the restructuring of the Multicare transaction Genesis
entered into a Restructuring Agreement with Cypress, TPG and Nazem to
restructure their joint investment in Genesis ElderCare Corp., the parent
company of Multicare. Pursuant to the Restructuring Agreement the Put under the
Put/Call Agreement was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock, which was issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp., and
34
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, which was issued to
Cypress, TPG and Nazem, or their affiliated investment funds, in
proportion to their respective investments in Genesis ElderCare Corp.
The Series H Preferred Stock are convertible into 27,850,286 shares of Common
Stock. The Series I Preferred Stock are convertible into 20,149,410 shares of
non-voting Common Stock. The Series and H and I Preferred have an initial
dividend of 5.00%, which increases 0.05% beginning the sixth anniversary date
and an additional 0.05% each anniversary date thereafter through the 12th
anniversary date, to a maximum of 8.5%.
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997 Act and
the Refinement Act, has resulted in continuing change in the Medicare and
Medicaid reimbursement programs which has adversely impacted us. 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. 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 us.
See "Cautionary Statements Regarding Forward Looking Statements," "Business -
Revenue Sources" and "Business - Government Regulation."
Anticipated Impact of Healthcare Reform
The Genesis eldercare centers began implementation of PPS on October 1, 1998 and
the majority of the Multicare eldercare centers began implementation of PPS on
January 1, 1999. The actual impact of PPS on our earnings in future periods will
depend on many variables which can not be quantified at this time, including the
effect of the Refinement Act, regulatory changes, patient acuity, patient length
of stay, Medicare census, referral patterns, ability to reduce costs and growth
of ancillary business. PPS and other existing and future legislation and
regulation may also adversely affect our pharmacy and medical supply revenue,
and other specialty medial services
See "Cautionary Statements Regarding Forward Looking Statements," "Business -
Revenue Sources:" and "Business - Government Regulation."
Other
In August 1998, in connection with the Vitalink Transaction, the Company issued
the Series G Preferred. The Series G Preferred has a face value of approximately
$295,100,000 and an initial dividend of 5.9375% and generally is not
transferable without our consent. The dividend rate increases on the fourth,
fifth, ninth, eleventh and thirteenth anniversary date to 6.1875%, 6.6250%,
7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is convertible
into Genesis common stock, par value $.02 per share, at $37.20 per share and it
35
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. At September 30, 1999 there were approximately
$15,100,000 of accrued, but unpaid dividends on the Series G Preferred. The
Company does not anticipate paying cash dividends on the Series G Preferred in
fiscal 2000. The holders of the Series G Preferred are entitled to be paid in
additional shares of Series G Preferred to the extent that dividends are not
declared and paid or funds continue to not be legally available for the payment
of dividends after four consecutive quarterly periods, as defined. 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.
In November 1999 the Company's Board of Directors approved a plan allowing
employees to elect to redeem unexercised stock options issued to them prior to
January 1, 1999 in exchange for Genesis common stock (the "Redemption Plan"). If
an employee elects to participate in the Redemption Plan, every one vested
outstanding stock option held as of November 11, 1999 would be exchanged for one
share of Genesis common stock, and every two unvested outstanding stock options
held as of November 11, 1999 would be exchanged for one share of Genesis common
stock. The Company believes nearly all employees will elect to participate in
the Redemption Plan. If all employees participate, approximately 4,600,000 stock
options would be redeemed in exchange for approximately 4,200,000 shares of
Genesis common stock. The Redemption Plan is subject to shareholder approval and
will be voted upon at the Company's 2000 Annual Meeting scheduled for March
2000. As a result of the Redemption Plan, the Company expects to record an after
tax charge to compensation expense of approximately $5,300,000 in the first
fiscal quarter of 2000.
Seasonality
Our 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, we
have offset our increased operating costs by increasing charges for our services
and expanding our 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."
36
Year 2000 Compliance
We have implemented a process to address our Year 2000 compliance issues. The
process includes:
o 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;
o the remediation of non-compliant systems and equipment; and
o contingency planning.
We have concluded our inventory and assessment work and have concluded our
remediation of information technology ("IT") systems and equipment and non-IT
systems and equipment (embedded technology). We have substantially completed our
review of the systems and equipment of critical suppliers, customers and other
third parties.
With respect to the Year 2000 compliance of critical third parties, we derive a
substantial portion of our revenues from the Medicare and Medicaid programs. In
1998, HCFA asserted that all systems necessary to make payments to fiscal
intermediaries would be compliant. HCFA provided further assurance that
intermediary systems would also be compliant well in advance of the deadline.
All Medicare and most Medicaid intermediaries have reported to us that they are
either already compliant or will be prior to the end of 1999. We have worked
actively to confirm the Year 2000 readiness status for each intermediary and
continue to work cooperatively with a few remaining Medicaid plans to ensure
appropriate continuing payments for services rendered to all government-insured
patients.
We have remediated our critical IT and non-IT systems and equipment. We have
also prepared contingency plans in the event that essential systems and
equipment fail to be Year 2000 compliant. We believe we have achieved Year 2000
compliance for all our essential systems and equipment, although there can be no
assurance that potential non-compliance will not have a material adverse effect
on our business, financial condition or results of operations. In addition there
can be no assurance that all of our critical suppliers and other third parties
will be Year 2000 compliant by January 1, 2000, or that such potential
non-compliance will not have a material adverse effect on our business,
financial condition or results of operations.
We currently estimate that our aggregate costs directly related to Year 2000
compliance efforts will be approximately $2,100,000. Our Year 2000 efforts are
ongoing and our overall plan and cost estimations will continue to evolve, as
new information becomes available. Our analysis of our 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.
Our failure, or the failure of third parties, to be fully Year 2000 compliant
for essential systems and equipment by January 1, 2000 could result in
interruptions of normal business operations. The Company's potential risks
include:
37
o the inability to deliver patient care related services in our
facilities and / or in non-affiliated facilities;
o the delayed receipt of reimbursement from the Federal or State
governments, private payors, or intermediaries;
o the failure of security systems, elevators, heating systems or other
operational systems and equipment of our facilities; and,
o the inability to receive critical equipment and supplies from
vendors.
Each of these events could have a material adverse effect on our business,
results of operations and financial condition.
Contingency plans for our Year 2000-related issues have been developed and
include, but are not limited to, identification of alternate suppliers,
alternate technologies and alternate manual systems.
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 Genesis or to products or services offered by
Genesis, is also intended to be "Year 2000 Readiness Disclosure" as such term is
defined in the Year 2000 Act.
New Accounting Pronouncements
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 our
fiscal year ending September 30, 2000. We currently estimate the adoption of the
Statement will result in a charge of approximately $6,700,000, net of tax, which
will be recorded as a cumulative effect of a change in accounting principle in
the Company's first quarter ending December 31, 1999.
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, 2000. We intend to adopt this
accounting standard as required. The adoption of this standard is not expected
to have a material impact on our earnings or financial position.
38
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes. In the normal course of
business, we employ established policies and procedures to manage our exposure
to changes in interest rates. Our objective in managing our exposure to interest
rate changes is to limit the impact of such changes on earnings and cash flows
and to lower our overall borrowing costs. To achieve our objectives, we
primarily use interest rate swaps to manage net exposure to interest rate
changes related to our portfolio of borrowings. Notional amounts of interest
rate swap agreements are used to measure interest to be paid or received
relating to such agreements and do not represent an amount of exposure to credit
loss. The fair value of interest rate swap agreements is the estimated amount we
would receive or pay to terminate the swap agreement at the reporting date,
taking into account current interest rates. The estimated amount we would pay to
terminate our interest rate swap agreements outstanding at September 30, 1999 is
approximately $26,830,000. The fair value of fixed rate and variable rate debt
is estimated to be $198,706,000 and $751,883,000, respectively, at September 30,
1999. The estimated fair value is based upon quoted market prices for the same
or similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The table below represents the contractual or
notional balances of our fixed rate and market sensitive instruments at expected
maturity dates and the weighted average interest rates.
Expected Maturity
($ in thousands) 2000 2001 2002 2003 2004 Thereafter Total
--------------------------------------------------------------------------------------
Fixed rate debt $ 8,456 $ 4,995 $ 3,111 $ 3,069 $ 3,047 $ 461,971 $ 484,649
Weighted average rate 8.78% 8.96% 9.23% 9.23% 9.32% 9.52% 9.49%
--------------------------------------------------------------------------------------
Variable rate debt $28,670 $ 28,670 $ 35,972 $ 649,472 $188,403 $105,345 $1,036,532
Weighted average rate L+3.29% L+3.29% L+3.28% L+3.25% L+3.56% L+3.75% L+3.36%
--------------------------------------------------------------------------------------
Variable to Fixed Swaps $ - $200,000 $ 70,000 $ 100,000 $ - $ 320,000 $ 690,000
Weighted average rate
Pay fixed rate - 5.48% 5.64% 4.98% - 6.83% 6.05%
Weighted average rate
Receive variable rate - L L L - L+1.38% L+1.17%
--------------------------------------------------------------------------------------
Fixed to Variable Swaps $ - $ - $ - $ - $ - $ 320,000 $ 320,000
Weighted average rate
Pay variable rate - - - - - L L
Weighted average rate
Receive fixed rate - - - - - 7.58% 7.58%
--------------------------------------------------------------------------------------
L - three-month LIBO rate (approximately 5.51% at September 30, 1999)
39
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 41
Consolidated Balance Sheets as of September 30, 1999 and 1998 42
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997 43
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1999, 1998 and 1997 44
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 45
Notes to Consolidated Financial Statements 46
40
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, 1999 and 1998 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, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
December 1, 1999
41
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Assets (in thousands except share
and per share data)
Current assets:
Cash and equivalents $ 12,397 $ 4,902
Investments in marketable securities 24,599 26,658
Accounts receivable, net of allowance for doubtful accounts
of $86,067 in 1999 and $73,719 in 1998 370,472 376,023
Inventory 63,369 63,760
Prepaid expenses and other current assets 46,964 40,579
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 517,801 511,922
- --------------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net 612,301 596,562
Notes receivable and other investments 40,075 47,623
Other long-term assets 112,978 136,161
Investments in unconsolidated affiliates 180,882 344,567
Goodwill and other intangibles, net 965,877 990,533
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,429,914 $ 2,627,368
==========================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 37,126 $ 49,712
Accounts payable 131,312 80,980
Accrued expenses 42,492 59,474
Accrued compensation 42,320 59,371
Accrued interest 28,344 18,924
Income taxes payable 503 -
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 282,097 268,461
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,484,510 1,358,595
Deferred income taxes 13,827 72,828
Deferred gain and other long-term liabilities 61,590 52,412
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 590,253 issued and outstanding at
September 30, 1999 and 1998 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 36,145,678 and 35,133,578 at September 30, 1999;
35,225,731 and 35,180,130 at September 30, 1998 723 704
Additional paid-in capital 753,452 749,491
Retained earnings (deficit) (165,620) 124,430
Accumulated other comprehensive income (loss) (428) 684
Treasury stock, at cost (243) (243)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 587,890 875,072
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,429,914 $ 2,627,368
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements
42
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
Net revenues:
Pharmacy and medical supply services $ 927,334 $ 424,778 $ 241,818
Inpatient services 704,105 741,383 711,853
Other revenue 234,987 239,144 146,152
- ------------------------------------------------------------------------------------------------------------------------------------
Total net revenues 1,866,426 1,405,305 1,099,823
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses 1,723,682 1,217,436 873,916
General corporate expenses 56,865 53,179 41,039
Depreciation and amortization 74,955 52,385 41,946
Lease expense 26,653 31,182 28,587
Interest expense, net 119,220 82,088 39,103
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, equity in net income (loss)
of unconsolidated affiliates and extraordinary items (134,949) (30,965) 75,232
Income tax expense (benefit) (44,711) (8,158) 27,088
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in net income (loss) of
unconsolidated affiliates and extraordinary items (90,238) (22,807) 48,144
Equity in net income (loss) of unconsolidated affiliates (178,235) 486 -
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary items (268,473) (22,321) 48,144
Extraordinary items, net of tax (2,100) (1,924) (553)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (270,573) (24,245) 47,591
Preferred stock dividend 19,477 1,655 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shareholders $ (290,050) $ (25,900) $ 47,591
====================================================================================================================================
Per common share data:
Basic
Earnings (loss) before extraordinary items $ (8.11) $ (0.68) $ 1.39
Net income (loss) $ (8.17) $ (0.74) $ 1.38
Weighted average shares of common stock 35,485,306 35,159,195 34,557,874
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted
Earnings (loss) before extraordinary items $ (8.11) $ (0.68) $ 1.34
Net income (loss) $ (8.17) $ (0.74) $ 1.33
Weighted average shares of common stock and equivalents 35,485,306 35,159,195 36,119,820
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
43
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Series G
Cumulative
Convertible Additional Retained
(in thousands) Preferred Common paid-in earnings
Stock stock capital (deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ - $ 640 $ 411,472 $ 102,739
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Exercise of common stock options - 4 2,815 -
Conversion of Debentures - 58 42,945 -
Comprehensive income
Net income - - - 47,591
Total comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ - $ 702 $ 457,232 $ 150,330
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Exercise of common stock options - 2 1,587 -
Issuance of Series G Cumulative Convertible Preferred Stock 6 - 295,114 -
Purchase of common stock call options - - (4,442) -
Comprehensive income (loss)
Net unrealized gain on marketable securities - - - -
Net loss - - - (24,245)
Total comprehensive income (loss)
Series G Cumulative Convertible Preferred Stock dividends - - - (1,655)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 6 $ 704 $ 749,491 $ 124,430
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Exercise of common stock options - 1 28 -
Issuance of common stock to 401(k) plan - 18 3,982 -
Partnership distribution - - (49) -
Comprehensive (loss)
Net unrealized loss on marketable securities - - - -
Net loss - - - (270,573)
Total comprehensive (loss)
Series G Cumulative Convertible Preferred Stock dividends - - - (19,477)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 6 $ 723 $ 753,452 $ (165,620)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
other
comprehensive Total
(in thousands) income Treasury shareholders'
(loss) stock equity
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ - $ (243) $ 514,608
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Exercise of common stock options - - 2,819
Conversion of Debentures - - 43,003
Comprehensive income
Net income - - 47,591
---------
Total comprehensive income 47,591
---------
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ - $ (243) $ 608,021
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Exercise of common stock options - - 1,589
Issuance of Series G Cumulative Convertible Preferred Stock - - 295,120
Purchase of common stock call options - - (4,442)
Comprehensive income (loss)
Net unrealized gain on marketable securities 684 - 684
Net loss - - (24,245)
---------
Total comprehensive income (loss) (23,561)
---------
Series G Cumulative Convertible Preferred Stock dividends - - (1,655)
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 684 $ (243) $ 875,072
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Exercise of common stock options - - 29
Issuance of common stock to 401(k) plan - - 4,000
Partnership distribution - - (49)
Comprehensive (loss)
Net unrealized loss on marketable securities (1,112) - (1,112)
Net loss - - (270,573)
---------
Total comprehensive loss) (271,685)
---------
Series G Cumulative Convertible Preferred Stock dividends - - (19,477)
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ (428) $ (243) $ 587,890
- ----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
44
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ (270,573) $ (24,245) $ 47,591
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 (45,214) (8,158) 21,023
Depreciation and amortization 74,955 52,385 41,946
Amortization of deferred gains and premiums (5,986) (1,700) (858)
Loss on impairment of assets and other charges 164,527 94,817 15,000
Equity in net (income) loss of unconsolidated affiliates 178,235 (486) -
Extraordinary items, net of tax 2,100 1,924 553
Non-cash common stock contribution to 401(k) plan 4,000 - -
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (47,562) (57,882) (41,801)
Cost reports receivable (3,633) (1,469) (17,447)
Inventory (131) (4,942) (5,938)
Prepaid expenses and other current assets (9,296) (4,989) (4,529)
Accounts payable and accrued expenses 2,135 32,700 (2,186)
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 314,130 102,200 5,763
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 43,557 77,955 53,354
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of marketable securities (11,171) (22,764) (27,022)
Proceeds on maturity or sale of marketable securities 12,119 10,835 17,809
Capital expenditures (77,943) (56,663) (61,102)
Payments for acquisitions, net of cash acquired (16,634) (400,576) (257,837)
Investments in unconsolidated affiliates (16,051) (344,081) -
Proceeds from assets sold, net - 91,495 -
Reductions in notes receivable and other investments 916 52,410 1,943
Additions to notes receivable and other investments (3,424) (15,947) (14,747)
Other long term asset additions (22,782) (15,446) (7,816)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (134,970) (700,737) (348,772)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings under working capital revolving credit facility 126,000 100,500 176,683
Repayment of long term debt and payment of sinking fund requirments (149,888) (69,540) (7,946)
Proceeds from issuance of long-term debt 136,756 611,243 126,500
Debt issuance costs (7,953) (23,317) (3,750)
Purchase of common stock call options - (4,442) -
Partnership distribution (49) - -
Preferred stock dividends paid (5,987) - -
Stock options exercised 29 1,589 2,819
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 98,908 616,033 294,306
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents 7,495 (6,749) (1,112)
Cash and equivalents
Beginning of year 4,902 11,651 12,763
- -----------------------------------------------------------------------------------------------------------------------------------
End of year $ 12,397 $ 4,902 $ 11,651
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Interest paid $ 117,864 $ 85,557 $ 40,869
Income taxes paid (received) 1,081 (31,370) 12,357
Non-cash financing activity - issuance of Genesis
Series G Cumulative Convertible Preferred Stock $ - $ 295,120 $ -
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
45
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 Statements 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 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.
Revenue Recognition
Revenue is recognized by the Company in the period the related services are
rendered. Revenues are recorded based on standard charges applicable to all
customers. The Company derives a substantial portion of its revenue under
Medicaid and Medicare reimbursement systems. Under certain retrospective
Medicaid systems and other cost-based reimbursement programs, the Company is
reimbursed for services rendered to covered customers 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. Adjustments and final settlements with
third-party payors are reflected in operations at the time of the adjustment or
settlement as an increase or decrease to the balance of cost report receivables
/ payables and revenue. Under certain prospective Medicaid systems and Medicare
the Company is reimbursed at a predetermined rate based upon the historical cost
to provide the service, demographics of the site of service and the acuity of
the customer. The differences between the established billing rates and the
predetermined rates are recorded as contractual adjustments and deducted from
revenues. Under a prospective reimbursement system, there is no adjustment or
settlement of the difference between the actual cost to provide the service and
the predetermined rate.
46
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, equity
securities and money market funds are considered to be available for sale and
accordingly are reported at fair value with unrealized gains and losses, net of
related tax effects, included within accumulated other comprehensive income as a
separate component of shareholders' equity. 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 3-15 years for
equipment, furniture and 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.
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
$12,726 and $8,705, were $29,066 and $29,567 at September 30, 1999 and 1998,
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 10 to 40
years. Goodwill, before accumulated amortization of $55,800 and $29,900, was
$1,003,900 and $1,000,100 at September 30, 1999 and 1998, respectively. Goodwill
47
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.
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.
48
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share applicable to common shares:
(in thousands except per share data):
Year Ended September 30,
1999 1998 1997
-------------------------------------------
Basic Earnings (Loss) Per Share:
Income (loss) before extraordinary items $(287,950) $(23,976) $48,144
Extraordinary items (2,100) (1,924) (553)
-------------------------------------------
Net income (loss) $(290,050) $(25,900) $47,591
-------------------------------------------
Weighted Average Shares 35,485 35,159 34,558
-------------------------------------------
Earnings (loss) per share before
extraordinary items $ (8.11) $ (0.68) $ 1.39
Loss per share - extraordinary items (0.06) (0.05) (0.02)
-------------------------------------------
Earnings (loss) per share $ (8.17) $ (0.74) $ 1.38
-------------------------------------------
Diluted Earnings (Loss) Per Share:
Income (loss) before extraordinary items $(287,950) $(23,976) $48,144
Extraordinary items (2,100) (1,924) (553)
-------------------------------------------
Net income (loss) $(290,050) $(25,900) $47,591
Adjustments to net income (loss) for interest
expense, amortization and other costs related to
the assumed conversion of convertible debentures - - 303
-------------------------------------------
Adjusted net income (loss) $(290,050) $(25,900) $47,894
-------------------------------------------
Weighted Average Shares & Common Stock Equivalents:
Weighted average shares 35,485 35,159 34,558
Dilutive effect of unexercised stock options - - 1,125
Convertible debenture shares - - 437
-------------------------------------------
Total 35,485 35,159 36,120
-------------------------------------------
Earnings (loss) per share before
extraordinary items $ (8.11) $ (0.68) $ 1.34
Loss per share - extraordinary items (0.06) (0.05) (0.02)
-------------------------------------------
Earnings (loss) per share $ (8.17) $ (0.74) $ 1.33
-------------------------------------------
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.
49
New Accounting Pronouncements
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 $6,700,
net of tax, which will be recorded as a cumulative effect of a change in
accounting principle in the Company's first quarter ending December 31, 1999.
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, 2000. 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.
(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 "Series G Preferred"), (ii) $22.50 in cash,
or (iii) a combination of cash and shares of Series G 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 Series G Preferred. The Series G 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 dividend rate increases on
the fourth, fifth, ninth, eleventh and thirteenth anniversary date to 6.1875%,
6.6250%, 7.0625%, 7.5% and 7.9375%, respectively. The Series G 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 40 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
50
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. See Footnote (13) - Commitments and Contingencies.
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000. Cypress, TPG and Nazem are sometimes collectively referred to
herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put / call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis
ElderCare Corp. common stock at a price determined pursuant to the Put/Call
Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. 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 (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"). The Company completed the Pharmacy Purchase effective
January 1, 1998. The Company completed the Therapy Purchase in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
51
Amendment to Put / Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock (the " Series H Preferred"), which was
issued to Cypress, TPG and Nazem, or their affiliated investment
funds, in proportion to their respective investments in Genesis
ElderCare Corp., and
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock (the "Series I
Preferred),which was issued to Cypress, TPG and Nazem, or their
affiliated investment funds, in proportion to their respective
investments in Genesis ElderCare Corp.
The Series H Preferred Stock are convertible into 27,850,286 shares of Common
Stock. The Series I Preferred Stock are convertible into 20,149,410 shares of
non-voting Common Stock. The Series and H and I Preferred have an initial
dividend of 5.00%, which increases 0.05% beginning the sixth anniversary date
and an additional 0.05% each anniversary date thereafter through the 12th
anniversary date, to a maximum of 8.5%.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis common stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an irrevocable
proxy to vote their shares of common stock of Genesis ElderCare Corp.
on all matters to be voted on by shareholders, including the election
of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions receive the
approval of at least one designee of each of Cypress, TPG and
Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
52
o provide that Genesis may appoint 100% of the members of the operating
committee of the board of directors of Genesis ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis common stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities. For so long as Cypress and/or TPG have the right to designate
directors on the Genesis board of directors, Genesis shall not, without the
consent of at least two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which would
constitute a change in control, as defined in the Restructuring
Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of, any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part or a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
53
Accounting Effects
Prior to the restructuring transaction, Genesis accounted for its investment in
Multicare using the equity method of accounting. Upon consummation of the
restructuring transaction, Genesis will consolidate the financial results of
Multicare since Genesis will have managerial, operational and financial control
of Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses will be consolidated at
their recorded historical amounts and the financial impact of transactions
between Genesis and Multicare will be eliminated in consolidation. The non-
Genesis shareholders' remaining 56.4% interest in Multicare will be carried as
minority interest based on their proportionate share of Multicare's historical
book equity. For so long as there is a minority interest in Multicare, the
minority shareholders' proportionate share of Multicare's net income or loss
will be recorded through adjustment to minority interest.
In connection with the restructuring transaction, Genesis intends to record a
non-cash charge of approximately $420,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred.
The following unaudited pro forma statement of operations information gives
effect to the Multicare joint venture restructuring had it occurred on October
1, 1998, after giving effect to certain adjustments, including the elimination
of intercompany transactions, the recording of minority interest, the issuance
of common stock, the recording of preferred stock dividends, the repayment of
debt with proceeds from the issuance of common stock and related income tax
effects. The unaudited pro forma financial information has been prepared to
reflect the consolidation of the financial results of Multicare. Accordingly,
Multicare's revenues and expenses are presented at their recorded historical
amounts and the financial impact of all transactions between Genesis and
Multicare are eliminated in consolidation. The pro forma financial information
does not include the $420,000 non cash charge representing the cost estimated to
terminate the Multicare put. This charge is a direct result of the Multicare
joint venture restructuring. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
transaction occurred at the beginning of the period presented.
(Unaudited) 1999
- --------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
- --------------------------------------------------------------------------------
Total net revenues $2,406,346
Loss before extraordinary item (311,144)
Loss attributable to common shareholders (313,244)
Diluted loss per common share before
extraordinary item (6.48)
Diluted loss per common share $ (6.53)
- --------------------------------------------------------------------------------
54
(3) Investments in Marketable Securities
Marketable securities at September 30, 1999 consist of the following:
Amortized Unrealized Unrealized Fair
cost gains losses value
---------------------------------------------------------------
U.S Treasury Bills $ 1,100 $ - $ (1) $ 1,099
U.S. Treasury Notes 11,030 65 (8) 11,087
Mortgage backed securities 6,634 - (297) 6,337
Equity securities 1,580 - (417) 1,163
Term deposits 1,497 - - 1,497
Money market funds 3,416 - - 3,416
---------------------------------------------------------------
$ 25,257 $ 65 $(723) $ 24,599
---------------------------------------------------------------
Marketable securities at September 30, 1998 consist of the following:
Amortized Unrealized Unrealized Fair
cost gains losses 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
---------------------------------------------------------------
Fixed interest securities held at September 30, 1999 and 1998 mature as follows:
1999 1998
---------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
---------------------------------------------------------------
Due in one year or less $ 3,496 $ 3,505 $ 3,001 $ 3,015
Due after 1 year through 5 years 6,211 6,121 8,187 8,427
Due after 5 years through 10 years 9,057 8,898 8,999 9,712
Due after 10 years - - 1,582 1,657
---------------------------------------------------------------
$ 18,764 $ 18,524 $ 21,769 $ 22,811
---------------------------------------------------------------
Actual maturities may differ from stated maturities because borrowers have the
right to call or prepay certain obligations with or without prepayment
penalties.
55
(4) Property, Plant and Equipment
Property, plant and equipment at September 30, 1999 and 1998 consist of the
following:
September 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Land $ 39,621 $ 39,244
Land improvements 6,144 5,656
Buildings 458,485 451,440
Equipment, furniture and fixtures 198,438 180,632
Construction in progress 61,385 40,778
- ----------------------------------------------------------------------------------------------------------------------------
764,073 717,750
Less accumulated depreciation (151,772) (121,188)
- ----------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $612,301 $ 596,562
- ----------------------------------------------------------------------------------------------------------------------------
Due to an impairment to the carrying value of certain properties, the Company
recorded write-downs of its property, plant and equipment of $7,400 and
$26,240, during the twelve months ending September 30, 1999 and 1998,
respectively.
(5) Long-Term Debt
Long-term debt at September 30, 1999 and 1998 consist of the following:
September 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Secured - due 2000 to 2034;
3.00% to 10.75% (weighted average interest rate 1999 - 7.96%;
1998 - 8.47%) $1,144,490 $1,151,292
Unsecured - due 2000 to 2009
6.64% to 11.00% (weighted average interest rate 1999 - 9.57%;
1998 - 9.44%) 376,691 251,915
- ----------------------------------------------------------------------------------------------------------------------------
1,521,181 1,403,207
Plus:
Debt premium, net of amortization 5,066 5,482
Less:
Debt discount, net of amortization (4,611) (382)
Current installments and short-term borrowings (37,126) (49,712)
- ----------------------------------------------------------------------------------------------------------------------------
Long term debt 1,484,510 1,358,595
- ----------------------------------------------------------------------------------------------------------------------------
At September 30, 1999 and 1998, the Company's long-term debt included
approximately $1,036,532 and $1,032,889 of floating rate debt based on Prime or
LIBO Rate with weighted average interest rates of 7.85% and 8.36%, respectively.
At September 30, 1999 and 1998, the Company's long-term debt included
approximately $484,649 and $370,318 of fixed rate debt with weighted average
interest rates of 9.49% and 9.40%, respectively.
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries a credit facility
totaling $1,250,000 (the "Credit Facility") for the purpose of: refinancing and
funding interest and principal payments of certain existing indebtedness;
funding permitted acquisitions; and funding Genesis' and its subsidiaries'
working capital for general corporate purposes, including fees and expenses of
transactions. The fourth amended and restated credit agreement made the
financial covenants for certain periods less restrictive, required minimum
56
assets sales and generally reallocated the proceeds thereof among the Tranche II
Facility (defined below), the Revolving Facility (defined below) and the Term
Loans (defined below); permitted the restructuring of the Put / Call Agreement,
as defined, and increased the interest rates applying to the Term Loans and the
Revolving Facility. Additionally, the fourth amended and restated credit
agreement provides for $40,000 of additional borrowing capacity, (the "Tranche
II Facility") subject to the satisfaction of certain conditions, which have been
satisfied. The asset sales required by the Credit Facility total $12,000 by
December 31, 1999, $37,000 by June 30, 2000 and $40,000 by December 31, 2000.
Genesis has satisfied the requirement through December 31, 1999 and has
transactions in process to satisfy the majority of the aggregate requirement
through December 31, 2000.
The Credit Facility consists of three term loans with original balances of
$200,000 each (collectively, the "Term Loans"), and a $650,000 revolving credit
loan (the "Revolving Facility") and a $40,000 Tranche II Facility. The Term
Loans amortize in quarterly installments through 2005, of which $28,670 is
payable in Fiscal 2000. The Term Loans consist of (i) an original six year term
loan maturing in September 2003 with an outstanding balance of $116,834 at
September 30, 1999 (the "Tranche A Term Facility"); (ii) an original seven year
term loan maturing in September 2004 with an outstanding balance of $152,520 at
September 30, 1999 (the "Tranche B Term Facility"); and (iii) an original eight
year term loan maturing in June 2005 with an outstanding balance of $152,156 at
September 30, 1999 (the "Tranche C Term Facility"). The Revolving Facility, with
an outstanding balance of $613,500 at September 30, 1999, becomes payable in
full on September 30, 2003.
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, and also by first priority security interests
(subject to certain exceptions) in all personal property, including inventory,
accounts receivable, equipment and general intangibles. Mortgages on certain of
Genesis' subsidiaries' real property were also granted 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 (the "Annual Applicable Margin") that is
dependent upon a certain financial ratio test. Loans under the Tranche A Term
Facility and Revolving Facility have an Annual Applicable Margin of 1.50% for
Prime Rate loans and 3.25% for LIBO Rate loans (an effective rate of 8.76% at
September 30, 1999). Loans under the Tranche B Term Facility have an Annual
Applicable Margin of 1.75% for Prime Rate loans and 3.50% for LIBO Rate loans
(an effective rate of 9.01% at September 30, 1999). Loans under the Tranche C
Term Facility have an Annual Applicable Margin of 2.00% for Prime Rate loans and
3.75% for LIBO Rate loans (an effective rate of 9.26% at September 30, 1999).
Subject to meeting certain financial ratios, 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; cause Genesis and its affiliates to maintain certain agreements
including the Management Agreement and the Put/Call Agreement (as amended), 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.
On August 20, 1999, the Company entered into an amendment of the Credit
Facility. The amendment establishes less restrictive financial covenant
requirements through the remaining term of the agreement, increases the Annual
Applicable Margin and provides the lenders of the Credit Facility a collateral
interest in certain real and personal property of the Company.
57
In December 1998, the Company issued $125,000 9 7/8% Senior Subordinated Notes
due 2009 at a price of 96.1598% resulting in net proceeds of $120,200. Interest
on the notes is payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 1999. Approximately $59,950 of the net proceeds were used to
repay portions of the Tranche A, B and C Term Facilities and approximately
$59,950 of the net proceeds were 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 24 eldercare centers, and certain other healthcare businesses
of Geriatric & Medical Companies, Inc. (the "GMC Transaction"), and to repay
certain debt assumed as a result of the GMC Transaction and to repurchase
Geriatric and Medical Companies, Inc. accounts receivable which were previously
financed.
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, 1999, sinking fund requirements and installments of long-term
debt are as follows:
Principal
Year ending September 30, Amount
- --------------------------------------------------------------------------------
2000 $ 37,126
2001 33,665
2002 39,083
2003 652,541
2004 191,450
Thereafter $567,771
- --------------------------------------------------------------------------------
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, 1999 and 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
(approximately 4.75% and 5.00%, respectively) and received quarterly payments at
floating rates based on three month LIBO Rate (approximately 5.51% and 5.64%,
respectively).
Interest of $4,784 in 1999, $3,526 in 1998 and $2,156 in 1997, was capitalized
in connection with facility construction, systems development and renovations.
During fiscal 1999, 1998 and 1997 the Company recorded extraordinary losses, net
of tax, of $2,100, $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.
58
(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, 1999 were as follows:
Minimum
Year ending September 30, Payment
- --------------------------------------------------------------------------------
2000 $ 37,039
2001 33,477
2002 26,161
2003 23,825
2004 $ 22,388
- --------------------------------------------------------------------------------
Excluded from the future minimum lease payments above in the year 2001 is
approximately $78,300 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, 1999, 1998 and 1997 was as follows:
Year ended September 30,
Class of payor 1999 1998 1997
- --------------------------------------------------------------------------------
Private pay and other $ 826,051 $ 581,128 $ 414,187
Medicaid 686,717 451,989 385,313
Medicare 242,807 258,279 252,845
- --------------------------------------------------------------------------------
$1,755,575 $1,291,396 $1,052,345
- --------------------------------------------------------------------------------
The above revenue amounts are net of third-party contractual allowances of
$343,020, $278,804 and $213,250, in 1999, 1998 and 1997, respectively.
59
(8) Income Taxes
Total income tax expense (benefit) for the years ended September 30, 1999, 1998
and 1997 was as follows:
Year ended September 30,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item and equity in net
income (loss) of unconsolidated affiliates $(44,711) $ (8,158) $ 27,088
Extraordinary items (1,276) (1,106) (318)
- -------------------------------------------------------------------------------------------------------------------------
Total $(45,987) $ (9,264) $ 26,770
- -------------------------------------------------------------------------------------------------------------------------
The components of the provision (benefit) for income taxes for the years ended
September 30, 1999, 1998 and 1997 were as follows:
Year ended September 30,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ 5,370
State 503 - 695
- ------------------------------------------------------------------------------------------------------------------------
$ 503 $ - $ 6,065
- ------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal $(45,272) $ (7,163) $20,781
State 58 (995) 242
- ------------------------------------------------------------------------------------------------------------------------
$(45,214) $ (8,158) $21,023
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Total $(44,711) $ (8,158) $27,088
- ------------------------------------------------------------------------------------------------------------------------
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,
1999 1998 1997
-----------------------------------------------------
Computed "expected" tax expense (benefit) $ (47,232) $ (10,838) $ 26,331
Increase (reduction) in income taxes resulting from :
State and local income taxes (benefit), net of federal tax
benefits (365) (463) 364
Amortization of goodwill 3,481 3,840 693
Targeted jobs tax credits (1,146) (1,073) (300)
Other, net 551 376 -
-----------------------------------------------------
Total income tax expense (benefit) $ (44,711) $ (8,158) $ 27,088
-----------------------------------------------------
60
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,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Excess tax depreciation expense versus book depreciation $ 3,225 $ 973 $ 2,525
Excess tax gains versus book gains - (7,275) (200)
Amortization of deferred gain on sale and leaseback 1,750 - -
Accrued liabilities and reserves (21,973) 820 15,000
Goodwill 3,926 3,689 3,575
Net operating loss (30,838) (6,128) -
Utilization of net operating loss carryforward - - 200
Other (1,304) (237) (77)
- --------------------------------------------------------------------------------------------------------------------
Net deferred tax provision $ (45,214) $ (8,158) $ 21,023
- --------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1999
and 1998 are presented below:
September 30,
1999 1998
- --------------------------------------------------------------------------------
Deferred Tax Assets
Accrued compensation $ 282 $ 444
Accounts receivable 744 -
Debt premium 2,144 2,144
Accrued liabilities and reserves 35,873 11,225
Net operating loss carryforwards 39,801 10,128
Other, net 2,325 1,017
- --------------------------------------------------------------------------------
Deferred tax assets 81,169 24,958
- --------------------------------------------------------------------------------
Valuation allowance (3,400) (3,400)
- --------------------------------------------------------------------------------
Net deferred tax assets 77,769 21,558
- --------------------------------------------------------------------------------
Deferred Tax Liabilities
Accounts receivable - (3,464)
Goodwill and other intangibles (29,455) (39,861)
Depreciation (53,583) (50,242)
Accrued liabilities and reserves (8,558) (819)
- --------------------------------------------------------------------------------
Total deferred tax liability (91,596) (94,386)
- --------------------------------------------------------------------------------
Net deferred tax liability $ (13,827) $ (72,828)
- --------------------------------------------------------------------------------
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 2000 through 2019.
61
(9) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 1999 and 1998 consist of
the following:
September 30,
1999 1998
- --------------------------------------------------------------------------------
Mortgage notes and other notes receivable $ 33,063 $ 41,011
Investments in non marketable securities 7,012 6,612
- --------------------------------------------------------------------------------
$ 40,075 $ 47,623
- --------------------------------------------------------------------------------
Mortgage notes and other notes receivable at September 30, 1999 bear interest at
rates ranging from 7.25% to 10.00% and mature at various times ranging from 2000
to 2029. Approximately $26,056 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.
The Company has agreed to provide third parties, including facilities under
management contract, with $16,200 of working capital lines of credit. The unused
portion of working capital lines of credit was $8,900 at September 30, 1999.
In December, 1997 the Board of Directors approved a Senior Executive Stock
Ownership Program. Under the terms of the program, certain of the Company's
senior executive employees are 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, 1999, the Company had
outstanding loans of approximately $3,000 to senior executive employees which
are included in mortgage notes and other receivables. The notes bear interest
based on the market rate at the date of the loan initiation.
(10) Other Long-Term Assets
Other long-term assets at September 30, 1999 and 1998 consist of the following:
September 30,
1999 1998
- --------------------------------------------------------------------------------
Deferred financing fees, net $ 29,066 $ 29,567
Subordinated management fees receivable from Multicare 26,907 14,048
Cost report receivables 26,939 62,257
Property deposits and funds held in escrow 11,907 12,179
Other, net 18,159 18,110
- --------------------------------------------------------------------------------
$112,978 $136,161
- --------------------------------------------------------------------------------
62
(11) Stock Option Plans
The Company has three stock option plans (the "Employee Plan", the "1998
Non-Qualified Employee Plan" and the "Directors Plan"). Under the Employee Plan,
6,750,000 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 exercisable 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
to 13 years from the date of the grant. Under the 1998 Non-Qualified Employee
Plan, 1,500,000 shares of common stock were reserved for issuance to non-officer
employees. Options granted in the 1998 Non-Qualified Employee Plan vest 20% in
the year of the grant and 20% over each of the next four years. The options
granted in the 1998 Non-Qualified Employee Plan expire 10 years from the date of
the grant. All options granted under the Employee Plan and the 1998
Non-Qualified 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
and the 1998 Non-Qualified Employee Plan for the three years ended September 30,
1999.
Option Price Available for
per Share Outstanding Exercisable Grant
- -----------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------
Authorized - - - 2,000,000
Granted $3.13 - $11.19 2,252,100 - (2,252,100)
Became Exercisable - - 1,845,276 -
Exercised $5.33 - $5.33 (2,100) (2,100) -
Canceled - (374,447) - 374,447
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $2.22 - $35.25 6,030,041 4,189,613 1,207,563
- -----------------------------------------------------------------------------------------------------------------------------
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,
1999, there were 88,500 options outstanding and exercisable 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 pro forma amounts indicated below:
63
September 30,
1999 1998
- --------------------------------------------------------------------------------
Net loss - as reported $ (290,050) $(25,900)
Net loss - pro forma (297,543) (31,469)
Net loss per share - as reported (diluted) (8.17) (0.74)
Net loss per share - pro forma (diluted) $ (8.39) $ (0.90)
- --------------------------------------------------------------------------------
The fair value of stock options granted in 1999 and 1998 is estimated at the
grant date using the Black-Scholes option-pricing model with the following
assumptions for 1999 and 1998: dividend yield of 0% (1999 and 1998); expected
volatility of 105.63% (1999) and 56.17% (1998); a risk-free return of 6.36%
(1999) and 5.9% (1998); and expected lives of approximately 7.5 years (1999) and
7.0 years (1998).
The following table summarizes information for stock options of the Employee
Plan, the 1998 Non-Qualified Employee Plan and the Director Plan outstanding at
September 30, 1999:
Weighted
Average Weighted
Remaining Average Weighted
Number Contractual Exercise Number Average
Range of Exercise Price Outstanding Life Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
$ 1.00 - $ 5.00 1,149,350 9.40 $ 4.55 244,970 $ 4.56
$ 5.01 - $10.00 407,169 5.00 6.54 407,169 6.54
$10.01 - $15.00 1,138,300 8.70 11.15 1,105,300 11.15
$15.01 - $20.00 592,025 4.70 16.89 582,350 16.85
$20.01 - $25.00 849,138 6.50 22.94 648,729 22.87
$25.01 - $30.00 1,451,609 7.60 28.93 825,043 28.98
$30.01 - $35.00 75,000 6.70 31.88 75,000 31.88
$35.01 - $40.00 455,950 7.40 35.25 389,552 35.25
- ----------------------------------------------------------------------------------------------------------------------
6,118,541 7.50 $ 18.06 4,278,113 $ 18.88
- ----------------------------------------------------------------------------------------------------------------------
In November 1999, subsequent to the fiscal year end, the Company's Board of
Directors approved a plan allowing employees to elect to redeem unexercised
stock options issued to them prior to January 1, 1999 in exchange for Genesis
common stock (the "Redemption Plan"). If an employee elects to participate in
the Redemption Plan, every one vested outstanding stock option held as of
November 11, 1999 would be exchanged for one share of Genesis common stock, and
every two unvested outstanding stock options held as of November 11, 1999 would
be exchanged for one share of Genesis common stock. The Company believes nearly
all employees will elect to participate in the Redemption Plan. If all employees
participate, approximately 4,600,000 stock options would be redeemed in exchange
for approximately 4,200,000 shares of Genesis common stock. The Redemption Plan
is subject to shareholder approval and will be voted upon at the Company's 2000
Annual Meeting scheduled for March 2000. As a result of the Redemption Plan, the
Company expects to record an after tax charge to compensation expense of
approximately $5,300 in the first fiscal quarter of 2000.
(12) 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 a maximum of 4%, in
64
accordance with Company policy) 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.
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 $6,651, $3,653 and $3,516 for the
years ended September 30, 1999, 1998 and 1997, respectively. In 1999, the
Company funded approximately $4,000 of its contribution to the Retirement Plan
in the form of approximately 917,000 shares of newly issued common stock.
(13) 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. Genesis
also requires that physicians practicing at its eldercare centers carry medical
malpractice insurance to cover their individual practices.
The Company has guaranteed $22,776 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.
65
NeighborCare purchases substantially all of its pharmaceuticals, approximately
$540,000 annually, through Cardinal Health, Inc. under a five year supply
contract which commenced in May of 1999. NeighborCare has other sources of
supply available to it and has not experienced difficulty obtaining
pharmaceuticals or other supplies used in the conduct of its business.
On May 7, 1999, Genesis and Vitalink filed multiple lawsuits requesting
injunctive relief and compensatory damages against HCR Manor Care, Inc. and two
of its subsidiaries and principles. The lawsuits arise from HCR Manor Care's
threatened termination of two long-term pharmacy services contract effective
June 1, 1999. Until such time as a final decision is rendered in connection with
an arbitration action between the parties in Maryland, the parties have agreed
to maintain the master services agreement in full force and effect.
Approximately 5% of the Company's 1999 revenues are the result of
pharmaceuticals and other ancillary services provided to HCR Manor Care.
On August 27, 1999 Manor Care Inc., a wholly owned subsidiary of HCR Manor Care
Inc., filed a lawsuit against Genesis in federal district court in Delaware
based upon Section 11 and Section 12 of the Securities Act. Manor Care Inc.
alleges that in connection with the sale of the Genesis Series G Preferred Stock
issued as part of the purchase price to acquire Vitalink, Genesis failed to
disclose or made misrepresentations related to the effects of the conversion to
the prospective pay system, the restructuring of the Multicare joint venture,
the impact of the acquisition of Multicare, the status of Genesis labor
relations, Genesis' ability to declare dividends on the Series G Preferred Stock
and information relating to the ratio of combined fixed charges and preference
dividends to earnings. Manor Care Inc. seeks, among other things, compensatory
damages and recission of the purchase of the Series G Preferred.
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.
66
(14) Loss on Impairment of Assets and Other Charges
The Company recorded in operating expenses impairment of assets and other
charges during the twelve months ended September 30, 1999, 1998 and 1997 of
$167,070, $115,505 and $15,000, respectively.
Fiscal 1999:
In accordance with SFAS 121, the Company records impairment losses on long-lived
assets, including goodwill, when events and circumstances indicate that
long-lived 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.
The profitability and liquidity of Genesis and the long term care industry have
been adversely impacted by PPS. The current and projected losses of certain
eldercare centers operating under PPS indicate that these assets are impaired.
The Company estimated the fair value of these assets by using a multiple of
their operating cash flow based upon market comparisons of similar assets
recently sold or currently under negotiations to sell. After performing this
evaluation, the Company concluded that the carrying value of certain eldercare
centers, including goodwill and property, plant and equipment, exceeded their
fair value by approximately $9,000 before tax.
In addition to long-lived assets, the Company performed an evaluation of all of
its assets, contracts, operations and employment arrangements. As a result of
this evaluation, the Company concluded that the adverse impact of PPS on the
Company's liquidity and profitability necessitated exiting certain businesses
and projects. The Company fully reserved the carrying value of its
transportation business, exited the operations of six leased eldercare centers
at the end of their lease terms, abandoned certain investments in information
systems, recorded the exit costs of a capitation contract in the Company's
Chesapeake region and wrote off certain unrecoverable development project costs
as well as other unrecoverable assets. In addition, the ability of certain
former customers of the Company to repay amounts due for services rendered is
less likely due to the adverse impact of PPS on their liquidity and
profitability. As a result, the Company wrote down certain notes receivable,
advances, trade and third party receivables, due to and from formerly owned and
managed facilities. Also, the Company entered into the restructuring of the
Multicare joint venture and amended its senior bank credit facility resulting in
legal and other professional fees. The following table summarizes the before tax
impact of the charges in Fiscal 1999:
Exit costs and write-off of unrecoverable assets of one owned eldercare center
to be sold, and six leased eldercare centers closed or no longer under lease
and an investment in a respiratory services company $ 24,100
Investments in information systems abandoned 13,000
Exit costs and write-down of the remaining assets of the transportation business 12,700
Impairment of long-lived assets of six eldercare centers under SFAS 121 9,000
Unrecoverable development project costs 5,600
Cost to exit a capitation contract 5,000
- ---------------------------------------------------------------------------------------------------------------------
Subtotal - terminated operations, discontinued businesses and asset impairments 69,400
- ---------------------------------------------------------------------------------------------------------------------
Uncollectible trade receivables due to customer bankruptcy or other
liquidity issues 17,800
Third party appeal issues deemed uncollectible 17,100
Costs to restructure the Multicare joint venture and the Company's amend senior bank credit facility 11,000
Other charges, including severance costs 13,870
- ---------------------------------------------------------------------------------------------------------------------
Subtotal - uncollectible accounts, restructuring and other - 59,770
- ---------------------------------------------------------------------------------------------------------------------
Notes receivable, advances, trade receivables and third party settlement receivables,
due from or to businesses formerly owned or managed deemed uncollectible 37,900
- ---------------------------------------------------------------------------------------------------------------------
Total (included in operating expenses) $ 167,070
- ---------------------------------------------------------------------------------------------------------------------
67
Fiscal 1998:
Due to specific events occurring in the fourth quarter of Fiscal 1998 and a
focus on core business operations in response to the PPS, the Company recorded
non-cash charges before income taxes of approximately $116,000, of which
approximately $24,000 related to the impairment of one eldercare center and
certain non-core businesses, including the Company's transportation business and
certain non-core Medicare home health operations; approximately $43,000 related
to investments in owned eldercare centers and other assets the Company believes
are impaired as a result of PPS; approximately $23,000 related to impaired
investments in eldercare centers previously owned or managed by the Company; and
approximately $26,000 related to the Company's investment in Doctors Health, a
medical care management company in the Company's Chesapeake region.
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. 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.
(15) Fair Value of Financial Instruments
The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), 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, 1999 and 1998 is approximately $26,830 and $29,685, 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 and floating 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, 1999 and 1998, the carrying value of fixed rate
debt of $484,649 and $370,318 had market values of $198,706 and $370,318,
respectively. At September 30, 1999 and 1998, the carrying value of floating
68
rate debt of $1,036,532 and $1,032,889 had market values of $751,883 and
$1,032,889, respectively.
(16) 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, 1999. Multicare is the
Company's only significant unconsolidated affiliate.
- --------------------------------------------------------------------------------
Total assets $ 1,302,364
Long-term debt 741,256
Total liabilities 976,453
Revenues 640,414
Net loss $ 407,327
- --------------------------------------------------------------------------------
In 1999, the Company earned approximately $38,360 of management fees in
connection with the management of the Multicare operations and approximately
$62,100 of pharmacy, medical supply, rehabilitation therapy and other healthcare
services provided to Multicare eldercare centers.
(17) 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."
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of September 30, 1999, the Company had approximately
$1,484,510 of long-term indebtedness, excluding the current portion of
indebtedness of $37,126, which represented 72% of our total capitalization. The
Company also has significant long-term operating lease obligations with respect
to certain of our eldercare centers. The degree to which we are leveraged could
have important consequences, including, but not limited to the following:
o 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;
o a substantial portion of the Company's cash flow from operations will
be dedicated to the payment of principal and interest on the
Company's indebtedness, thereby reducing the funds available to us
for our operations;
o the Company's operating flexibility is limited by restrictions
contained in some of the Company's debt agreements which set forth
minimum net worth requirements and/or limit the Company's ability to
incur additional indebtedness, to enter into other financial
transactions, to pay dividends, and set forth minimum net worth
requirements;
o the Company's degree of leverage may make it more vulnerable to
industry downturns and less competitive, may reduce the Company's
flexibility in responding to changing business and industry
conditions and may limit the Company's ability to pursue other
business opportunities, to finance the Company's future operations or
capital needs, and to implement its business strategy; and
o certain of the Company's borrowings are and will continue to be at
variable rates of interest, which exposes the Company's to the risk
of higher interest rates.
The Company expects to satisfy required payments of principal and interest on
indebtedness from its cash flow from operations. The Company's ability to
generate sufficient cash flows from operations depends on a number of internal
69
and external factors affecting our business and operations, including factors
beyond our control, such as prevailing industry conditions. There can be no
assurances that cash flow from operations will be sufficient to enable the
Company's to service its debt and meet other obligations. If such cash flow is
insufficient, the Company may be required to refinance and/or restructure 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 or restructuring
would be possible or that any such sales of assets or additional financing could
be achieved. We also have significant long-term operating lease obligations with
respect to certain of our sites of service, including eldercare centers.
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long term care facilities which
utilize our specialty medical services. The health care industry is experiencing
the effects of the federal and state governments trend toward cost containment,
as government and other third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers.
These cost containment measures, combined with the increasing influence of
managed care payors and competition for patients, generally have resulted in
reduced rates of reimbursement for services to be provided by the Company.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System ("PPS")
pursuant to the Balanced Budget Act of 1997, as modified by the
Medicare Balanced Budget Refinement Act; and
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that
these legislative changes or any future healthcare legislation will not
adversely affect the Company's business. There can be no assurance that payments
under governmental and private third party payor programs will be timely, 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.
(18) Segment Information
In Fiscal 1999, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. The Company's principal operating
segments are identified by the types of products and services from which
revenues are derived and are consistent with the reporting structure of the
Company's internal organization.
The Company has two reportable segments: (1) Pharmacy and medical supplies
services and (2) Inpatient services.
The Company provides pharmacy and medical supply services through its
NeighborCare(SM) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of infusion therapy, medical supplies and equipment provided to
eldercare centers it operates, as well as to independent healthcare providers by
contract. The Company provides these services through 69 institutional
pharmacies (one is jointly-owned) and 19 medical supply 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,
70
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 91% of the sales attributable to all pharmacy operations in Fiscal
1999 were generated through external contracts with independent healthcare
providers with the balance attributable to centers owned or leased by the
Company, including the jointly owned Multicare centers.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at its 109 owned and
leased eldercare centers. The centers offer three levels of care for their
customers: skilled, intermediate and personal.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales prices are
market based. The Company evaluates performance of its operating segments based
on income before interest, income taxes, depreciation, amortization, rent and
nonrecurring items.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column represents operating
information of business units below the prescribed quantitative thresholds.
These business units derive revenues from the following services: rehabilitation
therapy, management services, capitation fees, consulting services, homecare
services, physician services, transportation services, diagnostic services,
hospitality services, group purchasing fees and other healthcare related
services. In addition, the "Other" column includes the elimination of
intersegment transactions.
- ------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------
Pharmacy and
Medical Supply Inpatient
Services Services Other Total
- ------------------------------------------------------------------------------------------------------
Revenue from external customers $ 927,334 $ 704,105 $ 234,987 $ 1,866,426
Revenue from intersegment customers 60,502 79,843 140,345
Operating income (1) 119,282 104,305 29,362 252,949
Total assets 1,072,099 767,748 590,067 2,429,914
- ------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------
Revenue from external customers 424,778 741,383 239,144 1,405,305
Revenue from intersegment customers 47,708 87,336 135,044
Operating income (1) 51,441 152,483 46,271 250,195
Total assets 1,066,126 846,692 714,550 2,627,368
- ------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------
Revenue from external customers 241,818 711,853 146,152 1,099,823
Revenue from intersegment customers 45,089 56,452 101,541
Operating income (1) 29,895 152,015 17,958 199,868
Total assets $ 208,294 $ 986,384 $ 239,435 $ 1,434,113
- ------------------------------------------------------------------------------------------------------
71
(1) Operating income is defined as income before interest, income taxes,
depreciation, amortization, rent and nonrecurring items. The Company's segment
information does not include an allocation of overhead costs, which are between
3% - 4% of consolidated net revenues.
(19) Comprehensive Income
In October 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of Statement 130 had no impact on the
Company's net income available to common shareholders. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities be
included in other comprehensive income. The following table sets forth the
computation of comprehensive loss:
September 30,
1999 1998
---------------------------
Net loss attributed to common shareholders $ (290,050) $ (25,900)
Unrealized gain (loss) on marketable securities (1,112) 684
---------------------------
Total comprehensive loss $ (291,162) $ (25,216)
---------------------------
Accumulated other comprehensive income (loss), which is composed of net
unrealized gains and losses on marketable securities, was $(428) and $684 at
September 30, 1999 and 1998, respectively.
(20) 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) Per
Revenues Item (Loss) Item Share
- -----------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1998 $ 479,204 $ 6,476 $ 4,677 $ 0.18 $ 0.13
March 31, 1999 464,619 (11,258) (11,559) (0.32) (0.33)
June 30, 1999 465,088 (5,858) (5,858) (0.17) (0.17)
September 30, 1999 457,515 (277,310) (277,310) (7.67) (7.67)
- -----------------------------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------------------------
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 (loss)
per share for the four quarters does not equal the loss per share for the twelve
months. The second and fourth quarters of 1999 include non-cash after tax
impairment and other charges of approximately $7,654 and $262,755, respectively.
72
The fourth quarter of 1998 includes non-cash after tax impairment and other
charges of approximately $77,100 (see Note 14).
The December, March and June quarters of Fiscal 1999 have each been restated to
increase non-cash preferred stock dividends by $494, $482, and $486,
respectively, to adjust the accrual for the increasing rate dividend on the
Series G Preferred Stock on a straight line basis over the term of this series.
73
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 2000 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 2000 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 2000 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 2000 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) The following financial statements of Genesis Health Ventures, Inc.
and Subsidiaries are filed as part of this Form 10-K in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1999 and 1998
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
The following financial statements of the Multicare Companies, Inc. are
incorporated by reference to Multicare's Form 10-K for the year ended
September 20, 1999 filed December 29, 1999.
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1999 and 1998
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997 (unaudited), and the nine
months ended September 30, 1997
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999, 1998 and the nine months ended
September 30, 1997
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 (unaudited), and the nine
months ended September 30, 1997.
Notes to Consolidated Financial Statements
(a)(2) Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 1999, 1998, and 1997. Schedule II is included
herein on page 82. 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.
74
(a)(3) Exhibits
No. Description
2.1(1) 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.
2.2(1) 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.
2.3 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.
2.4(2) Agreement and Plan of Merger dated April 26, 1998, by and
among Genesis Health Ventures, Inc., V Acquisition Corp. and
Vitalink Pharmacy Services, Inc.
2.5(19) Amendment Number One to the Plan of Merger dated as of July
7, 1998.
2.6(21) Restructuring Agreement dated October 8, 1999 among The
Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc.,
Genesis and the other signatories thereto.
3.1(3) The Company's Amended and Restated Articles of
Incorporation.
3.2(4) The Company's Amended and Restated Bylaws.
3.3(20) Amendment to the Company's Articles of Incorporation, as
filed on March 11, 1994, with the Secretary of the
Commonwealth of Pennsylvania.
3.4(11) Amendment to the Company's Articles of Incorporation, as
filed on August 26, 1998, with the Secretary of the
Commonwealth of Pennsylvania.
3.5(21) Amendment to the Company's Amended and Restated Articles
of Incorporation, as filed with the Secretary of the
Commonwealth of Pennsylvania.
4.1(3) Specimen of Common Stock Certificate.
4.2(6) Specimen of the Company's First Mortgage Bonds (Series A)
due 2007.
4.3(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.
4.4(22) Rights Agreement between Genesis Health Ventures, Inc. and
Mellon Securities Trust Company.
4.5(9) Indenture dated as of June 15, 1995 between the Company and
Delaware Trust Company.
75
4.6(9) Specimen of the Company's 9-3/4% Senior Subordinated
Debentures due 2005.
4.7(10) Indenture dated as of October 7, 1996 between the Company
and First Union National Bank
4.8(10) Specimen of the Company's 9-1/4% Senior Subordinated Notes
due 2006.
4.9(11) Rights Agreement by and between Genesis Health Ventures,
Inc. and Manor Care Inc. dated April 26, 1998.
4.10(11) Indenture dated as of December 23, 1998 between the Company
and the Bank of New York.
4.11(11) 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).
4.12(21) Certificate of Designations for the Company's Series H
Senior Convertible Participation Cumulative Preferred Stock.
4.13(21) Certificate of Designations for the Company's Series I
Senior Convertible Exchangeable Participating Cumulative
Preferred Stock.
4.14(21) Form of Warrant issued in connection with the Multicare
restructuring transaction.
+10.1(3) The Company's Employee Retirement Plan, adopted January 1,
1989, as amended and related Retirement Plan Trust Agreement
+10.2(12) The Company's Amended and Restated Stock Option Plan.
+10.3(6) The Company's 1992 Stock Option Plan for Non-Employee
Directors
+10.4(6) The Company's Incentive Compensation Program.
+10.5(6) The Company's Execuflex Plan, dated as of January 1, 1992,
and related Trust Agreement, dated December 10, 1991.
+10.6(5) Lease dated January 5, 1989, as amended, by and between
Towson Building Associates Limited Partnership and
Meridian Healthcare, Inc.
+10.7(5) Sublease dated November 30, 1993, by and between Meridian
Healthcare, Inc. and Fairmount Associates, Inc.
+10.8(8) Agreement to Purchase Partnership Interests, made as of
March 1 1996, by and among Meridian Health, Inc., Fairmont
Associates, Inc. and MHC Holding Company
10.9(10) 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
10.10(10) Guaranty and Agreement of Suretyship from Genesis Health
Ventures, Inc. and its Material Subsidiaries, dated as of
October 7, 1996.
76
10.11(10) 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.
10.12(10) 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
10.13(10) 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.
10.14(10) Acquisition Loan and Security Agreement, dated as of
August 31, 1996, between Genesis Health Ventures, Inc. and
AGE Institute of Florida, Inc.
10.15(14) 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.
10.16(14) 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.
10.17(15) 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.
10.18(15) 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.
+10.19(1) Management Agreement dated October 9, 1997 among The
Multicare Companies, Inc., Genesis Health Ventures, Inc. and
Genesis ElderCare Network Services, Inc.
10.20(15) 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.
10.21(15) 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.
10.22(15) Letter Agreement dated June 16, 1997 between Genesis Health
Ventures, Inc. and Sterns Associates.
10.23(16) Assignment and Assumption Agreement dated January 30, 1998
among Genesis Health Ventures, Inc., Capital Corp. and AGE
Institute of Florida.
10.24(16) Amended and Restated Promissory Note dated January 30, 1998
among Genesis Health Ventures, Inc. and, ET Capital Corp.
and AGE Institute of Florida.
10.25(17) Master Agreement for Infusion Therapy Products and Services,
dated June 1, 1991.
77
10.26(18) Amendment to the Master Agreement for Infusion Therapy
Products and Services, as amended on September 19, 1997 and
April 26, 1998.
10.27(17) Master Pharmacy Consulting Agreement, dated June 1, 1991 and
amended on September 19, 1997 and April 26, 1998
+10.28(18) Amendment to the Master Pharmacy Consulting Agreement, dated
May 31, 1991 amended on September 19, 1997 and April 26,
1998.
10.29(17) Amendment to the Master Pharmacy Services Consulting
Agreement, as amended on September 19, 1997 and April 26,
1998.
10.30(17) Master Agreement for Pharmacy Services, dated June 1, 1991
and amended on September 19, 1997 and April 26, 1998.
10.31(18) Amendments to the Master Agreement for Pharmacy Services, as
amended on September 19, 1997 and April 26, 1998.
+10.32(11) Employment Agreement between the Company and Michael R.
Walker dated August 12, 1998.
+10.33(11) Employment Agreement between the Company and George V. Hager
dated August 12, 1998.
+10.34(11) Employment Agreement between the Company and Richard R.
Howard dated August 12, 1998.
+10.35(11) Employment Agreement between the Company and David C. Barr
dated August 12, 1998.
+10.36(11) Employment Agreement between the Company and Maryann Timon
dated November 11, 1998.
+10.37(11) Employment Agreement between the Company and Marc. D.
Rubinger dated November 11, 1998.
+10.38(21) Amended and Restated Stockholders Agreement dated November
15, 1999 by and among Genesis ElderCare Corp., The Cypress
Group L.L.C., TPG Partners II, L.P., Nazem, Inc., Genesis
and the other signatories thereto.
+10.39(21) Amended and Restated Put/Call Agreement dated November 15,
1999 by and among The Cypress Group L.L.C., TPG Partners
II, L.P., Nazem, Inc., Genesis and the other signatories
thereto.
+99.1(23) Fourth Amended and Restated Credit Agreement dated as of
August 20, 1999 by and among Genesis, the Subsidiaries of
Genesis referred to on the signature pages thereto (and such
other subsidiaries of Genesis which may from time to time
become Borrowers thereunder in accordance with the
provisions thereof) (collectively with Genesis, the
"Borrowers"), the Lenders referred to on the signature pages
thereto (together with other lenders parties thereto from
time to time, and their successors and assigns, the
"Lenders"), Mellon Bank, N.A., a national banking
association as issuer of Letters of Credit thereunder (in
such capacity, together with its successors and assigns in
such capacity, the "Administrative Agent"), Citicorp USA,
Inc. as Syndication Agent, First Union National Bank, a
national banking association as Documentation Agent, and
Bank of America, N.A. (as successor to NationsBank, N.A. and
Bank of America, NT&SA), a national banking association as
Syndication Agent.
78
21 Subsidiaries of the Company
23 Consent of KPMG LLP
23.1 Consent of KPMG LLP
27 Financial Data Schedule
- -------------------------
+ Management contract or compensatory plan or arrangement
(1) Incorporated by reference to Genesis Health Ventures, Inc.'s Current
Report on Form 8-K dated October 10, 1997.
(2) Incorporated by reference to Form S-4, dated June 30, 1998 (File No.
333-58221)
(3) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-40007).
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(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, 1996.
(9) Incorporated by reference to Form S-3, dated June 20, 1995 (File No.
33-9350).
(10) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ending September 30, 1998.
(12) Incorporated by reference to Form S-8, dated May 19, 1998 (File No.
333-53043)
(13) Incorporated by reference to the Company's Form 8-K dated November 30,
1993.
(14) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
(15) 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.
(16) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997.
(17) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form
S-1/A, dated February 29, 1992 (File No. 33-43261).
(18) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form
10-K dated August 31, 1998 (File No. 001-12729)
(19) Incorporated by reference to the Company's Amendment No. 1 to Form S-4
filed July 28, 1998 (333-58221).
(20) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994.
(21) Incorporated by reference to the Company's Report on Form 8-K dated
November 15, 1999.
(22) Incorporated by reference to the Company's Form 8-A filed May 11, 1995.
(23) Incorporated by reference to the Company's Form 10-Q/A filed September
15, 1999.
79
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 2, 1999,
reporting it had reached an agreement with The Cypress Group L.L.C. and
TPG Partners II, L.P. to restructure the Multicare joint venture. The
Current Report on Form 8-K does not include financial statements.
The Company filed a Current Report on Form 8-K dated November 15, 1999,
reporting the closing of its transaction with The Cypress Group L.L.C
and TPG Partners II, L.P. to restructure the Multicare joint venture.
The Current Report on Form 8-K does not include financial statements.
80
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.
Under date of December 1, 1999, we reported on the consolidated balance sheets
of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 1999 and
1998, 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, 1999 , as contained in the Genesis Health Ventures, Inc. annual
report on Form 10-K for the year 1999. 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 LLP
Philadelphia, Pennsylvania
December 1, 1999
81
Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 1999, 1998 and 1997
(in thousands)
Balance at Charged to Balance at
Beginning of Charged to Other End of
Description Period Operations Accounts (1) Deductions (2) Period
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1999
Allowance for Doubtful Accounts $ 73,719 54,061 1,500 43,213 $86,067
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
(1) - Represents amounts related to acquisitions
(2) - Represents amounts written off as uncollectible
82
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 27, 1999 by the undersigned duly
authorized.
Genesis Health Ventures, Inc.
By: /s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr.,
Executive 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 27, 1999.
Signature Capacity
/s/ Michael R. Walker
- ---------------------------- Chairman and Chief Executive Officer
Michael R. Walker
/s/ Richard R. Howard
- ---------------------------- Vice Chairman and Director
Richard R. Howard
/s/ Jack R. Anderson
- ---------------------------- Director
Jack R. Anderson
/s/ James G. Coulter
- ---------------------------- Director
James G. Coulter
/s/ Samuel H. Howard
- ---------------------------- Director
Samuel H. Howard
/s/ Roger C. Lipitz
- ---------------------------- Director
Roger C. Lipitz
/s/ Stephen E. Luongo
- ---------------------------- Director
Stephen E. Luongo
- ---------------------------- Director
Alan B. Miller
- ---------------------------- Director
James L. Singleton
/s/ George V. Hager, Jr.
- ---------------------------- Chief Financial Officer
George V. Hager, Jr. (Principal Accounting Officer)