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, 2001
|_| 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.
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(Exact name of Registrant as specified in its charter)
101 East State Street
Pennsylvania Kennett Square, PA 19348 06-1132947
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(State or other jurisdiction (Address of principal (I.R.S. Employer
of incorporation executive offices Identification
or organization) including zip code) Number)
(610) 444-6350
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, par value $.02 per share
Warrants to purchase common stock, par value $.02 per share,
exercisable until October 2, 2002
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
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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 $676,395,579(1). As of December 26, 2001,
39,671,279 shares of Common Stock were outstanding and 1,328,721 are to be
issued in connection with a plan confirmed by a court.
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
(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 26, 2001. 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 record
keeping purposes of the Securities and Exchange Commission.
INDEX
Page
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Cautionary Statements Regarding Forward Looking Statements........................................................1
Risk Factors......................................................................................................2
PART I
ITEM 1: BUSINESS
General................................................................................................9
Reorganization.........................................................................................9
Inpatient Services....................................................................................10
Pharmacy and Medical Supply Services..................................................................11
Other Services........................................................................................11
Revenue Sources.......................................................................................12
Marketing.............................................................................................16
Personnel.............................................................................................17
Employee Training and Development.....................................................................18
Governmental Regulation...............................................................................18
Corporate Integrity Program...........................................................................20
Competition in the Healthcare Services Industry.......................................................21
Insurance.............................................................................................22
ITEM 2: PROPERTIES............................................................................................23
ITEM 3: LEGAL PROCEEDINGS.....................................................................................25
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................28
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.......................................................................29
ITEM 6: SELECTED FINANCIAL DATA...............................................................................30
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................................31
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................50
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................................51
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................................................98
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................99
ITEM 11: EXECUTIVE COMPENSATION...............................................................................104
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................109
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................111
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K ......................................112
Cautionary Statements Regarding Forward Looking Statements
As used herein, unless the context otherwise requires, "Genesis," the "Company,"
"we," "our" or "us" refers to Genesis Health Ventures, Inc. and its
subsidiaries.
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:
o statements contained in "Risk Factors";
o certain statements in "Management's Discussion and Analysis of Financial
Condition and Results Of Operations," such as our ability or inability
to meet our liquidity needs, scheduled debt and interest payments and
expected future capital expenditure requirements, and to control costs,
sell assets and the expected effects of government regulation on
reimbursement for services provided;
o certain statements contained in "Business" concerning strategy,
corporate integrity programs, 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 these 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, which are discussed more fully in "Risk Factors":
o changes in the reimbursement rates or methods of payment from Medicare
and Medicaid, or the implementation of other measures to reduce the
reimbursement for our services;
o changes in pharmacy legislation and payment formulas;
o the expiration of enactments providing for additional governmental
funding;
o efforts of third party payors to control costs;
o the impact of federal and state regulations;
o changes in payor mix and payment methodologies;
o further consolidation of managed care organizations and other third
party payors;
o competition in our business;
o litigation regarding our NeighborCare(R)pharmacy operations' provision
of service to HCR Manor Care;
1
o an increase in insurance costs and potential liability for losses not
covered by, or in excess of, our insurance;
o competition for qualified staff in the healthcare industry;
o our ability to control operating costs, return to profitability and
generate sufficient cash flow to meet operational and financial
requirements; and
o an economic downturn or changes in the laws affecting our business in
those markets in which we operate.
Risk Factors
Set forth below are risks that we believe are material to our business
operations. Additional risks and uncertainties not known to us or that we
currently deem immaterial may also impair our business operations.
Changes in the reimbursement rates or methods of payment from Medicare and
Medicaid, or the implementation of other measures to reduce the reimbursement
for our services may adversely affect our revenues and operating margins.
We receive over 60% of our revenues from Medicare and Medicaid. The healthcare
industry is experiencing a strong trend toward cost containment, as government
seeks to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with providers. These cost containment measures generally have
resulted in reduced rates of reimbursement for services that we provide,
including skilled nursing facility services, pharmacy services and therapy
services.
Legislative and regulatory action has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs which have impacted us, 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 ("BBRA");
o adoption of the Benefits Improvement Protection Act of 2000 ("BIPA");
and
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
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.
The BIPA enactment mandates a phase out of intergovernmental transfer
transactions by states whereby states inflate the payments to certain public
facilities to increase federal matching funds. This action may reduce federal
support for a number of state Medicaid plans. The reduced federal payments may
impact aggregate available funds requiring states to further contain payments to
providers. We operate in several of the states that will experience a
contraction of federal matching funds.
2
With the repeal of the federal payment standards, 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.
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 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."
Additionally, the recent economic downturn may reduce state spending on Medicaid
programs. Recent data compiled by the National Conference of State Legislatures
indicate that the recent economic downturn has had a detrimental affect on state
revenues. Historically these budget pressures have translated into reductions in
state spending. Given that Medicaid outlays are a significant component of state
budgets, we expect continuing cost containment pressures on Medicaid outlays for
nursing homes and pharmacy services in the states in which we operate.
Changes in pharmacy legislation and payment formulas could impact our
NeighborCare(R) pharmacy operations.
Pharmacy coverage and cost containment are important policy debates at both the
federal and state levels. The federal government has considered proposals to
expand Medicare coverage for outpatient pharmacy services. Enactment of such
legislation could affect institutional pharmacy services. Likewise, a number of
states have proposed cost containment initiatives pending. Changes in payment
formulas and delivery requirements could impact our NeighborCare pharmacy
operations.
Our revenues will be adversely affected if enactments providing for additional
funding expire as currently scheduled.
A number of provisions of the BBRA and BIPA enactments providing additional
funding for Medicare participating skilled nursing facilities expire on
September 30, 2002. Expiring provisions are estimated to, on average, reduce our
per beneficiary per diems by $30. Moreover, the Centers for Medicare and
Medicaid Services ("CMS") has indicated its desire to complete refinements to
the case mix classification system as part of the Fiscal 2003 rule-making. Under
the law, when these revisions are implemented, the add-on's authorized by the
BBRA and BIPA will expire. As a result of the combination of these factors, the
Medicare skilled nursing facility sector is faced with an 18% reduction in the
average median per diems. If we were to experience an 18% decline in our current
average Medicare rate per patient day, the estimated annual reduction in
Medicare revenues of approximately $67,000,000 would have a material adverse
effect on our financial position, results of operations and cash flows.
3
Efforts of third party payors to control cost may adversely affect our revenues
and operating margins.
We receive approximately 40% of our revenues from private insurance, long-term
care facilities which utilize our specialty medical services, self-pay eldercare
facility residents, and other third party payors. These private third party
payors are continuing their efforts to control healthcare costs through direct
contracts with healthcare providers, increased utilization review and greater
enrollment in managed care programs and preferred provider organizations. These
private payors increasingly are demanding discounted fee structures and the
assumption by healthcare providers of all or a portion of the financial risk.
We conduct business in a heavily regulated industry, and changes in regulations
and violations of regulations may result in increased costs or sanctions that
reduce our revenues and profitability.
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure and certification of
eldercare centers and pharmacy operations, controlled substances and health
planning, in addition to reimbursement. 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,
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. Because these laws are amended from time to
time and subject to interpretation, we cannot predict when and to what extent
liability may arise. 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.
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. Rights
and remedies available to these programs include repayment of any amounts
alleged to be overpayments or in violation of program requirements, or making
deductions from future amounts due to us. These programs may also impose fines,
criminal penalties or program exclusions. Other payor sources also reserve
rights to conduct audits and make monetary adjustments.
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 us. However, in the ordinary course of our business,
we receive notices of deficiencies for failure to comply with various regulatory
requirements. We review such notices and take appropriate corrective action. In
most cases, we 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; and
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 center's 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.
4
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 encourage the referral of patients to a
particular provider for medical products and services. Furthermore, some states
restrict certain business relationships between physicians and other providers
of healthcare services. Many states prohibit business corporations from
providing, or holding themselves out as a provider of medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs and
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
From time to time, 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.
In July 1998, the federal government issued a new initiative to promote the
quality of care in nursing homes. 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.
The operation of our eldercare centers is subject to federal and state laws
prohibiting fraud by healthcare providers, including criminal provisions, which
prohibit filing false claims or making false statements to receive payment or
certification under Medicaid, or failing to refund overpayments or improper
payments. Violation of these criminal provisions is a felony punishable by
imprisonment and/or fines. We may be subject to fines and treble damage claims
if we violate the civil provisions which prohibit the knowing filing of a false
claim or the knowing use of false statements to obtain payment.
State and federal governments are devoting increasing attention and resources to
anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997
expanded the penalties for health care fraud, including broader provisions for
the exclusion of providers from the Medicaid program. We have established
policies and procedures that we believe are sufficient to ensure that our
facilities will operate in substantial compliance with these anti-fraud and
abuse requirements. While we believe that our business practices are consistent
with Medicaid criteria, those criteria are often vague and subject to change and
interpretation. Aggressive anti-fraud actions, however, could have an adverse
effect on our financial position, results of operations and cash flows.
State laws and regulations could affect our ability to grow.
Many states in which we operate 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.
5
Possible changes in the case mix of patients as well as payor mix and payment
methodologies may significantly affect our profitability.
The sources and amounts of our patient revenues will be determined by a number
of factors, including licensed bed capacity and occupancy rates of our centers,
the mix of patients and the rates of reimbursement among payors. Likewise
payment for ancillary medical services, including the institutional pharmacy
services of our NeighborCare pharmacy operations and therapy services provided
by our rehabilitation therapy services business, will vary based upon payor and
payment methodologies. Changes in the case mix of the patients as well as payor
mix among private pay, Medicare, and Medicaid will significantly affect our
profitability. Particularly, any significant increase in our Medicaid population
could have a material adverse effect on our financial position, results of
operations and cash flow, especially if states operating these programs continue
to limit, or more aggressively seek limits on, reimbursement rates.
Further consolidation of managed care organizations and other third party payors
may adversely affect our profits.
Managed care organizations and other third party payors have continued to
consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage of
the United States population are increasingly served by a small number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate us as a preferred 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.
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. See "Business - Competition in the Healthcare Services Industry."
We compete 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.
Our NeighborCare(R) pharmacy operations are involved in arbitration and
litigation with HCR Manor Care regarding certain service contracts whereby an
unfavorable decision would have a material adverse effect on our financial
position, results of operations and cash flows.
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care which constitute approximately ten percent and four
percent of the net revenues of our NeighborCare pharmacy operations and us,
respectively. These Service Contracts are the subject of certain arbitration and
litigation. We are not able to predict the results of such arbitration and
litigation. However, if the outcome is unfavorable to us, it would have a
material adverse effect on our financial position, results of operations and
cash flows.
6
An increase in insurance costs may adversely affect operating cash flow and we
may be liable for losses not covered by or in excess of our insurance.
We have experienced an adverse effect on operating cash flow beginning in the
third quarter of 2000 due to an increase in the cost of certain of our insurance
programs and the timing of funding new policies. Rising costs of eldercare
malpractice litigation, losses stemming from these malpractice lawsuits, and a
constriction of insurers has caused many insurance carriers to raise the cost of
insurance premiums or refuse to write insurance policies for nursing homes.
Also, a tightening of the reinsurance market has affected property, auto, and
excess liability insurance carriers. Accordingly, the costs of all insurance
premiums have increased.
We carry property, general and professional liability coverage on our behalf and
on the behalf of our subsidiaries in amounts deemed adequate by management.
However, there can be no assurance that any current or future claims will not
exceed applicable insurance coverage.
In addition, for workers' compensation insurance and certain health insurance
provided to our employees, we are self-insured. Accordingly, we are liable for
payments to be made under those plans. To the extent claims are greater than
estimated, they could adversely affect our financial position, results of
operations and cash flows.
We could experience significant increases in our operating costs due to intense
competition for qualified staff in the healthcare industry.
We and the healthcare industry continue to experience shortages in qualified
professional clinical staff. We compete with other healthcare providers and with
non-healthcare providers for both professional and non-professional employees.
As the demand for these services continually exceeds the supply of available and
qualified staff, we and our competitors have been forced to offer more
attractive wage and benefit packages to these professionals and to utilize
outside contractors for these services at premium rates. Furthermore, the
competitive arena for this shrinking labor market has created high turnover
among clinical professional staff as many seek to take advantage of the supply
of available positions, each offering new and more attractive wage and benefit
packages. In addition to the wage pressures inherent in this environment, the
cost of training new employees amid the high turnover rates has caused added
pressure on our operating margins. 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.
7
If we are unable to control operating costs, return to profitability and
generate sufficient cash flow to meet operational and financial requirements,
including servicing our reduced indebtedness, our business operations may be
adversely affected.
Cost containment and lower reimbursement levels by third party payors, including
the federal and state governments, have had a significant impact on the
healthcare industry as a whole and on our cash flows. Even with reduced
indebtedness, our operating margins may continue to be under pressure because of
continuing regulatory scrutiny and growth in operating expenses, such as labor
costs and insurance premiums. In addition, as a result of competitive pressures,
our ability to maintain operating margins through price increases to private
patients is limited. Additionally, in connection with our emergence from
bankruptcy, we entered into new senior loan obligations. If we are unable to
service our reduced indebtedness, our business operations may be adversely
affected. Therefore, we will have to find ways to control increasing operating
costs, return to profitability and generate sufficient cash flow to meet
operational and financing requirements, which includes servicing our reduced
indebtedness. If we are unable to do so, our business operations and revenues
may be materially adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
We rely on certain markets and the recent economic downturn or changes in the
laws affecting our business in those markets could have a material adverse
effect on our operating results.
Our business depends on its eldercare facilities, which are located in 15
states. As of November 15, 2001, 19% of the Company's eldercare facility beds
were located in Pennsylvania, 18% were located in New Jersey, 16% were located
in Massachusetts and 13% were located in Maryland. The economic condition of
these markets could affect the ability of our customers and third party payors
to reimburse the Company for our services through a reduction of disposable
household income or the ultimate reduction of the tax base used to generate
state funding of their respective Medicaid programs. An economic downturn, or
changes in the laws affecting our business, in these markets and surrounding
markets could have a material adverse effect on our financial position, results
of operations and cash flows.
8
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
its subsidiaries.
We are a leading provider of healthcare and support services to the elderly. Our
operations are comprised of two primary business segments, inpatient services
and pharmacy and medical supply services. These segments are complemented by an
array of other service capabilities through the Genesis ElderCare(R) delivery
model of integrated healthcare networks.
We provide inpatient services through networks of skilled nursing and assisted
living centers primarily located in the eastern United States. The networks
currently include 276 owned, leased, managed and jointly-owned eldercare centers
with approximately 33,000 beds.
We provide pharmacy and medical supply services nationwide through our
NeighborCare(R) integrated pharmacy and medical supply operation consisting of
60 institutional pharmacies of which two are jointly-owned. Our NeighborCare
pharmacy operations serve approximately 253,000 institutional beds; 22 medical
supply and home medical equipment distribution centers of which four are
jointly-owned and serve over 1,000 eldercare centers with over 80,000 beds; 29
community-based pharmacies of which two are jointly-owned and infusion therapy
services.
We also provide rehabilitation services, diagnostic services, respiratory
services, hospitality services, group purchasing services and healthcare
consulting services.
In order to achieve operating efficiencies, economies of scale and significant
market share, Genesis has concentrated its eldercare networks in five geographic
regions: 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 / Illinois / Wisconsin).
Reorganization
On October 2, 2001, the effective date, we and The Multicare Companies, Inc.,
referred to as Multicare, consummated a joint plan of reorganization (the
"Plan") under Chapter 11 of the Bankruptcy Code (the "Reorganization") pursuant
to a September 20, 2001 order entered by the U.S. Bankruptcy Court for the
District of Delaware approving the Plan proposed by us and Multicare.
The principal provisions of the Plan are as follows:
o Multicare became our wholly-owned subsidiary. We previously owned 43.6%
of Multicare and managed its skilled nursing and assisted living
facilities under the Genesis Eldercare brand name;
o New senior notes, new convertible preferred stock, new common stock and
new warrants were issued to the Companies' creditors. Approximately 93%
of our common stock, also referred to as the new common stock,
$242,600,000 in senior notes and preferred stock with a liquidation
preference of $42,600,000 were issued to our and Multicare senior
secured creditors. Approximately 7% of the new common stock is to be
issued to our and Multicare unsecured creditors as well as one year
warrants to purchase an additional 11% of the new common stock;
9
o Holders of our and Multicare pre-Chapter 11 preferred and common stock
received no distribution and those instruments were canceled;
o Claims between us and Multicare were set-off against one another and any
remaining claims were waived and released; and
o The following persons were designated to comprise our board of
directors: Michael R. Walker, our chief executive officer and chairman;
James H. Bloem of Humana Inc.; Edwin M. Crawford of Caremark Rx; James
E. Dalton, Jr.; James D. Dondero of HCMLP; Robert H. Fish of
Sonoma-Seacrest, LLC; Dr. Philip P. Gerbino of the University of the
Sciences in Philadelphia; and Joseph A. LaNasa III of Goldman Sachs &
Co.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Transactions and Events" for a description of other recent
matters impacting our business and results of operations.
Description of Business
Inpatient Services
We own, lease, manage or jointly-own 276 eldercare centers, including 34
standalone assisted living facilities and 24 transitional care units, located in
15 states.
Our 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.
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.
We have established and actively market programs for elderly and other customers
who require subacute levels of medical care. These programs include ventilator
care, intravenous therapy, post-surgical recovery, respiratory management,
orthopedic or neurological rehabilitation, terminal care and various forms of
coma, pain and wound management. Private insurance companies and other third
party payors, including certain state Medicaid programs, have recognized that
treating customers requiring subacute medical care in centers such as those we
operate is a cost-effective alternative to treatment in an acute care hospital.
We provide subacute care at rates that we believe are substantially below the
rates typically charged by acute care hospitals for comparable services.
10
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.
2001 2000 1999
--------------------------------------------------------------------------------
Average Beds in Service: (1)
Owned and Leased Facilities 24,783 14,286 15,522
Managed and Jointly-Owned Facilities 9,215 23,779 23,984
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 91% 91%
Managed and Jointly-Owned Facilities 88% 91% 90%
--------------------------------------------------------------------------------
(1) In connection with the consummation of the Plan, 10,702 Multicare beds
previously classified as "Managed and Jointly-Owned Facilities" were
reclassified as "Owned and Leased Facilities." See "Business -
Reorganization."
Pharmacy and Medical Supply Services
We provide pharmacy and medical supply services in 41 states through our
NeighborCare pharmacy operations. Our NeighborCare pharmacy operations consist
of long-term care and retail pharmacies, medical supply centers, infusion
services and home medical equipment facilities and serve over 250,000 customers
in long-term care settings and more than 1,000,000 covered lives in home care
settings.
Included in pharmacy and medical supply service revenues are institutional
pharmacy revenues, which include the provision of prescription and
non-prescription pharmaceuticals, infusion therapy, and medical supplies and
equipment provided to eldercare centers operated by us, 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. We
provide 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 60 institutional pharmacies (two are jointly-owned) and 22 medical
supply and home medical equipment distribution centers (four are jointly-owned)
located in our various market areas.
In addition, we operate 29 community-based pharmacies (two are jointly-owned)
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, 2001 were generated through external contracts
with independent healthcare providers with the balance attributable to centers
owned or leased by us.
Other Services
Rehabilitation Therapy. We provide an extensive range of rehabilitation therapy
services, including speech pathology, physical therapy and occupational therapy,
through 12 certified rehabilitation agencies in all five of our regional market
concentrations. These services are provided by approximately 3,300 licensed
rehabilitation therapists and assistants employed or contracted by us to
substantially all of the eldercare centers we operate, as well as by contract to
healthcare facilities operated by others.
11
Management Services. We provide management services to 84 eldercare centers
pursuant to management agreements that provide generally for the day-to-day
responsibility for the operation and management of the centers. In turn, we
receive 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
renewal option periods, are scheduled to terminate between 2002 and 2011.
Tidewater Group Purchasing. We own and operate The Tidewater Healthcare Shared
Services Group, Inc., referred to as Tidewater, one of the largest long-term
care group purchasing companies in the country. We have negotiated contracts
with 65 national and 170 regional vendors. 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 3,300 members with over 322,000 beds in 45 states and the
District of Columbia.
Other Services. We employ or have consulting arrangements with approximately 81
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; adult day care services; consulting
services; respiratory health services and hospitality services such as dietary,
housekeeping, laundry, plant operations and facilities management services. We
also provide healthcare consulting services.
The following table sets forth the amount of our total net revenue contributed
by our segments for the periods presented (in thousands):
2001 2000 1999
--------------------------------------------------------------------------------------
Inpatient services $ 1,360,230 $ 1,320,151 $ 704,105
Pharmacy and medical supply services 1,040,051 952,350 927,334
Other revenue 169,656 161,357 234,987
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 healthcare industry is experiencing the
effects of the trend toward cost containment as federal and state governments
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 rates of our centers,
the mix of patients and the rates of reimbursement among payors. Likewise,
payment for ancillary medical services, including the institutional pharmacy
services of NeighborCare and therapy services provided by our rehabilitation
therapy services business, will vary based upon payor and payment methodologies.
Changes in the case mix of the patients as well as payor mix among private pay,
Medicare, and Medicaid will significantly affect our profitability.
12
The following table reflects the allocation of customer service revenues among
these sources of revenue.
2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------
Private pay and other 39% 41% 47% 45% 39%
Medicaid 43 43 39 35 37
Medicare 18 16 14 20 24
------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
------------------------------------------------------------------------------------------
See "Business - Government Regulation."
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 United States citizen 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"); (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 Centers for
Medicare and Medicaid Services ("CMS") (formerly the Health Care Finance
Administration) a division of the Department of Health and Human Services
("HHS").
Medicaid (Title XIX of the Social Security Act) is a federal-state matching
program, whereby the federal government, under a needs based formula, matches
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 under federal rules. 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. For skilled nursing centers, most states pay prospective
rates, and have some form of acuity adjustment. In addition to facility based
services, most states cover an array of medical ancillary services, including
those services provided by institutional pharmacies. Payment methodologies for
these services vary based upon state preferences and practices permitted under
federal rules.
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. These
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 third party payor sources also reserve
rights to conduct audits and make monetary adjustments.
Laws Affecting Revenues. Congress has enacted three major laws during the past
five years that have significantly altered payment for nursing home and medical
ancillary services. The Balanced Budget Act of 1997 ("the 1997 Act"), signed
into law on August 5, 1997, reduced federal spending on the Medicare and
Medicaid programs. The Medicare Balanced Budget Refinement Act ("BBRA"), enacted
in November 1999 addressed a number of the funding difficulties caused by the
1997 Act. The Benefits Improvement and Protection Act of 2000 ("BIPA"), was
enacted on December 15, 2000, further modifying the law and restoring additional
funding. The following provides a brief summary of these laws and an overview of
the impact of these enactments on our services.
13
Under the 1997 Act, participating skilled nursing facilities are reimbursed
under a prospective payment system ("PPS") for inpatient Medicare covered
services. The PPS system commenced with a facility's first cost reporting period
beginning on or after July 1, 1998. 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 one of forty-four resource utilization groups ("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. The law
phased in PPS over a three-year period. The final phase in period for Genesis
began October 1, 2001 and is expected to result in a decline in Medicare
revenues of approximately $7,000,000. 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.
As implemented by CMS, PPS has had an adverse impact on the Medicare revenues of
many skilled nursing facilities. There have been three primary problems. First,
the base year calculations understate costs. Second, the market basket index
used to trend payments forward does not adequately reflect market experience.
Third, the RUG case mix allocation is not adequately predictive of the costs of
care for patients, and does not equitably allocate funding, especially for
non-therapy ancillary services.
In November 1999, the BBRA was passed in Congress. This enactment provided
relief for certain reductions in Medicare reimbursement caused by the 1997 Act.
For covered skilled nursing facility services furnished on or after April 1,
2000, the federal per diem rate was increased by 20% for 15 RUG payment
categories. While this provision was initially expected to adjust payment rates
for only six months, CMS withdrew proposed RUG refinement rules. These payment
add-ons will continue until CMS completes certain mandated recalculations of
current RUG weightings. For fiscal years 2001 and 2002, the BBRA mandated
federal per diem rates for all RUG categories be increased by an additional 4%
over the required market basket adjustment. The law provided that certain
specific services (such as prostheses and chemotherapy drugs) would be
reimbursed separately from and in addition to the federal per diem rate. A
provision was included that provided for cost report years beginning on or after
January 1, 2000, skilled nursing facilities could waive the PPS transition
period and elect to receive 100% of the federal per diem rate. The enactment
also lifted for two years a $1,500 cap on rehabilitation therapy services
provided under Medicare Part B.
On December 15, 2000, Congress passed BIPA that increased the nursing component
of Federal PPS rates by approximately 16.7% for the period from April 1, 2001
through September 30, 2002. The legislation also changed the 20% add-on to 3 of
the 14 rehabilitation RUG categories to a 6.7% add-on to all 14 rehabilitation
RUG categories beginning April 1, 2001. The Part B consolidated billing
provision of BBRA was repealed except for Medicare Part B therapy services and
the moratorium on the $1,500 therapy caps were extended through calendar year
2002. These changes have had a positive impact on operating results.
A number of the provisions of the BBRA and BIPA enactments providing additional
funding for Medicare participating skilled nursing facilities expire on
September 30, 2002, referred to as the Medicare Rate Cliff. Expiring provisions
are estimated to, on average, reduce per beneficiary per diems by $30. Moreover,
CMS has indicated its desire to complete refinements to the case mix
classification system ("RUG refinements") as part of the Fiscal 2003
rule-making. Under the law, when these revisions are implemented, the add-on's
authorized by the BBRA and BIPA will expire. The combined effect of the Medicare
Rate Cliff and RUG refinements on the Medicare skilled nursing facility sector
will be an 18% reduction in the average median per diems. If we were to
experience an 18% decline in our current average Medicare rate per patient day,
the estimated annual reduction in Medicare revenues of approximately $67,000,000
would have a material adverse affect on our financial position, results of
operations and cash flows. Trade organizations representing the skilled nursing
facility sector are aggressively pursuing strategies to minimize the potential
impact of the Medicare Rate Cliff.
14
The Company's average Medicare rate per patient day in Fiscal 1997, prior to the
implementation of PPS, was over $400. In Fiscal 1998, 1999, 2000 and 2001, the
average Medicare rate per patient day was $390, $302, $294 and $323
respectively.
The 1997 Act contains provisions that have affected amounts paid to our
NeighborCare pharmacy operations 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." The move to prospective payment
systems under the 1997 Act has made pricing a more important consideration in
the selection of pharmacy providers. Also, Congress included provisions in the
1997 Act that would require nursing facilities to submit all claims for
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. The BIPA, enacted in December 2000, repealed this provision,
except for therapy services.
The 1997 Act included several provisions affecting Medicaid. 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 healthcare providers be reasonable and adequate in
order to cover the costs of efficiently and economically operated healthcare
facilities. Under the 1997 Act, 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. With the repeal of the federal
payment standards, 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 institutional 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 BIPA enactment mandates a phase out of intergovernmental transfer
transactions by states whereby states artificially inflate the payments to
certain public facilities to increase federal matching funds. This action may
reduce federal support for a number of state Medicaid plans. The reduced federal
payments may impact aggregate available funds requiring states to further
contain payments to providers. Genesis operates in several of the states that
will experience a contraction of federal matching funds.
Recent data compiled by the National Conference of State Legislatures indicate
that the recent economic downturn has had a detrimental affect on state
revenues. Historically these budget pressures have translated into reductions in
state spending. Given that Medicaid outlays are a significant component of state
budgets, we expect continuing cost containment pressures on Medicaid outlays for
nursing homes and pharmacy services in the states in which we operate.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by CMS 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 our institutional pharmacy and medical supply operation to charge
Medicaid no more than its lowest charge to other consumers in the state. During
2000, Federal Medicaid requirements establishing payment caps on certain drugs
were revised ("Federal Upper Limits"). The final rule relating to Federal Upper
Limits was substantially modified, reducing the impact of the new rules on
NeighborCare operations.
15
Pharmacy coverage and cost containment are important policy debates at both the
federal and state levels. Congress has considered proposals to expand Medicare
coverage for outpatient pharmacy services. Enactment of such legislation could
affect institutional pharmacy services. Likewise, a number of states have
proposed cost containment initiatives pending. Changes in payment formulas and
delivery requirements could impact NeighborCare.
Federal 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.
Legal Proceedings Potentially Affecting Revenues. Certain service contracts
permit our NeighborCare pharmacy operations to provide services to HCR Manor
Care, Inc. constituting approximately ten percent and four percent of the net
revenues of NeighborCare and us, respectively, or approximately $116,000,000 for
the twelve months ended September 30, 2001. These service contracts with HCR
Manor Care 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 and Events - Vitalink
Transaction."
Our NeighborCare pharmacy operations provide services to 58 centers operated by
Mariner Post-Acute Network, Inc., referred to as Mariner, that represent four
percent and two percent of net revenues of our NeighborCare pharmacy operations
and us, respectively, or approximately $49,000,000, for the twelve months ended
September 30, 2001. On January 18, 2000, Mariner filed voluntary petitions under
Chapter 11 with the Bankruptcy Court, giving Mariner certain rights under the
protection of the Bankruptcy Court. We participate as a member of the official
Mariner unsecured creditors committee.
Effective November 1, 2001, the Mariner Bankruptcy Court approved a settlement
agreement between NeighborCare and Mariner relating to these Mariner service
contracts, whereby, among other things, (1) the form of the contracts were
restated and new pricing was implemented; (2) the terms of the contracts were
extended for eighteen months through April 30, 2003, except that Mariner has the
right to terminate a limited number of service contracts in the event of the
disposition or closure of the subject facility; (3) NeighborCare waived all
claims against Mariner in the Mariner bankruptcy with respect to these contracts
except for an allowed $6,000,000 pre-petition unsecured claim and (4) Mariner
"assumed" the service contracts, as modified, in the Bankruptcy Court.
See "Risk Factors," "Business - Government Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Revenue Sources."
Marketing
Marketing for eldercare centers is focused at the local level and is conducted
primarily by a dedicated regional marketing staff, who call on referral sources
such as hospitals, hospital discharge planners, doctors, 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. Toll-free regional Genesis ElderCare(R) phone lines assist the
marketing staff and direct referral sources. The ElderCare line speeds
admissions by automated tracking of bed availability and specialty care
capabilities for each Genesis ElderCare center and all our affiliates.
16
We market specialty medical services to independent healthcare providers, in
addition to providing such services to our owned, leased, managed and affiliated
eldercare centers. We market our institutional pharmacy, medical supplies,
rehabilitation therapy services, group purchasing, respiratory therapy,
diagnostic services and consulting services through a direct sales force which
primarily calls on eldercare centers, hospitals, clinics and home health
agencies.
In addition, a corporate marketing department supports the eldercare centers and
service companies in developing promotional materials and literature focusing on
the Company's philosophy of care, services provided and quality clinical
standards as well as providing industry research. See "Business - Government
Regulation" for a discussion of the federal and state laws which limit financial
and other arrangements between healthcare providers.
We operate our core business under the name Genesis ElderCare(R). The Genesis
ElderCare logo, trademarks and service marks 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 Genesis ElderCare lines, to promote our
brand name in trade, professional and business publications and to promote
services directly to consumers.
Personnel
At November 30, 2001, we employed over 46,000 people, including approximately
33,000 full-time and 13,000 part-time employees. Approximately 19% of these
employees are physicians, nurses and clinical professional staff.
We currently have 68 facilities that are covered by, or are negotiating,
collective bargaining agreements. The agreements expire at various dates from
2002 through 2005 and cover approximately 5,100 employees. We believe that our
relationship with our employees is generally good.
We and our industry continue to experience shortages in qualified professional
clinical staff. We compete with other healthcare providers and with
non-healthcare providers for both professional and non-professional employees.
As the demand for these services continually exceeds the supply of available and
qualified staff, we and our competitors have been forced to offer more
attractive wage and benefit packages to these professionals and to utilize
outside contractors for these services at premium rates. Furthermore, the
competitive arena for this shrinking labor market has created high turnover
among clinical professional staff as many seek to take advantage of the supply
of available positions, each offering new and more attractive wage and benefit
packages. In addition to the wage pressures inherent in this environment, the
cost of training new employees amid the high turnover rates has created added
pressure on our operating margins. 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 affect our ability to attract and
maintain an adequate staff of qualified healthcare personnel in the future. 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. See "Risk Factors."
17
Employee Training and Development
We believe 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.
In addition, we have 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.
Classes are held on the employee's 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, the nurse aides graduate and
are awarded the title of Geriatric Nursing Assistant Specialist ("GNAS") and
they are given a salary adjustment. The GNAS then takes on additional
responsibilities, acting in an enhanced, leadership roll in the center. As a
GNAS continues along their career path, we provide further incentives.
Similar programs are currently under development for both pharmacy technicians
and nursing assistants who work in the assisted living environment. In addition,
plans are underway to include specialized studies in the areas of end of life
and/or dementia for future GNASs.
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
registered nurses and licensed practical nurses occupying charge nurse positions
within our nursing centers as well as junior level managers throughout our
network. Over 1,300 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.
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. We review such notices and takes
appropriate corrective action. In most cases, we and the reviewing agency will
agree upon the measures to be taken to bring the center into compliance with
regulatory requirements. In some cases, the reviewing agency may take various
adverse actions against a provider, including but not limited to:
18
o the imposition of fines;
o suspension of payments for all or new admissions to the center; and
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 center's ability to continue to operate,
ability to provide certain services, and/or eligibility to participate in the
Medicare or Medicaid programs or to receive payments from other payors. 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.
All of our owned and leased skilled nursing centers are currently certified to
receive benefits provided under Medicare. Additionally, all our 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.
Many states in which we operate have adopted Certificate of Need ("CON") 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:
o the inability to provide the service;
o the inability to operate the centers;
o the inability to complete the acquisition, addition or other change; and
o the imposition of sanctions or adverse action on the center's license
and adverse reimbursement action.
During the past year, several states have passed legislation altering their CON
requirements. Virginia is expected to phase out its CON requirement, and
Maryland is studying a similar action. These changes are not expected to
materially alter our business opportunities.
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
19
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.
There have also been a number of recent federal and state legislative and
regulatory initiatives concerning reimbursement under the Medicare and Medicaid
programs. During the past few years, the Department of Health and Human Services
("HHS") has issued a series of voluntary compliance guidelines. These compliance
guidelines provide guidance on acceptable practices. Skilled nursing facility
services and durable medical equipment, prosthetics, orthotics, and supplies,
also referred to as DMEPOS, supplier performance practices have been among the
services addressed in these publications. Our Corporate Integrity Program is
working to assure that our practices conform. HHS also issues fraud alerts and
advisory opinions. Directives concerning double billing, home health services
and the provision of medical supplies to nursing facilities have been released.
It is anticipated that areas addressed by these advisories may come under closer
scrutiny by the government. While we have focused our internal compliance
reviews to assure our practices conform with government instructions, we cannot
accurately predict the impact of any such initiatives. See "Cautionary
Statements Regarding Forward Looking Statements" and "Revenue Sources."
We face additional federal requirements that mandate major changes in the
transmission and retention of health information. The Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") was enacted to ensure,
first, that employees can retain and at times transfer their health insurance
when they change jobs, and secondly, to simplify health care administrative
processes. This simplification includes expanded protection of the privacy and
security of personal medical data and requires the adoption of standards for the
exchange of electronic health information. Among the standards that HHS may
adopt pursuant to HIPAA are standards for the following: electronic transactions
and code sets; unique identifiers for providers, employers, health plans and
individuals; security and electronic signatures; privacy; and enforcement.
Although HIPAA was intended to ultimately reduce administrative expenses and
burdens faced within the healthcare industry, we believe that implementation of
this law will result in additional costs. We have approximately two years to
comply with the regulation. We have established a HIPAA task force consisting of
clinical, financial and information services professionals focused on HIPAA
compliance.
Corporate Integrity Program
The Genesis Corporate Integrity Program (the "Integrity Program") was developed
to assure that we continue to achieve our goal of providing a high level of care
and service in a manner consistent with all applicable state and federal laws
and regulations, and our internal standard of conduct. This program is intended
to allow personnel to prevent, detect and resolve any conduct or action that
fails to satisfy all applicable laws and our standard of conduct.
We have a corporate compliance officer responsible for administering the
Integrity Program. The corporate compliance officer, with the approval of the
chief executive officer or the board of directors, may use any of our resources
to evaluate and resolve compliance issues. The corporate compliance officer
reports significant compliance issues to the Board of Directors, including the
results of investigations and any subsequent disciplinary or remedial actions
taken.
20
In December 1998, we established the Corporate Integrity hotline (the
"Hotline"), which offers a toll-free number available to all of our employees to
report non-compliance issues. Employee calls to the Hotline may be kept
anonymous. All calls reporting alleged non-compliance are logged, investigated,
addressed and remedied by appropriate company officials.
In 1999, the corporate integrity subcommittee (the "CIS") was established to
ensure a mechanism exists for us to monitor compliance issues. Potential
compliance issues are referred by the corporate compliance officer to members of
the CIS for investigation. The CIS members are senior members of the
reimbursement, risk management, human resources, legal, clinical practices and
internal audit departments.
Periodically, we receive information from HHS regarding individuals and
providers that are excluded from participation in Medicare, Medicaid and other
federal healthcare programs. Providers include medical directors, attending
physicians, vendors, consultants and therapists. On a monthly basis, management
compares the information provided by HHS to data bases containing providers and
individuals doing businesses with us. Any potential matches are investigated and
any necessary corrective action is taken to ensure we cease doing business with
that provider and individual.
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.
We operate eldercare centers in 15 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.
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 the selection
of an eldercare center. Competition for subacute patients is intense among acute
care 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.
21
HCR Manor Care is a publicly traded owner of eldercare centers that competes
with us in certain markets. Pursuant to certain service contracts, our
NeighborCare pharmacy operations provide services to HCR Manor Care constituting
approximately four percent and ten percent of the consolidated net revenues of
Genesis and our NeighborCare pharmacy operations, respectively in fiscal 2001.
These service contracts are the subject of certain litigation. See "Legal
Proceedings."
See "Risk Factors."
Insurance
We carry property, general and professional liability 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.
We have experienced an adverse effect on operating cash flow beginning in the
third quarter of 2000 due to an increase in the cost of certain of our insurance
programs and the timing of funding new policies. Rising costs of eldercare
malpractice litigation, losses stemming from these malpractice lawsuits, and a
constriction of insurers have caused many insurance carriers to raise the cost
of insurance premiums or refuse to write insurance policies for nursing homes.
Also, a tightening of the reinsurance market has affected property, auto, and
excess liability insurance carriers. Accordingly, the costs of all insurance
premiums have increased.
Prior to June 1, 2000, we purchased general and professional liability insurance
coverage ("GL/PL") from various commercial insurers on a first dollar coverage
basis. Beginning with the June 1, 2000 policy, we have purchased GL/PL coverage
from a commercial insurer subject to per claim retentions. These retentions are
insured by our wholly-owned captive insurance company, Liberty Health Corp.,
LTD, referred to as LHC. LHC is currently insuring workers' compensation and
GL/PL retentions.
Workers' compensation insurance has been maintained as statutorily required, or
in certain jurisdictions for certain periods, we have qualified as exempt or
self-insured. Most of the commercial insurance purchased is loss sensitive in
nature. As a result, we are responsible for adverse loss development or, in some
cases, may be entitled to refunds if losses are below certain levels. We believe
that adequate reserves are in place to cover the ultimate liability related to
workers' compensation.
We provide several health insurance options to our employees, including a
self-insured 80/20 indemnity plan and several fully insured health maintenance
organizations.
See "Risk Factors."
22
ITEM 2: PROPERTIES
Eldercare Facilities
The following table provides information by state as of November 15, 2001
regarding the eldercare centers we own, lease and manage and the independently
owned facilities that, for a fee, have access to many of the resources and
capabilities of the Genesis Eldercare(R) Network ("Member Centers"). Member
Centers typically purchase an array of services from us and have access to
managed care contracts, preferred provider arrangements and group purchasing
arrangements. Included in the center count are 34 standalone assisted living
facilities with 3,323 units and 19 skilled nursing facilities with 632 assisted
living units. Certain properties are leased by the respective operating entities
from third parties. If we are unable to make rental payments under these leases
it 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. Also included in Managed centers are 24 transitional
care units with 621 beds located in hospitals principally in the state of
Massachusetts.
Wholly-Owned Leased Managed Member
Centers Centers Centers Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
----------------------------------------------------------------------------------------------------------------------------------
Maryland 13 1,711 6 843 12 1,683 15 2,848 46 7,085
Pennsylvania 29 3,778 7 688 11 1,824 3 375 50 6,665
New Jersey 22 3,230 12 1,970 8 747 2 375 44 6,322
Massachusetts 13 1,742 3 370 41 3,162 - - 57 5,274
Florida 12 1,556 3 321 - - 1 120 16 1,997
West Virginia 15 1,331 5 394 4 270 - - 24 1,995
Connecticut 9 1,381 1 130 2 168 - - 12 1,679
New Hampshire 9 920 3 260 1 85 - - 13 1,265
Delaware 4 502 - - 3 319 3 449 10 1,270
Virginia 5 709 1 240 - - - - 6 949
Illinois 9 919 - - - - - - 9 919
Wisconsin 5 720 - - - - - - 5 720
Rhode Island 3 373 - - - - - - 3 373
North Carolina - - - - 2 340 - - 2 340
Vermont 3 314 - - - - - - 3 314
District of Columbia - - - - - - 1 189 1 189
----------------------------------------------------------------------------------------------------------------------------------
Totals 151 19,186 41 5,216 84 8,598 25 4,356 301 37,356
----------------------------------------------------------------------------------------------------------------------------------
23
Pharmacy and Medical Supply Facilities
The following table provides information by state regarding the pharmacy and
medical supply locations operated by our NeighborCare(R) pharmacy operations as
of November 15, 2001.
All but two of these sites are leased. Our inability 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.
Medical Supply / Community
Institutional Home Medical Based
Pharmacies Equipment Sites Pharmacies Total
------------------------------------------------------------------------------------------------------------------------------
Maryland 6 5 27 38
Pennsylvania 7 4 2 13
California 5 1 - 6
Florida 3 3 - 6
New Jersey 4 1 - 5
Virginia 3 2 - 5
Wisconsin 5 - - 5
Illinois 3 1 - 4
South Carolina 3 1 - 4
Indiana 3 - - 3
Connecticut 1 1 - 2
Massachusetts 1 1 - 2
New Hampshire 1 1 - 2
New York 2 - - 2
North Carolina 2 - - 2
Oklahoma 1 1 - 2
Oregon 2 - - 2
Colorado 1 - - 1
Iowa 1 - - 1
Kentucky 1 - - 1
Michigan 1 - - 1
Ohio 1 - - 1
Rhode Island 1 - - 1
Texas 1 - - 1
West Virginia 1 - - 1
------------------------------------------------------------------------------------------------------------------------------
Totals 60 22 29 111
------------------------------------------------------------------------------------------------------------------------------
We believe that our physical properties are well maintained and are in a
suitable condition for the conduct of our business.
24
ITEM 3: LEGAL PROCEEDINGS
On October 2, 2001, we and Multicare consummated a joint plan of reorganization
(the "Plan") under Chapter 11 of the Bankruptcy Code pursuant to a September 20,
2001 order entered by the U.S. Bankruptcy Court for the District of Delaware
approving the Plan. See "Business - Reorganization."
An individual prepetition bond holder has filed a notice of appeal of the order
confirming the Plan of Reorganizaton in the United States District Court for the
District of Delaware. The appeal is pending. The Company has filed a motion to
dismiss.
We are a party to litigation arising in the ordinary course of business. With
exception to the discussion which follows, we do 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."
NeighborCare Pharmacy Services, Inc. v. HCR Manor Care, Inc., Manor Care, Inc.
and ManorCare Health Services, Inc.
On May 7, 1999, NeighborCare Pharmacy Services, Inc. ("NeighborCare"), our
wholly-owned subsidiary, filed a demand for arbitration under the commercial
arbitration rules of the American Arbitration Association (the "AAA
Arbitration") against HCR Manor Care, Inc., Manor Care, Inc. and ManorCare
Health Services, Inc (collectively, the "respondents"). The AAA Arbitration
principally concerns two long-term master service agreements between
NeighborCare(R) and ManorCare Health Services, Inc. ("the Master Service
Agreements"). Pursuant to one of these agreements (the "Master Pharmacy
Agreement"), NeighborCare provides pharmacy services to long-term care
facilities owned or operated by Manor Care, Inc., formerly known as HCR Manor
Care, Inc. ("Manor Care"). Pursuant to the other agreement (the "Master Infusion
Therapy Agreement"), NeighborCare provides infusion therapy products and
services to Manor Care long-term care facilities.
In the AAA Arbitration, NeighborCare seeks injunctive relief and compensatory
damages estimated to be approximately $34,000,000, plus interest, in connection
with (1) respondents' attempts to terminate the Master Service Agreements, and
(2) respondents' failure to provide NeighborCare with the right to serve as the
preferred provider of pharmacy and infusion therapy services to all Manor Care
long-term care facilities pursuant to the Master Service Agreements. Respondents
have filed counterclaims requesting declaratory relief approving the purported
termination of the Master Service Agreements, as well as counterclaims seeking
compensatory damages of at least $21,000,000, plus interest, in connection with
alleged overcharges under the two agreements.
The AAA Arbitration incorporates causes of action that NeighborCare originally
pleaded in a complaint filed on May 7, 1999 in the Circuit Court for Baltimore
City in an action captioned Vitalink Pharmacy Services, Inc. v. HCR Manor Care,
Inc., Manor Care, Inc., and ManorCare Health Services, Inc., Case No.
24-C-99-002179. At first, the AAA Arbitration only addressed claims relating to
the Master Pharmacy Agreement, which, as amended, contained an arbitration
clause. However, by letter agreement dated May 13, 1999 between NeighborCare and
the defendants in the state court case, the litigants agreed to address the
claims relating to the Master Infusion Therapy Agreement in the AAA Arbitration.
The parties further agreed to stay respondents' attempted termination of both
Master Service Agreements until ten days after a final decision is reached in
the AAA Arbitration. As a result, the Master Service Agreements remain in full
force and effect today.
The parties selected former federal judge Charles Renfrew to serve as the
Arbitrator. The parties briefed a motion by Manor Care to dismiss NeighborCare's
claims relating to its right to service all of Manor Care's facilities. In
connection with that motion, the Arbitrator, on May 17, 2000, declined to
dismiss NeighborCare's claims for money damages for breach of its contractual
right to serve as the preferred provider to all Manor Care long-term care
facilities. However, the Arbitrator did dismiss, without prejudice,
NeighborCare's claim for specific performance of that right.
25
On June 15, 2000, in anticipation of our possible bankruptcy filing, the
Arbitrator stayed the AAA Arbitration. In connection with this stay, the parties
agreed that respondents may pay NeighborCare 90% of the face amount of all
invoices for pharmaceutical and infusion therapy goods and services that
NeighborCare renders to respondents under the Master Service Agreements. The
parties agreed, however, that respondents must continue to pay NeighborCare the
full face amount of all invoices for pharmacy consulting services under the
Master Service Agreement. We subsequently filed for protection under chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") on June 22, 2000. Upon that
filing, the AAA Arbitration became subject to the automatic stay provisions of
11 U.S.C. ss. 362.
On December 8, 2000, Manor Care renewed a previously filed motion seeking to
lift the automatic stay in the AAA Arbitration. On February 6, 2001, the
Bankruptcy Court granted the motion, allowing the AAA Arbitration to continue.
The hearing in the AAA Arbitration began in Washington, D.C. on July 30, 2001
and was completed on August 16, 2001. Post-hearing briefing has been completed.
The Arbitrator's decision is pending.
Motion to Assume the Master Service Agreements, filed in In re Genesis Health
Ventures, Inc.
On January 16, 2001, NeighborCare filed a motion with the United States
Bankruptcy Court for the District of Delaware seeking to assume the Master
Service Agreements in its chapter 11 case. This motion was heard at the same
time the Bankruptcy Court considered Manor Care's motion to lift the automatic
stay. The Bankruptcy Court postponed any decision on the motion to assume
pending the outcome of the AAA Arbitration. This issue is still pending.
Genesis Health Ventures, Inc. v. HCR Manor Care, Inc., Manor Care, Inc., Paul A.
Ormond, and Stewart Bainum, Jr.
On May 7, 1999, we filed an action in the United States District Court for the
District of Delaware against HCR Manor Care, Inc., Manor Care, Inc., Paul A.
Ormond, and Stewart Bainum, Jr. (the "Genesis Delaware Action"). In this action,
we seek compensatory and punitive damages exceeding $200,000,000 for federal
securities fraud, common-law fraud, negligent misrepresentation and controlling
person liability in connection with material misrepresentations and omissions
made by defendants during the course of our acquisition of Vitalink. We further
seek injunctive relief with respect to Manor Care's failure to dispose of its
ownership interests in Heartland Healthcare Services, a competitor of
NeighborCare, pursuant to a non-competition provision found in a Side Agreement
between Genesis, Vitalink and the entity formerly known as Manor Care, Inc., and
now known as Manor Care of America, Inc. ("MCAI").
Defendants filed a motion to dismiss or stay this action pending the resolution
of the AAA Arbitration. On March 22, 2000, the Court denied the defendants'
motion to dismiss, but granted the motion to stay the case pending resolution of
the AAA Arbitration. As a result, the case remains stayed.
NeighborCare Pharmacy Services, Inc. v. Omnicare, Inc. and Heartland Healthcare
Services
On July 26, 1999, NeighborCare filed an action in the Circuit Court for
Baltimore County, Maryland against Omnicare, Inc. and Heartland Healthcare
Services, a joint venture between Omnicare and Manor Care. In this action,
NeighborCare seeks injunctive relief, and compensatory and punitive damages of
not less than $200,000,000, in connection with defendants' tortious interference
with the Master Service Agreements.
The two defendants each filed motions to dismiss, or, in the alternative, to
stay this action pending the resolution of the AAA Arbitration. On November 12,
1999, the Court granted the motions to stay, and set a January 31, 2000 hearing
date for the motions to dismiss. Defendants subsequently withdrew their motions
to dismiss prior to the hearing date. As a result, the case remains stayed.
26
Manor Care, Inc. v. Genesis Health Ventures, Inc.
On August 17, 1999, MCAI (then known as Manor Care, Inc.) filed a lawsuit in the
United States District Court for the District of Delaware against us. In this
action, the plaintiff brings claims under the federal securities laws resulting
from alleged misrepresentations and omissions made by us in connection with
MCAI's acquisition of our Series G Preferred Stock as compensation for its sale
of Vitalink to us. Plaintiff seeks compensatory damages of unspecified amount,
rescission of MCAI's purchase of the Series G Preferred Stock, and the return of
the consideration paid by MCAI at the time of our acquisition of Vitalink from
MCAI.
We filed a motion to dismiss this action. On September 29, 2000, the Court
granted that motion in part and denied it in part. Specifically, the Court
dismissed plaintiff's allegations regarding purportedly fraudulent statements
concerning: our knowledge as to certain legislative changes to the Medicare
program; the effect of our affiliate Multicare on Genesis' earnings; our intent
with respect to the issuance of preferred stock; and our ability to declare
dividends on the Series G Preferred Stock. Accordingly, the only allegations
that were not dismissed from this action concern our alleged failure to include
certain financial information on the Registration Statement it filed in
connection with our acquisition of Vitalink, and allegedly fraudulent statements
concerning our labor relations. Our motion to consolidate this action with the
Genesis Delaware Action described above has been denied.
On October 22, 2001, plaintiff filed a motion to reconsider the Court's decision
to dismiss this action in part, and we filed an opposition to that motion. On
December 5, 2001, Genesis filed a motion to dismiss the entire action pursuant
to our Joint Plan of Reorganization and the Bankruptcy Court's order confirming
that Plan, which extinguish plaintiff's claims against us except to the extent
that those claims may be repled as set-off or recoupment against claims brought
by us. The parties have agreed that plaintiff has until January 14, 2002 to
respond to that motion.
Manor Care of America, Inc. v. Genesis Health Ventures, Inc., the Cypress Group
L.L.C., TPG Partners II, L.P., and Nazem, Inc.
On December 22, 1999, MCAI filed a lawsuit in the United States District Court
for the Northern District of Ohio against us, the Cypress Group L.L.C., TPG
Partners II, L.P., and Nazem, Inc. In this action, MCAI brings claims of federal
securities fraud in connection with alleged misrepresentations and omissions
made by us in connection with our issuance of Series H Preferred Stock and
Series I Preferred Stock (the "Senior Preferred Stock") on or about November 15,
1999. In connection with the issuance of the Senior Preferred Stock, MCAI also
brings state law breach-of-contract claims with respect to our purported
obligations under (1) a Rights Agreement entered into between us and MCAI at the
time of our acquisition of Vitalink from MCAI, and (2) the terms of the Series G
Preferred Stock issued to MCAI in connection with the Vitalink transaction. MCAI
seeks rescission of the Senior Preferred Stock and unspecified monetary damages.
On February 29, 2000, we filed a motion to dismiss this action on the ground,
among others, that the sole federal claim alleged fails to state a cause of
action under federal securities laws. That motion has been fully briefed. In
response to our chapter 11 filing, the Court, on July 19, 2000, stayed this
action and ordered the case closed subject to reopening upon written motion. The
case remains closed.
We are not able to predict the results of such litigation. However, if the
outcome is unfavorable to us, and the claims of HCR Manor Care are upheld, such
results would have a material adverse effect on our financial position, results
from operations and cash flows. See "Cautionary Statement Regarding
Forward-Looking Statements" and "Risk Factors."
27
U.S. ex rel Scherfel v. Genesis Health Ventures et al.
In this action, brought in United States District Court for the District of New
Jersey on March 16, 2000, the plantiff alleges that a pharmacy purchased by
NeighborCare failed to process Medicaid credits for returned medications. The
allegations are vaguely alleged for other jurisdictions. While the action was
under seal in United States District Court, we fully cooperated with the
Department of Justice's evaluation of the allegations. On or about March 2001,
the Department of Justice declined to intervene in the suit and prosecute the
allegations. The plantiff filed a proof of claim in our bankruptcy proceedings
initially for approximately $650,000,000 and more recently submitted an amended
claim in the amount of approximately $325,000,000. We believe the allegations
have no merit and have objected to the proof of claim. We intend to defend the
suit.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
28
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table indicates the range of prices per share of the our common
stock that was cancelled as a result of the Plan, as reported on the New York
Stock Exchange through June 22, 2000 and on the OTC Bulletin Board thereafter.
Fiscal Year Ending High Low
------------------ ---- ---
September 30, 2001
First Quarter $0.20 $0.03
Second Quarter $0.41 $0.11
Third Quarter $0.36 $0.02
Fourth Quarter $0.08 $0.01
September 30, 2000
First Quarter $2.94 $1.94
Second Quarter $3.50 $0.56
Third Quarter $0.75 $0.02
Fourth Quarter $0.31 $0.06
Our new common stock was issued on October 2, 2001 and currently trades on the
OTC Bulletin Board under the symbol "GHVE". We have applied to have the new
common stock traded on the Nasdaq National Market. The range of prices from
October 2, 2001 through December 26, 2001 of the new common stock was $19.20 to
$26.00. As of December 26, 2001, there were 39,671,279 shares of the new common
stock outstanding and entitled to vote. As of December 26, 2001, there were
5,199 stockholders of record of the new common stock.
The Senior Credit Facility and Senior Secured Note agreements restrict our
ability to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
Management does not anticipate the payment of cash dividends on the new common
stock in the foreseeable future.
29
ITEM 6: SELECTED FINANCIAL DATA
|--------------------------Predecessor Company-------------------------|
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data
(in thousands, except per share data)
Net revenues $ 2,569,937 $ 2,433,858 $ 1,866,426 $ 1,405,305 $1,099,823
Operating income (loss) before capital costs (1) 133,135 (138,280) 85,879 134,690 184,868
Earnings (loss) before extraordinary items,
cumulative effect of accounting change and after
preferred dividends (1,277,814) (873,043) (287,950) (23,976) 48,144
Net income (loss) attributable to common
shareholders 247,009 (883,455) (290,050) (25,900) 47,591
Per common share data (Diluted):
Earnings (loss) before extraordinary items and
cumulative effect of accounting change (26.27) (18.55) (8.11) (0.68) 1.34
Net income (loss) attributable to common
shareholders $ 5.08 $ (18.77) $ (8.17) $ (0.74) $ 1.33
Weighted average shares of common stock and
equivalents 48,641 47,077 35,485 35,159 36,120
-------------------------------------------------------------------------------------------------------------------------------
Other Financial Data
Capital expenditures (in thousands) $ 43,721 $ 51,981 $ 77,943 $ 56,663 $ 61,102
Operating Data
Payor Mix
Private pay and other 39% 41% 47% 45% 39%
Medicare 18% 16% 14% 20% 24%
Medicaid 43% 43% 39% 35% 37%
Average owned/leased eldercare center beds (2) 24,783 14,286 15,522 15,137 15,132
Occupancy Percentage 90.8% 90.7% 90.7% 91.5% 91.0%
Average managed eldercare center beds (2) 9,215 23,779 23,984 24,234 6,101
Average institutional pharmacy beds served 253,224 244,409 245,277 109,520 51,655
Average full-time equivalent personnel 40,425 40,450 40,500 37,708 27,700
Successor |
Company | |------------------Predecessor Company-----------------|
2001 | 2000 1999 1998 1997
Balance Sheet Data (in thousands) ---- | ---- ---- ---- ----
Working capital $ 298,515 | $ 304,241 $ 235,704 $ 243,461 $ 166,065
Total assets 1,834,580 | 3,127,899 2,429,914 2,627,368 1,434,113
Liabilities subject to compromise - | 2,446,673 - - -
Long-term debt 603,268 | 10,441 1,484,510 1,358,595 651,667
Redeemable preferred stock 42,600 | 442,820 - - -
Shareholders' equity (deficit) $ 834,858 | $ (246,926) $ 587,890 $ 875,072 $ 608,021
(1) Capital costs include depreciation and amortization, lease expense, interest
expense, the Multicare joint venture restructuring cost incurred in 2000,
and debt restructuring and reorganization costs incurred in 2000 and 2001.
(2) In connection with the consummation of the Plan, 10,702 Multicare beds
previously classified as "Managed and Jointly-Owned Facilities" were
reclassified as "Owned and Leased Facilities." See "Business -
Reorganization."
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Certain Transactions and Events" for a description of
significant transactions, including the definition of Successor Company, which
is defined under "Reorganization - Fresh-Start Reporting."
30
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: inpatient services and pharmacy
and medical supply services. However, we also derive revenue from other sources.
Inpatient service revenue includes all room and board charges and ancillary
service revenue for our eldercare customers at our 192 owned and leased
eldercare centers.
We provide pharmacy and medical supply services through our NeighborCare(R)
pharmacy operations. 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 60 institutional pharmacies (two are
jointly-owned) and 22 medical supply and home medical equipment distribution
centers (four are jointly-owned) located in our various market areas. In
addition, we operate 29 community-based pharmacies (two are jointly-owned) 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.
We include the following service revenue in other revenues: rehabilitation
therapy services, management fees, capitation fees, consulting services,
homecare services, physician services, transportation services, diagnostic
services, hospitality services, group purchasing fees, respiratory health
services and other healthcare related services.
Certain Transactions and Events
Reorganization
On October 2, 2001, the effective date, we and Multicare consummated a joint
plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code (the
"Reorganization") pursuant to a September 20, 2001 order entered by the U.S.
Bankruptcy Court for the District of Delaware approving the Plan proposed by us
and Multicare.
The principal provisions of the Plan are as follows:
o Multicare became our wholly-owned subsidiary. We previously owned 43.6%
of Multicare and managed its skilled nursing and assisted living
facilities under the Genesis Eldercare(R) brand name;
o New senior notes, new convertible preferred stock, new common stock and
new warrants were issued to the companies' creditors. Approximately 93%
of our common stock, referred to as the new common stock, $242,600,000
in senior notes and preferred stock with a liquidation preference of
$42,600,000 were issued to our and Multicare senior secured creditors.
Approximately 7% of the new common stock is to be issued to our and
Multicare unsecured creditors as well as one year warrants to purchase
an additional 11% of the new common stock;
o Holders of our and Multicare pre-Chapter 11 preferred and common stock
received no distribution and those instruments were canceled;
31
o Claims between us and Multicare were set-off against one another and any
remaining claims were waived and released; and
o The following persons were designated to comprise our board of
directors: Michael R. Walker, our chief executive officer and chairman;
James H. Bloem of Humana Inc.; Edwin M. Crawford of Caremark Rx; James
E. Dalton, Jr.; James D. Dondero of HCMLP; Robert H. Fish of
Sonoma-Seacrest, LLC; Dr. Philip P. Gerbino of the University of the
Sciences in Philadelphia; and Joseph A. LaNasa III of Goldman Sachs &
Co.
Our financial difficulties were attributed to a number of factors. First, the
federal government made fundamental changes to the reimbursement for medical
services provided to individuals. These changes had a significant adverse impact
on the healthcare industry as a whole and on our cash flows. Second, the federal
reimbursement changes have exacerbated a long-standing problem of inadequate
reimbursement by the states for medical services provided to indigent persons
under the various state Medicaid programs. Third, numerous other factors have
adversely affected our cash flows, including increased labor costs, increased
professional liability and other insurance costs, and increased interest rates.
Finally, as a result of declining governmental reimbursement rates and in the
face of rising inflationary costs, we were too highly leveraged to service our
debt, including our long-term lease obligations. See Business - "Revenue
Sources," "Personnel," "Government Regulation," and "Insurance." Also see
"Fiscal 2000 Compared to Fiscal 1999."
On October 2, 2001, the effective date, and in connection with the consummation
of the Plan, we entered into a Senior Credit Facility consisting of the
following: (1) a $150,000,000 revolving line of credit (the "Revolving Credit
Facility"); (2) a $285,000,000 term loan (the "Term Loan") and (3) an
$80,000,000 delayed draw term loan (the "Delayed Draw Term Loan") (collectively
the "Senior Credit Facility"). The proceeds from the Term Loan were utilized to
repay $196,000,000 of the then outstanding amounts under the $250,000,000
Genesis debtor-in-possession financing facility (the "Genesis DIP Facility") and
$50,000,000 of the then outstanding synthetic lease facility, with the remaining
$39,000,000 provided to fund restructuring related costs in accordance with the
Plan.
On October 2, 2001, the effective date, and in connection with the consummation
of the Plan, we also entered an indenture agreement in the principal amount of
$242,605,000 (the "Senior Secured Notes").
Fresh-Start Reporting
Upon emergence from our Chapter 11 proceedings, we adopted fresh-start reporting
in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting By Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). In connection with the adoption of
fresh start reporting, a new entity has been deemed created for financial
reporting purposes. For financial reporting purposes, we adopted the provisions
of fresh-start reporting effective September 30, 2001. Consequently, the
consolidated balance sheet and related information at September 30, 2001 is
labeled "successor company," and reflects the Plan and the principles of fresh
start reporting. Periods presented prior to September 30, 2001 have been
designated "predecessor company."
In adopting the requirements of fresh-start reporting as of September 30, 2001,
we were required to value our assets and liabilities at their estimated fair
value and eliminate our accumulated deficit at September 30, 2001. With the
assistance of financial advisors in reliance upon various valuation methods,
including discounted projected cash flow analysis, price/earnings ratios, and
other applicable ratios and economic industry information relevant to our
operations, and through negotiations with the various creditor parties in
interest, we determined our reorganization value, before consideration of
post-filing current and long term liabilities or minority interests, to be
$1,525,000,000.
32
The adjustments to reflect the adoption of fresh-start reporting, including the
adjustments to record property, plant and equipment, other long-term assets,
investments in unconsolidated affiliates and identifiable intangible assets, at
their fair values, have been reflected in the consolidated balance sheet as of
September 30, 2001. In addition, the successor company's consolidated balance
sheet was further adjusted to eliminate existing liabilities subject to
compromise, minority interest with Multicare and consolidated shareholders'
deficit; and to reflect the aforementioned $1,525,000,000 reorganization value,
which includes the establishment of $320,953,000 of reorganization value in
excess of amounts allocable to net identifiable assets (goodwill). See "Footnote
2 - Fresh-Start Reporting in the Notes to Consolidated Financial Statements" for
a reconciliation of the predecessor Company and successor Company consolidated
balance sheets at September 30, 2001.
Merger of Genesis and Multicare
Prior to October 1, 1999, we accounted for our 43.6% owned investment in
Multicare using the equity method of accounting. Following a restructuring
transaction effective on October 1, 1999, we gained managerial, operational and
financial control of Multicare, and consequently consolidated the results of
Multicare. Accordingly, Multicare's assets, liabilities, revenues and expenses
as of and for the year ended September 30, 2000 are consolidated at their
recorded historical amounts and the financial impact of transactions between us
and Multicare are eliminated in consolidation. The non-Genesis shareholders'
remaining 56.4% interest in Multicare was carried as minority interest based on
their proportionate share of Multicare's historical book equity. In accordance
with the Plan, Multicare became our wholly-owned subsidiary on October 2, 2001,
the effective date. Under fresh start reporting, we consolidated our 100%
interest in Multicare as of September 30, 2001.
The consummation of the Plan constitutes a change in our controlling interests.
The provisions of the Plan will have a material effect on our operating results
in future periods. See "Footnote 5 - Significant Transactions and Events in the
Notes to Consolidated Financial Statements" concerning the pro forma effect of
the Plan and the Merger of Genesis and Multicare.
Proposed APS Transaction
On September 24, 2001, our wholly-owned subsidiary entered into an asset
purchase agreement to buy substantially all of the assets of American
Pharmaceutical Services, Inc., referred to as APS, and certain other corporate
entities, all of which are subsidiaries of either Mariner Health Group ("MHG")
or Mariner Post Acute Network, referred to as MPAN, (such selling entities,
collectively with MHG and MPAN, are referred to as the Sellers), for
approximately $42,000,000 plus up to $18,000,000 in deferred payments contingent
on performance (the "Genesis Original Offer").
The sale was subject to a U.S. Bankruptcy Court approved competitive bidding
process and final court approval of the prevailing bid in the MPAN and MHG
Chapter 11 cases. On December 5, 2001, pursuant to the bidding process, and
following an auction held on December 4, 2001, the Mariner Bankruptcy Court
approved another bidder to purchase APS. We will be eligible to collect a
"break-up fee" of $1,700,000 contingent upon our leaving the Genesis Original
Offer open for 60 days. If Mariner closes on the sale of APS to the prevailing
bidder within the 60 day period, Mariner is required to pay the break-up fee to
us. If Mariner does not close on the sale of APS to the prevailing bidder within
said 60 day period, Mariner may, at its option, seek to close on the sale of APS
to us upon the terms of the Genesis Original Offer or pay the break-up fee to
us.
33
Other Dispositions, Closures and Lease Terminations
In the normal course of business we continually evaluate the performance of our
operating units. Therefore, from time to time, under-performing or non-strategic
assets are closed or sold and related leases are terminated. Individually, these
actions are not significant.
ElderTrust Transactions
On January 31, 2001, we reached an agreement to restructure our relationship
with ElderTrust, a Maryland healthcare real estate investment trust. The
agreements encompass, among other things, the resolution of leases and mortgages
for 33 properties operated by us and Multicare either directly or through joint
ventures. Under our agreement, we assumed the ElderTrust leases subject to
certain modifications, including a reduction in our annual lease expense of
$745,000; extension of the maturity and reduction of the principal balances of
loans for three assisted living properties by $8,500,000 by satisfaction of an
ElderTrust obligation of like amount; and acquisition of a building currently
leased from ElderTrust, which is located on the campus of a Genesis skilled
nursing facility, for $1,250,000. In its agreement with ElderTrust, Multicare
sold three owned assisted living properties that are mortgaged to ElderTrust for
principal amounts totaling $19,650,000 in exchange for the outstanding
indebtedness. ElderTrust will lease the properties back to us under a new
ten-year lease with annual rents of $791,561.
AGE Institute
In the fourth fiscal quarter of 2000, we received notice from the AGE Holdings,
Inc., referred to as AGE, a not-for-profit owner / sponsor of 20 eldercare
centers with approximately 2,400 beds, that it wished to discontinue our
management contracts and ancillary service contracts (the "AGE Contracts").
Effective October 31, 2000, the AGE Contracts were terminated. In fiscal 2000,
the AGE Contracts generated approximately $19,000,000 in revenue and $2,000,000
in operating income.
On November 27, 2000, we filed an adversary proceeding in the Genesis bankruptcy
cases against AGE and four of AGE's subsidiaries: AGE Institute of Pennsylvania,
Inc.; AGE Institute of Massachusetts, Inc.; AGE Institute of Florida, Inc.; and
Delaware Valley Convalescent Homes, Inc. (collectively, the "AGE Entities"). The
complaint seeks to recover approximately $20,800,000 owed to us through the AGE
Contracts, by which we provided services to 20 nursing homes owned by the
defendants in Pennsylvania, Massachusetts and Florida. The complaint asserts
counts against all defendants for breach of contract, civil conspiracy and
unjust enrichment. The complaint asserts an additional claim against AGE
Institute of Pennsylvania, Inc. and AGE Institute of Massachusetts, Inc. for
breach of certain trust indentures. In response, the AGE Entities filed
counterclaims against us alleging violations of the Racketeering Influenced
Corrupt Organizations Act, fraud, lender liability, breach of fiduciary duty,
breach of management agreements, breach of professional standards/ professional
negligence, conversion, interference with business relations, and conspiracy.
The counterclaims seek punitive, compensatory, and exemplary damages, as well as
claims to invalidate certain working capital and subordinated loan obligations
of the AGE Entities to us. The counterclaims further seek administrative expense
treatment of any amount found due to the AGE Entities for post-petition damages.
While we believe that the counterclaims have no merit, in the event the AGE
Entities were to prevail on their counterclaims, such counterclaims could exceed
our claims against the AGE Entities. There are no assurances that we will
prevail on our claims against the AGE Entities and there will be any recovery.
The AGE Entities have filed proofs of claim (in unliquidated amounts) in the
Genesis Bankruptcy Cases in connection with their counterclaims. It is
anticipated that the adversary proceeding will not be tried until the summer of
2002. It should be noted that any recovery against the AGE Entities is
uncertain.
34
Sale of Ohio Operations
In the third fiscal quarter of 2000, effective May 31, 2000, Multicare sold 14
eldercare centers with 1,128 beds located in the state of Ohio for approximately
$33,000,000. We recorded a loss on sale of the Ohio properties of approximately
$7,922,000.
Vitalink Transaction
On August 28, 1998, we consummated the merger agreement with Vitalink Pharmacy
Services, Inc., referred to as Vitalink, pursuant to which Vitalink merged with
and into our wholly-owned subsidiary. 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 independent healthcare facilities.
Multicare Transactions
In October 1997, Genesis ElderCare Corp., a Delaware corporation owned 43.6% by
us, acquired Multicare, pursuant to a tender offer and merger. Multicare is in
the business of providing eldercare and specialty medical services in selected
geographic regions. Included among the operations acquired by Genesis Eldercare
Corp. were operations relating to the provision of:
o eldercare services including skilled nursing care, assisted living,
Alzheimer's care and related support activities traditionally provided
in eldercare facilities;
o specialty medical services consisting of sub-acute care such as
ventilator care, intravenous therapy and various forms of coma, pain and
wound management and rehabilitation therapies such as occupational,
physical and speech therapy, and stroke and orthopedic rehabilitation;
and
o management services and consulting services to eldercare centers.
In connection with the Multicare transaction, we entered into a management
agreement pursuant to which we managed Multicare's operations. We also entered
into an asset purchase agreement with Multicare and certain of its subsidiaries
pursuant to which we acquired all of the assets used in Multicare's outpatient
and inpatient rehabilitation therapy business, and a stock purchase agreement
with Multicare and certain subsidiaries pursuant to which we acquired all of the
outstanding capital stock and limited partnership interest of certain
subsidiaries of Multicare that were engaged in the business of providing
institutional pharmacy services to third parties.
Results of Operations
Fiscal 2001 Compared to Fiscal 2000
Our total net revenues for the twelve months ended September 30, 2001 were
$2,569,937,000 compared to $2,433,858,000 for the twelve months ended September
30, 2000, an increase of $136,079,000, or 6%.
35
Inpatient service revenue increased $40,079,000, or 3%, to $1,360,230,000 from
$1,320,151,000. Of this increase, approximately $8,922,000 is attributed to the
consolidation of two eldercare centers previously under joint ownership that
became wholly-owned effective July 1, 2000 (the "P&R Transaction").
Approximately $1,295,000 of the increase resulted from the consolidation of one
additional eldercare center previously under joint ownership that became
wholly-owned effective January 31, 2001 in connection with the ElderTrust
Transactions. Approximately $83,190,000 is principally attributed to increased
payment rates and higher Medicare, private pay and insurance patient days
("Quality Mix") as a percentage of total patient days. Our average rate per
patient day for the twelve months ended September 30, 2001 was $165 compared to
$153 for the comparable period in the prior year. This increase in the average
rate per patient day is principally driven by the effect of the BBRA and BIPA on
our average Medicare rate per patient day, which increased to $323 for the
twelve months ended September 30, 2001 compared to $294 for the comparable
period in the prior year. Our revenue Quality Mix for the twelve months ended
September 30, 2001 was 51.8% compared to 49.4% for the comparable period in the
prior year. These rate and Quality Mix increases are offset by a decrease in
revenue of approximately $53,328,000 resulting from the sale, closure or lease
terminations of certain eldercare centers. Total patient days decreased 455,965
to 8,161,134 during the twelve months ended September 30, 2001 compared to
8,617,099 during the comparable period last year. Of this decrease, 451,314
patient days are attributed to the sale, closure or lease terminations of
certain eldercare centers; offset by the consolidation of 76,941 patient days of
three eldercare centers following the P&R Transaction and Eldertrust
Transaction. A decrease of 22,385 days compared to the comparable period last
year is attributed to one additional calendar day in the September 30, 2000
period due to a leap year. The remaining decrease of 59,207 patient days is the
result of a decrease in overall occupancy.
Pharmacy and medical supply service revenue was $1,040,051,000 for the twelve
months ended September 30, 2001 compared to $952,350,000 for the twelve months
ended September 30, 2000. Pharmacy and medical supply service revenues increased
approximately $87,701,000, or 9%, due primarily to net revenue growth with
external customers.
Other revenues increased approximately $8,299,000 from $161,357,000 to
$169,656,000. Approximately $8,131,000 of this increase resulted from the
consolidation of a respiratory health business purchased in April of 2000 for
the entire 12 month period ended September 30, 2001, compared to only the final
six months in the prior year. Approximately $7,368,000 of this increase is
attributed to a net increase in revenues of other service businesses. The
remaining change is a reduction in other revenue of approximately $7,200,000 and
is attributed to the termination of certain management contracts, primarily with
AGE.
Salaries, wages and benefit costs increased $22,232,000, or 2% for the twelve
month period ended September 30, 2001 to $1,110,675,000 from $1,088,443,000 for
the same period in the prior year. Of this increase, approximately $6,178,000
resulted from the addition of new businesses in the current year. The overall
increase was offset by approximately $24,261,000 in decreased salaries, wage and
benefit costs resulting from the sale, closure or lease terminations of certain
eldercare centers. As a percentage of net revenue, salaries, wages and benefit
costs, once adjusted for the impact of new and exited businesses, declined to
43.3% for the twelve months ended September 30, 2001, compared to 44.7% for the
comparable period in the prior year. This decrease as a percentage of revenue
resulted from net revenue growth, primarily in our pharmacy and other ancillary
service businesses, which did not require proportional increases in labor
related costs.
Cost of sales increased $76,557,000 for the twelve month period ended September
30, 2001, to $611,517,000 from $534,960,000 for the same period in the prior
year. Approximately $70,707,000 is attributed to an increase in pharmacy and
medical supply cost of sales ($52,875,000 of which is attributed to pharmacy and
medical supply revenue volume growth, and $17,832,000 is attributed to changes
in customer and product mix). The remainder of the increase of approximately
$5,850,000, is principally related to the consolidation of and the growth in the
cost of sales of a respiratory health business purchased in April of 2000.
36
Our other operating expenses decreased $234,125,000, to $714,610,000 for the
twelve months ended September 30, 2001 from $948,735,000 for the comparable
period in the prior year. Of the net decrease, approximately $266,315,000 is
attributed to a decrease in certain charges equaling $108,393,000 for the twelve
month period ended September 30, 2001 compared to $374,708,000 for the same
period in the prior year (labeled as included in other operating expenses and
described more fully in the paragraphs that follow), and approximately
$22,134,000 from operating cost savings resulting from the sale, closure or
lease terminations of certain eldercare centers. Those reductions are offset by
approximately $3,459,000 attributed to the consolidation of the operating
expenses of three eldercare centers following the P&R and ElderTrust
Transactions; approximately $4,675,000 of higher bad debt provisions; and the
remaining operating cost growth of approximately $46,190,000 is attributed to
general inflationary cost increases.
During the twelve months ended September 30, 2001, we recorded costs in
connection with certain uncollectible receivables, insurance related cost and
other charges included in other operating expenses. The following table and
discussion provides additional information on these charges.
2001
--------------------------------------------------------------------------------------------------------------------
Notes receivable, advances, and trade receivables, due from affiliated
businesses formerly owned or managed deemed uncollectible $ 30,048,000
Uncollectible trade receivables 39,249,000
Self-insured and related program costs 21,026,000
Other charges 18,070,000
---------------------------------------------------------------------------------------------------------------------
Total uncollectible receivable, insurance related and other charges included in
other operating expenses $ 108,393,000
---------------------------------------------------------------------------------------------------------------------
In fiscal 2001, we performed periodic assessments of the collectibility of
amounts due from certain affiliated businesses in light of the adverse impact of
PPS on their liquidity and profitability. As a result of our assessment, the
carrying value of notes receivable, advances and trade receivables due from
affilitates was written down by $30,048,000.
In fiscal 2001, we performed a re-evaluation of our allowance for doubtful
accounts triggered by deteriorations in the agings of certain categories of
receivables. We believed that such deteriorations in the agings were due to
several prolonged negative factors related to the operational effects of the
bankruptcy filings such as personnel shortages and the time demands required in
normalizing relations with vendors and addressing a multitude of bankruptcy
issues. As a result of this re-evaluation, we determined that an increase in the
allowance for doubtful accounts of approximately $39,249,000 was necessary.
In fiscal 2001, as a result of adverse claims development we reevaluated the
levels of reserves established for certain self-insured health and workers'
compensation benefits and other insurance related programs. These charges were
approximately $21,026,000.
In addition, we incurred charges of approximately $18,070,000 during fiscal
2001, principally related to contract and litigation matters and settlements,
and certain other charges.
In October of 2000, we sold an idle 232 bed eldercare center for cash
consideration of approximately $7,000,000, resulting in a net gain of
approximately $1,770,000. In April of 2001, we sold an underperforming 121 bed
eldercare center for cash consideration of approximately $461,000. The sale
resulted in a net loss of approximately $2,310,000.
Depreciation and amortization expense decreased $9,678,000, principally
attributed to the fourth quarter of fiscal 2000 write-off of impaired goodwill
and property, plant and equipment and the sale, closure or lease terminations of
certain eldercare centers.
Lease expense decreased $2,502,000, of which approximately $2,204,000 is
attributed to the sale, closure or lease terminations of certain eldercare
centers, offset by an increase of approximately $1,202,000 attributed to the
consolidation of two leased eldercare centers in connection with the P&R
Transaction. The remaining decrease of approximately $1,500,000 is attributed to
a decline in the weighted average borrowing rate associated with a lease
financing facility.
37
Interest expense decreased $84,253,000. In accordance with SOP 90-7, we ceased
accruing interest following the petition date, June 22, 2000, on certain
long-term debt instruments classified as liabilities subject to compromise. Our
contractual interest expense for the twelve months ended September 30, 2001 was
$214,735,000, leaving $95,418,000 of interest expense unaccrued for that period
as a result of the Chapter 11 filings. Contractual interest expense for the
twelve months ended September 30, 2001 decreased by $16,764,000 compared to
$231,499,000 for the same period in the prior year. Approximately $33,618,000 of
the decrease is primarily attributed to a lower weighted average borrowing rate
and offset by additional net capital and working capital borrowings under the
Genesis DIP Facility resulting in additional interest expense of approximately
$16,854,000.
During the twelve months ended September 30, 2001, we recorded charges in
connection with debt restructuring and reorganization costs. The following table
and discussion provides additional information on these charges.
2001
-------------------------------------------------------------------------------------------------------------
Debt Restructuring and Reorganization Costs:
Professional, bank and other fees $ 59,393,000
Employee benefit related costs 16,786,000
Exit costs of terminated businesses 5,877,000
Fresh start valuation adjustments 1,033,729,000
-------------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 1,115,785,000
-------------------------------------------------------------------------------------------------------------
During the twelve months ended September 30, 2001, we incurred approximately
$1,115,785,000 of legal, bank, accounting, fresh-start valuation adjustments and
other costs in connection with our debt restructuring and the Chapter 11 cases.
Of these charges, approximately $59,393,000 is attributed to professional, bank
and other fees and approximately $16,786,000 pertains to certain salary and
benefit related costs, principally for a court approved special recognition
program. In addition, we incurred approximately $5,877,000 of costs associated
with exiting certain terminated businesses. Fresh-start valuation adjustments of
$1,033,729,000 were recorded pursuant to the provisions of SOP 90-7, which
require entities to record their assets and liabilities at estimated fair
values. The fresh-start valuation adjustment is principally the result of the
elimination of predecessor company goodwill and the revaluation of property,
plant and equipment to estimated fair values.
Equity in net loss of unconsolidated affiliates for the twelve months ended
September 30, 2001 was $10,232,000 compared to $2,407,000 for the comparable
period in the prior year. This increase of $7,825,000 is attributed to changes
in the earnings/losses reported by our unconsolidated affiliates, as well as the
P&R Transaction.
Minority interest decreased $108,991,000 during the twelve months ended
September 30, 2001 to $23,453,000 compared to $132,444,000 for the comparable
period in the prior year. This decrease is principally attributed to a lower net
loss reported by Multicare and the resulting Multicare joint venture partners'
56.4% interest in the Multicare net loss for the period. The Multicare net loss
was reduced during the twelve months ended September 30, 2001 compared to the
comparable period in the prior year, principally due to lower asset impairment
charges and lower interest expense recognition under SOP 90-7.
As a result of the consummation of the Plan, and in accordance with the
provisions of SOP 90-7, we recorded a $1,524,823,000 extraordinary gain on the
discharge of certain of our indebtedness.
Effective October 1, 1999, Genesis adopted the provisions of the American
Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5") which requires start-up costs
be expensed as incurred. For the twelve months ended September 30, 2000, the
cumulative effect of expensing all unamortized start-up costs at October 1, 1999
was $16,400,000 pre tax and $10,412,000 after tax.
38
Preferred stock dividends increased $3,027,000 to $45,623,000 during the twelve
months ended September 30, 2001 compared to $42,596,000 for the comparable
period in the prior year. This increase is attributed to a full twelve months of
series H and series I preferred stock accrued dividends for the twelve months
ended September 30, 2001 compared to ten and one-half months in the 2000 period.
Fiscal 2000 Compared to Fiscal 1999
In Fiscal 1999, prior to the Multicare restructuring transaction, we accounted
for our investment in Multicare using the equity method of accounting. In Fiscal
2000, upon consummation of the restructuring transaction, we consolidated the
financial results of Multicare because we had managerial, operational and
financial control of Multicare under the terms of the restructuring agreement.
Accordingly, Multicare's assets, liabilities, revenues and expenses are
consolidated at their recorded historical amounts and the financial impact of
transactions between us and Multicare are eliminated in consolidation. For the
twelve months ended September 30, 2000, approximately $136,100,000 of revenue,
and a corresponding amount of expense, was eliminated as a result of the
consolidation of us and Multicare. The non-Genesis shareholders' remaining 56.4%
interest in Multicare is carried as minority interest based on their
proportionate share of Multicare's historical book equity. A significant
percentage of the fluctuations in operating results reported in Fiscal 2000
compared to Fiscal 1999 are a result of this change in the method of accounting
for Multicare.
Inpatient service revenue increased $616,046,000 or 87% to $1,320,151,000 from
$704,105,000. Of this increase, approximately $632,078,000 is attributed to the
consolidation of Multicare's inpatient revenues in the twelve months ended
September 30, 2000, and approximately $16,300,000 is attributed to volume growth
in Genesis' Medicare census. These increases are offset by reduced revenue of
approximately $44,100,000 resulting from ten fewer eldercare centers operating
in the September 30, 2000 period compared to the September 30, 1999 period, and
approximately $5,400,000 is attributed to rate dilution in our Medicare rate per
patient day as a result of PPS. The remaining increase of approximately
$17,168,000 is due to shifts in other payor categories and rates. Our average
Medicare rate per patient day for the fiscal year ended September 30, 2000 was
approximately $294 compared to $302 for the fiscal year ended September 30,
1999. Total patient days increased 3,679,048 to 8,617,099 during the twelve
months ended September 30, 2000 compared to 4,938,051 during the comparable
period last year. Of this increase, 4,001,732 patient days are attributed to the
consolidation of Multicare's inpatient business in the twelve months ended
September 30, 2000, and 13,284 days are attributed to one additional calendar
day in the September 2000 period due to a leap year. These increases are offset
by a reduction of 319,148 patient days resulting from ten fewer eldercare
centers operating in the September 30, 2000 period compared to the September 30,
1999 period and the remaining decrease of 16,820 is the result of a decline in
overall occupancy.
Pharmacy and medical supply service revenues were $952,350,000 for the fiscal
year ended September 30, 2000 versus $927,334,000 for fiscal year ended
September 30, 1999. Pharmacy and medical supply service revenues increased
approximately $51,716,000 due to net revenue growth with external customers.
This increase is offset by approximately $26,700,000 due to the consolidation of
Multicare's results with ours in the September 2000 period and the resulting
elimination of pharmacy and medical supply service revenues generated with the
Multicare centers.
Other revenues decreased approximately $73,630,000 from $234,987,000 to
$161,357,000. Approximately $5,300,000 of this decline is attributed to
contraction in our rehabilitation services business since the January 1, 1999
implementation of PPS by many of our external rehabilitation customers.
Approximately $60,800,000 of the decline is attributed to the consolidation of
Multicare's results with ours and the resulting elimination of management fee
and other service related revenues with Multicare in the twelve months ended
September 30, 2000. Approximately $20,200,000 of this decline is attributed to
the termination of a capitation contract in our Chesapeake region. Of the
remaining increase in other revenue, $5,800,000 is attributed to the revenues of
a respiratory health services business acquired in the third fiscal quarter of
2000, with the remaining approximately $6,900,000 attributed to net growth in
our other service businesses.
39
Salaries, wages and benefits cost increased $375,239,000, or 52.6% for the
twelve month period ended September 30, 2000 to $1,088,443,000 from $713,204,000
for the same period during fiscal 1999. Of this increase, approximately
$339,575,000 resulted from the consolidation of Multicare's salaries, wages and
benefit costs. Salaries, wages and benefit costs, as a percentage of net
revenue, excluding the consolidation of Multicare's labor related costs,
increased to 38.9% for the twelve months ended September 30, 2000, compared to
38.2% for the comparable period in the prior year. The growth in salaries,
wages, and benefits as a percentage of revenue between 1999 and 2000 is
attributed to continued pressure on wage and benefit related costs in all of our
operating businesses, particularly in our eldercare centers. We and our industry
have experienced shortages in qualified professional clinical staff. As the
demand for these services has exceeded the supply of available and qualified
staff, we and our competitors have been forced to offer more attractive wage and
benefit packages to these professionals and to utilize outside contractors for
these services at premium rates. Furthermore, the competitive arena for this
shrinking labor market has created high turnover among clinical professional
staff as many seek to take advantage of the supply of available positions, many
offering new and more attractive wage and benefit packages. See Business -
"Government Regulation," "Personnel," "Employee Training and Development."
Cost of sales increased $32,791,000 for the twelve month period ended September
30, 2000, to $534,960,000 from $502,169,000 for the same period in the prior
year. Approximately $73,656,000 is attributed to an increase in pharmacy and
medical supply cost of sales ($26,923,000 of which is attributed to pharmacy and
medical supply revenue volume growth, and $46,733,000 is attributed to changes
in customer and product mix). The remaining variance is a decrease of
approximately $40,865,000, which is due to the consolidation of Multicare in the
twelve month period ended September 30, 2000, and the corresponding elimination
of intercompany transactions resulting from pharmacy and medical supply sales to
Multicare eldercare centers.
Our other operating expenses were $948,735,000 for the fiscal year ended
September 30, 2000 compared to $565,174,000 for the twelve months ended
September 30, 1999, an increase of $383,561,000 or 67.8%, of which approximately
$158,020,000 is attributed to the consolidation of Multicare's operating
expenses (not including Multicare's debt restructuring and impairment charges)
with ours, approximately $207,638,000 is attributed to an increase in certain
charges (including those of Multicare) described more fully in the paragraphs
that follow, approximately $16,300,000 is due to adverse development in
self-insured employee health coverage, approximately $9,500,000 is due to
additional provisions made for bad debts, approximately $2,000,000 is attributed
to our adoption of a new accounting principle that requires start-up costs be
expensed when incurred, $3,200,000 is attributed to the conversion of our
incentive compensation program from stock-based to cash-based, approximately
$5,400,000 is attributed to the operating expenses of a respiratory health
services business acquired in the third fiscal quarter of 2000, and
approximately $41,303,000 is attributed to growth in insurance related costs and
inflationary increases. These increases are offset by reduced operating expenses
of approximately $20,200,000 attributed to a terminated capitation contract in
our Chesapeake region and $39,600,000 resulting from ten fewer eldercare centers
operating in the twelve months ended September 30, 2000 compared to the twelve
months ended September 30, 1999.
In addition to the wage pressures inherent in this environment, the cost of
training new employees amid the high turnover rates has caused added pressure on
our operating margins. In addition to labor pressures, we and our industry
continue to experience an adverse effect on operating profits due to an increase
in the cost of certain of its insurance programs. Rising costs of eldercare
malpractice litigation involving nursing care operators and losses stemming from
these malpractice lawsuits has caused many insurance providers to raise the cost
of insurance premiums or refuse to write insurance policies for nursing homes.
Accordingly, the costs of general and professional liability and property
insurance premiums have increased. Also, the impact of government regulation in
a heavily regulated environment has adversely impacted our ability to reduce
costs. The pressures on operating expenses described above are coupled with the
effects of the federal and state governments' and other third party payors'
trend toward imposing lower reimbursement rates, resulting in our inability to
grow revenues at a rate that equals or exceeds the growth in our cost levels.
The downward trend of reimbursement rates to nursing care operators and the cost
pressures previously described have adversely impacted customers of our
ancillary service businesses, resulting in pricing pressures in those
businesses. See Business - "Revenue Sources," "Insurance" and "Competition in
the Healthcare Services Industry."
40
During fiscal 2000, we recorded charges in connection with the Multicare joint
venture restructuring, the impairment of long-lived assets and other impairments
and charges. The following table and discussion provides additional information
on these charges.
2000
--------------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring $ 420,000,000
--------------------------------------------------------------------------------------------------------------
Asset Impairment and Other Charges:
Impairment of long-lived assets $ 234,009,000
Exit costs and write-off of unrecoverable assets of six eldercare centers closed or leases
terminated 28,363,000
Investments in information systems development abandoned in fiscal 2000 19,200,000
Uncollectible trade and notes receivable due to customer bankruptcy or other
liquidity issues 41,955,000
Other charges, including third party appeal issues and other cost settlement balances deemed
uncollectible and insurance related adjustments 51,181,000
--------------------------------------------------------------------------------------------------------------
Total asset impairments and other charges included in other operating expenses $ 374,708,000
--------------------------------------------------------------------------------------------------------------
In connection with the restructuring transaction in the first fiscal quarter of
2000, we recorded 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 stock. The cost to terminate the Put
was estimated based upon our assessment that no incremental value was realized
by us as a result of the changes in the equity ownership structure of Multicare
brought about by the restructuring of the Multicare joint venture.
During the fourth quarter of fiscal 2000, in connection with our budget
preparations for the forthcoming year and in accordance with Statement of
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), management
reviewed the current and projected undiscounted cash flows of our eldercare
centers and our NeighborCare pharmacy operations. This review indicated that the
assets of certain eldercare centers were impaired. The fair market value of
businesses deemed potentially impaired were then estimated and compared to the
carrying values of the long-lived assets. Any excess long-lived asset carrying
value over the estimated fair value was written-off. Fair value was estimated
using a per bed value determined by our management. The total loss for SFAS No.
121 impairments of $234,009,000 is associated with 49 eldercare centers. No
impairment charge was assessed on the long-lived assets of our NeighborCare
pharmacy operations. The impairment charge recorded resulted in the write-off of
$185,037,000 of goodwill and $34,578,000 of property, plant and equipment.
During fiscal 2000, we closed or were in the process of closing or terminating
the leases of six underperforming eldercare centers with 842 combined beds. As a
result, a charge of $28,363,000 was recorded to account for certain impaired and
abandoned assets of these eldercare centers as well as the estimated future cost
of maintaining owned properties that were closed.
41
As a result of our Chapter 11 bankruptcy filing and curtailment in funding
availability, we assessed the recoverability of our investment in certain
information systems developed internally for the operating needs of our
institutional pharmacy and infusion therapy businesses. Our assessment
determined that $19,200,000 of the carrying value of our investment in these
systems was unrecoverable through estimated future product sales to third
parties and future operating efficiencies.
During fiscal 2000, we performed periodic assessments of the collectibility of
amounts due from certain affiliated businesses in light of the adverse impact of
PPS on their liquidity and profitability. In certain cases, customers have filed
for protection under Chapter 11 of the Bankruptcy Code. As a result of our
assessment, the carrying value of notes receivable, advances and trade
receivables due from these customers was written down $41,955,000.
In the fourth quarter of fiscal 2000, we performed an assessment of the
collectibility of certain aged amounts due from third party payors and concluded
that approximately $12,451,000 was unrecoverable. In addition, as a result of
adverse claims development we reevaluated the levels of reserves established for
certain self insured and other programs, including workers' compensation and
general liability insurance, resulting in a charge of approximately $35,235,000.
In the third fiscal quarter of 2000, effective May 31, 2000, Multicare sold 14
eldercare centers with 1,128 beds located in the state of Ohio for approximately
$33,000,000. We recorded a loss on sale of the Ohio properties of approximately
$7,922,000.
Depreciation and amortization expense increased $42,006,000 to $116,961,000
during the twelve months ended September 30, 2000 from $74,955,000 during the
same period in the prior year. $38,064,000 of this increase is attributed to the
consolidation of Multicare's results with those of ours. The remaining increase
is principally attributed to incremental amortization of deferred financing
costs, as well as incremental depreciation expense from capital expenditures
made since September 30, 1999.
Lease expense increased $11,471,000 to $38,124,000 during the twelve months
ended September 30, 2000 from $26,653,000 during the same period in the prior
year. $11,824,000 of this increase is attributed to the consolidation of
Multicare's results with ours. This increase is offset by $3,300,000 attributed
to six fewer eldercare centers leased during the twelve months ended September
30, 2000 compared to the twelve months ended September 30, 1999. The remaining
increase of approximately $2,900,000 is the result of increases in a variable
rate lease financing facility and scheduled increases in fixed lease rates.
Interest expense increased $84,350,000 to $203,570,000 during the twelve months
ended September 30, 2000 from $119,220,000 during the same period in the prior
year. $57,943,000 of this increase is attributed to the consolidation of
Multicare's results with ours. In connection with our Chapter 11 filing,
effective June 22, 2000 we ceased accruing interest on $371,590,000 of senior
subordinated notes with a weighted average interest rate of 9.62%, or
approximately $9,800,000. The remaining increase in interest expense of
approximately $36,207,000 is primarily due to additional capital and working
capital borrowings and an increase in our weighted average borrowing rate.
Amendments to the our Credit Facility resulted in higher variable rates of
interest, along with increases in market rates of interest. Genesis' average
variable debt borrowing rate in fiscal 2000 increased to 10.0% from 7.85% in
fiscal 1999, resulting in over $23,000,000 of added interest expense. The
remaining increase in interest expense is principally attributed to growth in
debt volume. Our contractual interest expense for the year ended September 30,
2000 was $231,499,000, leaving $27,929,000 of interest expense unaccrued at
September 30, 2000 as a result of the Chapter 11 filings.
During fiscal 2000, we recorded charges in connection with debt restructuring
and reorganization costs. The following table and discussion provides additional
information on these charges.
42
2000
-------------------------------------------------------------------------------------------------------------
Debt Restructuring and Reorganization Costs:
Professional, bank and other fees in connection with the Company's amended senior
bank credit facilities, debtor-in-possession financing and the filings under Chapter 11 $ 29,935,000
Interest rate swap termination charge 28,331,000
Employee benefit related costs 4,529,000
-------------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 62,795,000
--------------------------------------------------------------------------------------------------------------
During the third fiscal quarter of 2000, we began discussions with our lenders
under our and Multicare Credit Facilities to revise our capital structure.
During the discussion period, which continued into the third fiscal quarter, we
and Multicare did not make certain scheduled principal and interest payments
under our and Multicare Credit Facilities or certain scheduled interest payments
under certain of our and Multicare senior subordinated debt agreements. On June
22, 2000, we and Multicare filed for voluntary relief under Chapter 11 of the
Bankruptcy Code. In connection with the debt restructuring negotiations and for
the costs of the subsequent reorganization cases, we incurred legal, bank,
accounting and other costs of approximately $29,935,000. As a result of the
nonpayment of interest under our Credit Facility, certain provisions under
existing interest rate swap arrangements with Citibank were triggered. Citibank
notified us that they elected to force early termination of the interest rate
swap arrangements, and have asserted a $28,331,000 obligation. In addition, as a
result of our restructuring and Chapter 11 cases we incurred costs of $4,529,000
for certain salary and benefit related costs, principally for a court approved
special recognition program.
During the first fiscal quarter of 2000, we recorded a non-cash pre tax charge
of $7,720,000 for a stock option redemption program (the "Redemption Program")
under which our current employees and directors elected to surrender certain of
our stock options for unrestricted shares of our common stock. The Redemption
Program was approved by shareholder vote at our 2000 Annual Meeting. As a result
of our worsening financial condition and other considerations, we determined not
to proceed with the Redemption Program, and therefore the $7,720,000 charge
recorded in the first quarter was subsequently reversed. The elections made by
optionees would have resulted in the redemption of approximately 4,600,000 stock
options in exchange for approximately 4,000,000 shares of our common stock.
Equity in net loss of unconsolidated affiliates declined $175,828,000 to a loss
of $2,407,000 during the twelve months ended September 30, 2000 from a loss of
$178,235,000 during the same period in the prior year. This change is
principally due to the Fiscal 2000 change in our accounting for Multicare to the
consolidation method of accounting. In consolidation, our 43.6% share in the net
loss of Multicare was eliminated.
Minority interest of $132,444,000 recorded during the twelve months ended
September 30, 2000 principally represents our Multicare joint venture partners'
56.4% interest in the Multicare net loss for the period.
Effective October 1, 1999, we adopted the provisions of the American Institute
of Certified Public Accountant's Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5") which requires start-up costs be
expensed as incurred. The cumulative effect of expensing all unamortized
start-up costs at October 1, 1999 was approximately $16,400,000 pre tax and
$10,412,000 after tax.
Preferred stock dividends increased $23,119,000 to $42,596,000 during the twelve
months ended September 30, 2000 from $19,477,000 during the same period in the
prior year. This increase is attributed to dividends accrued following the
issuance of series H and series I preferred stock in mid-November, 1999.
43
Liquidity and Capital Resources
Working Capital and Cash Flows
At September 30, 2001 we reported working capital of $298,515,000 as compared to
net working capital of $304,241,000 at September 30, 2000. Our days sales
outstanding at September 30, 2001 was approximately 60 days compared to the
approximately 67 days at September 30, 2000. Our unrestricted cash balance at
September 30, 2001 was $32,139,000.
At September 30, 2001, we reported restricted investments in marketable
securities of $51,625,000, which are held by Liberty Health Corp. LTD., referred
to as LHC, our wholly-owned captive insurance subsidiary incorporated under the
laws of Bermuda. The investments held by LHC are restricted by statutory capital
requirements in Bermuda. In addition, certain of these investments are pledged
as security for letters of credit issued by LHC. As a result of such
restrictions and encumbrances, we and LHC are precluded from freely transferring
funds through intercompany loans, advances or cash dividends.
Our cash flow from operations for the twelve months ended September 30, 2001 was
a source of cash of $7,337,000 compared to a use of cash of $103,294,000 for the
twelve months ended September 30, 2000, principally due to reduced interest
payments during our Chapter 11 proceedings and improvement in the collections of
accounts receivables. These cash flow savings were offset by incremental
payments of approximately $28,291,000 of debt restructuring and reorganization
costs for the twelve months ended September 30, 2001 compared to the same period
in the prior year. We believe that cash flows from operations, along with
available borrowings under our new Senior Credit Facility, are sufficient to
meet our current liquidity needs.
Indebtedness
Senior Credit Facility
On October 2, 2001, the effective date, and in connection with the consummation
of the Plan, we entered into a Senior Credit Facility consisting of the
following: (1) a $150,000,000 revolving line of credit (the "Revolving Credit
Facility"); (2) a $285,000,000 term loan (the "Term Loan") and (3) an
$80,000,000 delayed draw term loan (the "Delayed Draw Term Loan") (collectively
the "Senior Credit Facility"). The outstanding amounts under the Term Loan and
the Delayed Draw Term Loan bear interest at the London Inter-bank Offered Rate
("LIBOR") plus 3.50%, or approximately 6.10% at September 30, 2001. The
outstanding amounts under the Revolving Credit Facility, if any, bear interest
based upon a performance related grid.
Pursuant to the Senior Credit Facility, we and each of our subsidiaries named as
guarantors have granted the lenders first priority liens and security interests
in all unencumbered property, including but not limited to: fee owned property,
bank accounts, investment property, accounts receivable, equipment and general
intangible assets.
The Senior Credit Facility limits, among other things, our ability to incur
additional indebtedness or contingent obligations, permit additional liens, to
make additional acquisitions, to sell or dispose of assets, to create or incur
liens on assets, to pay dividends on our common stock and to merge or
consolidate with any other person or entity. The Senior Credit Facility contains
customary representations and warranties.
The Senior Credit Facility requires us to maintain compliance with certain
financial and non-financial covenants, including minimum EBITDAR (as defined);
limitations on capital expenditures, maximum leverage ratios, minimum fixed
charge coverage ratios and minimum net worth.
44
The Revolving Credit Facility is available to fund obligations under the Plan
and for general working capital requirements. The Revolving Credit Facility
matures on October 2, 2006. Usage under the Revolving Credit Facility is subject
to a Borrowing Base (as defined) calculation based upon real property collateral
value and a percentage of eligible accounts receivable (as defined). To date,
there have been no borrowings under the Revolving Credit Facility.
The proceeds from the Term Loan were utilized to repay $196,000,000 of the then
outstanding amounts under the Genesis DIP Facility, and $50,000,000 of the then
outstanding synthetic lease facility, with the remaining $39,000,000 provided to
fund restructuring related costs in accordance with the Plan. In connection with
the consummation of the Plan, the Term Loan balance is $285,000,000. The Term
Loan amortizes at a rate of one percent per year, and matures on April 2, 2007.
The Delayed Draw Term Loan may be used to (1) fund the purchase price of the
proposed APS Transaction; (2) pay certain outstanding amounts owed to ElderTrust
on certain loans secured by mortgages; (3) fund the exercise of an option to
purchase three eldercare centers and (4) to make other Specific Payments (as
defined). Once repaid, the Delayed Draw Term Loan can not be re-borrowed. In
connection with the consummation of the Plan, no borrowings were made under the
Delayed Draw Term Loan. The Delayed Draw Term Loan amortizes at a rate of one
percent per year, and matures on April 2, 2007.
In the first fiscal quarter of 2002, we utilized approximately $10,000,000 from
the Delayed Draw Term Loan to fund the exercise of the purchase option
previously described, and we utilized approxmiately $22,000,000 from the Delayed
Draw Term Loan to satisfy certain mortgages as previously described. As a result
of subsequent developments in our bid to consummate the APS Transaction,
management is seeking lender approval to repay other debt obligations with the
available borrowings under the Delayed Draw Term Loan that were otherwise
earmarked for the APS Transaction. See "Certain Transactions and Events -
Proposed APS Transaction."
Senior Secured Notes
On October 2, 2001 the effective date, and in connection with the consummation
of the Plan, we entered an indenture agreement in the principal amount of
$242,605,000 (the "Senior Secured Notes"). The Senior Secured Notes bear
interest at LIBOR plus 5.0% (approximately 7.60% at September 30, 2001), and
amortize one percent each year and mature on April 2, 2006. The Senior Secured
Notes are secured by a junior lien on real property and related fixtures of
substantially all of our subsidiaries, subject to liens granted to the lenders'
interests under the Senior Credit Facility. The Senior Secured Notes may be
pre-paid at any time without penalty, subject to restrictions in place under the
Senior Credit Facility. Compliance with certain financial and non-financial
covenants is required, but they are less restrictive than those required by the
Senior Credit Facility.
Other Secured Indebtedness
On October 2, 2001, the effective date, we had $116,904,000 of other secured
debt consisting principally of revenue bonds and secured bank loans, including
loans insured by the Department of Housing and Urban Development. These loans
are secured by the underlying real and personal property of individual eldercare
centers. All of the other secured loans have fixed rates of interest ranging
from 3.00% to 11.00%, with a weighted average rate of 9.04%.
Redeemable Preferred Stock
In connection with the consummation of the Plan, we issued series A convertible
preferred stock (the "Series A Preferred"). The Series A Preferred has a
liquidation preference of $42,600,000 and accrues dividends at the annual rate
of 6% payable in additional shares of Series A Preferred. The Series A Preferred
is convertible at any time, at the option of the holders, into 2,095,425 shares
of the new common stock. We have the right to convert all of the shares of
Series A Preferred to shares of our new common stock at any time after the first
anniversary date of the effective date, or October 2, 2002, when the average
trading price of the new common stock over the immediately preceding 30 days is
$30.00 or more per share. We have the right to redeem the Series A Preferred at
any time by giving 30 days notice to the holders (subject to certain
restrictions imposed by the Company's senior credit facilities). The Series A
Preferred are subject to mandatory redemption on October 2, 2010. The conversion
rate is $20.33 of liquidation preference for each share of new common stock.
45
Warrants
On October 2, 2001, the effective date, we issued warrants (the "Warrants") to
purchase 4,559,475 shares of new common stock. This represents approximately 11%
of the new common stock issued on the effective date. The Warrants expire on
October 2, 2002 and have an exercise price of $20.33 per share of new common
stock. An assumed exercise of all Warrants would result in cash proceeds to us
of approximately $93,000,000.
Capital Expenditures
Investing activities for the twelve months ended September 30, 2001 include
approximately $43,721,000 of capital expenditures compared to approximately
$51,981,000 for the comparable period of the prior year. Capital expenditures
consist primarily of betterments and expansion of eldercare centers and
investments in data processing hardware and software. In order to maintain our
physical properties in a suitable condition to conduct our business and meet
regulatory requirements, we expect to continue to incur capital expenditure
costs at levels at or above those for the twelve months ended September 30, 2001
for the foreseeable future. Cash flows provided by investing activities for the
twelve months ended September 30, 2001 and 2000 include approximately $7,010,000
and $33,000,000, respectively, of cash proceeds from the sale of eldercare
centers.
For the twelve months ended September 30, 2001, we incurred approximately
$35,622,000 of lease obligation costs and expect to continue to incur lease
costs at levels approximating those for the twelve months ended September 30,
2001 for the foreseeable future.
Net Operating Losses
Following the consummation of the Plan, we had approximately $495,000,000 of Net
Operating Loss ("NOL") carryforwards which will expire between September 30,
2020 and September 30, 2021. In addition, we have a capital loss carryforward of
$736,000,000, which will expire September 30, 2005. These NOLs and capital loss
carryforward have been reduced to $161,000,000 and $195,000,000, respectively,
as a result of the discharge and cancellation of various prepetition liabilities
under the Plan. The reduction of the NOLs and capital loss carryforward will be
effective on October 1, 2002.
In addition, the NOLs and capital loss carryforward remaining after the
application of the cancellation of indebtedness provisions are subject to
certain provisions of the Internal Revenue Code which restricts the utilization
of the losses. Section 382 of the Internal Revenue Code imposes limitations on
the utilization of loss carryforwards after certain changes of ownership of a
loss company. The Company is deemed to be a loss company for these purposes.
Under these provisions, our ability to utilize these loss carryforwards in the
future will generally be subject to an annual limitation of approximately
$43,000,000.
There can be no assurances that we will be able to utilize these NOLs or capital
loss carryforward due to the complex nature of the applicable tax code and the
differences that may exist between our interpretation of the code and that of
the Internal Revenue Service. As a result of the risks associated with NOLs and
capital loss carryforward, we have established a 100% valuation allowance to
offset the associated deferred tax asset.
46
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 healthcare 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, have resulted in reduced rates of
reimbursement for services we provide.
Congress has enacted three major laws during the past five years that have
significantly altered payment for nursing home and medical ancillary services.
The Balanced Budget Act of 1997 ("the 1997 Act"), signed into law on August 5,
1997, reduced federal spending on the Medicare and Medicaid programs. As
implemented by the Centers for Medicare and Medicaid Services ("CMS"), formerly
the Health Care Financing Administration ("HCFA"), the 1997 Act has had an
adverse impact on the Medicare revenues of many skilled nursing facilities.
There have been three primary problems with the 1997 Act. First, the base year
calculations understate costs. Second, the market basket index used to trend
payments forward does not adequately reflect market experience. Third, the RUGs
case mix allocation is not adequately predictive of the costs of care for
patients, and does not equitably allocate funding, especially for non-therapy
ancillary services. The Medicare Balanced Budget Refinement Act ("BBRA"),
enacted in November 1999 addressed a number of the funding difficulties caused
by the 1997 Act. A second enactment, the Benefits Improvement and Protection Act
of 2000 ("BIPA"), was enacted on December 15, 2000, further modifying the law
and restoring additional funding.
A number of the provisions of the BBRA and BIPA enactments providing additional
funding for Medicare participating skilled nursing facilities expire on
September 30, 2002. Expiring provisions are estimated to, on average, reduce per
beneficiary per diems by $30. Moreover, CMS has indicated its desire to complete
refinements to the case mix classification system as part of the Fiscal 2003
rule-making. Under the law, when these revisions are implemented, the add-on's
authorized by the BBRA and BIPA will expire. Combined, the Medicare skilled
nursing facility sector face an 18% reduction in the average median per diems.
If we were to experience an 18% decline in our current average Medicare rate per
patient day, the estimated annual reduction in Medicare revenues of
approximately $67,000,000 would have a material adverse affect on our financial
position, results of operations, and cash flows. Trade organizations
representing the skilled nursing facility sector are aggressively pursuing
strategies to minimize the potential impact of the "Medicare Rate Cliff."
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by CMS 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 our institutional pharmacy and medical supply operation to charge
Medicaid no more than its lowest charge to other consumers in the state. During
2000, Federal Medicaid requirements establishing payment caps on certain drugs
were revised ("Federal Upper Limits"). The final rule relating to Federal Upper
Limits was substantially modified, reducing the impact of the new rules on
NeighborCare operations.
Pharmacy coverage and cost containment are important policy debates at both the
federal and state levels. Congress has considered proposals to expand Medicare
coverage for outpatient pharmacy services. Enactment of such legislation could
affect institutional pharmacy services. Likewise, a number of states have
proposed cost containment initiatives pending. Changes in payment formulas and
delivery requirements could impact our NeighborCare pharmacy operations.
Recently the President announced a plan for discount purchasing of prescription
drugs for Medicare beneficiaries. Details of the plan are just becoming public.
Implementation could affect institutional pharmacy services.
47
Federal 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.
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 or any future healthcare legislation will not adversely
affect our 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. Our financial condition and results of operations may be affected by
the 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.
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care, Inc. constituting $116,000,000, or approximately ten
percent and four percent of the net revenues, of NeighborCare and Genesis,
respectively. These service contracts with HCR Manor Care, Inc. are the subject
of certain litigation. See "Legal Proceedings."
NeighborCare pharmacy operations provide services to 58 centers operated by
Mariner Post-Acute Network, Inc., referred to as Mariner, which represent four
percent and two percent of net revenues of NeighborCare and Genesis,
respectively, or approximately $49,000,000 for the twelve months ended September
30, 2001. On January 18, 2000, Mariner filed voluntary petitions under Chapter
11 with the Bankruptcy Court, giving Mariner certain rights under the protection
of the Bankruptcy Court to reject the service contracts for those centers.
Genesis participates as a member of the official Mariner unsecured creditors'
committee.
Effective November 1, 2001, the Mariner Bankruptcy Court approved a settlement
agreement between NeighborCare and Mariner relating to these Mariner service
contracts, whereby, among other things, (1) the form of the contracts was
restated and new pricing was implemented; (2) the term of the contracts was
extended for eighteen months through April 30, 2003, except that Mariner has the
right to terminate a limited number of service contracts in the event of the
disposition or closure of the subject facility; (3) NeighborCare waived all
claims against Mariner in the Mariner bankruptcy with respect to these contracts
except for an allowed $6,000,000 pre-petition unsecured claim and (4) Mariner
"assumed" the service contracts, as modified, in the Bankruptcy Court.
Legislative and Regulatory Issues
In July 1998, federal government administration issued a new initiative to
promote the quality of care in nursing homes. 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.
We face additional federal requirements that mandate major changes in the
transmission and retention of health information. The Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") was enacted to ensure,
first, that employees can retain and at times transfer their health insurance
when they change jobs, and secondly, to simplify health care administrative
processes. This simplification includes expanded protection of the privacy and
security of personal medical data and requires the adoption of standards for the
exchange of electronic health information. Among the standards that the
Department of Health and Human Services will adopt pursuant to HIPAA are
standards for the following: electronic transactions and code sets; unique
identifiers for providers, employers, health plans and individuals; security and
electronic signatures; privacy; and enforcement.
48
Although HIPAA was intended to ultimately reduce administrative expenses and
burdens faced within the healthcare industry, we believe that implementation of
this law will result in additional costs. We have approximately two years to
comply with the regulation. We have established a HIPAA task force consisting of
both clinical and information services professionals focused on HIPAA
compliance.
Insurance
Prior to June 1, 2000, we purchased general and professional liability insurance
coverage ("GL/PL") from various commercial insurers on a first dollar coverage
basis. Beginning with the June 1, 2000 policy, we have purchased GL/PL coverage
from a commercial insurer subject to per claim retentions. These retentions are
insured by our wholly-owned captive insurance company, Liberty Health Corp.,
LTD, referred to as LHC. LHC is currently insuring workers' compensation and
GL/PL retentions. Based on independent actuarial studies, we believe that LHC's
reserves are sufficient to meet our obligations.
Workers' compensation insurance has been maintained as statutorily required, or
in certain jurisdictions for certain periods, we have qualified as exempt or
self-insured. Most of the commercial insurance purchased is loss sensitive in
nature. As a result, we are responsible for adverse loss development or, in some
cases, may be entitled to refunds if losses are below certain levels. We believe
that adequate reserves are in place to cover the ultimate liability related to
workers' compensation.
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," "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Fiscal 2001 Compared to Fiscal 2000."
49
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes. In the past, we employed
established policies and procedures to manage our exposure to changes in
interest rates. Our objective in managing 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 objective, we primarily use interest
rate swap agreements to manage net exposure to interest rate changes related to
our portfolio of borrowings. As of September 30, 2001, no interest rate swap
agreements were in place. It is expected that interest rate swap agreements will
be entered into in the fourth quarter of fiscal 2002 to manage the exposure to
interest rate changes on our variable rate debt.
At September 30, 2001, we had $527,605,000 of debt subject to variable market
rates of interest. We are exposed to the impact of interest rate changes. For
each additional percentage point increase in the LIBOR, we will incur additional
interest expense of approximately $5,276,000 annually.
Expected Maturity Date
------------------------------------------------------------------------------------------------------------------------------
($ in thousands) 2002 2003 2004 2005 2006 Thereafter Total
------------------------------------------------------------------------------------------------
Fixed rate debt $35,965 $ 5,520 $ 3,619 $ 3,750 $ 3,948 $ 64,102 $ 116,904
Weighted average rate 9.67% 8.54% 8.57% 8.55% 8.56% 8.79% 9.04%
------------------------------------------------------------------------------------------------
Variable rate debt $5,276 $5,276 $5,276 $5,276 $5,276 $501,225 $ 527,605
Weighted average rate L+4.19% L+4.19% L+4.19% L+4.19% L+4.19% L+4.19% L+4.19%
------------------------------------------------------------------------------------------------
In connection with the adoption of fresh-start reporting, our fixed and variable
rate debt is recorded at fair value at September 30, 2001.
L - three-month LIBOR (approximately 2.60% at September 30, 2001)
50
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 52
Consolidated Balance Sheets as of September 30, 2001 (Successor) and 2000 (Predecessor) 53
Consolidated Statements of Operations for the years ended
September 30, 2001, 2000 and 1999 (Predecessor) 54
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended September 30, 2001, 2000 and 1999 (Predecessor) 55
Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999 (Predecessor) 56
Notes to Consolidated Financial Statements 57
51
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 sheet of Genesis Health
Ventures, Inc. and subsidiaries (the "Company") as of September 30, 2001
(Successor Company) and the accompanying consolidated balance sheet of Genesis
Health Ventures, Inc. and subsidiaries as of September 30, 2000 and related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the years in the three year period ended September 30, 2001
(Predecessor Company). 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 auditing standards generally accepted
in the United States of America. 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, 2001 and the financial
position of the Predecessor Company as of September 30, 2000 and the results of
the Predecessor Company's operations and cash flows for each of the years in the
three year period ended September 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note 3 to the consolidated financial statements, the Predecessor
Company changed its method of accounting for the costs of start-up activities
effective October 1, 1999.
As described in note 2 to the consolidated financial statements, on October 2,
2001 the Company consummated a Joint Plan of Reorganization (the "Plan") which
had been confirmed by the United States Bankruptcy Court. The Plan resulted in a
change in ownership of the Predecessor Company and, accordingly, effective
September 30, 2001 the Company accounted for the change in ownership through
"fresh-start" reporting. As a result, the consolidated information prior to
September 30, 2001 is presented on a different cost basis than that as of
September 30, 2001 and, therefore, is not comparable.
KPMG LLP
Philadelphia, Pennsylvania
December 19, 2001
52
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Balance Sheets
Successor Company | Predecessor Company
September 30, 2001 | September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
(in thousands except share and per share data)
Assets |
|
Current assets: |
Cash and equivalents $ 32,139 | $ 22,948
Restricted investments in marketable securities 51,625 | 27,899
Accounts receivable, net of allowance for doubtful accounts |
of $83,125 in 2001 and $78,020 in 2000 399,816 | 446,614
Inventory 65,222 | 65,637
Prepaid expenses and other current assets 35,753 | 54,223
--------------------------------------------------------------------------------------------------------------------------
Total current assets 584,555 | 617,321
---------------------------------------------------------------------------------------------------------------------------
|
Property, plant and equipment, net 822,740 | 1,107,346
Notes receivable and other investments 14,539 | 39,244
Other long-term assets 45,698 | 105,726
Investments in unconsolidated affiliates 12,504 | 22,956
Identifiable intangible assets 33,591 | -
Goodwill, net 320,953 | 1,235,306
---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,834,580 | $ 3,127,899
---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficit) |
Current liabilities: |
Current installments of long-term debt $ 41,241 | $ 133,000
Accounts payable 46,429 | 36,944
Accrued expenses 64,692 | 39,993
Accrued compensation 117,840 | 100,164
Accrued interest 15,838 | 2,979
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 286,040 | 313,080
---------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise - | 2,446,673
Long-term debt 603,268 | 10,441
Deferred income taxes - | 54,082
Deferred gain and other long-term liabilities 65,677 | 51,670
Minority interest 2,137 | 56,059
Redeemable preferred stock (subject to compromise in 2000) 42,600 | 442,820
Shareholders' equity (deficit): |
Series G Cumulative Convertible Preferred Stock, |
par $.01, authorized 5,000,000 shares, issued and |
outstanding 589,714 at September 30, 2000 only - | 6
Common stock |
Successor Company - par $.02, 200,000,000 authorized, |
39,671,279 issued and outstanding, and 1,328,721 to be issued |
at September 30, 2001 |
Predecessor Company - par $.02, 200,000,000 authorized, |
48,653,294 issued, and 48,641,194 outstanding at September 30, 2000 820 | 973
Additional paid-in capital 832,710 | 803,202
Retained earnings (accumulated deficit) 1,136 | (1,049,075)
Accumulated other comprehensive income (loss) 192 | (1,789)
Treasury stock, at cost - | (243)
---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 834,858 | (246,926)
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 1,834,580 | $ 3,127,899
---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
53
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Operations
Predecessor Company
Year ended September 30,
------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
Net revenues:
Inpatient services $ 1,360,230 $ 1,320,151 $ 704,105
Pharmacy and medical supply services 1,040,051 952,350 927,334
Other revenue 169,656 161,357 234,987
------------------------------------------------------------------------------------------------------------------------------
Total net revenues 2,569,937 2,433,858 1,866,426
------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 1,110,675 1,088,443 713,204
Cost of sales 611,517 534,960 502,169
Other operating expenses 714,610 948,735 565,174
Loss on sale of assets 2,310 7,922 -
Gain on sale of assets (1,770) - -
Multicare joint venture restructuring - 420,000 -
Depreciation and amortization 107,283 116,961 74,955
Lease expense 35,622 38,124 26,653
Interest expense, net (contractual interest for the years ended
September 30, 2001 and 2000 was $214,735 and $231,499, respectively) 119,317 203,570 119,220
------------------------------------------------------------------------------------------------------------------------------
Loss before debt restructuring and reorganization costs,
income tax benefit, equity in net loss of unconsolidated
affiliates, minority interest, extraordinary items and cumulative effect
of accounting change (129,627) (924,857) (134,949)
Debt restructuring and reorganization costs 1,115,785 62,795 -
------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, equity in net loss of
unconsolidated affiliates, minority interest, extraordinary items and
cumulative effect of accounting change (1,245,412) (987,652) (134,949)
Income tax benefit - 27,168 44,711
------------------------------------------------------------------------------------------------------------------------------
Loss before equity in net loss of unconsolidated affiliates, minority
interest, extraordinary items and cumulative effect of accounting change (1,245,412) (960,484) (90,238)
Equity in net loss of unconsolidated affiliates (10,232) (2,407) (178,235)
Minority interest 23,453 132,444 -
------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary items and cumulative effect
of accounting change (1,232,191) (830,447) (268,473)
Extraordinary items, net of tax 1,524,823 - (2,100)
Cumulative effect of accounting change, net of tax - (10,412) -
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 292,632 (840,859) (270,573)
Preferred stock dividends 45,623 42,596 19,477
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shareholders $ 247,009 $ (883,455) $ (290,050)
------------------------------------------------------------------------------------------------------------------------------
Per common share data:
Basic and diluted
Loss before extraordinary items and cumulative effect
of accounting change $ (26.27) $ (18.55) $ (8.11)
Net income (loss) $ 5.08 $ (18.77) $ (8.17)
Weighted average shares of common stock 48,641,456 47,076,746 35,485,306
------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
54
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
Series G
Cumulative
Convertible Additional Retained
(in thousands) Preferred Common paid-in earnings
Stock stock capital (deficit)
---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 (Predecessor Company) $ 6 $ 704 $ 749,491 $ 124,430
---------------------------------------------------------------------------------------------------------------------------
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)
Series G Cumulative Convertible Preferred Stock dividends - - - (19,477)
Total comprehensive loss
---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 (Predecessor Company) $ 6 $ 723 $ 753,452 $ (165,620)
---------------------------------------------------------------------------------------------------------------------------
Issuance of common stock - 250 49,750 -
Comprehensive loss
Net unrealized loss on marketable securities - - - -
Net loss - - - (840,859)
Series G Cumulative Convertible Preferred Stock dividends - - - (19,776)
Series H Senior Convertible Participating Cumulative
Preferred Stock dividends - - - (13,258)
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock dividends - - - (9,562)
Total comprehensive loss
---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 (Predecessor Company) $ 6 $ 973 $ 803,202 $(1,049,075)
---------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net unrealized gain on marketable securities - - - -
Net income - - - 292,632
Series G Cumulative Convertible Preferred Stock dividends - - - (19,721)
Series H Senior Convertible Participating Cumulative
Preferred Stock dividends - - - (15,029)
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock dividends - - - (10,873)
Total comprehensive income
---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 (Predecessor Company) $ 6 $ 973 $ 803,202 $ (802,066)
===========================================================================================================================
Fresh start adjustments (6) (973) (803,202) 803,202
Issuance of common stock - 820 832,710 -
---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 (Successor Company) $ - $ 820 $ 832,710 $ 1,136
---------------------------------------------------------------------------------------------------------------------------
[RESTUBBED TABLE]
Acumulated
other Total
comprehensive shareholders'
(in thousands) income Treasury equity
(loss) stock (deficit)
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 (Predecessor Company) $ 684 $ (243) $ 875,072
----------------------------------------------------------------------------------------------------------------------
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)
Series G Cumulative Convertible Preferred Stock dividends - - (19,477)
-----------
Total comprehensive loss (291,162)
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 (Predecessor Company) $ (428) $ (243) $ 587,890
----------------------------------------------------------------------------------------------------------------------
Issuance of common stock - - 50,000
Comprehensive loss
Net unrealized loss on marketable securities (1,361) - (1,361)
Net loss - - (840,859)
Series G Cumulative Convertible Preferred Stock dividends - - (19,776)
Series H Senior Convertible Participating Cumulative
Preferred Stock dividends - - (13,258)
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock dividends - - (9,562)
-----------
Total comprehensive loss (884,816)
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 (Predecessor Company) $ (1,789) $ (243) $ (246,926)
----------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net unrealized gain on marketable securities 1,981 - 1,981
Net income - - 292,632
Series G Cumulative Convertible Preferred Stock dividends - - (19,721)
Series H Senior Convertible Participating Cumulative
Preferred Stock dividends - - (15,029)
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock dividends - - (10,873)
-----------
Total comprehensive income 248,990
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 (Predecessor Company) $ 192 $ (243) $ 2,064
======================================================================================================================
Fresh start adjustments - 243 (736)
Issuance of common stock - - 833,530
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 (Successor Company) $ 192 $ - $ 834,858
----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
55
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Predecessor Company
Year ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 292,632 $ (840,859) $ (270,573)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Charges (credits) included in operations not requiring funds:
Extraordinary items, net of tax (1,524,823) - 2,100
Debt restructuring and reorganization costs 1,115,785 62,795 -
Loss on impairment of assets and other charges 110,249 372,189 164,527
Multicare joint venture restructuring charge - 420,000 -
Depreciation and amortization 107,283 116,961 74,955
Provision for losses on accounts receivable 49,901 45,226 54,061
Equity in net (income) loss of unconsolidated affiliates
and minority interest (13,221) (124,870) 178,235
Amortization of deferred gains and premiums (6,845) (5,962) (5,986)
Loss on sale of assets, net of gains 540 7,922 -
Provision for deferred taxes - (27,831) (45,214)
Cumulative effect of accounting change, net of tax - 10,412 -
Non-cash common stock contribution to 401(k) plan - - 4,000
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (40,745) (75,390) (101,623)
Cost reports receivable - - (3,633)
Inventory (236) (2,331) (131)
Prepaid expenses and other current assets (12,094) (13,129) (9,296)
Accounts payable and accrued expenses (26,684) (32,313) 2,135
------------------------------------------------------------------------------------------------------------------------------------
Total adjustments (240,890) 753,679 314,130
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations before debt restructuring
and reorganization costs 51,742 (87,180) 43,557
------------------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (44,405) (16,114) -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 7,337 (103,294) 43,557
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of restricted marketable securities (55,057) (39,614) (11,171)
Proceeds on maturity or sale of restricted marketable securities 33,311 34,954 12,119
Capital expenditures (43,721) (51,981) (77,943)
Payments for acquisitions, net of cash acquired - (588) (16,634)
Investments in unconsolidated affiliates - - (16,051)
Proceeds from assets sold, net 7,010 33,000 -
Reductions in notes receivable and other investments 1,032 - 916
Additions to notes receivable and other investments - (3,083) (3,424)
Other long term asset additions (1,324) (6,200) (22,782)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (58,749) (33,512) (134,970)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under prepetition working capital revolving credit facilities 1,006 49,868 126,000
Net borrowings under Genesis DIP Facility 63,000 133,000 -
Repayment of Genesis DIP Facility (196,000) - -
Repayment of long term debt and payment of sinking fund requirments (77,990) (90,295) (149,888)
Proceeds from issuance of long-term debt 285,000 10,000 136,756
Debt issuance costs (14,413) (9,183) (7,953)
Issuance of common stock - 50,000 -
Partnership distribution - - (49)
Preferred stock dividends paid - - (5,987)
Stock options exercised - - 29
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 60,603 143,390 98,908
------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 9,191 6,584 7,495
Cash and equivalents:
Beginning of year (1) 22,948 16,364 4,902
------------------------------------------------------------------------------------------------------------------------------------
End of year $ 32,139 $ 22,948 $ 12,397
------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $118,057 $179,215 $117,864
Income taxes paid - 587 1,081
Non-cash financing activity - issuance of Genesis Series H Senior Convertible
Participating Cumulative Preferred Stock and Genesis Series I Senior
Convertible Exchangeable Participating Cumulative Preferred Stock $ - $420,000 $ -
------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
(1) The beginning cash balance was adjusted to include the October 1, 1999
opening cash balance of Multicare following the Company's change in
accounting for Multicare from the equity method of accounting to the
consolidation method of accounting.
56
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Reorganization
On June 22, 2000, (the "Petition Date") Genesis Health Ventures, Inc. and
certain of its direct and indirect subsidiaries ("Genesis" or the "Company")
filed for voluntary relief under Chapter 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). On the same date, The Multicare Companies,
Inc. and certain of its direct and indirect susidiaries ("Multicare") and
certain of its affiliates also filed for relief under Chapter 11 of the
Bankruptcy Code with the Bankruptcy Court (singularly and collectively referred
to herein as "the Chapter 11 cases" or "the bankruptcy cases" unless the context
otherwise requires).
Genesis and Multicare's financial difficulties were attributed to a number of
factors. First, the federal government made fundamental changes to the
reimbursement for medical services provided to individuals. The changes had a
significant adverse impact on the healthcare industry as a whole and on the
Company's cash flows. Second, the federal reimbursement changes have exacerbated
a long-standing problem of inadequate reimbursement by the states for medical
services provided to indigent persons under the various state Medicaid programs.
Third, numerous other factors adversely affected the Company's cash flows,
including increased labor costs, increased professional liability and other
insurance costs, and increased interest rates. Finally, as a result of declining
governmental reimbursement rates and in the face of rising inflationary costs,
the Companies were too highly leveraged to service their debt, including their
long-term lease obligations.
On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement for
Genesis and Multicare's (the "Debtors'") Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code, (the "Disclosure Statement"), and authorized
the Debtors to solicit votes with regard to the approval or rejection of the
Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code,
dated July 6, 2001.
On October 2, 2001, (the "Effective Date"), Genesis and Multicare consummated a
joint plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy
Code (the "Reorganization") pursuant to a September 20, 2001 order entered by
the Bankruptcy Court approving the Plan proposed by Genesis Health Ventures,
Inc., et al., and The Multicare Companies, Inc., et al. The principal provisions
of the Plan are as follows:
o Multicare became a wholly-owned subsidiary of Genesis. Genesis
previously owned 43.6% of Multicare and managed its skilled nursing and
assisted living facilities under the Genesis Eldercare(R) brand name;
o New senior notes, new convertible preferred stock, new common stock and
new warrants were issued to the Companies' creditors. Approximately 93%
of the successor company's common stock (the "new common stock"),
$242,600,000 in senior notes and preferred stock with a liquidation
preference of $42,600,000 were issued to the Genesis and Multicare
senior secured creditors. Approximately 7% of the new common stock is to
be issued to the Genesis and Multicare unsecured creditors as well as
one year warrants to purchase an additional 11% of the new common stock;
o Holders of Genesis and Multicare pre-chapter 11 preferred and common
stock received no distribution and those instruments were canceled;
o Claims between Genesis and Multicare were set-off against one another
and any remaining claims were waived and released; and
o The board of directors of the Successor Company consists of: Michael R.
Walker, the Chief Executive Officer and Chairman of the Company; James
H. Bloem of Humana Inc.; Edwin M. Crawford of Caremark Rx; James E.
Dalton, Jr.; James D. Dondero of HCMLP; Robert H. Fish of
Sonoma-Seacrest, LLC; Dr. Philip P. Gerbino of the University of the
Sciences in Philadelphia; and Joseph A. LaNasa III of Goldman Sachs &
Co.
57
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company (defined in "Footnote 2 Fresh-Start Reporting") entered into a
Senior Credit Facility consisting of the following: (1) a $150,000,000 revolving
line of credit (the "Revolving Credit Facility"); (2) a $285,000,000 term loan
(the "Term Loan") and (3) an $80,000,000 delayed draw term loan (the "Delayed
Draw Term Loan") (collectively the "Senior Credit Facility"). The proceeds from
the Term Loan were utilized to repay $196,000,000 of the then outstanding
amounts under the Genesis DIP Facility (later defined), and $50,000,000 of the
then outstanding synthetic lease facility, with the remaining $39,000,000
provided to fund debt restructuring and reorganization related costs in
accordance with the Plan.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company also entered an indenture agreement in the principal amount of
$242,605,000 (the "Senior Secured Notes").
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain on debt discharge as follows (in thousands):
Liabilities subject to compromise:
Revolving credit and term loans $ 1,484,904
Senior subordinated notes 617,510
Other indebtedness 120,961
--------------------------------------------------------------------------------
Long-term debt subject to compromise 2,223,375
--------------------------------------------------------------------------------
Accounts payable and accrued liabilities 64,621
Accrued interest (including a $28,331 swap termination fee) 87,716
Accrued preferred stock dividends on Series G Preferred Stock 49,673
--------------------------------------------------------------------------------
Subtotal - liabilities subject to compromise 2,425,385
--------------------------------------------------------------------------------
Redeemable preferred stock - Series H and Series I 468,722
--------------------------------------------------------------------------------
Total liabilities subject to compromise 2,894,107
--------------------------------------------------------------------------------
Less:
Cash payments 25,000
Value of secured, priority and other claims assumed 143,319
Value of new Senior Secured Notes 242,605
Value of Term Loan used to repay synthetic lease facility 50,000
Carrying value of deferred financing fees of discharged debts 32,230
Value of Successor Company's common stock 833,530
Value of Successor Company's redeemable preferred stock 42,600
--------------------------------------------------------------------------------
Extraordinary gain on debt discharge $ 1,524,823
--------------------------------------------------------------------------------
58
In accordance with SOP 90-7 (as defined below), the Company has recorded all
transactions incurred as a result of the Bankruptcy filing separately as debt
restructuring and reorganization costs. A summary of the principal categories of
debt restructuring and reorganization costs follows (in thousands):
2001 2000
--------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Professional, bank and other fees $ 59,393 $29,935
Employee benefit related costs, including severance 16,786 4,529
Costs of exited businesses 5,877 -
Interest rate swap termination charge - 28,331
Fresh start valuation adjustments 1,033,729 -
--------------------------------------------------------------------------------
$1,115,785 $62,795
--------------------------------------------------------------------------------
(2) Fresh Start Reporting
Upon emergence from its Chapter 11 proceedings, the Company adopted the
principles of fresh start reporting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting By
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") /
("fresh-start reporting"). In connection with the adoption of fresh-start
reporting, a new entity has been deemed created for financial reporting
purposes. For financial reporting purposes, the Company adopted the provisions
of fresh-start reporting effective September 30, 2001. Consequently, the
consolidated balance sheet and related information at September 30, 2001 is
labeled "Successor Company"; and reflects the Company's Plan and the principles
of fresh-start reporting. Periods presented prior to September 30, 2001 have
been designated "Predecessor Company."
In adopting the requirements of fresh-start reporting as of September 30, 2001,
the Company was required to value its assets and liabilities at fair value and
eliminate its accumulated deficit at September 30, 2001. A $1,525,000,000
reorganization value, before consideration of post filing current and long term
liabilities or minority interests was determined by the Company with the
assistance of financial advisors in reliance upon various valuation methods,
including discounted projected cash flow analysis, price / earnings ratios, and
other applicable ratios and economic industry information relevant to the
operations of the Company, and through negotiations with the various creditor
parties in interest.
The following reconciliation of the Predecessor Company's consolidated balance
sheet as of September 30, 2001 to that of the Successor Company was prepared to
present the adjustments that give effect to the reorganization and fresh-start
reporting.
The adjustments entitled "Reorganization" reflect the consummation of the Plan,
including the elimination of existing liabilities subject to compromise, and
consolidated shareholders' deficit; and to reflect the aforementioned
$1,525,000,000 reorganization value, which includes the establishment of
$320,953,000 of reorganization value in excess of amounts allocable to net
identifiable assets (goodwill).
The adjustments entitled "Fresh-Start Adjustments" reflect the adoption of
fresh-start reporting, including the elimination of minority interest with
Multicare and the adjustments to record property, plant and equipment, other
long-term assets, and identifiable intangible assets, at their fair values.
Management estimated the fair value of its assets and liabilities by utilizing
both independent appraisals and commonly used discounted cash flow valuation
methods.
Several of the Company's subsidiaries and consolidated joint ventures did not
file for Chapter 11 protection. The non-filing subsidiaries are not subject to
the fresh start reporting provisions under SOP 90-7 and, consequently, their
balance sheets are reflected in the consolidated balance sheet at historical
carrying value.
59
Predecessor Fresh-Start Successor
(in thousands) Company Reorganization Adjustments Reclassification Company
-----------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 30,552 $ 1,587 $ - $ - $ 32,139
Restricted investments in marketable
securities 51,625 - - - 51,625
Accounts receivable, net 399,816 - - - 399,816
Inventory 65,222 - - - 65,222
Prepaid expenses and other current assets 35,753 - - - 35,753
-----------------------------------------------------------------------------------------------------------------------------------
Total current assets 582,968 1,587 - - 584,555
Property, plant and equipment 1,382,455 - (548,730) - 833,725
Accumulated depreciation (306,797) - 295,812 - (10,985)
-----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,075,658 - (252,918) - 822,740
Notes receivable and other investments 18,001 - (3,462) - 14,539
Other long-term assets 93,973 (25,452) (22,823) - 45,698
Investments in unconsolidated affiliates 12,504 - - - 12,504
Identifiable intangible assets - - 33,591 - 33,591
Goodwill and other intangibles, net 1,191,438 - (870,485) - 320,953
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,974,542 $ (23,865) $(1,116,097) $ - $1,834,580
===================================================================================================================================
Liabilities and Shareholders' Equity (Deficit)
Current installments of long-term debt $ 196,000 $ (196,000) $ - $ 41,241 $ 41,241
Accounts payable 46,429 - - - 46,429
Accrued expenses 67,904 (5,635) 2,423 - 64,692
Accrued compensation 117,840 - - - 117,840
Accrued interest 1,599 14,239 - - 15,838
-----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 429,772 (187,396) 2,423 41,241 286,040
Liabilities subject to compromise 2,425,385 (2,425,385) - - -
Long-term debt 14,104 626,921 3,484 (41,241) 603,268
Deferred income taxes 53,157 - (53,157) - -
Deferred gain and other long-term liabilities 41,495 30,500 (6,318) - 65,677
Minority interest 30,937 - (28,800) - 2,137
Redeemable preferred stock subject to
compromise (Predecessor Company) 468,722 (426,122) - - 42,600
Shareholders' equity (deficit)
Series G Preferred Stock 6 (6) - - -
Common stock 973 (153) - - 820
Additional paid-in capital 803,202 832,710 - (803,202) 832,710
Retained earnings (accumulated deficit) (1,293,160) 1,524,823 (1,033,729) 803,202 1,136
Accumulated comprehensive loss 192 - - - 192
Treasury stock, at cost (243) 243 - - -
-----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (489,030) 2,357,617 (1,033,729) - 834,858
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity (deficit) $ 2,974,542 $ (23,865) $(1,116,097) $ - $1,834,580
===================================================================================================================================
60
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Predecessor of Genesis as of September 30, 2000 and for the three years ended
September 30, 2001, and the Successor Company at September 30, 2001. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In accordance with the Plan, Multicare became a wholly-owned subsidiary of
Genesis on the Effective Date. Under fresh-start reporting, the Company
consolidated its 100% interest in Multicare as of September 30, 2001. Genesis
previously owned 43.6% of Multicare.
Following a restructuring transaction effective on October 1, 1999 Genesis
gained managerial, operational and financial control of Multicare, and
consequently consolidated the results of Multicare. Accordingly, Multicare's
assets, liabilities, revenues and expenses as of and for the year ended
September 30, 2000 are consolidated at their recorded historical amounts and the
financial impact of transactions between Genesis and Multicare are eliminated in
consolidation. The non-Genesis shareholders' remaining 56.4% interest in
Multicare is carried as minority interest based on their proportionate share of
Multicare's historical book equity.
Prior to October 1, 1999, Genesis accounted for its 43.6% owned investment in
Multicare using the equity method of accounting.
Other than Multicare, 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.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, the consolidated financial statements for the periods presented
include all necessary adjustments (consisting of normal recurring accruals and
all adjustments pursuant to SOP 90-7) for a fair presentation of the financial
position and results of operations for the periods presented.
Prior to the Effective Date, SOP 90-7 required a segregation of liabilities
subject to compromise by the Bankruptcy Court as of June 22, 2000 and
identification of all transactions and events that are directly associated with
the reorganization of the Company. Pursuant to SOP 90-7, prepetition liabilities
were reported on the basis of the expected amounts of such allowed claims, as
opposed to the amounts for which those claims may be settled.
Certain prior year balances have been reclassified to conform with the current
year presentation.
Factors Affecting Comparability of Financial Information
The amounts recorded in the consolidated balance sheet of the Predecessor
Company were materially changed with the implementation of fresh-start
reporting. Consequently, the consolidated balance sheet of the Successor Company
is generally not comparable to that of the Predecessor Company, principally due
to the adjustment of property, plant and equipment and goodwill to estimated
fair value, the discharge of liabilities subject to compromise and the
recapitalization of the Company. In addition, the Company recorded an
extraordinary gain of $1,524,823,000 from the restructuring of its debt in
accordance with the provisions of the Plan. Fresh-start valuation adjustments of
$1,033,729,000 were made to reduce the net assets and liabilities of the
Successor Company to estimated fair value as of September 30, 2001.
61
Business
Genesis provides a broad range of healthcare services to the geriatric
population, principally within five geographic markets in the eastern United
States. The Company's operations are comprised of two primary business segments:
inpatient services, and pharmacy and medical supply services. Inpatient services
are provided through a network of skilled nursing and assisted living centers.
Pharmacy and medical supply services are provided through long-term care
pharmacies serving approximately 253,000 institutional beds; medical supply and
home medical equipment distribution; community-based pharmacies and infusion
therapy services. These segments are complemented by an array of other service
capabilities through the Genesis ElderCare(R) delivery model of integrated
healthcare networks.
Revenue Recognition
Within the Company's eldercare centers, revenue is recognized 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
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. 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.
Within the Company's ancillary service businesses, the Company records revenues
at the time services or supplies are provided. Revenue is reported at the
estimated net realizable amounts expected to be received from individuals, third
party payors or others for services and supplies provided.
Cash Equivalents
Short-term investments which have a maturity of ninety days or less at
acquisition are considered cash equivalents.
Restricted Investments in Marketable Securities
Marketable securities, which are comprised of fixed interest securities, equity
securities, money market funds and liquid reserve 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 or loss as a separate component of shareholders' equity
(deficit). 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.
62
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.
Marketable securities are held by the Company's wholly-owned captive insurance
subsidiary, Liberty Health Corp., LTD ("LHC") and are substantially restricted
to securing the outstanding claims losses of LHC. LHC was not a party to the
Chapter 11 cases.
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 and building improvements, buildings, and equipment of the
Predecessor Company are stated at cost. Depreciation is calculated on the
straight-line method over estimated useful lives of 20-35 years for land and
building 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.
As of the Effective Date, the Successor Company adjusted its property, plant and
equipment to estimated fair value and changed the depreciable lives of certain
assets in conjunction with the implementation of fresh-start reporting. The
Successor Company maintains the same policies concerning transactions affecting
property, plant and equipment as noted above.
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 are deferred and are 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 $422,000 and
$23,496,000 were $10,147,000 and $38,462,000 at September 30, 2001 and 2000,
respectively, and are included in other long-term assets. As of the Effective
Date, approximately $32,200,000 of net deferred financing fees associated with
debts that were discharged as a result of the Reorganization were eliminated as
a fresh-start adjustment. Approximately, $8,778,000 of financing fees associated
with new indebtedness of the Successor Company were deferred at September 30,
2001.
Goodwill
Goodwill of the Predecessor Company principally consisted of the excess of the
purchase price over the fair market value of net assets acquired and was
amortized on a straight-line basis from 10 to 40 years. In accordance with
fresh-start reporting, the Predecessor Company's remaining goodwill was
eliminated as of the Effective Date.
63
New goodwill representing excess reorganization value of $320,953,000 was
established in connection with fresh-start reporting. New goodwill is the
difference between the Successor Company's reorganization value over the fair
value of its net tangible and identifiable intangible assets. Under SFAS 142,
adopted by the Company in fresh-start reporting, the Company will not amortize
new goodwill, rather its recoverability will be evaluated on at least an annual
basis.
Accounting Pronouncements Recently Adopted
As of the Effective Date, and in accordance with the early adoption provisions
of SOP 90-7, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141"), Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS No. 142"), Statement of Financial Accounting Standards No. 143
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") and Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144").
The principal provisions of SFAS No. 141 require that all business combinations
be accounted for by the purchase method of accounting and identifiable
intangible assets are to be recognized apart from goodwill.
The principal provisions of SFAS No. 142 require that goodwill and other
intangible assets deemed to have an indefinite useful life are not amortized but
rather tested annually for impairment. Under SFAS No. 142, intangible assets
that have finite useful lives will continue to be amortized over their useful
lives. SFAS No. 142 requires companies to test intangible assets that will not
be amortized for impairment at least annually by comparing the fair value of
those assets to their recorded amounts.
The principal provisions of SFAS No. 143 address financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and or normal use of the assets. The enterprise also
is to record a corresponding increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the life of the asset. The liability is changed at the end of
each period to reflect the passage of time (i.e., accretion expense) and changes
in the estimated future cash flows underlying the initial fair value
measurement. Because of the extensive use of estimates, most enterprises will
record a gain or loss when they settle the obligation. The adoption of SFAS No.
143 had no impact on the consolidated financial statements of the Company.
The principal provisions of SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes Statement of Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121"), it retains many of the fundamental provisions of that
statement.
64
Identifiable Intangible Assets
In adopting the requirements of fresh-start reporting and SFAS No. 141, the
Successor Company recognized certain identifiable intangible assets, which are
stated at their estimated fair value and, in accordance with FAS 142, are being
amortized on the straight-line basis over the following estimated useful lives
(in thousands):
Classification Fair Value Estimated Life (Years)
--------------------------------------------------------------------------------
Customer contracts $26,391 2 - 6
Trademarks and tradenames 5,000 5
Non competition agreements 2,200 1 - 4
--------------------------------------------------------------------------------
Total $33,591
--------------------------------------------------------------------------------
Under the provisions of SFAS No. 142, the Successor Company will test
identifiable intangible assets for impairment at least annually by comparing the
fair value of those assets to their recorded amounts.
Loss Reserves For Certain Self-insured Programs
Certain of the Company's workers' compensation, and general and professional
liability insurance is insured by the Company's wholly-owned insurance company,
Liberty Health Corp., LTD ("LHC").
Outstanding losses and loss expenses comprise estimates of the amount of
reported losses and loss expenses received from the loss administrator together
with a provision for losses incurred but not reported, based on the
recommendations of an independent actuary using the past loss experience of the
Company and the industry.
Outstanding losses and loss expenses are discounted at a rate of 4.5% in 2001
and 2000, which estimates the present value of funds required to pay losses at a
future date. Had the Company provided losses at undiscounted levels at September
30, 2001 and 2000, the reserve for outstanding losses and loss expenses would
have been increased by approximately $6,000,000 in 2001 and $3,235,000 in 2000.
Management believes, based on the recommendations of an independent actuary,
that the provision for outstanding losses and loss expenses will be adequate to
cover the ultimate net cost of losses incurred to the balance sheet date but the
provision is necessarily an estimate and may ultimately be settled for a
significantly greater or lesser amount. It is at least reasonably possible that
management will revise this estimate significantly in the near term. Any
subsequent differences arising are recorded in the period in which they are
determined.
At September 30, 2001 and 2000, LHC has approximately $44,600,000 and
$24,700,000, respectively, of loss reserves, which are included in accrued
compensation reported on the consolidated balance sheets.
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.
65
Unfavorable Leases
As of the Effective Date, the Successor Company revalued its leases in
conjunction with the implementation of fresh-start reporting. At September 30,
2001, an unfavorable lease credit of $33,788,000 was established and is included
in deferred gain and other long-term liabilities in the consolidated balance
sheet of the Successor Company. Amortization of unfavorable leases is computed
using the straight-line method over the individual lease life.
Earnings or Loss Per Share
Basic earnings or loss per share is calculated by dividing net income or loss
available / attributed to common shareholders by the weighted average of common
shares outstanding during the period. Diluted earnings per share is calculated
by using the weighted average of common shares outstanding adjusted to include
the potentially dilutive effect of outstanding stock options.
Any incremental shares resulting from outstanding stock options would be
anti-dilutive in the 2000 and 1999 calculations of diluted loss per share. Due
to the Company's fractional share price during fiscal 2001, there were no stock
options outstanding during fiscal 2001 at an exercise price low enough to result
in a dilutive impact to the Company's earnings per share calculation.
Pursuant to SOP 90-7, common stock was adjusted to reflect the capitalization of
the Successor Company in accordance with the Plan.
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 accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates. See "Footnote 4
- Certain Significant Risks and Uncertainties."
Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position 98-5, Reporting
on the Costs of Start-Up Activities ("SOP 98-5"). 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
business in a new territory, conducting business with a new process in an
existing facility, or commencing a new operation. The cumulative effect of
expensing all unamortized start-up costs at October 1, 1999 was approximately
$16,400,000 pre tax and $10,412,000 after tax.
(4) Certain Significant Risks and Uncertainties
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care facilities which
utilize our pharmacy and other specialty medical services. The healthcare
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, have
resulted in reduced rates of reimbursement for services provided by the Company.
66
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 ("BBRA") and the Benefit Improvement Protection Act of
2000 ("BIPA"); and
o The repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
o A number of the provisions of the BBRA and BIPA enactments providing
additional funding for Medicare participating skilled nursing facilities
expire on September 30, 2002. Expiring provisions are estimated to, on
average, reduce per beneficiary per diems by $30. Moreover, the Centers
for Medicare and Medicaid Services has indicated its desire to complete
refinements to the case mix classification system (RUG refinements) as
part of the Fiscal 2003 rule-making. Under the law, when these revisions
are implemented, the add-on's authorized by the BBRA and BIPA will
expire. Combined, the Medicare skilled nursing facility sector face an
18% reduction in the average median per diems. If Genesis were to
experience an 18% decline in its current average Medicare rate per
patient day, the estimated annual reduction in Medicare revenues of
approximately $67,000,000 would have a material adverse effect on the
Company's financial position, results of operations and cash flows.
Trade organizations representing the skilled nursing facility sector are
aggressively pursuing strategies to minimize the potentially adverse
impact of the "Medicare Rate Cliff."
o The 1997 Act included several provisions affecting Medicaid. 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. Under the
1997 Act, 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. With the repeal of the
Federal payment standards, 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. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems
and payment methodologies.
o The BIPA enactment mandates a phase out of intergovernmental transfer
(IGT) transactions by states whereby states artificially inflate the
payments to certain public facilities to increase Federal matching
funds. This action may reduce Federal support for a number of state
Medicaid plans. The reduced Federal payments may impact aggregate
available funds requiring states to further contain payments to
providers. Genesis operates in several of the states that will
experience a contraction of Federal matching funds.
67
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 the Company's business. Accordingly, there can be no assurance
that the impact of these 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 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.
(5) Significant Transactions and Events
Merger of Genesis /Multicare and the Reorganization
In accordance with the Plan, Multicare became a wholly-owned subsidiary of
Genesis on the Effective Date. Under fresh-start reporting, the Company
consolidated its 100% interest in Multicare as of September 30, 2001. Genesis
previously owned 43.6% of Multicare.
The consummation of the Company's Plan constitutes a change in the controlling
interests of the Company. The provisions of the Plan will have a material effect
on the operating results of the Successor Company in future periods.
The following unaudited pro forma statement of operations information gives
effect to the Plan as if it were consummated on October 1, 2000. The unaudited
pro forma financial information has been prepared to reflect the consolidation
of the financial results of Multicare, with no minority interest. The pro forma
financial information includes consideration for the Company's new capital
structure, the elimination of restructuring related charges, and changes in
depreciation and amortization expense following the revaluation of assets and
liabilities to fair value. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
transaction actually occurred at the beginning of the period presented.
(Unaudited, in thousands, except per share amounts) 2001
------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
------------------------------------------------------------------------------
Total net revenues $2,569,937
Loss before extraordinary item (29,354)
Loss attributable to common shareholders (29,354)
Diluted loss per common share before extraordinary item (0.72)
Diluted loss per common share (0.72)
------------------------------------------------------------------------------
Proposed APS Transaction
On September 24, 2001, a wholly-owned subsidiary of Genesis entered into an
asset purchase agreement to buy substantially all of the assets of American
Pharmaceutical Services, Inc. ("APS"), and certain other corporate entities, all
of which are subsidiaries of either Mariner Health Group ("MHG") or Mariner Post
Acute Network ("MPAN") (such selling entities, collectively with MHG and MPAN,
are referred to as the "Sellers"), for approximately $42,000,000 plus up to
$18,000,000 in deferred payments contingent on performance (the "Genesis
Original Offer").
68
The sale was subject to a U.S. Bankruptcy Court approved competitive bidding
process and final court approval of the prevailing bid in the MPAN and MHG
chapter 11 cases. On December 5, 2001, pursuant to the bidding process, and
following an auction held on December 4, 2001, the Mariner Bankruptcy Court
approved another bidder to purchase APS. The Company will be eligible to collect
a "break-up fee" of $1,700,000 contingent upon the Company leaving the Genesis
Original Offer open for 60 days. If Mariner closes on the sale of APS to the
prevailing bidder within the 60 day period, Mariner is required to pay the
break-up fee to the Company. If Mariner does not close on the sale of APS to the
prevailing bidder within said 60 day period, Mariner may, at its option, seek to
close on the sale of APS to the Company upon the terms of the Genesis Original
Offer or pay the break-up fee to the Company.
Sale of Ohio Operations
Effective May 31, 2000, Multicare sold all of its long-term care operations
located in the state of Ohio, which included 14 eldercare centers with 1,128
beds. The properties were sold for $33,000,000 in cash, resulting in a loss on
sale of $7,922,000. The net proceeds of the sale were applied against
Multicare's term loans and revolving credit facility.
Other Dispositions, Closures and Lease Terminations
Both in the normal course of business and in connection with the Reorganization,
the Company has and will continue to evaluate the performance of its operating
units. Consequently, certain under performing or non strategic assets are
routinely closed, sold or related leases are rejected or terminated. Such
dispositions, closures and lease terminations are not individually significant.
ElderTrust Transactions
On January 31, 2001, the Company reached an agreement to restructure its
relationship with ElderTrust, a Maryland healthcare real estate investment
trust. The agreements encompass, among other things, the resolution of leases
and mortgages for 33 properties operated by Genesis and Multicare either
directly or through joint ventures. Under its agreement, Genesis assumed the
ElderTrust leases subject to certain modifications, including a reduction in
Genesis' annual lease expense of $745,000; extended the maturity and reduced the
principal balances of loans for three assisted living properties by $8,500,000
by satisfaction of an ElderTrust obligation of like amount; and acquired a
building currently leased from ElderTrust, which is located on the campus of a
Genesis skilled nursing facility, for $1,250,000. In its agreement with
ElderTrust, Multicare sold three owned assisted living properties that are
mortgaged to ElderTrust for principal amounts totaling $19,650,000 in exchange
for the outstanding indebtedness. ElderTrust will lease the properties back to
Genesis under a new ten-year lease with annual rents of $791,561.
AGE Institute
In the fourth fiscal quarter of 2000, the Company received notice from the AGE
Holdings, Inc., a not-for-profit owner / sponsor of 20 eldercare centers with
approximately 2,400 beds, that it wished to discontinue its management contracts
and ancillary service contracts (the "AGE Contracts"). Effective October 31,
2000, the AGE Contracts were terminated. In fiscal 2000, the AGE Contracts
generated approximately $19,000,000 in revenue and $2,000,000 in operating
income.
69
On November 27, 2000, Genesis Health Ventures, Inc., along with several
subsidiaries, filed an adversary proceeding in the Genesis bankruptcy cases
against four related nursing home owners (AGE Institute of Pennsylvania, Inc.;
AGE Institute of Massachusetts, Inc.; AGE Institute of Florida, Inc.; and
Delaware Valley Convalescent Homes, Inc.); and their parent company AGE
Holdings, Inc. (collectively, the "AGE Entities"). The complaint seeks to
recover approximately $20,800,000 owed to Genesis through the AGE Contracts, by
which Genesis provided services to 20 nursing homes owned by the defendants in
Pennsylvania, Massachusetts and Florida. The complaint asserts counts against
all defendants for breach of contract, civil conspiracy and unjust enrichment,
and against AGE Institute of Pennsylvania, Inc. and AGE Institute of
Massachusetts, Inc. for breach of certain trust indentures. In response, the AGE
Entities filed counterclaims against the Genesis Debtors alleging violations of
RICO, fraud, lender liability, breach of fiduciary duty, breach of management
agreements, breach of professional standards / professional negligence,
conversion, interference with business relations, and conspiracy. The
counterclaims seek punitive, compensatory, and / exemplary damages, as well as
claims to invalidate certain working capital and subordinated loan obligations
of the AGE Entities to the Genesis Debtors. The counterclaims further seek
administrative expense treatment of any amount found due to the AGE Entities for
post-petition damages. While the Genesis Debtors believe that the counterclaims
have no merit, in the event the AGE Entities were to prevail on their
counterclaims, such counterclaims could exceed the claims of the Genesis Debtors
against the AGE Entities. The AGE Entities have filed proofs of claim (in
unliquidated amounts) in the Genesis Bankruptcy Cases in connection with their
counterclaims. It is anticipated that the adversary proceeding will not be tried
until the summer of 2002. Any recovery against the AGE Entities is uncertain.
70
(6) Restricted Investments in Marketable Securities
Marketable securities are held by the Company's wholly-owned subsidiary, Liberty
Health Corporation, LTD ("LHC"), incorporated under the laws of Bermuda. LHC
provides various insurance coverages to the Company and to unrelated entities,
most of which are managed by the Company.
Marketable securities at September 30, 2001 of the Successor Company consist of
the following (in thousands):
Amortized Unrealized Unrealized Fair
cost gains losses value
--------------------------------------------------------------------------------------------------
U.S. mortgage backed securities $ 7,554 $ 616 $ - $ 8,170
Corporate bonds 6,600 189 - 6,789
Equity securities 1,580 - (509) 1,071
Term deposits 1,497 - - 1,497
Liquid reserve fund 26,805 - - 26,805
Money market funds 7,293 - - 7,293
--------------------------------------------------------------------------------------------------
$ 51,329 $ 805 $(509) $ 51,625
--------------------------------------------------------------------------------------------------
Marketable securities at September 30, 2000 of the Predecessor Company consisted
of the following (in thousands):
Amortized Unrealized Unrealized Fair
cost gains losses value
--------------------------------------------------------------------------------------------------
U.S. Treasury Notes $ 1,100 $ - $ (3) $ 1,097
U.S. mortgage backed securities 7,544 39 (15) 7,568
Corporate bonds 6,618 - (371) 6,247
Equity securities 1,580 - (1,439) 141
Term deposits 1,497 - - 1,497
Liquid Reserve Fund 4,078 - - 4,078
Money market funds 7,271 - - 7,271
--------------------------------------------------------------------------------------------------
$ 29,688 $ 39 $(1,828) $ 27,899
--------------------------------------------------------------------------------------------------
Fixed interest securities held at September 30, 2001 and 2000 mature as follows
(in thousands):
Successor Company | Predecessor Company
------------------------------------------------------------------------------------------------------
2001 | 2000
------------------------------------------------------------------------------------------------------
Amortized Fair | Amortized Fair
cost value | cost value
------------------------------------------------------------------------------------------------------
Due in one year or less $ 2,101 $ 2,161 | $ 1,100 $ 1,097
Due after 1 year through 5 years 6,968 7,466 | 5,108 5,006
Due after 5 years through 10 years 5,085 5,332 | 9,054 8,809
------------------------------------------------------------------------------------------------------
$14,154 $14,959 | $15,262 $14,912
------------------------------------------------------------------------------------------------------
Actual maturities may differ from stated maturities because borrowers have the
right to call or prepay certain obligations with or without prepayment
penalties.
71
In the normal course of business, LHC's bankers have issued letters of credit
totaling $39,667,000 in 2001 and $17,147,000 in 2000 in favor of insurers.
Marketable securities with an amortized cost of $44,477,000 and a market value
of $44,773,000 were pledged as security for these letters of credit as of
September 30, 2001.
(7) Property, Plant and Equipment
Property, plant and equipment at September 30, 2001 and 2000 consist of the
following (in thousands):
Successor | Predecessor
Company | Company
--------------------------------------------------------------------------------
2001 | 2000
--------------------------------------------------------------------------------
Land $ 86,072 | $ 104,741
Buildings and improvements 623,944 | 914,731
Equipment, furniture and fixtures 112,429 | 269,607
Construction in progress 11,280 | 68,588
--------------------------------------------------------------------------------
833,725 | 1,357,667
Less accumulated depreciation (10,985) | (250,321)
--------------------------------------------------------------------------------
Net property, plant and equipment $822,740 | $1,107,346
--------------------------------------------------------------------------------
Due to an impairment to the carrying value of certain properties, the Company
recorded a write-down of its property, plant and equipment of $34,578,000 during
the twelve months ended September 30, 2000.
In accordance with the provisions of fresh-start reporting, the Company adjusted
its property, plant and equipment to estimated fair value, with exception to
certain subsidiaries that were not party to the Chapter 11 cases. Such
subsidiaries property, plant and equipment, and related accumulated
depreciation, remain at their historical carrying value.
(8) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 2001 and 2000 consist of
the following (in thousands):
Successor | Predecessor
Company | Company
--------------------------------------------------------------------------------
2001 | 2000
--------------------------------------------------------------------------------
Mortgage notes and other notes receivable $13,107 | $32,232
Investments in revenue bonds 1,432 | 7,012
--------------------------------------------------------------------------------
$14,539 | $39,244
--------------------------------------------------------------------------------
Mortgage notes and other notes receivable at September 30, 2001 bear interest at
rates ranging from 7.25% to 10.0% and mature at various times ranging from 2002
to 2029. The majority 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.
During fiscal 2001, the Company performed periodic assessments of the
collectibility of amounts due from affiliated businesses in light of the adverse
impact of PPS on their liquidity and profitability. As a result of this
assessment, the carrying value of notes receivable, advances and trade
receivables due from affiliates was written down to net realizable value.
72
The Company has agreed to provide third parties, including facilities under
management contract, with $8,800,000 of working capital lines of credit. The
unused portion of working capital lines of credit was $5,161,000 at September
30, 2001.
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 were 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 was required to own the shares within three years of the date of
the adoption of the program. Subject to applicable laws, the Company was
authorized to 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, 2001, the
Company had outstanding loan and accrued interest balances of approximately
$3,200,000 from the senior executives. The note agreements were amended in
fiscal 2000 to adjust the interest rate to 8.00% simple interest. Previously,
the loans accrued interest based on the market rate at the date of the loan
initiation.
On February 23, 2001, the U.S. Bankruptcy Court ordered that the remaining loans
be forgiven on the first anniversary of the Company's emergence from bankruptcy.
Therefore, effective October 2, 2002, these loans will be forgiven and the
Company will hold the executives harmless for all and any of the tax
consequences resulting from the forgiveness of the loans. At September 30, 2001,
the carrying value of the executive loans are fully reserved.
Investments in revenue bonds bear interest at rates ranging from 10.00% to
10.45% and mature at various times between 2011 and 2021. The revenue bonds held
were issued by a skilled nursing facility owned by an independent third party
and managed by Genesis.
(9) Other Long-Term Assets
Other long-term assets at September 30, 2001 and 2000 consist of the following
(in thousands):
Successor | Predecessor
Company | Company
--------------------------------------------------------------------------------
2001 | 2000
--------------------------------------------------------------------------------
Deferred financing fees, net $ 9,725 | $ 38,462
Cost report receivables 11,217 | 36,784
Property deposits and funds held in escrow 15,587 | 15,227
Other, net 9,169 | 15,253
--------------------------------------------------------------------------------
$45,698 | $105,726
--------------------------------------------------------------------------------
As of the Effective Date, approximately $32,200,000 of net deferred financing
fees associated with debts that were discharged as a result of the
Reorganization were eliminated. Approximately, $8,778,000 of financing fees
associated with new indebtedness of the Successor Company were deferred at
September 30, 2001.
In connection with our bankruptcy proceedings and the related negotiations with
the federal government, the Company performed an assessment of the
collectibility of certain aged cost report receivable amounts due from
government agencies and concluded that approximately $22,824,000 was
unrecoverable.
73
(10) Long-Term Debt
Long-term debt at September 30, 2001 and 2000 consist of the following (in
thousands):
Successor | Predecessor
Company | Company
---------------------------------------------------------------------------------------------------------------
2001 | 2000
---------------------------------------------------------------------------------------------------------------
Secured debt |
Debtor-in-possession financing facilities $ - | $ 133,000
Credit facilities 285,000 | 1,483,897
Senior Secured Notes 242,605 | -
Mortgage and other secured debt, net of unamortized debt premium 116,904 | 158,756
---------------------------------------------------------------------------------------------------------------
Total secured debt 644,509 | 1,775,653
Unsecured debt |
Senior subordinated notes, net of unamortized debt discount - | 617,488
Notes payable and other unsecured debt - | 7,623
---------------------------------------------------------------------------------------------------------------
Total unsecured debt - | 625,111
|
Total debt 644,509 | 2,400,764
Less: |
Current portion of long-term debt (41,241) | (133,000)
Long-term debt subject to compromise - | (2,257,323)
---------------------------------------------------------------------------------------------------------------
Long-term debt $ 603,268 | $ 10,441
---------------------------------------------------------------------------------------------------------------
Interest of $2,520,000 in 2001, $4,402,000 in 2000 and $4,784,000 in 1999, was
capitalized in connection with facility construction, systems development and
renovations.
During fiscal 2001 the Company recorded an extraordinary gain on debt discharge
of $1,524,823,000 in connection with the consummation of the Plan. During fiscal
1999, the Company recorded an extraordinary loss, net of tax of $2,100,000
related to the early retirement of debt.
Long term debt - Successor Company:
Senior Credit Facility
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered into a Senior Credit Facility consisting of the
following: (1) a $150,000,000 revolving line of credit (the "Revolving Credit
Facility"); (2) a $285,000,000 term loan (the "Term Loan") and (3) an
$80,000,000 delayed draw term loan (the "Delayed Draw Term Loan") (collectively
the "Senior Credit Facility"). The outstanding amounts under the Term Loan and
the Delayed Draw Term Loan bear interest at the London Inter-bank Offered Rate
("LIBOR") plus 3.50%, or approximately 6.10% at September 30, 2001. The
outstanding amounts under the Revolving Credit Facility, if any, bear interest
based upon a performance related grid.
Pursuant to the Senior Credit Facility, the Company and each of its subsidiaries
named as guarantors have granted the lenders first priority liens and security
interests in all unencumbered property, including but not limited to: fee owned
property, bank accounts, investment property, accounts receivable, equipment and
general intangible assets.
74
The Senior Credit Facility limits, among other things, the Company's ability to
incur additional indebtedness or contingent obligations, permit additional
liens, to make additional acquisitions, to sell or dispose of assets, to create
or incur liens on assets, to pay dividends on common stock and to merge or
consolidate with any other person or entity. The Senior Credit Facility contains
customary representations and warranties.
The Senior Credit Facility requires the Successor Company to maintain compliance
with certain financial and non-financial covenants, including minimum EBITDAR
(as defined); limitations on capital expenditures, maximum leverage ratios,
minimum fixed charge coverage ratios and minimum net worth.
The Revolving Credit Facility is available to fund obligations under the Plan
and for general working capital requirements. The Revolving Credit Facility
matures on October 2, 2006. Usage under the Revolving Credit Facility is subject
to a Borrowing Base (as defined) calculation based upon real property collateral
value and a percentage of eligible accounts receivable (as defined). No
borrowings have been made under the Revolving Credit Facility.
The proceeds from the Term Loan were utilized to repay $196,000,000 of the then
outstanding amounts under the Genesis DIP Facility (later defined), and
$50,000,000 of the then outstanding synthetic lease facility, with the remaining
$39,000,000 provided to fund restructuring related costs in accordance with the
Plan. In connection with the consummation of the Plan, the Term Loan balance is
$285,000,000. The Term Loan amortizes at a rate one percent per year, and
matures on April 2, 2007.
The Delayed Draw Term Loan shall be used to (1) fund the purchase price of the
proposed APS Transaction (defined herein); (2) pay certain outstanding amounts
owed to ElderTrust on certain loans secured by mortgages; (3) fund the exercise
of an option to purchase three eldercare centers and (4) to make other Specific
Payments (as defined). Once repaid, the Delayed Draw Term Loan can not be
re-borrowed. In connection with the consummation of the Plan, no borrowings were
made under the Delayed Draw Term Loan. The Delayed Draw Term Loan amortizes at a
rate one percent per year, and matures on April 2, 2007.
In the first fiscal quarter of 2002, the Company utilized approximately
$10,000,000 from the Delayed Draw Term Loan to fund the exercise of the purchase
option previously described, and we utilized approximately $22,000,000 from the
Delayed Draw Term Loan to satisfy certain mortgages as previously described. As
a result of subsequent developments in the Company's bid to consummate the APS
Transaction, management is seeking lender approval to repay other debt
obligations with the available borrowings under the Delayed Draw Term Loan that
were otherwise earmarked for the APS Transaction. See Footnote 5 - "Significant
Transactions and Events - Proposed APS Transaction."
Senior Secured Notes
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered an indenture agreement in the principal amount of
$242,605,000 (the "Senior Secured Notes"). The Senior Secured Notes bear
interest at LIBOR plus 5.0% (approximately 7.60% at September 30, 2001), and
amortize one percent each year and mature on April 2, 2007. The Senior Secured
Notes are secured by a junior lien on real property and related fixtures of
substantially all of the Company's subsidiaries, subject to liens granted to the
lenders' interests subject to the Senior Credit Facility. The Senior Secured
Notes may be prepaid at any time without penalty, subject to restrictions in
place under the Senior Credit Facility. Compliance with certain financial and
non-financial covenants is required, but they are less restrictive than those
required by the Senior Credit Facility.
Other Secured Indebtedness
On the Effective Date of the Plan and at September 30, 2001, the Company had
$116,904,000 of other secured debt consisting principally of revenue bonds and
secured bank loans, including loans insured by the Department of Housing and
Urban Development. These loans are secured by the underlying real and personal
property of individual eldercare centers. All of the other secured loans have
fixed rates of interest ranging from 3.00% to 11.00%, with a weighted average
rate of 9.04%.
75
On the Effective date, sinking fund requirements and installments of long-term
debt are as follows (in thousands):
Years Ending September 30, Principal Amount
--------------------------------------------------------------------------------
2002 $ 41,241
2003 10,796
2004 8,895
2005 9,026
2006 9,224
Thereafter $ 565,327
Long-Term Debt - Predecessor Company:
In connection with the Chapter 11 cases, no principal or interest payments were
made on certain indebtedness incurred by the Company prior to June 22, 2000
("Prepetition Debt"). With regard to Multicare, no principal or interest
payments were made on $424,110,000 of the Multicare Credit Facility,
$250,000,000 of senior subordinated notes and $53,101,000 of other indebtedness.
Multicare continued to pay interest on an aggregate outstanding balance of
$10,240,000 in connection with two secured loans of subsidiaries not party to
the Chapter 11 cases. With regard to Genesis, no principal or interest payments
were made on $370,000,000 of senior subordinated notes and $101,485,000 of other
indebtedness. Subsequent to June 22, 2000, Genesis repaid $40,000,000 of Tranche
II Prepetition Debt under the Genesis Credit Facility and all interest incurred
prior to June 22, 2000 on Prepetition Debt under the Genesis Credit Facility.
Interest incurred on $1,059,000,000 of Prepetition Debt under the Genesis Credit
Facility subsequent to June 22, 2000 continued to be paid as billed.
At September 30, 2000 the Company's long-term debt included approximately
$1,616,897,000 of floating rate debt based on Prime or LIBOR rate. In fiscal
2000, the weighted average interest rates on floating rate debt was 10.00%. At
September 30, 2000, the Company' long-term debt included approximately
$783,867,000 of fixed rate debt. In fiscal 2000 the weighted average interest
rates on fixed rate debt was 9.45%.
Genesis Debtor-in-Possession Financing
On July 18, 2000, the Bankruptcy Court entered the Final Order approving a
$250,000,000 Genesis debtor-in-possession financing facility (the "Genesis DIP
Facility"). Usage under the Genesis DIP Facility was subject to a Borrowing Base
which provided for maximum borrowings (subject to the $250,000,000 commitment
limit) by the Company equal to the sum of (i) up to 90% of outstanding eligible
accounts receivable, as defined and (ii) up to $175,000,000 against real
property.
Proceeds of the Genesis DIP Facility were available for general working capital
purposes and as a condition of the loan, were required to refinance the
$40,000,000 outstanding under the Company's pre-petition priority Tranche II
sub-facility. Additionally, $44,000,000 of proceeds were used to satisfy all
unpaid interest and rent obligations to the senior secured creditors under the
Fourth Amended and Restated Credit Agreement dated August 20, 1999 and the
Synthetic Lease dated October 7, 1996 as adequate protection for any diminution
in value of the pre-petition senior secured lenders in these facilities,
respectively.
The Genesis DIP Facility was scheduled to mature on December 21, 2001, and was
paid in full in connection with the consummation of the Plan on the Effective
Date. Advances under the Genesis DIP Facility accrued interest at either Prime
plus 2.25% or LIBOR rate plus 3.75%, or approximately 10.55% at September 30,
2000. As of September 30, 2000 borrowings outstanding under the Genesis DIP
Facility were $133,000,000. The Genesis DIP Facility provided for the issuance
of up to $25,000,000 in standby letters of credit. As of September 30, 2000
there was $11,500,000 in letters of credit issued thereunder, for a total
utilization under the Genesis DIP Facility of $144,500,000.
76
Multicare Debtor-in-Possession Financing
On July 18, 2000, the Bankruptcy Court entered the Final Order approving a
$50,000,000 Multicare debtor-in-possession financing facility (the " Multicare
DIP Facility"). Usage under the Multicare DIP Facility was subject to a
Borrowing Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable, as defined, and a real estate component. Proceeds of the Multicare
DIP Facility were available for general working capital purposes. As of
September 30, 2000 and through the Effective Date, there was no usage under the
Multicare DIP Facility. The Multicare DIP Facility provided for the issuance of
up to $20,000,000 in standby letters of credit. As of September 30, 2000 there
were $3,700,000 in letters of credit issued thereunder.
Genesis Credit Facility - (Subject to Compromise)
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 (excluding
Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility")
The Genesis Credit Facility consisted of three term loans with original balances
of $200,000,000 each (collectively, the "Genesis Term Loans"), and a
$650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a
$40,000,000 Tranche II Facility. The Genesis Term Loans amortized in quarterly
installments through 2005. The Genesis Term Loans consisted of (i) an original
six year term loan maturing in September 2003 with an outstanding balance of
$110,445,000 at September 30, 2000 (the "Genesis Tranche A Term Facility"); (ii)
an original seven year term loan maturing in September 2004 with an outstanding
balance of $152,130,000 at September 30, 2000 (the "Genesis Tranche B Term
Facility"); and (iii) an original eight year term loan maturing in June 2005
with an outstanding balance of $151,378,000 at September 30, 2000 (the "Genesis
Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding
balance of $645,834,000 (excluding letters of credit) at September 30, 2000, was
to become payable in full on September 30, 2003. At September 30, 2000, there
were no outstanding borrowings under the Tranche II Facility. The aggregate
outstanding balance of the Genesis Credit Facility at September 30, 2000 was
classified as a liability subject to compromise.
Loans under the Genesis Credit Facility bore, at Genesis' option, interest at
the per annum Prime Rate as announced by the administrative agent, or the
applicable Adjusted LIBOR plus, in either event, a margin (the "Applicable
Margin") that was dependent upon a certain financial ratio test. Loans under the
Genesis Tranche A Term Facility and Genesis Revolving Facility had an Applicable
Margin of 1.50% for Prime Rate loans and 3.25% for LIBOR rate loans. Loans under
the Genesis Tranche B Term Facility had an Applicable Margin of 1.75% for Prime
Rate loans and 3.50% for LIBOR Rate loans. Loans under the Genesis Tranche C
Term Facility had an Applicable Margin of 2.00% for Prime Rate loans and 3.75%
for LIBOR Rate loans. Subject to meeting certain financial ratios, the above
referenced interest rates were reduced. Genesis was in default under the Genesis
Credit Facility.
Interest under the Genesis Credit Facility incurred prior to and subsequent to
the Petition Date has been paid.
Multicare Credit Facility - (Subject to Compromise)
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility").
77
The Multicare Credit Facilities consisted of three term loans with an aggregate
original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and
a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortized in quarterly installments through 2005. The loans
consisted of (i) an original six year term loan maturing in September 2003 with
an outstanding balance of $132,239,000 at September 30, 2000 (the "Multicare
Tranche A Term Facility"); (ii) an original seven year term loan maturing in
September 2004 with an outstanding balance of $138,339,000 at September 30, 2000
(the "Tranche B Term Facility"); and (iii) an original eight year term loan
maturing in June 2005 with an outstanding balance of $45,877,000 at September
30, 2000 (the "Multicare Tranche C Term Facility"). The Multicare Revolving
Facility, with an outstanding balance of $107,655,000 at September 30, 2000, was
to become payable in full on September 30, 2003. The aggregate outstanding
balance of the Multicare Credit Facility at September 30, 2000 was classified as
a liability subject to compromise.
Loans under the Multicare Tranche A Term Facility bore interest at a rate equal
to LIBOR Rate plus a margin up to 3.75%, loans under the Multicare Tranche B
Term Facility bore interest at a rate equal to LIBOR Rate plus a margin up to
4.0%, loans under the Multicare Tranche C Term Facility bore interest at a rate
equal to LIBOR Rate plus a margin up to 4.25%; loans under the Multicare
Revolving Credit Facility bore interest at a rate equal to LIBOR Rate plus a
margin up to 3.75%. Subject to meeting certain financial covenants, the
above-referenced interest rates were reduced.
Multicare was in default under the Multicare Credit Facility and did not make
any scheduled interest payments since March 29, 2000.
Mortgage and Other Secured Debt - (Subject to Compromise)
The Company had $158,756,000 of mortgage and other secured debt at September 30,
2000 consisting principally of secured revenue bonds and secured bank loans,
including loans insured by the Department of Housing and Urban Development.
Senior Subordinated Notes - (Subject to Compromise)
In December 1998, Genesis issued $125,000,000 9.88% Senior Subordinated Notes
due 2009 at a price of 96.1598% resulting in net proceeds of $120,200,000.
Interest on the notes was 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.
In August 1997, Genesis Eldercare Acquisition Corp. issued $250,000,000 9%
Senior Subordinated Notes due 2007. Interest on the notes was payable
semiannually on February 1 and August 1 of each year. The net proceeds were used
to finance the consummation of GEAC's acquisition of Multicare.
In October 1996, Genesis completed an offering of $125,000,000 9.25% Senior
Subordinated Notes due 2006. Interest was payable on April 1 and October 1 of
each year. The Company used the net proceeds of approximately $121,250,000
together with borrowings under the Credit Facility, to pay the cash portion of
the purchase price of 24 eldercare centers, and certain other healthcare
businesses of Geriatric & Medical Companies, Inc., 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.
78
In June 1995, Genesis completed an offering of $120,000,000 of 9.75% Senior
Subordinated Notes due 2005. Interest was payable on the notes on June 15 and
December 15 of each year. The notes were 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.
Unsecured Senior Subordinated Notes include $1,590,000 of untendered 9.38%
senior subordinated notes assumed by Genesis in connection with the Vitalink
Transaction.
Notes Payable and Other Unsecured Debt - (Subject to Compromise)
Notes payable and other unsecured debt principally consists of seller notes due
to the previous owners of small businesses acquired.
(11) Leases and Lease Commitments
The Company leases certain facilities under operating leases. Future minimum
payments for the next five years under operating leases at September 30, 2001
are as follows (in thousands):
Minimum
Year ending September 30, Payment
--------------------------------------------------------------------------------
2002 $ 41,193
2003 38,657
2004 37,436
2005 32,132
2006 $ 28,742
--------------------------------------------------------------------------------
The Company classifies operating lease costs associated with its eldercare
centers and corporate office sites as lease expense in the consolidated
statement of operations, while the operating lease costs of pharmacy and other
health service sites are included within other operating expenses.
On January 31, 2001, the Company reached agreements to restructure its
relationship with ElderTrust. See "Footnote 5 - Significant Transactions and
Events - ElderTrust Transactions".
Upon consummation of the Plan, the Company discharged a secured off-balance
sheet lease financing facility (the "Synthetic Lease") associated with nine
leased eldercare centers and its corporate headquarters building with a cash
payment of $50,000,000 and a $35,155,000 senior secured claim. The annual lease
cost of the Synthetic Lease approximated $7,800,000. The fair value of the
underlying land and buildings of the formerly synthetically leased properties
are included in the consolidated balance sheet at September 30, 2001.
Prior to the adoption of fresh-start reporting, the Predecessor Company carried
approximately $40,100,000 of deferred gains on sale lease back transactions. In
accordance with the provisions of SOP 90-7, the deferred gains were eliminated
and are not reflected in the consolidated balance sheet of the Successor
Company.
Also in connection with the adoption of fresh-start reporting, the Successor
Company recorded an unfavorable lease liability of $33,788,000 associated with
40 leased properties which will be amortized using the straight-line method over
the remaining lives of the leases. The unfavorable component of these lease
contracts was estimated using market comparable lease coverage ratios for
similar assets. The unfavorable lease liability will be amortized to lease
expense over the remaining lease terms, which have a weighted average term of
approximately six and one half years.
79
(12) Income Taxes
Total income tax benefit for the years ended September 30, 2001, 2000 and 1999
was as follows (in thousands):
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
Predecessor Company:
Loss before equity in net loss of
unconsolidated affiliates, minority interest,
extraordinary items and cumulative effect of
accounting change $ - $ (27,168) $ (44,711)
Extraordinary items - - (1,276)
Cumulative effect of accounting change - (5,988) -
-----------------------------------------------------------------------------------------------------------------
Total $ - $ (33,156) $ (45,987)
-----------------------------------------------------------------------------------------------------------------
The components of the provision (benefit) for income taxes for the years ended
September 30, 2001, 2000 and 1999 were as follows (in thousands):
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ -
State - 663 503
-----------------------------------------------------------------------------------------------------------------
$ - $ 663 $ 503
-----------------------------------------------------------------------------------------------------------------
Deferred:
Federal $ - $ (27,831) $ (45,272)
State - - 58
-----------------------------------------------------------------------------------------------------------------
$ - $ (27,831) $ (45,214)
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Total $ - $ (27,168) $ (44,711)
-----------------------------------------------------------------------------------------------------------------
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, equity in net
income (loss) of unconsolidated affiliates, minority interest, extraordinary
items and cumulative effect of accounting change as a result of the following
(in thousands):
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
Computed "expected" benefit $ (435,750) $ (345,678) $ (47,232)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal tax benefits - (431) (365)
Amortization of goodwill 8,750 9,545 3,481
Targeted jobs tax credits - (1,389) (1,146)
Multicare joint-venture restructuring charge - 147,000 -
Write-off of non deductible goodwill 304,500 47,352 -
Adequate protection payments 40,250 - -
Change in valuation allowance 84,350 115,495 -
Other, net (2,100) 938 551
-----------------------------------------------------------------------------------------------------------------
Total income tax benefit $ - $ (27,168) $ (44,711)
-----------------------------------------------------------------------------------------------------------------
80
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 2001
and 2000 are presented below (in thousands):
Successor | Predecessor
Company | Company
-------------------------------------------------------------------------------------------------
2001 | 2000
-------------------------------------------------------------------------------------------------
Deferred Tax Assets: |
Accrued compensation $ 1,109 | $ 1,609
Accounts receivable 15,999 | 1,999
Accrued liabilities and reserves 65,247 | 60,247
Net operating and capital loss carryforwards 130,423 | 148,423
Other, net 12,779 | 8,558
-------------------------------------------------------------------------------------------------
Deferred tax assets 225,557 | 220,836
-------------------------------------------------------------------------------------------------
Valuation allowance (127,534) | (118,895)
-------------------------------------------------------------------------------------------------
Net deferred tax assets 98,023 | 101,941
-------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Accounts receivable (25,442) | (4,442)
Goodwill and other intangibles (49,321) | (31,321)
Depreciation (11,300) | (110,300)
Accrued liabilities and reserves (11,960) | (9,960)
-------------------------------------------------------------------------------------------------
Total deferred tax liability (98,023) | (156,023)
-------------------------------------------------------------------------------------------------
Net deferred tax liability $ - | $ (54,082)
-------------------------------------------------------------------------------------------------
Successor Company:
Following the consummation of the Plan, the Company has approximately
$495,000,000 of Net Operating Loss ("NOL") carryforwards which will expire
between September 30, 2020 and September 30, 2021. In addition, the Company has
a capital loss carryforward of $736,000,000, which will expire September 30,
2005. These NOLs and capital loss carryforward have been reduced to $161,000,000
and $195,000,000, respectively as a result of the discharge and cancellation of
various prepetition liabilities under the Plan. The reduction of the NOLs and
capital loss carryforward will be effective on October 1, 2002.
In addition, the NOLs and capital loss carryforward remaining after the
application of the cancellation of indebtedness provisions are subject to
certain provisions of the Internal Revenue Code which restricts the utilization
of the losses. Section 382 of the Internal Revenue Code imposes limitations on
the utilization of loss carryforwards after certain changes of ownership of a
loss company. The Company is deemed to be a loss company for these purposes.
Under these provisions, the Company's ability to utilize these loss
carryforwards in the future will generally be subject to an annual limitation of
approximately $43,000,000.
There can be no assurances that the Company will be able to utilize these NOLs
or capital loss carryforward due to the complex nature of the applicable tax
code and the differences that may exist between management's interpretation of
the code and that of the Internal Revenue Service. As a result of the risks
associated with NOLs and capital loss carryforward, management has established a
100% valuation allowance to offset the associated net deferred tax asset.
81
Pursuant to SOP 90-7, the income tax benefit, if any, of any future realization
of the remaining NOL carryforwards existing as of the Effective Date will be
applied first as a reduction to goodwill.
(13) Redeemable Preferred Stock
Successor Company:
Series A Convertible Preferred Stock
In connection with the consummation of the Plan, the Successor Company issued
Series A Convertible Preferred Stock (the "Series A Preferred"). The Series A
Preferred has a liquidation preference of $42,600,000 and accrues dividends at
the annual rate of 6% payable in additional shares of Series A Preferred. The
Series A Preferred is convertible at any time, at the option of the holders,
into 2,095,425 shares of the Successor Company's common stock. The Successor
Company has the right to convert all of the shares of Series A Preferred to
shares of Successor Company common stock at any time after the first anniversary
date of the Effective Date, or October 2, 2002, when the average trading price
for of the Successor Company common stock over the immediately preceding 30 days
is $30.00 or more per share. The Successor Company has the right to redeem the
Series A Preferred at any time by giving 30 days notice to the holders (subject
to certain restrictions imposed by the Company's senior credit facilities). The
Series A Preferred are subject to mandatory redemption on October 2, 2010. The
conversion rate is $20.33 of liquidation preference for each share of Successor
Company common stock.
The Series A Preferred is reflected in the consolidated balance sheet of the
Successor Company under redeemable preferred stock.
Predecessor Company:
Series H Senior Convertible Participating Cumulative Preferred Stock
In connection with the November 1999 restructuring of the Multicare
joint-venture, Genesis issued 24,369 shares of Genesis Series H Senior
Convertible Participating Cumulative Preferred Stock (the "Series H Preferred").
Upon consummation of the Plan, $271,977,000 face value plus accrued and unpaid
dividends of the Series H Preferred was eliminated upon the adoption of
fresh-start reporting. The face value of the Series H Preferred plus accrued and
unpaid dividends at September 30, 2000 was $256,948,000 which was classified as
subject to compromise.
82
Series I Senior Convertible Exchangeable Participating Cumulative Preferred
Stock
Also, in connection with the November 1999 restructuring of the Multicare Joint
Venture, Genesis issued 17,631 of Genesis Senior I Convertible Exchangeable
Participating Cumulative Preferred Stock (the "Series I Preferred").
Upon consummation of the Plan, $196,745,000 face value plus accrued and unpaid
dividends of the Series I Preferred was eliminated upon the adoption of
fresh-start reporting. The face value of the Series I Preferred plus accrued and
unpaid dividends at September 30, 2000 was $185,872,000, which was classified as
subject to compromise.
(14) Shareholders' Equity (Deficit)
Successor Company:
Common Stock
The authorized common stock of the Successor Company consists of 200,000,000
shares, $.02 par value, of which 39,671,279 shares were issued and outstanding
following the initial distribution of common shares in accordance with the Plan.
The provisions of the Plan call for the issuance of 41,000,000 shares. The
remaining 1,328,721 will be issued when all outstanding claim objections and
other disputed claim matters of the bankruptcy proceedings are resolved.
Warrants
On the Effective Date, the Successor Company issued warrants (the "Warrants"),
$.02 par value, to purchase 4,559,475 shares of new common stock. This
represents approximately 11% of the new common stock issued on the Effective
Date. The Warrants expire on October 2, 2002 and have an exercise price of
$20.33 per share of new common stock. An assumed exercise of all Warrants would
result in cash proceeds to the Company of approximately $93,000,000.
Restricted Stock Grants
On October 2, 2001, the Board of Directors authorized the Successor Company to
issue 750,000 restricted shares of the Successor Company common stock to 43 of
its senior officers. These shares vest quarterly over a five year period,
commencing on January 1, 2002 and ending on October 1, 2006.
In future periods, the Company will record compensation expense ratably over
each vesting period at $20.33 per vesting share.
Predecessor Company:
Common Stock
The authorized common stock of the Predecessor Company consisted of 200,000,000
shares, $.02 par value, of which 48,653,294 were issued and 48,641,194 were
outstanding at September 30, 2000. These shares were cancelled as of the
Effective Date.
83
Preferred Stock
In August 1998, the Predecessor Company issued the Genesis Series G Cumulative
Convertible Preferred Stock (the "Series G Preferred"). Upon consummation of the
Plan, $295,100,000 face value plus accrued dividends of $49,673,000 were
eliminated upon the adoption of fresh-start reporting. At September 30, 2000
there were approximately $34,921,000 of accrued, but unpaid dividends on the
Series G Preferred. The accrued dividends were classified as liabilities subject
to compromise at September 30, 2000.
(15) Stock Option Plans
Following the Effective Date, and subsequent to September 30, 2001, the
Successor Company adopted the 2001 Stock Option Plan (the "2001 Plan"). The
aggregate number of shares of the Successor Company common stock which may be
issued under the 2001 Plan is 3,480,000, of which 3,305,000 may be issued to
non-directors and 175,000 may be issued solely to directors.
The Predecessor Company had three stock option plans (the "Employee Plan," the
"1998 Non-Qualified Employee Plan" and the "Directors Plan"). On the Effective
Date, all outstanding exercisable and unexercised stock options of the
Predecessor Company were canceled. Presented below is a summary of the Employee
Plan and the 1998 Non-Qualified Employee Plan for the two years ended September
30, 2000 (in thousands).
Predecessor Company Option Price Available for
Per Share Outstanding Exercisable Grant
-----------------------------------------------------------------------------------------------------------------------------
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 - - 1,545,389 -
Exercised $5.33 - $5.33 (2,100) (2,100) -
Canceled - (678,182) - 678,182
-----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $2.22 - $35.25 5,726,306 3,889,726 1,511,298
-----------------------------------------------------------------------------------------------------------------------------
Authorized - - - -
Granted $2.00 - $2.81 720,000 - (720,000)
Became Exercisable - - 199,782 -
Exercised - - - -
Canceled - (794,370) - 794,370
-----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $2.00 - $35.25 5,651,936 4,089,508 1,585,668
-----------------------------------------------------------------------------------------------------------------------------
At September 30, 2000, there were 63,000 options outstanding and exercisable
under the Directors Plan at grant prices ranging from $1.56 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
loss would have been changed to the pro forma amounts indicated below (in
thousands):
Predecessor Company 2000 1999
--------------------------------------------------------------------------------
Net loss - as reported $ (883,455) $ (290,050)
Net loss - pro forma (883,870) (297,543)
Net loss per share - as reported (diluted) (18.77) (8.17)
Net loss per share - pro forma (diluted) (18.78) (8.39)
--------------------------------------------------------------------------------
84
The fair value of stock options granted in 2000 and 1999 is estimated at the
grant date using the Black-Scholes option-pricing model with the following
assumptions for 2000 and 1999: dividend yield of 0% (2000 and 1999); expected
volatility of 179.22% (2000) and 105.63% (1999); a risk-free return of 5.17%
(2000) and 6.36% (1999); and expected lives of approximately 6.6 years (2000)
and 7.5 years (1999).
The Company did not make any stock option grants in 2001 and as a result of the
Company's deteriorating stock price following its voluntary petition for relief
under Chapter 11 Bankruptcy, there were no outstanding stock options with
intrinsic value during the twelve months ended September 30, 2001. Consequently,
there is no compensation cost in fiscal 2001 pursuant to the provisions of
Statement 123.
(16) Patient Service Revenue
The distribution of net patient service revenue by class of payor for the years
ended September 30, 2001, 2000 and 1999 was as follows (in thousands):
Class of payor 2001 2000 1999
--------------------------------------------------------------------------------
Private pay and other $ 961,092 $ 965,702 $ 826,051
Medicaid 1,064,096 1,014,983 686,717
Medicare 434,190 381,148 242,807
--------------------------------------------------------------------------------
$2,459,378 $2,361,833 $1,755,575
--------------------------------------------------------------------------------
The above revenue amounts are net of third-party contractual allowances of
$533,593,000, $496,792,000 and $343,020,000 in 2001, 2000 and 1999,
respectively.
Differences between patient service revenue and total net revenues reported in
the consolidated statements of operations consist of revenues earned for
management services, assisted living operations, group purchasing fees and other
miscellaneous revenues.
(17) 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
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.
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 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).
85
The Company recorded retirement plan expense for the 401(k) match and the
discretionary contribution of approximately $7,926,000, $7,138,000 and
$6,651,000 for the years ended September 30, 2001, 2000 and 1999, respectively.
In 1999, the Company funded approximately $4,000,000 of its contribution to the
Retirement Plan in the form of approximately 917,000 shares of newly issued
Predecessor Company common stock.
(18) Loss on Impairment of Assets and Other Charges
Fiscal 2001:
During the twelve months ended September 30, 2001, the Company recorded costs in
connection with certain uncollectible receivables, insurance related costs and
other charges, and debt restructuring and reorganization costs. The following
table and discussion provides additional information on these charges (in
thousands):
2001
-----------------------------------------------------------------------------------------------------
Notes receivable, advances, and trade receivables, due from affiliated businesses
formerly owned or managed deemed uncollectible $ 30,048
Uncollectible trade receivables 39,249
Self-insured and related program costs 21,026
Other charges 18,070
-----------------------------------------------------------------------------------------------------
Total uncollectible receivable, insurance related and other charges included in
other operating expenses $ 108,393
-----------------------------------------------------------------------------------------------------
Debt Restructuring and Reorganization Costs:
Professional, bank and other fees $ 59,393
Employee benefit related costs, including severance 16,786
Exit costs of terminated businesses 5,877
Fresh start valuation adjustments 1,033,729
-----------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $1,115,785
-----------------------------------------------------------------------------------------------------
Uncollectible receivable, insurance related costs and other charges included in
other operating expenses
In fiscal 2001, the Company performed periodic assessments of the collectibility
of amounts due from certain affiliated businesses in light of the adverse impact
of PPS on their liquidity and profitability. As a result of our assessment, the
carrying value of notes receivable, advances and trade receivables due from
affilitates was written down by $30,048,000.
In fiscal 2001, the Company performed a re-evaluation of its allowance for
doubtful accounts triggered by deteriorations in the agings of certain
categories of receivables. Management believed that such deteriorations in the
agings were due to several prolonged negative factors related to the operational
effects of the bankruptcy filings such as personnel shortages and the time
demands required in normalizing relations with vendors and addressing a
multitude of bankruptcy issues. As a result of this re-evaluation, the Company
determined that an increase in the allowance for doubtful accounts of
approximately $39,249,000 was necessary.
In fiscal 2001, as a result of adverse claims development we reevaluated the
levels of reserves established for certain self-insured health and workers'
compensation benefits and other insurance related programs. These charges were
approximately $21,026,000.
In addition, the Company incurred charges of approximately $18,070,000 during
fiscal 2001, principally related to contract and litigation matters and
settlements, and certain other charges.
86
Debt restructuring and reorganization costs
During the twelve months ended September 30, 2001, the Company incurred
approximately $1,115,785,000 of legal, bank, accounting, fresh-start valuation
adjustments and other costs in connection with its debt restructuring and the
Chapter 11 cases. Of these charges, approximately $59,393,000 is attributed to
professional, bank and other fees and approximately $16,786,000 pertains to
certain salary and benefit related costs, principally for a court approved
special recognition program. In addition, the Company incurred approximately
$5,877,000 of costs associated with exiting certain terminated businesses.
Fresh-start valuation adjustments of $1,033,729,000 were recorded pursuant to
the provisions of SOP 90-7, which require entities to record their assets and
liabilities at fair value. The fresh-start valuation adjustment is principally
the result of the elimination of predecessor company goodwill and the
revaluation of property, plant and equipment to estimated fair values.
Fiscal 2000:
During fiscal 2000, the Company recorded charges in connection with the
Multicare joint venture restructuring, the impairment of long-lived assets and
other impairments and charges and debt restructuring, and reorganization costs.
The following table and discussion provides additional information on these
charges (in thousands):
2000
----------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring $ 420,000
----------------------------------------------------------------------------------------------------------
Impairment of long-lived assets $ 234,009
Exit costs and write-off of unrecoverable assets of six eldercare centers closed or leases
terminated 28,363
Investments in information system development abandoned in fiscal 2000 19,200
Uncollectible trade and notes receivable due to customer bankruptcy or other
liquidity issues 41,955
Other charges, including third party appeal issues and other cost settlement balances deemed
uncollectible and insurance related adjustments 51,181
----------------------------------------------------------------------------------------------------------
Total asset impairments and other charges (included in other operating expenses) $ 374,708
----------------------------------------------------------------------------------------------------------
Professional bank and other costs in connection with the Company's amended senior
bank credit facility and the filings under Chapter 11 $ 29,935
Interest rate swap termination charge 28,331
Employee benefit related costs 4,529
----------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 62,795
----------------------------------------------------------------------------------------------------------
87
Multicare joint-venture restructuring
In connection with the restructuring transaction in the first fiscal quarter of
2000, the Company recorded 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. The cost to terminate
the Put was estimated based upon our assessment that no incremental value was
realized by Genesis as a result of the changes in the equity ownership structure
of Multicare brought about by the restructuring of the Multicare joint venture.
Asset impairments and other charges
During the fourth quarter of fiscal 2000, in connection with the Company's
budget preparations for the forthcoming year and in accordance with SFAS No.
121, management reviewed the current and projected undiscounted cash flows of
the Company's eldercare centers and its NeighborCare(R) pharmacy businesses.
This review indicated that the assets of certain eldercare centers were
impaired. The fair market value of businesses deemed potentially impaired were
then estimated and compared to the carrying values of the long-lived assets. Any
excess long-lived asset carrying value over the estimated fair value was
written-off. Fair value was estimated using a per bed value determined by
Company management. The total loss for SFAS No. 121 impairments of $234,009,000
is associated with 49 eldercare centers. No impairment charge was assessed on
the long-lived assets of the NeighborCare pharmacy businesses. The impairment
charge recorded resulted in the write-off of $185,037,000 of goodwill and
$34,578,000 of property, plant and equipment.
During fiscal 2000, the Company closed or terminated the leases of six
underperforming eldercare centers with 842 combined beds. As a result, a charge
of $28,363,000 was recorded to account for certain impaired and abandoned assets
of these eldercare centers as well as the estimated future cost of maintaining
owned properties that were closed.
As a result of the Company's Chapter 11 bankruptcy filing and curtailment in
funding availability, the Company assessed the recoverability of our investment
in certain information systems developed internally for the operating needs of
our institutional pharmacy and infusion therapy businesses. The Company's
assessment determined that $19,200,000 of the carrying value of our investment
in these systems was unrecoverable through estimated future product sales to
third parties and future operating efficiencies.
During fiscal 2000, the Company performed periodic assessments of the
collectibility of amounts due from certain current and former customers in light
of the adverse impact of PPS on their liquidity and profitability. In certain
cases, customers have filed for protection under Chapter 11 of the Bankruptcy
Code. As a result of the Company's assessment, the carrying value of notes
receivable, advances and trade receivables due from these customers was written
down $41,955,000.
In the fourth quarter of fiscal 2000, the Company performed an assessment of the
collectibility of certain aged amounts due from third party payors and concluded
that approximately $12,451,000 was unrecoverable. In addition, as a result of
adverse claims development we reevaluated the levels of reserves established for
certain self-insured and other programs, including workers' compensation and
general liability insurance, resulting in a charge of approximately $35,235,000.
88
Debt Restructuring and Reorganization Costs
During the third fiscal quarter of 2000, the Company began discussions with our
lenders under the Genesis and Multicare Credit Facilities to revise our capital
structure. During the discussion period, which continued into the third fiscal
quarter, Genesis and Multicare did not make certain scheduled principal and
interest payments under the Genesis and Multicare Credit Facilities or certain
scheduled interest payments under certain of the Genesis and Multicare senior
subordinated debt agreements. On June 22, 2000 Genesis and Multicare filed for
voluntary relief under Chapter 11 of the Bankruptcy Court. In connection with
the debt restructuring negotiations and for the costs of the subsequent
reorganization cases, the Company incurred legal, bank, accounting and other
costs of approximately $29,935,000. As a result of the nonpayment of interest
under the Genesis Credit Facility, certain provisions under existing interest
rate swap arrangements with Citibank were triggered. Citibank notified Genesis
that they elected to force early termination of the interest rate swap
arrangements, and have asserted a $28,331,000 obligation. In addition, as a
result of the Company's restructuring and Chapter 11 cases the Company incurred
costs of $4,529,000 for certain salary and benefit related costs, principally
for a court approved special recognition program.
During the first fiscal quarter of 2000, the Company recorded a non-cash pre tax
charge of $7,720,000 for a stock option redemption program (the "Redemption
Program") under which current Genesis employees and directors elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan was approved by shareholder vote at the
Company's 2000 Annual Meeting. As a result of the Company's worsening financial
condition and other considerations, the Company determined not to proceed with
the Redemption Program, and therefore the $7,720,000 charge recorded in the
first quarter was subsequently reversed. The elections made by optionees would
have resulted in the redemption of approximately 4,600,000 stock options in
exchange for approximately 4,000,000 shares of Genesis Common Stock.
Fiscal 1999:
After performing an evaluation in fiscal 1999 like the one described in the
"Fiscal 2000" section of this footnote, the Company concluded that the carrying
value of certain eldercare centers, including goodwill and property, plant and
equipment, exceeded their fair value by approximately $9,000,000 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 (in thousands):
89
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 No. 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 amend the Company's 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 other operating expenses) $167,070
-----------------------------------------------------------------------------------------------------------------
(19) Commitments and Contingencies
Insurance
Prior to June 1, 2000, the Company purchased general and professional liability
insurance coverage ("GL/PL") from various commercial insurers on a first dollar
coverage basis. Beginning with the June 1, 2000 policy, the Company has
purchased GL/PL coverage from a commercial insurer subject to per claim
retentions. These retentions are insured by the Company's wholly owned captive
insurance company, Liberty Health Corp., LTD ("LHC"). LHC is currently insuring
workers' compensation and GL/PL retentions. The Company, based on independent
actuarial studies, believes that LHC's reserves are sufficient to meet their
obligations.
Workers' compensation insurance has been maintained as statutorily required, or
in certain jurisdictions for certain periods, the Company has qualified as
exempt ("self-insured"). Most of the commercial insurance purchased is loss
sensitive in nature. As a result, the Company is responsible for adverse loss
development or, in some cases, may be entitled to refunds if losses are below
certain levels. The Company believes that adequate reserves are in place to
cover the ultimate liability related to workers' compensation.
The Company offers its employees several different health insurance options,
including a self-insured program. Losses are limited to $150,000 per claimant
per year. Genesis also requires that physicians practicing at its eldercare
centers carry medical malpractice insurance to cover their individual practices.
Financial Guarantees
The Company has guaranteed approximately $10,200,000 of indebtedness of others,
including 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.
90
Supply Contract
NeighborCare Pharmacy Services, Inc. (d/b/a NeighborCare) purchases
substantially all of its pharmaceuticals, approximately $618,000,000 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.
Legal Proceedings
NeighborCare Pharmacy Services, Inc. v. HCR Manor Care, Inc., Manor Care, Inc.
and ManorCare Health Services, Inc.
On May 7, 1999, NeighborCare Pharmacy Services, Inc. ("NeighborCare"), a
wholly-owned subsidiary of Genesis, filed a demand for arbitration under the
commercial arbitration rules of the American Arbitration Association (the "AAA
Arbitration") against HCR Manor Care, Inc., Manor Care, Inc. and ManorCare
Health Services, Inc (collectively, the "respondents"). The AAA Arbitration
principally concerns two long-term master service agreements between
NeighborCare and ManorCare Health Services, Inc. ("the Master Service
Agreements"). Pursuant to one of these agreements (the "Master Pharmacy
Agreement"), NeighborCare provides pharmacy services to long-term care
facilities owned or operated by Manor Care, Inc., formerly known as HCR Manor
Care, Inc. ("Manor Care"). Pursuant to the other agreement (the "Master Infusion
Therapy Agreement"), NeighborCare provides infusion therapy products and
services to Manor Care long-term care facilities. The Master Service Agreements
represent approximately ten percent and four percent (approximately
$116,000,000) of the net revenues of NeighborCare and Genesis, respectively.
In the AAA Arbitration, NeighborCare seeks injunctive relief and compensatory
damages estimated to be approximately $34,000,000, plus interest, in connection
with (1) respondents' attempts to terminate the Master Service Agreements, and
(2) respondents' failure to provide NeighborCare with the right to serve as the
preferred provider of pharmacy and infusion therapy services to all Manor Care
long-term care facilities pursuant to the Master Service Agreements. Respondents
have filed counterclaims requesting declaratory relief approving the purported
termination of the Master Service Agreements, as well as counterclaims seeking
compensatory damages of at least $21,000,000, plus interest, in connection with
alleged overcharges under the two agreements.
The AAA Arbitration incorporates causes of action that NeighborCare originally
pleaded in a complaint filed on May 7, 1999 in the Circuit Court for Baltimore
City in an action captioned Vitalink Pharmacy Services, Inc. v. HCR Manor Care,
Inc., Manor Care, Inc., and ManorCare Health Services, Inc., Case No.
24-C-99-002179. At first, the AAA Arbitration only addressed claims relating to
the Master Pharmacy Agreement, which, as amended, contained an arbitration
clause. However, by letter agreement dated May 13, 1999 between NeighborCare and
the defendants in the state court case, the litigants agreed to address the
claims relating to the Master Infusion Therapy Agreement in the AAA Arbitration.
The parties further agreed to stay respondents' attempted termination of both
Master Service Agreements until ten days after a final decision is reached in
the AAA Arbitration. As a result, the Master Service Agreements remain in full
force and effect.
The parties selected former federal judge Charles Renfrew to serve as the
Arbitrator. The parties briefed a motion by Manor Care to dismiss NeighborCare's
claims relating to its right to service all of Manor Care's facilities. In
connection with that motion, the Arbitrator, on May 17, 2000, declined to
dismiss NeighborCare's claims for money damages for breach of its contractual
right to serve as the preferred provider to all Manor Care long-term care
facilities. However, the Arbitrator did dismiss, without prejudice,
NeighborCare's claim for specific performance of that right.
91
On June 15, 2000, in anticipation of the possible bankruptcy filing of Genesis,
the Arbitrator stayed the AAA Arbitration. In connection with this stay, the
parties agreed that respondents may pay NeighborCare 90% of the face amount of
all invoices for pharmaceutical and infusion therapy goods and services that
NeighborCare renders to respondents under the Master Service Agreements. The
parties agreed, however, that respondents must continue to pay NeighborCare the
full face amount of all invoices for pharmacy consulting services under the
Master Service Agreement. Genesis subsequently filed for protection under
chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court") on June 22, 2000.
Upon that filing, the AAA Arbitration became subject to the automatic stay
provisions of 11 U.S.C. ss. 362.
On December 8, 2000, Manor Care renewed a previously filed motion seeking to
lift the automatic stay in the AAA Arbitration. On February 6, 2001, the
Bankruptcy Court granted the motion, allowing the AAA Arbitration to continue.
The hearing in the AAA Arbitration began in Washington, D.C. on July 30, 2001
and was completed on August 16, 2001. Post-hearing briefing has been completed.
The Arbitrator's decision is pending.
Motion to Assume the Master Service Agreements, filed in In re Genesis Health
Ventures, Inc.
On January 16, 2001, NeighborCare filed a motion with the United States
Bankruptcy Court for the District of Delaware seeking to assume the Master
Service Agreements in its chapter 11 case. This motion was heard at the same
time the Bankruptcy Court considered Manor Care's motion to lift the automatic
stay. The Bankruptcy Court postponed any decision on the motion to assume
pending the outcome of the AAA Arbitration. This issue is still pending.
Genesis Health Ventures, Inc. v. HCR Manor Care, Inc., Manor Care, Inc., Paul A.
Ormond, and Stewart Bainum, Jr.
On May 7, 1999, Genesis filed an action in the United States District Court for
the District of Delaware against HCR Manor Care, Inc., Manor Care, Inc., Paul A.
Ormond, and Stewart Bainum, Jr. (the "Genesis Delaware Action"). In this action,
Genesis seeks compensatory and punitive damages exceeding $200,000,000 for
federal securities fraud, common-law fraud, negligent misrepresentation and
controlling person liability in connection with material misrepresentations and
omissions made by defendants during the course of Genesis' acquisition of
Vitalink. Genesis further seeks injunctive relief with respect to Manor Care's
failure to dispose of its ownership interests in Heartland Healthcare Services,
a competitor of NeighborCare, pursuant to a non-competition provision found in a
Side Agreement between Genesis, Vitalink and the entity formerly known as Manor
Care, Inc., and now known as Manor Care of America, Inc. ("MCAI").
Defendants filed a motion to dismiss or stay this action pending the resolution
of the AAA Arbitration. On March 22, 2000, the Court denied the defendants'
motion to dismiss, but granted the motion to stay the case pending resolution of
the AAA Arbitration. As a result, the case remains stayed.
NeighborCare Pharmacy Services, Inc. v. Omnicare, Inc. and Heartland Healthcare
Services
On July 26, 1999, NeighborCare filed an action in the Circuit Court for
Baltimore County, Maryland against Omnicare, Inc. and Heartland Healthcare
Services, a joint venture between Omnicare and Manor Care. In this action,
NeighborCare seeks injunctive relief, and compensatory and punitive damages of
not less than $200,000,000, in connection with defendants' tortious interference
with the Master Service Agreements.
The two defendants each filed motions to dismiss, or, in the alternative, to
stay this action pending the resolution of the AAA Arbitration. On November 12,
1999, the Court granted the motions to stay, and set a January 31, 2000 hearing
date for the motions to dismiss. Defendants subsequently withdrew their motions
to dismiss prior to the hearing date. As a result, the case remains stayed.
92
Manor Care, Inc. v. Genesis Health Ventures, Inc.
On August 17, 1999, MCAI (then known as Manor Care, Inc.) filed a lawsuit in the
United States District Court for the District of Delaware against Genesis. In
this action, the plaintiff brings claims under the federal securities laws
resulting from alleged misrepresentations and omissions made by Genesis in
connection with MCAI's acquisition of Genesis' Series G Preferred Stock as
compensation for its sale of Vitalink to Genesis. Plaintiff seeks compensatory
damages of unspecified amount, rescission of MCAI's purchase of the Series G
Preferred Stock, and the return of the consideration paid by MCAI at the time of
Genesis' acquisition of Vitalink from MCAI.
Genesis filed a motion to dismiss this action. On September 29, 2000, the Court
granted that motion in part and denied it in part. Specifically, the Court
dismissed plaintiff's allegations regarding purportedly fraudulent statements
concerning: Genesis' knowledge as to certain legislative changes to the Medicare
program; the effect of Genesis' affiliate Multicare on Genesis' earnings;
Genesis' intent with respect to the issuance of preferred stock; and Genesis'
ability to declare dividends on the Series G Preferred Stock. Accordingly, the
only allegations that were not dismissed from this action concern Genesis'
alleged failure to include certain financial information on the Registration
Statement it filed in connection with its acquisition of Vitalink, and allegedly
fraudulent statements concerning Genesis' labor relations. Genesis' motion to
consolidate this action with the Genesis Delaware Action described above has
been denied.
On October 22, 2001, plaintiff filed a motion to reconsider the Court's decision
to dismiss this action in part, and Genesis has filed an opposition to that
motion. On December 5, 2001, Genesis filed a motion to dismiss the entire action
pursuant to Genesis' Joint Plan of Reorganization and the Bankruptcy Court's
order confirming that Plan, which extinguish plaintiff's claims against Genesis
except to the extent that those claims may be repled as set-off or recoupment
against claims brought by Genesis. The parties have agreed that plaintiff has
until January 14, 2002 to respond to that motion.
Manor Care of America, Inc. v. Genesis Health Ventures, Inc., the Cypress Group
L.L.C., TPG Partners II, L.P., and Nazem, Inc.
On December 22, 1999, MCAI filed a lawsuit in the United States District Court
for the Northern District of Ohio against Genesis Health Ventures, Inc., the
Cypress Group L.L.C., TPG Partners II, L.P., and Nazem, Inc. In this action,
MCAI brings claims of federal securities fraud in connection with alleged
misrepresentations and omissions made by Genesis in connection with Genesis'
issuance of Series H Preferred Stock and Series I Preferred Stock (the "Senior
Preferred Stock") on or about November 15, 1999. In connection with the issuance
of the Senior Preferred Stock, MCAI also brings state law breach-of-contract
claims with respect to Genesis' purported obligations under (1) a Rights
Agreement entered into between Genesis and MCAI at the time of Genesis'
acquisition of Vitalink from MCAI, and (2) the terms of the Series G Preferred
Stock issued to MCAI in connection with the Vitalink transaction. MCAI seeks
rescission of the Senior Preferred Stock and unspecified monetary damages.
On February 29, 2000, Genesis filed a motion to dismiss this action on the
ground, among others, that the sole federal claim alleged fails to state a cause
of action under federal securities laws. That motion has been fully briefed. In
response to Genesis' chapter 11 filing, the Court, on July 19, 2000, stayed this
action and ordered the case closed subject to reopening upon written motion. The
case remains closed.
Genesis is not able to predict the results of such litigation. However, if the
outcome is unfavorable to us, and the claims of HCR Manor Care are upheld, such
results would have a material adverse effect on our financial position, results
of operations and cash flows.
93
U.S. ex rel Scherfel v. Genesis Health Ventures et al.
In this action brought in United States District Court for the District of New
Jersey on March 16, 2000, the plaintiff alleges that a pharmacy purchased by
NeighborCare, Inc. failed to process Medicaid credits for returned medications.
The allegations are vaguely alleged for other jurisdictions. While the action
was under seal in United States District Court, Genesis fully cooperated with
the Department of Justice's evaluation of the allegations. On or about March
2001, the Department of Justice declined to intervene in the suit and prosecute
the allegations. The plantiff filed a proof of claim in the Genesis bankruptcy
proceedings initially for approximately $650,000,000 and more recently submitted
an amended claim in the amount of approximately $325,000,000. The Company
believes the allegations have no merit and has objected to the proof of claim.
The Company intends to defend the suit.
Other Legal Proceedings
An individual prepetition bond holder has filed a notice of appeal of the order
confirming the Plan of Reorganizaton in the United States District Court for the
District of Delaware. The appeal is pending. The Company has filed a motion to
dismiss.
Genesis is a party to other 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.
(20) Fair Value of Financial Instruments
The carrying amount of the Predecessor Company and Successor Company 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 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.
In connection with the adoption of fresh-start reporting, the carrying value of
the Successor Company's long-term debt equals fair value.
94
(21) Segment 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 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 60 institutional
pharmacies (two are jointly-owned) and 22 medical supply and home medical
equipment distribution centers (four are jointly-owned) located in its various
market areas. In addition, the Company operates 29 community-based pharmacies
(two are jointly-owned) 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 Fiscal
2001 were generated through external contracts with independent healthcare
providers with the balance attributable to centers owned or leased by the
Company.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at its 192 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.
95
------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------
Pharmacy
and
Medical
Inpatient Supply
(in thousands) Services Services Other Total
------------------------------------------------------------------------------------------------------
Revenue from external customers $ 1,360,230 $1,040,051 $ 169,656 $2,569,937
Revenue from intersegment customers - 98,121 194,295 292,416
Operating income (1) 179,414 101,872 (39,758) 241,528
Total assets (2) 990,978 672,234 171,368 1,834,580
------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------
Revenue from external customers $ 1,320,151 $ 952,350 $ 161,357 $2,433,858
Revenue from intersegment customers - 99,928 185,886 285,814
Operating income (1) (3) 182,205 93,709 (39,486) 236,428
Total assets 1,739,658 1,041,757 346,484 3,127,899
------------------------------------------------------------------------------------------------------
1999
------------------------------------------------------------------------------------------------------
Revenue from external customers $ 704,105 $ 927,334 $ 234,987 $1,866,426
Revenue from intersegment customers - 60,502 79,843 140,345
Operating income (1) 104,305 119,282 29,362 252,949
Total assets 767,748 1,072,099 590,067 2,429,914
------------------------------------------------------------------------------------------------------
(1) Operating income is defined as income before interest, income taxes,
depreciation, amortization, rent and nonrecurring items. See Footnote 18 -
"Loss on Impairment of Assets and Other Charges." The Company's segment
information does not include an allocation of overhead costs, which for the
inpatient services segment are between 3% - 4% of inpatient services net
revenues, and for the pharmacy and medical supply segment are between 1% -
2% of the net revenues of that segment.
(2) Successor Company. All other segment information presented is that of the
Predecessor Company.
(3) Certain operating income balances in the 2000 period were reclassified to
conform to the current year presentation.
(22) Comprehensive Income (Loss)
The following table sets forth the computation of comprehensive loss for the
years ended September 30, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
--------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shareholders $247,009 $(883,455) $(290,050)
Unrealized (loss) gain on marketable securities 1,981 (1,361) (1,112)
--------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $248,990 $(884,816) $(291,162)
--------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss, which is composed of net unrealized gains
and losses on marketable securities, was $192,000 and $(1,789,000) at September
30, 2001 and 2000, respectively.
96
(23) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows (in
thousands):
Loss Before Diluted
Extraordinary Earnings
Item and (Loss) Per
Cumulative Share Before
Effect of Extraordinary
Accounting Item and
Change and Cumulative Diluted
After Effect of Earnings
Total Net Loss from Preferred Net Income Accounting (Loss)
Revenues operations (1) Dividends (Loss) Change Per Share
-------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 2000 $ 629,019 $ (8,696) $ (32,811) $ (32,811) $ (0.67) $ (0.67)
March 31, 2001 630,082 (12,741) (36,723) (36,723) (0.75) (0.75)
June 30, 2001 650,741 (1,117) (28,291) (28,291) (0.58) (0.58)
September 30, 2001 660,095 (107,073) (1,179,989) 344,834 (24.26) 7.09
-------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1999 $ 586,884 $ (445,671) $ (439,770) $(450,182) $(10.37) $(10.62)
March 31, 2000 604,843 (58,111) (54,932) (54,932) (1.13) (1.13)
June 30, 2000 615,851 (68,923) (60,937) (60,937) (1.25) (1.25)
September 30, 2000 626,280 (352,152) (317,404) (317,404) (6.53) (6.53)
-------------------------------------------------------------------------------------------------------------------
(1) Loss from operations is defined as: loss before debt restructuring and
reorganization costs, income taxes, equity in net loss of unconsolidated
affiliates, minority interest, extraordinary items and cumulative effect of
accounting change.
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 diluted
earnings (loss) per share for the four quarters does not equal the loss per
share for the twelve months.
The first, second, third and fourth quarters of 2001 include debt restructuring,
reorganization costs, and other charges of $14,209,000, $16,307,000, $17,704,000
and $1,067,565,000, respectively. In addition, the fourth quarter of fiscal 2001
includes an extraordinary gain of $1,524,823,000 in connection with the
Company's reorganization. The fourth quarter of 2000 includes $62,795,000 of
debt restructuring, reorganization costs, and other charges. See "Footnote 18 -
Loss on Impairment of Assets and Other Charges," and "Footnote 1 -
Reorganization."
97
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
98
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to our non-employee
directors.
Name Age Committees of the board of directors
---- --- ------------------------------------
James H. Bloem 51 Audit Committee
Edwin M. Crawford 52 Compensation Committee
James E. Dalton, Jr. 59 Executive Committee
James D. Dondero 39 Audit Committee, Executive Committee
Robert H. Fish 51 Audit Committee
Dr. Philip P. Gerbino 54 Audit Committee, Compensation Committee
Joseph A. LaNasa III 32 Compensation Committee, Executive Committee
James H. Bloem is Senior Vice President and Chief Financial Officer of Humana
and is responsible for developing business growth strategies and supervising all
accounting, actuarial, financial, tax, risk management, treasury, and investor
relations activities. Previously, Mr. Bloem has served as Executive Vice
President, then as President of the personal care division of Perrigo Company,
the nation's largest manufacturer of over-the-counter pharmaceuticals, personal
care, and nutritional products for the store brand market. Mr. Bloem's
experience also includes independent financial and business consulting and a law
partnership with a specialization in taxation and corporate practice. Mr. Bloem
holds a Law degree from Vanderbilt University and a Masters of Business
Administration degree from Harvard Business School. He is also a certified
public accountant and serves as director of several corporate and educational
boards.
Edwin M. Crawford is Chairman of the Board and Chief Executive Officer of
Caremark Rx, Inc. (formerly MedPartners, Inc.), a leading prescription benefit
manager (PBM), providing comprehensive drug benefit services to over 1,200
health plan sponsors and holding contracts to serve approximately 20 million
participants throughout the United States. Prior to joining Caremark Rx, Inc.,
Mr. Crawford was Chairman, President and CEO of Magellan Health Services, Inc.,
one of the nation's leading specialty managed care companies. A certified public
accountant, Mr. Crawford received his B.S. degree from Auburn University in
1971.
James E. Dalton's extensive management experience includes senior management
positions with several national healthcare organizations including Quorum Health
Group, Inc., HealthTrust Inc. and Humana and with hospitals in Virginia and West
Virginia. He serves on the board of directors of a number of health care
organizations and serves on the board of trustees of Universal Health Realty
Income Trust, and the American Hospital Association. He is a Fellow of the
American College of Healthcare Executives and past chairman of the Federation of
American Hospitals. He holds a Bachelor's degree in Economics from
Randolph-Macon College and a Master's degree in Hospital Administration from the
Medical College of Virginia.
James D. Dondero is President of Highland Capital Management, LP where he has
facilitated growth through the creation of 19 separate portfolios holding in
excess of $8 billion. Formerly, Mr. Dondero served as Chief Investment Officer
of Protective Life Insurance Company's GIC subsidiary from 1989 to 1993. His
portfolio management experience includes mortgage-backed securities, investment
grade corporates, leveraged bank loans, emerging markets, derivatives, preferred
stocks and common stocks. Mr. Dondero is a certified public accountant,
chartered financial analyst, a certified management accountant and a member of
the NYSSA. He completed his financial training at Morgan Guaranty Trust Company
and is a graduate of the University of Virginia with degrees in Accounting and
Finance.
99
Robert H. Fish has over 25 years experience in health care management. He is a
Managing Partner of Sonoma-Seacrest, LLC, a California-based healthcare practice
specializing in strategic planning, performance improvement, and merger and
acquisition issues. Prior to joining Sonoma, Mr. Fish served as President and
Chief Executive Officer of St. Joseph Health System and President and Chief
Executive Officer of ValleyCare Health System. Mr. Fish holds a Bachelor of Arts
degree in Sociology and Anthropology from Whittier College and a Masters in
Hospital Administration from the University of California at Berkeley. In
addition to consulting, Mr. Fish is a member of several corporate and social
service boards.
Dr. Philip P. Gerbino is president of the University of the Sciences in
Philadelphia, which includes the Philadelphia College of Pharmacy, and has been
part of the faculty and administration of that institution for over 25 years. In
addition, he is a national leader in the pharmacy field and has served as
president of the American Pharmaceutical Association, president of the APhA
Academy of Pharmacy Practice, member of the U.S. Pharmacopeial Advisory Panel on
Geriatrics and as chair of the Commission for Certification in Geriatric
Pharmacy. He also serves on the board of directors of a number of public and
private healthcare organizations and foundations. Dr. Gerbino holds a Bachelor
of Science degree in Pharmacy and a Doctor of Pharmacy degree from the
Philadelphia College of Pharmacy and Science.
Joseph A. LaNasa III is a co-portfolio manager and a vice president in
distressed bank debt at Goldman Sachs & Co., where he analyzes and invests in
the debt of financially troubled companies. Prior to joining Goldman Sachs, he
worked as an attorney at Wachtell, Lipton, Rosen & Katz and before that he
clerked for the honorable Adrian Duplantier in federal district court in the
Eastern District of New Orleans. He graduated magna cum laude from Harvard Law
School and summa cum laude from Georgetown University's School of Foreign
Service.
The board of directors was appointed in connection with the consummation of the
Plan, and will serve for a term of one year. At the first meeting of
shareholders for the election of directors, the board of directors will be
divided into three classes, class I, class II and class III, which will be as
nearly equal in number as possible. Each director will serve for a term ending
on the date of the third annual meeting following the annual meeting at which
the director was elected; provided, however, that each director in class I will
hold office until the first annual meeting of shareholders following the meeting
at which the director was elected; each director in class II will hold office
until the second annual meeting of shareholders following the meeting at which
the director was elected; and each director in class III will hold office until
the third annual meeting of shareholders following the meeting at which the
director was elected.
100
The following table sets forth certain information with respect to our executive
officers.
Name Age Position
---- --- --------
Michael R. Walker 53 Chairman and Chief Executive Officer
Richard R. Howard 52 Vice Chairman
David C. Barr 51 Vice Chairman
George V. Hager, Jr. 45 Executive Vice President and Chief Financial Officer
Barbara J. Hauswald 42 Senior Vice President and Treasurer
James V. McKeon 37 Senior Vice President and Corporate Controller
Richard Pell, Jr. 53 Senior Vice President, Administration and Chief Compliance Officer
Richard L. Castor 46 Senior Vice President and Chief Information Officer
James W. Tabak 42 Senior Vice President, Human Resources
James J. Wankmiller, Esquire 47 Senior Vice President, General Counsel and Corporate Secretary
Michael R. Walker founded Genesis and has served as chairman and chief executive
officer of the company since its inception in 1985. Mr. Walker is also founder
and chairman of the board of trustees of ElderTrust, a healthcare real estate
investment trust. In addition to his responsibilities with Genesis and
ElderTrust, Mr. Walker leads the Alliance for Quality Nursing Home Care, ("The
Alliance") a national coalition of the nation's top 12 long term care providers.
Since 1999, The Alliance has lobbied for and gained nearly $5 billion in
additional Medicare funding for long term care providers. Mr. Walker holds a
Master of Business Administration degree from Temple University and a Bachelor
of Arts in Business Administration degree from Franklin and Marshall College.
Richard R. Howard as vice chairman oversees Genesis ElderCare's five regional
operations plus clinical practice, real estate and property management. Prior to
becoming vice chairman in 1998, Mr. Howard served as president and as president
and chief operating officer. He joined Genesis in 1985 as vice president of
development. Mr. Howard's experience also includes over ten years in the banking
industry. He 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 is vice chairman of Genesis. He is responsible for oversight of
the Genesis Health Services entities which include the company's pharmacy,
medical supply, rehabilitation therapy, respiratory health, hospitality, group
purchasing, consulting and diagnostic services. Mr. Barr also has responsibility
for senior housing initiatives, and corporate sales and marketing. Prior to
becoming vice chairman in 1998, he served as executive vice president and as
chief operating officer. Before joining Genesis, Mr. Barr was a principal of a
private consulting firm, Kane Maiwurm Barr, Inc., which provided management
consulting services to small and medium-sized firms. Mr. Barr's experience also
includes over 10 years with a service conglomerate and in the corporate banking
industry. Mr. Barr graduated in 1972 from the University of Miami with a
Bachelor of Science degree in Accounting.
George V. Hager, Jr. serves as executive vice president and chief financial
officer and is responsible for corporate finance, treasury, information
services, third party reimbursement and risk management. Mr. Hager joined
Genesis in 1992 as vice president and chief financial officer and was named
senior vice president and chief financial officer in 1994. Mr. Hager has over 20
years experience in the healthcare industry including leading KPMG LLP's
healthcare practice in Philadelphia. He holds a Bachelor of Arts degree in
Economics from Dickinson College and a Master of Business Administration degree
from Rutgers Graduate School of Management. Mr. Hager is a certified public
accountant and a member of both the AICPA and PICPA.
101
Barbara J. Hauswald has served as senior vice president and treasurer since
April 2000, and joined us as vice president and treasurer in 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 senior vice president and corporate controller of
Genesis since April 2000. 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 April 1997
to April 2000, Mr. McKeon served as the vice president and corporate controller.
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.
Richard Pell, Jr. has served as senior vice president-administration and chief
compliance officer of us since April 1998. Mr. Pell oversees the following
areas: human resources, law, government relations, public relations, staff
development and corporate communications. 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. 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.
Richard L. Castor has served as senior vice president and chief information
officer since June 2001, chief technology officer since December 2000, and as
president of HealthObjects, a wholly-owned software development company since
March 1998. Prior to that time, Mr. Castor served as chief technology officer
for Aetna for 2 years, chief information officer and vice president of MIS for
U.S. Healthcare for 8 years, and director for several R&D and commercial
information systems organizations for GlaxoSmithKline over a 10 year period. Mr.
Castor received a Bachelor of Science degree in Computer Science from Denison
University in 1977.
James W. Tabak, Esquire is senior vice president of human resources and oversees
and directs the function of the human resource department including human
resource planning, employment, training and development, labor relations,
compensation, benefits and merit review system. Mr. Tabak joined us in January
1992 and has served as associate general counsel and vice president of human
resources. His prior experience includes work as an associate counsel for The
Mutual Benefit Life Insurance Company. He holds a Bachelor of Science degree in
Political Science from the University of Pennsylvania and a law degree from The
Boston University School of Law. Mr. Tabak is licensed to practice law in
Pennsylvania, New York and New Jersey.
James J. Wankmiller, Esquire has served as senior vice president, general
counsel and corporate secretary since April 2000. Mr. Wankmiller joined Genesis
in October 1996 as vice president, general counsel. Prior to joining Genesis, he
was vice president of law and corporate secretary for Geriatric & Medical
Companies, Inc. Mr. Wankmiller received his Bachelor of Science degree from St.
Joseph's University in 1976 and his Juris Doctorate degree from Villanova
University School of Law in 1980. He is a member of the National Health Lawyers
Association, the Pennsylvania Society of Healthcare Attorneys, the Pennsylvania
Bar Association's In House Counsel and Health Care Law Committees, and the
American Corporate Counsel Association - Delaware Valley Chapter. He also serves
on the legal subcommittee of the American Health Care Association.
Reorganization
All of the executive officers were with us either prior to or during our Chapter
11 bankruptcy proceedings. Mr. Walker and Dr. Gerbino were members of our board
of directors either prior to or during our Chapter 11 bankruptcy proceedings.
See "Business - Reorganization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
102
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange Act Requires Genesis' directors and executive
officers and persons who own more than 10% of a registered class of Genesis'
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of common stock and other equity securities of Genesis.
Officers, directors and greater than 10% shareholders are required by the SEC
regulation to furnish Genesis with copies of all Section 16 (a) forms they file.
To Genesis' knowledge, based solely on review of the copies of such reports
submitted to Genesis with respect to the fiscal year ended September 30, 2001,
all Section 16 (a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with.
103
ITEM 11: EXECUTIVE COMPENSATION
Long Term All Other
Annual Compensation Compensation Compensation
------------------- ------------ ------------
(1)(6)
------
Name and Position Fiscal Salary Bonus Option
with the Company Year (2)(4)(5) (7)(8)(9) Awards (3)
---------------- ---- --------- ---------- ----------
Michael R. Walker 2001 $750,000 $883,813 - $1,700
Chairman and Chief 2000 721,154 - - 4,525
Executive Officer 1999 650,000 - 300,000 18,377
-------------------------------------------------------------------------------------------------------------------
Richard R. Howard 2001 $500,000 $392,250 - -
Vice Chairman 2000 505,824 - - 3,400
1999 454,715 - 200,000 13,752
-------------------------------------------------------------------------------------------------------------------
David C. Barr 2001 $500,000 $392,250 - $1,700
Vice Chairman 2000 502,139 - - 2,875
1999 489,446 - 200,000 11,837
-------------------------------------------------------------------------------------------------------------------
George V. Hager, Jr. 2001 $350,000 $274,875 - $1,700
Executive Vice President 2000 356,637 - - 2,275
And Chief Financial Officer 1999 325,093 - 75,000 7,888
-------------------------------------------------------------------------------------------------------------------
Robert A. Smith 2001 $232,281 $57,700 - $76,219
President, 2000 187,872 - - 8,561
NeighborCare Pharmacy 1999 - - - -
-------------------------------------------------------------------------------------------------------------------
(1) Represents our matching contribution under the 401(k) Retirement Plan
and Non Qualified Retirement Plans, except otherwise noted.
(2) Includes compensation deferred under the 401(k) Retirement Plan,
Execuflex Plan and other arrangements with us; does not include other
payments made by us under the 401(k) Retirement Plan, Execuflex Plan
and other arrangements with us.
(3) No options were granted by us during the fiscal year ended September
30, 2001 to any of our five most highly compensated executive officers.
Does not include stock options Messrs. Walker, Howard, Barr and Hager
forfeited in fiscal 2000.
(4) The 1999 annual salary compensation for Messrs. Howard and Barr were
restated by $54,714 and $93,015, respectively as a result of an
increase in compensation retroactive to April 11, 1999. These
retroactive adjustments were deferred by Messrs. Howard and Barr under
the Non Qualified Deferred Compensation Plan.
(5) The 2000 annual salary of Messrs. Howard, Barr and Hager include
$91,439, $155,446 and $50,291, respectively of compensation deferred
under the Non Qualified Deferred Compensation Plan.
(6) In addition to our matching contribution under the 401(k) Retirement
Plan, Mr. Smith also received relocation and automobile compensation in
2001 of $72,195 and $ 2,908, respectively and automobile/transportation
compensation of $8,238 in 2000.
(7) Includes performance bonuses for Messrs. Walker, Barr, Howard, and
Hager of $71,000, $31,000, $31,000 and $22,000, respectively, and
bankruptcy court approved emergence bonuses of $812,812, $361,250,
$361,250, and $252,875, respectively.
(8) Mr. Walker deferred the receipt of his emergence bonus ($812,812)
and the performance bonus ($71,000) into the Non Qualified Deferred
Compensation Plan. Mr. Barr deferred the receipt of his emergence bonus
($361,250) and the performance bonus ($31,000) into the Non Qualified
Deferred Compensation Plan. Mr. Hager deferred the receipt of 50% of
his emergence bonus ($137,437) and 50% of his cash bonus ($11,000)
into the Non Qualified Deferred Compensation Plan.
(9) Mr. Smith received a performance bonus and a bankruptcy court approved
special recognition bonus in the amount of $32,500 and $25,200,
respectively.
104
Directors Compensation
Each director who is not an employee of us receives an annual fee of $25,000 for
serving as a director of us and $1,500 for each day during which he participates
in a meeting of our board of directors and, if on a separate day, $1,000 for
each day during which he participates in a meeting of a committee of our board
of directors of which he is a member.
Employment Agreements
We entered into amended employment agreements, effective October 2, 2001, with
Michael R. Walker as our chairman and chief executive officer, Richard R. Howard
and David C. Barr as our vice chairmen and George V. Hager, Jr., as our
executive vice president and chief financial officer. The agreements currently
expire on October 2, 2004. Unless notice of non-renewal is given by two-thirds
of the non-management members of the board of directors, the current terms of
the agreements shall automatically extend an additional year beginning on the
anniversary thereof in 2002. The annual base salaries of Messrs. Walker, Howard,
Barr and Hager currently are $850,000, $500,000, $500,000 and $400,000,
respectively, and are reviewable by our board of directors at least annually.
The agreements may be terminated by us at any time for Cause (as defined) upon
the vote of not less than two-thirds of the non-management membership of our
board of directors. Each executive may terminate his employment agreement upon
notice to us of the occurrence of certain events, including an election by us
not to renew the term of the agreement, as described above. If an executive
terminates his employment following a change in control, the executive is
entitled to receive, among other things, accrued bonuses and severance pay three
times the executive's termination base salary plus three times the executive's
average incentive compensation award, subject to the terms of the employment
agreement. Upon a change in control, stock options granted to the executive
immediately and fully vest and restricted stock awarded to the executive
immediately and fully vests. In the event that we terminate the executive's
employment agreement without Cause, or the executive terminates his employment
agreement as described in the preceding sentence, the executive is entitled to
severance compensation equal to three years base salary plus the cash bonuses
granted during such period. If an executive becomes disabled, he will continue
to receive all of his compensation and benefits so long as such period of
disability does not exceed 6 consecutive months or shorter periods aggregating 6
months in any 12 month period. Each employment agreement also contains
provisions that are intended to limit the executive from competing with us
throughout the term of the agreement and for a period of two years thereafter.
We have employment contracts with other key executives. The terms of the
contracts consider base compensation, incentive compensation, severance, and
non-compete provisions. The contracts expire over periods from July 1, 2002, to
October 31, 2003.
Restricted Stock Grants
On October 2, 2001, the Board of Directors authorized the Successor Company to
issue 750,000 restricted shares of the Successor Company common stock to 43 of
its senior officers. These shares will vest and will be issued quarterly over a
five year period, commencing on January 1, 2002 and ending on October 1, 2006.
Stock Option Plans
Pursuant to the terms of the Plan, shares of our common were canceled.
Consequently, unexercised stock options of Amended and Restated Stock Option
Plan and the 1998 Non-Qualified Employee Stock Option Plan were also canceled
and the related plans ceased to exist. Set forth below is a summary of certain
significant provisions of our 2001 Stock Option Plan (the "2001 Plan").
105
The purpose of the 2001 Plan is to provide additional incentive to officers,
other key employees, and directors of, and important consultants to us and each
present or future parent or subsidiary corporation, by encouraging them to
invest in shares of our new common stock, par value $0.02 and thereby acquire a
proprietary interest in us and an increased personal interest in our continued
success and progress.
The aggregate number of shares of our common stock which may be issued under
this 2001 Plan is 3,480,000 of which 3,305,000 shares may be issued to
non-directors and 175,000 shares may be issued solely to directors.
Notwithstanding the foregoing, in the event of any change in the outstanding
shares of the common stock of us by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what our compensation committee of the
board of directors (the "Committee") deems in its sole discretion to be similar
circumstances, the aggregate number and kind of shares which may be issued under
the 2001 Plan shall be appropriately adjusted in a manner determined in the sole
discretion of the Committee. Reacquired shares of our common stock, as well as
unissued shares, may be used for the purpose of the 2001 Plan. Our common stock
subject to options which have terminated unexercised, either in whole or in
part, shall be available for future options granted under the 2001 Plan. As of
November 15, 2001, 2,680,000 stock options have been awarded of which 2,505,000
stock options were awarded to employees and 175,000 stock options were awarded
to non-employee directors.
All officers and key employees of the Company and of any present or future
Company parent or subsidiary corporation are eligible to receive an option or
options under this 2001 Plan. All directors of, and important consultants to us
and of any of our present or future parent or subsidiary corporation are also
eligible to receive an option or options under this 2001 Plan. The individuals
who receive an option or options shall be selected by the Committee, in its sole
discretion unless otherwise stipulated in the 2001 Plan. No individual may
receive options under this 2001 Plan for more than 80% of the total number of
shares of the our common stock authorized for issuance under this 2001 Plan.
Options Granted
No options were granted by the Company during the fiscal year ended September
30, 2001 to any of the five most highly compensated executive officers of
Genesis. All outstanding options were cancelled as a result of the Plan.
Special Recognition Program
On September 5, 2000, we obtained Bankruptcy Court approval for a special
recognition program (the "SRP"). The SRP was established to enhance our ability
to reward and retain certain key employees during the reorganization.
Cash payments under the SRP were paid out over four payments on the
participant's first pay day following September 30, 2000, December 31, 2000, May
31, 2001 and on a date following our emergence from bankruptcy. The aggregate
cost of the cash payments under the SRP was approximately $11,200,000. Messrs.
Walker, Howard, Barr and Hager were not participants of the SRP.
Non Qualified Deferred Compensation Plans
Effective April 1, 2001 we adopted the Genesis Health Ventures, Inc. Deferred
Compensation Plan (the "Non Qualified Deferred Compensation Plan") for a select
group of management and / or Highly Compensated employees, as such term is
defined in the Internal Revenue Service Code (the "Code"), which allows them to
defer receipt of compensation and supplement retirement savings under the
Genesis Health Ventures, Inc. Retirement Plan. In October of 2001, the Non
Qualified Deferred Compensation Plan was amended and made available to all
highly compensated employees as defined by the IRS (in calendar 2002, employees
whose base salary meets or exceeds $90,000).
106
Beginning January 1, 2002, eligible employees will be permitted to defer up to
50% of their base salary and up to 100% of their incentive compensation bonus
each year on a pre-tax basis. Participants will be able to select from several
fund choices and their Plan account will raise or decline in value in accordance
with the performance of the funds they have selected.
In November 1991, we adopted the Execuflex Plan. All Genesis employees that were
Highly Compensated, as such term is defined in the Code, were entitled to
participate in the Execuflex Plan. Pursuant to the terms of the Execuflex Plan,
an eligible employee could authorize us to reduce his / her base compensation or
bonuses and credit such amounts to a retirement account, education account or
fixed period account. A company matching contribution was based on years of
service. In April 2000, the Execuflex Plan was liquidated and all eligible
participant balances were distributed.
Retirement Plan
On January 1, 1989, we adopted an employee Retirement Plan which consists of a
401(k) component and a profit sharing component. The Retirement Plan, which is
intended to be qualified under Sections 401(a) and (k) of the Code, is a cash
deferred profit-sharing plan covering all of our employees (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. Effective January
1, 2000, under the 401(k) component, each eligible employee may elect to
contribute a portion of his current compensation up to the lesser of $10,500 (or
the maximum then permitted by the Code) or 15% (or for highly compensated
employees, 4%) of such employee's annual compensation. We may make a matching
contribution in cash, stock or other property 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. An employee's
eligibility for a matching contribution is contingent upon his employment on the
last day of the calendar year. Our match since January, 1995 has been based on
years of service. An employee who has completed six years of service is matched
$0.75 per $1.00 of contribution up to 4% of his salary. Therefore, if this
employee contributes 4% or more of his salary, the Company contributes 3% of his
salary. If the employee contributes less than 4%, we contribute $0.75 per $1.00
of contribution. If an employee has not completed six years of service, or is
considered a highly compensated employee (as such term is defined in the Code),
he is matched $0.50 per $1.00 of contribution up to 2% of his salary. Under the
profit sharing provisions of the Retirement Plan, we may make an additional
employer contribution in cash, Company stock or other property 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.
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.
An employee's eligibility for profit sharing contribution is contingent upon a
service requirement of a minimum of 1,000 hours and employment on the last day
of the calendar year. All employee contributions to the Retirement Plan are 100%
vested. Our contributions are vested in accordance with a schedule that
generally provides for vesting after five years of service with us (any
non-vested amounts that are forfeited by participants are used to reduce the
following year's contribution by us). Distribution of benefits normally will
commence upon the participant's reaching age 65 (or, if earlier, upon the
participant's death, disability, or termination of employment). Payment of
Retirement Plan benefits will generally be made in a lump sum unless an
alternative equivalent form of benefit is elected. Certain special rules apply
to the distribution of benefits to participants for whom the Retirement Plan has
accepted a transfer of assets from another tax-qualified pension plan.
107
Senior Executive Stock Ownership Program and Executive Loans
In December, 1997 the board of directors approved a Senior Executive Stock
Ownership Program. Under the terms of the program, certain of our senior
executive employees were required to own shares of our common stock having a
market value based upon a multiple of the executive's salary. Each executive was
required to own the shares within three years of the date of the adoption of the
program. Subject to applicable laws, we were authorized to lend funds to one or
more of the senior executive employees for his or her purchase of our common
stock. As of September 30, 2001, we had outstanding loan and accrued interest
balances of approximately $3,200,000 from the senior executives. The note
agreements were amended in fiscal 2000 to adjust the interest rate to 8% simple
interest. Previously, the loans accrued interest based on the market rate at the
date of the loan initiation.
On February 23, 2001, the U.S. Bankruptcy Court ordered that the remaining loans
be forgiven on the first anniversary of our emergence from bankruptcy.
Therefore, effective October 2, 2002, these loans will be forgiven and we will
hold the executives harmless for all and any of the tax consequences resulting
from the forgiveness of the loans.
108
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of November 15, 2001 for:
o each person who we know owns beneficially more than 5% of our common
stock,
o each of our most highly compensated executive officers;
o each of our directors; and
o all of our executive officers and directors as a group.
Unless otherwise noted below, and subject to applicable community property laws,
to our knowledge, each person has sole voting and investment power over the
shares shown as beneficially owned, except to the extent authority is shared by
spouses under applicable law and except as set forth in the footnotes to the
table.
The number of shares beneficially owned by each shareholder is determined under
rules promulgated by the SEC. The information does not necessarily indicate
beneficial ownership for any other purpose. Under these rules, the number of
shares of common stock deemed outstanding includes shares issuable upon exercise
of options and warrants held by the respective person or group which may be
exercised within 60 days after November 15, 2001. For purposes of calculating
each person's or group's percentage ownership, stock options and warrants
exercisable within 60 days after November 15, 2001 are included for that person
or group but not the stock options and warrants of any other person or group.
All addresses for the executive officers and directors are c/o Genesis Health
Ventures, Inc., 101 East State Street, Kennett Square, Pennsylvania 19348.
109
Beneficial ownership, as set forth in the regulations of the SEC, includes
securities owned by or for the spouse, children or certain other relatives of
such person as well as other securities as to which the person has or shares
voting or investment power or has the right to acquire within 60 days after
November 15, 2001. The same shares may be beneficially owned by more than one
person. Beneficial ownership may be disclaimed as to certain of the securities.
-------------------------------------------------------------------------------------------------------------
Shares of Common Percent of
Stock Beneficially Common Stock
Owned Owned
-------------------------------------------------------------------------------------------------------------
Goldman Sachs Group. (1), (2)
85 Broad Street
New York, NY 10004 7,173,461 17.69%
-------------------------------------------------------------------------------------------------------------
James H. Bloem 25,000 *
-------------------------------------------------------------------------------------------------------------
Edwin M. Crawford 25,000 *
-------------------------------------------------------------------------------------------------------------
James D. Dondero 25,000 *
-------------------------------------------------------------------------------------------------------------
Robert H. Fish 25,000 *
-------------------------------------------------------------------------------------------------------------
Dr. Philip P. Gerbino 25,000 *
-------------------------------------------------------------------------------------------------------------
Joseph A. LaNasa III 7,173,461 17.69%
-------------------------------------------------------------------------------------------------------------
James E. Dalton, Jr. 25,000 *
-------------------------------------------------------------------------------------------------------------
Michael R. Walker - -
-------------------------------------------------------------------------------------------------------------
David C. Barr - -
-------------------------------------------------------------------------------------------------------------
Richard R. Howard - -
-------------------------------------------------------------------------------------------------------------
George V. Hager, Jr. - -
-------------------------------------------------------------------------------------------------------------
Robert A. Smith - -
-------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group (26 persons) 7,323,461 18.06%
-------------------------------------------------------------------------------------------------------------
* Less than one percent.
(1) Goldman Sachs & Company is a wholly owned subsidiary of The Goldman
Sachs Group. Goldman Sachs & Co.'s direct beneficial ownership consist
of (a) 6,433,167 shares of new common stock, (b) 362,127 additional
shares which may be acquired upon the exercise of warrants and (c)
71,799 shares of convertible preferred stock which are convertible into
353,167 shares of new common stock. Joseph A. LaNasa III, a vice
president of Goldman Sachs Co., is a member of the successor company's
board of directors and was granted 25,000 shares of stock options in
the successor company. Mr. LaNasa has an understanding with Goldman
Sachs Group pursuant to which he holds the options for the benefit of
the Goldman Sachs Group.
(2) Goldman Sachs & Co. currently owns 15.525% of issued stock warrants.
The remaining stock warrants to be issued will increase their ownership
in warrants by an additional 345,741 shares.
110
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Senior Executive Officer Stock Ownership Plan at September 30,
2001, Genesis had loans outstanding to Messrs. Howard, Barr, Hager and Rubinger
in the principal amounts of $646,889, $820,962, $624,244 and $492,812,
respectively. On February 23, 2001, the U.S. Bankruptcy Court ordered that the
remaining loans be forgiven on the first anniversary of our emergence from
bankruptcy. Therefore, effective October 2, 2002, these loans will be forgiven
and we will hold the executives harmless for all and any of the tax consequences
resulting from the forgiveness of the loans.
Michael R. Walker is chairman of the board for the real estate investment trust
ElderTrust. ElderTrust leases 19 eldercare centers to Genesis at an annual lease
cost of approximately $16,863,000. A majority of ElderTrust's owned real estate
was formerly owned by Genesis and sold to ElderTrust in sale lease back
transactions. Genesis leases office space to Elder Trust at an annual rate of
$46,000. On January 31, 2001, we reached an agreement to restructure their
relationship. The agreement encompasses, among other things, the resolution of
leases and mortgages for 33 properties operated by us either directly or through
joint ventures. Under its agreement, Genesis assumed the ElderTrust leases
subject to certain modifications, including a reduction in our annual lease
expense of $745,000; extended the maturity and reduced the principal balances
for three assisted living properties by $8,500,000 by satisfaction of an
ElderTrust obligation of like amount and acquired a building currently leased
from ElderTrust, which is located on the campus of one of our skilled nursing
facilities, for $1,250,000. In addition, we sold three owned assisted living
properties that are mortgaged to ElderTrust for principal amounts totaling
$19,500,000 in exchange for the outstanding indebtedness. ElderTrust will lease
the properties back to us under a new ten year lease with annual rents of
$791,561. Mr. Walker abstains from voting on all board of director resolutions
involving any of our matters with any ElderTrust entity.
Mr. Joseph A. LaNasa III is an elected member of our board of directors. In this
capacity, he will participate and have the opportunity to vote on matters that
are presented to our board of directors. Mr. LaNasa is employed by Goldman Sachs
Co. as a vice president. Mr. LaNasa has acquired stock options that were granted
under our 2001 Stock Option Plan. He has an understanding with the Goldman Sachs
Group pursuant to which he holds the options for the benefit of the Goldman
Sachs Group. The Goldman Sachs Group beneficially owns 17.69% of the company's
common stock.
Mr. Glenn Adrian is president of our Allegheny Region. The Allegheny Region,
headquarted in Morgantown, West Virginia, oversees management of eldercare
centers in West Virginia, western Pennsylvania, Illinois and Wisconsin. Mr.
Adrian is also a principal owner of Glenmark Holding LLC that leases real estate
to us and our subsidiary companies. Approximately 18,000 square feet of office
space and 16,000 square feet of warehouse space are leased to us at a total
annual cost of approximately $502,000. The leases expire in December, 2004.
111
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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, 2001
(Successor Company) and 2000 (Predecessor Company)
Consolidated Statements of Operations for the years ended
September 30, 2001, 2000 and 1999 (Predecessor Company)
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended September 30, 2001, 2000 and 1999
(Predecessor Company)
Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999 (Predecessor Company)
Notes to Consolidated Financial Statements
(a)(2) Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 2001, 2000 and 1999. Schedule II is included
herein on page 120. 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.
112
No. Description
2.1(1) Stock Purchase Agreement dated October 10, 1997 among Genesis
Health Ventures, Inc. (the "Company"), 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 the
Company, 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(1) Agreement and Plan of Merger dated June 16, 1997 by and among
Genesis ElderCare Corp., Genesis ElderCare Acquisition Corp.,
the Company, and the Multicare Companies, Inc.
2.4(2) Agreement and Plan of Merger, dated as of April 26, 1998, by
and among the Company, V Acquisition Corp. and Vitalink
Pharmacy Services, Inc.
2.5(3) Amendment Number One, dated as of July 7, 1998, to the
Agreement and Plan of Merger, dated as of April 26, 1998, by
and among the Company, V Acquisition Corp. and Vitalink
Pharmacy Services, Inc.
2.6 Agreement and Plan of Merger by and among the Company,
Multicare Acquisition Corp., and Genesis Eldercare Corp. dated
October 2, 2001.
2.7(4) Debtors' Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code dated July 6, 2001.
2.8(5) Technical Amendments to Debtors' Joint Plan of Reorganization
under Chapter 11 of the Bankruptcy Code dated August 27, 2001.
2.9(5) Amendments to Debtors' Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code dated to comply with opinion
on confirmation dated September 13, 2001.
2.10(6) Asset Purchase Agreement dated September 24, 2001, by and
among, Mariner Post-Acute Network, Inc. ("MPAN"), Mariner
Health Group, Inc. ("MHG"), certain corporate entities related
to MPAN and MHG, the Company and NeighborCare Pharmacy
Services, Inc.
3.1 The Company's Amended and Restated Articles of Incorporation,
as filed with the Secretary of the Commonwealth of
Pennsylvania on October 2, 2001.
3.2 The Company's Amended and Restated Bylaws.
4.1(7) Specimen of Common Stock Certificate.
4.2(8) Specimen of the Company's First Mortgage Bonds (Series A) due
2007.
4.3(9) 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 Form of Warrant (included in Exhibit 10.23).
113
4.5 Certificate of Designation of the Series A Convertible
Preferred Stock (included in Exhibit 3.1).
4.6 Indenture for Second Priority Secured Notes due 2007 dated as
of October 2, 2001 between the Company, as issuer, the
Guarantors, and the Bank of New York, as Trustee.
+10.1(10) The Company's Employee Retirement Plan, adopted January 1,
1989, as amended and related Retirement Plan Trust Agreement.
+10.2(8) The Company's Incentive Compensation Program.
+10.3(11) Lease, dated as of January 5, 1989, as amended, by and
between Towson Building Associates Limited Partnership and
Meridian Healthcare, Inc.
+10.4(11) Sublease, dated as of November 30, 1993, by and between
Meridian Healthcare, Inc. and Fairmount Associates, Inc.
+10.5(12) Agreement to Purchase Partnership Interests, dated as of
March 1 1996, by and among Meridian Health, Inc., Fairmont
ssociates, Inc. and MHC Holding Company.
10.6(13) Letter Agreement, dated as of June 16, 1997, between the
Company and Sterns Associates.
10.7(14) Master Agreement for Infusion Therapy Products and Services,
dated June 1, 1991.
10.8(15) Amendment to the Master Agreement for Infusion Therapy
Products and Services, as amended on September 19, 1997 and
April 26, 1998.
10.9(14) Master Pharmacy Consulting Agreement, dated as of June 1,
1991 and amended on September 19, 1997 and April 26, 1998.
10.10(15) Amendment to the Master Pharmacy Consulting Agreement, dated
as of May 31, 1991 amended on September 19, 1997 and
April 26, 1998.
10.11(14) Amendment to the Master Pharmacy Services Consulting
Agreement, as amended on September 19, 1997 and April 26,
1998.
10.12(14) Master Agreement for Pharmacy Services, dated as of June 1,
1991 and amended on September 19, 1997 and April 26, 1998.
10.13(15) Amendments to the Master Agreement for Pharmacy Services, as
amended on September 19, 1997 and April 26, 1998.
10.14(16) Fourth Amended and Restated Credit Agreement, dated as of
August 20, 1999, by and among the Company, the Subsidiaries
of the Company referred to on the signature pages thereto
(and such other subsidiaries of the Company 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.
114
10.15(17) Forbearance Agreement, dated as of March 20, 2000, among
Genesis Health Ventures, Inc., certain Subsidiaries thereof,
Mellon Bank, N.A. as Administrative Agent, Issuer of Letters
of Credit, Collateral Agent and Synthetic Lease Facility
Agent, Citicorp USA, Inc. as Syndication Agent, First Union
National Bank as Documentation Agent, Bank of America, N.A.
as Syndication Agent, and the Lenders and Secured Parties.
10.16(18) Revolving Credit and Guaranty Agreement, dated as of June 22,
2000, among Genesis Health Ventures, Inc., a
Debtor-in-Possession under Chapter 11 of the Bankruptcy Code
as Borrower and Mellon Bank, N.A. as Administrative Agent and
Arranger, First Union National Bank as Syndication Agent and
Goldman Sachs. Credit Partners, L.P., as Documentation Agent.
+10.17 2001 Stock Option Plan.
+10.18 Employment Agreement between the Company and Michael R.
Walker dated as of October 2, 2001.
+10.19 Employment Agreement between the Company and George V. Hager,
Jr. dated as of October 2, 2001.
+10.20 Employment Agreement between the Company and Richard R.
Howard dated as of October 2, 2001.
+10.21 Employment Agreement between the Company and David C. Barr
dated as of October 2, 2001.
+10.22 Employment Agreement between the Company and Robert A. Smith
dated as of July 2, 2001 and the amendment thereto dated
October 2, 2001.
10.23 Warrant Agreement by and between the Company and Mellon
Investor Services LLC as Warrant Agent dated as of October 2,
2001.
10.24 Registration Rights Agreement between the Company, Goldman
Sachs & Co., and Highland Capital Management L.P., dated as
of October 2, 2001, regarding the Company's Common Stock.
10.25 Registration Rights Agreement between the Company, Goldman
Sachs & Co., and Highland Capital Management L.P., dated as
of October 2, 2001, regarding the Company's Second Priority
Secured Notes due 2007.
10.26(19) Second Amendment and Waiver, dated as of February 14, 2001,
to the Revolving Credit and Guarantee Agreement, dated as of
June 22, 2000, among the Company and certain of its lenders.
10.27(20) Third Amendment, dated as of June 29, 2001, to the Revolving
Credit and Guaranty Agreement, dated as of June 22, 2000,
among the Company and certain of its lenders.
10.28 Credit, Security, Guaranty and Pledge Agreement, dated as of
October 2, 2001, among the Company, the Guarantors, the
Lenders, First Union Securities, Inc., as Co-Lead Arranger,
Goldman Sachs Credit Partners L.P., as Co-Lead Arranger and
Syndication Agent, First Union National Bank, as
Administrative Agent and Collateral Agent, General Electric
Capital Corporation, as Collateral Monitoring Agent and
Co-Documentation Agent and CitiCorp USA, Inc., as
Co-Documentation Agent.
115
21 Subsidiaries of the Company
--------------------------
+ Management contract or compensatory plan or arrangement.
1) Incorporated by reference to the Company's Current Report on Form 8-K filed
on October 10, 1997.
2) Incorporated by reference to the Company's Registration Statement on Form
S-4, filed on June 30, 1998 (File No. 333-58221).
3) Incorporated by reference to the Company's Amendment No. 1 to Form S-4
filed July 28, 1998 (333-58221).
4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 19, 2001.
5) Incorporated by reference to the Company's Form T-3 filed on September 18,
2001.
6) Incorporated by reference to the Company's Current Report on Form 8-K filed
on October 9, 2001.
7) Incorporated by reference to the Company's Form 8-A12G filed on October 2,
2001.
8) Incorporated by reference to the Company's Registration Statement on Form
S-1, dated September 4, 1992 (as amended) (Registration No. 33-51670).
9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992.
10) Incorporated by reference to the Company's Registration Statement on Form
S-1, dated June 19, 1991 (Registration No. 33-40007).
11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996 and filed on May 15, 1996.
13) 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. 14) Incorporated by reference to
Vitalink Pharmacy Services, Inc's. Registration Statement on Form S-1/A,
dated February 29, 1992 (File No. 33-43261).
15) Incorporated by reference to Vitalink Pharmacy Services, Inc's. Annual
Report on Form 10-K for the fiscal year ended May 31, 1998 (File No.
001-12729) and filed on August 31, 1998.
16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended June 30, 1999 and filed on September 15, 1999.
17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 and filed on May 15, 2000.
18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 and filed on August 21, 2000.
19) Incorporated by reference to the Company's Quarterly Report Form 10-Q for
the quarter ended December 31, 2000 and filed on March 22, 2001.
20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and filed on August 18, 2001.
116
(b) Reports on Form 8-K
On October 4, 2001, the Company filed a Report on Form 8-K
reporting the Company's emergence from Chapter 11 Bankruptcy
pursuant to the terms of the Plan.
On October 9, 2001, the Company filed a Report on Form 8-K
reporting that a subsidiary of the Company entered into an asset
purchase agreement to acquire substantially all of the assets of
American Pharmaceutical Services, Inc., subject to certain
contingencies.
117
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.:
Under date of December 19, 2001, we reported on the consolidated balance sheet
of Genesis Health Ventures, Inc. and subsidiaries (the "Company") as of
September 30, 2001 (Successor Company) and the accompanying consolidated balance
sheet of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 2000
and related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
September 30, 2001 (Predecessor Company), as contained in the Genesis Health
Ventures, Inc. annual report on Form 10-K for the year 2001. 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.
As discussed in note 3 to the consolidated financial statements, the Company
changed its method of accounting for costs of start-up activities effective
October 1, 1999.
The audit report on the consolidated financial statements of the Company
referred to above contains an explanatory paragraph that states that on October
2, 2001 the Company consummated a Joint Plan of Reorganization (the "Plan")
which had been confirmed by the United States Bankruptcy Court. The Plan
resulted in a change in ownership of the Predecessor Company and, accordingly,
effective September 30, 2001 the Company accounted for the change in ownership
through "fresh-start" reporting. As a result, the consolidated information prior
to September 30, 2001 is presented on a different cost basis than that as of
September 30, 2001 and, therefore, is not comparable.
KPMG LLP
Philadelphia, Pennsylvania
December 19, 2001
118
Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 2001, 2000 and 1999
(in thousands)
Charged to
Balance at Other Balance
Beginning of Charged to Accounts Deductions at End of
Description Period Operations (1) (2) Period
------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2001
Allowance for Doubtful Accounts $78,020 49,901 12,509 57,305 $83,125
Year Ended September 30, 2000
Allowance for Doubtful Accounts $86,067 45,226 13,466 66,739 $78,020
Year Ended September 30, 1999
Allowance for Doubtful Accounts $73,719 54,061 1,500 43,213 $86,067
(1) - In fiscal 2001, represents a reclassification of amounts previously
reported as a direct reduction to trade receivables, rather than an allowance
for doubtful accounts. In fiscal 2000, includes $18,494,000 representing the
beginning of period balance of the Multicare Companies, Inc. Beginning October
1, 2000, Genesis changed its method of accounting for Multicare from the equity
method of accounting to the consolidation method of accounting.
(2) - Represents amounts written off as uncollectible
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf on December 28, 2001 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 28, 2001.
Signature Capacity
/s/ Michael R. Walker
------------------------------------
Michael R. Walker Chairman and Chief Executive
Officer (Principal Executive
Officer
/s/ James H. Bloem
------------------------------------
James H. Bloem Director
/s/ Edwin M. Crawford
------------------------------------
Edwin M. Crawford Director
/s/ James E. Dalton, Jr.
------------------------------------
James E. Dalton, Jr. Director
/s/ James D. Dondero
------------------------------------
James D. Dondero Director
/s/ Robert H. Fish
------------------------------------
Robert H. Fish Director
/s/ Dr. Philip P. Gerbino
------------------------------------
Dr. Philip P. Gerbino Director
/s/ Joseph A. La Nasa III
------------------------------------
Joseph A. LaNasa III Director
/s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr. Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
120