UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (ii) has been subject to such filing requirements
for the past 90 days.
YES [ x ] NO [ ]
Indicate by check mark whether the registrant (1) has filed all 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.
Note: The Company is currently in the process of formulating a plan of
reorganization in connection with the registrant and certain of its
subsidiaries' filings under Chapter 11 of the Bankruptcy Code. Consequently, no
plan of reorganization has been submitted to or confirmed by a bankruptcy court.
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of March 13, 2001: 48,641,194 shares of common stock
TABLE OF CONTENTS
Page
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...............................2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements..................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........33
Part II: OTHER INFORMATION
Item 1. Legal Proceedings....................................................34
Item 2. Changes in Securities................................................37
Item 3. Defaults Upon Senior Securities..................................... 37
Item 4. Submission of Matters to a Vote of Security Holders..................37
Item 5. Other Information....................................................37
Item 6. Exhibits and Reports on Form 8-K.................................... 37
SIGNATURES.............................................................................38
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our
ability or inability to meet our liquidity needs, make
scheduled debt and interest payments, meet expected future
capital expenditure requirements, obtain affordable insurance
coverage and control costs; and the expected effects of
government regulation on reimbursement for services provided
and on the costs of doing business; and
o certain statements in "Legal Proceedings" regarding the
effects of litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our bankruptcy cases and our ability to continue as a going
concern;
o certain covenant amendments to our debtor-in-possession
financing that may be terminated;
o our default under our senior credit agreement and our senior
subordinated and other notes;
o confirmation of a restructuring plan;
o our substantial indebtedness and significant debt service
obligations;
o our ability to retain and attract management and other key
personnel;
o our ability or inability to access capital and the related
cost of the capital necessary to fund future growth;
o the impact of health care reform, including the Medicare
Prospective Payment System ("PPS"), the Balanced Budget
Refinement Act ("BBRA") and the Benefit Improvement and
Protection Act of 2000 ("BIPA") and the adoption of cost
containment measures by the federal and state governments;
o the adoption of cost containment measures by other third party
payors;
o the impact of government regulation, including our ability to
operate in a heavily regulated environment and to satisfy
regulatory authorities;
o the occurrence of changes in the mix of payment sources
utilized by patients to pay for services;
o competition in our industry;
o our ability to consummate or complete development projects or
to profitably operate or successfully integrate enterprises
into our other operations; and
o changes in general economic conditions.
2
Our bankruptcy cases and recurring losses, among other things, raise substantial
doubt about our ability to continue as a going concern.
On June 22, 2000, (the "Petition Date") Genesis Health Ventures, Inc. and
certain of its direct and indirect subsidiaries 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, Genesis' 43.6% owned affiliate, The Multicare Companies, Inc.
("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). Both companies are currently operating as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. These
cases, among other factors such as the Company's recurring losses and defaults
under various loan agreements, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying unaudited condensed
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern with the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
However, as a result of the bankruptcy cases and circumstances relating to this
event, including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. Additionally, a deadline of December 19, 2000 was
established for the assertion of pre-bankruptcy claims against the Company
(commonly referred to as a bar date); including contingent, unliquidated or
disputed claims, which claims could result in an increase in liabilities subject
to compromise as reported in the accompanying consolidated financial statements.
The Company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the Company's
debtor-in-possession financing agreements and the ability to generate sufficient
cash from operations and financing arrangements to meet obligations.
These and other factors have been discussed in more detail in the Company's
periodic reports.
3
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31, September 30,
------------------------------------------------------------------------------------------------------------------------------
2000 2000
------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 19,876 $ 22,948
Restricted investments in marketable securities 31,697 27,899
Accounts receivable, net of allowance for doubtful accounts 456,440 446,614
Inventory 65,011 65,637
Prepaid expenses and other current assets 61,759 54,223
------------------------------------------------------------------------------------------------------------------------------
Total current assets 634,783 617,321
------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,097,178 1,107,346
Notes receivable and other investments 38,881 39,244
Other long-term assets 105,943 105,726
Investments in unconsolidated affiliates 23,871 22,956
Goodwill and other intangibles, net 1,226,035 1,235,306
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,126,691 $ 3,127,899
------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Deficit
Current liabilities not subject to compromise:
Current installments of long-term debt $ 154,500 $ 133,000
Accounts payable and accrued expenses 183,323 180,080
------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 337,823 313,080
------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 2,449,192 2,446,673
Long-term debt 10,359 10,441
Deferred income taxes 54,082 54,082
Deferred gain and other long-term liabilities 50,693 51,670
Minority interest 54,243 56,059
Redeemable preferred stock, including accrued dividends (subject to compromise) 449,349 442,820
Shareholders' deficit:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 589,714 issued and outstanding at
December 31, 2000 and September 30, 2000 6 6
Common stock, par $.02, authorized 200,000,000 shares, issued and
outstanding 48,653,294 and 48,641,194 at December 31, 2000
and September 30, 2000 973 973
Additional paid-in capital 803,202 803,202
Accumulated deficit (1,081,886) (1,049,075)
Accumulated other comprehensive loss (1,102) (1,789)
Treasury stock, at cost (243) (243)
------------------------------------------------------------------------------------------------------------------------------
Total shareholders' deficit (279,050) (246,926)
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 3,126,691 $ 3,127,899
------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Three months ended
December 31
----------------------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Net revenues:
Inpatient services $ 333,699 $ 326,327
Pharmacy and medical supply services 255,574 223,907
Other revenue 39,746 36,650
----------------------------------------------------------------------------------------------------------------------------------
Total net revenues 629,019 586,884
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses 569,001 513,414
Debt restructuring, reorganization costs and other charges 14,209 7,720
Gain on sale of eldercare center (1,770) -
Multicare joint venture restructuring charge - 420,000
Depreciation and amortization 26,926 29,118
Lease expense 9,405 9,527
Interest expense (contractual interest for the
three months ended December 31, 2000 is $61,752) 34,154 52,776
----------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, minority interest, equity in
net loss of unconsolidated affiliates, and
cumulative effect of accounting change (22,906) (445,671)
Income tax benefit - 7,280
----------------------------------------------------------------------------------------------------------------------------------
Loss before minority interest, equity in net loss of
unconsolidated affiliates, and cumulative effect of accounting change (22,906) (438,391)
Minority interest 1,811 7,533
Equity in net loss of unconsolidated affiliates (216) (606)
----------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (21,311) (431,464)
Cumulative effect of accounting change - (10,412)
----------------------------------------------------------------------------------------------------------------------------------
Net loss (21,311) (441,876)
Preferred stock dividends 11,500 8,306
----------------------------------------------------------------------------------------------------------------------------------
Loss attributed to common shareholders $ (32,811) $ (450,182)
----------------------------------------------------------------------------------------------------------------------------------
Per common share data:
Basic and Diluted
Loss before cumulative effect of accounting change $ (0.67) $ (10.37)
Net loss $ (0.67) $ (10.62)
Weighted average shares of common stock 48,641,194 42,389,715
----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Three months ended
December 31,
------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (21,311) $ (441,876)
Net charges included in operations not requiring funds 45,483 458,332
Changes in assets and liabilities:
Accounts receivable (19,251) (15,090)
Accounts payable and accrued expenses (5,348) (33,864)
Other, net (2,313) (6,174)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities before debt
restructuring and reorganization costs (2,740) (38,672)
------------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (11,392) -
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (14,132) (38,672)
------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net purchases of restricted marketable securities (3,111) (11,271)
Proceeds from the sale of an eldercare center 7,010 -
Capital expenditures (11,564) (14,314)
Repayment of advances to unconsolidated affiliates - 3,846
Notes receivable and other investments, and
other long-term asset additions, net (2,081) (11,677)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,746) (33,416)
------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving credit facilities 21,500 39,201
Repayment of long-term debt and payment of sinking fund requirements (694) (22,778)
Proceeds from issuance of long-term debt - 10,000
Proceeds from issuance of common stock - 50,000
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,806 76,423
------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (3,072) 4,335
Cash and equivalents
Beginning of period 22,948 16,364
------------------------------------------------------------------------------------------------------------------------------
End of period $ 19,876 $ 20,699
------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes To Unaudited Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
Genesis Health Ventures, Inc. and its subsidiaries, ("the Company", "Genesis",
"we" or "our") provide a broad range of healthcare services to the geriatric
population, principally within five geographic markets in the eastern United
States. These services include healthcare services traditionally provided in
eldercare centers and specialty medical services; such as rehabilitation
therapy, institutional pharmacy and medical supply services, community-based
pharmacies and management services, provided to independent geriatric care
providers.
Prior to October 1, 1999, Genesis accounted for its 43.6% owned investment in
The Multicare Companies, Inc. ("Multicare") using the equity method of
accounting. Upon consummation of a restructuring transaction, more fully
described in Footnote 5 - Multicare Transaction and its Restructuring, Genesis
consolidated the financial results of Multicare since Genesis has 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 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. For so long as there is a minority interest
in Multicare, the minority shareholders' proportionate share of Multicare's net
income or loss will be recorded through an adjustment to minority interest. If
losses applicable to the minority shareholders exceed the minority interest in
the equity of Multicare, such excess and future losses applicable to the
minority shareholders will be charged to the consolidated results of Genesis.
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 accompanying unaudited condensed consolidated
statements of operations.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 2000. The accompanying unaudited condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. On June 22, 2000, (the "Petition Date") Genesis Health
Ventures, Inc. and certain of its direct and indirect subsidiaries 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, 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). Both
companies are currently operating as debtors-in-possession subject to the
jurisdiction of the Bankruptcy Court. These cases, among other factors such as
the Company's recurring losses and defaults of various loan agreements, raise
substantial doubt about the Company's ability to continue as a going concern.
See Footnote 2 - Voluntary Petitions for Relief Under Chapter 11 of the United
States Bankruptcy Code.
The accompanying unaudited condensed consolidated financial statements are
unaudited and have been prepared in accordance with generally accepted
accounting principles. In the opinion of management, the unaudited condensed
consolidated financial statements include all necessary adjustments (consisting
of normal recurring accruals and, subsequent to the Petition Date, all
adjustments pursuant to the American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7")) for a fair presentation
of the financial position and results of operations for the periods presented.
SOP 90-7 requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the Petition Date and identification of all transactions
and events that are directly associated with the reorganization of the Company.
Pursuant to SOP 90-7, prepetition liabilities are reported on the basis of the
expected amounts of such allowed claims, as opposed to the amounts for which
those claims may be settled. Under a confirmed final plan of reorganization,
those claims may be settled at amounts substantially less than their allowed
amounts.
7
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Voluntary Petition for Relief Under Chapter 11 of the United States
Bankruptcy Code
Except for relief that might otherwise be granted by the Bankruptcy Court
overseeing the Chapter 11 cases, and further subject to certain statutory
exceptions, the automatic stay protection afforded by Chapter 11 of the
Bankruptcy Code cases prevents any creditor or other third parties from taking
any action in connection with any defaults under prepetition debt obligations or
agreements of the Company and those of its subsidiaries or affiliates which are
debtors in the Chapter 11 cases. In connection with the Chapter 11 cases, the
Company expects to develop a plan of reorganization that will be approved by its
creditors and confirmed by the Bankruptcy Court overseeing the Company's Chapter
11 cases. In the event the plan of reorganization is accepted, continuation of
the business thereafter is dependent on the Company's ability to achieve
successful future operations.
The Bankruptcy Court approved, on a final basis, borrowings of up to
$250,000,000 in respect of the Genesis debtor-in-possession financing facility
(the "Genesis DIP Facility") with Mellon Bank, N.A. as Agent and a syndicate of
lenders. The Bankruptcy Court also approved, on a final basis, borrowings of up
to $50,000,000 in respect of the Multicare debtor-in-possession financing
facility (the "Multicare DIP Facility") with Mellon Bank, N.A. as Agent and a
syndicate of lenders. The Genesis and Multicare Debtors intend to utilize the
DIP Facilities of the respective companies and existing cash flows to fund
ongoing operations during the Chapter 11 cases. As of December 31, 2000,
approximately $154,500,000 of borrowings under the Genesis DIP Facility were
outstanding and no borrowings were outstanding under the Multicare DIP Facility.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain prepetition wages, salaries, benefits and other employee
obligations, as well as to continue in place the Debtors' various employee
compensation programs and procedures. On that date, the Bankruptcy Court also
authorized the Debtors to pay, among other claims, the prepetition claims of
certain critical vendors and patients. All other unsecured prepetition
liabilities are classified in the unaudited condensed consolidated balance sheet
as liabilities subject to compromise. The Debtors intend to remain in possession
of their assets and continue in the management and operation of their properties
and businesses, and to pay the post-petition claims of their various vendors and
providers in the ordinary course of business.
8
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of December 31, 2000 and
September 30, 2000 follows (in thousands):
December 31, September 30,
2000 2000
-----------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $ 1,483,898 $ 1,483,898
Senior subordinated notes 617,643 617,488
Revenue bonds and other indebtedness 156,499 155,937
-----------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $ 2,258,040 $ 2,257,323
-----------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 63,918 67,574
Accrued interest (including a $28,331 swap
termination fee) 87,342 86,855
Accrued preferred stock dividends on Series G
Preferred Stock 39,892 34,921
-----------------------------------------------------------------------------------------------------------
$ 2,449,192 $ 2,446,673
-----------------------------------------------------------------------------------------------------------
A summary of the principal categories of debt restructuring and reorganization
costs follows (in thousands):
For the Three
Months Ended
December 31, 2000
-----------------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Legal, accounting, bank and consulting fees $ 10,099
Employee benefit related costs 4,110
-----------------------------------------------------------------------------------------------------------
$ 14,209
-----------------------------------------------------------------------------------------------------------
3. Certain Significant Risks and Uncertainties
Going Concern
In connection with the Chapter 11 cases, the Company expects to develop a plan
of reorganization that will be approved by its creditors and confirmed by the
Bankruptcy Court overseeing the Company's Chapter 11 cases. In the event the
plan of reorganization is accepted, continuation of the business thereafter is
dependent on the Company's ability to achieve successful future operations. The
Company's ability to continue as a going concern is dependent upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
the ability to comply with the terms of the Company's debtor-in-possession
financing agreements and the ability to generate sufficient cash from operations
and financing arrangements to meet obligations. There can be no assurances the
Company will be successful in achieving a confirmed plan of reorganization,
future profitable operations, compliance with the terms of the
debtor-in-possession financing arrangements and sufficient cash flows from
operations and financing arrangements to meet obligations.
On February 14, 2001, Genesis and Multicare received waivers from their
respective lenders (the "DIP Lenders") under the Genesis DIP Facility and the
Multicare DIP Facility (collectively, the "DIP Facilities") for any event of
default regarding certain financial covenants relating to minimum EBITDA
(earnings before interest, taxes, depreciation and amortization) that may have
resulted from asset impairment and other non-recurring charges recorded by
Genesis and Multicare in the fourth quarter of Fiscal 2000. The waivers extend
through December 31, 2000. In addition, Genesis and Multicare received certain
amendments to the DIP Facilities, including an amendment that makes the minimum
EBITDA covenants for both companies less restrictive in future periods (the
"EBITDA Amendment"). The EBITDA Amendment can be terminated by the DIP Lenders
if, on or before April 2, 2001, the Bankruptcy Court has not approved payments
by Genesis and Multicare to the DIP Lenders of amendment fees related thereto.
There can be no assurances that Bankruptcy Court approval for the amendment fee
will be granted, and as a result, there can be no assurances that the DIP
Lenders will not exercise their rights under the DIP Facilities in an event of
default, including but not limited to, precluding future borrowings under the
DIP Facilities.
9
Following the Petition Date, Genesis continues to pay interest on approximately
$1,100,000,000 of certain prepetition senior long term debt obligations, which
has, in part, resulted in Genesis' active borrowing under the Genesis DIP
Facility. Multicare discontinued paying interest on virtually all of its
prepetition long term debt obligations following the Petition Date, which has,
in part, resulted in Multicare's ability to fund capital and working capital
needs through operations without borrowing under the Multicare DIP Facility. An
event of default and any related borrowing restrictions placed under the
respective DIP Facilities could have a material adverse effect on the financial
position of Genesis and Multicare, resulting in factors including, but not
limited to:
o Genesis' inability to continue funding prepetition senior long
term debt interest obligations, which could be disruptive to
ongoing reorganization negotiations;
o Genesis' and / or Multicare's inability to extend required letters
of credit in the ordinary course of business;
o Genesis' and / or Multicare's inability to fund capital and
working capital requirements; and
o Genesis' and / or Multicare's inability to successfully
reorganize.
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care facilities which
utilize our specialty medical services. The 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.
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 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.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by HCFA and applicable federal law. In
most states, pharmacy services are priced at the lower of "usual and customary"
charges or cost (which generally is defined as a function of average wholesale
price and may include a profit percentage) plus a dispensing fee. Certain states
have "lowest charge legislation" or "most favored nation provisions" which
require our institutional pharmacy and medical supply operation
("NeighborCare(R)") 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
rulemaking was substantially modified minimizing the impact of the new rules on
NeighborCare operations.
10
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 out patient 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.
Congress and state governments continue to focus on efforts to curb spending on
health care programs such as Medicare and Medicaid. Such efforts have not been
limited to skilled nursing facilities, but have and will most likely include
other services provided by us, including pharmacy and therapy services. We
cannot at this time predict the extent to which these proposals will be adopted
or, if adopted and implemented, what effect, if any, such proposals will have on
us. Efforts to impose reduced allowances, greater discounts and more stringent
cost controls by government and other payors are expected to continue.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that 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.
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care constituting approximately eleven percent and four
percent of the net revenues of NeighborCare and Genesis, respectively. These
service contracts with HCR Manor Care are the subject of certain litigation. See
"Legal Proceedings".
NeighborCare pharmacy operations provide services to Mariner Post-Acute Network,
Inc. and Mariner Health Group, Inc. (collectively, "Mariner") under certain
service contracts. On January 18, 2000, Mariner filed voluntary petitions under
Chapter 11 with the Bankruptcy Court. To date, the service contracts with
Mariner have been honored; however, Mariner has certain rights under the
protection of the Bankruptcy Court to reject these contracts, which represent
six percent and two percent of the net revenues of NeighborCare and Genesis,
respectively. Genesis participates as a member of the official Mariner unsecured
creditors committee.
11
4. Long-Term Debt
Long-term debt at December 31, 2000 and September 30, 2000 consists of the
following (in thousands):
December 31, September 30,
2000 2000
-------------------------------------------------------------------------------------------------------------
Secured debt
Debtor-in-possession financing facilities $ 154,500 $ 133,000
Credit facilities 1,483,898 1,483,897
Mortgage and other secured debt, including unamortized
debt premium 158,522 158,756
-------------------------------------------------------------------------------------------------------------
Total secured debt 1,796,920 1,775,653
Unsecured debt
Senior subordinated notes, net of unamortized debt discount 617,643 617,488
Notes payable and other unsecured debt 8,336 7,623
-------------------------------------------------------------------------------------------------------------
Total unsecured debt 625,979 625,111
Total Debt 2,422,899 2,400,764
Less:
Current portion of long-term debt (154,500) (133,000)
Long term debt subject to compromise (2,258,040) (2,257,323)
-------------------------------------------------------------------------------------------------------------
Long-term debt $ 10,359 $ 10,441
-------------------------------------------------------------------------------------------------------------
In connection with the Chapter 11 cases, no principal or interest payments have
been made on certain indebtedness incurred by the Company prior to June 22, 2000
("Prepetition Debt"). With regard to Multicare, no principal or interest
payments have been made on $424,110,000 of the Multicare Credit Facility,
$250,000,000 of senior subordinated notes and $53,066,000 of other indebtedness.
Multicare continues to pay interest on an aggregate outstanding balance of
$10,161,000 in connection with two secured loans of subsidiaries not party to
the Chapter 11 cases. With regard to Genesis, no principal or interest payments
have been made on $370,000,000 of senior subordinated notes and approximately
$103,000,000 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 as adequate protection. Interest incurred on
$1,059,788,000 of Prepetition Debt under the Genesis Credit Facility subsequent
to June 22, 2000 continues to be paid as billed. Genesis is also current in
paying interest on balances outstanding under the Genesis Debtor-in-Possession
Financing.
Secured Debt
Genesis Debtor-in- Possession Financing
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by the Company and
those of its subsidiaries and affiliates which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code and (excluding Multicare
and its direct and indirect subsidiaries), b) authorization for the Company to
enter into a secured debtor-in-possession revolving credit facility with a group
of banks led by Mellon Bank, N. A., (the "Genesis DIP Facility") and authorizing
advances in the interim period of up to $150,000,000 out of a possible
$250,000,000 facility. On July 18, 2000, the Bankruptcy Court entered the Final
Order approving the $250,000,000 Genesis DIP Facility and permitting full usage
thereunder. Usage under the Genesis DIP Facility is subject to a Borrowing Base
which provides 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. The Genesis DIP Facility, which is classified as a current liability,
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the Eurodollar Rate ("LIBO Rate") plus 3.75%. Proceeds of
12
the Genesis DIP Facility are 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 prepetition 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
prepetition senior secured lenders in these facilities, respectively. The
Company will continue to pay interest and rent pursuant to these agreements as
adequate protection. Interest is accrued and paid at the Prime Rate as announced
by the administrative agent, or the applicable Adjusted LIBO Rate plus, in
either event, a margin that is dependent upon a certain financial ratio test. As
of December 31, 2000, borrowings outstanding under the Genesis DIP Facility were
$154,500,000. The Genesis DIP Facility provides for the issuance of up to
$25,000,000 in standby letters of credit. As of December 31, 2000, there were
$5,710,000 in letters of credit issued thereunder, for a total utilization under
the Genesis DIP Facility of $160,210,000.
Pursuant to the agreement, the Company and each of its subsidiaries named as
borrowers or guarantors under the Genesis DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Genesis DIP Facility) in all unencumbered pre- and post-
petition property of the Company. The Genesis DIP Facility also has priority
over the liens on all collateral pledged under (i) the Genesis Credit Facility
(later defined), (ii) the Synthetic Lease dated October 7, 1996 and (iii) other
obligations covered by the Collateral Agency Agreement, including any Swap
Agreement, which collateral includes, but is not limited to, all personal
property, including bank accounts and investment property, accounts receivable,
inventory, equipment, and general intangibles, substantially all fee-owned real
property, and the capital stock of Genesis and its borrower and guarantor
subsidiaries.
The Genesis DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Genesis DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Genesis DIP Facility usage amounts and
maximum capital expenditures. The breach of any such provisions, to the extent
not waived or cured within any applicable grace or cure periods, could result in
the Company's inability to obtain further advances under the Genesis DIP
Facility and the potential exercise of remedies by the Genesis DIP Facility
lenders (without regard to the automatic stay unless reimposed by the Bankruptcy
Court) which could materially impair the ability of the Company to successfully
reorganize under Chapter 11.
On February 14, 2001, Genesis received a waiver from its lenders (the "Genesis
DIP Lenders") under the Genesis DIP Facility for any event of default regarding
certain financial covenants relating to minimum EBITDA that may have resulted
from asset impairment and other non-recurring charges recorded by Genesis in the
fourth quarter of Fiscal 2000. The waiver extends through December 31, 2000. In
addition, Genesis received certain amendments to the Genesis DIP Facility,
including an amendment that makes the minimum EBITDA covenant less restrictive
in future periods (the "Genesis EBITDA Amendment"). The Genesis EBITDA Amendment
can be terminated by the Genesis DIP Lenders if on or before April 2, 2001, the
Bankruptcy Court has not approved payment by Genesis to the Genesis DIP Lenders
of an amendment fee related thereto. There can be no assurances that Bankruptcy
Court approval for the amendment fee will be granted, and as a result, there can
be no assurances that the Genesis DIP Lenders will not exercise their rights
under the Genesis DIP Facility in an event of default, including but not limited
to, precluding future borrowings under the Genesis DIP Facility.
Multicare Debtor-in-Possession Financing
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by Multicare and
those of its affiliates which had filed petitions for reorganization under
Chapter 11 of the Bankruptcy Code and b) authorization for Multicare to enter
into a secured debtor-in-possession revolving credit facility with a group of
banks led by Mellon Bank, N. A., (the "Multicare DIP Facility") and authorizing
advances in the interim period of up to $30,000,000 out of a possible
$50,000,000. On July 18, 2000, the Bankruptcy Court entered the Final Order
approving the $50,000,000 Multicare DIP Facility and permitting full usage
13
thereunder. Usage under the Multicare DIP Facility is 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. The Multicare DIP Facility
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP
Facility are available for general working capital purposes. As of December 31,
2000, there has been no usage under the Multicare DIP Facility. The Multicare
DIP Facility provides for the issuance of up to $20,000,000 in standby letters
of credit. As of December 31, 2000, there were $2,383,000 in letters of credit
issued thereunder.
Pursuant to the agreement, Multicare and each of its affiliates named as
borrowers or guarantors under the Multicare DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Multicare DIP Facility) in all unencumbered pre- and post-
petition property of Multicare. The Multicare DIP Facility also has priority
over the liens on all collateral pledged under the prepetition Multicare Credit
Facility (later defined) dated as of October 9, 1997 as amended, which
collateral includes, but is not limited to, all personal property, including
bank accounts and investment property, accounts receivable, inventory,
equipment, and general intangibles, substantially all fee owned real property,
and the capital stock of Multicare and its borrower and guarantor affiliates.
The Multicare DIP financing agreement limits, among other things, Multicare's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Multicare DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Multicare DIP Facility usage amounts
and maximum capital expenditures. The breach of any such provisions, to the
extent not waived or cured within any applicable grace or cure periods, could
result in Multicare's inability to obtain further advances under the Multicare
DIP Facility and the potential exercise of remedies by the Multicare DIP
Facility lenders (without regard to the automatic stay unless reimposed by the
Bankruptcy Court) which could materially impair the ability of Multicare to
successfully reorganize under Chapter 11.
On February 14, 2001, Multicare received a waiver from its lenders (the
"Multicare DIP Lenders") under the Multicare DIP Facility for any event of
default regarding certain financial covenants relating to minimum EBITDA that
may have resulted from asset impairment and other non-recurring charges recorded
in the fourth quarter of Fiscal 2000. The waiver extends through December 31,
2000. In addition, Multicare received certain amendments to the Multicare DIP
Facility, including an amendment that makes the minimum EBITDA covenant less
restrictive in future periods (the "Multicare EBITDA Amendment"). The Multicare
EBITDA Amendment can be terminated by the Multicare DIP Lenders if on or before
April 2, 2001, the Bankruptcy Court has not approved payment by Multicare to the
Multicare Lenders of an amendment fee related thereto. There can be no
assurances that Bankruptcy Court approval for the amendment fee will be granted,
and as a result, there can be no assurances that the Multicare DIP Lenders will
not exercise their rights under the Multicare DIP Facility in an event of
default, including but not limited to, precluding future borrowings under the
Multicare DIP Facility.
Genesis Credit Facility
Genesis and certain of its subsidiaries (excluding Multicare) are borrowers
under a prepetition credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility"). As of December 31, 2000, $1,059,787,000 was outstanding under the
Genesis Credit Facility, which is classified as a liability subject to
compromise.
Subject to liens granted under the Genesis DIP Facility, the Genesis Credit
Facility (as amended) is secured by a first priority security interest in all of
the stock, partnership interests and other equity of all of Genesis' present and
future subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries, and also by first priority security interests in
substantially all personal property, excluding inventory, including accounts
receivable, equipment and general intangibles. Mortgages on substantially all of
Genesis' subsidiaries' real property were also granted.
Genesis is 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, or is accrued and paid when due.
14
Multicare Credit Facility
Multicare and certain of its subsidiaries are borrowers under a prepetition
credit facility totaling $525,000,000 (the "Multicare Credit Facility"). As of
December 31, 2000, $424,110,000 was outstanding under the Multicare Credit
Facility, which is classified as a liability subject to compromise.
Subject to liens granted under the Multicare DIP Facility, The Multicare Credit
Facility (as amended) is secured by first priority security interests (subject
to certain exceptions) in all personal property, including inventory, accounts
receivable, equipment and general intangibles. Mortgages on certain of
Multicare's subsidiaries' real property were also granted.
Multicare is in default under the Multicare Credit Facility and has not made any
scheduled interest payments since March 29, 2000.
Mortgage and Other Secured Debt
At December 31, 2000, the Company has $158,522,000 of mortgage and other secured
debt consisting principally of secured revenue bonds and secured bank loans,
including loans insured by the Department of Housing and Urban Development. With
exception to $10,359,000, the aggregate balance of mortgage and other secured
debt is classified as liabilities subject to compromise.
Unsecured Debt
Senior Subordinated Notes
At December 31, 2000, the following senior subordinated notes, net of discounts,
were outstanding (in thousands):
Issuer Maturity Date Rate Outstanding Balance
-------------------------------------------------------------------------------------------------------------
Genesis 2009 9.88% $120,979
Genesis 2006 9.25% 125,000
Genesis 2005 9.75% 120,000
Genesis Matured and untendered 9.38% 1,590
Multicare 2007 9.00% 249,074
-------------------------------------------------------------------------------------------------------------
$617,643
Genesis and Multicare are in default of the indenture agreements of the above
referenced senior subordinated notes. The outstanding balances of the senior
subordinated notes are classified as liabilities subject to compromise.
Notes Payable and Other Unsecured Debt
Notes payable and other unsecured debt principally consists of seller notes due
to the previous owners of small businesses acquired.
15
5. Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors."
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated October 9, 1997 (the "Multicare
Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a
put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement")
relating to their respective ownership interests in Genesis ElderCare Corp.
pursuant to which, among other things, Genesis had the option to purchase (the
"Call") Genesis ElderCare Corp. common stock held by Cypress, TPG and Nazem at a
price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG
and Nazem had the option to sell (the "Put") such Genesis ElderCare Corp. common
stock at a price determined pursuant to the Put/Call Agreement.
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis Common Stock and a ten year warrant to purchase 2,000,000 shares of
Genesis Common Stock at an exercise price of $5.00 per share.
In connection with the restructuring transaction, Genesis recorded a non-cash
charge of approximately $420,000,000 during the quarter ended December 31, 1999,
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 the Company's 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.
16
7. Loss Per Share
The following table sets forth the computation of basic and diluted loss
attributed to common shares (in thousands, except per share data):
Three Three
Months Months
Ended Ended
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per Share:
Loss before cumulative effect of accounting change $ (32,811) $ (439,770)
Cumulative effect of accounting change - (10,412)
--------------------------------------------------------------------------------------------------------
Net loss attributed to common shareholders $ (32,811) $ (450,182)
--------------------------------------------------------------------------------------------------------
Weighted average shares 48,641 42,390
--------------------------------------------------------------------------------------------------------
Loss per share before cumulative effect of accounting change $ (0.67) $ (10.37)
Cumulative effect of accounting change - (0.25)
--------------------------------------------------------------------------------------------------------
Loss per share $ (0.67) $ (10.62)
--------------------------------------------------------------------------------------------------------
For the three months ended December 31, 2000 and 1999, no exercise of stock
options is assumed since their effect is antidilutive.
8. Comprehensive Loss
The following table sets forth the computation of comprehensive loss (in
thousands):
Three Three
Months Months
Ended Ended
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------
Loss attributed to common shareholders $ (32,811) $ (450,182)
Unrealized gain (loss) on marketable securities 687 (261)
--------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (32,124) $ (450,443)
--------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss, which is composed of net unrealized gains
and losses on marketable securities, was ($1,102,000) and ($1,789,000) at
December 31, 2000 and September 30, 2000, respectively.
9. Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities",
("SOP 98-5") which requires the costs of start-up activities be expensed as
incurred, rather than capitalized and subsequently amortized. The adoption of
SOP 98-5 resulted in the write-off of $10,412,000, net of tax, of unamortized
start-up costs and is reflected as a cumulative effect of accounting change in
the unaudited condensed consolidated statements of operations for the three
months ended December 31, 1999.
17
10. 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(R) 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 61 institutional
pharmacies (three are jointly-owned) and 23 medical supply and home medical
equipment distribution centers (four are jointly-owned) located in its various
market areas. In addition, the Company operates 32 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
2000 were generated through external contracts with independent healthcare
providers with the balance attributable to centers owned or leased by the
Company, including the jointly owned Multicare centers.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at its 198 owned and
leased eldercare centers, including the jointly-owned Multicare 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 of the
consolidated company. 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, consulting services, homecare services, physician
services, transportation services, diagnostic services, hospitality services,
respiratory health services, group purchasing fees and other healthcare related
services. In addition, the "Other" column includes the elimination of
intersegment transactions.
18
Pharmacy
(in thousands) and
Medical
Supply Inpatient
Three months ended Services Services Other Total
-----------------------------------------------------------------------------------------------------------
December 31, 2000
-----------------------------------------------------------------------------------------------------------
Revenue from external customers $ 255,574 $ 333,699 $ 39,746 $ 629,019
Revenue from intersegment
customers 22,170 - 47,015 69,185
Operating income (1) 23,206 35,236 1,576 60,018
Total assets 1,057,982 1,756,407 312,302 3,126,691
-----------------------------------------------------------------------------------------------------------
December 31, 1999
-----------------------------------------------------------------------------------------------------------
Revenue from external customers $ 223,907 $ 326,327 $ 36,650 $ 586,884
Revenue from intersegment
customers 26,321 - 40,299 66,620
Operating income (1) 25,860 39,208 8,402 73,470
Total assets 1,090,280 1,811,692 644,378 3,546,350
-----------------------------------------------------------------------------------------------------------
(1) Operating income is defined as income before interest, income taxes,
depreciation, amortization, rent and nonrecurring items. The Company's segment
information does not include an allocation of overhead costs, which are between
3% - 4% of consolidated net revenues.
11. Restricted Assets
The Company's cash balance at December 31, 2000 was approximately $19,900,000 of
which approximately $19,100,000 is held by Multicare. As a result of certain
restrictions placed on Multicare and Genesis by their respective senior credit
agreements and the automatic stay provisions imposed by the Bankruptcy Court,
Genesis and Multicare are precluded from freely transferring funds through
intercompany loans, advances or cash dividends. Consequently, the $19,100,000 of
cash and other assets held by Multicare at December 31, 2000 is not available to
Genesis.
At December 31, 2000, the Company reported restricted investments in marketable
securities of $31,697,000 which are held by Liberty Health Corp. LTD. ("LHC"),
Genesis' 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, Genesis and LHC are precluded from freely
transferring funds through intercompany loans, advances or cash dividends. LHC
is not a party to the Chapter 11 cases.
12. Subsequent Event
Effective January 31, 2001, we restructured our relationship with ElderTrust, a
Maryland healthcare real estate investment trust. The related 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 previously 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 were mortgaged to ElderTrust for principal
amounts totaling $19,500,000 in exchange for the outstanding indebtedness.
ElderTrust leases the properties back to Multicare under a new ten-year lease
with annual rents of $792,000. These transactions will be recorded in the
Company's second fiscal quarter ending March 31, 2001.
19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since we began operations in July 1985, we have focused our efforts on providing
an expanding array of specialty medical services to elderly customers. We
generate revenues primarily from two sources: pharmacy and medical supply
services, and inpatient services; however, we also derive revenue from other
sources.
We include in inpatient services revenue all room and board charges and
ancillary service revenue for our eldercare customers at our 198 owned, leased
and Multicare jointly-owned eldercare centers.
We provide pharmacy and medical supply services through our NeighborCare(R)
pharmacy subsidiaries. Included in pharmacy and medical supply service revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. We
provide these services through 61 institutional pharmacies (three are
jointly-owned) and 23 medical supply and home medical equipment distribution
centers (four are jointly-owned) located in our various market areas. In
addition, we operate 32 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, 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
Liquidity and Going Concern Assumption
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern with the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. However, as a result of the Bankruptcy cases and
circumstances relating to this event, including the Company's leveraged
financial structure, losses from operations and defaults under various loan
agreements, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. The Company's ability to continue as a going
concern is dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, the ability to comply with the
terms of the Company's debtor-in-possession financing agreements and the ability
to generate sufficient cash flow.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to individuals. The changes have 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 less
than fair 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.
20
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
(the "Merger"). In connection with their investments in the common stock of
Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a
stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders
Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call
agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to
their respective ownership interests in Genesis ElderCare Corp. pursuant to
which, among other things, Genesis had the option to purchase (the "Call")
Genesis ElderCare Corp. common stock held by Cypress, TPG and Nazem at a price
determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and
Nazem had the option to sell (the "Put") such Genesis ElderCare Corp. common
stock at a price determined pursuant to the Put/Call Agreement.
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis Common Stock and a ten year warrant to purchase 2,000,000 shares of
Genesis Common Stock at an exercise price of $5.00 per share.
ElderTrust Transactions
Effective January 31, 2001, we restructured our relationship with ElderTrust, a
Maryland healthcare real estate investment trust. The related 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 previously 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 were mortgaged to ElderTrust for principal
amounts totaling $19,500,000 in exchange for the outstanding indebtedness.
ElderTrust leases the properties back to Multicare under a new ten-year lease
with annual rents of $792,000. These transactions will be recorded in the
Company's second fiscal quarter ending March 31, 2001.
21
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. The Company recorded a loss on sale of the Ohio properties of
approximately $7,922,000.
Results of Operations
Three months ended December 31, 2000 compared to three months ended December
31, 1999
The Company's total net revenues for the quarter ended December 31, 2000 were
$629,019,000 compared to $586,884,000 for the quarter ended December 31, 1999,
an increase of $42,135,000, or 7%.
Inpatient service revenue increased $7,372,000, or 2%, to $333,699,000 from
$326,327,000. Of this increase, approximately $3,100,000 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") and
approximately $24,000,000 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. The Company's average rate per patient day for
the quarter ended December 31, 2000 was $161 compared to $148 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 on our average Medicare rate per
patient day, which increased to $316 for the quarter ended December 31, 2000
compared to $289 for the comparable period in the prior year. The Company's
revenue Quality Mix for the quarter ended December 31, 2000 was 50.1% compared
to 48.6% for the comparable period in the prior year. These rate and mix
increases are offset by a decrease in revenue of approximately $19,700,000
resulting from the sale, closure or lease terminations of certain eldercare
centers. Total patient days decreased 133,431 to 2,077,408 during the quarter
ended December 31, 2000 compared to 2,210,839 during the comparable period last
year. Of this decrease, 149,499 patient days are attributed to the sale, closure
or lease terminations of certain eldercare centers; offset by the consolidation
of 20,825 patient days of two eldercare centers following the P&R Transaction
and the remaining decrease of 4,757 patient days is the result of a decrease in
overall occupancy.
Pharmacy and medical supply service revenue was $255,574,000 for the quarter
ended December 31, 2000 compared to $223,907,000 for the quarter ended December
31, 1999. Pharmacy and medical supply service revenues increased approximately
$31,667,000 due primarily to net revenue growth with external customers.
Other revenues increased approximately $3,096,000 from $36,650,000 to
$39,746,000. Approximately $4,100,000 of this increase is attributed to the
revenues of a respiratory health services business acquired in the third fiscal
quarter of 2000, offset by a decline in revenue of approximately $1,400,000
resulting from the termination of certain management contracts with AGE
Institute. The remaining increase of approximately $400,000 is attributed to net
growth in revenues of other service businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $55,587,000, or 11%, to $569,001,000 for the
quarter ended December 31, 2000 from $513,414,000 for the comparable period in
the prior year. This net increase is attributed to approximately $3,800,000 from
the consolidation of a respiratory health services business acquired in the
third fiscal quarter of 2000, approximately $2,800,000 is attributed to the
consolidation of the operating expenses of two eldercare centers following the
P&R Transaction, approximately $6,400,000 is attributed to increases in the cost
of certain self-insured employee health coverage, and is offset by $17,900,000
of operating cost savings resulting from the sale, closure or lease terminations
of certain eldercare centers. The remaining increase in operating expenses of
approximately $60,487,000 is attributed to growth in labor related costs, cost
of sales, property and liability insurance related costs and general
inflationary cost increases.
22
The acceleration in the operating cost growth rate (approximately 11.8%) over
the revenue growth rate (approximately 9.6%) is attributed to continued pressure
on wage and benefit related costs in all of our operating businesses. The
Company and the industry continue to experience significant shortages in
qualified professional clinical staff. As the demand for these services
continually exceeds the supply of available and qualified staff, the Company 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. 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, the Company and 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.
During the three months ended December 31, 2000 and 1999, the Company recorded
charges in connection with the Multicare joint venture restructuring; debt
restructuring and reorganization costs; and a gain on the sale of an eldercare
center. The following table and discussion provides additional information on
these charges.
2000 1999
------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring $ - $ 420,000,000
------------------------------------------------------------------------------------------------------
Professional, bank and other fees in connection with the
Company's Chapter 11 reorganization $ 10,098,938 $ -
Employee benefit related costs 4,109,999 -
Stock option redemption program - 7,720,000
------------------------------------------------------------------------------------------------------
Total debt restructuring, reorganization costs and other
charges $ 14,208,937 $ 7,720,000
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Gain on sale of an eldercare center $ (1,770,141) $ -
------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring
In connection with the restructuring transaction in the three months ended
December 31, 1999, Genesis 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.
23
Debt Restructuring, Reorganization Costs and Other Charges
During the three months ended December 31, 2000, we incurred legal, bank,
accounting and other costs of approximately $10,100,000 in connection with the
Chapter 11 cases. In addition, we incurred costs of $4,100,000 for certain
salary and benefit related costs, principally for a court approved special
recognition program. The Company expects that such debt restructuring and
reorganization costs will continue at current, and perhaps accelerated, levels
throughout the course of our Chapter 11 cases.
During the three months ended December 31, 1999, 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 of fiscal 2000 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.
Gain on Sale
In October of 2000, the Company sold an idle 232 bed eldercare center for cash
consideration of approximately $7,000,000. The sale resulted in a net gain of
approximately $1,800,000.
Depreciation and amortization expense decreased $2,192,000, 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 $122,000, of which approximately $678,000 is attributed
to the sale, closure or lease terminations of certain eldercare centers, offset
by an increase of approximately $304,000 attributed to the lease expense of two
eldercare centers following the P&R Transaction. The remaining increase of
approximately $500,000 is attributed to growth in the cost of a variable rate
lease financing facility and scheduled increases in fixed lease rates.
Interest expense decreased $18,622,000. In accordance with SOP 90-7, the Company
ceased accruing interest following the Petition Date on certain long-term debt
instruments classified as liabilities subject to compromise. The Company's
contractual interest expense for the three months ended December 31, 2000 was
$61,752,000, leaving $27,598,000 of interest expense unaccrued for the three
months ended December 31, 2000 as a result of the Chapter 11 filings. The
relative increase in contractual interest expense of $8,976,000 for the three
months ended December 31, 2000 compared to the same period in the prior year is
the result of additional net capital and working capital borrowings and an
increase in the Company's weighted average borrowing rate prompted by increases
in market rates of interest and higher interest rate spreads charged by the
Company's lenders in connection with the Company's worsening financial condition
and the Chapter 11 cases.
As a result of the Company's Chapter 11 filings and uncertainties regarding its
ability to generate sufficient taxable income to utilize future net operating
loss carryforwards, the Company recorded a valuation allowance on all
incremental net operating loss carryforward benefits during the three months
ended December 31, 2000 and consequently, did not report an income tax benefit
for the three months ended December 31, 2000. The Company reported a $7,280,000
tax benefit for the three months ended December 31, 1999.
Equity in net loss of unconsolidated affiliates for the three months ended
December 31, 2000 was $216,000 compared to $606,000 for the comparable period in
the prior year, which is attributed to changes in the earnings / losses reported
by the Company's unconsolidated affiliates.
24
Minority interest decreased $5,722,000 during the three months ended December
31, 2000 to $1,811,000 compared to $7,533,000 for the comparable period in the
prior year. This decrease is principally attributed to a lower net loss reported
by Multicare and the resulting Genesis' Multicare joint venture partners' 56.4%
interest in the Multicare net loss for the period. The Multicare net loss was
reduced during the three months ended December 31, 2000 compared to the
comparable period in the prior year, principally due to lower interest expense
recognition under SOP 90-7.
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 three months ended December 31, 1999, the
cumulative effect of expensing all unamortized start-up costs at October 1, 1999
was $16,400,000 pre tax and $10,400,000 after tax.
Preferred stock dividends increased $3,194,000 to $11,500,000 during the three
months ended December 31, 2000 compared to $8,306,000 for the comparable period
in the prior year. This increase is attributed to a full three months of accrued
dividends for the three months ended December 31, 2000, in connection with the
issuance of Series H and Series I Preferred Stock in mid-November, 1999,
compared to a partial period for the three months ended December 31, 1999.
Liquidity and Capital Resources
Chapter 11 Bankruptcy and Debtor-In-Possession Financing
On June 22, 2000 (the "Petition Date"), the Company and substantially all of its
subsidiaries and affiliates, filed voluntary petitions in the United States
Bankruptcy Court for the District of Delaware under the Bankruptcy Code. While
this action constituted a default under the Company's and such subsidiaries and
affiliates various financing arrangements, Section 362(a) of the Bankruptcy Code
imposes an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by the Company and
those of its subsidiaries and affiliates which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code and (excluding Multicare
and its direct and indirect subsidiaries), b) authorization for Genesis to enter
into a secured debtor-in-possession revolving credit facility with a group of
banks led by Mellon Bank, N. A., (the "Genesis DIP Facility") and authorizing
advances in the interim period of up to $150,000,000 out of a possible
$250,000,000 facility. On July 18, 2000, the Bankruptcy Court entered the Final
Order approving the $250,000,000 Genesis DIP Facility and permitting full usage
thereunder. Usage under the Genesis DIP Facility is subject to a Borrowing Base
which provides 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. The Genesis DIP Facility, which is classified as a current liability,
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the Eurodollar ("LIBO") Rate plus 3.75%. Proceeds of the
Genesis DIP Facility are 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 prepetition 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
prepetition senior secured lenders in these facilities, respectively. The
Company will continue to pay interest and rent pursuant to these agreements as
adequate protection. Interest is accrued and paid at the Prime Rate as announced
by the administrative agent, or the applicable Adjusted LIBO Rate plus, in
either event, a margin that is dependent upon a certain financial ratio test. As
of December 31, 2000 borrowings outstanding under the Genesis DIP Facility were
$154,500,000. As of March 13, 2001 borrowings outstanding under the Genesis DIP
Facility were $184,000,000. The Genesis DIP Facility provides for the issuance
of up to $25,000,000 in standby letters of credit. As of March 13, 2001 there
were $3,300,000 in letters of credit issued thereunder for a total utilization
under the Genesis DIP Facility of $187,300,000.
25
Pursuant to the agreement, the Company and each of its subsidiaries named as
borrowers or guarantors under the Genesis DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Genesis DIP Facility) in all unencumbered pre- and post-
petition property of the Company. The Genesis DIP Facility also has priority
over the liens on all collateral pledged under (i) the Genesis Credit Facility,
(ii) the Synthetic Lease dated October 7, 1996 and (iii) other obligations
covered by the Collateral Agency Agreement, including any Swap Agreement, which
collateral includes, but is not limited to, all personal property, including
bank accounts and investment property, accounts receivable, inventory,
equipment, and general intangibles, substantially all fee owned real property,
and the capital stock of Genesis and its borrower and guarantor subsidiaries.
The Genesis DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Genesis DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Genesis DIP Facility usage amounts and
maximum capital expenditures. The breach of any such provisions, to the extent
not waived or cured within any applicable grace or cure periods, could result in
the Company's inability to obtain further advances under the Genesis DIP
Facility and the potential exercise of remedies by the Genesis DIP Facility
lenders (without regard to the automatic stay unless reimposed by the Bankruptcy
Court) which could materially impair the ability of the Company to successfully
reorganize under Chapter 11.
On February 14, 2001, Genesis received a waiver from its lenders (the "Genesis
DIP Lenders") under the Genesis DIP Facility for any event of default regarding
certain financial covenants relating to minimum EBITDA that may have resulted
from asset impairment and other non-recurring charges recorded by Genesis in the
fourth quarter of Fiscal 2000. The waiver extends through December 31, 2000. In
addition, Genesis received certain amendments to the Genesis DIP Facility,
including an amendment that makes the minimum EBITDA covenant less restrictive
in future periods (the "Genesis EBITDA Amendment"). The Genesis EBITDA Amendment
can be terminated by the Genesis DIP Lenders if on or before April 2, 2001, the
Bankruptcy Court has not approved payment by Genesis to the Genesis DIP Lenders
of an amendment fee related thereto. There can be no assurances that Bankruptcy
Court approval for the amendment fee will be granted, and as a result, there can
be no assurances that the Genesis DIP Lenders will not exercise their rights
under the Genesis DIP Facility in an event of default, including but not limited
to, precluding future borrowings under the Genesis DIP Facility.
Following the Petition Date, Genesis continues to pay interest on approximately
$1,100,000 of certain prepetition senior long term debt obligations, which has,
in part, resulted in Genesis' active borrowing under the Genesis DIP Facility.
An event of default and any related borrowing restrictions placed under the
Genesis DIP Facility could have a material adverse effect on the financial
position of Genesis, resulting in factors, including, but not limited to,
Genesis' inability to:
o continue funding prepetition senior long term debt interest
obligations, which could be disruptive to ongoing
reorganization negotiations;
o extend required letters of credit in the ordinary course of
business;
o fund capital and working capital requirements; and
o successfully reorganize.
On June 22, 2000, Multicare and substantially all of its affiliates, filed
voluntary petitions in the United States Bankruptcy Court for the District of
Delaware under the Bankruptcy Code. While this action constituted a default
under Multicare's and such affiliates various financing arrangements, Section
362(a) of the Bankruptcy Code imposes an automatic stay that generally precludes
creditors and other interested parties under such arrangements from taking any
remedial action in response to any such resulting default without prior
Bankruptcy Court approval. Among the orders entered by the Bankruptcy Court on
June 23, 2000 were orders approving on an interim basis, a) the use of cash
collateral by Multicare and those of its affiliates which had filed petitions
for reorganization under Chapter 11 of the Bankruptcy Code and (b) authorization
for Multicare to enter into a secured debtor-in-possession revolving credit
26
facility with a group of banks led by Mellon Bank, N. A., (the "Multicare DIP
Facility") and authorizing advances in the interim period of up to $30,000,000
out of a possible $50,000,000. On July 18, 2000, the Bankruptcy Court entered
the Final Order approving the $50,000,000 Multicare DIP Facility and permitting
full usage thereunder. Usage under the Multicare DIP Facility is 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. The Multicare DIP Facility
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP
Facility are available for general working capital purposes. Through March 13,
2001, there has been no usage under the Multicare DIP Facility, other than for
standby letters of credit. The Multicare DIP Facility provides for the issuance
of up to $20,000,000 in standby letters of credit. As of March 13, 2001 there
were $2,200,000 in letters of credit issued thereunder.
The obligations of Multicare under the Multicare DIP Facility are jointly and
severally guaranteed by each of Multicare's filing affiliates. Pursuant to the
agreement, Multicare and each of its affiliates named as borrowers or guarantors
under the Multicare DIP Facility have granted to the lenders first priority
liens and security interests (subject to valid, perfected, enforceable and
nonavoidable liens of record existing immediately prior to the petition date and
other carve-outs and exceptions as fully described in the Multicare DIP
Facility) in all unencumbered pre- and post-petition property of Multicare. The
Multicare DIP Facility also has priority over the liens on all collateral
pledged under the Multicare Credit Facility, which collateral includes, but is
not limited to, all personal property, including bank accounts and investment
property, accounts receivable, inventory, equipment, and general intangibles,
substantially all fee owned real property, and the capital stock of Multicare
and its borrower and guarantor affiliates.
The Multicare DIP financing agreement limits, among other things, Multicare's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Multicare DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Multicare DIP Facility usage amounts
and maximum capital expenditures. The breach of any such provisions, to the
extent not waived or cured within any applicable grace or cure periods, could
result in Multicare's inability to obtain further advances under the Multicare
DIP Facility and the potential exercise of remedies by the Multicare DIP
Facility lenders (without regard to the automatic stay unless reimposed by the
Bankruptcy Court) which could materially impair the ability of Multicare to
successfully reorganize under Chapter 11.
On February 14, 2001, Multicare received a waiver from its lenders (the
"Multicare DIP Lenders") under the Multicare DIP Facility for any event of
default regarding certain financial covenants relating to minimum EBITDA that
may have resulted from asset impairment and other non-recurring charges recorded
in the fourth quarter of Fiscal 2000. The waiver extends through December 31,
2000. In addition, Multicare received certain amendments to the Multicare DIP
Facility, including an amendment that makes the minimum EBITDA covenant less
restrictive in future periods (the "Multicare EBITDA Amendment"). The Multicare
EBITDA Amendment can be terminated by the Multicare DIP Lenders if on or before
April 2, 2001, the Bankruptcy Court has not approved payment by Multicare to the
Multicare Lenders of an amendment fee related thereto. There can be no
assurances that Bankruptcy Court approval for the amendment fee will be granted,
and as a result, there can be no assurances that the Multicare DIP Lenders will
not exercise their rights under the Multicare DIP Facility in an event of
default, including but not limited to, precluding future borrowings under the
Multicare DIP Facility.
Multicare discontinued paying interest on virtually all of its prepetition long
term debt obligations following the Petition Date, which has, in part, resulted
in Multicare's ability to fund capital and working capital needs through
operations without borrowing under the Multicare DIP Facility. An event of
default and any related borrowing restrictions placed under the Multicare DIP
Facility could have a material adverse effect on the financial position of
Multicare, and could result in factors including, but not limited to,
Multicare's inability to:
o extend required letters of credit in the ordinary course of
business;
o fund capital and working capital requirements; and
o successfully reorganize.
27
Under the Bankruptcy Code, actions to collect prepetition indebtedness are
enjoined and other contractual obligations generally may not be enforced against
the Company. In addition, the Company may reject executory contracts and lease
obligations. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. If the Company
is able to successfully reorganize, substantially all unsecured liabilities as
of the petition date would be subject to modification under a plan of
reorganization to be voted upon by all impaired classes of creditors and equity
security holders and approved by the Bankruptcy Court.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain prepetition wages, salaries, benefits and other employee
obligations, as well as to continue in place the Debtors' various employee
compensation programs and procedures. On that date, the Bankruptcy Court also
authorized the Debtors to pay, among other claims, the prepetition claims of
certain critical vendors and patients. All other unsecured prepetition
liabilities are classified in the consolidated balance sheet as liabilities
subject to compromise. The Debtors intend to remain in possession of their
assets and continue in the management and operation of their properties and
businesses, and to pay the post-petition claims of their various vendors and
providers in the ordinary course of business.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of December 31, 2000 and
September 30, 2000 follows (in thousands):
December 31, September 30,
2000 2000
----------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $1,483,898 $1,483,898
Senior subordinated notes 617,643 617,488
Revenue bonds and other indebtedness 156,499 155,937
----------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $2,258,040 $2,257,323
----------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 63,918 67,574
Accrued interest (including a $28,331 swap
termination fee) 87,342 86,855
Accrued preferred stock dividends on Series G
Preferred Stock 39,892 34,921
----------------------------------------------------------------------------------------------------------
$2,449,192 $2,446,673
----------------------------------------------------------------------------------------------------------
28
A summary of the principal categories of debt restructuring and reorganization
costs follows (in thousands):
For the Three
Months Ended
December 31, 2000
-------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Legal, accounting, bank and consulting fees $ 10,099
Employee benefit related costs, including severance 4,110
------------------------------------------------------------------------------
$ 14,209
------------------------------------------------------------------------------
General Operations
At December 31, 2000, the Company reported working capital of $296,960,000 as
compared to working capital of $304,241,000 at September 30, 2000. Genesis' cash
flow from operations for the three months ended December 31, 2000 was a use of
cash of $14,132,000 compared to a use of cash of $38,672,000 for the three
months ended December 31, 1999. The improvement in operating cash flows is
principally due to the timing of payments to vendors and lenders, offset by
payments made during the three months ended December 31, 2000 of approximately
$11,400,000 for debt restructuring and reorganization costs. The Company's days
sales outstanding for the three months ended December 31, 2000 were unchanged
from the three months ended September 30, 2000 at 67 days. The Company's cash
balance at December 31, 2000 was approximately $19,900,000, of which
approximately $19,100,000 is held by Multicare. As a result of certain
restrictions placed on Multicare and Genesis by their respective senior credit
agreements and the automatic stay provisions imposed by the Bankruptcy Court,
Genesis and Multicare are precluded from freely transferring funds through
intercompany loans, advances or cash dividends. Consequently, the $19,100,000 of
cash held by Multicare at December 31, 2000 is not available to Genesis.
At December 31, 2000, the Company reported restricted investments in marketable
securities of $31,697,000, which are held by Liberty Health Corp. LTD. ("LHC"),
Genesis' 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, Genesis and LHC are precluded from freely
transferring funds through intercompany loans, advances or cash dividends. LHC
is not a party to the Chapter 11 cases.
Investing activities for the three months ended December 31, 2000 include
approximately $11,600,000 of capital expenditures compared to approximately
$14,300,000 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, the Company expects to continue to incur capital
expenditure costs at levels at or above those for the three months ended
December 31, 2000 for the foreseeable future. Cash flows provided by investing
activities for the three months ended December 31, 2000 include approximately
$7,000,000 of cash proceeds from the sale of an eldercare center located in the
Company's Chesapeake region.
Financing activities for the three months ended December 31, 2000 include net
borrowings of $21,500,000 under the Genesis DIP Facility.
The Company incurred approximately $14,209,000 of debt restructuring and
reorganization costs for the three months ended December 31, 2000. The Company
anticipates that such costs will be incurred throughout the duration of the
bankruptcy.
29
The Company has prepetition long-term debt obligations of approximately
$2,258,040,000 at December 31, 2000, which are classified as liabilities subject
to compromise. Due to the failure to make required debt service payments, meet
certain financial covenants and the commencement of the Chapter 11 cases, the
Company is in default on substantially all of the related debt agreements. The
automatic stay protection afforded by the Chapter 11 cases prevents any action
from being taken with regard to any of the defaults under the prepetition debt
agreements. The Company continues to pay interest on approximately
$1,059,000,000 of the prepetition debt obligations as adequate protection.
For the three months ended December 31, 2000, the Company incurred approximately
$9,400,000 of lease obligation costs and expects to continue to incur lease
costs at levels approximating those for the three months ended December 31, 2000
for the foreseeable future.
The Company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the Company's
debtor-in-possession financing agreements and the ability to generate sufficient
cash from operations and financing arrangements to meet obligations. There can
be no assurances the Company will be successful in achieving a confirmed plan of
reorganization, future profitable operations, compliance with the terms of the
debtor-in-possession financing arrangements and sufficient cash flows from
operations and financing arrangements to meet obligations.
Although management believes that cash flow from operations, coupled with
available borrowings under the DIP Facilities will be sufficient to fund the
Companies' working capital requirements throughout the bankruptcy proceedings,
there can be no assurances that such capital resources will be sufficient to
fund operations until such time as the Company is able to propose a plan or
reorganization that will be acceptable to creditors and confirmed by the
Bankruptcy Court.
Insurance
The Company has 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 its
insurance programs and the timing of funding new policies. 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. In addition, as a result of the
Company's current financial condition it is unable to continue certain
self-insured programs and has replaced these programs with outside insurance
carriers.
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 a $500,000 per
claim retention, except in Florida, where the retention is $2,500,000 per claim.
On an annual basis, the cost of the GL/PL has increased by approximately
$7,000,000, for the policy year ending June 1, 2001 as compared to the policy
year ended June 1, 2000.
LHC, the Company's wholly owned captive insurance subsidiary, provides
reinsurance for the Company and others. LHC has, or is currently, reinsuring
certain windstorm, workers' compensation and GL/PL deductibles. The Company,
based on independent actuarial studies, believes that LHC's reserves are
sufficient to meet their obligations. LHC continues to operate as a going
concern, and has been excluded from the Company's Chapter 11 cases.
The Company provides several health insurance options to its employees. Prior to
Fiscal 1999, the Company offered a self-insured 80/20 indemnity plan (the "80/20
Plan") and several fully insured HMO's. In late Fiscal 1999, a new self insured
indemnity plan (the "Choice Plan") was developed and made available to a limited
number of employees. The Choice Plan became available to all employees in
January 2000. The Choice Plan enabled employees to take advantage of much lower
co-pays that were competitive with HMO co-pays, while still allowing them to go
to any provider in the 80/20 Plan preferred provider organization. In Fiscal
2000, the medical and pharmacy utilization levels under the Choice Plan and the
80/20 Plan were greater than the Company anticipated, resulting in additional
health insurance costs of approximately $28,000,000. Effective April 1, 2001,
the Choice Plan will be eliminated from the Company's benefit program and
employee copays for prescriptions will be increased.
30
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care facilities which
utilize our specialty medical services. The 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.
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 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.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by HCFA and applicable federal law. In
most states, pharmacy services are priced at the lower of "usual and customary"
charges or cost (which generally is defined as a function of average wholesale
price and may include a profit percentage) plus a dispensing fee. Certain states
have "lowest charge legislation" or "most favored nation provisions" which
require our institutional pharmacy and medical supply operation
("NeighborCare(R)") 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
rulemaking was substantially modified minimizing 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 out patient 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.
Congress and state governments continue to focus on efforts to curb spending on
health care programs such as Medicare and Medicaid. Such efforts have not been
limited to skilled nursing facilities, but have and will most likely include
other services provided by us, including pharmacy and therapy services. We
cannot at this time predict the extent to which these proposals will be adopted
or, if adopted and implemented, what effect, if any, such proposals will have on
us. Efforts to impose reduced allowances, greater discounts and more stringent
cost controls by government and other payors are expected to continue.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that 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.
31
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care constituting approximately eleven percent and four
percent of the net revenues of NeighborCare and Genesis, respectively. These
service contracts with HCR Manor Care are the subject of certain litigation. See
"Legal Proceedings".
NeighborCare pharmacy operations provide services to Mariner Post-Acute Network,
Inc. and Mariner Health Group, Inc. (collectively, "Mariner") under certain
service contracts. On January 18, 2000, Mariner filed voluntary petitions under
Chapter 11 with the Bankruptcy Court. To date, the service contracts with
Mariner have been honored; however, Mariner has certain rights under the
protection of the Bankruptcy Court to reject these contracts, which represent
six percent and two percent of the net revenues of NeighborCare and Genesis,
respectively. Genesis participates as a member of the official Mariner unsecured
creditors committee.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997
Balanced Budget Act, the Balanced Budget Refinement Act and the Benefits
Improvement Protection Act of 2000 has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs which has adversely impacted the
Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. 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.
In July 1998, the Clinton 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.
Anticipated Impact of Healthcare Reform
On December 15, 2000 Congress passed the Benefit Improvement and Protection Act
of 2000 that, among other provisions, increases the nursing component of Federal
PPS rates by approximately 16.7% for the period from April 1, 2001 through
September 30, 2002. The legislation will also change 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 will be repealed except for Medicare Part B therapy services and, the
moratorium on the $1,500 therapy caps will be extended through calendar year
2002. The Company has not yet evaluated what effect BIPA will have on its
operating results.
PPS and other existing and future legislation and regulation have already, and
may in the future, adversely affect our pharmacy and medical supply revenue, and
other specialty medial services.
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.
32
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2000, the Company had $1,638,397,000 of debt subject to variable
market rates of interest, of which $1,483,898,000 is classified as a liability
subject to compromise as a result of our Chapter 11 filings. Genesis continues
to accrue and pay interest on approximately $1,213,500,000 of Genesis' variable
rate debt. Multicare, as a result of its Chapter 11 cases, ceased accruing and
paying interest on all of its variable rate debt following the Petition Date. At
December 31, 2000, Genesis and Multicare have no interest rate swap agreements
outstanding to manage exposure to increases in market rates of interest.
33
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Genesis and Vitalink Actions Against HCR Manor Care
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink
Pharmacy Services (d/b/a NeighborCare(R)), a subsidiary of
Genesis, filed multiple lawsuits requesting injunctive relief
and compensatory damages against HCR Manor Care, Inc. ("HCR
Manor Care"), two of its subsidiaries and two of its
principals. The lawsuits arise from HCR Manor Care's
threatened termination of long-term pharmacy services
contracts effective June 1, 1999. Vitalink filed a complaint
against HCR Manor Care and two of its subsidiaries in
Baltimore City, Maryland circuit court (the "Maryland State
Court Action"). Genesis filed a complaint against HCR Manor
Care, a subsidiary, and two of its principals in federal
district court in Delaware including, among other counts,
securities fraud (the "Delaware Federal Action"). Vitalink
has also instituted an arbitration action before the American
Arbitration Association (the "Arbitration"). In these
actions, Vitalink is seeking a declaration that it has a
right to provide pharmacy, infusion therapy and related
services to all of HCR Manor Care's facilities and a
declaration that HCR Manor Care's threatened termination of
the long-term pharmacy service contracts was unlawful.
Genesis and Vitalink also seek over $100,000,000 in
compensatory damages and enforcement of a 10-year
non-competition clause.
Genesis acquired Vitalink from Manor Care in August 1998. In
1991, Vitalink and Manor Care had entered into long-term
master pharmacy, infusion therapy and related agreements
which gave Vitalink the right to provide pharmacy services to
all facilities owned or licensed by Manor Care and its
affiliates. On July 10, 1998, Manor Care advised Vitalink and
Genesis that Manor Care would not provide notice of
non-renewal of the master service agreements; accordingly the
terms of the pharmacy service agreements were extended to
September, 2004. Under the master service agreements, Genesis
and Vitalink receive revenues at the rate of approximately
$107,000,000 per year.
By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Action relating to the
master service agreements with the Arbitration matter.
Accordingly, on May 25, 1999, the Maryland State Court Action
was dismissed voluntarily. Until such time as a final
decision is rendered in said Arbitration, or by the
Bankruptcy Court, as appropriate, the parties have agreed to
maintain the master service agreements in full force and
effect.
HCR Manor Care and its subsidiaries have pleaded
counterclaims in the Arbitration seeking damages for
Vitalink's alleged overbilling for products and services
provided to HCR Manor Care, a declaration that HCR Manor Care
had the right to terminate the master service agreements, and
a declaration that Vitalink does not have the right to
provide pharmacy, infusion therapy and related services to
facilities owned by HCR prior to its merger with Manor Care.
According to an expert report submitted by HCR Manor Care on
May 8, 2000, HCR Manor Care is seeking $17,800,000 in
compensatory damages for alleged overbilling by Vitalink
between September 1, 1998 and March 31, 2000.
On January 14, 2000, HCR Manor Care moved to dismiss
Vitalink's claims in the Arbitration that it has a right to
provide pharmacy and related services to the HCR Manor Care
facilities not previously under the control of Manor Care. On
May 17, 2000, the Arbitrator ordered the dismissal of
Vitalink's claims seeking a declaratory judgment and
injunctive relief for denial of Vitalink's right to service
the additional HCR Manor Care facilities, but sustained
Vitalink's claim seeking compensatory damages against HCR
Manor Care for denial of that right.
34
Trial in the arbitration was originally scheduled to begin on
June 12, 2000. On May 23, 2000, however, the Arbitrator
postponed the trial indefinitely due to Vitalink's potential
bankruptcy filing. In connection with this stay, the parties
agreed that HCR Manor Care may pay, on an interim basis,
NeighborCare 90 percent 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 remaining 10 percent must be held in
a segregated account by Manor Care. After Genesis and its
affiliates, including Vitalink, filed voluntary petitions for
restructuring under Chapter 11 of the Bankruptcy Code on June
22, 2000, the Arbitration was automatically stayed pursuant
to 11 U.S.C. ss. 362(a).
On August 1, 2000, HCR Manor Care moved to lift the automatic
stay and compel arbitration. On September 5, 2000, the
Bankruptcy Court denied that motion, with leave to refile in
90 days. On December 8, 2000, Manor Care renewed its motion
to lift the stay in the arbitration. On January 16, 2001,
Genesis filed a motion to assume the master service
agreements asserting that the determination of the Bankruptcy
Court will supersede a significant number of issues in the
Arbitration. On February 6, 2001, the Bankruptcy Court
granted Manor Care's renewed motion to lift the stay in the
Arbitration, and postponed consideration of Genesis' motion
to assume the master service agreements until after the
Arbitration is completed. The trial in the Arbitration is now
scheduled to begin during the week of July 20, 2001.
On June 29, 1999, defendants moved to dismiss or stay
Genesis' securities fraud complaint filed in the Delaware
Federal Action. On March 22, 2000, HCR Manor Care's motion
was denied with respect to its motion to dismiss the
complaint, but was granted to the extent that the action was
stayed pending a decision in the Arbitration. Accordingly,
Genesis still maintains the Delaware Federal Action. As a
result of Genesis' Chapter 11 filing, this action is also
automatically stayed pursuant to 11 U.S.C. ss. 362(a).
The Vitalink Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel,
filed an additional complaint against Omnicare, Inc.
("Omnicare") and Heartland Healthcare Services (a joint
venture between Omnicare and HCR Manor Care) seeking
injunctive relief and compensatory and punitive damages. The
complaint includes counts for tortious interference with
Vitalink's contractual rights under its exclusive long-term
service contracts with HCR Manor Care. On November 12, 1999,
in response to a motion filed by the defendants, that action
was stayed pending a decision in the Arbitration.
The HCR Manor Care Action Against Genesis in Delaware
On August 27, 1999, Manor Care Inc., a wholly owned
subsidiary of HCR Manor Care Inc., filed a lawsuit against
Genesis in federal district court in Delaware based upon
Section 11 and Section 12 of the Securities Act. Manor Care
Inc. alleges that in connection with the sale of the Genesis
Series G Preferred Stock issued as part of the purchase price
to acquire Vitalink, Genesis failed to disclose or made
misrepresentations related to the effects of the conversion
to the prospective payment system on Genesis' earnings, the
restructuring of the Genesis ElderCare Corp. Joint Venture,
the impact of the operations of Genesis' Multicare affiliate
on Genesis' earnings, the status of Genesis' labor relations,
Genesis' ability to declare dividends on the Series G
Preferred Stock, the value of the conversion right attached
to the Series G Preferred Stock, and information relating to
the ratio of combined fixed charges and preference dividends
to earnings. Manor Care, Inc. seeks, among other things,
compensatory damages and rescission of the purchase of the
Series G Preferred Stock.
35
On November 23, 1999, Genesis moved to dismiss this action on
the grounds, among others, that Manor Care's complaint failed
to plead fraud with particularity. On September 29, 2000, the
Court granted that motion in part and denied it in part.
Specifically, the Court dismissed all of defendants'
allegations except those concerning the Company's labor
relations and the ratio of combined fixed charges and
preference dividends to earnings.
On January 18, 2000, Genesis moved to consolidate this action
with the action brought against HCR Manor Care in Delaware
federal court. That motion has been fully submitted and is
awaiting decision. As a result of Genesis' Chapter 11 filing,
this action is also automatically stayed pursuant to 11
U.S.C. ss. 362(a).
The HCR Manor Care Action Against Genesis in Ohio
On December 22, 1999, Manor Care filed a lawsuit against
Genesis and others in the United States District Court for
the Northern District of Ohio. Manor Care alleges, among
other things, that the Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred") and Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock (the "Series I
Preferred") were issued in violation of the terms of the
Series G Preferred and the Rights Agreement dated as of April
26, 1998 between Genesis and Manor Care. Manor Care seeks,
among other things, damages and rescission or cancellation of
the Series H and Series I Preferred. On February 29, 2000,
Genesis moved to dismiss this action on the ground, among
others, that Manor Care's complaint failed to state a cause
of action. This motion has been fully submitted, including
supplemental briefing by both parties, and is awaiting
decision. As a result of Genesis' Chapter 11 filing, this
action is also automatically stayed pursuant to 11 U.S.C. ss.
362(a).
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. See
"Cautionary Statement Regarding Forward-Looking Statements"
and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources - Revenue Sources."
36
Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities
On June 22, 2000, the Company and certain of its subsidiaries
and affiliates filed voluntary petitions with the United
States Bankruptcy Court for the District of Delaware to
reorganize their capital structure under Chapter 11 of the
United States Bankruptcy Code. As a result of the Chapter 11
cases, no principal or interest payments will be made on
certain indebtedness incurred by the Company prior to June 22,
2000, including, among others, senior subordinated notes,
until a plan of reorganization defining the payment terms has
been approved by the Bankruptcy Court. Additional information
regarding the Chapter 11 cases is set forth elsewhere in this
Form 10-Q, including Note 2 to the Unaudited Condensed
Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of
Operations."
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
99.1 Second Amendment and Waiver, dated as of February 14,
2001 to the Revolving Credit And Guarantee Agreement,
dated as of June 22, 2000 among Genesis Health
Ventures, Inc. and certain of its lenders.
(b) Reports on Form 8-K
None
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: March 22, 2001 /s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr.
Executive Vice President and Chief
Financial Officer
38