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, 2001
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: 000-33217
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 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 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.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of February 8, 2002: 39,764,798 shares of common stock issued
and 1,366,221 are to be issued in connection with a plan confirmed by a court.
TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS..........................................2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................25
Part II: OTHER INFORMATION
Item 1. Legal Proceedings...............................................................26
Item 2. Changes in Securities...........................................................27
Item 3. Defaults Upon Senior Securities.................................................27
Item 4. Submission of Matters to a Vote of Security Holders.............................27
Item 5. Other Information...............................................................27
Item 6. Exhibits and Reports on Form 8-K................................................27
SIGNATURES........................................................................................28
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
As used herein, unless the context otherwise requires, "Genesis," the "Company,"
"we," "our" or "us" refers to Genesis Health Ventures, Inc. and its
subsidiaries.
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to:
o certain statements in "Management's Discussion and Analysis of Financial
Condition and Results Of Operations," such as our ability to meet our
liquidity needs, scheduled debt and interest payments and expected future
capital expenditure requirements;
o certain statements in the Notes to Unaudited Condensed Consolidated
Financial Statements concerning pro forma adjustments; and
o certain statements in "Legal Proceedings" regarding the effects of
litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that these statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o changes in the reimbursement rates or methods of payment from Medicare and
Medicaid, or the implementation of other measures to reduce the
reimbursement for our services;
o changes in pharmacy legislation and payment formulas;
o the expiration of enactments providing for additional governmental funding;
o efforts of third party payors to control costs;
o the impact of federal and state regulations;
o changes in payor mix and payment methodologies;
o further consolidation of managed care organizations and other third party
payors;
o competition in our business;
o litigation regarding our NeighborCare(R)pharmacy operations' provision of
service to HCR Manor Care;
o an increase in insurance costs and potential liability for losses not
covered by, or in excess of, our insurance;
o competition for qualified staff in the healthcare industry;
o our ability to control operating costs, return to profitability and
generate sufficient cash flow to meet operational and financial
requirements; and
o an economic downturn or changes in the laws affecting our business in those
markets in which we operate.
These risks are described in more detail in our Annual Report on Form 10-K.
2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
Successor Company Successor Company
--------------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
2001 2001
--------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 60,077 $ 32,139
Restricted investments in marketable securities 57,316 51,625
Accounts receivable, net of allowance for doubtful accounts 398,654 399,816
Inventory 66,806 65,222
Prepaid expenses and other current assets 33,801 35,753
--------------------------------------------------------------------------------------------------------------------------------
Total current assets 616,654 584,555
--------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 831,714 822,740
Notes receivable and other investments 16,456 14,539
Other long-term assets 44,664 45,698
Investments in unconsolidated affiliates 12,824 12,504
Identifiable intangible assets, net 31,418 33,591
Goodwill, net 313,452 320,953
--------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,867,182 $ 1,834,580
================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 10,734 $ 41,241
Accounts payable and accrued expenses 250,466 244,799
--------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 261,200 286,040
--------------------------------------------------------------------------------------------------------------------------------
Long-term debt 643,305 603,268
Deferred income taxes 1,310 -
Other long-term liabilities 61,263 65,677
Minority interest 6,396 2,137
Redeemable preferred stock, including accrued dividends 43,230 42,600
Shareholders' equity:
Common stock, par $.02, 200,000,000 shares authorized,
39,671,279 shares issued and outstanding at December 31,
and September 30, 2001; and 1,366,221 and 1,328,721 shares
to be issued at December 31, and September 30, 2001, respectively 820 820
Additional paid-in capital 832,710 832,710
Retained earnings 16,735 1,136
Accumulated other comprehensive income 213 192
--------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 850,478 834,858
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,867,182 $ 1,834,580
================================================================================================================================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Successor Company | Predecessor Company
Three months ended | Three months ended
-----------------------------------------------------------------------------------------------------------------------------------
December 31, | December 31,
2001 | 2000
-----------------------------------------------------------------------------------------------------------------------------------
Net revenues: |
Inpatient services $ 354,010 | $ 333,699
Pharmacy and medical supply services 273,394 | 255,574
Other revenue 42,090 | 39,746
-----------------------------------------------------------------------------------------------------------------------------------
Total net revenues 669,494 | 629,019
-----------------------------------------------------------------------------------------------------------------------------------
|
Operating expenses: |
Salaries, wages and benefits 293,464 | 273,196
Cost of sales 162,646 | 151,370
Other operating expenses 151,842 | 144,435
Gain on sale of eldercare center - | (1,770)
Depreciation and amortization 15,794 | 26,926
Lease expense 6,835 | 9,405
Interest expense (contractual interest for the |
three months ended December 31, 2000 was $61,752) 13,059 | 34,154
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before debt restructuring and reorganization costs, income taxes, |
equity in net income (loss) of unconsolidated |
affiliates and minority interest 25,854 | (8,697)
Debt restructuring and reorganization costs - | 14,209
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, equity in net income (loss) |
of unconsolidated affiliates and minority interest 25,854 | (22,906)
Income taxes 10,083 | -
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in net income (loss) of unconsolidated affiliates |
and minority interest 15,771 | (22,906)
Equity in net income (loss) of unconsolidated affiliates 615 | (216)
Minority interest (157) | 1,811
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 16,229 | (21,311)
Preferred stock dividends 630 | 11,500
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shareholders $ 15,599 | $ (32,811)
===================================================================================================================================
Per common share data: |
Basic |
Net income (loss) $ 0.38 | $ (0.67)
Weighted average shares 41,037,500 | 48,641,194
-----------------------------------------------------------------------------------------------------------------------------------
Diluted |
Net income (loss) $ 0.37 | $ (0.67)
Weighted average shares 42,108,032 | 48,641,194
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Successor Company | Predecessor Company
Three months ended | Three months ended
-----------------------------------------------------------------------------------------------------------------------------------
December 31, | December 31,
2001 | 2000
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities: |
Net income (loss) $ 16,229 | $ (21,311)
Net charges included in operations not requiring funds 34,380 | 45,483
Changes in assets and liabilities: |
Accounts receivable (6,329) | (19,251)
Accounts payable and accrued expenses 28,103 | (5,348)
Other, net 1,295 | (2,313)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities before debt |
restructuring and reorganization costs 73,678 | (2,740)
----------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (25,974) | (11,392)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 47,704 | (14,132)
----------------------------------------------------------------------------------------------------------------------------
|
Cash flows from investing activities: |
Net purchases of restricted marketable securities (5,669) | (3,111)
Proceeds from sale of eldercare center - | 7,010
Capital expenditures (10,821) | (11,564)
Purchase of eldercare centers (10,453) | -
Notes receivable and other investments, and |
other long-term asset additions, net (2,354) | (2,081)
----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,297) | (9,746)
----------------------------------------------------------------------------------------------------------------------------
|
Cash flows from financing activities: |
Net borrowings under working capital revolving credit facilities - | 21,500
Repayment of long-term debt and payment of sinking fund requirements (23,469) | (694)
Proceeds from issuance of long-term debt 33,000 | -
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,531 | 20,806
----------------------------------------------------------------------------------------------------------------------------
|
Net increase (decrease) in cash and equivalents 27,938 | (3,072)
Cash and equivalents: |
Beginning of period 32,139 | 22,948
----------------------------------------------------------------------------------------------------------------------------
End of period $ 60,077 | $ 19,876
============================================================================================================================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Genesis Health Ventures, Inc. and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
1. Business
Genesis Health Ventures, Inc. and its subsidiaries ("Genesis" or the "Company")
provides a broad range of healthcare services to the geriatric population,
principally within five geographic markets in the eastern United States. The
Company's operations are comprised of two primary business segments: inpatient
services and pharmacy and medical supply services. Inpatient services are
provided through a network of skilled nursing and assisted living centers.
Pharmacy and medical supply services are provided through long-term care
pharmacies serving approximately 254,000 institutional beds; medical supply and
home medical equipment distribution; community-based pharmacies and infusion
therapy services. These segments are complemented by an array of other service
capabilities through the Genesis ElderCare(R) delivery model of integrated
healthcare networks.
2. Basis of Presentation
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, 2001.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared in accordance with accounting principles generally accepted
in the United States of America. In the opinion of management, the unaudited
condensed consolidated financial statements include all necessary adjustments
consisting of normal recurring accruals and, from June 22, 2000 (the "Petition
Date") to September 30, 2001, all adjustments pursuant to the American Institute
of Certified Public Accountants Statement of Position 90-7, "Financial Reporting
By Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") for a fair
presentation of the financial position and results of operations for the periods
presented. Also in accordance with the provisions of SOP 90-7, the unaudited
condensed consolidated balance sheets include all necessary adjustments
incorporating the provisions of fresh-start reporting at September 30, 2001.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. Factors Affecting Comparability of Financial Information
As a consequence of the implementation of fresh-start reporting effective
September 30, 2001 (see "Footnote 4 - Reorganization"), the financial
information presented in the unaudited condensed consolidated statement of
operations and the corresponding statements of cash flows for the three months
ended December 31, 2001 are generally not comparable to the financial results
for the three months ended December 31, 2000. Any financial information herein
labeled "Predecessor Company" refers to periods prior to the adoption of
fresh-start reporting, while those labeled "Successor Company" refer to periods
following the Company's reorganization.
The lack of comparability in the accompanying unaudited condensed consolidated
financial statements is most apparent in the Company's capital costs (lease,
interest, depreciation and amortization), as well as with income taxes, minority
interests, debt restructuring and reorganization costs, and preferred dividends.
Management believes that business segment operating revenues and operating
expenses of the Predecessor Company are generally comparable to those of the
Successor Company.
4. Reorganization
Background.
On June 22, 2000, Genesis 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, The Multicare Companies,
Inc. and certain of its direct and indirect subsidiaries ("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).
6
Genesis and Multicare's financial difficulties were attributed to a number of
factors. First, the federal government made fundamental changes to the
reimbursement for medical services provided to individuals. The changes had a
significant adverse impact on the healthcare industry as a whole and on Genesis
and Multicare's cash flows. Second, the federal reimbursement changes have
exacerbated a long-standing problem of inadequate reimbursement by the states
for medical services provided to indigent persons under the various state
Medicaid programs. Third, numerous other factors adversely affected Genesis and
Multicare's cash flows, including increased labor costs, increased professional
liability and other insurance costs, and increased interest rates. Finally, as a
result of declining governmental reimbursement rates and in the face of rising
inflationary costs, Genesis and Multicare were too highly leveraged to service
their debt, including their long-term lease obligations.
On October 2, 2001, (the "Effective Date"), Genesis and Multicare consummated a
joint plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy
Code (the "Reorganization") pursuant to a September 20, 2001 order entered by
the Bankruptcy Court approving the Plan proposed by Genesis and Multicare. The
principal provisions of the Plan were as follows:
o Multicare became a wholly-owned subsidiary of Genesis. Genesis previously
owned 43.6% of Multicare and managed its skilled nursing and assisted
living facilities under the Genesis Eldercare(R) brand name;
o New senior notes, new convertible preferred stock, new common stock and new
warrants were issued to Genesis and Multicare's creditors. Approximately
93% of the Successor Company's new common stock, $242.6 million in new
senior notes and new preferred stock with a liquidation preference of $42.6
million were issued to the Genesis and Multicare senior secured creditors.
Approximately 7% of the new common stock is to be issued to the Genesis and
Multicare unsecured creditors as well as new one year warrants to purchase
an additional 11% of the new common stock;
o Holders of Genesis and Multicare pre-chapter 11 preferred and common stock
received no distribution and those instruments were canceled;
o Claims between Genesis and Multicare were set-off against one another
and any remaining claims were waived and released; and
o A new Board of Directors was consummated.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered into a new Senior Credit Facility (defined in
"Footnote 6 - Long-Term Debt").
In accordance with SOP 90-7, the Company has recorded all expenses incurred as a
result of the bankruptcy filing separately as debt restructuring and
reorganization costs. A summary of the principal categories of debt
restructuring and reorganization costs are as follows (in thousands):
Successor | Predecessor
Company | Company
------------------------------------------------------------------------------------------------
For the three | For the three
months ended | months ended
December 31, 2001 | December 31, 2000
------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs: |
Professional, bank and other fees $ - | $ 10,099
Employee benefit related costs, including severance - | 4,110
------------------------------------------------------------------------------------------------
$ - | $ 14,209
------------------------------------------------------------------------------------------------
7
Fresh-Start Reporting.
For financial reporting purposes, the Company adopted the provisions of
fresh-start reporting effective September 30, 2001. In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes.
In adopting the requirements of fresh-start reporting as of September 30, 2001,
the provisions of the Company's reorganization plan were implemented, assets and
liabilities were adjusted to their estimated fair values and the Company's
accumulated deficit was eliminated.
Merger of Genesis and Multicare.
In accordance with the Plan, Multicare became a wholly-owned subsidiary of
Genesis on the Effective Date. Under fresh-start reporting, the Company
consolidated its 100% interest in Multicare as of September 30, 2001. Genesis
previously owned 43.6% of Multicare.
The consummation of the Company's Plan constitutes a change in the controlling
interests of the Company. The provisions of the Plan have a material effect on
the operating results of the Successor Company in periods following the
Reorganization.
The following unaudited pro forma statement of operations information gives
effect to the Plan as if it were consummated on October 1, 2000. The unaudited
pro forma financial information has been prepared to reflect the consolidation
of the financial results of Multicare, with no minority interest. The pro forma
financial information includes consideration for the Company's new capital
structure, the elimination of restructuring related charges, and changes in
depreciation and amortization expense following the revaluation of assets and
liabilities to their estimated fair value. The pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had the reorganization actually occurred at the beginning of the period
presented.
Three Months Ended
(Unaudited, in thousands, except per share amounts) December 31, 2000
--------------------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
--------------------------------------------------------------------------------------------
Total net revenues $ 629,019
Net income attributable to common shareholders 13,083
Net income per common share - Basic 0.32
Net income per common share - Diluted $ 0.31
--------------------------------------------------------------------------------------------
5. Certain Significant Risks and Uncertainties
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 the Company's pharmacy and other specialty medical services. The
healthcare industry is experiencing the effects of the federal and state
governments' trend toward cost containment, as government and other third party
payors seek to impose lower reimbursement and utilization rates and negotiate
reduced payment schedules with providers. These cost containment measures,
combined with the increasing influence of managed care payors and competition
for patients, have resulted in reduced rates of reimbursement for services
provided by the Company.
A number of the provisions of the recently enacted Balanced Budget Refinement
Act ("BBRA") and the Benefits Improvement Protection Act ("BIPA") which provide
additional funding for Medicare participating skilled nursing facilities expire
on September 30, 2002. Expiring provisions are estimated to, on average, reduce
per beneficiary per diems by $30. Moreover, the Centers for Medicare and
Medicaid Services have indicated its desire to complete refinements to the case
mix classification system (RUG refinements) as part of the Fiscal 2003
rule-making. Under the law, when these revisions are implemented, the add-on's
authorized by the BBRA and BIPA will expire. Combined, the Medicare skilled
nursing facility sector faces an 18% reduction in the average median per diems.
If Genesis were to experience an 18% decline in its current average Medicare
rate per patient day, the estimated annual reduction in Medicare revenues of
approximately $67 million would have a material adverse effect on the Company's
financial position, results of operations and cash flows. Trade organizations
representing the skilled nursing facility sector are aggressively pursuing
strategies to minimize the potentially adverse impact of the "Medicare Rate
Cliff."
8
It is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Company's business. Accordingly, there can be no assurance
that the impact of these changes or any future healthcare legislation will not
adversely affect the Company's business. There can be no assurance that payments
under governmental and private third party payor programs will be timely, will
remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. The Company's financial condition and results of
operations may be affected by the reimbursement process, which in the Company's
industry is complex and can involve lengthy delays between the time that revenue
is recognized and the time that reimbursement amounts are settled.
Legal Proceedings Potentially Affecting Revenues.
Certain service contracts permit the Company's NeighborCare(R) pharmacy
operations to provide services to HCR Manor Care constituting approximately ten
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 "Part II: Other Information, Item 1 - Legal Proceedings"
herein and in the Company's Annual Report on Form 10-K.
9
6. Long-Term Debt
Long-term debt at December 31, 2001 and September 30, 2001 consist of the
following (in thousands):
December 31, September 30,
-----------------------------------------------------------------------------------------------
2001 2001
-----------------------------------------------------------------------------------------------
Secured debt
Senior Credit Facility
Term Loan $ 285,000 $ 285,000
Delayed Draw Term Loan 33,000 -
-----------------------------------------------------------------------------------------------
Total Senior Credit Facility 318,000 285,000
Senior Secured Notes 242,605 242,605
Mortgage and other secured debts 93,434 116,904
-----------------------------------------------------------------------------------------------
Total debt 654,039 644,509
Less:
Current portion of long-term debt (10,734) (41,241)
-----------------------------------------------------------------------------------------------
Long-term debt $ 643,305 $ 603,268
-----------------------------------------------------------------------------------------------
Senior Credit Facility.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered into a Senior Credit Facility consisting of the
following: (1) a $150 million revolving line of credit (the "Revolving Credit
Facility"); (2) a $285 million term loan (the "Term Loan") and (3) an $80
million delayed draw term loan (the "Delayed Draw Term Loan") (collectively the
"Senior Credit Facility"). The outstanding amounts under the Term Loan and the
Delayed Draw Term Loan bear interest at the London Inter-bank Offered Rate
("LIBOR") plus 3.50%, or approximately 5.40% at December 31, 2001. The
outstanding amounts under the Revolving Credit Facility, if any, bear interest
based upon a performance related grid.
The Senior Credit Facility requires the Successor Company to maintain compliance
with certain financial and non-financial covenants, including minimum EBITDAR
(as defined); limitations on capital expenditures, maximum leverage ratios,
minimum fixed charge coverage ratios and minimum net worth.
In December 2001, the Senior Credit was amended in order to extend the date by
which the Company is required to achieve certain levels of fixed versus variable
interest rate exposure. As amended, by June 30, 2002, the Company is required to
enter into interest rate swap agreements that effectively fix or cap the
interest cost on at least 50% of its consolidated debt. At December 31, 2001,
the Company's debt mix is approximately 14% fixed and 86% variable.
The Revolving Credit Facility is available to fund obligations under the Plan
and for general working capital requirements. The Revolving Credit Facility
matures on October 2, 2006. Usage under the Revolving Credit Facility is subject
to a Borrowing Base (as defined) calculation based upon real property collateral
value and a percentage of eligible accounts receivable (as defined). Excluding
an approximately $0.9 million posted letter of credit, no borrowings were
outstanding under the Revolving Credit Facility at December 31, 2001.
The Delayed Draw Term Loan, as originally contracted, was to be used to (1) fund
the purchase price of a proposed acquisition of a pharmacy operation, (2) pay
certain outstanding amounts owed to ElderTrust on certain loans secured by
mortgages; (3) fund the exercise of an option to purchase three eldercare
centers and (4) to make other Specific Payments (as defined). Once repaid, the
Delayed Draw Term Loan can not be re-borrowed. The Delayed Draw Term Loan
amortizes at a rate of one percent per year, and matures on April 2, 2007. As a
result of subsequent developments in the Company's bid to consummate a proposed
acquisition of a pharmacy operation, the Delayed Draw Term Loan was amended in
December 2001 to allow available borrowings that were otherwise earmarked for
the proposed pharmacy transaction to be used to restructure credit terms with
NeighborCare pharmacy's primary supplier of pharmacy products.
10
In the first fiscal quarter of 2002, the Company utilized approximately $10
million from the Delayed Draw Term Loan to fund the exercise of the purchase
option previously described, and the Company utilized approximately $23 million
from the Delayed Draw Term Loan to satisfy certain mortgages as previously
described.
During the second quarter of fiscal 2002, through February 8, 2002, the Company
borrowed approximately $42 million from the Delayed Draw Term Loan to finance
the repayment of all trade balances due to NeighborCare Pharmacy's primary
supplier of pharmacy products. Prospectively, this change in credit terms will
result in reduced pharmacy product acquisition costs, partially offset by an
increase in interest expense on the incremental Delayed Draw Term Loan
borrowings.
Senior Secured Notes.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered an indenture agreement in the principal amount of
$242.6 million (the "Senior Secured Notes"). The Senior Secured Notes bear
interest at LIBOR plus 5.0% (approximately 6.90% at December 31, 2001), and
amortize one percent each year and mature on April 2, 2007.
Other Secured Indebtedness.
During the three months ended December 31, 2001, the Company refinanced
approximately $23 million of other secured indebtedness with proceeds from the
Delayed Draw Term Loan. At December 31, 2001, the Company had approximately
$93.4 million of other secured debt consisting principally of revenue bonds and
secured bank loans.
7. Income Taxes
The Company's provision for income taxes for the three months ended December 31,
2001 was $10.1 million. The Company realized a $7.5 million tax benefit through
the realization of Net Operating Loss ("NOL") carryforwards and $1.3 million of
deferred tax liabilities due to temporary differences between book and tax basis
goodwill amortization. Pursuant to SOP 90-7, the income tax benefit of any
future realization of the NOL carryforwards are to be applied first as a
reduction to goodwill.
11
8. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) attributed to common shares (in thousands, except per share data):
Successor | Predecessor
Company | Company
|
Three | Three
Months | Months
Ended | Ended
December 31, | December 31,
2001 2000
-------------------------------------------------------------------------------------------
Basic: |
Net income (loss) attributed to common |
shareholders (Numerator) $ 15,599 | $ (32,811)
|
Weighted average shares (Denominator) 41,037 | 48,641
|
-------------------------------------------------------------------------------------------
Net income (loss) attributed to common |
shareholders per share $ 0.38 | $ (0.67)
-------------------------------------------------------------------------------------------
|
Diluted: |
Net income (loss) attributed to common |
shareholders (Numerator) $ 15,599 | $ (32,811)
|
Weighted average shares - basic 41,037 | 48,641
Add: |
Dilutive effect of restricted stock grants 713 | -
Dilutive effect of warrants 260 | -
Dilutive effect of stock options 98 | -
-------------------------------------------------------------------------------------------
Weighted average shares - diluted (Denominator) 42,108 | 48,641
|
-------------------------------------------------------------------------------------------
Net income (loss) attributed to common |
shareholders per share $ 0.37 | $ (0.67)
-------------------------------------------------------------------------------------------
Included in the calculation of basic weighted average shares of 41,037,500 are
1,328,721 shares to be issued in connection with a plan confirmed by a court and
37,450 shares authorized and deemed earned, but not issued, in connection with a
restricted stock plan.
Weighted average diluted shares include 712,500 shares of unvested restricted
stock grants. As the restricted stock grants vest, the Company will recognize
compensation expense and the related vested shares will be included in the
calculation of weighted average basic shares.
For the three months ended December 31, 2000, no exercise of stock options is
assumed since their effect is antidilutive.
12
9. Comprehensive Income (Loss)
The following table sets forth the computation of comprehensive income (loss)
(in thousands):
Successor | Predecessor
Company | Company
|
Three | Three
Months | Months
Ended | Ended
December 31, | December 31,
2001 | 2000
---------------------------------------------------------------------------------------------
Net income (loss) attributed to common |
shareholders $ 15,599 | $ (32,811)
Unrealized gain on marketable securities 21 | 687
---------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 15,620 | $ (32,124)
---------------------------------------------------------------------------------------------
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) inpatient services and (2) pharmacy
and medical supplies services.
The Company includes in inpatient services revenues all room and board charges
and ancillary service revenue for its eldercare customers at its 192 owned and
leased eldercare centers. The centers offer three levels of care for their
customers: skilled, intermediate and personal.
The Company provides pharmacy and medical supply services through its
NeighborCare pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of infusion therapy, medical supplies and equipment provided to
eldercare centers it operates, as well as to independent healthcare providers by
contract. The Company provides these services through 65 institutional
pharmacies (eight 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 31 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 are
generated through external contracts with independent healthcare providers with
the balance attributable to centers owned or leased by the Company.
The accounting policies of the segments are the same as those of the
consolidated organization. All intersegment sales prices are market based.
The carrying value of the Company's assets in the following segment information
at December 31, 2001 and September 30, 2001, and the capital costs (depreciation
and amortization, lease expense, and interest), as well as income taxes,
minority interest and preferred dividends for the three months ended December
31, 2001 reflect the provisions of the plan of reorganization and the impact of
fresh-start accounting. These costs for periods prior to the Company's emergence
from bankruptcy generally were recorded based on historical costs or contractual
agreements and do not reflect the provisions of the plan of reorganization.
Accordingly, capital costs of the Successor Company for the three months ended
December 31, 2001 are not comparable to those of the Predecessor Company for the
same period in the prior year.
13
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "All other" category of revenues and operating
income 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, group purchasing fees, respiratory health
servcies, staffing services and other healthcare related services. The
"Corporate and adjustments" category consists of the Company's general and
administrative function, for which there is generally no revenue generated, as
well as other unallocated expenses.
Successor | Predecessor
Company | Company
Three months ended | Three months ended
(in thousands) December 31, 2001 | December 31, 2000(1)
-------------------------------------------------------------------------------------------------------------
Revenues: |
Inpatient services - external $ 354,010 | $ 333,699
Pharmacy and medical supply services: |
External 273,394 | 255,574
Intersegment 26,246 | 22,170
All other: |
External 42,090 | 39,746
Intersegment 42,469 | 47,015
Elimination of intersegment revenues (68,715) | (69,185)
-------------------------------------------------------------------------------------------------------------
Total net revenues $ 669,494 | $ 629,019
-------------------------------------------------------------------------------------------------------------
|
Operating income: |
Inpatient services $ 45,207 | $ 39,212
Pharmacy and medical supply services 26,254 | 23,206
All other 10,741 | 10,929
Corporate and other adjustments (20,660) | (13,329)
-------------------------------------------------------------------------------------------------------------
Total operating income $ 61,542 | $ 60,018
-------------------------------------------------------------------------------------------------------------
|
Capital and other: |
Consolidated: |
Depreciation and amortization $ 15,794 | $ 26,926
Lease expense 6,835 | 9,405
Interest expense 13,059 | 34,154
Gain on sale of eldercare center - | (1,770)
Debt restructuring and reorganization costs - | 14,209
Income taxes 10,083 | -
Equity in (earnings) loss of unconsolidated affiliates (615) | 216
Minority interest 157 | (1,811)
Preferred stock dividends 630 | 11,500
-------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shareholders $ 15,599 | $ (32,811)
-------------------------------------------------------------------------------------------------------------
Successor Successor
Company Company
December 31, September 30,
(in thousands) 2001 2001 (1)
-------------------------------------------------------------------------------------------------------------
Assets:
Inpatient services $ 1,084,798 $ 1,079,791
Pharmacy and medical supply services 672,818 672,234
Other 109,566 82,555
-------------------------------------------------------------------------------------------------------------
$ 1,867,182 $ 1,834,580
=============================================================================================================
(1) The December 31, 2000 and September 30, 2001 periods were restated to
conform to the current period presentation which considers direct overhead
costs in the calculation of inpatient services operating income and
realigns overhead businesses within the inpatient services segment for the
asset information. The summary segment information for pharmacy and
medical supplies has historically included direct overhead costs.
14
11. Restricted Assets
At December 31, 2001 and September 30, 2001, the Company reported restricted
investments in marketable securities of $57.3 million and $51.6 million,
respectively, 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.
15
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: inpatient services and pharmacy
and medical supply services. However, we also derive revenue from other sources.
Inpatient services revenues include all room and board charges and ancillary
service revenue for our eldercare customers at our 192 owned and leased
eldercare centers.
We provide pharmacy and medical supply services through our NeighborCare(R)
pharmacy operations. Included in pharmacy and medical supply services revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by us, as well as to independent healthcare providers by contract. We provide
these services through 65 institutional pharmacies (eight 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 31
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, staffing services
and other healthcare related services.
Certain Transactions and Events
Reorganization:
Background.
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, The Multicare Companies, Inc. and certain of its direct and
indirect subsidiaries ("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).
Our and Multicare's financial difficulties were attributed to a number of
factors. First, the federal government made fundamental changes to the
reimbursement for medical services provided to individuals. The changes had a
significant adverse impact on the healthcare industry as a whole and on our and
Multicare's cash flows. Second, the federal reimbursement changes have
exacerbated a long-standing problem of inadequate reimbursement by the states
for medical services provided to indigent persons under the various state
Medicaid programs. Third, numerous other factors adversely affected 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 and Multicare were too highly leveraged to service our
debt, including our long-term lease obligations.
16
On October 2, 2001, (the "Effective Date"), we and Multicare consummated a joint
plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code (the
"Reorganization") pursuant to a September 20, 2001 order entered by the
Bankruptcy Court approving the Plan proposed by us, and Multicare. The principal
provisions of the Plan were as follows:
o Multicare became our wholly-owned subsidiary. We previously owned 43.6% of
Multicare and managed its skilled nursing and assisted living facilities
under the Genesis Eldercare(R) brand name;
o New senior notes, new convertible preferred stock, new common stock and new
warrants were issued to our and Multicare's creditors. Approximately 93% of
new common stock, $242.6 million in new senior notes and new preferred
stock with a liquidation preference of $42.6 million were issued to our and
Multicare's senior secured creditors. Approximately 7% of the new common
stock is to be issued to our and Multicare's unsecured creditors as well as
new one year warrants to purchase an additional 11% of the new common
stock;
o Holders of our and Multicare's pre-chapter 11 preferred and common stock
received no distribution and those instruments were canceled;
o Claims between us and Multicare were set-off against one another and any
remaining claims were waived and released; and
o A new Board of Directors was consummated.
On the Effective Date, and in connection with the consummation of the Plan, we
entered into a Senior Credit Facility consisting of the following: (1) a $150
million revolving line of credit (the "Revolving Credit Facility"); (2) a $285
million term loan (the "Term Loan") and (3) an $80 million delayed draw term
loan (the "Delayed Draw Term Loan") (collectively the "Senior Credit Facility").
The proceeds from the Term Loan were utilized to repay $196 million of the then
outstanding amounts under the Genesis DIP Facility (later defined), and $50
million of the then outstanding synthetic lease facility, with the remaining $39
million provided to fund debt restructuring and reorganization related costs in
accordance with the Plan.
In accordance with SOP 90-7 (as defined below under "Fresh-Start Reporting"), we
recorded all expenses incurred as a result of the Bankruptcy filing separately
as debt restructuring and reorganization costs. A summary of the principal
categories of debt restructuring and reorganization costs are as follows (in
thousands):
Successor | Predecessor
Company | Company
--------------------------------------------------------------------------------------------
For the three | For the three
months ended | months ended
December 31, 2001 | December 31, 2000
---------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs: |
Professional, bank and other fees $ - | $ 10,099
Employee benefit related costs, including severance - | 4,110
--------------------------------------------------------------------------------------------
$ - | $ 14,209
--------------------------------------------------------------------------------------------
17
Fresh-Start Reporting.
Upon emergence from our Chapter 11 proceedings, we adopted the principles of
fresh start reporting in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7") / ("fresh-start
reporting"). In connection with the adoption of fresh-start reporting, a new
entity has been deemed created for financial reporting purposes. For financial
reporting purposes, we adopted the provisions of fresh-start reporting effective
September 30, 2001.
In adopting the requirements of fresh-start reporting as of September 30, 2001,
the provisions of our Plan were implemented, assets and liabilities were
adjusted to their estimated fair values and our accumulated deficit was
eliminated.
Factors Affecting Comparability of Financial Information.
As a consequence of the implementation of fresh-start reporting effective
September 30, 2001, the financial information presented in the unaudited
condensed consolidated statement of operations and the corresponding statement
of cash flows for the three months ended December 31, 2001 are generally not
comparable to the financial results for the three months ended December 31,
2000. Any financial information herein labeled "Predecessor Company" refers to
periods prior to the adoption of fresh-start reporting, while those labeled
"Successor Company" refer to periods following our reorganization.
The lack of comparability in the accompanying unaudited condensed consolidated
financial statements is most apparent in our capital costs (lease, interest,
depreciation and amortization), as well as with income taxes, minority
interests, debt restructuring and reorganization costs, and preferred dividends.
We believe that business segment operating revenue and operating expenses of the
Predecessor Company are generally comparable to those of the Successor Company.
Merger of Genesis and Multicare.
In accordance with the Plan, Multicare became our wholly-owned subsidiary on the
Effective Date. Under fresh-start reporting, we consolidated our 100% interest
in Multicare as of September 30, 2001. We previously owned 43.6% of Multicare.
Results of Operations
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Inpatient Services
Inpatient services revenue increased $20.3 million, or 6%, to $354.0 million for
the three months ended December 31, 2001 from $333.7 million for the same period
in the previous year. The addition of two eldercare centers subsequent to
December 31, 2000 accounts for approximately $0.4 million of the overall
increase. Approximately $25.4 million is principally attributed to increased
payment rates and higher Medicare, private pay and insurance patient days
("Quality Mix") as a percentage of total patient days. Our average rate per
patient day for the three months ended December 31, 2001 was $174 compared to
$161 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 BIPA on our
average Medicare rate per patient day, which increased to $340 for the three
months ended December 31, 2001 compared to $316 for the comparable period in the
prior year. Our revenue Quality Mix for the three months ended December 31, 2001
was 50.4% compared to 50.1% for the comparable period in the prior year. These
rate and Quality Mix increases are offset by a decrease in revenue of
approximately $5.5 million resulting from the sale, closure or lease
terminations of certain eldercare centers. Total patient days decreased 46,299
to 2,031,109 during the three months ended December 31, 2001 compared to
2,077,408 during the comparable period last year. Of this decrease, 50,853
patient days are attributed to the sale, closure or lease terminations of
certain eldercare centers; offset by the addition of 6,254 patient days of two
eldercare centers. The remaining decrease of 1,700 patient days is the result of
a decrease in overall occupancy.
18
Operating expenses for the three months ended December 31, 2001 increased $14.3
million, or 5%, to $308.8 million from $294.5 million for the same period in the
prior year. The primary cost for this segment is salary, wage and benefit costs,
which increased $5.5 million, or 3% for the three month period ended December
31, 2001 to $173.2 million from $167.7 million for the same period in the prior
year. Of this increase, approximately $0.4 million resulted from the addition of
new businesses in the current year, offset by a reduction of approximately $3.8
million in salary, wage and benefit costs resulting from the sale, closure or
lease terminations of certain eldercare centers. Salary, wage and benefit costs,
considering the impact of new or exited businesses, increased $8.9 million, or
5%, driven by inflationary cost increases and the relative mix of employed labor
versus agency labor costs. As a percentage of net revenue, salary, wage and
benefit costs, once adjusted for the impact of new and exited businesses,
declined to 48.8% for the three months ended December 31, 2001, compared to
49.9% for the comparable period in the prior year. This decrease as a percentage
of revenue resulted primarily from a disproportionate per diem rate growth,
largely created by the effect of the BIPA, previously discussed. Other operating
expense, once reduced for the impact of new and exited businesses ($0.4 million
and $1.9 million for the three months ended December 31, 2001 and 2000,
respectively), increased $10.3 million, or 8%, to $135.2 million for the three
months ended December 31, 2001 compared to $124.9 million for the same period
last year. The increase was primarily driven by additional ancillary supply
costs of approximately $4.7 million, increased agency labor costs (principally
nursing costs) of approximately $2.7 million, increased property and general
liability insurance of approximately $0.6 million and other operating costs of
approximately $3.0 million. These increases were offset by reduced bad debt
expense of $0.7 million.
Operating income increased $6 million, to $45.2 million for three months ended
December 31, 2001 from $39.2 million in the same period in the prior year.
Pharmacy and medical supply services
Pharmacy and medical supply services revenue (before intersegment eliminations)
increased $21.9 million, or 8%, to $299.6 million for the three months ended
December 31, 2001 compared to $277.7 million for the three months ended December
31, 2000. Revenues from intersegment customers, which are eliminated in
consolidation, increased approximately $4.0 million, or 18%, to $26.2 million
for the three months ended December 31, 2001 compared to $22.2 million for the
same period of the prior year. The remaining increase in net pharmacy and
medical supply service revenues of approximately $17.9 million, or 7%, is due
primarily to rate increases and shifts in customer product mix with external
customers.
Cost of sales (before intersegment eliminations) increased $15.2 million for the
three month period ended December 31, 2001, to $187.9 million from $172.7
million for the same period in the prior year. Of this growth, $13.6 million is
attributed to pharmacy and medical supply revenue growth, and $1.6 million is
attributed to changes in customer and product mix. Other operating expenses for
this segment, including salaries, wages and benefits, increased $3.7 million to
$85.5 million for the three months ended December 31, 2001 compared to $81.8
million for the same period in the prior year. As a percentage of revenue, other
operating costs remained relatively consistent at 29% for both periods.
Operating income increased $3.1 million, to $26.3 million for three months ended
December 31, 2001 from $23.2 million in the same period in the prior year.
During the second quarter of fiscal 2002 we borrowed approximately $42 million
from the Delayed Draw Term Loan to finance the repayment of all trade balances
due to NeighborCare pharmacy's primary supplier of pharmacy products.
Prospectively, this change in credit terms will result in reduced pharmacy
product acquisition costs.
19
All Other
All other includes operating information of business units below the prescribed
quantitative thresholds. These business units derive revenues and expenses from
the following services: rehabilitation therapy, management services, consulting
services, homecare services, physician services, transportation services,
diagnostic services, hospitality services, group purchasing fees, respiratory
health services, staffing services and other healthcare related services.
Revenues, including intersegment revenues, from other segments decreased
approximately $2.1 million to $84.6 million from $86.7 million for the three
month periods ended December 31, 2001 and December 31, 2000, respectively. The
decline was primarily caused by less management and development fee revenue,
offset by growth in other service related businesses' revenue.
Operating income for all other businesses remained relatively flat, declining
$0.2 million, to $10.7 million for three months ended December 31, 2001 from
$10.9 million in the same period in the prior year.
Corporate and other adjustments
The "Corporate and adjustments" category consists of our general and
administrative function and other unallocated amounts, by which there is
generally no revenue generated. Operating expenses increased $7.4 million in the
three months ended December 31, 2001 to $20.7 million compared to $13.3 million
in the comparable period in the prior year. Of this increase, approximately $3
million is related to increased expense levels for our cash based incentive
compensation program and an executive non-cash stock based compensation program,
approximately $2 million relates to other unallocated employee benefit costs,
and the remaining increase of approximately $2.4 million is principally
attributed to labor related and other operating expense growth in our corporate
support functions.
Capital costs and other
Our capital costs for the three months ended December 31, 2001 reflect the
impact of fresh-start reporting following the emergence from bankruptcy. Those
adjustments materially changed the recorded amounts of capital costs, most
notably depreciation and amortization, lease expense, interest expense, income
taxes, minority interest and preferred stock dividends, and as a result, will
not be comparable to those for the three months ended December 31, 2000.
Depreciation and amortization expense decreased $11.1 million to $15.8 million
for the three months ended December 31, 2001 compared to $26.9 million for the
same period in the prior year. The decrease was primarily caused by the impact
of fresh-start accounting on the carrying value of our property, plant and
equipment, which were adjusted to their estimated fair value as of September 30,
2001.
Lease expense decreased $2.6 million for the three months ended December 31,
2001, to $6.8 million compared to $9.4 million for the same period in the prior
year. Of this decrease, approximately $1.0 million is attributed to the sale,
closure or lease terminations or modifications of certain eldercare centers. The
remaining decrease of approximately $1.6 million is principally attributed to
the discharge in bankruptcy of our lease financing facility.
Interest expense decreased $21.1 million for the three months ended December 31,
2001, to $13.1 million compared to $34.2 million for the same period in the
prior year. For the three months ended December 31, 2000, in accordance with SOP
90-7, we ceased accruing interest following the Petition Date on certain
long-term debt instruments classified as liabilities subject to compromise. Our
contractual interest expense for the three months ended December 31, 2000 was
$61.8 million, leaving $27.6 million of interest expense unaccrued for that
period as a result of the Chapter 11 filings. Contractual interest expense for
the three months ended December 31, 2001 has been accrued at the contractual
rates. Contractual interest expense for the three months ended December 31, 2001
decreased by $48.7 million compared to the same period in the prior year. This
decrease is attributed to the overall reduction of debt levels following our
emergence from bankruptcy in addition to a lower weighted average borrowing
rate.
20
In October of 2000, we sold an idle 232 bed eldercare center for cash
consideration of approximately $7 million, resulting in a net gain on sale of
approximately $1.8 million.
During the three months ended December 31, 2000, we incurred legal, bank,
accounting and other costs of approximately $10.1 million in connection with the
Chapter 11 cases. In addition, we incurred costs of $4.1 million for certain
salary and benefit related costs, principally for a court approved special
recognition program. In connection with the adoption of fresh-start reporting,
all contingent debt restructuring and reorganization costs related to the
bankruptcy cases were accrued for at September 30, 2001.
Income tax increased $10.1 million for the three months ended December 31, 2001
from zero in the same period in the prior year. Our provision for income taxes
for the three months ended December 31, 2001 was $10.1 million. We realized a
$7.5 million tax benefit through the realization of Net Operating Loss ("NOL")
carryforwards and $1.3 million of deferred tax liabilities due to temporary
differences between book and tax basis goodwill amortization. Pursuant to SOP
90-7, the income tax benefit of any future realization of the NOL carryforwards
are to be applied first as a reduction to goodwill.
Equity in net earnings of unconsolidated affiliates for the three months ended
December 31, 2001 was $0.6 million compared to equity in net loss of
unconsolidated affiliates of $0.2 million for the comparable period in the prior
year, which is attributed to changes in the earnings / losses reported by our
unconsolidated affiliates.
Minority interest decreased $2.0 million during the three months ended December
31, 2001 to ($0.2) million compared to $1.8 million for the comparable period in
the prior year. This decrease is principally attributed to an increase in net
earnings of consolidated joint ventures. In addition, the three months ended
December 31, 2000 included the 56.4% interest in the net losses of Multicare
attributable to the joint venture partner. Upon our emergence from bankruptcy,
we and Multicare merged, effectively terminating the joint venture and any
interest the joint venture partners had in Multicare.
Preferred stock dividends decreased $10.9 million to $0.6 million during the
three months ended December 31, 2001 compared to $11.5 million for the
comparable period in the prior year. This decrease is attributed to the
cancellation of our preferred stock and related dividends, and offset with
dividends on $42.0 million of Series A redeemable preferred stock issued in
connection with the Plan.
Liquidity and Capital Resources
Working Capital and Cash Flows
At December 31, 2001, we had a cash balance of $60.1 million, net working
capital of $355.5 million and approximately $149.1 million of unused commitments
under our $150 million Revolving Credit Facility.
At December 31, 2001, we had restricted investments in marketable securities of
$57.3 million, which are held by Liberty Health Corp. LTD., referred to as LHC,
our wholly-owned captive insurance subsidiary incorporated under the laws of
Bermuda. The investments held by LHC are restricted by statutory capital
requirements in Bermuda. In addition, certain of these investments are pledged
as security for letters of credit issued by LHC. As a result of such
restrictions and encumbrances, we and LHC are precluded from freely transferring
funds through intercompany loans, advances or cash dividends.
Our cash flow from operations before debt restructuring and reorganization costs
for the three months ended December 31, 2001 was a source of cash of $73.7
million compared to a use of cash of $2.7 million for the three months ended
December 31, 2000, principally due to reduced interest and lease payments
following our reorganization, improvement in the collection of accounts
receivable and the timing of vendor and employee payments. Cash payments for
debt restructuring and reorganization costs were approximately $26 million
during the three months ended December 31, 2001 compared to $11.4 million for
the same period in the prior year. We believe that cash flow from operations,
along with available borrowings under our Revolving Credit Facility, are
sufficient to meet our current liquidity needs.
21
Our days sales outstanding at December 31, 2001 was approximately 58 days
compared to approximately 60 days at September 30, 2001.
Our net cash used for investing activities for the three months ended December
31, 2001 was $29.3 million, and includes approximately $10.8 million of capital
expenditures. Capital expenditures consist primarily of betterments and
expansion of eldercare centers and investments in data processing hardware and
software. In order to maintain our physical properties in a suitable condition
to conduct our business and meet regulatory requirements, we expect to continue
to incur capital expenditure costs at levels at or above those for the three
months ended December 31, 2001 for the foreseeable future.
Our investing activities for the three months ended December 31, 2001 also
include: approximately $5.7 million in net investments in restricted investments
in marketable securities, representing the current period funding of self
insured workers' compensation and general / professional liability insurance
retentions held by LHC; and approximately $10.5 million in connection with the
exercise of an option to purchase three formerly leased eldercare centers.
Our cash flows from investing activities for the three months ended December 31,
2000 include approximately $7 million of cash proceeds from the sale of an
eldercare center.
Our financing activities for the three months ended December 31, 2001, resulted
in net cash inflows of $9.5 million, and include approximately $33 million of
cash proceeds from borrowings under the Delayed Draw Term Loan. $10 million of
the borrowings were used to finance the price of the purchase option previously
described, and the remaining $23 million were used to refinance several
mortgages at more favorable rates of interest. As a result of subsequent
developments in our bid to consummate a proposed acquisition of a pharmacy
operation, the Delayed Draw Term Loan was amended in December 2001 to allow
available borrowings that were otherwise earmarked for the proposed pharmacy
transaction to be used to restructure credit terms with NeighborCare pharmacy's
primary supplier of pharmacy products.
During the second quarter of fiscal 2002, through February 8, 2002, we borrowed
approximately $42 million from the Delayed Draw Term Loan to finance the
repayment of all trade balances due to NeighborCare Pharmacy's primary supplier
of pharmacy products. Prospectively, this change in credit terms will result in
reduced pharmacy product acquisition costs, partially offset by an increase in
interest expense on the incremental Delayed Draw Term Loan borrowings. Assuming
no future changes in variable rates of interest, the net impact of this
transaction will be positive to our cash flows.
In December 2001, the Senior Credit Facility was amended in order to extend the
date by which we are required to achieve certain levels of fixed versus variable
interest rate exposure. As amended, by June 30, 2002, we are required the enter
into interest rate swap agreements that effectively fix or cap the interest cost
on at least 50% of our consolidated debt. At December 31, 2001, our debt mix is
approximately 14% fixed and 86% variable.
For the three months ended December 31, 2001, we incurred approximately $6.8
million of lease obligation costs and expect to continue to incur lease costs at
or above levels approximating those for the three months ended December 31, 2001
for the foreseeable future.
22
Financial Commitments
Requests for providing commitments to extend financial guarantees and extend
credit are reviewed and approved by senior management. Management regularly
reviews all outstanding commitments, letters of credit and financial guarantees,
and the results of these reviews are considered in assessing the need for any
reserves for possible credit and guarantee loss.
We have posted $3.5 million of outstanding letters of credit. The letters of
credit guarantee performance to third parties of various trade activities. The
letters of credit are not recorded as liabilities on our balance sheet unless
they are utilized by the third party. The financial risk approximates the amount
of outstanding letters of credit.
We have extended approximately $7.3 million in working capital lines of credit
to certain jointly owned and managed companies, of which $4.8 million were
unused at December 31, 2001. Credit risk represents the accounting loss that
would be recognized at the reporting date if the affiliate companies were deemed
unable to repay any amounts utilized under the working capital lines of credit.
Commitments to extend credit to third parties are conditional agreements
generally having fixed expiration or termination dates and specific interest
rates and purposes.
We are a party to joint venture partnerships whereby our ownership interests are
less than 50% of the total capital of the partnerships. We account for these
partnerships using the equity method of accounting and, therefore; the assets,
liabilities and operating results of these partnerships are not consolidated
with ours. Although we are not contractually obligated to fund operating losses
of these partnerships, in certain cases, we have extended credit to such joint
venture partnerships in the past and may decide to do so in the future in order
to realize economic benefits from our joint venture relationship. Management
assesses the creditworthiness of such partnerships in the same manner it does
other third-parties. We have provided $10.9 million of financial guarantees
related to loan commitments of four jointly owned and managed companies. We have
also provided $11.1 million of financial guarantees related to lease obligations
of one jointly-owned and managed company. The guarantees are not recorded as
liabilities on our balance sheet unless we are required to perform under the
guarantee. Credit risk represents the accounting loss that would be recognized
at the reporting date if counter-parties failed to perform completely as
contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that no amounts could be
recovered from other parties.
Warrants
In connection with our Reorganization, we issued warrants (the "Warrants") to
purchase 4,559,475 shares of new common stock. This represents approximately 11
% of the new common stock issued on the effective date. The Warrants expire on
October 2, 2002 and have an exercise price of $20.33 per share of new common
stock.
Income Taxes
Our provision for income taxes for the three months ended December 31, 2001 was
$10.1 million. We realized a $7.5 million tax benefit through the realization of
Net Operating Loss ("NOL") carryforwards and $1.3 million of deferred tax
liabilities due to temporary differences between book and tax basis goodwill
amortization. Pursuant to SOP 90-7, the income tax benefit of any future
realization of the NOL carryforwards are to be applied first as a reduction to
goodwill.
Revenue Sources
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, other third party payors and long-term care facilities which utilize
our pharmacy and other specialty medical services. The healthcare industry is
experiencing the effects of the federal and state governments' trend toward cost
containment, as government and other third party payors seek to impose lower
reimbursement and utilization rates and negotiate reduced payment schedules with
providers. These cost containment measures, combined with the increasing
influence of managed care payors and competition for patients, have resulted in
reduced rates of reimbursement for services provided by us.
23
A number of the provisions of the recently enacted Balanced Budget Refinement
Act ("BBRA") and the Benefits Improvement Protection Act ("BIPA") which provide
additional funding for Medicare participating skilled nursing facilities expire
on September 30, 2002. Expiring provisions are estimated to, on average, reduce
per beneficiary per diems by $30. Moreover, the Centers for Medicare and
Medicaid Services ("CMS") has indicated its desire to complete refinements to
the case mix classification system as part of the Fiscal 2003 rule-making. Under
the law, when these revisions are implemented, the add-on's authorized by the
BBRA and BIPA will expire. Combined, the Medicare skilled nursing facility
sector face an 18% reduction in the average median per diems. If we were to
experience an 18% decline in our current average Medicare rate per patient day,
the estimated annual reduction in Medicare revenues of approximately $67 million
would have a material adverse affect on our financial position, results of
operations, and cash flows. Trade organizations representing the skilled nursing
facility sector are aggressively pursuing strategies to minimize the potential
impact of the "Medicare Rate Cliff."
It is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes or any future healthcare legislation will not adversely
affect our business. There can be no assurance that payments under governmental
and private third party payor programs will be timely, will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs. Our financial condition and results of operations may be affected by
the reimbursement process, which in our industry is complex and can involve
lengthy delays between the time that revenue is recognized and the time that
reimbursement amounts are settled.
Certain service contracts permit our NeighborCare(R) pharmacy operations to
provide services to HCR Manor Care, Inc. constituting $120 million, or
approximately ten percent and four percent of the net annual revenues, of
NeighborCare and us, respectively. These service contracts with HCR Manor Care
are the subject of certain litigation. See "Part II: Other Information, Item 1 -
Legal Proceedings" herein and in the Company's Annual Report of Form 10-K.
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.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes. In the past, we employed
established policies and procedures to manage our exposure to changes in
interest rates. Our objective in managing exposure to interest rate changes is
to limit the impact of such changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve our objective, we primarily use interest
rate swap agreements to manage net exposure to interest rate changes related to
our portfolio of borrowings. As of December 31, 2001, no interest rate swap
agreements were in place.
In December 2001, the Senior Credit Facility was amended in order to extend the
date by which we are required to achieve certain levels of fixed versus variable
interest rate exposure. As amended, by June 30, 2002, we are required to enter
into interest rate swap agreements that effectively fix or cap the interest cost
on at least 50% of our consolidated debt. At December 31, 2001, our debt mix is
approximately 14% fixed and 86% variable.
At December 31, 2001, we had $560.6 million of debt subject to variable market
rates of interest. For each additional percentage point increase in the LIBOR,
we will incur additional interest expense of approximately $5.6 million
annually.
25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to litigation arising in the ordinary course of business. The
following discussions represent updates to the litigation previously described
in our Annual Report on Form 10-K. For a more comprehensive discussion of our
existing litigation matters see "Item 3: Legal Proceedings" in our Annual Report
on Form 10-K.
Manor Care, Inc. v. Genesis Health Ventures, Inc., D. Del. Civil Action No.
99-580 (Robinson, J.).
On August 17, 1999, MCAI (then known as Manor Care, Inc.) filed a lawsuit in the
United States District Court for the District of Delaware against Genesis. In
this action, plaintiff brings claims under the federal securities laws resulting
from alleged misrepresentations and omissions made by Genesis in connection with
MCAI's acquisition of Genesis' Series G Preferred Stock as compensation for its
sale of Vitalink to Genesis. Plaintiff seeks compensatory damages of unspecified
amount, rescission of MCAI's purchase of the Series G Preferred Stock, and the
return of the consideration paid by MCAI at the time of Genesis' acquisition of
Vitalink from MCAI.
Genesis filed a motion to dismiss this action. On September 29, 2000, the Court
granted that motion in part and denied it in part. Specifically, the Court
dismissed plaintiff's allegations regarding purportedly fraudulent statements
concerning: Genesis' knowledge as to certain legislative changes to the Medicare
program; the effect of Genesis' affiliate Multicare on Genesis' earnings;
Genesis' intent with respect to the issuance of preferred stock; and Genesis'
ability to declare dividends on the Series G Preferred Stock. Accordingly, the
only allegations that were not dismissed from this action concern Genesis'
alleged failure to include certain financial information on the Registration
Statement it filed in connection with its acquisition of Vitalink, and allegedly
fraudulent statements concerning Genesis' labor relations. Genesis' motion to
consolidate this action with the Genesis Delaware Action described above has
been denied.
On October 22, 2001, plaintiff filed a motion to reconsider the Court's decision
to dismiss this action in part, and Genesis has filed an opposition to that
motion. On December 5, 2001, Genesis filed a motion to dismiss the entire action
pursuant to Genesis' Joint Plan of Reorganization and the Bankruptcy Court's
order confirming that Plan, which extinguish plaintiff's claims against Genesis
except to the extent that those claims may be applied as set-off or recoupment
against claims brought by Genesis. Briefing on these two motions was completed
on February 8, 2002.
U.S. ex rel Scherfel v. Genesis Health Ventures et al.
In this action, brought in United States District Court for the District of New
Jersey on March 16, 2000, the plaintiff alleges that a pharmacy purchased by
NeighborCare failed to process Medicaid credits for returned medications. The
allegations are vaguely alleged for other jurisdictions. While the action was
under seal in United States District Court, we fully cooperated with the
Department of Justice's evaluation of the allegations. On or about March 2001,
the Department of Justice declined to intervene in the suit and prosecute the
allegations. The U.S. District court action is no longer under seal but remains
administratively stayed pending resolution of the bankruptcy issues.
The plaintiff filed a proof of claim in our bankruptcy proceedings initially for
approximately $650,000,000 and more recently submitted an amended claim in the
amount of approximately $325,000,000. We believe the allegations have no merit
and have objected to the proof of claim. In connection with an estimation of the
proof of claim in the bankruptcy proceeding, Debtors filed a motion for summary
judgment urging that the claim be estimated at zero. On or about January 24,
2002, the bankruptcy court granted Debtors' motion and estimated the claim at
zero. On or about February 11, 2002, the plaintiff appealed the bankruptcy
court's granting of summary judgment.
26
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
On February 8, 2002, our common stock began trading on the NASDAQ
National Market System under the symbol "GHVI" and our warrants began
trading on the NASDAQ National Market System under the symbol "GHVIW".
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1(1) The Company's Amended and Restated Articles of
Incorporation.
3.2 The Company's Amended and Restated By-laws.
10.1(2) Genesis Health Ventures Inc. Deferred Compensation
Plan.
99.1 Amendment No. 1, dated as of December 31, 2001, to
the Credit, Security, Guaranty and Pledge Agreement
dated as of October 2, 2001,
-----------
1) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 2001.
2) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 33-82206).
(b) Reports on Form 8-K
None
27
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: February 14, 2002 /s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr.
Executive Vice President and Chief
Financial Officer
28