SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of Registrant as specified in its charter)
101 East State Street
Pennsylvania Kennett Square, PA 19348 06-1132947
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
(610) 444-6350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.02 per share OTC-BB
9 3/4% Senior Subordinated Debentures due 2005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days. YES X NO
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of voting and non-voting common stock held
by non-affiliates of the Registrant is $7,599,652(1). As of January 16, 2001,
48,653,344 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock, multiplied by the last
reported sale price for the Company's Common Stock on January 16, 2001. The
information provided shall in no way be construed as an admission that any
officer, director or 10% shareholder in the Company may or may not be
deemed an affiliate of the Company or that he/it is the beneficial owner of
the shares reported as being held by him/it, and any such inference is
hereby disclaimed. The information provided herein is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
INDEX
Page
Cautionary Statements Regarding Forward Looking Statements..................................................... 1
PART I
ITEM 1: BUSINESS
General ............................................................................................ 5
Voluntary Petition for Relief Under Chapter 11 of the United States Bankruptcy Code................... 6
Inpatient Services.................................................................................... 6
Pharmacy and Medical Supply Services.................................................................. 7
Other Services........................................................................................ 8
Revenue Sources....................................................................................... 8
Marketing............................................................................................. 12
Personnel............................................................................................. 12
Employee Training and Development..................................................................... 13
Governmental Regulation............................................................................... 13
Corporate Integrity Program........................................................................... 15
Competition in the Healthcare Services Industry....................................................... 16
Insurance............................................................................................. 17
ITEM 2: PROPERTIES............................................................................................ 19
ITEM 3: LEGAL PROCEEDINGS..................................................................................... 20
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 22
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................................................... 23
ITEM 6: SELECTED FINANCIAL DATA............................................................................... 24
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................. 25
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 48
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................... 49
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................. 92
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 92
ITEM 11: EXECUTIVE COMPENSATION............................................................................... 97
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................... 108
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 110
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K ...................................... 112
Cautionary Statements Regarding Forward Looking Statements
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our ability or
inability to meet our liquidity needs, scheduled debt and interest
payments and expected future capital expenditure requirements, and to
control costs, sell assets and the expected effects of government
regulation on reimbursement for services provided;
o certain statements contained in "Business" concerning strategy;
corporate integrity programs, government regulations and the Medicare
and Medicaid programs;
o certain statements in the Notes to Consolidated Financial Statements
concerning pro forma adjustments; and
o certain statements in "Legal Proceedings" regarding the effects of
litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that 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 the effect of planned dispositions of assets;
o our ability or inability to secure the capital and the related cost of
the capital necessary to fund future growth;
o the impact of health care reform, including the Medicare Prospective
Payment System ("PPS"), 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.
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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 raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 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.
There can be no assurances that the cash flow from our debtor-in-possession
financing and operations will be sufficient to enable us to service our
substantial indebtedness and meet our other obligations.
The Chapter 11 cases constituted a default under the Company's and such
subsidiaries and affiliates various financing arrangements. 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.
The Bankruptcy Court approved borrowings of up to $250,000,000 in respect to a
debtor-in-possession financing facility for Genesis and $50,000,000 in respect
to a debtor-in-possession financing facility for Multicare. Through January 31,
2001, borrowings under these facilities were $165,000,000.
The debtor-in-possession financing agreements limit, 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 debtor-in-possession financing agreements
contain customary representations, warranties and covenants, including certain
financial covenants relating to minimum EBITDA, occupancy and
debtor-in-possession borrowings 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 debtor-in-possession financing agreements and the potential
exercise of remedies by the related 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.
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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 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.
As a result of the pending status of Bankruptcy Court approval for payment of
the amendment fees, the Company classified the Genesis DIP Facility balance of
$133,000,000 as a current liability in the September 30, 2000 consolidated
balance sheet.
There can be no assurances that cash flow from operations and the
debtor-in-possession financing will be sufficient to enable us to service our
debt and meet our obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Limitations on reimbursement including the implementation of the Medicare
Prospective Payment System and other health care reforms may adversely affect
our business.
We receive revenues from Medicare, Medicaid, private insurance, long-term care
facilities which utilize our specialty medical services, self-pay eldercare
facility residents, and other third party payors. The health care industry is
experiencing a strong trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services to be provided by us.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System pursuant to
the Balanced Budget Act of 1997, as modified by the Medicare Balanced
Budget Refinement Act; and the Benefits Improvement Protection Act of
2000;
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect our business. These changes may also adversely affect long term care
facilities which are customers of our specialty medical businesses, such as
pharmacy and rehabilitation therapy services, which may, in turn, adversely
affect such businesses. There can be no assurance that payments under
governmental and private third party payor programs will be timely, will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. Our financial condition and results of operations may be affected
by the revenue reimbursement process, which in our industry is complex and can
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involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled. See "Business - Revenue Sources" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Extensive regulation by the federal and state governments may adversely affect
our costs of doing business.
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, reimbursement, licensure and
certification of eldercare centers and pharmacy operations, controlled
substances and health planning. Compliance with such regulatory requirements, as
interpreted and amended from time to time, can increase operating costs and
thereby adversely affect the financial viability of our business. Failure to
comply with current or future regulatory requirements could also result in the
imposition of various remedies including (with respect to inpatient services)
fines, restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of a facility or site of
service.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. See "Business - Government Regulation."
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
Changes in applicable laws and regulations, or new interpretations of existing
laws and regulations, could have a material adverse effect on reimbursement,
certification or licensure of our nursing facilities, pharmacies or other
aspects of our business, including eligibility for participation in federal and
state programs, costs of doing business, or the levels of reimbursement from
governmental or private sources. We cannot predict the content or impact of
future legislation and regulations affecting us. There can be no assurance that
regulatory authorities will not adopt changes or new interpretations of existing
regulations that could adversely affect us. See "Business - Revenue Sources" and
"Business - Government Regulation."
We face intense competition in our business.
The healthcare industry is highly competitive. We compete with a variety of
other companies in providing eldercare services, many of which have greater
financial and other resources and may be more established in their respective
communities than us. Competing companies may offer newer or different centers or
services than us and may thereby attract our customers who are either presently
customers of our eldercare centers or are otherwise receiving our eldercare
services.
In addition, as a result of the Vitalink Transaction, HCR Manor Care, a publicly
traded owner of eldercare centers that competes with us, owns 586,240 shares of
Genesis Series G Cumulative Convertible Preferred Stock. That stock is
convertible at the option of HCR Manor Care into approximately 7,880,000 shares
of our Common Stock. See Item 12 "Security Ownership of Certain Beneficial
Owners and Management". Certain service contracts (the "Service Contracts")
permit our NeighborCare(R) pharmacy operations to provide services to HCR Manor
Care constituting approximately eleven percent and four percent of the net
revenues of NeighborCare(R) and Genesis, respectively. These Service Contracts
are the subject of certain litigation. See "Business - Competition", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Certain Transactions and Events-Vitalink
Transaction."
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PART I
ITEM 1: BUSINESS
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania
corporation. As used herein, unless the context otherwise requires, "Genesis,"
the "Company," "we," "our" or "us" refers to Genesis Health Ventures, Inc. and
subsidiaries.
Genesis is a leading provider of healthcare and support services to the elderly.
We have developed the Genesis ElderCare(SM) delivery model of integrated
healthcare networks to provide cost-effective, outcome-oriented services to the
elderly. Genesis provides eldercare in the eastern United States through a
network of skilled nursing and assisted living centers. Genesis provides long
term care support services nationwide including pharmacy, medical equipment and
supplies, rehabilitation, group purchasing, consulting and facility management.
Through these integrated healthcare networks, Genesis provides inpatient,
pharmacy, medical supply and other healthcare services. The networks currently
include 317 owned, leased, managed, jointly-owned and affiliated eldercare
centers with approximately 39,400 beds; an integrated NeighborCare(R) pharmacy
and medical supply operation ("NeighborCare") with over $1,050,000,000 in annual
revenues, including 61 long-term care pharmacies (three are jointly-owned)
serving approximately 253,000 institutional beds; 23 medical supply and home
medical equipment distribution centers (four are jointly-owned) serving over
1,000 eldercare centers with over 80,000 beds; 32 community-based pharmacies
(two are jointly-owned); infusion therapy services; and six certified
rehabilitation agencies providing services through over 600 contracts. We also
provide diagnostic, respiratory and hospitality services in selected markets and
operate a group purchasing organization.
In order to achieve operating efficiencies, economies of scale and significant
market share, Genesis has concentrated its eldercare networks in five geographic
regions in which over 11,400,000 people over the age of 65 reside. The five
geographic markets that Genesis principally serves are: New England Region
(Massachusetts/Connecticut/New Hampshire/Vermont/Rhode Island); Midatlantic
Region (Greater Philadelphia / Delaware Valley/New Jersey); Chesapeake Region
(Southern Delaware/Eastern Shore of Maryland/Baltimore, Maryland/Washington
D.C./Virginia); Southern Region (Central Florida); and Allegheny / Midwest
Region (West Virginia/Western Pennsylvania /Illinois/Wisconsin). The Company
believes that it is the largest operator of eldercare center beds in the states
of New Hampshire, Massachusetts, New Jersey, Pennsylvania, Maryland and West
Virginia.
The Company's eldercare services focus on the central medical and physical
issues facing the more medically demanding elderly. By integrating the talents
of physicians with case management, comprehensive discharge planning and, where
necessary, home support services, we believe we provide cost-effective care
management to achieve superior outcomes and return customers to the community.
We believe that our orientation toward achieving improved customer outcomes
through our eldercare networks has resulted in increased utilization of
specialty medical services, high occupancy of available beds, enhanced quality
payor mix and a broader base of repeat customers.
We have undertaken several initiatives to position the Company to compete in the
current healthcare environment. These initiatives include:
o the development of clinical care protocols to monitor the delivery and
utilization of medical care;
o establishing and marketing the Genesis ElderCare(SM) brand name and
establishing Genesis ElderCare(SM) toll-free telephone lines along
with other trademarks, to increase awareness of our eldercare services
in the healthcare market; and
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o seeking strategic alliances with other healthcare providers to broaden
our continuum of care.
Since we began operations, we have focused our efforts on providing an expanding
array of specialty medical services to elderly customers. We generate revenues
primarily from two segments: pharmacy and medical supply services; and inpatient
services; however, we also derive revenue from other sources.
Voluntary Petition for Relief Under Chapter 11 of the United States Bankruptcy
Code
On June 22, 2000, 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 raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying 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.
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 eligible individuals. The changes have had a significantly
negative 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 states for medical services provided
to indigent persons. Third, numerous other factors have adversely affected our
cash flows, including increased labor costs, increased professional and
liability insurance costs and increased interest rates. Finally, as a result of
declining governmental reimbursement rates in the face of rising inflationary
costs, we are too highly leveraged to service our indebtedness, including our
long-term lease obligations. See Business - "Revenue Sources", "Personnel",
"Government Regulation" and "Insurance". Also, see Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Fiscal 2000
Compared to Fiscal 1999."
Inpatient Services
Genesis owns, leases or manages 292 eldercare centers (including 36 standalone
assisted living facilities and 23 transitional care units) located in 15 states.
Our skilled nursing centers offer three levels of care for their customers:
skilled, intermediate and personal. Skilled care provides 24-hour per day
professional services of a registered nurse; intermediate care provides less
intensive nursing care; and personal care provides for the needs of customers
requiring minimal supervision and assistance. Each eldercare center is
supervised by a licensed healthcare administrator and engages the services of a
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Medical Director to supervise the delivery of healthcare services to residents
and a Director of Nursing to supervise the nursing staff. We maintain a
corporate quality assurance program to monitor regulatory compliance and to
enhance the standard of care provided in each center.
Genesis has established and actively markets programs for elderly and other
customers who require subacute levels of medical care. These programs include
ventilator care, intravenous therapy, post-surgical recovery, respiratory
management, orthopedic or neurological rehabilitation, terminal care and various
forms of coma, pain and wound management. Private insurance companies and other
third party payors, including certain state Medicaid programs, have recognized
that treating customers requiring subacute medical care in centers such as those
operated by Genesis is a cost-effective alternative to treatment in an acute
care hospital. We provide such care at rates that we believe are substantially
below the rates typically charged by acute care hospitals for comparable
services.
The following table sets forth, for the periods indicated, information regarding
our average number of beds in service and the average occupancy levels at our
eldercare centers during the respective fiscal years.
2000 1999 1998
--------------------------------------------------------------------------------
Average Beds in Service: (1)
Owned and Leased Facilities 14,286 15,522 15,137
Managed and Jointly-Owned Facilities 23,779 23,984 24,234
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 91% 91%
Managed and Jointly-Owned Facilities 91% 90% 92%
--------------------------------------------------------------------------------
(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
Pharmacy and Medical Supply Services
Genesis 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 prescription and non prescription pharmaceuticals, infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. The
pharmacy services provided in these settings are tailored to meet the needs of
the institutional customer. These services include highly specialized packaging
and dispensing systems, computerized medical records processing and 24-hour
emergency services. NeighborCare provides institutional pharmacy products and
services to the elderly, chronically ill and disabled in long-term care and
alternate sites settings, including skilled nursing facilities, assisted living
facilities, residential and independent living communities and the home. We also
provide pharmacy consulting services to assure proper and effective drug
therapy. We provide these services through 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. Approximately 91%
of the sales attributable to all pharmacy operations in the twelve months ended
September 30, 2000 were generated through external contracts with independent
healthcare providers with the balance attributable to centers owned or leased by
us, including the jointly-owned Multicare centers.
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Other Services
Rehabilitation Therapy. We provide an extensive range of rehabilitation therapy
services, including speech pathology, physical therapy and occupational therapy,
through six certified rehabilitation agencies in all five of our regional market
concentrations. These services are provided by approximately 3,200 licensed
rehabilitation therapists and assistants employed or contracted by Genesis to
substantially all of the eldercare centers we operate, as well as by contract to
healthcare facilities operated by others.
Management Services. We provide management services to 190 eldercare centers
pursuant to management agreements that provide generally for the day-to-day
responsibility for the operation and management of the centers. In turn, Genesis
receives management fees, depending on the agreement, computed as either an
overall fixed fee, a fixed fee per customer, a percentage of net revenues of the
center plus an incentive fee, or a percentage of gross revenues of the center
with some incentive clauses. The various management agreements, including option
periods, are scheduled to terminate between 2001 and 2010. We have extended
various mortgage and other loans to certain facilities under management
contract. See "Notes to Consolidated Financial Statements - Footnote 11- Notes
Receivable and Other Investments."
Group Purchasing. We jointly own and operate The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), one of the largest long-term care group
purchasing companies in the country. Tidewater provides purchasing and shared
service programs specially designed to meet the needs of eldercare centers and
other long-term care facilities. Tidewater's services are contracted to
approximately 3,100 members with over 308,000 beds in 45 states and the District
of Columbia.
Other Services. We employ or have consulting arrangements with approximately 81
physicians, physician assistants and nurse practitioners who are primarily
involved in designing and administering clinical programs and directing patient
care. We also provide an array of other specialty medical services in certain
parts of our eldercare network, including portable x-ray and other diagnostic
services; home healthcare services; adult day care services; consulting
services; respiratory health services and hospitality services such as dietary,
housekeeping, laundry, plant operations and facilities management services.
Revenue Sources
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, other third party payors and long term care facilities which utilize
our specialty medical services. The health care industry is experiencing the
effects of the federal and state governments trend toward cost containment, as
government and other third party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with providers. These
cost containment measures, combined with the increasing influence of managed
care payors and competition for patients, generally have resulted in reduced
rates of reimbursement for services provided by us.
The sources and amounts of our patient revenues will be determined by a number
of factors, including licensed bed capacity and occupancy rates of our centers,
the mix of patients and the rates of reimbursement among payors. Likewise
payment for ancillary medical services, including the institutional pharmacy
services of NeighborCare and therapy services provided by our rehabilitation
therapy services business, will vary based upon payor and payment methodologies.
Changes in the case mix of the patients as well as payor mix among private pay,
Medicare, and Medicaid will significantly affect our profitability.
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Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title
XVIII of the Social Security Act), known as "Medicare," has made available to
nearly every American 65 years of age and older a broad program of health
insurance designed to help the nation's elderly meet hospital and other health
care costs. Health insurance coverage has been extended to certain persons under
age 65 qualifying as disabled and those having end-stage renal disease. Medicare
includes three related health insurance programs: (i) hospital insurance ("Part
A"); and (ii) supplementary medical insurance ("Part B"); and (iii) a managed
care option for beneficiaries who are entitled to Part A and enrolled in Part B
("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently
administered by fiscal intermediaries (for Part A and some Part B services) and
carriers (for Part B) under the direction of the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS").
Medicaid (Title XIX of the Social Security Act) is a federal-state matching
program, whereby the federal government, under a needs based formula, matches
funds provided by the participating states for medical assistance to "medically
indigent" persons. The programs are administered by the applicable state welfare
or social service agencies under Federal rules. Although Medicaid programs vary
from state to state, traditionally they have provided for the payment of certain
expenses, up to established limits, at rates determined in accordance with each
state's regulations. For nursing centers, most states pay prospective rates, and
have some form of acuity adjustment. In addition to facility based services,
most states cover an array of medical ancillary services, including
institutional pharmacy. Payment methodologies for these services vary based upon
state preferences and practices permitted under Federal rules.
Medicare and Medicaid are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially affect the timing and/or levels of
payments to us for our services.
We are subject to periodic audits by the Medicare and Medicaid programs, which
have various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements. Such
rights and remedies may include requiring the repayment of any amounts alleged
to be overpayments or in violation of program requirements, or making deductions
from future amounts due to us. Such programs may also impose fines, criminal
penalties or program exclusions. Other payor sources also reserve rights to
conduct audits and make monetary adjustments.
Congress has enacted three major laws during the past five years that have
significantly altered payment for nursing home and medical ancillary services.
The Balanced Budget Act of 1997 ("the 1997 Act"), signed into law on August 5,
1997, reduced federal spending on the Medicare and Medicaid programs. The
Medicare Balanced Budget Refinement Act ("BBRA"), enacted in November 1999
addressed a number of the funding difficulties caused by the 1997 Act. 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 following provides an overview to the impact of each enactment on
Genesis services.
Under the 1997 Act, participating skilled nursing facilities are reimbursed
under a prospective payment system ("PPS") for inpatient Medicare covered
services. The PPS system commenced with a facility's first cost reporting period
beginning on or after July 1, 1998. Under PPS, nursing facilities are paid a
predetermined amount per patient, per day ("per diem") based on the anticipated
costs of treating patients. The per diem rate is determined by classifying each
patient into one of forty-four resource utilization groups ("RUG") using the
information gathered during the minimum data set ("MDS") assesent. There is a
separate per diem rate for each of the RUG classifications. The per diem rate
also covers rehabilitation and non-rehabilitation ancillary services. The law
phased in PPS over a three-year period. PPS reimbursement is based largely on a
nursing facility's costs for the services it provided to Medicare beneficiaries
in the 1994-1995 base year.
As implemented by HCFA, PPS has had an adverse impact on the Medicare revenues
of many skilled nursing facilities. There have been three primary problems.
First, the base year calculations understate costs. Second, the market basket
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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.
In November 1999, the BBRA was passed in Congress. This enactment provided
relief for certain reductions in Medicare reimbursement caused by the 1997 Act.
For covered skilled nursing facility services furnished on or after April 1,
2000, the federal per diem rate was increased by 20% for 15 RUG payment
categories. While this provision was initially expected to adjust payment rates
for only six months, HCFA withdrew proposed RUG refinement rules. These payment
add-ons will continue until HCFA completes certain mandated recalculations of
current RUG weightings. For fiscal years 2001 and 2002, the BBRA mandated
federal per diem rates for all RUG categories be increased by an additional 4%
over the required market basket adjustment. The law provided that certain
specific services (such as prostheses and chemotherapy drugs) would be
reimbursed separately from and in addition to the federal per diem rate. A
provision was included that provided that for cost report years beginning on or
after January 1, 2000, skilled nursing facilities could waive the PPS transition
period and elect to receive 100% of the federal per diem rate. The enactment
also lifted for two years the $1,500 cap on rehabilitation therapy services
provided under Medicare Part B.
On December 15, 2000 Congress passed BIPA 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.
The Company's average Medicare rate per patient day in Fiscal 1997, prior to the
implementation of PPS, was over $400. In Fiscal 1998, 1999 and 2000 the average
Medicare rate per patient day was $390, $302 and $294, respectively.
The 1997 Act had provisions that affected amounts paid to NeighborCare for
pharmacy and medical supply products and services. Reimbursement for certain
products covered under Medicare Part B is limited to 95% of the "average
wholesale price." The move to prospective payment systems under the 1997 Act has
made pricing a more important consideration in the selection of pharmacy
providers. Also, Congress included provisions in the 1997 Act that would require
nursing facilities to submit all claims for all Medicare-covered services that
their residents receive, both Medicare Part A and Part B, even if such services
are provided by outside suppliers, including but not limited to pharmacy and
rehabilitation therapy providers, except for certain excluded services
("Consolidated Billing"). The BIPA enacted in December 2000, repealed this
provision except for therapy services.
The 1997 Act included several provisions affecting Medicaid. The 1997 Act
repealed the "Boren Amendment" federal payment standard for Medicaid payments to
nursing facilities effective October 1, 1997. The Boren Amendment required that
Medicaid payments to certain health care providers be reasonable and adequate in
order to cover the costs of efficiently and economically operated healthcare
facilities. Under the 1997 Act, states must now use a public notice and comment
period in order to determine rates and provide interested parties a reasonable
opportunity to comment on proposed rates and the justification for and the
methodology used in calculating such rates. With the repeal of the Federal
payment standards, there can be no assurances that budget constraints or other
factors will not cause states to reduce Medicaid reimbursement to nursing
facilities and pharmacies or that payments to nursing facilities and pharmacies
will be made on timely basis. The 1997 Act also grants greater flexibility to
states to establish Medicaid managed care projects without the need to obtain a
federal waiver. Although these projects generally exempt institutional care,
including nursing facilities and institutional pharmacy services, no assurances
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can be given that these projects ultimately will not change the reimbursement
methodology for nursing facility services or pharmacy services from
fee-for-service to managed care negotiated or capitated rates. We anticipate
that federal and state governments will continue to review and assess
alternative health care delivery systems and payment methodologies.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by HCFA and applicable federal law. In
most states, pharmacy services are priced at the lower of "usual and customary"
charges or cost (which generally is defined as a function of average wholesale
price and may include a profit percentage) plus a dispensing fee. Certain states
have "lowest charge legislation" or "most favored nation provisions" which
require NeighborCare to charge Medicaid no more that its lowest charge to other
consumers in the state. 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.
The following table reflects the allocation of customer service revenues among
these sources of revenue.
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Private pay and other 41% 47% 45% 39% 39%
Medicaid 43 39 35 37 36
Medicare 16 14 20 24 25
--------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
--------------------------------------------------------------------------------
See "Business - Government Regulation."
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
"Business - Competition", "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of operations -Certain Transactions
and Events-Vitalink Transaction."
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 -
Marketing
Marketing for eldercare centers is focused at the local level and is conducted
primarily by the center administrator and its admissions director, with support
from a dedicated regional marketing staff, who call on referral sources such as
doctors, hospitals, hospital discharge planners, churches and various community
organizations. In addition to those efforts, our marketing objective is to
maintain public awareness of the eldercare center and its capabilities. We take
advantage of our regional concentrations in our marketing efforts, where
appropriate, through consolidated marketing programs which benefit more than one
center.
Genesis markets specialty medical services to its managed eldercare centers, as
well as to independent healthcare providers, in addition to providing such
services to its owned, leased, managed and affiliated eldercare centers. We
market our rehabilitation therapy services, institutional pharmacy, medical
supply and other services through a direct sales force which primarily calls on
eldercare centers, hospitals, clinics and home health agencies.
The corporate managed care department, through regional managers, markets our
services directly to insurance companies, managed care organizations and other
third party payors. In addition, the marketing department supports the eldercare
centers in developing promotional materials and literature focusing on the
Company's philosophy of care, services provided and quality clinical standards.
See "Governmental Regulation" for a discussion of the federal and state laws
which limit financial and other arrangements between healthcare providers.
We operate our core business under the name Genesis ElderCare(SM). The Genesis
ElderCare logo and service mark have been featured in a series of print
advertisements in publications serving the regional markets in which we operate.
Our marketing of Genesis ElderCare is aimed at increasing awareness among
decision makers in key professional and business audiences. We are using
advertising, including our toll free ElderCare Lines, to promote our brand name
in trade, professional and business publications and to promote services
directly to consumers.
Personnel
At December 31, 2000, Genesis and its subsidiaries (including Multicare)
employed over 46,000 people, including approximately 33,000 full-time and 13,000
part-time employees. Approximately 19% of these employees are physicians, nurses
and professional staff. Approximately 13,000 of these employees are employed by
Multicare.
Including Multicare, we currently have 81 facilities that are covered by, or are
negotiating, collective bargaining agreements. The agreements expire at various
dates from 2001 through 2005 and cover approximately 5,100 employees. Although
we have been subject to an aggressive union organizing campaign by the Service
Employees International Union ("SEIU"), we have experienced little impact at the
facility level. We believe that our relationship with our employees is generally
good.
The Company and the industry continue to experience significant shortages in
qualified professional clinical staff. We compete with other healthcare
providers and with non-healthcare providers for both professional and
non-professional employees. As the demand for these services continually exceeds
the supply of available and qualified staff, 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, each offering new and more
attractive wage and benefit packages. In addition to the wage pressures inherent
in this environment, the cost of training new employees amid the high turnover
rates has caused added pressure on our operating margins. While we have been
able to retain the services of an adequate number of qualified personnel to
- 12 -
staff our facilities appropriately and maintain our standards of quality care,
there can be no assurance that continued shortages will not in the future affect
our ability to attract and maintain an adequate staff of qualified healthcare
personnel. A lack of qualified personnel at a facility could result in
significant increases in labor costs at such facility or otherwise adversely
affect operations at such facility. Any of these developments could adversely
affect our operating results or expansion plans.
Employee Training and Development
Genesis believes that nursing and professional staff retention and development
has been and continues to be a critical factor in our successful operation. In
response to this challenge, a compensation program which provides for annual
merit reviews as well as financial and quality of care incentives has been
implemented to promote center staff motivation and productivity and to reduce
turnover rates. Management believes that our wage rates for professional nursing
staff are commensurate with market rates.
In addition, Genesis has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized
through a variety of in-house programs as well as a tuition reimbursement
program. We have established, company-wide, the Genesis Nursing Assistant
Specialist Program, which is offered on a joint basis with community colleges.
Classes are held on the employees' time, at our cost, last for approximately six
months and provide advanced instruction in nursing care. When all of the
requirements for class participation have been met through attendance,
discussion and examinations, the nurses aide graduates and is awarded the title
of Nursing Assistant Specialist and receives a salary adjustment. We have
maintained a retention rate of 82% since 1990 of the nurses aide graduates.
Approximately 1,800 nurses aides have graduated from the Genesis Nursing
Assistant Specialist Program and received an increase in salary. As the nurse
aide continues through the career ladder, we continue to provide incentives. At
the next level, Senior Nursing Assistant Specialist, the employee receives
another increase in salary and additional tuition reimbursement of up to $2,500
toward becoming a Licensed Practical Nurse ("LPN") or Registered Nurse ("RN")
and at the Senior Nursing Assistant Specialist Coordinator level, tuition
reimbursement increases to a maximum of $3,000 per year towards a nursing
degree. Similar program are currently under development for both pharmacy
technicians and nursing assistants who work in the assisted living environment.
We began a junior level management and leadership training program in 1990
referred to as the Pilot Light Program. The target audience for this training is
RN's and LPN's occupying charge nurse positions within the Company's nursing
centers as well as junior level managers throughout the Genesis networks. Over
1,100 participants have graduated from this program.
Government Regulation
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. For our eldercare centers, this regulation relates, among other
things, to the adequacy of physical plant and equipment, qualifications of
personnel, standards of care and operational requirements. For pharmacy and
medical supply products and services, this regulation relates, among other
things, to operational requirements, reimbursement, documentation, licensure,
certification and regulation of controlled substances. Compliance with such
regulatory requirements, as interpreted and amended from time to time, can
increase operating costs and thereby adversely affect the financial viability of
our business. Failure to comply with current or future regulatory requirements
could also result in the imposition of various remedies including fines,
restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of the facility.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. Following this pronouncement, it has become
more difficult for nursing facilities to maintain licensing and certification.
- 13 -
We have experienced and expect to continue to experience increased costs in
connection with maintaining our licenses and certifications as well as increased
enforcement actions.
All of our eldercare centers and healthcare services, to the extent required,
are licensed under applicable law. All skilled nursing centers and healthcare
services, or practitioners providing the services therein, are certified or
approved as providers under one or more of the Medicaid and Medicare programs.
Generally, assisted living centers are not eligible to be certified under
Medicare or Medicaid. Licensing, certification and other applicable standards
vary from jurisdiction to jurisdiction and are revised periodically. State and
local agencies survey all skilled nursing centers on a regular basis to
determine whether such centers are in compliance with governmental operating and
health standards and conditions for participation in government sponsored third
party payor programs. We believe that our eldercare centers and other sites of
service are in substantial compliance with the various Medicare, Medicaid and
state regulatory requirements applicable to them. However, in the ordinary
course of our business, we receive notices of deficiencies for failure to comply
with various regulatory requirements. Genesis reviews such notices and takes
appropriate corrective action. In most cases, Genesis and the reviewing agency
will agree upon the measures to be taken to bring the center into compliance
with regulatory requirements. In some cases or upon repeat violations, the
reviewing agency may take various adverse actions against a provider, including
but not limited to:
o the imposition of fines;
o suspension of payments for new admissions to the center;
o in extreme circumstances, decertification from participation in the
Medicare or Medicaid programs and revocation of a center's license.
These actions may adversely affect a centers' ability to continue to operate,
the ability to provide certain services, and / or eligibility to participate in
the Medicare or Medicaid programs or to receive payments from other payors.
Additionally, actions taken against one center may subject other centers under
common control or ownership to adverse remedies. Certain of our centers have
received notices in the past from state and federal agencies that, as a result
of certain alleged deficiencies, the agency was taking steps to decertify the
centers from participation in Medicare and Medicaid programs. However, except as
discussed below, all such centers have taken appropriate corrective action such
that they were not decertified from the program(s).
In March 1999, the Company voluntarily closed an eldercare center in the state
of Florida following notice of possible decertification from Florida's
regulatory agency. We believe the agency's actions were inappropriate and caused
the center to lose its economic viability which, in our opinion, necessitated
the closing of the center. In addition, a Multicare center in West Virginia was
decertified from the Medicare and Medicaid programs in 1999, but was immediately
reinstated.
All of our owned and leased skilled nursing centers are currently certified to
receive benefits provided under Medicare for these services. Additionally, all
Genesis and Multicare skilled nursing centers are currently certified to receive
benefits under Medicaid. Both initial and continuing qualifications of a skilled
nursing center to participate in such programs depend upon many factors
including accommodations, equipment, services, patient care, safety, personnel,
physical environment, and adequate policies, procedures and controls.
Many states in which Genesis operates have adopted Certificate of Need or
similar laws which generally require that a state agency approve certain
acquisitions and determine that the need for certain bed additions, new
services, and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other
changes, or the expenditure of capital. State approvals are generally issued for
a specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
centers, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the center's license
- 14 -
and adverse reimbursement action. During the past year, several states have
passed legislation altering their Certificate of Need requirements. Virginia
will phase out its requirement. Maryland is studying a similar action. These
changes are not expected to materially alter our business opportunities.
We are also subject to federal and state laws which govern financial and other
arrangements between healthcare providers. These laws often prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. These laws include:
o the "anti-kickback" provisions of the federal Medicare and Medicaid
programs, which prohibit, among other things, knowingly and willfully
soliciting, receiving, offering or paying any remuneration (including
any kickback, bribe or rebate) directly or indirectly in return for or
to induce the referral of an individual to a person for the furnishing
or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid;
and
o the "Stark laws" which prohibit, with limited exceptions, the referral
of patients by physicians for certain services, including home health
services, physical therapy and occupational therapy, to an entity in
which the physician has a financial interest.
In addition, some states restrict certain business relationships between
physicians and other providers of healthcare services. Many states prohibit
business corporations from providing, or holding themselves out as a provider of
medical care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. From time to time, we have sought guidance as to the
interpretation of these laws; however, there can be no assurance that such laws
will ultimately be interpreted in a manner consistent with our practices.
There have also been a number of recent federal and state legislative and
regulatory initiatives concerning reimbursement under the Medicare and Medicaid
programs. During the past two years, the Office of the Inspector General, HHS
has issued a series of voluntary compliance guidelines. These compliance
guidelines provide guidance on acceptable practices. Skilled nursing facility
services and DMEPOS supplier performance practices have been among the services
addressed in these publications. Our Regulatory Compliance Advisory Committee is
working to assure that our practices conform. The Office of the Inspector
General, HHS also issues fraud alerts and advisory opinions. Directives
concerning double billing, home health services and the provision of medical
supplies to nursing facilities have been released. It is anticipated that areas
addressed by these advisories may come under closer scrutiny by the government.
While we have focused our internal compliance reviews to assure our practices
conform with government instructions, we cannot accurately predict the impact of
any such initiatives. See "Cautionary Statements Regarding Forward Looking
Statements" and "Revenue Sources".
Corporate Integrity Program
The Genesis Corporate Integrity Program (the "Integrity Program") was developed
to assure that we continue to achieve our goal of providing a high level of care
and service in a manner consistent with all applicable state and federal laws
and regulations, and our internal standard of conduct. This program is intended
to allow personnel to prevent, detect and resolve any conduct or action that
fails to satisfy all applicable laws and our standard of conduct.
The Company has a Corporate Compliance Officer responsible for administering the
Integrity Program. The Corporate Compliance Officer, with the concurrence of the
Chief Executive Officer or the Board of Directors, may use any of the Company's
- 15 -
resources to evaluate and resolve compliance issues. The Compliance Officer
reports significant compliance issues to the Board of Directors, including the
results of investigations and any subsequent disciplinary or remedial actions
taken.
In December 1998, the Company established the Corporate Integrity Hotline (the
"Hotline"), which offers a toll-free number available to all employees of
Genesis to report non-compliance issues. Employee calls to the hotline are kept
anonymous. All calls reporting alleged non-compliance are logged, investigated,
addressed and remedied by appropriate company officials.
In 1999, two subcommittees were established to further ensure the effectiveness
of the Integrity Program. The Regulatory Compliance Advisory Committee ("RCAC")
was formed to ensure that a mechanism exists to monitor federal and state
regulations which effect the Company and to ensure that existing regulations are
being adhered to throughout the organization. The RCAC is comprised of senior
level management and meets bimonthly to discuss regulatory issues which
potentially impact the Company. The Corporate Integrity Subcommittee (the "CIS")
was established to ensure a mechanism exists for the Company to monitory
compliance issues. Potential compliance issues are referred by the Corporate
Compliance Officer to members of the CIS for investigation. The CIS members are
senior members of the risk management, human resources, legal, clinical
practices and internal audit departments.
Periodically, the Company receives information from the Department of Health and
Human Services Office of Inspector General (HHS OIG) regarding individuals and
providers that are excluded from participation in Medicare, Medicaid and other
federal healthcare programs. Providers include medical directors, attending
physicians, vendors, consultants and therapists. On a monthly basis, management
compares the information provided by the HHS OIG to data bases containing
providers and individuals doing businesses with Genesis. Any potential matches
are investigated and any necessary corrective action is taken to ensure we cease
doing businesses with such providers and individuals.
Competition in the Healthcare Services Industry
We compete with a variety of other companies in providing healthcare services.
Certain competing companies have greater financial and other resources and may
be more established in their respective communities than us. Competing companies
may offer newer or different centers or services than us and may thereby attract
our customers who are either presently residents of our eldercare centers or are
otherwise receiving our healthcare services.
As a result of the Vitalink Transaction, HCR Manor Care, a publicly traded owner
of eldercare centers that competes with us in certain markets, owns 586,240
shares of Genesis Series G Cumulative Convertible Preferred Stock (the "Series G
Preferred") which are convertible at the option of the holder into approximately
7,880,000 shares of our Common Stock. See Item 12 "Security Ownership of Certain
Beneficial Owners and Management". Pursuant to certain service contracts (the
"Service Contracts"), our NeighborCare pharmacy operations provide services to
HCR Manor Care constituting approximately four percent and eleven percent of the
consolidated net revenues of Genesis and NeighborCare, respectively in fiscal
2000. These Service Contracts are the subject of certain litigation. See "Legal
Proceedings".
We operate eldercare centers in 15 states. In each market, our eldercare centers
may compete for customers with rehabilitation hospitals; subacute units of
hospitals; skilled or intermediate nursing centers; and personal care or
residential centers which offer comparable services to those offered by our
centers.
Certain of these providers are operated by not-for-profit organizations and
similar businesses which can finance capital expenditures on a tax-exempt basis
or receive charitable contributions unavailable to us. In competing for
customers, a center's local reputation is of paramount importance. Referrals
- 16 -
typically come from acute care hospitals; physicians; religious groups; health
maintenance organizations; the customer's families and friends; and other
community organizations.
Members of a customer's family generally actively participate in selecting an
eldercare center. Competition for subacute patients is intense among hospitals
with long-term care capability, rehabilitation hospitals and other specialty
providers and is expected to remain so in the future. Important competitive
factors include the reputation in the community; services offered; the
appearance of a center; and the cost of services.
Genesis competes in providing pharmacy, medical supply and other specialty
medical services with a variety of different companies. Generally, this
competition is national, regional and local in nature. The primary competitive
factors in the specialty medical services business are similar to those in the
eldercare center business and include reputation; the cost of services; the
quality of clinical services; responsiveness to customer needs; and the ability
to provide support in other areas such as third party reimbursement, information
management and patient record-keeping.
Insurance
The Company carries property, general and professional liability coverage on
behalf of itself and its subsidiaries in amounts deemed adequate by management.
However, there can be no assurance that any current or future claims will not
exceed applicable insurance coverage.
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.
Workers' compensation insurance has been maintained as statutorily required, or
in certain jurisdictions for certain periods, the Company has qualified as
exempt ("self insured"). Most of the commercial insurance purchased is loss
sensitive in nature. As a result, the Company is responsible for adverse loss
development or, in some cases, may be entitled to refunds if losses are below
certain levels. The Company believes that adequate reserves are in place to
cover the ultimate liability related to workers' compensation.
The Company maintains a wholly owned captive insurance subsidiary, Liberty
Health Corp., LTD ("LHC") to provide 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
- 17 -
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.
- 18 -
ITEM 2: PROPERTIES
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Genesis as of December 31, 2000. Included
in the center count are 36 standalone assisted living facilities with 3,333
units and 23 skilled nursing facilities with 792 assisted living units. Certain
properties are leased by the respective operating entities from third parties.
The inability of Genesis to make rental payments under these leases could result
in loss of the leased property through eviction or other proceedings. Certain
leases do not provide for non disturbance from the mortgagee of the fee interest
in the property and consequently each such lease is subject to termination in
the event that the mortgage is foreclosed following a default by the owner.
Included in Managed Centers are 131 jointly-owned facilities with 16,047 beds /
assisted living units, including the Multicare centers. Also included in Managed
Centers are 24 transitional care units with 621 beds located in hospitals
principally in the state of Massachusetts. Member Centers consist of
independently owned facilities that, for a fee, have access to many of the
resources and capabilities of the Genesis Eldercare Network, including
participation in Genesis' managed care contracts, preferred provider
arrangements and group purchasing arrangements. These centers typically purchase
an array of services from Genesis.
Wholly-Owned Leased Managed Member
Centers Centers Centers (1) Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
------------------------------------------------------------------------------------------------------------------------------------
Maryland 13 1,759 6 801 13 1,805 15 2,848 47 7,213
Pennsylvania 17 2,315 4 459 29 3,899 3 375 53 7,048
New Jersey 8 1,640 4 670 30 3,717 2 375 44 6,402
Massachusetts 6 712 1 132 53 4,786 - - 60 5,630
Connecticut 4 615 - - 14 1,717 - - 18 2,332
West Virginia - - 2 180 23 1,952 - - 25 2,132
Florida 12 1,559 1 120 1 120 1 120 15 1,919
New Hampshire 9 916 4 364 1 90 - - 14 1,370
Delaware 4 502 - - 3 319 3 449 10 1,270
Virginia 4 619 1 240 1 90 6 949
Wisconsin - - - - 7 951 - - 7 951
Illinois - - - - 9 919 - - 9 919
Rhode Island - - - - 3 373 - - 3 373
North Carolina - - - - 2 340 - - 2 340
Vermont 2 256 - - 1 58 - - 3 314
District of Columbia - - - - - - 1 189 1 189
------------------------------------------------------------------------------------------------------------------------------------
Totals 79 10,893 23 2,966 190 21,136 25 4,356 317 39,351
------------------------------------------------------------------------------------------------------------------------------------
We have 2 owned and 107 leased pharmacy and medical supply locations in 41
states.
We believe that all of our physical properties are well maintained and are in a
suitable condition for the conduct of our business.
(1) - Includes 96 centers with 11,305 beds owned or leased by Multicare. Prior
to October 1, 2000, Genesis accounted for its 43.6% owned investment in
Multicare using the equity method of accounting. Upon consummation of a
restructuring transaction, more fully described in Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Multicare
Transaction and its Restructuring", Genesis consolidated the financial results
of Multicare.
- 19 -
ITEM 3: LEGAL PROCEEDINGS
Genesis is a party to litigation arising in the ordinary course of business.
Genesis does not believe the results of such litigation, even if the outcome is
unfavorable to us, would have a material adverse effect on our financial
position. See "Cautionary Statements Regarding Forward Looking Statements."
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.
- 20 -
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. The Bankruptcy Court has not yet ruled on these motions. As a
result, the Arbitration remains stayed to date.
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.
On November 23, 1999, Genesis moved to dismiss this action on the ground, 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.
- 21 -
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."
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
- 22 -
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table indicates the high and low sale prices per share, as
reported on the New York Stock Exchange through June 22, 2000 and on the OTC
Bulletin Board thereafter.
Calendar Year High Low
------------- ---- ---
2000
First Quarter $3.50 $0.56
Second Quarter $0.75 $0.02
Third Quarter $0.31 $0.06
Fourth Quarter $0.20 $0.03
1999
First Quarter $9.50 $3.50
Second Quarter $7.69 $3.00
Third Quarter $4.00 $1.88
Fourth Quarter $2.94 $1.94
As of December 31, 2000, 48,653,344 shares of Common Stock were held of record
by 770 shareholders. In addition, there were 589,714 outstanding shares of
Series G Preferred Stock which are convertible into 7,926,411 shares of Common
Stock; 24,369 shares of Series H Preferred Stock which are convertible into
27,850,590 shares of Common Stock; and 17,631 shares of Series I Preferred Stock
which are convertible into 20,149,410 shares of non-voting common stock. The
Company has not paid any cash dividends on its Common Stock since its inception
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. At September 30, 2000 there were approximately $34,921,000,
$13,258,000 and $9,562,000 of accrued but unpaid dividends on the Series G
Preferred, the Series H Preferred and the Series I Preferred, respectively,
which are subject to compromise in connection with the Chapter 11 Cases.
Certain of the Company's outstanding loans contain covenants which limit our
ability to declare and pay dividends. In addition, the Company's current
financial condition limits our ability to declare and pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements". Also, see Item 12 "Security Ownership of
Certain Beneficial Owners and Management".
- 23 -
ITEM 6: SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Statement of Operations Data
(in thousands, except per share data)
Net revenues $2,433,858 $1,866,426 $1,405,305 $1,099,823 $ 671,469
Operating income (loss) before capital
costs* (208,997) 85,879 134,690 184,868 127,024
Earnings (loss) before extraordinary items,
cumulative effect of accounting change and
after preferred dividends (873,043) (287,950) (23,976) 48,144 37,169
Net income (loss) attributable to common
shareholders (883,455) (290,050) (25,900) 47,591 37,169
Per common share data (Diluted):
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change (18.55) (8.11) (0.68) 1.34 1.29
Net income (loss) attributable to common
shareholders $ (18.77) $ (8.17) $ (0.74) $ 1.33 $ 1.29
Weighted average shares of common stock and
equivalents 47,077 35,485 35,159 36,120 31,058
------------------------------------------------------------------------------------------------------------------------------------
Other Financial Data
Operating income (loss) before capital
costs* as a percent of revenue (8.6%) 4.6% 9.6% 16.8% 18.9%
Capital expenditures (in thousands) $ 51,981 $ 77,943 $ 56,663 $ 61,102 $38,645
Operating Data
Payor Mix (as a percent of patient service
revenue)
Private pay and other 41% 47% 45% 39% 39%
Medicare 16% 14% 20% 24% 25%
Medicaid 43% 39% 35% 37% 36%
Average owned/leased eldercare center
beds 14,286 15,522 15,137 15,132 9,429
Occupancy Percentage 90.7% 90.7% 91.5% 91.0% 92.6%
Average managed eldercare center beds 23,779 23,984 24,234 6,101 5,030
Average full-time equivalent personnel 40,450 40,500 37,708 27,700 16,325
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (in thousands)
Working capital $ 304,241 $ 235,704 $ 243,461 $ 166,065 $ 113,916
Total assets 3,127,899 2,429,914 2,627,368 1,434,113 950,669
Liabilities subject to compromise 2,446,673 - - - -
Long-term debt 10,441 1,484,510 1,358,595 651,667 338,933
Redeemable preferred stock - (subject to compromise) 442,820 - - - -
Shareholders' equity (deficit) $ (246,926) $ 587,890 $ 875,072 $ 608,021 $ 514,608
* Capital costs include depreciation and amortization, lease expense, interest
expense and the Multicare joint venture restructuring cost incurred in 2000.
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Certain Transactions and Events" for a description of
significant transactions.
- 24 -
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Since we began operations in July 1985, we have focused our efforts on providing
an expanding array of specialty medical services to elderly customers. We
generate revenues primarily from two sources: pharmacy and medical supply
services, and inpatient services however, we also derive revenue from other
sources.
We 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, capitation fees, consulting services,
homecare services, physician services, transportation services, diagnostic
services, hospitality services, group purchasing fees, respiratory health
services and other healthcare related services.
Certain Transactions and Events
Liquidity and Going Concern Assumption
The accompanying 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 Chapter 11 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. 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 from operations and financing
arrangements to meet obligations.
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
then fair reimbursement by the states for medical services provided to indigent
persons under the various state Medicaid programs. Third, numerous other factors
- 25 -
have adversely affected our cash flows, including increased labor costs,
increased professional liability and other insurance costs, and increased
interest rates. Finally, as a result of declining governmental reimbursement
rates and in the face of rising inflationary costs, we were too highly leveraged
to service our debt, including our long-term lease obligations. See Business -
"Revenue Sources", "Personnel", "Government Regulation", and "Insurance". Also
see Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Fiscal 2000 Compared to Fiscal 1999".
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
to receive:
o .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Series G Preferred"),
o $22.50 in cash, or
o a combination of cash and shares of Series G Preferred (collectively,
the "Merger Consideration"). The Merger Consideration paid to
stockholders of Vitalink to acquire their shares (including shares
which may have been issued upon the exercise of outstanding options)
was $590,200,000, of which 50% was paid in cash and 50% in Series G
Preferred.
At September 30, 2000 there were approximately $34,921,000 in dividends in
arrears on the Series G Preferred which are recorded on the accompanying balance
sheet as liabilities subject to compromise. The holders of the Series G
Preferred are entitled to be paid in additional shares of Series G Preferred to
the extent that dividends are not declared and paid or funds continue not to be
legally available for the payment of dividends after four consecutive quarterly
periods, as defined. To date, the Company has not issued additional shares of
Series G Preferred in lieu of cash dividends.
Pursuant to four agreements with HCR Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR Manor Care (the
"Service Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004. See "Legal Proceedings".
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
- 26 -
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put/call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. common stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to sell (the "Put") such Genesis ElderCare
Corp. common stock at a price determined pursuant to the Put/Call Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 (the "Therapy Purchase") and a stock purchase agreement (the
"Pharmacy Purchase Agreement") with Multicare and certain subsidiaries pursuant
to which Genesis acquired all of the outstanding capital stock and limited
partnership interests of certain subsidiaries of Multicare that were engaged in
the business of providing institutional pharmacy services to third parties for
$50,000,000 (the "Pharmacy Purchase"). The Company completed the Pharmacy
Purchase effective January 1, 1998. The Company completed the Therapy Purchase
in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred"), which 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.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
- 27 -
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis Common Stock and a ten year warrant to purchase 2,000,000 shares of
Genesis Common Stock at an exercise price of $5.00 per share. See Item 12
"Security Ownership of Certain Beneficial Owners and Management".
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis Common Stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an irrevocable
proxy to vote their shares of common stock of Genesis ElderCare Corp.
on all matters to be voted on by shareholders, including the election
of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions receive the
approval of at least one designee of each of Cypress, TPG and Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
o provide that Genesis may appoint 100% of the members of the operating
committee of the board of directors of Genesis ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis Common Stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
- 28 -
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which would
constitute a change in control, as defined in the Restructuring
Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part of a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the Multicare restructuring transaction, Genesis accounted for its
investment in Multicare using the equity method of accounting. Upon consummation
of the restructuring transaction, 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 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.
In connection with the restructuring transaction, 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
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.
AGE Institute
In the fourth fiscal quarter of 2000, we received notice from the AGE Holdings,
Inc., a not-for-profit owner / sponsor of 20 eldercare centers with
approximately 2,400 beds, that it wished to discontinue our management contracts
and ancillary service contracts (the "AGE Contracts"). Effective October 31,
- 29 -
2000, the AGE Contracts were terminated. In fiscal 2000, the AGE Contracts
generated approximately $19,000,000 in revenue and $2,000,000 in operating
income.
On November 27, 2000, Genesis Health Ventures, Inc., along with several
subsidiaries, filed an adversary proceeding in the Genesis bankruptcy cases
against four related nursing home owners (AGE Institute of Pennsylvania, Inc.;
AGE Institute of Massachusetts, Inc.; AGE Institute of Florida, Inc.; and
Delaware Valley Convalescent Homes, Inc.); and their parent company AGE
Holdings, Inc. The complaint seeks to recover approximately $20,800,000 owed to
Genesis through the AGE Contracts, by which Genesis provided services to 20
nursing homes owned by the defendants in Pennsylvania, Massachusetts and
Florida. The complaint asserts counts against all defendants for breach of
contract, civil conspiracy and unjust enrichment, and against AGE Institute of
Pennsylvania, Inc. and AGE Institute of Massachusetts, Inc. for breach of
certain trust indentures. On January 4, 2001, the AGE defendants filed a motion
to dismiss the claims for conspiracy and for breach of the trust indentures; to
dismiss AGE Holdings, Inc., as a defendant; and to strike Genesis' demands for
punitive damages and attorneys' fees. Genesis filed a response to the motion,
which is pending. Although the defendants have not yet filed an answer to the
contract claims, Genesis expects to start discovery on the claims shortly.
ElderTrust Transactions
On January 31, 2001, we reached agreements to restructure our relationship with
ElderTrust, a Maryland healthcare real estate investment trust. The agreements
encompass, among other things, the resolution of leases and mortgages for 33
properties operated by Genesis and Multicare either directly or through joint
ventures. Under its agreement, Genesis: assumed the ElderTrust leases subject to
certain modifications, including a reduction in Genesis' annual lease expense of
$745,000; extended the maturity and reduced the principal balances of loans for
three assisted living properties by $8,500,000 by satisfaction of an ElderTrust
obligation of like amount; and acquired a building currently leased from
ElderTrust, which is located on the campus of a Genesis skilled nursing
facility, for $1,250,000. In its agreement with ElderTrust, Multicare sold three
owned assisted living properties that are mortgaged to ElderTrust for principal
amounts totaling $19,500,000 in exchange for the outstanding indebtedness.
ElderTrust will lease the properties back to Multicare under a new ten-year
lease with annual rents of $791,561.
On January 30, 1998, Genesis completed deleveraging transactions with
ElderTrust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Genesis received an
additional $14,000,000 from the sale of a loan and two additional assisted
living facilities and the recoupment of amounts advanced and expenses incurred
in connection with the formation of ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000,000 which has been
deferred and is being amortized over the ten-year term of the lease contracts
with ElderTrust. Additionally, ElderTrust has funded approximately $15,100,000
to finance the development and expansion of three additional assisted living
facilities. Genesis repaid a portion of the revolving credit component of the
Genesis Credit Facility with the proceeds from these transactions. In September
1998, Genesis sold leasehold rights and an option to purchase seven eldercare
facilities acquired in our November 1993 acquisition of Meridian Healthcare,
Inc. to ElderTrust for $44,000,000, including $35,500,000 in cash and an
$8,500,000 note. As part of the transaction, Genesis will continue to sublease
the facilities for ten years with an option to extend the lease until 2018 at an
initial annual lease obligation of approximately $10,000,000. The transaction
resulted in a gain of approximately $43,700,000 which has been deferred and is
being amortized over the ten-year lease term of the lease contracts with
ElderTrust.
- 30 -
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.
Fiscal 2000 Compared to Fiscal 1999
In Fiscal 1999, prior to the Multicare restructuring transaction, Genesis
accounted for its investment in Multicare using the equity method of accounting.
In Fiscal 2000, upon consummation of the restructuring transaction, 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. For the twelve months ended September 30, 2000, approximately
$136,100,000 of revenue, and a corresponding amount of expense, was eliminated
as a result of the consolidation of Genesis and Multicare. The non-Genesis
shareholders' remaining 56.4% interest in Multicare is carried as minority
interest based on their proportionate share of Multicare's historical book
equity. A significant percentage of the fluctuations in operating results
reported in Fiscal 2000 compared to Fiscal 1999 are a result of this change in
the method of accounting for Multicare.
Inpatient service revenue increased $616,046,000 or 87% to $1,320,151,000 from
$704,105,000. Of this increase, approximately $632,078,000 is attributed to the
consolidation of Multicare's inpatient revenues in the twelve months ended
September 30, 2000, and approximately $16,300,000 is attributed to volume growth
in Genesis' Medicare census. These increases are offset by reduced revenue of
approximately $44,100,000 resulting from ten fewer eldercare centers operating
in the September 30, 2000 period compared to the September 30, 1999 period, and
approximately $5,400,000 is attributed to rate dilution in the Company's
Medicare rate per patient day as a result of PPS. The remaining increase of
approximately $17,168,000 is due to shifts in other payor categories and rates.
The Company's average Medicare rate per patient day for the fiscal year ended
September 30, 2000 was approximately $294 compared to $302 for the fiscal year
ended September 30, 1999. Total patient days increased 3,679,048 to 8,617,099
during the twelve months ended September 30, 2000 compared to 4,938,051 during
the comparable period last year. Of this increase, 4,001,732 patient days are
attributed to the consolidation of Multicare's inpatient business in the twelve
months ended September 30, 2000, and 13,284 days are attributed to one
additional calendar day in the September 2000 period due to a leap year. These
increases are offset by a reduction of 319,148 patient days resulting from ten
fewer eldercare centers operating in the September 30, 2000 period compared to
the September 30, 1999 period and the remaining decrease of 16,820 is the result
of a decline in overall occupancy. Pharmacy and medical supply service revenues
were $952,350,000 for the fiscal year ended September 30, 2000 versus
$927,334,000 for fiscal year ended September 30, 1999. Pharmacy and medical
supply service revenues increased approximately $51,716,000 due to net revenue
growth with external customers. This increase is offset by approximately
$26,700,000 due to the consolidation of Multicare's results with those of
Genesis in the September 2000 period and the resulting elimination of pharmacy
and medical supply service revenues generated with the Multicare centers. Other
revenues decreased approximately $73,630,000 from $234,987,000 to $161,357,000.
Approximately $5,300,000 of this decline is attributed to contraction in the
Company's rehabilitation services business since the January 1, 1999
implementation of PPS by many of the Company's external rehabilitation
customers. Approximately $60,800,000 of the decline is attributed to the
consolidation of Multicare's results with those of Genesis and the resulting
elimination of management fee and other service related revenues with Multicare
in the twelve months ended September 30, 2000. Approximately $20,200,000 of this
decline is attributed to the termination of a capitation contract in the
Company's Chesapeake region. Of the remaining increase in other revenue,
$5,800,000 is attributed to the revenues of a respiratory health services
business acquired in the third fiscal quarter of 2000, with the remaining
approximately $6,900,000 attributed to net growth in the Company's other service
businesses.
- 31 -
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $2,642,855,000 for the fiscal year ended
September 30, 2000 compared to $1,780,547,000 for the twelve months ended
September 30, 1999, an increase of $862,308,000 or 48%, of which approximately
$456,730,000 is attributed to the consolidation of Multicare's operating
expenses (not including Multicare's debt restructuring and impairment charges)
with those of Genesis, approximately $278,355,000 is attributed to an increase
in certain charges (including those of Multicare) described more fully in the
paragraphs that follow, approximately $16,300,000 is due to adverse development
in self-insured employee health coverage, approximately $9,500,000 is due to
additional provisions made for bad debts, approximately $2,000,000 is attributed
to the Company's adoption of a new accounting principle that requires start-up
costs be expensed when incurred, $3,200,000 is attributed to the conversion of
the Company's incentive compensation program from stock-based to cash-based,
approximately $5,400,000 is attributed to the operating expenses of a
respiratory health services business acquired in the third fiscal quarter of
2000, and approximately $150,623,000 is attributed to growth in cost of sales,
insurance related costs and inflationary increases, principally labor related
costs. These increases are offset by reduced operating expenses of approximately
$20,200,000 attributed to a terminated capitation contract in the Company's
Chesapeake region and $39,600,000 resulting from ten fewer eldercare centers
operating in the twelve months ended September 30, 2000 compared to the twelve
months ended September 30, 1999.
The acceleration in the operating cost growth rate (approximately 8.5%) over the
revenue growth rate (approximately 4.1%) is attributed to continued pressure on
wage and benefit related costs in all of our operating businesses, particularly
in our eldercare centers. 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. See Business - "Government Regulation", "Personnel", "Employee
Training and Development", "Revenue Sources", "Insurance" and "Competition in
the Healthcare Services Industry".
- 32 -
During fiscal 2000, the Company recorded charges in connection with the
Multicare joint venture restructuring; the impairment of long-lived assets and
other impairments and charges; debt restructuring, and reorganization costs; and
a loss on the sale of 14 eldercare centers located in the state of Ohio. The
following table and discussion provides additional information on these charges.
------------------------------------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring $ 420,000,000
------------------------------------------------------------------------------------------------------------------------------------
Impairment of long-lived assets $ 234,009,000
Exit costs and write-off of unrecoverable assets of six eldercare centers closed or leases
terminated 28,363,000
Investments in information systems development abandoned in fiscal 2000 19,200,000
Uncollectible trade and notes receivable due to customer bankruptcy or other
liquidity issues 41,955,000
Other charges, including third party appeal issues and other cost settlement balances deemed
uncollectible and insurance related adjustments 51,181,000
------------------------------------------------------------------------------------------------------------------------------------
Total asset impairments and other charges (included in other operating expenses) $ 374,708,000
------------------------------------------------------------------------------------------------------------------------------------
Professional bank and other fees in connection with the Company's amended senior
bank credit facilities, debtor-in-possession financing and the filings under Chapter 11 $ 29,935,000
Interest rate swap termination charge 28,331,000
Employee benefit related costs 4,529,000
------------------------------------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 62,795,000
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Loss on sale of 14 eldercare centers located in the state of Ohio $ 7,922,000
------------------------------------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring
In connection with the restructuring transaction in the first fiscal quarter of
2000, we recorded a non-cash charge of approximately $420,000,000 representing
the estimated cost to terminate the Put in consideration for the issuance of the
Series H Preferred and Series I Preferred. The cost to terminate the Put was
estimated based upon our assessment that no incremental value was realized by
Genesis as a result of the changes in the equity ownership structure of
Multicare brought about by the restructuring of the Multicare joint venture.
Asset impairments and other charges
During the fourth quarter of fiscal 2000, in connection with the Company's
budget preparations for the forthcoming year, management reviewed the current
and projected undiscounted cash flows of our eldercare centers and our
NeighborCare Pharmacy businesses. This review indicated that the assets of
certain eldercare centers were impaired. The fair market value of businesses
deemed potentially impaired were then estimated and compared to the carrying
values of the long-lived assets. Any excess long-lived asset carrying value over
the estimated fair value was written-off. Fair value was estimated using a per
bed value determined by Company management. The total loss for SFAS 121
impairments of $234,009,000 is associated with 49 eldercare centers. No
impairment charge was assessed on the long-lived assets of the NeighborCare
Pharmacy businesses. The impairment charge recorded resulted in the write-off of
$185,037,000 of goodwill and $34,578,000 of property, plant and equipment.
During fiscal 2000, we closed or are in the process of closing or terminating
the leases of six underperforming eldercare centers with 842 combined beds. As a
result, a charge of $28,363,000 was recorded to account for certain impaired and
abandoned assets of these eldercare centers as well as the estimated future cost
of maintaining owned properties that were closed.
- 33 -
As a result of the Company's Chapter 11 bankruptcy filing and curtailment in
funding availability, we assessed the recoverability of our investment in
certain information systems developed internally for the operating needs of our
institutional pharmacy and infusion therapy businesses. Our assessment
determined that $19,200,000 of the carrying value of our investment in these
systems was unrecoverable through estimated future product sales to third
parties and future operating efficiencies.
During fiscal 2000, we performed periodic assessments of the collectibility of
amounts due from certain current and former customers in light of the adverse
impact of PPS on their liquidity and profitability. In certain cases, customers
have filed for protection under Chapter 11 of the Bankruptcy Code. As a result
of our assessment, the carrying value of notes receivable, advances and trade
receivables due from these customers was written down $41,955,000.
In the fourth quarter of fiscal 2000, we performed an assessment of the
collectibility of certain aged amounts due from third party payors and concluded
that approximately $12,451,000 was unrecoverable. In addition, as a result of
adverse claims development we reevaluated the levels of reserves established for
certain self insured and other programs, including workers' compensation and
general liability insurance, resulting in a charge of approximately $35,235,000.
Debt Restructuring and Reorganization Costs
During the third fiscal quarter of 2000, we began discussions with our lenders
under the Genesis and Multicare Credit Facilities to revise our capital
structure. During the discussion period, which continued into the third fiscal
quarter, Genesis and Multicare did not make certain scheduled principal and
interest payments under the Genesis and Multicare Credit Facilities or certain
scheduled interest payments under certain of the Genesis and Multicare senior
subordinated debt agreements. On June 22, 2000, Genesis and Multicare filed for
voluntary relief under Chapter 11 of the Bankruptcy Court. In connection with
the debt restructuring negotiations and for the costs of the subsequent
reorganization cases, we incurred legal, bank, accounting and other costs of
approximately $29,935,000. As a result of the nonpayment of interest under the
Genesis Credit Facility, certain provisions under existing interest rate swap
arrangements with Citibank were triggered. Citibank notified Genesis that they
elected to force early termination of the interest rate swap arrangements, and
have asserted a $28,331,000 obligation. In addition, as a result of our
restructuring and Chapter 11 cases we incurred costs of $4,529,000 for certain
salary and benefit related costs, principally for a court approved special
recognition program.
During the first fiscal quarter of 2000, the Company recorded a non-cash pre tax
charge of $7,720,000 for a stock option redemption program (the "Redemption
Program") under which current Genesis employees and directors elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan was approved by shareholder vote at the
Company's 2000 Annual Meeting. As a result of the Company's worsening financial
condition and other considerations, the Company determined not to proceed with
the Redemption Program, and therefore the $7,720,000 charge recorded in the
first quarter was subsequently reversed. The elections made by optionees would
have resulted in the redemption of approximately 4,600,000 stock options in
exchange for approximately 4,000,000 shares of Genesis Common Stock.
Loss on Sale of Ohio Assets
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.
Depreciation and amortization expense increased $42,006,000 to $116,961,000
during the twelve months ended September 30, 2000 from $74,955,000 during the
same period in the prior year. $38,064,000 of this increase is attributed to the
- 34 -
consolidation of Multicare's results with those of Genesis. The remaining
increase is principally attributed to incremental amortization of deferred
financing costs, as well as incremental depreciation expense from capital
expenditures made since September 30, 1999.
Lease expense increased $11,471,000 to $38,124,000 during the twelve months
ended September 30, 2000 from $26,653,000 during the same period in the prior
year. $11,824,000 of this increase is attributed to the consolidation of
Multicare's results with those of Genesis. This increase is offset by $3,300,000
attributed to six fewer eldercare centers leased during the twelve months ended
September 30, 2000 compared to the twelve months ended September 30, 1999. The
remaining increase of approximately $2,900,000 is the result of increases in a
variable rate lease financing facility and scheduled increases in fixed lease
rates.
Interest expense increased $84,350,000 to $203,570,000 during the twelve months
ended September 30, 2000 from $119,220,000 during the same period in the prior
year. $57,943,000 of this increase is attributed to the consolidation of
Multicare's results with those of Genesis. In connection with the Genesis
Chapter 11 filing, effective June 22, 2000 we ceased accruing interest on
$371,590,000 of senior subordinated notes with a weighted average interest rate
of 9.62%, or approximately $9,800,000. The remaining increase in interest
expense of approximately $36,207,000 is primarily due to additional capital and
working capital borrowings and an increase in our weighted average borrowing
rate. Amendments to the Genesis Credit Facility resulted in higher variable
rates of interest, along with increases in market rates of interest. Genesis'
average variable debt borrowing rate in fiscal 2000 increased to 10.0% from
7.85% in fiscal 1999, resulting in over $23,000,000 of added interest expense.
The remaining increase in interest expense is principally attributed to growth
in debt volume. The Company's contractual interest expense for the year ended
September 30, 2000 was $231,499,000, leaving $27,929,000 of interest expense
unaccrued at September 30, 2000 as a result of the Chapter 11 filings.
Equity in net loss of unconsolidated affiliates declined $175,828,000 to a loss
of $2,407,000 during the twelve months ended September 30, 2000 from a loss of
$178,235,000 during the same period in the prior year. This change is
principally due to the Fiscal 2000 change in Genesis' accounting for Multicare
to the consolidation method of accounting. In consolidation, Genesis' 43.6%
share in the net loss of Multicare was eliminated.
Minority interest of $132,444,000 recorded during the twelve months ended
September 30, 2000 principally represents Genesis' Multicare joint venture
partners' 56.4% interest in the Multicare net loss for the period.
Effective October 1, 1999, we adopted the provisions of the American Institute
of Certified Public Accountant's Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be
expensed as incurred. The cumulative effect of expensing all unamortized
start-up costs at October 1, 1999 was approximately $16,400,000 pre tax and
$10,412,000 after tax.
Preferred stock dividends increased $23,119,000 to $42,596,000 during the twelve
months ended September 30, 2000 from $19,477,000 during the same period in the
prior year. This increase is attributed to dividends accrued following the
issuance of Series H and Series I Preferred Stock in mid-November, 1999.
Fiscal 1999 Compared to Fiscal 1998
Inpatient service revenue declined $37,278,000 or 5% to $704,105,000 from
$741,383,000. Of this decline, approximately $2,693,000 is attributed to the
revenues of an eldercare center located in Florida that was closed in March
1999, $5,036,000 is attributed to the revenues of a Pennsylvania eldercare
center for which the lease was terminated in July 1998 and approximately
$42,740,000 is attributed to dilution in the Company's Medicare rate following
Genesis' October 1, 1998 implementation of PPS. These decreases in inpatient
service revenue are offset by the positive impact of rate increases of other
payor categories and changes in payor mix. Under PPS, the average Medicare rate
per day was reduced to approximately $302 per patient day during the twelve
months ended September 30, 1999 compared to approximately $390 per patient day
- 35 -
for the comparable period last year. There were 544,997 Medicare patient days
during the twelve months ended September 30, 1999 compared to 491,493 for the
comparable period last year. Total patient days declined 63,009 to 4,938,051
during Fiscal 1999 compared to 5,001,060 during Fiscal 1998. The decline in
overall census is principally attributed to 17,462 patient days at a closed
Florida eldercare center, 29,733 patient days at a Pennsylvania eldercare center
for which the lease was terminated and the remaining decline of 15,814 patient
days is attributed to a net drop in overall occupancy. Pharmacy and medical
supply service revenue increased $502,556,000 to $927,334,000 from $424,778,000,
of which approximately $453,324,000 is attributed to the added revenues as a
result of the Vitalink Transaction, approximately $20,720,000 is attributed to
the added revenues as a result of the Multicare Pharmacy Purchase, and the
remainder is primarily due to other volume growth in the institutional, medical
supply and community-based pharmacies. Other revenue declined from $239,144,000
to $234,987,000, or $4,157,000. This decline is primarily due to reduced
rehabilitation service revenue following our implementation of PPS and the
January 1, 1999 implementation of PPS by many of our external rehabilitation
customers, including the Multicare eldercare centers. Additionally, we had
reduced management fees as a result of the termination of eight management
contracts and the negative impact of PPS on the net revenues of the managed
eldercare centers. These declines in other revenue were offset by increases in
other service-related business.
Our operating expenses before depreciation, amortization, lease expense, and
interest expense were $1,780,547,000 for the twelve months ended September 30,
1999 compared to $1,270,615,000 for the comparable period in the prior year, an
increase of $509,932,000 or 40%, of which approximately $391,304,000 is
attributed to the added operating expenses as a result of the Vitalink
Transaction, approximately $14,707,000 is attributed to the added operating
expenses as a result of the Multicare Pharmacy Purchase, approximately
$51,565,000 is attributed to an increase in the impairment of assets and other
charges (see discussion and table below), and the remaining increase of
$59,234,000 is attributed to inflationary increases, growth in the institutional
pharmacy, medical supply and contract therapy divisions, capitated expenses, as
well as increased costs of community-based programs. These increases are offset
by reduced operating expenses of approximately $2,273,000 attributed to a closed
Florida eldercare center and $4,605,000 to a Pennsylvania eldercare center for
which the lease was terminated.
In accordance with SFAS 121, we record impairment losses on long-lived assets,
including goodwill, when events and circumstances indicate that long-lived
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
The profitability and liquidity of Genesis and the long-term care industry have
been adversely impacted by PPS. The current and projected undiscounted cash
flows of certain eldercare centers operating under PPS indicate that these
assets are impaired. We estimated the fair value of these assets by using a
multiple of their operating cash flow based upon market comparisons of similar
assets recently sold or currently under negotiations to sell. After performing
this evaluation, we concluded that the carrying value of certain eldercare
centers, including goodwill and property, plant and equipment exceeded their
fair value by approximately $9,000,000.
In addition to long-lived assets, we performed an evaluation of all of our
assets, contracts, operations and employment arrangements. As a result of this
evaluation, we concluded that the adverse impact of PPS on our liquidity and
profitability necessitated exiting certain businesses and projects. We fully
reserved the carrying value of our transportation business, exited the
operations of six leased eldercare centers at the end of their lease terms,
abandoned investments in information systems, recorded the exit costs of a
capitation contract in our Chesapeake region and wrote off certain unrecoverable
development project costs as well as other unrecoverable assets. In addition,
the ability of certain former customers of ours to repay amounts due for
services rendered is less likely due to the adverse impact of PPS on their
liquidity and profitability. As a result, we wrote down certain notes
receivable, advances, trade and third party receivables, due to and from
formerly owned and managed facilities. Also, we entered into the restructuring
of the Multicare joint venture and amended our senior bank credit facility
resulting in legal and other professional fees. The following table summarizes
the before tax impact of the charges in Fiscal 1999:
- 36 -
Exit costs and write-off of unrecoverable assets of one owned eldercare center to be
sold, and six leased eldercare centers closed or no longer under lease and an investment in
a respiratory services company $ 24,100,000
Investments in information systems abandoned 13,000,000
Exit costs and write-down of the remaining assets of the transportation business 12,700,000
Impairment of long-lived assets of six eldercare centers 9,000,000
Unrecoverable development project costs 5,600,000
Cost to exit a capitation contract 5,000,000
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - terminated operations, discontinued businesses and asset impairments 69,400,000
------------------------------------------------------------------------------------------------------------------------------------
Uncollectible trade receivables due to customer bankruptcy or other
liquidity issues 17,800,000
Third party appeal issues deemed uncollectible 17,100,000
Costs to restructure the Multicare joint venture and amend the Company's senior bank credit
facility 11,000,000
Other charges, including severance costs 13,870,000
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - Uncollectible accounts, restructuring and other 59,770,000
------------------------------------------------------------------------------------------------------------------------------------
Notes receivable, advances, trade receivables and third party settlement receivables,
due from or to businesses formerly owned or managed deemed uncollectible 37,900,000
------------------------------------------------------------------------------------------------------------------------------------
Total (included in operating expenses) $ 167,070,000
------------------------------------------------------------------------------------------------------------------------------------
Due to specific events occurring in the fourth quarter of Fiscal 1998 and a
focus on core business operations in response to PPS, we recorded non-cash
charges before income taxes of approximately $115,505,000, of which
approximately $24,000,000 related to the impairment of one eldercare center and
certain non-core businesses, including our transportation business and certain
non-core Medicare home health operations; approximately $43,000,000 related to
investments in owned eldercare centers and other assets we believe are impaired
as a result of PPS; approximately $23,000,000 related to impaired investments in
eldercare centers previously owned or managed by us; and approximately
$26,000,000 related to our investment in Doctors Health, a medical care
management company in our Chesapeake region.
Depreciation and amortization expense increased $22,570,000 to $74,955,000
during the twelve months ended September 30, 1999 from $52,385,000 during the
same period in the prior year. This increase is attributed to the depreciation
of fixed assets and amortization of goodwill and deferred financing costs in
connection with the Multicare Pharmacy Purchase and the Vitalink Transaction, as
well as incremental depreciation expense from capital additions made since
September 30, 1998.
Lease expense decreased $4,529,000 to $26,653,000 during the twelve months ended
September 30, 1999 from $31,182,000 during the same period in the prior year.
This decrease is principally attributed to the amortization of deferred gains on
sale leaseback transactions with ElderTrust for a full twelve months in Fiscal
1999 compared to one month in Fiscal 1998.
Interest expense increased $37,132,000 to $119,220,000 during the twelve months
ended September 30, 1999 from $82,088,000 during the same period in the prior
year. This increase in interest expense is primarily due to additional
borrowings used to finance the Multicare Pharmacy Purchase, the Vitalink
Transaction and increased working capital and capital borrowings. This increase
is partially offset by interest savings as a result of the repayment of
indebtedness from proceeds received in connection with the ElderTrust
Transactions.
Equity in net income (loss) of unconsolidated affiliates declined $178,721,000
to a loss of $178,235,000 in Fiscal 1999 from income of $486,000 in Fiscal 1998.
Approximately $164,133,000 of this decline is due to the recognition of our
43.6% share of after tax charges recorded by Multicare related to the write-down
- 37 -
of long-lived assets, including goodwill, pursuant to FAS 121. In part,
Multicare's January 1, 1999 implementation of PPS and changes in other
government regulation has precluded it from achieving operating profits at
levels that existed prior to the Multicare Transaction. The remaining decline is
principally due to Multicare's declining earnings as a result of PPS.
In connection with the early repayment and restructuring of debt in the quarters
ended December 31, 1998 and 1997, we recorded an extraordinary loss, net of tax
of approximately $1,799,000 ($2,902,000 before tax) and $1,924,000 ($3,030,000
before tax), respectively, to write-off unamortized deferred financing fees. In
connection with the defeasance of certain municipal bonds in the quarter ended
March 31, 1999 we recorded an extraordinary loss, net of tax of approximately
$301,000 ($474,000 before tax).
In Fiscal 1999, we accrued $19,477,000 of dividends on the Series G Preferred
issued in August of 1998 in connection with the Vitalink Transaction. In Fiscal
1998 approximately $1,655,000 were accrued from the date of issuance through
September 30, 1998. Approximately $15,145,000 of Series G Preferred dividends
were accrued and unpaid at September 30, 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 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 pre-petition priority
Tranche II sub-facility. Additionally, $44,000,000 of proceeds were used to
satisfy all unpaid interest and rent obligations to the senior secured creditors
under the Fourth Amended and Restated Credit Agreement dated August 20, 1999 and
the Synthetic Lease dated October 7, 1996 as adequate protection for any
diminution in value of the pre-petition senior secured lenders in these
facilities, respectively. The 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 September 30, 2000 borrowings
outstanding under the Genesis DIP Facility were $133,000,000. As of January 31,
2001 borrowings outstanding under the Genesis DIP Facility were $165,000,000.
The Genesis DIP Facility provides for the issuance of up to $25,000,000 in
standby letters of credit. As of January 31, 2001 there were $4,900,000 in
letters of credit issued thereunder for a total utilization under the Genesis
DIP Facility of $169,900,000.
- 38 -
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.
As a result of the pending status of Bankruptcy Court approval for payment of
the amendment fee, the Company classified the Genesis DIP Facility balance of
$133,000,000 as a current liability in the September 30, 2000 consolidated
balance sheet.
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
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
- 39 -
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 January 31,
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 January 31, 2001 there
were $3,700,000 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 (the "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.
Under the Bankruptcy Code, actions to collect pre-petition 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.
- 40 -
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain pre-petition 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 pre-petition claims of
certain critical vendors and patients. All other unsecured pre-petition
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 follows (in thousands):
As of
September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $1,483,898
Senior subordinated notes 617,488
Revenue bonds and other indebtedness 155,937
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $2,257,323
------------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 67,574
Accrued interest (including a $28,331 interest rate swap termination fee) 86,855
Accrued preferred stock dividends on Series G Preferred Stock 34,921
------------------------------------------------------------------------------------------------------------------------------------
$2,446,673
------------------------------------------------------------------------------------------------------------------------------------
A summary of the principal categories of debt restructuring and reorganization
costs follows (in thousands):
For the Twelve
Months Ended
September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Legal, accounting and consulting fees $ 20,748
Bank fees 9,187
Interest rate swap termination charge 28,331
Employee benefit related costs 4,529
------------------------------------------------------------------------------------------------------------------------------------
$ 62,795
------------------------------------------------------------------------------------------------------------------------------------
At September 30, 2000, the Company reported working capital of $304,241,000 as
compared to net working capital of $235,704,000 at September 30, 1999 primarily
due to the change to a long-term classification of certain liabilities subject
to compromise in accordance with SOP 90-7. Genesis' cash flow from operations
for the twelve months ended September 30, 2000 was a use of cash of $103,294,000
compared to a source of cash of $43,557,000 for the twelve months ended
September 30, 1999, principally due to increased losses and the timing of vendor
payments, as well as approximately $16,100,000 of debt restructuring and
reorganization costs.
At September 30, 2000, $91,553,000 of receivables and payables, including a
deferred management fee, between Genesis and Multicare were eliminated in
consolidation.
- 41 -
Investing activities for the twelve months ended September 30, 2000 include
approximately $52,000,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data processing
hardware and software. Of the capital expenditures, approximately $12,000,000
relates to the construction, renovation and expansion of assisted living
facilities. Cash flows provided by investing activities in the 2000 period also
include the proceeds from the sale of 14 eldercare centers located in Ohio
effective May 31, 2000. The net proceeds of the disposition of $33,000,000 are
classified as cash flow provided by investing activities and was used to pay
down the Multicare Term Loans and the Multicare Credit Facility.
Financing activities during the twelve months ended September 30, 2000 include
$50,000,000 of proceeds received for the issuance of Common Stock to Cypress and
TPG in connection with the Multicare joint venture restructuring transaction.
The Company has incurred approximately $29,900,000 of debt restructuring and
reorganization costs in fiscal 2000. The Company anticipates that such costs
will be incurred throughout the duration of the bankruptcy.
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.
In April of 2000, the Company terminated the Execuflex Plan and the Vitalink
Nonqualified Plan. All amounts in these plans were distributed to the
participants with no material effect to the Company's cash flow.
Credit Facilities and Other Debt
Genesis Credit Facility
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries (excluding
Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility") for the purpose of: refinancing and funding interest and principal
payments of certain existing indebtedness; funding permitted acquisitions; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of transactions. The fourth amended and
restated credit agreement made the financial covenants for certain periods less
restrictive, required minimum asset sales, increased the Applicable Margin
(defined below), provided the lenders of the Genesis Credit Facility a
collateral interest in certain real and personal property of the Company, and
generally reallocated the proceeds thereof among the Tranche II Facility
(defined below), the Genesis Revolving Facility (defined below) and the Genesis
Term Loans (defined below) and permitted the restructuring of the Put/Call
Agreement, as defined. Additionally, the fourth amended and restated credit
agreement provided for $40,000,000 of additional borrowing capacity, (the
"Tranche II Facility") available to the Company beginning in December 1999.
The Genesis Credit Facility consists of three term loans with original balances
of $200,000,000 each (collectively, the "Genesis Term Loans"), and a
$650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a
$40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly
installments through 2005. The Genesis Term Loans consist of (i) an original six
year term loan maturing in September 2003 with an outstanding balance of
$110,445,000 at September 30, 2000 (the "Genesis Tranche A Term Facility"); (ii)
an original seven year term loan maturing in September 2004 with an outstanding
balance of $152,130,000 at September 30, 2000 (the "Genesis Tranche B Term
Facility"); and (iii) an original eight year term loan maturing in June 2005
- 42 -
with an outstanding balance of $151,378,000 at September 30, 2000 (the "Genesis
Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding
balance of $645,834,000 (excluding letters of credit) at September 30, 2000,
becomes payable in full on September 30, 2003. At September 30, 2000, there were
no outstanding borrowings under the Tranche II Facility. The aggregate
outstanding balance of the Genesis Credit Facility at September 30, 2000 is
classified as a liability subject to compromise.
Subject to liens granted under the Genesis DIP Facility, the Genesis Credit
Facility is secured by a first priority security interest in all of the stock,
partnership interests and other equity of all of Genesis' present and future
subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries, and also by first priority security interests 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. Loans under the Genesis
Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate
as announced by the administrative agent, or the applicable Adjusted LIBO Rate
plus, in either event, a margin (the "Applicable Margin") that is dependent upon
a certain financial ratio test. Loans under the Genesis Tranche A Term Facility
and Genesis Revolving Facility have an Applicable Margin of 1.50% for Prime Rate
loans and 3.25% for LIBO Rate loans. Loans under the Genesis Tranche B Term
Facility have an Applicable Margin of 1.75% for Prime Rate loans and 3.50% for
LIBO Rate loans. Loans under the Genesis Tranche C Term Facility have an
Applicable Margin of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans.
Subject to meeting certain financial ratios, the above referenced interest rates
are reduced.
The Genesis Credit Facility contains a number of covenants that, among other
things, restrict the ability of Genesis and its subsidiaries to dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Genesis and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; cause Genesis and its affiliates to
maintain certain agreements including the Management Agreement and the Put/Call
Agreement (as amended), and to maintain corporate separateness; and cause
Genesis to comply with the terms of other material agreements, as well as to
comply with usual and customary covenants for transactions of this nature.
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.
Multicare Credit Facility
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility") which made the financial covenants
for certain periods less restrictive, permitted a portion of the proceeds of
assets sales to repay indebtedness under the Multicare Tranche A Term Facility
(defined below) and Multicare Revolving Facility (defined below), permitted the
restructuring of the Put/Call Agreement, increased the interest rates applying
to the Multicare Term Loans (defined below) and the Multicare Revolving
Facility, and increased the level of management fee Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
The Multicare Credit Facilities consist of three term loans with an aggregate
original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and
a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortize in quarterly installments through 2005. The loans
consist of (i) an original six year term loan maturing in September 2003 with an
outstanding balance of $132,239,000 at September 30, 2000 (the "Multicare
Tranche A Term Facility"); (ii) an original seven year term loan maturing in
September 2004 with an outstanding balance of $138,339,000 at September 30, 2000
(the "Tranche B Term Facility"); and (iii) and an original eight year term loan
maturing in June 2005 with an outstanding balance of $45,877,000 at September
- 43 -
30, 2000 (the "Multicare Tranche C Term Facility"). The Multicare Revolving
Facility, with an outstanding balance of $107,655,000 at September 30, 2000,
becomes payable in full on September 30, 2003. The aggregate outstanding balance
of the Multicare Credit Facility at September 30, 2000 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. Loans under the
Multicare Credit Facility bear, at Multicare's option, interest at the per annum
Prime Rate as announced by the administrative agent, or the applicable Adjusted
LIBO Rate plus, in either event, an Annual Applicable Margin that is dependent
upon a certain financial ratio test.
Effective with the Amendment on August 20, 1999, loans under the Multicare
Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at
a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare
Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 4.25%; loans under the Multicare Revolving Credit Facility bear interest
at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting
certain financial covenants, the above-referenced interest rates will be
reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Multicare Credit Facility, the Company is no longer entitled to elect a LIBO
Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term
Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%;
loans under the Multicare Tranche B Term Facility bear interest at a rate equal
to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C
Term Facility bear interest at a rate equal to Prime Rate plus a margin up to
2.5%; loans under the Multicare Revolving Credit Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.0%.
The Multicare Credit Facility contains a number of covenants that, among other
things, restrict the ability of Multicare and its subsidiaries to: dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Multicare and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; cause Multicare and its affiliates
to maintain certain agreements including the Management Agreement and the
Put/Call Agreement (as amended), and to maintain corporate separateness; and
cause Multicare to comply with the terms of other material agreements, as well
as to comply with usual and customary covenants for transactions of this nature.
Multicare is in default under the Multicare Credit Facility and has not made any
scheduled interest payments since March 29, 2000.
The aggregate outstanding balance of the Genesis Credit Facility and the
Multicare Credit Facility of $1,483,898,000 is classified as a liability subject
to compromise.
Other Indebtedness
Genesis has outstanding an aggregate of $371,590,000 of Senior Subordinated
Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%.
Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are
due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior
Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the
Multicare Notes is payable semi-annually. Genesis and Multicare are in default
of their respective senior subordinated note indenture agreements. The aggregate
outstanding balance of the Genesis Notes and the Multicare Notes at September
30, 2000 is classified as a liability subject to compromise.
- 44 -
Certain of these and other of Genesis' and Multicare's outstanding loans contain
covenants which, without the prior consent of the lenders, limit certain of
Genesis' and Multicare's activities. Such covenants contain limitations relating
to the merger or consolidation of Genesis or Multicare and Genesis' and
Multicare's ability to secure indebtedness, make guarantees, grant security
interests and declare dividends. In addition, certain of Genesis and Multicare's
outstanding loans require that Genesis and Multicare maintain certain minimum
levels of cash flow and debt service coverage, and must maintain certain ratios
of liabilities to net worth. Under certain of these loans, Genesis is restricted
from paying cash dividends on the Common Stock, unless certain conditions are
met. Genesis has not declared or paid any cash dividends on its Common Stock
since its inception.
With exception to the Genesis and Multicare DIP Facilities and two secured loans
of two Multicare subsidiaries not party to the Chapter 11 cases, all debt
balances at September 30, 2000 are classified as liabilities subject to
compromise.
The Multicare Restructuring
In connection with the November 1999 restructuring of the Multicare
joint-venture, Genesis entered into a Restructuring Agreement with Cypress, TPG
and Nazem to restructure their joint investment in Genesis ElderCare Corp., the
parent company of Multicare. Pursuant to the Restructuring Agreement the Put
under the Put/Call Agreement was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock, which was issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, which was issued to Cypress,
TPG and Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
The Series H Preferred are convertible into 27,850,286 shares of Common Stock.
The Series I Preferred are convertible into 20,149,410 shares of non-voting
common stock. The Series H and I Preferred have an initial dividend of 5.00%,
which increases 0.05% beginning the sixth anniversary date and an additional
0.05% each anniversary date thereafter through the 12th anniversary date, to a
maximum of 8.5%.
In November 1999, 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.
See Item 12 "Security Ownership of Certain Beneficial Owners and Management".
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997
Balanced Budget Act and the Balanced Budget Refinement Act, has resulted in
continuing changes in the Medicare and Medicaid reimbursement programs which has
adversely impacted us. The changes have limited, and are expected to continue to
limit, payment increases under these programs. Also, the timing of payments made
under the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Within the statutory framework
of the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings and interpretations which may further affect payments
made under those programs. Further, the federal and state governments may reduce
the funds available under those programs in the future or require more stringent
utilization and quality reviews of eldercare centers or other providers. There
can be no assurances that adjustments from Medicare or Medicaid audits will not
have a material adverse effect on us.
- 45 -
Anticipated Impact of Healthcare Reform
The Genesis eldercare centers began implementation of the Medicare Prospective
Payment System ("PPS") on October 1, 1998 and the majority of the Multicare
eldercare centers began implementation of PPS on January 1, 1999. On July 31,
2000, HCFA issued final rules for PPS. The final rule continues the current PPS
methodology, as amended by the Balanced Budget Refinement Act of 1999 ("BBRA").
Effective April 1, 2000, 15 of the 44 RUG III (Resource Utilization Groups)
payment categories were increased by 20% until the later of October 1, 2000 or
the implementation of a refined RUG system. This final rule extends the 20%
add-on for the 15 RUG III categories until at least September 20, 2001.
Additionally, the final rule formalizes the BBRA requirement for a 4% across the
board increase in the Federal per diem payment rates, exclusive of the 20%
add-on. The final rule also announces the annual update factor at 2.161%, which
is equivalent to the market basket increase less one percentage point, as
mandated by current law. The actual impact of the July 31, 2000 final rule on
our earnings in future periods will depend on many variables which can not be
quantified at this time, including the effect of regulatory changes, patient
acuity, patient length of stay, Medicare census, referral patterns, ability to
reduce costs and growth of ancillary business.
On December 15, 2000 Congress passed the Benefit Improvement and Protection Act
of 2000 ("BIPA") 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.
Other
In August 1998, in connection with the Vitalink Transaction, the Company issued
the Series G Preferred. The Series G Preferred has a face value of approximately
$295,100,000 and an initial dividend of 5.9375% and generally is not
transferable without our consent. The dividend rate increases on the fourth,
fifth, ninth, eleventh and thirteenth anniversary dates to 6.1875%, 6.6250%,
7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is convertible
into Genesis Common Stock, par value $.02 per share, at $37.20 per share and it
may be called for conversion after April 26, 2001, provided the price of Common
Stock reaches certain trading levels and after April 26, 2002, subject to a
market-based call premium. At September 30, 2000 there were approximately
$34,921,000 of accrued, but unpaid dividends on the Series G Preferred. The
accrued dividends are classified as liabilities subject to compromise at
September 30, 2000. The holders of the Series G Preferred are entitled to be
paid in additional shares of Series G Preferred to the extent that dividends are
not declared and paid or funds continue to not be legally available for the
payment of dividends after four consecutive quarterly periods, as defined. To
date, the Company has not issued additional shares of Series G Preferred in lieu
of cash dividends.
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.
- 46 -
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. To date, we
have offset our increased operating costs by increasing charges for our services
and expanding our services. Genesis has also implemented cost control measures
to limit increases in operating costs and expenses but cannot predict its
ability to control such operating cost increases in the future. See "Cautionary
Statements Regarding Forward Looking Statements" and "Fiscal 2000 Compared to
Fiscal 1999".
Year 2000 Compliance
The Company did not experience any material interruptions of business as a
result of the Year 2000 computer problem.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"), as amended. Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters in fiscal years beginning after June 15, 2000. We intend to
adopt this accounting standard as required. The adoption of this standard is not
expected to have a material impact on our earnings or financial position.
- 47 -
ITEM 7A: QUANTITATIVE AND QUALITIATIVE 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 this objective, the Company primarily used
interest rate swaps to manage net exposure to interest rate changes related to
its portfolio of borrowings. Notional amounts of interest rate swap agreements
are used to measure interest to be paid or received relating to such agreements
and do not represent an amount of exposure to credit loss. The fair value of
interest rate swap agreements is the estimated amount we would receive or pay to
terminate the swap agreement at the reporting date, taking into account current
interest rates. As a result of the non-payment of interest under the Genesis
Credit Facility, certain provisions under existing interest rate swap
arrangements with Citibank were triggered. Citibank notified Genesis that they
elected to force early termination of the interest rate swap arrangements, and
have asserted a $28,331,000 obligation, which is classified as a liability
subject to compromise. The interest rate swap termination charge is reflected in
the consolidated statement of operations as debt restructuring and
reorganization costs. In fiscal 2000, Multicare terminated all of its interest
rate swap agreements for approximately $100,000.
At September 30, 2000, the Company had $1,616,897,000 of debt subject to
variable market rates of interest. As a result of our Chapter 11 filings,
$1,483,897,000 of our variable rate debt is classified as a liability subject to
compromise.
As a result of increases in market rates of interest, defaults under certain
loan agreements and higher rates of interest associated with the Genesis DIP
Facility, the Company's weighted average borrowing rate on variable rate debt
increased in Fiscal 2000 approximately 200 basis points. These rate increases,
coupled with additional borrowings under the Genesis Credit Facility and the
Genesis DIP Facility, resulted in additional interest cost in Fiscal 2000 of
approximately $36,200,000. At September 30, 2000, Genesis had no interest rate
swap agreements outstanding to manage the exposure to such interest rate
changes.
- 48 -
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 50
Consolidated Balance Sheets as of September 30, 2000 and 1999 51
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998 52
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended September 30, 2000, 1999 and 1998 53
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998 54
Notes to Consolidated Financial Statements 55
- 49 -
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Genesis Health
Ventures, Inc. and subsidiaries as of September 30, 2000 and 1999 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the years in the three-year period ended September
30, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Genesis Health
Ventures, Inc. and subsidiaries as of September 30, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for costs of start-up activities effective
October 1, 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
consolidated financial statements, the Company has suffered recurring losses in
each of the years in the three-year period ended September 30, 2000 and, as of
September 30, 2000 has a shareholders' deficit. In addition, the Company and its
consolidated affiliate, The Multicare Companies, Inc. are in default of various
loan agreements and on June 22, 2000 filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code. These conditions raise
substantial doubt about the Company's ability to continue as a going concern. As
discussed in note 3 to the consolidated financial statements, management intends
to develop a plan of reorganization for approval by the Company's creditors and
confirmation by the U.S. Bankruptcy Court. If the plan of reorganization is
accepted, continuation of the business thereafter is dependent on the Company's
ability to achieve successful future operations. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
KPMG LLP
Philadelphia, Pennsylvania
February 14, 2001
- 50 -
Genesis Health Ventures, Inc. and Subsidiaries
Debtor-In-Possession
Consolidated Balance Sheets
September 30, September 30,
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Assets (in thousands except share
and per share data)
Current assets:
Cash and equivalents $ 22,948 $ 12,397
Restricted investments in marketable securities 27,899 24,599
Accounts receivable, net of allowance for doubtful accounts
of $78,020 in 2000 and $86,067 in 1999 446,614 370,472
Inventory 65,637 63,369
Prepaid expenses and other current assets 54,223 46,964
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 617,321 517,801
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,107,346 612,301
Notes receivable and other investments 39,244 40,075
Other long-term assets 105,726 112,978
Investments in unconsolidated affiliates 22,956 180,882
Goodwill and other intangibles, net 1,235,306 965,877
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,127,899 $ 2,429,914
====================================================================================================================================
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current installments of long-term debt $ 133,000 $ 37,126
Accounts payable 36,944 131,312
Accrued expenses 39,993 42,492
Accrued compensation 100,164 42,320
Accrued interest 2,979 28,344
Income taxes payable - 503
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 313,080 282,097
------------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 2,446,673 -
Long-term debt 10,441 1,484,510
Deferred income taxes 54,082 13,827
Deferred gain and other long-term liabilities 51,670 61,590
Minority interest 56,059 -
Redeemable preferred stock - subject to compromise (including accrued
dividends of $22,820) 442,820 -
Shareholders' equity (deficit):
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 589,714 and 590,253 issued and outstanding at
September 30, 2000 and 1999 6 6
Common stock, par $.02, authorized 200,000,000 shares, issued and
outstanding 48,653,294 and 48,641,194 at September 30, 2000;
36,145,678 and 36,133,578 at September 30, 1999 973 723
Additional paid-in capital 803,202 753,452
Accumulated deficit (1,049,075) (165,620)
Accumulated other comprehensive loss (1,789) (428)
Treasury stock, at cost (243) (243)
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (246,926) 587,890
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 3,127,899 $ 2,429,914
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
- 51 -
Genesis Health Ventures, Inc. and Subsidiaries
Debtor-In-Possession
Consolidated Statements of Operations
Year ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
Net revenues:
Inpatient services $ 1,320,151 $ 704,105 $ 741,383
Pharmacy and medical supply services 952,350 927,334 424,778
Other revenue 161,357 234,987 239,144
------------------------------------------------------------------------------------------------------------------------------------
Total net revenues 2,433,858 1,866,426 1,405,305
------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 1,088,443 713,204 581,169
Cost of sales 534,960 502,169 231,848
Other operating expenses 948,735 565,174 457,598
Debt restructuring and reorganization costs 62,795 - -
Loss on sale of assets 7,922 - -
Multicare joint venture restructuring 420,000 - -
Depreciation and amortization 116,961 74,955 52,385
Lease expense 38,124 26,653 31,182
Interest expense, net (contractual interest for the year
ended September 30, 2000 was $231,499) 203,570 119,220 82,088
------------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, equity in net income (loss)
of unconsolidated affiliates, minority interest, extraordinary items
and cumulative effect of accounting change (987,652) (134,949) (30,965)
Income tax benefit 27,168 44,711 8,158
------------------------------------------------------------------------------------------------------------------------------------
Loss before equity in net income (loss) of
unconsolidated affiliates, minority interest, extraordinary items
and cumulative effect of accounting change (960,484) (90,238) (22,807)
Equity in net income (loss) of unconsolidated affiliates (2,407) (178,235) 486
Minority interest 132,444 - -
------------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary items and cumulative effect
of accounting change (830,447) (268,473) (22,321)
Extraordinary items, net of tax - (2,100) (1,924)
Cumulative effect of accounting change, net of tax (10,412) - -
------------------------------------------------------------------------------------------------------------------------------------
Net Loss (840,859) (270,573) (24,245)
Preferred stock dividends 42,596 19,477 1,655
------------------------------------------------------------------------------------------------------------------------------------
Net Loss attributed to common shareholders $ (883,455) $ (290,050) $ (25,900)
====================================================================================================================================
Per common share data:
Basic and diluted
Loss before extraordinary items and cumulative effect
of accounting change $ (18.55) $ (8.11) $ (0.68)
Net loss $ (18.77) $ (8.17) $ (0.74)
Weighted average shares of common stock 47,076,746 35,485,306 35,159,195
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
- 52 -
Genesis Health Ventures, Inc. and Subsidiaries
Debtor-In-Possession
Consolidated Statements of Shareholders' Equity (Deficit)
Series G Accumulated
Cumulative other Total
Convertible Additional Retained comprehensive shareholders'
(in thousands) Preferred Common paid-in earnings income Treasury equity
Stock stock capital (deficit) (loss) stock (deficit)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ - $ 702 $ 457,232 $ 150,330 $ - $ (243) $ 608,021
====================================================================================================================================
Shares issued in connection with:
Exercise of common stock options - 2 1,587 - - - 1,589
Issuance of Series G Cumulative Convertible
Preferred Stock 6 - 295,114 - - - 295,120
Purchase of common stock call options - - (4,442) - - - (4,442)
Comprehensive income (loss)
Net unrealized gain on marketable securities - - - - 684 - 684
Net loss - - - (24,245) - - (24,245)
----------
Total comprehensive loss (23,561)
----------
Series G Cumulative Convertible Preferred Stock
dividends - - - (1,655) - - (1,655)
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 6 $ 704 $ 749,491 $ 124,430 $ 684 $ (243) $ 875,072
====================================================================================================================================
Shares issued in connection with:
Exercise of common stock options - 1 28 - - - 29
Issuance of common stock to 401(k) plan - 18 3,982 - - - 4,000
Partnership distribution - - (49) - - - (49)
Comprehensive loss
Net unrealized loss on marketable securities - - - - (1,112) - (1,112)
Net loss - - - (270,573) - - (270,573)
----------
Total comprehensive loss (271,685)
----------
Series G Cumulative Convertible Preferred Stock
dividends - - - (19,477) - - (19,477)
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 6 $ 723 $ 753,452 $ (165,620) $ (428) $ (243) $ 587,890
====================================================================================================================================
Shares issued in connection with:
Issuance of common stock - 250 49,750 - - - 50,000
Comprehensive loss
Net unrealized loss on marketable securities - - - - (1,361) - (1,361)
Net loss - - - (840,859) - - (840,859)
----------
Total comprehensive loss (842,220)
----------
Series G Cumulative Convertible Preferred Stock dividends - - - (19,776) - - (19,776)
Series H Senior Convertible Participating Cumulative
Preferred Stock dividends - - - (13,258) - - (13,258)
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock dividends - - - (9,562) - - (9,562)
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $ 6 $ 973 $ 803,202 $(1,049,075) $ (1,789) $ (243) $ (246,926)
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
- 53 -
Genesis Health Ventures, Inc. and Subsidiaries
Debtor-In-Possession
Consolidated Statements of Cash Flows
Year ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (840,859) $ (270,573) $ (24,245)
Adjustments to reconcile net loss to net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes (27,831) (45,214) (8,158)
Depreciation and amortization 116,961 74,955 52,385
Amortization of deferred gains and premiums (5,962) (5,986) (1,700)
Multicare joint venture restructuring charge 420,000 - -
Loss on impairment of assets and other charges 372,189 164,527 94,817
Debt restructuring and reorganization costs 62,795 - -
Loss on sale of assets 7,922 - -
Equity in net (income) loss of unconsolidated affiliates and minority interest (124,870) 178,235 (486)
Extraordinary items, net of tax - 2,100 1,924
Cumulative effect of accounting change, net of tax 10,412 - -
Non-cash common stock contribution to 401(k) plan - 4,000 -
Changes in assets and liabilities excluding the effects of acquisitions :
Accounts receivable (30,164) (47,562) (57,882)
Cost reports receivable - (3,633) (1,469)
Inventory (2,331) (131) (4,942)
Prepaid expenses and other current assets (13,129) (9,296) (4,989)
Accounts payable and accrued expenses (32,313) 2,135 32,700
------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 753,679 314,130 102,200
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations before debt restructuring and regorganization
costs (87,180) 43,557 77,955
------------------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (16,114) - -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (103,294) 43,557 77,955
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of marketable securities (39,614) (11,171) (22,764)
Proceeds on maturity or sale of marketable securities 34,954 12,119 10,835
Capital expenditures (51,981) (77,943) (56,663)
Payments for acquisitions, net of cash acquired (588) (16,634) (400,576)
Investments in unconsolidated affiliates - (16,051) (344,081)
Proceeds from assets sold, net 33,000 - 91,495
Reductions in notes receivable and other investments - 916 52,410
Additions to notes receivable and other investments (3,083) (3,424) (15,947)
Other long term asset additions (6,200) (22,782) (15,446)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (33,512) (134,970) (700,737)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under prepetition working capital revolving credit facilities 49,868 126,000 100,500
Net borrowings under Genesis DIP Facility 133,000 - -
Repayment of long term debt and payment of sinking fund requirments (90,295) (149,888) (69,540)
Proceeds from issuance of long-term debt 10,000 136,756 611,243
Debt issuance costs (9,183) (7,953) (23,317)
Issuance of common stock 50,000 - -
Purchase of common stock call options - - (4,442)
Partnership distribution - (49) -
Preferred stock dividends paid - (5,987) -
Stock options exercised - 29 1,589
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 143,390 98,908 616,033
------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents 6,584 7,495 (6,749)
Cash and equivalents:
Beginning of year (1) 16,364 4,902 11,651
------------------------------------------------------------------------------------------------------------------------------------
End of year $ 22,948 $ 12,397 $ 4,902
====================================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 179,215 $117,864 $ 85,557
Income taxes paid (received) 587 1,081 (31,370)
Non-cash financing activity - issuance of Genesis Series H Senior Convertible
Participating Cumulative Preferred Stock and Genesis Series I Senior
Convertible Exchangeable Participating Cumulative Preferred Stock 420,000 - -
Non-cash financing activity - issuance of Genesis Series G Cumulative Convertible
Preferred Stock $ - $ - $295,120
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
(1) The beginning cash balance was adjusted to include the opening cash balance
of Multicare following the Company's change in accounting for Multicare from
the equity method of accounting to the consolidation method of accounting.
- 54 -
Genesis Health Ventures, Inc. and Subsidiaries
Debtor-In-Possession
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Genesis Health Ventures, Inc. and its consolidated subsidiaries (the "Company"
or "Genesis"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Prior to October 1, 2000, 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 4 - Acquisitions / Dispositions - 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 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 Consolidated Statements of Operations.
The accompanying 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, 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 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 consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, the consolidated financial statements as of and for the year ended
September 30, 2000 include all necessary adjustments (consisting of normal
recurring accruals and 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
- 55 -
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.
All dollars are expressed in thousands except per share amounts. All other
amounts are expressed in whole numbers. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Business
The Company provides a broad range of healthcare services to the geriatric
population, principally within five geographic markets in the eastern United
States. These services include healthcare services traditionally provided in
eldercare centers; specialty medical services, such as rehabilitation therapy,
institutional pharmacy and medical supply services, community-based pharmacies
and management services to independent geriatric care providers.
Revenue Recognition
Within the Company's eldercare centers, revenue is recognized in the period the
related services are rendered. Revenues are recorded based on standard charges
applicable to all customers. The Company derives a substantial portion of its
revenue under Medicaid and Medicare reimbursement systems. Under certain
prospective Medicaid systems and Medicare the Company is reimbursed at a
predetermined rate based upon the historical cost to provide the service,
demographics of the site of service and the acuity of the customer. The
differences between the established billing rates and the predetermined rates
are recorded as contractual adjustments and deducted from revenues. Under a
prospective reimbursement system, there is no adjustment or settlement of the
difference between the actual cost to provide the service and the predetermined
rate. Under certain retrospective Medicaid systems and other cost-based
reimbursement programs, the Company is reimbursed for services rendered to
covered customers as determined by reimbursement formulas. The differences
between established billing rates and the amounts reimbursable by the programs
and customer payments are recorded as contractual adjustments and deducted from
revenues. Retroactively calculated third-party contractual adjustments are
accrued on an estimated basis in the period the related services are rendered.
Revisions to estimated contractual adjustments are recorded based upon audits by
third-party payors, as well as other communications with third-party payors such
as desk reviews, regulation changes and policy statements. Adjustments and final
settlements with third-party payors are reflected in operations at the time of
the adjustment or settlement as an increase or decrease to the balance of cost
report receivables / payables and revenue.
Within the Company's ancillary service businesses, the Company records revenues
at the time services or supplies are provided. Revenue is reported at the
estimated net realizable amounts expected to be received from individuals, third
party payors or others for services and supplies provided.
Cash Equivalents
Short-term investments which have a maturity of ninety days or less at
acquisition are considered cash equivalents.
Restricted Investments in Marketable Securities
Marketable securities, which comprises fixed interest securities, equity
securities, money market funds and liquid reserve funds are considered to be
available for sale and accordingly are reported at fair value with unrealized
gains and losses, net of related tax effects, included within accumulated other
comprehensive income or loss as a separate component of shareholders' equity
(deficit). Fair values for fixed interest securities are based on quoted market
prices.
- 56 -
A decline in the market value of any security below cost that is deemed other
than temporary is charged to earnings, resulting in the establishment of a new
cost basis for the security.
Premiums and discounts on fixed interest securities are amortized or accreted
over the life of the related security as an adjustment to yield using the
straight-line method. Realized gains and losses for securities classified as
available for sale are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Marketable securities are held by the Company's wholly-owned captive insurance
subsidiary, Liberty Health Corp., LTD ("LHC") and are substantially restricted
to securing the outstanding claims losses of LHC. LHC is not a party to the
Chapter 11 cases.
Inventories
Inventories, consisting of drugs and supplies, are stated at the lower of cost
or market. Cost is determined primarily on the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Land, land and building improvements, buildings, and equipment are stated at
cost. Depreciation is calculated on the straight-line method over estimated
useful lives of 20-35 years for land and building improvements and buildings,
and 3-15 years for equipment, furniture and fixtures and information systems.
Expenditures for maintenance and repairs necessary to maintain property and
equipment in efficient operating condition are charged to operations. Costs of
additions and betterments are capitalized. Interest costs associated with
construction or renovation are capitalized in the period in which they are
incurred.
The Company records impairment losses on long-lived assets including property,
plant and equipment used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
Deferred Financing Costs
Financing costs have been deferred and are being amortized on a straight-line
basis, which approximates the effective interest method, over the term of the
related debt. Deferred financing costs, net of accumulated amortization of
$23,496 and $12,726, were $38,462 and $29,066 at September 30, 2000 and 1999,
respectively, and are included in other long term assets.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair market value
of net assets acquired and is amortized on a straight-line basis from 10 to 40
years. Goodwill, before accumulated amortization of $130,850 and $55,800, was
$1,351,461 and $1,003,900 at September 30, 2000 and 1999, respectively. Goodwill
is reviewed for impairment whenever events or circumstances provide evidence
that suggest that the carrying amount of goodwill may not be recoverable. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance can be recovered through projected
undiscounted future cash flows.
The Company records impairment losses on long-lived assets including goodwill
and other intangibles used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
- 57 -
With respect to the carrying value of the excess of cost over net asset value of
purchased facilities and other intangible assets, the Company determines on a
quarterly basis whether an impairment event has occurred by considering factors
such as the market value of the asset; a significant adverse change in legal
factors or in the business climate; adverse regulatory action; a history of
operating or cash flow losses; or a projection of continuing losses associated
with an operating entity. The carrying value of excess cost over net asset value
of purchased facilities and other intangible assets will be evaluated if the
facts and circumstances suggest that it has been impaired. If this evaluation
indicates that the value of the asset will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, an impairment loss is calculated based on excess of the
carrying amount of the asset over the asset's fair value.
Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. Provision is made for deferred income taxes applicable to
temporary differences between financial statement and taxable income.
Earnings or Loss Per Share
Basic earnings or loss per share is calculated by dividing net income or loss
available / attributed to common shareholders by the weighted average of common
shares outstanding during the period. Diluted earnings per share is calculated
by using the weighted average of common shares outstanding adjusted to include
the potentially dilutive effect of outstanding stock options.
Any incremental shares resulting from outstanding stock options would be
anti-dilutive in the 2000, 1999 and 1998 calculations of diluted loss per share.
Use of Estimates
Management of the Company has made a number of estimates relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ from those estimates.
Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position 98-5, Reporting
on the Costs of Start-Up Activities ("SOP 98-5"). The statement requires costs
of start-up activities, including organizational costs, to be expensed as
incurred. Start-up activities are defined as those one-time activities related
to opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new process in an
existing facility, or commencing a new operation. The cumulative effect of
expensing all unamortized start-up costs at October 1, 1999 was approximately
$16,400 pre tax and $10,412 after tax.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"), as amended. Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
- 58 -
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters in fiscal years beginning after June 15, 2000. The Company
intends to adopt this accounting standard as required. The adoption of this
standard is not expected to have a material impact on the Company's earnings or
financial position.
(2) Voluntary Petitions 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 pre-petition 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 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 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 September 30, 2000, approximately $133,000 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 pre-petition 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 pre-petition claims of
certain critical vendors and patients. All other unsecured pre-petition
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.
- 59 -
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 Cases follows (in thousands):
As of
September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $1,483,898
Senior subordinated notes 617,488
Revenue bonds and other indebtedness 155,937
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $2,257,323
------------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 67,574
Accrued interest (including a $28,331 swap termination fee) 86,855
Accrued preferred stock dividends on Series G Preferred Stock 34,921
------------------------------------------------------------------------------------------------------------------------------------
$2,446,673
------------------------------------------------------------------------------------------------------------------------------------
A summary of the principal categories of debt restructuring and reorganization
costs follows (in thousands):
For the Twelve
Months Ended
September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Legal, accounting and consulting fees $ 20,748
Bank fees 9,187
Interest rate swap termination charge 28,331
Employee benefit related costs, including severance 4,529
------------------------------------------------------------------------------------------------------------------------------------
$ 62,795
------------------------------------------------------------------------------------------------------------------------------------
(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 that
- 60 -
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.
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.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System pursuant to
the Balanced Budget Act of 1997, as modified by the Medicare Balanced
Budget Refinement Act and the Benefit Improvement Protection Act of
2000; and
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that 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.
(4) Acquisitions/Dispositions
Sale of Ohio Operations
Effective June 1, 2000, Multicare sold all of its long-term care operations
located in the state of Ohio, which included 14 eldercare centers with 1,128
beds. The properties were sold for $33,000 in cash, resulting in a loss of sale
of $7,922. The net proceeds of the sale were applied against Multicare's term
loans and revolving credit facility on a pro rata basis in accordance with the
relative aggregate principal amount thereof held by each applicable lender.
- 61 -
Other Dispositions, Closures and Lease Terminations
During fiscal 2000, we closed or are in the process of closing or terminating
the leases of six underperforming eldercare centers with 842 combined beds. As a
result, a charge of $28,363 was recorded to account for certain impaired and
abandoned assets of these eldercare centers as well as the estimated future cost
of maintaining owned properties that were closed. Of the centers closed three
were owned centers and three were leased. In October 2000, one of the closed
centers was sold to an independent third party for approximately $7,000 in cash.
During fiscal 1999, management decided to exit the operations of six leased
eldercare centers with 580 beds at the end of their lease terms on November 1,
2000. Effective October 1, 1999, the Company sold one eldercare center with 348
beds for approximately $19,000. No gain or loss on sale was recorded as the
carrying value of the underlying assets were written down to fair value at the
end of fiscal 1999.
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
to receive (i) .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Series G Preferred"), (ii) $22.50 in cash,
or (iii) a combination of cash and shares of Series G Preferred (collectively,
the "Merger Consideration"). The Merger Consideration paid to stockholders of
Vitalink to acquire their shares (including shares which may have been issued
upon the exercise of outstanding options) was $590,200, of which 50% was paid in
cash and 50% in Series G Preferred. The Series G Preferred has a face value of
approximately $295,100 and an initial dividend of 5.9375% and generally is not
transferable without the consent of the Company. The dividend rate increases on
the fourth, fifth, ninth, eleventh and thirteenth anniversary date to 6.1875%,
6.6250%, 7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is
convertible into Genesis common stock, par value $.02 per share (the "Common
Stock"), at $37.20 per share and it may be called for conversion after April 26,
2001, provided the price of Common Stock reaches certain trading levels and
after April 26, 2002, subject to a market-based call premium. Vitalink's total
net revenues for the fiscal years ended May 31, 1997 and 1998, were $274,000 and
$494,000, respectively. As a result of the merger, Genesis assumed approximately
$87,000 of indebtedness Vitalink had outstanding. The cash portion of the
purchase price was funded through borrowings under the Genesis Credit Facility,
as defined. The Vitalink Transaction is being accounted for under the purchase
method and the related goodwill is being amortized over a 40-year period.
Pursuant to four agreements with HCR Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR Manor Care (the
"Services Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004. See Footnote (15) -
Commitments and Contingencies.
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
- 62 -
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000. Cypress, TPG and Nazem are sometimes collectively referred to
herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put/call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. common stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to sell (the "Put") such Genesis ElderCare
Corp. common stock at a price determined pursuant to the Put/Call Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000 (the "Therapy Purchase") and a stock purchase agreement (the "Pharmacy
Purchase Agreement") with Multicare and certain subsidiaries pursuant to which
Genesis acquired all of the outstanding capital stock and limited partnership
interests of certain subsidiaries of Multicare that were engaged in the business
of providing institutional pharmacy services to third parties for $50,000 (the
"Pharmacy Purchase"). The Company completed the Pharmacy Purchase effective
January 1, 1998. The Company completed the Therapy Purchase in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred"), which 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.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
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Genesis ElderCare Corp. not owned by Genesis for $2,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000 into Genesis in exchange for 12,500,000 shares of
Genesis Common Stock and a ten year warrant to purchase 2,000,000 shares of
Genesis Common Stock at an exercise price of $5.00 per share.
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis Common Stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an irrevocable
proxy to vote their shares of common stock of Genesis ElderCare Corp.
on all matters to be voted on by shareholders, including the election
of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions receive the
approval of at least one designee of each of Cypress, TPG and Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
o provide that Genesis may appoint 100% of the members of the operating
committee of the board of directors of Genesis ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis Common Stock, Cypress or TPG, as applicable, are
- 64 -
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which would
constitute a change in control, as defined in the Restructuring
Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part of a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the Multicare restructuring transaction, Genesis accounted for its
investment in Multicare using the equity method of accounting. Upon consummation
of the restructuring transaction, 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 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.
In connection with the restructuring transaction, Genesis recorded a non-cash
charge of approximately $420,000 representing the estimated cost to terminate
the Put in consideration for the issuance of the Series H Preferred and Series I
Preferred. The 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.
- 65 -
The following unaudited pro forma statement of operations information gives
effect to the Multicare joint venture restructuring had it occurred on October
1, 1998, after giving effect to certain adjustments, including the elimination
of intercompany transactions, the recording of minority interest, the issuance
of Common Stock, the recording of preferred stock dividends, the repayment of
debt with proceeds from the issuance of Common Stock and related income tax
effects. The unaudited pro forma financial information has been prepared to
reflect the consolidation of the financial results of Multicare. Accordingly,
Multicare's revenues and expenses are presented at their recorded historical
amounts and the financial impact of all transactions between Genesis and
Multicare are eliminated in consolidation. The pro forma financial information
does not include the $420,000 non-cash charge representing the cost estimated to
terminate the Put. This charge is a direct result of the Multicare joint venture
restructuring. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had the transaction occurred
at the beginning of the period presented.
(Unaudited) 1999
--------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
--------------------------------------------------------------------------------
Total net revenues $2,406,346
Loss before extraordinary item (311,144)
Loss attributable to common shareholders (313,244)
Diluted loss per common share before extraordinary item (6.48)
Diluted loss per common share $ (6.53)
--------------------------------------------------------------------------------
(5) Restricted Investments in Marketable Securities
Marketable securities are held by the Company's wholly-owned subsidiary, Liberty
Health Corporation, LTD ("LHC"), incorporated under the laws of Bermuda. Liberty
provides various insurance coverages to the Company and to unrelated entities,
most of which are managed by the Company.
Marketable securities at September 30, 2000 consist of the following:
Amortized Unrealized Unrealized Fair
cost gains losses value
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes $ 1,100 $ - $ (3) $ 1,097
U.S. mortgage backed securities 7,544 39 (15) 7,568
Corporate bonds 6,618 - (371) 6,247
Equity securities 1,580 - (1,439) 141
Term deposits 1,497 - - 1,497
Liquid reserve fund 4,078 - - 4,078
Money market funds 7,271 - - 7,271
------------------------------------------------------------------------------------------------------------------------------------
$ 29,688 $ 39 $ (1,828) $ 27,899
------------------------------------------------------------------------------------------------------------------------------------
Marketable securities at September 30, 1999 consist of the following:
Amortized Unrealized Unrealized Fair
cost gains losses value
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes $ 1,100 $ - $ (1) $ 1,099
U.S. mortgage backed securities 11,030 65 (8) 11,087
Corporate bonds 6,634 - (297) 6,337
Equity securities 1,580 - (417) 1,163
Term deposits 1,497 - - 1,497
Money market funds 3,416 - - 3,416
------------------------------------------------------------------------------------------------------------------------------------
$ 25,257 $ 65 $ (723) $ 24,599
------------------------------------------------------------------------------------------------------------------------------------
- 66 -
Fixed interest securities held at September 30, 2000 and 1999 mature as follows:
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
------------------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 1,100 $ 1,097 $ 3,496 $ 3,505
Due after 1 year through 5 years 5,108 5,006 6,211 6,121
Due after 5 years through 10 years 9,054 8,809 9,057 8,897
Due after 10 years - - - -
------------------------------------------------------------------------------------------------------------------------------------
$15,262 $14,912 $ 18,764 $ 18,523
------------------------------------------------------------------------------------------------------------------------------------
Actual maturities may differ from stated maturities because borrowers have the
right to call or prepay certain obligations with or without prepayment
penalties.
In the normal course of business, LHC's bankers have issued letters of credit
totaling $17,148 (1999 - $9,000) in favor of insurers. Marketable securities
with an amortized cost of $22,416 and a market value of $20,627 were pledged as
security for these letters of credit as of September 30, 2000.
(6) Property, Plant and Equipment
Property, plant and equipment at September 30, 2000 and 1999 consist of the
following:
2000 1999
--------------------------------------------------------------------------------
Land $ 104,741 $ 39,621
Buildings and improvements 914,731 464,629
Equipment, furniture and fixtures 269,607 198,438
Construction in progress 68,588 61,385
--------------------------------------------------------------------------------
1,357,667 764,073
Less accumulated depreciation (250,321) (151,772)
--------------------------------------------------------------------------------
Net property, plant and equipment $1,107,346 $612,301
--------------------------------------------------------------------------------
Due to an impairment to the carrying value of certain properties, the Company
recorded write-downs of its property, plant and equipment of $34,578 and $7,400,
during the twelve months ending September 30, 2000 and 1999, respectively.
- 67 -
(7) Long-Term Debt
Long-term debt at September 30, 2000 and 1999 consist of the following:
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Secured debt - (weighted average interest rate 2000-10.0%; 1999 -7.96%)
Debtor-in-possession financing facilities $ 133,000 $ -
Credit facilities 1,483,897 1,034,945
Mortgage and other secured debt, net of unamortized debt premium 158,756 115,236
------------------------------------------------------------------------------------------------------------------------------------
Total secured debt 1,775,653 1,150,181
Unsecured debt - (weighted average interest rate 2000-9.35%;
1999 -9.57%)
Senior subordinated notes, net of unamortized debt discount 617,488 366,978
Notes payable and other unsecured debt 7,623 4,477
------------------------------------------------------------------------------------------------------------------------------------
Total unsecured debt 625,111 371,455
Total Debt 2,400,764 1,521,636
Less:
Current portion of long-term debt (133,000) (37,126)
Long term debt subject to compromise (2,257,323) -
------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 10,441 $ 1,484,510
------------------------------------------------------------------------------------------------------------------------------------
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 of the Multicare Credit Facility, $250,000
of senior subordinated notes and $53,101 of other indebtedness. Multicare
continues to pay interest on an aggregate outstanding balance of $10,240 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 of senior subordinated notes and $101,485 of other indebtedness.
Subsequent to June 22, 2000, Genesis repaid $40,000 of Tranche II Prepetition
Debt under the Genesis Credit Facility and all interest incurred prior to June
22, 2000 on Prepetition Debt under the Genesis Credit Facility. Interest
incurred on $1,059,000 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.
At September 30, 2000 and 1999, the Company's long-term debt included
approximately $1,616,897 and $1,034,945, respectively, of floating rate debt
based on Prime or LIBO Rate. In fiscal 2000 and fiscal 1999, the weighted
average interest rates on floating rate debt were 10.00% and 7.85%,
respectively. At September 30, 2000 and 1999, the Company' long-term debt
included approximately $783,867 and $486,691 of fixed rate debt. In fiscal 2000
and 1999, the weighted average interest rates on fixed rate debt were 9.45% and
9.49%, respectively.
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 out of a possible $250,000
facility. On July 18, 2000, the Bankruptcy Court entered the Final Order
- 68 -
approving the $250,000 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 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 against real property.
The Genesis DIP Facility 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 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 outstanding under the Company's pre-petition priority
Tranche II sub-facility. Additionally, $44,000 of proceeds were used to satisfy
all unpaid interest and rent obligations to the senior secured creditors under
the Fourth Amended and Restated Credit Agreement dated August 20, 1999 and the
Synthetic Lease dated October 7, 1996 as adequate protection for any diminution
in value of the pre-petition senior secured lenders in these facilities,
respectively. The 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 September 30, 2000 borrowings outstanding under the
Genesis DIP Facility were $133,000. The Genesis DIP Facility provides for the
issuance of up to $25,000 in standby letters of credit. As of September 30, 2000
there was $11,500 in letters of credit issued thereunder, for a total
utilization under the Genesis DIP Facility of $144,500.
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.
- 69 -
As a result of the pending status of Bankruptcy Court approval for payment of
the amendment fee, the Company classified the Genesis DIP Facility balance of
$133,000 as a current liability in the September 30, 2000 consolidated balance
sheet.
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 out of a possible $50,000. On
July 18, 2000, the Bankruptcy Court entered the Final Order approving the
$50,000 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 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 September 30, 2000, there has been no usage
under the Multicare DIP Facility. The Multicare DIP Facility provides for the
issuance of up to $20,000 in standby letters of credit. As of September 30, 2000
there were $3,700 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 Pre-petition Senior Credit
Facility 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
- 70 -
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 entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries (excluding
Multicare) a credit facility totaling $1,250,000 (the "Genesis Credit Facility")
for the purpose of: refinancing and funding interest and principal payments of
certain existing indebtedness; funding permitted acquisitions; and funding
Genesis' and its subsidiaries' working capital for general corporate purposes,
including fees and expenses of transactions. The fourth amended and restated
credit agreement made the financial covenants for certain periods less
restrictive, required minimum asset sales, increased the Applicable Margin
(defined below), provided the lenders of the Genesis Credit Facility a
collateral interest in certain real and personal property of the Company, and
generally reallocated the proceeds thereof among the Tranche II Facility
(defined below), the Genesis Revolving Facility (defined below) and the Genesis
Term Loans (defined below) and permitted the restructuring of the Put/Call
Agreement, as defined. Additionally, the fourth amended and restated credit
agreement provided for $40,000 of additional borrowing capacity, (the "Tranche
II Facility") available to the Company beginning in December 1999.
The Genesis Credit Facility consists of three term loans with original balances
of $200,000 each (collectively, the "Genesis Term Loans"), and a $650,000
revolving credit loan (the "Genesis Revolving Facility") and a $40,000 Tranche
II Facility. The Genesis Term Loans amortize in quarterly installments through
2005. The Genesis Term Loans consist of (i) an original six year term loan
maturing in September 2003 with an outstanding balance of $110,445 at September
30, 2000 (the "Genesis Tranche A Term Facility"); (ii) an original seven year
term loan maturing in September 2004 with an outstanding balance of $152,130 at
September 30, 2000 (the "Genesis Tranche B Term Facility"); and (iii) an
original eight year term loan maturing in June 2005 with an outstanding balance
of $151,378 at September 30, 2000 (the "Genesis Tranche C Term Facility"). The
Genesis Revolving Facility, with an outstanding balance of $645,834 (excluding
letters of credit) at September 30, 2000, becomes payable in full on September
30, 2003. At September 30, 2000, there were no outstanding borrowings under the
Tranche II Facility. The aggregate outstanding balance of the Genesis Credit
Facility at September 30, 2000 is classified as a liability subject to
compromise.
Subject to liens granted under the Genesis DIP Facility, the Genesis Credit
Facility is secured by a first priority security interest in all of the stock,
partnership interests and other equity of all of Genesis' present and future
subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries, and also by first priority security interests 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. Loans under the Genesis
Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate
as announced by the administrative agent, or the applicable Adjusted LIBO Rate
plus, in either event, a margin (the "Applicable Margin") that is dependent upon
a certain financial ratio test. Loans under the Genesis Tranche A Term Facility
and Genesis Revolving Facility have an Applicable Margin of 1.50% for Prime Rate
loans and 3.25% for LIBO Rate loans. Loans under the Genesis Tranche B Term
Facility have an Applicable Margin of 1.75% for Prime Rate loans and 3.50% for
LIBO Rate loans. Loans under the Genesis Tranche C Term Facility have an
Applicable Margin of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans.
Subject to meeting certain financial ratios, the above referenced interest rates
are reduced.
The Genesis Credit Facility contains a number of covenants that, among other
things, restrict the ability of Genesis and its subsidiaries to dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Genesis and its subsidiaries to prepay
- 71 -
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; cause Genesis and its affiliates to
maintain certain agreements including the Management Agreement and the Put/Call
Agreement (as amended), and to maintain corporate separateness; and cause
Genesis to comply with the terms of other material agreements, as well as to
comply with usual and customary covenants for transactions of this nature.
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.
Multicare Credit Facility
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility") which made the financial covenants
for certain periods less restrictive, permitted a portion of the proceeds of
assets sales to repay indebtedness under the Multicare Tranche A Term Facility
(defined below) and Multicare Revolving Facility (defined below), permitted the
restructuring of the Put/Call Agreement, increased the interest rates applying
to the Multicare Term Loans (defined below) and the Multicare Revolving
Facility, and increased the level of management fee Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
The Multicare Credit Facilities consist of three term loans with an aggregate
original balance of $400,000 (collectively, the "Multicare Term Loans"), and a
$125,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortize in quarterly installments through 2005. The loans
consist of (i) an original six year term loan maturing in September 2003 with an
outstanding balance of $132,239 at September 30, 2000 (the "Multicare Tranche A
Term Facility"); (ii) an original seven year term loan maturing in September
2004 with an outstanding balance of $138,339 at September 30, 2000 (the "Tranche
B Term Facility"); and (iii) and an original eight year term loan maturing in
June 2005 with an outstanding balance of $45,877 at September 30, 2000 (the
"Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an
outstanding balance of $107,655 at September 30, 2000, becomes payable in full
on September 30, 2003. The aggregate outstanding balance of the Multicare Credit
Facility at September 30, 2000 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. Loans under the
Multicare Credit Facility bear, at Multicare's option, interest at the per annum
Prime Rate as announced by the administrative agent, or the applicable Adjusted
LIBO Rate plus, in either event, an Annual Applicable Margin that is dependent
upon a certain financial ratio test.
Effective with the Amendment on August 20, 1999, loans under the Multicare
Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at
a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare
Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 4.25%; loans under the Multicare Revolving Credit Facility bear interest
at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting
certain financial covenants, the above-referenced interest rates will be
reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Multicare Credit Facility, the Company is no longer entitled to elect a LIBO
Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term
Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%;
loans under the Multicare Tranche B Term Facility bear interest at a rate equal
to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C
Term Facility bear interest at a rate equal to Prime Rate plus a margin up to
2.5%; loans under the Multicare Revolving Credit Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.0%.
- 72 -
The Multicare Credit Facility contains a number of covenants that, among other
things, restrict the ability of Multicare and its subsidiaries to: dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Multicare and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; cause Multicare and its affiliates
to maintain certain agreements including the Management Agreement and the
Put/Call Agreement (as amended), and to maintain corporate separateness; and
cause Multicare to comply with the terms of other material agreements, as well
as to comply with usual and customary covenants for transactions of this nature.
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
The Company has $158,756 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.
Unsecured Debt
Senior Subordinated Notes
In December 1998, Genesis issued $125,000 9 7/8% Senior Subordinated Notes due
2009 at a price of 96.1598% resulting in net proceeds of $120,200. Interest on
the notes is payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 1999. Approximately $59,950 of the net proceeds were used to
repay portions of the Tranche A, B and C Term Facilities and approximately
$59,950 of the net proceeds were used to repay a portion of the Revolving
Facility.
In August 1997, Genesis Eldercare Acquisition Corp. ("GEAC") issued $250,000 9%
Senior Subordinated Notes due 2007. Interest on the notes is payable
semiannually on February 1 and August 1 of each year. The net proceeds were used
to finance the consummation of GEAC's acquisition of Multicare.
In October 1996, Genesis completed an offering of $125,000 9 1/4% Senior
Subordinated Notes due 2006. Interest is payable on April 1 and October 1 of
each year. The Company used the net proceeds of approximately $121,250, together
with borrowings under the Credit Facility, to pay the cash portion of the
purchase price of 24 eldercare centers, and certain other healthcare businesses
of Geriatric & Medical Companies, Inc. (the "GMC Transaction"), and to repay
certain debt assumed as a result of the GMC Transaction and to repurchase
Geriatric and Medical Companies, Inc. accounts receivable which were previously
financed.
In June 1995, Genesis completed an offering of $120,000 of 9 3/4 % Senior
Subordinated Notes due 2005. Interest is payable on the notes on June 15 and
December 15 of each year. The notes are redeemable at the option of the Company
in whole or in part, at any time, on or after June 15, 2000 at a redemption
price initially equal to 104.05% of the principal amount and decreasing annually
thereafter. The Company used the net proceeds from the notes offering to repay a
portion of the Credit Facility.
Unsecured Senior Subordinated Notes include $1,590 of untendered 9 3/8% senior
subordinated notes assumed by Genesis in connection with the Vitalink
Transaction.
- 73 -
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.
The Company enters into interest rate swap agreements to manage interest costs
and risks associated with changing interest rates. These agreements generally
convert underlying variable-rate debt based on LIBO Rates into fixed-rate debt.
At September 30, 2000 the Company has no interest rate swap agreements
outstanding. At September 30, 1999, the notional principal amount of interest
rate swap agreements totaled $1,100,000 with a net fixed notional amount of
$370,000 whereby the Company made quarterly payments at a weighted average fixed
rate of approximately 4.75% and received quarterly payments at floating rates
based on three month LIBO Rate of approximately 5.51%. As a result of the
non-payment of interest under the Genesis Credit Facility, certain provisions
under existing interest rate swap arrangements with Citibank were triggered.
Citibank notified Genesis that they elected to force early termination of the
interest rate swap arrangements, and have asserted a $28,331 obligation, which
is classified as a liability subject to compromise. The interest rate swap
termination charge is reflected in the consolidated statement of operations as
debt restructuring and reorganization costs.
Interest of $4,402 in 2000, $4,784 in 1999 and $3,526 in 1998, was capitalized
in connection with facility construction, systems development and renovations.
During fiscal 1999 and 1998 the Company recorded extraordinary losses, net of
tax, of $2,100 and $1,924, respectively, related to the early retirement of
debt. The Company is restricted from declaring any dividends on its Common Stock
or authorizing any other distribution on account of ownership of its capital
stock unless certain conditions are met.
(8) Leases and Lease Commitments
The Company leases certain facilities and equipment under operating leases.
Future minimum payments for the next five years under operating leases at
September 30, 2000 were as follows:
Minimum
Year ending September 30, Payment
-------------------------------------------------------------------------------
2001 $ 48,178
2002 39,629
2003 36,437
2004 34,563
2005 $ 27,811
-------------------------------------------------------------------------------
Excluded from the future minimum lease payments above in the year 2001 is
approximately $78,300 related to a residual value guarantee due under a lease
financing facility. This off-balance sheet obligation is subject to compromise
through the Chapter 11 cases.
The Company may assume or reject executory contracts, including lease
agreements, under the Bankruptcy Code. The Company has rejected or expects to
reject three eldercare center lease agreements since the Chapter 11 Cases were
filed. The annual revenues, operating loss and lease costs of the properties
underlying the rejected lease agreements are $11,275, $1,154 and $680,
respectively.
On January 30, 1998, Genesis completed deleveraging transactions with
ElderTrust, a newly formed Maryland healthcare real estate investment trust.
Genesis, a co-registrant on the ElderTrust initial public offering, received
approximately $78,000 in proceeds from the sale and leaseback of 13 properties
to ElderTrust, including four properties it had purchased from Crozer-Keystone
- 74 -
Health System in anticipation of resale to ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000 which has been deferred
and is being amortized over the ten-year term of the lease contracts with
ElderTrust. In September 1998, the Company sold its leasehold rights and option
to purchase seven eldercare facilities acquired in its November 1993 acquisition
of Meridian Healthcare, Inc. to ElderTrust for $44,000, including $35,500 in
cash and an $8,500 note. As part of the transaction, Genesis will continue to
sublease the facilities for ten years with an option to extend the lease until
2018 at an initial annual lease obligation of approximately $10,000. The
transaction resulted in a gain of approximately $43,700 which has been deferred
and is being amortized over the ten-year lease term of the lease contracts with
ElderTrust.
On January 31, 2001, subsequent to fiscal year end, the Company reached
agreements to restructure its relationship with ElderTrust. The agreements
encompass, among other things, the resolution of leases and mortgages for 33
properties operated by Genesis and Multicare either directly or through joint
ventures. Under its agreement, Genesis: assumed the ElderTrust leases subject to
certain modifications, including a reduction in Genesis' annual lease expense of
$745; extended the maturity and reduced the principal balances of loans for
three assisted living properties by $8,500 by satisfaction of an ElderTrust
obligation of like amount and acquired a building currently leased from
ElderTrust, which is located on the campus of a Genesis skilled nursing
facility, for $1,250. In its agreement with ElderTrust, Multicare sold three
owned assisted living properties that are mortgaged to ElderTrust for principal
amounts totaling $19,500 in exchange for the outstanding indebtedness.
ElderTrust will lease the properties back to Multicare under a new ten-year
lease with annual rents of $792.
(9) Patient Service Revenue
The distribution of net patient service revenue by class of payor for the years
ended September 30, 2000, 1999 and 1998 was as follows:
Class of payor 2000 1999 1998
--------------------------------------------------------------------------------
Private pay and other $ 965,702 $ 826,051 $ 581,128
Medicaid 1,014,983 686,717 451,989
Medicare 381,148 242,807 258,279
--------------------------------------------------------------------------------
$ 2,361,833 $1,755,575 $1,291,396
--------------------------------------------------------------------------------
The above revenue amounts are net of third-party contractual allowances of
$496,792, $343,020 and $278,804 in 2000, 1999 and 1998, respectively.
- 75 -
(10) Income Taxes
Total income tax benefit for the years ended September 30, 2000, 1999 and 1998
was as follows:
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Loss before equity in net loss / income of
unconsolidated affiliates, minority interest,
extraordinary items and cumulative effect of
accounting change $ (27,168) $ (44,711) $ (8,158)
Extraordinary items - (1,276) (1,106)
Cumulative effect of accounting change (5,988) - -
-----------------------------------------------------------------------------------------------------------
Total $ (33,156) $ (45,987) $ (9,264)
-----------------------------------------------------------------------------------------------------------
The components of the provision (benefit) for income taxes for the years ended
September 30, 2000, 1999 and 1998 were as follows:
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ -
State 663 503 -
-----------------------------------------------------------------------------------------------------------
$ 663 $ 503 $ -
-----------------------------------------------------------------------------------------------------------
Deferred:
Federal $ (27,831) $ (45,272) $ (7,163)
State - 58 (995)
-----------------------------------------------------------------------------------------------------------
$ (27,831) $ (45,214) $ (8,158)
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total $ (27,168) $ (44,711) $ (8,158)
-----------------------------------------------------------------------------------------------------------
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to net income before income taxes, equity in net
income (loss) of unconsolidated affiliates, minority interest, extraordinary
items and cumulative effect of accounting change as a result of the following:
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Computed "expected" benefit $ (345,678) $ (47,232) $ (10,838)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
tax benefits (431) (365) (463)
Amortization of goodwill 9,545 3,481 3,840
Targeted jobs tax credits (1,389) (1,146) (1,073)
Multicare joint-venture restructuring charge 147,000 - -
Write-off of non deductible goodwill 47,352 - -
Change in valuation allowance 115,495 - -
Other, net 938 551 376
-----------------------------------------------------------------------------------------------------------
Total income tax benefit $ (27,168) $ (44,711) $ (8,158)
-----------------------------------------------------------------------------------------------------------
- 76 -
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 2000
and 1999 are presented below:
2000 1999
--------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Accrued compensation $ 1,609 $ 282
Accounts receivable - 744
Debt premium 1,999 2,144
Accrued liabilities and reserves 60,247 35,873
Net operating loss carryforwards 148,423 39,801
Other, net 8,558 2,325
--------------------------------------------------------------------------------------------------------------------
Deferred tax assets 220,836 81,169
--------------------------------------------------------------------------------------------------------------------
Valuation allowance (118,895) (3,400)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 101,941 77,769
--------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Accounts receivable (4,442) -
Goodwill and other intangibles (31,321) (29,455)
Depreciation (110,300) (53,583)
Accrued liabilities and reserves (9,960) (8,558)
--------------------------------------------------------------------------------------------------------------------
Total deferred tax liability (156,023) (91,596)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (54,082) $ (13,827)
--------------------------------------------------------------------------------------------------------------------
The deferred tax assets related to net operating loss carryforwards are
available to reduce future income taxes payable, subject to applicable
carryforward rules and limitations. The net operating loss carryforwards expire
in years 2001 through 2019. As a result of the Company's Chapter 11 filings and
uncertainties regarding it's ability to generate sufficient taxable income to
utilize future net operating loss carryforwards, the Company recorded a $118,895
valuation allowance against the balance of its deferred tax assets.
(11) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 2000 and 1999 consist of
the following:
2000 1999
--------------------------------------------------------------------------------------------------------------------
Mortgage notes and other notes receivable $ 32,232 $ 33,063
Investments in revenue bonds 7,012 7,012
--------------------------------------------------------------------------------------------------------------------
$ 39,244 $ 40,075
--------------------------------------------------------------------------------------------------------------------
Mortgage notes and other notes receivable at September 30, 2000 bear interest at
rates ranging from 7.25% to 10.0% and mature at various times ranging from 2001
to 2029. Approximately $21,132 of the mortgage notes and other notes are secured
by first or second mortgage liens on underlying facilities and personal
property, accounts receivable, inventory and / or gross facility receipts, as
defined.
The Company has agreed to provide third parties, including facilities under
management contract, with $14,100 of working capital lines of credit. The unused
portion of working capital lines of credit was $8,100 at September 30, 2000.
In December, 1997 the Board of Directors approved a Senior Executive Stock
Ownership Program. Under the terms of the program, certain of the Company's
senior executive employees are required to own shares of the Company's Common
Stock having a market value based upon a multiple of the executive's salary.
- 77 -
Each executive is required to own the shares within three years of the date of
the adoption of the program. Subject to applicable laws, the Company may lend
funds to one or more of the senior executive employees for his or her purchase
of the Company's Common Stock. As of September 30, 2000 and 1999, the Company
had outstanding loans and accrued interest of approximately $3,200 and $3,000,
respectively, to senior executive employees which are included in mortgage notes
and other notes receivables. The note agreements were amended in fiscal 2000 to
adjust the interest rate to 8% simple interest. Previously, the loans accrued
interest based on the market rate at the date of the loan initiation.
Investments in revenue bonds bear interest at rates ranging from 7.25% to 10.45%
and mature at various times between 2011 and 2029. The revenue bonds held
consist of two series; one issued by a jointly-owned assisted living facility
managed by Genesis and one issued by a skilled nursing facility owned by an
independent third party and managed by Genesis.
(12) Other Long-Term Assets
Other long-term assets at September 30, 2000 and 1999 consist of the following:
2000 1999
--------------------------------------------------------------------------------------------------------------------
Deferred financing fees, net $ 38,462 $ 29,066
Subordinated management fees due from Multicare - 26,907
Cost report receivables 36,784 26,939
Property deposits and funds held in escrow 15,227 11,907
Other, net 15,253 18,159
--------------------------------------------------------------------------------------------------------------------
$ 105,726 $ 112,978
--------------------------------------------------------------------------------------------------------------------
(13) Stock Option Plans
The Company has three stock option plans (the "Employee Plan", the "1998
Non-Qualified Employee Plan" and the "Directors Plan"). Under the Employee Plan,
6,750,000 shares of Common Stock were reserved for issuance to employees
including officers and directors. Options granted in the Employee Plan prior to
fiscal 1997 generally become exercisable over a five year period, while options
granted subsequent to fiscal 1996 vest 25% in the year of the grant and 25% over
each of the next three years. The options granted in the Employee Plan expire 10
to 13 years from the date of the grant. Under the 1998 Non-Qualified Employee
Plan, 1,500,000 shares of Common Stock were reserved for issuance to non-officer
employees. Options granted in the 1998 Non-Qualified Employee Plan vest 20% in
the year of the grant and 20% over each of the next four years. The options
granted in the 1998 Non-Qualified Employee Plan expire 10 years from the date of
the grant. All options granted under the Employee Plan and the 1998
Non-Qualified Employee Plan have been at the fair market value of the Common
Stock on the date of grant. Presented below is a summary of the Employee Plan
and the 1998 Non-Qualified Employee Plan for the three years ended September 30,
2000.
- 78 -
Option Price Available for
Per Share Outstanding Exercisable Grant
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $2.22 - $35.25 3,421,825 1,663,640 142,931
------------------------------------------------------------------------------------------------------------------------------------
Authorized - - - 1,750,000
Granted $27.12 - $28.75 1,056,905 - (1,056,905)
Became Exercisable - - 757,849 -
Exercised $5.33 - $32.88 (75,052) (75,052) -
Canceled - (249,190) - 249,190
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $2.22 - $35.25 4,154,488 2,346,437 1,085,216
------------------------------------------------------------------------------------------------------------------------------------
Authorized - - - 2,000,000
Granted $3.13 - $11.19 2,252,100 - (2,252,100)
Became Exercisable - - 1,545,389 -
Exercised $5.33 - $5.33 (2,100) (2,100) -
Canceled - (678,182) - 678,182
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $2.22 - $35.25 5,726,306 3,889,726 1,511,298
------------------------------------------------------------------------------------------------------------------------------------
Authorized - - - -
Granted $2.00 - $2.81 720,000 - (720,000)
Became Exercisable - - 199,782 -
Exercised - - - -
Canceled - (794,370) - 794,370
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $2.00 - $35.25 5,651,936 4,089,508 1,585,668
------------------------------------------------------------------------------------------------------------------------------------
In March 1992, the Company adopted, and in February 1993, the shareholders
approved, the Directors Plan. Pursuant to the Directors Plan, options may be
granted for an aggregate of 225,000 shares of Common Stock. In March 2000, the
shareholders approved to increase the number of shares issuable under the
Directors Plan by 1,650,000 shares to an aggregate of 1,875,000 shares. The
Directors Plan terminates ten years after its approval by the shareholders. At
September 30, 2000, there were 63,000 options outstanding and exercisable at
grant prices ranging from $1.56 to $35.25.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", and
applies APB Opinion No. 25 in accounting for its plans and, accordingly, has not
recognized compensation cost for stock option plans in its financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date consistent with the provisions of Statement 123, the Company's net
loss would have been changed to the pro forma amounts indicated below:
2000 1999
--------------------------------------------------------------------------------------------------
Net loss - as reported $ (883,455) $ (290,050)
Net loss - pro forma (883,870) (297,543)
Net loss per share - as reported (diluted) (18.77) (8.17)
Net loss per share - pro forma (diluted) $ (18.78) $ (8.39)
--------------------------------------------------------------------------------------------------
The fair value of stock options granted in 2000 and 1999 is estimated at the
grant date using the Black-Scholes option-pricing model with the following
assumptions for 2000 and 1999: dividend yield of 0% (2000 and 1999); expected
volatility of 179.22% (2000) and 105.63% (1999); a risk-free return of 5.17%
(2000) and 6.36% (1999); and expected lives of approximately 6.6 years (2000)
and 7.5 years (1999).
- 79 -
The following table summarizes information for stock options of the Employee
Plan, the Directors Plan and the 1999 Non-Qualified Employee Plan outstanding at
September 30, 2000:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Price Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------------------------------------------------------------
$ 0.00 - $ 3.52 667,500 9.10 $ 2.03 28,700 $ 2.21
$ 3.53 - $ 7.05 1,168,276 7.70 4.71 602,146 4.85
$ 7.06 - $10.57 267,593 3.70 8.20 267,593 8.20
$10.58 - $14.10 1,006,500 7.90 11.20 984,100 11.20
$14.01 - $17.62 529,625 3.50 16.71 529,625 16.71
$17.63 - $21.15 370,265 4.10 20.17 370,265 20.17
$21.16 - $28.20 445,222 5.70 25.03 443,597 25.02
$28.21 - $31.72 1,057,465 6.30 28.91 764,072 28.93
$31.73 - $35.25 202,490 5.30 35.25 162,410 35.25
------------------------------------------------------------------------------------------------------------------------------------
5,714,936 6.60 $ 15.09 4,152,508 $17.38
------------------------------------------------------------------------------------------------------------------------------------
During the first fiscal quarter of 2000, the Company recorded a non-cash pre tax
charge of $7,720 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 charge recorded in the first
quarter was reversed in the fourth quarter of 2000. 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.
(14) Retirement Plan
The Company's retirement plan (the "Retirement Plan") is a cash deferred
profit-sharing plan covering all of the employees of the Company (other than
certain employees covered by a collective bargaining agreement) who have
completed at least 1,000 hours of service and twelve months of employment. Under
the 401(k) component, each employee may elect to contribute a portion of his or
her current compensation up to the maximum permitted by the Internal Revenue
Code or 15% (or for more highly compensated employees a maximum of 4%, in
accordance with Company policy) of such employee's annual compensation. The
Company may make a matching contribution each year as determined by the Board of
Directors. The Board of Directors may establish this contribution at any level
each year, or may omit such contribution entirely.
The Company match since January 1995 has been based on years of service. For an
employee who has completed six years of service prior to the beginning of the
calendar year, he/she receives a match of $0.75 per $1.00 of contribution up to
4% of his/her salary. Therefore, if this employee contributes 4% or more of
his/her salary, the Company contributes 3% of his/her salary. If the employee
contributes less than 4%, the Company contributes $0.75 per $1.00 of
contribution.
If an employee has not completed six years of service, he/she is matched $0.50
per $1.00 of contribution up to 2% of his/her salary. Therefore, if this
employee contributes 2% or more of his/her salary, the Company contributes 1% of
his/her salary. If the employee contributes less than 2%, the Company
contributes $0.50 per $1.00 of contribution.
- 80 -
Under the profit sharing provisions of the Retirement Plan, the Company may make
an additional employer contribution as determined by the Board of Directors each
year. The Board of Directors may establish this contribution at any level each
year, or may omit such contribution entirely. It is the Company's intent that
employer contributions under the profit sharing provisions of the Retirement
Plan are to be made only if there are sufficient profits to do so. Profit
sharing contributions are allocated among the accounts of participants in the
proportion that their annual compensation bears to the aggregate annual
compensation of all participants. All employee contributions to the Retirement
Plan are 100% vested. Company contributions are vested in accordance with a
schedule that generally provides for vesting after five years of service with
the Company (any non-vested amounts that are forfeited by participants are used
to reduce the following year's contribution by the Company).
The Company recorded retirement plan expense for the 401(k) match and the
discretionary contribution of approximately $7,138, $6,651 and $3,653 for the
years ended September 30, 2000, 1999 and 1998, respectively. In 1999, the
Company funded approximately $4,000 of its contribution to the Retirement Plan
in the form of approximately 917,000 shares of newly issued Common Stock.
(15) Commitments and Contingencies
The Company, prior to June 1, 2000, was primarily self-insured for workers'
compensation. The Company elected to reinsure the first $500 per occurrence for
workers' compensation claims, through its wholly owned captive insurance
company, Liberty Health Corp., LTD., through September 30, 1999. Subsequent to
June 1, 2000, the Company primarily purchased loss sensitive workers'
compensation insurance policies from commercial insurers. The Company's maximum
exposure is $500 per occurrence for workers' compensation. The Company offers
its employees several different health insurance options, with the largest being
self-insured programs. Losses are limited to $150 per claimant per year. The
Company carries excess insurance with commercial carriers for losses above $500
per workers' compensation claim, and $150 per participant for health insurance.
The provision for estimated workers' compensation and health insurance claims
includes estimates of the ultimate costs for both reported claims and claims
incurred but not reported. Genesis also requires that physicians practicing at
its eldercare centers carry medical malpractice insurance to cover their
individual practices.
The Company has guaranteed approximately $25,000 of indebtedness of others,
including facilities under management contract. The Company's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for guarantees, loan commitments and letters of credit is represented
by the dollar amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet financial instruments. In connection with the Chapter 11
proceedings, these commitments are subject to compromise.
NeighborCare purchases substantially all of its pharmaceuticals, approximately
$556,000 annually, through Cardinal Health, Inc. under a five year supply
contract which commenced in May of 1999. NeighborCare has other sources of
supply available to it and has not experienced difficulty obtaining
pharmaceuticals or other supplies used in the conduct of its business.
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services
(d/b/a NeighborCare), 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
- 81 -
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 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 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 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.
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. The Bankruptcy Court has not yet ruled on these motions. As a
result, the Arbitration remains stayed to date.
- 82 -
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).
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 tortuous 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.
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.
On November 23, 1999, Genesis moved to dismiss this action on the ground, 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).
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.
Genesis is a party to other litigation arising in the ordinary course of
business. Genesis does not believe the results of such litigation, even if the
outcome is unfavorable to the Company, would have a material adverse effect on
its consolidated financial position or results of operations.
- 83 -
NeighborCare(R) 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(R) and
Genesis, respectively. Genesis participates as a member of the official Mariner
unsecured creditors committee.
(16) Loss on Impairment of Assets and Other Charges
The Company recorded in operating expenses impairment of assets and other
charges during the twelve months ended September 30, 2000, 1999 and 1998 of
$865,425, $167,070, and $115,505, respectively.
Fiscal 2000:
During fiscal 2000, the Company recorded charges in connection with the
Multicare joint venture restructuring, the impairment of long-lived assets and
other impairments and charges, debt restructuring, and reorganization costs and
a loss on the sale of 14 eldercare centers located in the state of Ohio. The
following table and discussion provides additional information on these charges.
------------------------------------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring $ 420,000
------------------------------------------------------------------------------------------------------------------------------------
Impairment of long-lived assets $ 234,009
Exit costs and write-off of unrecoverable assets of six eldercare centers closed or leases
terminated 28,363
Investments in information system development abandoned in fiscal 2000 19,200
Uncollectible trade and notes receivable due to customer bankruptcy or other
liquidity issues 41,955
Other charges, including third party appeal issues and other cost settlement balances deemed
uncollectible and insurance related adjustments 51,181
------------------------------------------------------------------------------------------------------------------------------------
Total asset impairments and other charges (included in other operating expenses) $ 374,708
------------------------------------------------------------------------------------------------------------------------------------
Professional bank and other costs in connection with the Company's amended senior
bank credit facility and the filings under Chapter 11 $ 29,935
Interest rate swap termination charge 28,331
Employee benefit related costs 4,529
------------------------------------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 62,795
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Loss on sale of 14 eldercare centers located in the state of Ohio $ 7,922
------------------------------------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring
In connection with the restructuring transaction in the first fiscal quarter of
2000, we recorded a non-cash charge of approximately $420,000 representing the
estimated cost to terminate the Put in consideration for the issuance of the
Series H Preferred and Series I Preferred. The 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.
- 84 -
Asset impairments and other charges
During the fourth quarter of fiscal 2000, in connection with the Company's
budget preparations for the forthcoming year, management reviewed the current
and projected undiscounted cash flows of our eldercare centers and our
NeighborCare Pharmacy businesses. This review indicated that the assets of
certain eldercare centers were impaired. The fair market value of businesses
deemed potentially impaired were then estimated and compared to the carrying
values of the long-lived assets. Any excess long-lived asset carrying value over
the estimated fair value was written-off. Fair value was estimated using a per
bed value determined by Company management. The total loss for SFAS 121
impairments of $234,009 is associated with 49 eldercare centers. No impairment
charge was assessed on the long-lived assets of the NeighborCare Pharmacy
businesses. The impairment charge recorded resulted in the write-off of $185,037
of goodwill and $34,578 of property, plant and equipment.
During fiscal 2000, we closed or are in the process of closing or terminating
the leases of six underperforming eldercare centers with 842 combined beds. As a
result, a charge of $28,363 was recorded to account for certain impaired and
abandoned assets of these eldercare centers as well as the estimated future cost
of maintaining owned properties that were closed.
As a result of the Company's Chapter 11 bankruptcy filing and curtailment in
funding availability, we assessed the recoverability of our investment in
certain information systems developed internally for the operating needs of our
institutional pharmacy and infusion therapy businesses. Our assessment
determined that $19,200 of the carrying value of our investment in these systems
was unrecoverable through estimated future product sales to third parties and
future operating efficiencies.
During fiscal 2000, we performed periodic assessments of the collectibility of
amounts due from certain current and former customers in light of the adverse
impact of PPS on their liquidity and profitability. In certain cases, customers
have filed for protection under Chapter 11 of the Bankruptcy Code. As a result
of our assessment, the carrying value of notes receivable, advances and trade
receivables due from these customers was written down $41,955.
In the fourth quarter of fiscal 2000, we performed an assessment of the
collectibility of certain aged amounts due from third party payors and concluded
that approximately $12,451 was unrecoverable . In addition, as a result of
adverse claims development we reevaluated the levels of reserves established for
certain self insured and other programs, including workers' compensation and
general liability insurance, resulting in a charge of approximately $35,235.
Debt Restructuring and Reorganization Costs
During the third fiscal quarter of 2000, we began discussions with our lenders
under the Genesis and Multicare Credit Facilities to revise our capital
structure. During the discussion period, which continued into the third fiscal
quarter, Genesis and Multicare did not make certain scheduled principal and
interest payments under the Genesis and Multicare Credit Facilities or certain
scheduled interest payments under certain of the Genesis and Multicare senior
subordinated debt agreements. On June 22, 2000 Genesis and Multicare filed for
voluntary relief under Chapter 11 of the Bankruptcy Court. In connection with
the debt restructuring negotiations and for the costs of the subsequent
reorganization cases, we incurred legal, bank, accounting and other costs of
approximately $29,935. As a result of the nonpayment of interest under the
Genesis Credit Facility, certain provisions under existing interest rate swap
arrangements with Citibank were triggered. Citibank notified Genesis that they
elected to force early termination of the interest rate swap arrangements, and
have asserted a $28,331 obligation. In addition, as a result of our
restructuring and Chapter 11 cases we incurred costs of $4,529 for certain
salary and benefit related costs, principally for a court approved special
recognition program.
- 85 -
During the first fiscal quarter of 2000, the Company recorded a non-cash pre tax
charge of $7,720 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 charge recorded in the first
quarter was subsequently reversed. The elections made by optionees would have
resulted in the redemption of approximately 4,600,000 stock options in exchange
for approximately 4,000,000 shares of Genesis Common Stock.
Loss on Sale of Ohio Assets
In the third fiscal quarter, effective May 31, 2000, Multicare sold 14 eldercare
centers with 1,128 beds located in the state of Ohio for approximately $33,000.
The Company recorded a loss on sale of the Ohio properties of approximately
$7,922.
Fiscal 1999:
After performing an evaluation in fiscal 1999 like the one described in the
"Fiscal 2000" section of this footnote, the Company concluded that the carrying
value of certain eldercare centers, including goodwill and property, plant and
equipment, exceeded their fair value by approximately $9,000 before tax.
In addition to long-lived assets, the Company performed an evaluation of all of
its assets, contracts, operations and employment arrangements. As a result of
this evaluation, the Company concluded that the adverse impact of PPS on the
Company's liquidity and profitability necessitated exiting certain businesses
and projects. The Company fully reserved the carrying value of its
transportation business, exited the operations of six leased eldercare centers
at the end of their lease terms, abandoned certain investments in information
systems, recorded the exit costs of a capitation contract in the Company's
Chesapeake region and wrote off certain unrecoverable development project costs
as well as other unrecoverable assets. In addition, the ability of certain
former customers of the Company to repay amounts due for services rendered is
less likely due to the adverse impact of PPS on their liquidity and
profitability. As a result, the Company wrote down certain notes receivable,
advances, trade and third party receivables, due to and from formerly owned and
managed facilities. Also, the Company entered into the restructuring of the
Multicare joint venture and amended its senior bank credit facility resulting in
legal and other professional fees. The following table summarizes the before tax
impact of the charges in Fiscal 1999:
- 86 -
Exit costs and write-off of unrecoverable assets of one owned eldercare center
to be sold, and six leased eldercare centers closed or no longer under lease
and an investment in a respiratory services company $ 24,100
Investments in information systems abandoned 13,000
Exit costs and write-down of the remaining assets of the transportation business 12,700
Impairment of long-lived assets of six eldercare centers under SFAS 121 9,000
Unrecoverable development project costs 5,600
Cost to exit a capitation contract 5,000
-------------------------------------------------------------------------------------------------------------------------
Subtotal - terminated operations, discontinued businesses and asset impairments 69,400
-------------------------------------------------------------------------------------------------------------------------
Uncollectible trade receivables due to customer bankruptcy or other
liquidity issues 17,800
Third party appeal issues deemed uncollectible 17,100
Costs to restructure the Multicare joint venture and amend the Company's senior bank credit
facility 11,000
Other charges, including severance costs 13,870
-------------------------------------------------------------------------------------------------------------------------
Subtotal - Uncollectible accounts, restructuring and other - 59,770
-------------------------------------------------------------------------------------------------------------------------
Notes receivable, advances, trade receivables and third party settlement receivables,
due from or to businesses formerly owned or managed deemed uncollectible 37,900
-------------------------------------------------------------------------------------------------------------------------
Total (included in other operating expenses) $ 167,070
-------------------------------------------------------------------------------------------------------------------------
Fiscal 1998:
Due to specific events occurring in the fourth quarter of Fiscal 1998 and a
focus on core business operations in response to the PPS, the Company recorded
non-cash charges before income taxes of approximately $116,000, of which
approximately $24,000 related to the impairment of one eldercare center and
certain non-core businesses, including the Company's transportation business and
certain non-core Medicare home health operations; approximately $43,000 related
to investments in owned eldercare centers and other assets the Company believes
are impaired as a result of PPS; approximately $23,000 related to impaired
investments in eldercare centers previously owned or managed by the Company; and
approximately $26,000 related to the Company's investment in Doctors Health, a
medical care management company in the Company's Chesapeake region.
(17) Fair Value of Financial Instruments
The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), prepaid expenses and other
current assets, accounts payable, accrued expenses, accrued compensation and
accrued interest approximates fair value because of the short-term maturity of
these instruments.
The Company also believes the carrying value of mortgage notes and other notes
receivable, and non marketable debt securities approximate fair value based upon
the discounted value of expected future cash flows using interest rates at which
similar investments would be made to borrowers with similar credit quality and
for the same remaining maturities.
The fair value of interest rate swap agreements is the estimated amount the
Company would receive or pay to terminate the swap agreement at the reporting
date, taking into account current interest rates. The estimated amount the
Company would pay to terminate its interest rate swap agreements outstanding at
September 30, 1999 is approximately $26,830. The Company had no outstanding
interest rate swap agreements outstanding at September 30, 2000.
- 87 -
The fair value of the Company's commitments to provide working capital lines of
credit and certain financial guarantees is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
Since the Company has not charged fees for currently outstanding commitments
there is no fair value of such financial instruments.
The fair value of the Company's fixed rate and floating rate long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. As a result of the Chapter 11 cases, fair value of long-term debt
can not be determined. At September 30, 2000, nearly all of the Company's
long-term debt is classified as liabilities subject to compromise. At September
30, 1999, the carrying value of fixed rate debt of $486,691 had a market value
of $198,706. At September 30, 1999, the carrying value of floating rate debt of
$1,034,945 had a market value of $751,883.
(18) 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 (one is 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 described in the
summary of significant accounting policies. All intersegment sales prices are
market based. The Company evaluates performance of its operating segments based
on income before interest, income taxes, depreciation, amortization, rent and
nonrecurring items.
- 88 -
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column represents operating
information of business units below the prescribed quantitative thresholds.
These business units derive revenues from the following services: rehabilitation
therapy, management services, capitation fees, consulting services, homecare
services, physician services, transportation services, diagnostic services,
hospitality services, group purchasing fees and other healthcare related
services. In addition, the "Other" column includes the elimination of
intersegment transactions.
------------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------------
Pharmacy and
Medical
Supply Inpatient
Services Services Other Total
------------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers $ 952,350 $ 1,320,151 $ 161,357 $ 2,433,858
Revenue from intersegment customers 99,928 - 185,886 285,814
Operating income (1) 93,709 143,465 (746) 236,428
Total assets 1,041,757 1,739,658 346,484 3,127,899
------------------------------------------------------------------------------------------------------------------------------------
1999
------------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 927,334 704,105 234,987 1,866,426
Revenue from intersegment customers 60,502 - 79,843 140,345
Operating income (1) 119,282 104,305 29,362 252,949
Total assets 1,072,099 767,748 590,067 2,429,914
------------------------------------------------------------------------------------------------------------------------------------
1998
------------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 424,778 741,383 239,144 1,405,305
Revenue from intersegment customers 47,708 - 87,336 135,044
Operating income (1) 51,441 152,483 46,271 250,195
Total assets $ 1,066,126 $ 846,692 $ 714,550 $ 2,627,368
------------------------------------------------------------------------------------------------------------------------------------
(1) Operating income is defined as income before interest, income taxes,
depreciation, amortization, rent and nonrecurring items. The Company's segment
information does not include an allocation of overhead costs, which are between
3% - 4% of consolidated net revenues.
(19) Comprehensive Loss
The following table sets forth the computation of comprehensive loss for the
years ended September 30, 2000, 1999 and 1998:
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
Net loss attributed to common shareholders $ (883,455) $ (290,050) $ (24,245)
Unrealized (loss) gain on marketable securities (1,361) (1,112) 684
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (884,816) $ (291,162) $ (23,561)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss, which is composed of net unrealized gains
and losses on marketable securities, was $(1,789) and $(428) at September 30,
2000 and 1999, respectively.
- 89 -
(20) Condensed Financial Information of Parent Company
The Company's consolidated balance sheet as of September 30, 2000, and the
related statement of operations, shareholders' deficit and cash flows for the
year ended September 30, 2000 include the consolidated financial statements of
Multicare and Liberty Health Corp. LTD. ("Liberty").
Genesis, Multicare and their respective subsidiaries and affiliates are
borrowers under separate senior credit agreements (See Note 7 - Long-Term Debt).
Also, Genesis and Multicare are involved in separate bankruptcy proceedings (See
Note 2 - Voluntary Petitions for Relief Under Chapter 11 of the United States
Bankruptcy Code). As a result of certain restrictions placed on Multicare and
Genesis by their respective senior credit agreements and the automatic stay
provision imposed by the Bankruptcy Court, Genesis and Multicare are precluded
from freely transferring funds through intercompany loans, advances or cash
dividends.
Liberty is a wholly owned captive insurance subsidiary incorporated under the
laws of Bermuda that provides reinsurance for the Company and for third parties.
Liberty holds certain marketable securities and other assets that are restricted
by statutory capital requirements in Bermuda. In addition, certain marketable
securities are pledged as security for letters of credit issued by Liberty. As a
result of such restrictions and encumbrances, Genesis and Liberty are precluded
from freely transferring funds through intercompany loans, advances or cash
dividends.
The following condensed balance sheet information as of September 30, 2000 and
the related condensed information regarding operations and cash flows for the
year ended September 30, 2000 exclude the consolidated financial information of
Multicare and Liberty Health.
----------------------------------------------------------------------------------------------------------
Condensed balance sheet:
Current assets $ 502,143
Total assets 2,150,945
Current liabilities 235,756
Liabilities subject to compromise 1,665,921
Long-term debt 201
Shareholders' deficit $ (251,737)
----------------------------------------------------------------------------------------------------------
Condensed statement of operations:
Net revenues $1,922,558
Loss before income taxes, equity in net loss of unconsolidated
affiliates, minority interest and cumulative effect of accounting change (736,703)
Net loss attributed to common shareholders $ (883,282)
----------------------------------------------------------------------------------------------------------
Condensed statement of cash flows:
Cash used in operating activities $ (125,863)
Cash used in investing activities (66,342)
Cash provided by financing activities 184,136
Net decrease in cash and equivalents $ (8,069)
-----------------------------------------------------------------------------------------------------------
The condensed balance sheet information includes $91,553 of trade receivables
and a deferred management fee due to Genesis from Multicare. As a result of
Multicare's separate Chapter 11 filings, as well as certain risks and
uncertainties regarding Muliticare's ability to continue as a going concern,
the net realizable value of such receivables is unknown. Genesis has not
recorded an allowance for doubtful accounts on these amounts due since
Multicare and Genesis are consolidated for financial reporting purposes, and
these amounts are eliminated in consolidation.
- 90 -
(21) Redeemable Preferred Stock
In connection with the November 1999 restructuring of the Multicare
joint-venture, Genesis issued to Cypress, TPG and Nazem 24,369 shares of Genesis
Series H Senior Convertible Participating Cumulative Preferred Stock (the
"Series H Preferred") and 17,631 shares of Genesis Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock (the "Series I
Preferred").
The Series H Preferred are convertible into 27,850,286 shares of Common Stock
and have an initial dividend of 5.00%, which increases 0.05% beginning in
November of 2005 and an additional 0.05% each anniversary date thereafter
through 2011, to a maximum dividend of 8.5%. The Series H Preferred, which have
certain voting rights, rank senior to all classes of Genesis Common Stock and on
a parity with the Genesis Series I Preferred. The Series H Preferred have a
mandatory redemption in November of 2011 equal to the face value of the Series H
Preferred plus accrued and unpaid dividends. The face value of the Series H
Preferred plus accrued and unpaid dividends at September 30, 2000 is $256,948,
which is subject to compromise as a result of the Company's Chapter 11 Cases.
The Series I Preferred are convertible into 20,149,410 shares of non-voting
common stock and have an initial dividend of 5.00%, which increases 0.05%
beginning in November of 2005 and an additional 0.05% each anniversary date
thereafter through 2011, to a maximum dividend of 8.5%. The Series I Preferred,
which have no voting rights, rank senior to all classes of Genesis Common Stock
and on a parity with the Genesis Series H Preferred. The Series I Preferred have
a mandatory redemption in November of 2011 equal to the face value of the Series
I Preferred plus accrued and unpaid dividends. The face value of the Series I
Preferred plus accrued and unpaid dividends at September 30, 2000 is $185,872,
which is subject to compromise as a result of the Company's Chapter 11 Cases.
(22) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows:
Diluted
Earnings (Loss) Earnings (Loss)
Before Per Share
Extraordinary Before
Item and Extraordinary
Cumulative Effect Item and
of Accounting Cumulative Diluted
Change and After Effect of Earnings
Total Net Preferred Net Income Accounting (Loss) Per
Revenues Dividends (Loss) Change Share
------------------------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1999 $ 586,884 $ (439,770) $(450,182) $ (10.37) $(10.62)
March 31, 2000 604,843 (54,932) (54,932) (1.13) (1.13)
June 30, 2000 615,851 (60,937) (60,937) (1.25) (1.25)
September 30, 2000 626,280 (317,404) (317,404) (6.53) (6.53)
------------------------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1998 479,204 6,476 4,677 0.18 0.13
March 31, 1999 464,619 (11,258) (11,559) (0.32) (0.33)
June 30, 1999 465,088 (5,858) (5,858) (0.17) (0.17)
September 30, 1999 $ 457,515 $ (277,310) $(277,310) $(7.67) $ (7.67)
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share was calculated for each three month and the
twelve-month period on a stand-alone basis. As a result, the sum of the earnings
(loss) per share for the four quarters does not equal the loss per share for the
twelve months. The first, second, third and fourth quarters of 2000 include
non-cash before tax impairment and other charges of approximately $427,720,
$36,393, $44,124 and $357,188, respectively. The second and fourth quarters of
1999 include non-cash after tax impairment and other charges of approximately
$7,654 and $262,755, respectively, including approximately $103,339 representing
Genesis' 43.6% share of certain impairment and other charges recorded by
Multicare. See Note (16) - Loss on Impairment of Assets and Other Charges.
- 91 -
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to non-employee
directors of the Company.
Name Age Committees of the board of directors
---- --- ------------------------------------
Jack R. Anderson 75 Executive Committee
Joseph R. Buckley 53
James G. Coulter 39 Executive Committee
Dr. Philip P. Gerbino 53 Audit Committee
Samuel H. Howard 61 Audit Committee and Stock Option and Compensation Committees
Roger C. Lipitz 58 Executive Committee and Audit Committee
John C. McMeekin 66
James L. Singleton 45 Compensation Committee and Proxy Committee
James B. Williams 44 Litigation Committee
Jack R. Anderson has served as a director of Genesis since November 1998. Since
1982, Mr. Anderson has been President of Calver Corporation, a Dallas based
health care consulting and investing firm. From September 1981 until May 1982,
Mr. Anderson served as President of Manor Care, Inc. From 1970 until 1981, Mr.
Anderson served as President and later as Chairman of Hospital Affiliates
International, Inc., ("HAI") a hospital management company in Nashville. Mr.
Anderson is a member of the board of directors of Horizon Health Corporation and
PacifiCare Health Systems, Inc.
Joseph R. Buckley has served as a director of Genesis since November 2000. From
1979 through 1998, Mr. Buckley was employed in senior management positions for
Manor Care, Inc., including President and CEO of Manor Care Realty, Inc.
Currently, Mr. Buckley is the non-executive Chairman of the Board of Chesapeake
Healthcare, a start-up company funded by the Bainum Family and Baron Asset
Management. The Company develops and operates specialized Assisted Living
Facilities for persons with Alzheimer's disease and related conditions. From
1995 to 1998, Mr. Buckley served as a member of the Board, and subsequently
Chairman of the Board, of In Home Health, Inc., which has revenues of $80
million and is located in Minneapolis, MN. From 1995 to 1998, Mr. Buckley served
as a member of the Board of Vitalink Pharmacy Services, Inc. Vitalink was the
second largest independent institutional pharmacy services company in the U.S.
Vitalink was acquired by Genesis Health Ventures in August, 1998.
James G. Coulter is one of the three founding partners of TPG. TPG, based in San
Francisco, and Fort Worth, Texas is a private equity investment fund managing in
excess of $7.0 billion. TPG is the lead equity investor in more than 20
companies including Beringer Wine Estates; Del Monte Foods; Oxford Health Plans,
Inc.; Paradyne Networks, Inc.; America West Airlines; Zilog, Inc.; Ducati
Motorcycles; S.P.A.; and J. Crew Group, Inc.; ON Semiconductors; Zhone
Communications; Bally, and Globespan Semiconductors. In addition, TPG serves as
a control shareholder of Newbridge Latin America and Newbridge Asia, regional
private equity funds managing in excess of $800 million. Mr. Coulter was also a
founding partner of Colony Investors, a $2.5 billion real estate investment
fund. Mr. Coulter is a 1982 Phi Beta Kappa, summa cum laude graduate of
Dartmouth College and a member of the class of 1986 Stanford Graduate School of
- 92 -
Business. Prior to co-founding the Texas Pacific Group in 1992, he worked as a
vice president of Keystone, Inc., and as an analyst for Lehman Brothers Kuhn
Loeb. Mr. Coulter serves on the boards of directors of Beringer Wine Estates;
Northwest Airlines; Oxford Health Plans, Inc.; Globespan, Inc.;
ZhoneCommunications; and J. Crew Group, Inc. He also serves on the boards of the
San Francisco Zoological Society and the Bay Area Discovery Museum.
Dr. Philip P. Gerbino is president of the University of Sciences in
Philadelphia, which includes the Philadelphia College of Pharmacy. He has been
part of the faculty and administration of the Philadelphia College of Pharmacy
and Sciences for over 25 years. Prior to being named president on January 1,
1995, he served as dean of the School of Pharmacy and vice president for
academic affairs.
Samuel H. Howard has served as a director of Genesis since March 1988. He is the
founder and chairman of Xantus Corporation and the founder and President of
Phoenix Communications Group, Inc. and Phoenix Holdings, Inc. all of which are
based in Tennessee. Mr. Howard's past corporate and operations experience in the
healthcare industry include having served as the Senior Vice President of Public
Affairs for Hospital Corporation of America from August 1981 to January 1990,
Vice President and Treasurer for HAI, and Vice President of Finance and Business
for Meharry Medical College. In addition, Mr. Howard was a financial analyst for
General Electric Company and a White House Fellow with U.S. Ambassador Arthur
Goldberg. Mr. Howard is a member of the board of directors of O'Charley's Inc.
Roger C. Lipitz has served as a director of Genesis since March 1994. From
January 1994 until January 1996, Mr. Lipitz served on a consulting basis as
Director of Government Relations of Genesis. From 1969 until its acquisition by
Genesis in 1993, Mr. Lipitz served as Chairman of the Board of Meridian
Healthcare, Inc., a Maryland based long-term care company which operated over
5,000 beds and related businesses. Mr. Lipitz is a past president of the
American Health Care Association, Health Facilities Association of Maryland and
the National Council of Health Care Services. Mr. Lipitz is a member of the
board of directors of Blue Cross and Blue Shield of Maryland.
John C. McMeekin retired as Chief Executive Officer of Crozer-Keystone Health
System in January 2001. Before joining Crozer-Chester Medical Center in 1983,
Mr. McMeekin was a senior officer of Philadelphia Blue Cross and began his
health career at Pennsylvania Hospital in 1965. He is a past Chairman of the
Hospital & HealthSystem Association of Pennsylvania and Chairman of their
holding company, Health Alliance of Pennsylvania. In addition, he served on the
Board of VHA, the Board and Executive Committee of the American Hospital
Association and chaired the AHA Regional Policy Group II. He also served on the
Executive Committee and Board of the Greater Philadelphia Chamber of Commerce
and was a trustee of Elwyn Institute. For twelve years Mr. McMeekin served as
Public Governor on the Board of the Philadelphia Stock Exchange. He is a
graduate of Penn State University and holds a Masters degree from the Wharton
School of the University of Pennsylvania. Following his retirement from
Crozer-Keystone Health System, Mr. McMeekin assumed the management
responsibility as President & CEO for developing the University Technology Park
in Chester, Pennsylvania, a joint venture between Widener University and
Crozer-Keystone Health System.. He also serves on the board of Philadelphia
International Medicine. Mr. McMeekin continues to serve on the board of the
Health Alliance of Pennsylvania as past chairman and on the board of the
American Lung Association.
James L. Singleton is Vice Chairman and a founding partner of The Cypress Group
L.L.C. Cypress, a firm specializing in management led leveraged buyouts and
strategic joint ventures, was formed in 1994 and currently manages private
equity commitments of $3.5 billion. Before founding Cypress, Mr. Singleton was a
Managing Director of Lehman Brothers Inc. where he was a senior member of that
firm's Merchant Banking Group. From 1989 to 1994, that Group managed a private
equity fund with $1.25 billion in capital commitments. Mr. Singleton was also a
member of Lehman's Investment Committee, which reviewed and approved all capital
investments for that firm. Mr. Singleton began his investment banking career in
1983 when he joined Lehman Brothers Kuhn Loeb. In his merchant banking
activities, Mr. Singleton has participated in 21 investments with transaction
value of approximately $15 billion. He serves and has served on the Boards of
- 93 -
numerous public and private companies, including Infinity Broadcasting,
Evergreen Media, Wometco and Georgia Cable, Cinemark USA, Williams Scotsman,
WESCO International, Club Corporation of America and Danka Business Systems. Mr.
Singleton is also a Trustee of The Nightingale-Bamford School and a member of
the Special Projects Committee of The Society of Memorial Sloan-Kettering Cancer
Center. Mr. Singleton graduated from Yale College and completed his M.B.A. at
the University of Chicago's Graduate School of Business.
James B. Williams is a partner in Texas Pacific Group and currently serves as
Chairman and acting CEO of Vivra, Inc. (since 1999). Mr. Williams formerly with
Kaiser Permanente (1994-1998), an integrated healthcare organization as:
President-Kaiser Group Health, President Kaiser Permanente International, and
national Senior Vice President-Operations and Strategic Development. Mr.
Williams previously was Managing Director of Hay Group serving as Worldwide
Director-Health Industry consulting, Director-Strategic Management and other
roles (1980-1994). He currently serves as Director of: Magellan Health Services;
Vivra, Inc.; and American Brass and Iron; and as advisory Board member of Compaq
Computer Corporation and Catholic Healthcare West. Mr. Williams formerly served
on Board of Community Health Plan (New York) and several Boards associated with
Kaiser Permanente.
The following table sets forth certain information with respect to the executive
officers of the Company.
Name Age Position
---- --- ---------
Michael R. Walker 52 Chairman and Chief Executive Officer
Richard R. Howard 51 Vice Chairman and Director
David C. Barr 50 Vice Chairman
George V. Hager, Jr. 45 Executive Vice President and Chief Financial Officer
Barbara J. Hauswald 41 Senior Vice President and Treasurer
James V. McKeon 36 Senior Vice President and Corporate Controller
Richard Pell, Jr. 52 Senior Vice President, Administration and Chief Compliance Officer
Marc D. Rubinger 51 Senior Vice President and Chief Information Officer
James W. Tabak 41 Senior Vice President, Human Resources
James J. Wankmiller, Esquire 46 Senior Vice President, General Counsel and Corporate Secretary
Michael R. Walker founded Genesis and has served as chairman and chief executive
officer of the company since its inception. Mr. Walker is also founder and
chairman of the board of trustees of ElderTrust, a healthcare real estate
investment trust. In addition to his responsibilities with Genesis and
ElderTrust, Mr. Walker leads the Alliance for Quality Nursing Home Care, ("The
Alliance") a national coalition of the nation's top 12 long term care providers.
Since 1999, The Alliance has lobbied for and gained nearly $5 billion in
additional Medicare funding for long term care providers. Mr. Walker holds a
Master of Business Administration degree from Temple University and a Bachelor
of Arts in Business Administration degree from Franklin and Marshall College.
Richard R. Howard has served as a Genesis director since the company was
founded. As Vice Chairman, Mr. Howard oversees Genesis ElderCare's five regional
operations plus clinical practice, real estate and property management. Prior to
becoming Vice Chairman in 1998, Mr. Howard served as President and as President
and Chief Operating Officer. He joined Genesis in 1985 as Vice President of
Development. Mr. Howard's experience also includes over ten years in the banking
industry. He is a graduate of the Wharton School, University of Pennsylvania,
where he received a Bachelor of Science degree in Economics in 1971.
David C. Barr is Vice Chairman of Genesis Health Services which includes the
company's pharmacy, medical supply, rehabilitation therapy, hospitality, group
purchasing, consulting and diagnostic services. Prior to becoming Vice Chairman
in 1998, he served as Executive Vice President and as Chief Operating Officer.
Before joining Genesis, Mr. Barr was a principal of a private consulting firm,
Kane Maiwurm Barr, Inc., which provided management consulting services to small
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and medium-sized firms. Mr. Barr's experience also includes over 10 years with a
service conglomerate and in the corporate banking industry. Mr. Barr graduated
in 1972 from the University of Miami with a Bachelor of Science degree in
Accounting.
George V. Hager, Jr. serves as Executive Vice President and Chief Financial
Officer and is responsible for corporate finance, treasury, information
services, reimbursement and risk management. Mr. Hager joined Genesis in 1992 as
Vice President and Chief Financial Officer and was named Senior Vice President
and Chief Financial Officer in 1994. Mr. Hager has over 20 years experience in
the healthcare industry including leading KPMG LLP's healthcare practice in
Philadelphia. He holds a Bachelor of Arts degree in Economics from Dickinson
College and a Master of Business Administration degree from Rutgers Graduate
School of Management. Mr. Hager is a certified public accountant and a member of
both the AICPA and PICPA.
Barbara J. Hauswald has served as Senior Vice President and Treasurer since
April, 2000, and joined us as Vice President and Treasurer in April, 1998. Prior
to joining Genesis, Ms. Hauswald served as First Vice President in the Health
Care Banking Department of Mellon Bank N.A. Ms. Hauswald has over 16 years of
commercial banking experience. She received a Bachelor of Science degree in
Commerce in 1981 from the University of Virginia.
James V. McKeon has served as Senior Vice President and Corporate Controller of
Genesis since April, 2000. Mr. McKeon joined us in June 1994 as Director of
Financial Reporting and Investor Relations and served as Vice President of
Finance and Investor Relations from November 1995 to April 1997. From April 1997
to April, 2000, Mr. McKeon served as the Vice President and Corporate
Controller. From September 1986 until June 1994, Mr. McKeon was employed by KPMG
LLP, most recently as Senior Manager. He received a Bachelor of Science degree
in Accountancy from Villanova University in 1986. Mr. McKeon is a certified
public accountant and a member of the AICPA and PICPA.
Richard Pell, Jr. has served as Senior Vice President-Administration and Chief
Compliance Officer of Genesis since April 1998. Mr. Pell oversees the following
areas: Human Resources, Law, Government Relations, Public Relations, and
Corporate Communications. Prior to joining Genesis, Mr. Pell was the Director of
the Veterans Affairs Medical Center in Martinsburg, West Virginia and Chief of
Staff for the Department of Veterans Affairs for the previous nine years. He
received a Bachelor of Science Degree in Economics from the University of
Pennsylvania in 1970 and a Masters Degree in Health Care Administration from the
Mt. Sinai School of Medicine, City University of New York in 1975.
Marc D. Rubinger has served as Senior Vice President and Chief Information
Officer since April 1997. From November 1995 to April 1997, Mr. Rubinger served
as Vice President and Chief Information Officer. Prior to joining Genesis, Mr.
Rubinger was General Manager-Decision Support Systems for Shared Medical
Systems. From 1975 through 1986, Mr. Rubinger was with Ernst & Young in their
national healthcare consulting practice, most recently as a partner. He received
a Bachelor's degree in Bioscience from Binghamton University in 1971 and a
Masters of Health Administration and Planning from The George Washington
University in 1973.
James W. Tabak has served as Senior Vice President, Human Resources since April,
2000. Mr. Tabak joined us in January, 1992 as Associate General Counsel and
served as Vice President of Human Resources from May 1993 to April 2000. From
February 1990 to January 1992, Mr. Tabak was employed by The Mutual Benefit Life
Insurance Company as Associate Counsel. He received a Bachelor of Science degree
in Political Science from The University of Pennsylvania and his Juris Doctorate
degree from The Boston University School of Law. Mr. Tabak is licensed to
practice law in the states of Pennsylvania, New York and New Jersey.
James J. Wankmiller, Esquire has served as Senior Vice President, General
Counsel and Corporate Secretary since April 2000. Mr. Wankmiller joined Genesis
in October 1996 as Vice President, General Counsel. Prior to joining Genesis, he
was Vice President of Law and Corporate Secretary for Geriatric & Medical
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Companies, Inc. Mr. Wankmiller received his Bachelor of Science degree, from St.
Joseph's University in 1976 and his Juris Doctorate degree from Villanova
University School of Law in 1980. He is a member of the National Health Lawyers
Association, the Pennsylvania Society of Healthcare Attorneys, the Pennsylvania
Bar Association's In House Counsel and Health Care Law Committees, and the
American Corporate Counsel Association - Delaware Valley Chapter. He also serves
on the Legal Subcommittee of the American Health Care Association and the Legal
Task Force of the Pennsylvania Health Care Association.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Genesis' directors and executive
officers and persons who own more than 10% of a registered class of Genesis'
equity securities, to file with the Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
Genesis. Officers, directors and greater than 10% shareholders are required by
the Commission regulation to furnish Genesis with copies of all Section 16(a)
forms they file.
To Genesis' knowledge, based solely on review of the copies of such reports
submitted to Genesis with respect to the fiscal year ended September 30, 2000,
all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with, except that
Wallace E. Boston, James G. Coulter, Philip P. Gerbino, Richard Pell, Jr.,
Steven J. Powers, James L. Singleton, James J. Wankmiller, James B. Williams,
and Marilyn G. Wood each filed a late report on Form 3, and Jack R. Anderson,
Stephen E. Luongo, and James V. McKeon each filed a late report on Form 4.
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ITEM 11: EXECUTIVE COMPENSATION
Long Term All Other
Annual Compensation Compensation Compensation(1)(6)
------------------- ------------ ------------------
Name and Position Fiscal Salary Option
with the Company Year (2)(4)(5) Bonus Awards(3)
----------------- ------ --------- ----- ---------
Michael R. Walker 2000 $721,154 $ - - $ 4,525
Chairman and Chief 1999 650,000 - 300,000 18,377
Executive Officer 1998 626,931 - - 18,705
------------------------------------------------------------------------------------------------------------------------------------
Richard R. Howard 2000 $505,824 $ - - $ 3,400
Vice Chairman and Director 1999 454,715 - 200,000 13,752
1998 376,924 - - 13,698
------------------------------------------------------------------------------------------------------------------------------------
David C. Barr 2000 $502,139 $ - - $ 2,875
Vice Chairman 1999 489,446 - 200,000 11,837
1998 311,539 - - 12,222
------------------------------------------------------------------------------------------------------------------------------------
George V. Hager, Jr. 2000 $356,637 $ - - $ 2,275
Executive Vice President 1999 325,093 - 75,000 7,888
And Chief Financial Officer 1998 287,616 - - 8,245
------------------------------------------------------------------------------------------------------------------------------------
Maryann Timon
Former Senior Vice 2000 $152,749 $ - - $ 308,575
President - Internet 1999 232,306 - - 6,279
Strategies 1998 192,920 - - 3,636
------------------------------------------------------------------------------------------------------------------------------------
(1) Represents Genesis' matching contribution under the 401 (k) Retirement Plan
and Execuflex Plan, except otherwise noted.
(2) Includes compensation deferred under the 401(k) Retirement Plan, Execuflex
Plan and other arrangements with Genesis; does not include other payments
made by Genesis under the 401(k) Retirement Plan, Execuflex Plan and other
arrangements with Genesis.
(3) Does not include stock options Messrs. Walker, Howard, Barr and Hager
forfeited.
(4) The 1999 annual salary compensation for Messrs. Howard and Barr were
restated by $54,714 and $93,015, respectively as a result of an increase in
compensation retroactive to April 11, 1999. These retroactive adjustments
were deferred by Messrs. Howard and Barr under the Genesis Health Ventures,
Inc. Deferred Compensation Plan.
(5) The 2000 annual salary of Messrs. Howard, Barr and Hager include $91,439,
$155,446 and $50,291, respectively of compensation deferred under the
Genesis Health Ventures, Inc. Deferred Compensation Plan.
(6) Ms. Timon's employment ended May 31, 2000. Accordingly, Ms. Timon's annual
salary is for a partial year of service. Ms. Timon's other compensation
includes $307,000 of severance compensation.
Employment Agreements
Genesis entered into employment agreements, effective August 12, 1998, with
Michael R. Walker as its Chairman and Chief Executive Officer, Richard R. Howard
and David C. Barr as its Vice Chairmen and George V. Hager, Jr., as its
Executive Vice President and Chief Financial Officer. The agreement with Mr.
Walker currently expires on August 12, 2003; the agreements with Messrs. Howard,
Barr and Hager each currently expire on August 12, 2001. Unless notice of
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non-renewal is given by two-thirds of the entire board of directors, the current
term of Mr. Walker's agreement shall automatically extend an additional year
beginning on the anniversary thereof in 2001, the agreements for Messrs. Barr,
Howard and Hager extended an additional year beginning on the anniversary
thereof in 1999. The annual base salaries of Messrs. Walker, Howard, Barr and
Hager currently are $750,000, $500,000, $500,000 and $350,000, respectively, and
are reviewable by Genesis' board of directors at least annually. The agreements
may be terminated by Genesis at any time for Cause (as defined) upon the vote of
not less than two-thirds of the entire membership of Genesis' board of
directors. Each Genesis executive may terminate his employment agreement upon
notice to Genesis of the occurrence of certain events, including an election by
Genesis not to renew the term of the agreement, as described above. In the event
that Genesis terminates the Genesis Executive's employment agreement without
Cause, or the Genesis Executive terminates his employment agreement as described
in the preceding sentence, Mr. Walker is entitled to severance compensation
equal to the greater of the remainder of the term of the agreement or three
years average base salary plus the value of stock options (using Black-Scholes
valuation method) granted during such period and Messrs. Walker, Howard, Barr
and Hager are entitled to severance compensation equal to three years base
salary plus the value of stock options (using a Black-Scholes valuation method)
and cash bonus granted during such period. In each case, the value of such stock
options and cash bonus may not exceed 100% of such base salary. Messrs. Barr and
Howard are entitled to certain insurance benefits. If a Genesis Executive
becomes disabled, he will continue to receive all of his compensation and
benefits so long as such period of disability does not exceed 12 consecutive
months or shorter periods aggregating 12 months in any 24 month period. Each
employment agreement also contains provisions that are intended to limit the
Genesis Executive from competing with Genesis throughout the term of the
agreement and for a period of two years thereafter. In addition, under the
Senior Executive Employee Stock Ownership Program, Genesis may make loans to the
Genesis Executives to maintain a predetermined stock ownership position in
Genesis.
Stock Option Plans
Set forth below is a summary of certain significant provisions of the Genesis
Amended and Restated Employee Stock Option Plan (the "Employee Stock Option
Plan").
General
Pursuant to the Employee Stock Option Plan, stock options may be granted which
are intended to qualify as incentive stock options ("Incentive Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as stock options not intended to so qualify ("Non-Qualified Options"). The
primary purpose of the Employee Stock Option Plan is to provide additional
incentive to key employees and officers of Genesis by encouraging them to invest
in the Common Stock and thereby acquire a proprietary interest in Genesis and an
increased personal interest in Genesis' continued success and progress.
Eligibility and Administration
All officers and key employees of, and consultants and advisors to, Genesis or
any current or future subsidiary (currently approximately 1,500 people) are
eligible to receive options under the Employee Stock Option Plan. The Employee
Stock Option Plan is administered by the Stock Option Committee. Subject to the
provisions of the Employee Stock Option Plan, the Stock Option Committee
determines, among other things, which officers, key employees, consultants and
advisors of Genesis and any subsidiary will be granted options under the
Employee Stock Option Plan, whether options granted will be Incentive Options or
Non-Qualified Options, the number of shares subject to an option, the time at
which an option is granted, the rate of option exercisability, the duration of
an option and the exercise price of an option. The Stock Option Committee has
the exclusive right to adopt or rescind rules for the administration of the
Employee Stock Option Plan, correct defects and omissions in, reconcile
inconsistencies in, and construe the Employee Stock Option Plan. The Stock
Option Committee also has the right to modify, suspend or terminate the Employee
Stock Option Plan, subject to certain conditions.
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Number of Shares Adjustment
The aggregate number of shares which may be issued upon the exercise of options
granted under the Employee Stock Option Plan will equal 6,750,000 shares of
Common Stock. The aggregate number and kind of shares issuable under the
Employee Stock Option Plan is subject to appropriate adjustment to reflect
changes in the capitalization of Genesis, such as by stock dividend, stock split
or other circumstances deemed by the Stock Option Committee to be similar. Any
shares of Common Stock subject to options that terminate unexercised will be
available for future options granted under the Employee Stock Option Plan
provided that shares subject to options surrendered under the stock redemption
program will not be eligible for reissuance. The maximum number of shares for
which options may be granted to any participant in any year is 750,000 shares of
Common Stock, subject to certain adjustments in the event of any change in the
outstanding shares of the Common Stock of Genesis.
Exercise Price and Terms
The exercise price for Incentive Options granted under the Employee Stock Option
Plan must be equal to at least 100% of the fair market value of Common Stock as
of the date of the grant of the option, except that the option exercise price of
Incentive Options granted to an individual owning shares of Genesis possessing
more than 10% of the total combined voting power of all classes of stock of
Genesis must not be less than 110% of the fair market value as of the date of
the grant of the option. The option price for Non-Qualified Options must equal
at least 100% of the fair market value of the Common Stock on the date of the
grant.
Unless terminated earlier by the option's terms, Non-Qualified Options and
Incentive Options granted under the Employee Stock Option Plan will expire ten
years after the date they are granted, except that if Incentive Options are
granted to an individual owning shares of Genesis possessing more than 10% of
the total combined voting power of all classes of stock of Genesis on the date
of the grant, such options will expire five years after the date they are
granted.
Payment of the option price on exercise of Incentive Options and Non-Qualified
Options may be made in cash, shares of Common Stock or a combination of both.
Under the terms of the Employee Stock Option Plan, the Stock Option Committee
could interpret the provision of the plan which allows payment of the option
price in shares of Common Stock to permit the "pyramiding" of shares in
successive, simultaneous exercises. As a result, an optionee could initially
exercise an option in part, acquiring a small number of shares of Common Stock
and immediately thereafter effect further exercises of the option, using the
shares of Common Stock acquired upon earlier exercises to pay for an
increasingly greater number of shares received on each successive exercise. This
procedure could permit an optionee to pay the option price by using a single
share of Common Stock or a small number of shares of Common Stock and to acquire
a number of shares of Common Stock having an aggregate fair market value equal
to the excess of (a) the fair market value of all shares to which the option
relates over (b) the aggregate exercise price under the option.
Termination of Service, Death and Disability
All unexercised options will terminate three months following the date an
optionee ceases to be employed by Genesis or any subsidiary of Genesis, other
than by reason of disability or death (but in no event later than the expiration
date). An optionee who ceases to be an employee because of a disability must
exercise the option within one year after he ceases to be an employee (but in no
event later than the expiration date). The heirs or personal representative of a
deceased optionee who could have exercised an option while alive may exercise
such option within one-year following the optionee's death (but in no event
later than the expiration date).
- 99 -
Assignment of Options
In January 1999, Genesis' Stock Option Committee and board of directors amended
the Employee Stock Option Plan to permit the transfer of Non-Qualified Stock
Options to certain family members and to trusts and partnerships established for
the benefit of certain family members. Prior to such amendment, the Employee
Stock Option Plan provided that options granted under the plan could not be
transferred except by the laws of descent and distribution in the event of
death.
Federal Income Tax Consequences
Non Qualified Options.
Generally, there will be no federal income tax consequences to either the
optionee or Genesis on the grant of a Non-Qualified Option. On the exercise of a
Non-Qualified Option, the optionee has taxable ordinary income equal to the
excess of the fair market value of the shares acquired on the exercise date over
the option price of the shares. Genesis will be entitled to a federal income tax
deduction in an amount equal to such excess, provided that Genesis (i) complies
with applicable reporting rules and (ii) either the deduction limitation imposed
by Section 162(m) of the Code is not exceeded or the Non-Qualified Options are
excepted from the limitation imposed by Section 162(m) by reason of qualifying
under the performance based compensation exception contained in Section 162(m).
See "Section 162(m)" below.
Upon the sale of stock acquired by exercise of a Non-Qualified Option, optionees
will realize long-term or short-term capital gain or loss depending upon their
holding period for such stock. Capital losses for individuals are deductible
only to the extent of capital gains for the taxable year plus $3,000.
An optionee who surrenders shares in payment of the exercise price of a
Non-Qualified Option will not recognize gain or loss with respect to the shares
so delivered unless such shares were acquired pursuant to the exercise of an
Incentive Stock Option and the delivery of such shares is a disqualifying
disposition. See "Incentive Stock Options" below. The optionee will recognize
ordinary income on the exercise of the Non-Qualified Option as described above.
Of the shares received in such an exchange, that number of shares equal to the
number of shares surrendered will have the same tax basis and capital gains
holding period as the shares surrendered. The balance of the shares received
will have a tax basis equal to their fair market value on the date of exercise
and the capital gains holding period will begin on the date of exercise.
In the event of a permitted transfer by gift of a Non-Qualified Option, the
transferor will remain taxable on the ordinary income realized as and when such
Non-Qualified Option is exercised by the transferee. All other tax consequences
described above will be applicable to the transferee of the Non-Qualified
Option. A permitted transfer by gift of a Non-Qualified Option may result in
federal transfer taxes to the transferor at such time as the option is
transferred, as well as such later time or times as the Non-Qualified Option
vests, if not fully vested on the date of the initial transfer.
Incentive Stock Options.
Generally, under the Code, an optionee will not realize taxable income by reason
of the grant or the exercise of an Incentive Option (see, however, the
discussion of alternative minimum tax below). If an optionee exercises an
Incentive Option and does not dispose of the shares until the later of (i) two
years from the date the option was granted and (ii) one year from the date of
exercise, the entire gain, if any, realized upon disposition of such shares will
be taxable to the optionee as long-term capital gain, and Genesis will not be
entitled to any deduction. If an optionee disposes of the shares within the
period of two years from the date of grant or one year from the date of exercise
(a "disqualifying disposition"), the optionee generally will realize ordinary
- 100 -
income in the year of disposition and Genesis will receive a corresponding
deduction, in an amount equal to the excess of (1) the lesser of (a) the amount,
if any, realized on the disposition and (b) the fair market value of the shares
on the date the option was exercised over (2) the option price, provided that
the deduction limit of Section 162(m) is not exceeded or the Incentive Option
qualifies for the performance-based compensation exception provided for in
Section 162(m). See "Section 162(m)"below. Any additional gain realized on the
disposition will be long-term or short-term capital gain and any loss will be
long-term or short-term capital loss. The optionee will be considered to have
disposed of a share if he sells, exchanges, makes a gift of or transfers legal
title to the share (except transfers, among others, by pledge, on death or to
spouses). If the disposition is by sale or exchange, the optionee's tax basis
will equal the amount paid for the share plus any ordinary income realized as a
result of the disqualifying disposition.
The exercise of an Incentive Option may subject the optionee to the alternative
minimum tax. The amount by which the fair market value of the shares purchased
at the time of the exercise exceeds the option exercise price is an adjustment
for purposes of computing the alternative minimum tax. In the event of a
disqualifying disposition of the shares in the same taxable year as exercise of
the Incentive Option, no adjustment is then required for purposes of the
alternative minimum tax, but regular income tax, as described above, may result
from such disqualifying disposition.
An optionee who surrenders shares as payment of the exercise price of his
Incentive Option generally will not recognize gain or loss on his surrender of
such shares. The surrender of shares previously acquired upon exercise of an
Incentive Option in payment of the exercise price of another Incentive Option,
is, however, a "disposition" of such shares. If the incentive stock option
holding period requirements described above have not been satisfied with respect
to such shares, such disposition will be a disqualifying disposition that may
cause the optionee to recognize ordinary income as discussed above.
Under the Code, all of the shares received by an optionee upon exercise of an
Incentive Option by surrendering shares will be subject to the incentive stock
option holding period requirements. Of those shares, a number of shares (the
"Exchange Shares") equal to the number of shares surrendered by the optionee
will have the same tax basis for capital gains purposes (increased by any
ordinary income recognized as a result of any disqualifying disposition of the
surrendered shares if they were incentive stock option shares) and the same
capital gains holding period as the shares surrendered. For purposes of
determining ordinary income upon a subsequent disqualifying disposition of the
Exchange Shares, the amount paid for such shares will be deemed to be the fair
market value of the shares surrendered. The balance of the shares received by
the optionee will have a tax basis (and a deemed purchase price) of zero and a
capital gains holding period beginning on the date of exercise. The Incentive
Stock Option holding period for all shares will be the same as if the option had
been exercised for cash.
Section 162(m).
Generally, Section 162(m) denies a deduction to any publicly held corporation,
such as Genesis, for certain compensation exceeding $1,000,000 paid to the chief
executive officer and the other four highest paid executive officers during any
taxable year. Although ordinary income that is realized upon the exercise of a
Non-Qualified Option or the disqualifying disposition of shares acquired
pursuant to the exercise of an Incentive Option is potentially subject to the
limitation imposed under Section162(m), Genesis believes that Section 162(m)
will have no application to stock options to be granted by reason of the
amendment to increase the number of stock options which may be granted under the
Employee Stock Option Plan, and will have limited applicability to stock options
heretofore granted under the Employee Stock Option Plan, either because such
stock options were grand fathered from the application of Section 162(m) by
certain transition rules, or will qualify for the performance based compensation
exception to Section 162(m).
Set forth below is a summary of certain significant provisions of the Genesis
Non-Employee Director Stock Option Plan.
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General
At the 2000 annual meeting the shareholders approved amendments to the Genesis
Non-Employee Director Stock Option Plan ("Director Plan") that (a) increased the
number of shares issuable under the Director Plan by 1,650,000 shares to an
aggregate of 1,875,000 shares, and (b) increased the number of shares to be
granted annually to each non-employee director from 4,500 to 15,000 per year.
In March 1992, Genesis adopted, and in February 1993, the shareholders approved,
the Director Plan. The purpose of the Director Plan is to attract and retain
certain non-employee directors and to provide additional incentive to them by
encouraging them to invest in the Common Stock and acquire an increased personal
interest in Genesis' business. Payment of the exercise price for options granted
under the Director Plan may be made in cash, shares of Common Stock or a
combination of both. All options granted pursuant to the Director Plan are
immediately exercisable and, except as indicated below, may not be exercised
more than ten years from the date of grant. Options granted under the Director
Plan are not incentive stock options under Section 422 of the Code. The Director
Plan is administered by the board of directors of Genesis, including
non-employee directors, who may modify, amend, suspend or terminate the Director
Plan, other than the number of shares with respect to which options are to be
granted, the option exercise price, the class of persons eligible to
participate, or options previously granted. At each annual meeting, each
individual who is elected, re-elected or continues as a non-employee director
automatically is granted an option to purchase shares of Common Stock at the
then fair market value of the Common Stock.
Eligibility and Administration
Each person who is not an employee of Genesis, or any Genesis subsidiary
corporation, who is elected or re-elected as a director of Genesis at any annual
or special meeting of shareholders of Genesis, or continues as a director of
Genesis as of the date of the annual or special meeting of shareholders of
Genesis at which directors of Genesis are elected or re-elected, as of the date
of such election or re-election, automatically is granted an option to purchase
the designated amount of shares of Genesis' Common Stock. The action of the
shareholders in electing or re-electing a non-employee director constitutes the
granting of the option and the date when shareholders take such action is the
date of the granting of the option, regardless of when the option is actually
delivered to the non-employee director.
The Director Plan is administered by Genesis' board of directors, including
non-employee directors. The board of directors has the exclusive right to adopt
such rules for the administration of the Director Plan, construe the Director
Plan and options issued pursuant to it, correct defects and omissions and
reconcile inconsistencies in the Director Plan to the extent necessary to
effectuate the Director Plan and the options issued pursuant to it, and such
actions are final, binding and conclusive upon all parties concerned. A majority
of members of the board constitutes a quorum for all purposes and the vote or
written consent of a majority of the members of the board on a particular matter
constitutes the act of the board on such matter. No member of the board of
directors of Genesis is liable for any act or omission (whether or not
negligent) taken or omitted in good faith, or for the exercise of any authority
or discretion granted in connection with the Director Plan to the board of
directors or for the acts or omissions of any other members of the board of
directors. If the board of directors voluntarily submits a proposed
modification, amendment, suspension or termination of the Director Plan for
shareholder approval, such submission will not require any future modifications,
amendments (whether or not relating to the same provision or subject matter),
suspensions or terminations to be similarly submitted for shareholder approval,
unless otherwise required by law.
- 102 -
Number of Shares and Adjustment
Currently, 1,770,000 shares are available for issuance.
Exercise Price and Terms
Options granted pursuant to the Director Plan may be exercised in whole or in
part from time to time, for up to the total whole number of shares then subject
to the option minus the number of shares previously purchased by the exercise of
the option.
The exercise price for options granted under the Director Plan will be equal to
the fair market value of Common Stock as of the date of the grant of the option.
The fair market value of Common Stock on any particular date shall mean the last
reported sale price of a share of Common Stock on any stock exchange on which
such stock is then listed or admitted to trading on the New York Stock Exchange
on such date, or if no sale took place on such day, the last such date on which
a sale took place, or if the Common Stock is not then quoted on the New York
Stock Exchange or listed or admitted to trading on any stock exchange, the
average of the bid and asked prices in the over-the-counter market on such date,
or if none of the foregoing, a price determined by the board of directors.
Options granted under the Director Plan are exercisable immediately and, unless
terminated earlier by the Director Plan's terms, expire ten years after the date
they are granted.
Payment of the option price on exercise of options may be made in cash,
certificates representing Common Stock which will be valued by the Secretary of
Genesis at the fair market value of a share of Common Stock on the last trading
day immediately preceding delivery of the certificate to Genesis or a
combination of both. Under the terms of the Director Plan, the provision of the
plan which allows payment of the option price in shares of Common Stock of
Genesis could be interpreted by the board of directors to permit the
"pyramiding" of shares in successive exercises. As a result, an optionee could
initially exercise an option in part, acquiring a small number of shares of
Common Stock and immediately thereafter effect further exercises of the option,
using the shares of Common Stock acquired upon earlier exercises to pay for an
increasingly greater number of shares received on each successive exercise. This
procedure could permit an optionee to pay the option price by using a single
share of Common Stock or a small number of shares of Common Stock, and
immediately thereafter effect further exercises of the option using the Common
Stock acquired upon earlier exercises to pay for an increasingly greater number
of shares received on each successive exercise. This procedure could permit an
optionee to pay the option price by using a single share of stock or a small
number of shares of Common Stock and to acquire a number of shares of Common
Stock having an aggregate fair market value equal to the excess of (a) the fair
market value (as determined above) of all shares to which the option relates
over (b) the aggregate exercise price under the option.
United States Federal Income Tax Information
Options granted under the Director Plan are not incentive stock options under
Section 422 of the Internal Revenue Code ("Non-Qualified Options"). Generally,
there will be no federal income tax consequences to either the optionee or
Genesis on the grant of a Non-Qualified Option. On the exercise of a
Non-Qualified Option, the optionee has taxable ordinary income equal to the
excess of the fair market value of the shares acquired on the exercise date over
the option price of the shares. Genesis will be entitled to a federal income tax
deduction in an amount equal to such excess. Upon the sale of stock acquired by
exercise of a Non-Qualified Option, optionees will realize long-term or
short-term capital gain or loss depending upon their holding period for such
stock. Capital losses for individuals are deductible only to the extent of
capital gains for the year plus $3,000. An optionee who surrenders shares in
payment of the exercise price of a Non-Qualified Option will not recognize gain
- 103 -
or loss with respect to the shares so delivered unless such shares were acquired
pursuant to the exercise of an Incentive Stock Option and the delivery of such
shares is a disqualifying disposition. The optionee will recognize ordinary
income on the exercise of the Non-Qualified Option as described above. Of the
shares received in such an exchange, that number of shares equal to the number
of shares surrendered will have the same tax basis and capital gains holding
period as the shares surrendered. The balance of the shares received will have a
tax basis equal to their fair market value on the date of exercise and the
capital gains holding period will begin on the date of exercise. In the event of
a permitted transfer by gift of a Non-Qualified Option, the transferor will
remain taxable on the ordinary income realized as and when such Non-Qualified
Option is exercised by the transferee. All other tax consequences described
above will be applicable to the transferee of the Non-Qualified Option. A
permitted transfer by gift of a Non-Qualified Option may result in federal
transfer taxes to the transferor at such time as the option is transferred, as
well as such later time or times as the Non-Qualified Option vests, if not fully
vested on the date of the initial transfer.
Set forth below is a summary of certain significant provisions of the 1998
Non-Qualified Employee Stock Option Plan.
On November 11, 1998, Genesis adopted the 1998 Non-Qualified Employee Stock
Option Plan (the "Non-Officer Stock Option Plan") which authorizes the issuance
of up to 2,000,000 shares of Genesis' Common Stock. Genesis uses the Non-Officer
Stock Option Plan as a long-term incentive plan for non-officer employees of
Genesis. The objectives of the Non-Officer Stock Option Plan are to align the
long-term interests of employees and shareholders by creating a direct link
between compensation and shareholder return, and to enable employees to develop
and maintain a significant long-term equity interest in Genesis. The provisions
of the Non-Office Stock Option Plan are similiar to those of the Employee Stock
Option Plan previously described.
- 104 -
Options Grants
No options were granted by the Company during the fiscal year ended September
30, 2000 to any of the five most highly compensated active executive officers of
Genesis.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information concerning the shares
acquired upon exercise of options, the number of unexercised options and the
value of unexercised options at the end of fiscal 2000 held by the Chief
Executive Officer and each of the four other most highly compensated executive
officers of Genesis:
Number of Value of Unexercised
Unexercised In-the-Money
Shares Options at Fiscal Options at Fiscal
Acquired Year-End Year-End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable(1)
---- -------- -------- ----------------- --------------------
Michael R. Walker - - 667,501 / 0 $0 / $0
Richard R. Howard - - 336,750 / 0 0 / 0
David C. Barr - - 352,770 / 0 0 / 0
George V. Hager, Jr. - - 147,500 / 0 0 / 0
Maryann Timon (1) - - 0 / 0 0 / 0
(1) Ms. Timon's employment ended May 31, 2000.
Executive Deferred Compensation Plans
Effective April 1, 2000 the Company adopted the Genesis Health Ventures, Inc.
Deferred Compensation Plan (the "Deferred Comp. Plan") for a select group of
management and / or highly compensated employees which allows them to defer
receipt of compensation and supplement retirement savings under the Genesis
Health Ventures, Inc. Retirement Plan. Participant balances in the Deferred
Comp. Plan earn interest at the rate of 12.5% annually, compounded monthly.
Benefit withdrawals are made following retirement, termination of employment,
disability or death. Upon termination of employment by a participant, the
Company may deduct any amount owed by the participant to the Company. Messrs.
Walker, Howard, Barr, Hager and Rubinger are participants of the Deferred Comp.
Plan.
Special Recognition Program
On September 5, 2000, the Company obtained Bankruptcy Court approval for a
Special Recognition Program (the "SRP"). The SRP was established to enhance the
Company's ability to reward and retain certain key employees during the
reorganization.
Cash payments under the SRP are to be paid out over four payments on the
participant's first pay day following September 30, 2000, December 31, 2000, May
31, 2001 and on the date the Company emerges from bankruptcy. The Company
estimates the maximum aggregate cost of the cash payments under the SRP to be
approximately $11,500,000.
Messrs. Walker, Howard, Barr and Hager are not participants of the SRP.
- 105 -
Other Employment Agreements
On September 5, 2000, the Company obtained Bankruptcy Court approval to affirm
employment agreements with certain officers of the Company.
The Company estimates the maximum potential cost of assuming the employment
agreements is approximately $8,400,000, representing the maximum aggregate cost
of severance payments due should such officers' employment be terminated for
reasons that would entitle them to receive severance.
Retirement Plan
On January 1, 1989, the Company adopted an employee Retirement Plan which
consists of a 401(k) component and a profit sharing component. The Retirement
Plan, which is intended to be qualified under Sections 401(a) and (k) of the
Code, is a cash deferred profit-sharing plan covering all of the employees of
the Company (other than certain employees covered by a collective bargaining
agreement) who have completed at least 1,000 hours of service and twelve months
of employment. Effective January 1, 2000, under the 401(k) component, each
eligible employee may elect to contribute a portion of his current compensation
up to the lesser of $10,500 (or the maximum then permitted by the Code) or 15%
(or for highly compensated employees, 4%) of such employee's annual
compensation. The Company may make a matching contribution in cash, Company
Stock or other property as determined by the Board of Directors each year. The
Board of Directors may establish this contribution at any level each year, or
may omit such contribution entirely. An employee's eligibility for a matching
contribution is contingent upon his employment on the last day of the calendar
year. The Company match since January, 1995 has been based on years of service.
An employee who has completed six years of service is matched of $0.75 per $1.00
of contribution up to 4% of his salary. Therefore, if this employee contributes
4% or more of his salary, the Company contributes 3% of his salary. If the
employee contributes less than 4%, the Company contributes $0.75 per $1.00 of
contribution. If an employee has not completed six years of service, he is
matched $0.50 per $1.00 of contribution up to 2% of his salary. Therefore, if
this employee contributes 2% or more of his salary, the Company contributes 1%
of his salary. If the employee contributes less than 2%, the Company contributes
$0.50 per $1.00 of contribution. Highly Compensated Employees (as such term is
defined in the Code) regardless of their years of service, are not eligible for
a Company matching contribution under the Plan. Under the profit sharing
provisions of the Retirement Plan, the Company may make an additional employer
contribution in cash, Company stock or other property as determined by the Board
of Directors each year. The Board of Directors may establish this contribution
at any level each year, or may omit such contribution entirely. Profit sharing
contributions are allocated among the accounts of participants in the proportion
that their annual compensation bears to the aggregate annual compensation of all
participants. An employee's eligibility for profit sharing contribution is
contingent upon a service requirement of a minimum of 1,000 hours and employment
on the last day of the calendar year. All employee contributions to the
Retirement Plan are 100% vested. The Company's contributions are vested in
accordance with a schedule that generally provides for vesting after five years
of service with the Company (any non-vested amounts that are forfeited by
participants are used to reduce the following year's contribution by the
Company). Distribution of benefits normally will commence upon the participant's
reaching age 65 (or, if earlier, upon the participant's death, disability, or
termination of employment). Payment of Retirement Plan benefits will generally
be made in a lump sum unless an alternative equivalent form of benefit is
elected. Certain special rules apply to the distribution of benefits to
participants for whom the Retirement Plan has accepted a transfer of assets from
another tax-qualified pension plan.
Execuflex Plan
In November 1991, Genesis adopted the Execuflex Plan. All Genesis employees who
are Highly Compensated, as such term is defined in the Code, are entitled to
participate in the Execuflex Plan. Pursuant to the terms of the Execuflex Plan,
- 106 -
an eligible employee may authorize Genesis to reduce his base compensation or
bonuses and credit such amounts to a retirement account, education account or
fixed period account. The Genesis match since March 1, 1997 has been based on
years of service. Effective January 1, 2000, if an employee has completed more
than six years of service, he is matched $0.75 per $1.00 of contribution up to
4% of his salary. If the employee contributes 4% or more of his salary, Genesis
contributes 3% of his salary. If the employee contributes less than 4%, Genesis
contributes $0.75 per $1.00 of contribution. If an employee has six years of
service or less, he is matched $0.50 per $1.00 of contribution up to 2% of his
salary. Therefore, if this employee contributes 2% or more of his salary,
Genesis contributes 1% of his salary. If the employee contributes less than 2%,
Genesis contributes $0.50 per $1.00 of contribution. Benefits derived from
matching contributions made by Genesis are forfeited if a member of the
Execuflex Plan separates from Genesis's employ prior to completing five years of
employment with Genesis. In April 2000, the Execuflex Plan was liquidated and
all eligible participant balances were distributed.
Senior Executive Stock Ownership Program and Executive Loans
In December, 1997 the Board of Directors approved a Senior Executive Stock
Ownership Program. Under the terms of the program, certain of the Company's
senior executive employees are required to own shares of the Company's Common
Stock having a market value based upon a multiple of the executive's salary.
Each executive is required to own the shares within three years of the date of
the adoption of the program. Subject to applicable laws, the Company may lend
funds to one or more of the senior executive employees for his or her purchase
of the Company's Common Stock. As of September 30, 2000 the Company had
outstanding loans and accrued interest of approximately $3,200,000 from senior
executives. The note agreements were amended in fiscal 2000 to adjust the
interest rate to 8% simple interest. Previously, the loans accrued interest
based on the market rate at the date of the loan initiation.
- 107 -
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The following table sets forth at December 31, 2000, certain information with
respect to the beneficial ownership of Common Stock (I) by each person who is
known by Genesis to be the beneficial owner of more than five percent of the
Common Stock, (ii) by each director, (iii) by each of Genesis' five most highly
compensated executive officers and (iv) by all directors and executive officers
as a group.
------------------------------------------------------------------------------------------------------------
Shares of Common Percent of
Stock Beneficially Common
Owned(1) Stock Owned
------------------------------------------------------------------------------------------------------------
The Cypress Group L.L.C. (2)
65 East 55th Street
19th Floor
New York, NY 10022 21,175,714 33.3%
------------------------------------------------------------------------------------------------------------
TPG Partners II, L.P. (3)
201 Main Street
Suite 2420
Fort Worth, TX 76102 20,478,605 32.6%
------------------------------------------------------------------------------------------------------------
HCR Manor Care, Inc. (4)
One Seagate
Toledo, OH 43604-2616 7,879,570 13.9%
------------------------------------------------------------------------------------------------------------
Putnam Investments (5)
One Post Office Square
Boston, MA 02109 3,289,151 6.8%
------------------------------------------------------------------------------------------------------------
Jack R. Anderson (6) 9,000 *
------------------------------------------------------------------------------------------------------------
Joseph R. Buckley - -
------------------------------------------------------------------------------------------------------------
James G. Coulter (7) 20,483,105 32.6%
------------------------------------------------------------------------------------------------------------
Philip P. Gerbino (8) 7,710 *
------------------------------------------------------------------------------------------------------------
Richard R. Howard (9) 426,700 *
------------------------------------------------------------------------------------------------------------
Samuel H. Howard (10) 27,000 *
------------------------------------------------------------------------------------------------------------
John C. McMeekin - -
------------------------------------------------------------------------------------------------------------
Roger C. Lipitz (11) 28,000 *
------------------------------------------------------------------------------------------------------------
James L. Singleton (12) 21,186,339 33.3%
------------------------------------------------------------------------------------------------------------
Michael R. Walker (13) 1,095,401 2.2%
------------------------------------------------------------------------------------------------------------
James B. Williams (14) 20,478,605 32.6%
------------------------------------------------------------------------------------------------------------
David C. Barr (15) 352,770 *
------------------------------------------------------------------------------------------------------------
George V. Hager, Jr. (16) 179,353 *
------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group (26 persons) 44,348,099 56.5%
------------------------------------------------------------------------------------------------------------
* - Less than one percent.
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission (the "Commission")
and accordingly, may include securities owned by or for, among others, the
spouse, children or certain other relatives of such person as well as other
securities as to which the person has or shares voting or investment power
or has the right to acquire within 60 days after December 31, 2000. The
same shares may be beneficially owned by more than one person. Beneficial
ownership may be disclaimed as to certain of the securities.
- 108 -
(2) Consist of (a) 5,942,063 shares of Common Stock, 950,730 shares of which
may be acquired upon the exercise of warrants and 11,585 shares of Series H
Preferred Stock which are convertible into 13,240,000 shares of Common
Stock, beneficially owned by Cypress Merchant Banking Partners L.P. and (b)
307,937 shares of Common Stock, 49,270 shares of which may be acquired upon
the exercise of warrants and 600 shares of Series H Preferred Stock which
are convertible into 685,714 shares of Common Stock, beneficially owned by
Cypress Offshore Partners L.P., The Cypress Group L.L.C., as well as
Cypress Associates L.P., James A. Stern, Jeffery P. Hughes, James L.
Singleton and David P. Spalding, may be deemed to beneficially own these
shares. However, all of these persons disclaim beneficial ownership. Does
not include 8,851 shares of Series I Preferred Stock convertible to
10,115,429 shares of non-voting Common Stock beneficially owned by the
Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P.
(3) Consists of (a) 6,250,000 shares of Common Stock, 1,000,000 shares of
Common Stock which may be converted upon the exercise of warrants and (b)
11,575 shares of Series H Preferred Stock which are convertible into
13,228,604 shares of Common Stock. These shares are beneficially owned by
TPG Partners II, L.P. and the following affiliates: TPG Parallel, L.P., TPG
Investors II, L.P. and TPG MC Coinvestment, L.P. However, all of these
groups disclaim beneficial ownership. Does not include 8,375 shares of
Series I Preferred Stock convertible into 9,571,429 shares of non-voting
common stock beneficially owned by TPG Investors II L.P., TPG Parallel II
L.P., TPG MC Coinvestment L.P. and TPG Partners II L.P.
(4) Consists of 586,240 shares of Series G Preferred Stock which are
convertible into 7,879,550 shares of Common Stock. Does not include shares
beneficially owned by Jack R. Anderson who is HCR Manor Care, Inc.'s
designee to the board of directors.
(5) Based upon a Schedule 13G, dated January 28, 1998. Consists of 3,092,550
shares beneficially owned by Putnam Investment Management, Inc. and 196,601
shares beneficially owned by The Putnam Advisory Company, Inc. which are
registered investment advisors, and are wholly-owned by Putnam Investments,
Inc. Putnam Investments Inc. is a wholly-owned subsidiary of Marsh &
McLennon Companies, Inc.
(6) Does not include shares beneficially owned by HCR Manor Care, Inc. Jack R.
Anderson is a HCR Manor Care, Inc. designee to the board of directors.
Consists of 9,000 shares of Common Stock which may be acquired upon the
exercise of stock options.
(7) Includes 20,478,605 shares held by TPG Partners, II L.P. and certain of its
affiliates. See Note (3). James G. Coulter disclaims beneficial ownership
of such shares. Mr. Coulter is one of The Cypress Group L.L.C. and TPG
Partners II, L.P.'s designees to the board of directors. Includes 4,500
shares of Common Stock which may be acquired upon the exercise of stock
options.
(8) Includes 7,500 shares of Common Stock which may be acquired upon the
exercise of stock options.
(9) Includes 336,750 shares of Common Stock which may be acquired upon the
exercise of stock options.
(10) Consists of 27,000 shares of Common Stock which may be acquired upon the
exercise of stock options.
(11) Includes 27,000 shares of Common Stock which may be acquired upon the
exercise of stock options.
(12) Includes 21,175,714 shares held by affiliates of The Cypress Group L.L.C.
See Note (2). James L. Singleton disclaims beneficial ownership of such
shares. Mr. Singleton is one of The Cypress Group L.L.C. and TPG Partners
II, L.P. designees to the board of directors.
(13) Includes 667,501 shares of Common Stock which may be acquired upon the
exercise of stock options.
(14) Consists of 20,478,605 shares held by TPG Partners, II L.P. and certain of
its affiliates. See Note (3). James B. Williams disclaims beneficial
ownership of such shares. James B. Williams is one of The Cypress Group
L.L.C. and TPG Partners II, L.P.'s designees to the board of directors.
(15) Consists of 352,770 shares of Common Stock which may be acquired upon the
exercise of stock options.
(16) Includes 147,500 shares of Common Stock which may be acquired upon the
exercise of stock options
- 109 -
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 12, 1999, Genesis Holding, Inc. ("Holdings") entered into a Stock
Purchase Agreement (the "Purchase Agreement") to purchase all of the issued and
outstanding shares of HealthObjects Corporation and its subsidiaries
(collectively, "HealthObjects"). HealthObjects was 93% beneficially owned by
Michael G. Bronfein, who was an officer of Genesis until November 11, 1999, and
7% beneficially owned by Michael J. Russo. Prior to entering into the Purchase
Agreement, Genesis had made loans of approximately $13,300,000 to HealthObjects
for the benefit of HealthObjects and its subsidiaries. Michael Bronfein and his
affiliates had made certain loans and advances to HealthObjects in the amount of
$4,148,605 that were purchased by Genesis in connection with the acquisition.
The transaction closed on January 3, 2000. Genesis paid $10,000 in cash to
purchase the shares and issued three promissory notes (the "Notes") in the
amount of $4,148,605 to purchase the loans and advances made by Michael Bronfein
and his affiliates. Holdings and Genesis are co-obligors of the Notes. The Notes
are comprised of (i) a $2,500,000 promissory note which bears interest at the
prime rate per annum and is payable on third, fourth and fifth anniversary of
the Closing Date; (ii) a $898,605 promissory note which bears interest at 5.25%
per annum and is payable on January 3, 2005; and (iii) a $750,000 promissory
note which bears interest at 5.25% per annum and is payable on January 3, 2005.
On January 7, 2000, Genesis paid $100,000 to the Bronfeins, as additional
consideration for the loans and advances made by Michael Bronfein and his
affiliates. In addition, Genesis has agreed to make contingent payments on the
fifth and sixth anniversary of the closing date of the transaction based on the
annualized cost savings realized by NeighborCare's institutional pharmacy
operations, if any.
On September 1, 2000, the Company entered into a Consulting Agreement with
Michael Bronfein. The initial term of the agreement is for six months, with an
automatic renewal for successive six month periods unless terminated by either
party. Mr. Bronfein receives a fee of $25,000 per month for his services.
On November 30, 1993, Genesis paid approximately $205,000,000 to acquire
substantially all of the assets and stock of Meridian Healthcare. Roger C.
Lipitz, a director, is a former stockholder of Meridian Healthcare and served as
it's Chairman. As part of the Meridian Transaction, Genesis entered into
agreements to lease and operate, for ten years with a five year renewal option,
at an aggregate cost of $6,000,000 per year, seven geriatric care facilities
owned by seven different partnerships formed by certain former shareholders of
Meridian, including Mr. Lipitz (the "Former Shareholders"). In March 1996,
Genesis acquired for total consideration of approximately $31,900,000, including
the payment of assumed debt, the remaining partnership interest owned by the
Former Shareholders in five geriatric care facilities which were jointly owned
by Genesis and limited partnerships owned by the Former Shareholders. Genesis
also pays approximately $992,376 per year, effective December 1, 1999, to Towson
Building Associates, L.P., a limited partnership formed by the Former
Shareholders, to lease Genesis' regional headquarters located in Towson,
Maryland. Mr. Lipitz beneficially owns between 20% to 26.5% of the partnership
interests in the referenced partnerships formed and owned by the Former
Shareholders. Mr. Lipitz abstains from voting on all board of director
resolutions involving Company matters with any of the above entities.
Pursuant to the Senior Executive Officer Stock Ownership Plan, at September 30,
2000, Genesis had loans outstanding to Messrs. Howard, Barr, Hager and Rubinger
in the principal amounts of $646,889, $820,962, $624,244, and $492,812,
respectively.
Samuel H. Howard, a Director of Genesis, is affiliated to two companies in which
civil actions for Rehabilitation are filed against them in their respective
courts. Civil actions exist against Xantus Healthplan of Tennessee, Inc. and
Xantus Healthplan of Mississippi, Inc., both subsidiaries of Xantus Corporation.
Mr. Howard is the founder and Chairman of Xantus Corporation.
- 110 -
Michael R. Walker is Chairman of the Board for the real estate investment trust
Elder Trust. On January 31, 2001, the Company and its affiliate, The Multicare
Companies, Inc. ("Multicare") reached agreements to restructure their
relationship. The agreements encompass, among other things, the resolution of
leases and mortgages for 33 properties operated by Company and Multicare either
directly or through joint ventures. Under its agreement, Genesis assumed the
ElderTrust leases subject to certain modifications, including a reduction in
Company' annual lease expense of $745,000; extended the maturity and reduced the
principal balances for three assisted living properties by $8,500,000 by
satisfaction of an ElderTrust obligation of like amount and acquired a building
currently leased from ElderTrust, which is located on the campus of a Company
skilled nursing facility, for $1,250,000. In its agreement with ElderTrust,
Multicare sold three owned assisted living properties that are mortgaged to
ElderTrust for principal amounts totaling $19,500,000 in exchange for the
outstanding indebtedness. ElderTrust will lease the properties back to Multicare
under a new ten year lease with annual rents of $791,561. Mr. Walker abstains
from voting on all board of director resolutions involving Company matters with
any ElderTrust entity.
James G. Coulter was designated a Director of the Company by Cypress and TPG
upon the issuance of the Series H Preferred Stock. Mr. Coulter is a partner in
TPG. The Company's transactions with TPG are set forth in detail in Item 7
herein and detailed information regarding Mr. Coulter is set forth in Item 10
herein..
James L. Singleton was designated a Director of the Company by Cypress and TPG
upon the issuance of the Series H Preferred Stock. Mr. Singleton is Vice
Chairman and a partner in The Cypress Group L.L.C. The Company's transactions
with Cypress are set forth in detail in Item 7 herein and detailed information
regarding Mr. Singleton is set forth in Item 10 herein.
James B. Williams was designated a Director of the Company by Cypress and TPG
upon selection of the Series G directors. Mr. Williams is a partner in TPG. The
Company's transactions with TPG are set forth in detail in Item 7 herein and
detailed information regarding Mr. Williams is set forth in Item 10 herein.
John C. McMeekin was appointed as a Director of the Company in November 2000.
From July 1990 through January 15, 2001, Mr. McMeekin was the President and CEO
of Crozer-Keystone Health Systems, Inc., which is a not for profit entity
organized under the laws of Pennsylvania. The Company and Crozer Keystone-Health
Systems, Inc. entered into a joint venture in December 1997 entitled
Crozer-Genesis ElderCare Limited Partnership, which is a for-profit limited
partnership organized under the laws of Pennsylvania. Crozer-Genesis ElderCare
Limited Partnership is the owner/licensee of the following nursing facilities:
o Belvedere Nursing and Convalescent Center;
o Chapel Manor Nursing and Convalescent Center;
o Harston Hall Nursing and Convalescent Home; and
o Pennsburg Manor.
Crozer-Genesis ElderCare, Inc., a for-profit corporation organized under the
laws of Pennsylvania, is the 1% general partner of Crozer-Genesis ElderCare
Limited Partnership. Crozer-Keystone Health Systems, Inc. is the 49.5% limited
partner of Crozer-Genesis ElderCare Limited Partnership and a 50% shareholder of
Crozer-Genesis ElderCare, Inc. Genesis-Crozer Partnership Holding Company, Inc.,
a Pennsylvania corporation, owns 49.5% of Crozer-Genesis ElderCare Limited
Partnership and is a 50% shareholder of Crozer-Genesis ElderCare, Inc.
Healthcare Resources Corp., a Pennsylvania corporation, is the 100% stockholder
of Genesis-Crozer ElderCare Limited Partnership. Genesis Holdings, Inc., a
Delaware corporation, owns 100% of the stock of Healthcare Resources Corp. As of
December 12, 2000, Mr. McMeekin was no longer on the board of directors of
Crozer-Genesis ElderCare Limited Partnership. Mr. McMeekin retired from
Crozer-Keystone Health Systems, Inc. on January 15, 2001.
- 111 -
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of Genesis Health Ventures, Inc. and
Subsidiaries are filed as part of this Form 10-K in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 2000 and 1999
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
The following financial statements of the Multicare Companies, Inc. are
incorporated by reference to Multicare's Form 10-K for the year ended September
30, 2000 filed February 21, 2001:
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 2000 and 1999
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a)(2) Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 2000, 1999, and 1998. Schedule II is included
herein on page 120. All other schedules not listed have been
omitted since the required information is included in the
financial statements or the notes thereto, or is not applicable or
required.
- 112 -
(a)(3) Exhibits
No. Description
--- -----------
2.1(1) Stock Purchase Agreement dated October 10, 1997 among Genesis Health Ventures, Inc., The Multicare
Companies, Inc., Concord Health Group, Inc., Horizon Associates, Inc., Horizon Medical Equipment and
Supply, Inc., Institutional Health Services, Inc., Care4 L.P., Concord Pharmacy Services, Inc., Compass
Health Services, Inc. and Encare of Massachusetts, Inc.
2.2(1) Asset Purchase Agreement dated October 11, 1997 among Genesis Health Ventures, Inc., The Multicare
Companies, Inc., Health Care Rehab Systems, Inc., Horizon Rehabilitation, Inc., Progressive
Rehabilitation Centers, Inc., and Total Rehabilitation Centers, L.L.C.
2.3(1) Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis
ElderCare Acquisition Corp., Genesis Health Ventures, Inc., and the Multicare Companies, Inc.
2.4(2) Agreement and Plan of Merger dated April 26, 1998, by and among Genesis Health Ventures, Inc., V
Acquisition Corp. and Vitalink Pharmacy Services, Inc.
2.5(19) Amendment Number One to the Plan of Merger dated as of July 7, 1998.
2.6(21) Restructuring Agreement dated October 8, 1999 among The Cypress Group L.L.C., TPG Partners II, L.P.,
Nazem, Inc., Genesis and the other signatories thereto.
3.1(3) The Company's Amended and Restated Articles of Incorporation.
3.2(4) The Company's Amended and Restated Bylaws.
3.3(20) Amendment to the Company's Articles of Incorporation, as filed on March 11, 1994, with the Secretary of
the Commonwealth of Pennsylvania.
3.4(11) Amendment to the Company's Articles of Incorporation, as filed on August 26, 1998, with the Secretary
of the Commonwealth of Pennsylvania.
3.5(21) Amendment to the Company's Amended and Restated Articles of Incorporation, as filed with the Secretary
of the Commonwealth of Pennsylvania.
4.1(3) Specimen of Common Stock Certificate.
4.2(6) Specimen of the Company's First Mortgage Bonds (Series A) due 2007.
4.3(7) Indenture of Mortgage and Deed of Trust, dated as of September 1, 1992, by and among the Company,
Delaware Trust Company and Richard N. Smith.
4.4(22) Rights Agreement between Genesis Health Ventures, Inc. and Mellon Securities Trust Company.
4.5(9) Indenture dated as of June 15, 1995 between the Company and Delaware Trust Company.
- 113 -
4.6(9) Specimen of the Company's 9-3/4% Senior Subordinated Debentures due 2005.
4.7(10) Indenture dated as of October 7, 1996 between the Company and First Union National Bank.
4.8(10) Specimen of the Company's 9-1/4% Senior Subordinated Notes due 2006.
4.9(11) Rights Agreement by and between Genesis Health Ventures, Inc. and Manor Care Inc. dated April 26, 1998.
4.10(11) Indenture dated as of December 23, 1998 between the Company and the Bank of New York.
4.11(11) Specimen of the Company's 9-7/8% Senior Subordinated Debentures due 2009 (Attached as Exhibit A-1 to
the Indenture dated December 23, 1998 between the Company and the Bank of New York attached hereto as
Exhibit 4.11).
4.12(21) Certificate of Designations for the Company's Series H Senior Convertible Participation Cumulative
Preferred Stock.
4.13(21) Certificate of Designations for the Company's Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock.
4.14(21) Form of Warrant issued in connection with the Multicare restructuring transaction.
+10.1(3) The Company's Employee Retirement Plan, adopted January 1, 1989, as amended and related Retirement Plan
Trust Agreement
+10.2(12) The Company's Amended and Restated Stock Option Plan.
+10.3(6) The Company's 1992 Stock Option Plan for Non-Employee Directors
+10.4(6) The Company's Incentive Compensation Program.
+10.5(6) The Company's Execuflex Plan, dated as of January 1, 1992, and related Trust Agreement, dated December
10, 1991.
+10.6(5) Lease dated January 5, 1989, as amended, by and between Towson Building Associates Limited Partnership
and Meridian Healthcare, Inc.
+10.7(5) Sublease dated November 30, 1993, by and between Meridian Healthcare, Inc. and Fairmount Associates, Inc.
+10.8(8) Agreement to Purchase Partnership Interests, made as of March 1 1996, by and among Meridian Health,
Inc., Fairmont Associates, Inc. and MHC Holding Company.
10.9(10) Guaranty and Agreement of Suretyship Regarding Obligations of Lessee and Affiliates from Genesis Health
Ventures, Inc. and its Material Subsidiaries, dated as of October 7, 1996.
10.10(10) Guaranty and Agreement of Suretyship from Genesis Health Ventures, Inc. and its Material Subsidiaries,
dated as of October 7, 1996.
- 114 -
10.11(10) Amended and Restated Lease and Agreement, dated as of October 7, 1996, between Mellon Financial
Services Corporation #4, as Lessor, and Genesis Eldercare Properties, Inc., as Lessee.
10.12(10) Amended and Restated Participation Agreement, dated as of October 7, 1996, among Genesis Eldercare
Properties, Inc., as Lessee, Mellon Financial Services Corporation #4, as Lessor, Persons Named on
Schedule I, as Lenders, and Mellon Bank, N.A. not in its individual capacity except as expressly stated
therein, but solely as Agent.
10.13(10) Management and Affiliation Agreement, dated as of August 31, 1996, by and between Genesis ElderCare
Network Services, Inc., the Company and AGE Institute of Florida, Inc.
10.14(10) Acquisition Loan and Security Agreement, dated as of August 31, 1996, between Genesis Health Ventures,
Inc. and AGE Institute of Florida, Inc.
10.15(14) Amended and Restated Lease Agreement dated as of October 7, 1996 between Mellon Financial Services
Corporation #4, as Lessor, and Genesis ElderCare Properties, Inc., as lessee.
10.16(14) Second Amendment to Amended and Restated Participation Agreement dated March 7, 1998 among Genesis
ElderCare Properties, Inc., as lessee, Mellon Financial Services Corporation #4, as lessor; various
financial institutions as lendors and Mellon Bank N.A., a national banking association as Agent for
Lessor and the Lendors.
10.17(15) Third Amended and Restated Credit Agreement dated October 9, 1997 to Genesis Health Ventures, Inc. from
Mellon Bank, N.A., Citicorp USA, Inc., First Union National Bank and NationsBank, N.A.
10.18(15) Credit Agreement dated October 14, 1997 to The Multicare Companies, Inc. from Mellon Bank, N.A.,
Citicorp USA, Inc., First Union National Bank and NationsBank, N.A.
+10.19(1) Management Agreement dated October 9, 1997 among The Multicare Companies, Inc., Genesis Health
Ventures, Inc. and Genesis ElderCare Network Services, Inc.
10.20(15) Stockholders' Agreement dated October 9, 1997 among Genesis ElderCare Corp., The Cypress Group L.L.C.,
TPG Partners II, L.P., Nazem, Inc. and Genesis Health Ventures, Inc.
10.21(15) Put/Call Agreement dated October 9, 1997 among The Cypress Group, L.L.C., TPG Partners, II, L.P.,
Nazem, Inc. and Genesis Health Ventures, Inc.
10.22(15) Letter Agreement dated June 16, 1997 between Genesis Health Ventures, Inc. and Sterns Associates.
10.23(16) Assignment and Assumption Agreement dated January 30, 1998 among Genesis Health Ventures, Inc., Capital
Corp. and AGE Institute of Florida.
10.24(16) Amended and Restated Promissory Note dated January 30, 1998 among Genesis Health Ventures, Inc. and, ET
Capital Corp. and AGE Institute of Florida.
10.25(17) Master Agreement for Infusion Therapy Products and Services, dated June 1, 1991.
- 115 -
10.26(18) Amendment to the Master Agreement for Infusion Therapy Products and Services, as amended on September
19, 1997 and April 26, 1998.
10.27(17) Master Pharmacy Consulting Agreement, dated June 1, 1991 and amended on September 19, 1997 and April
26, 1998
+10.28(18) Amendment to the Master Pharmacy Consulting Agreement, dated May 31, 1991 amended on September 19, 1997
and April 26, 1998.
10.29(17) Amendment to the Master Pharmacy Services Consulting Agreement, as amended on September 19, 1997 and
April 26, 1998.
10.30(17) Master Agreement for Pharmacy Services, dated June 1, 1991 and amended on September 19, 1997 and April
26, 1998.
10.31(18) Amendments to the Master Agreement for Pharmacy Services, as amended on September 19, 1997 and April
26, 1998.
+10.32(11) Employment Agreement between the Company and Michael R. Walker dated August 12, 1998.
+10.33(11) Employment Agreement between the Company and George V. Hager dated August 12, 1998.
+10.34(11) Employment Agreement between the Company and Richard R. Howard dated August 12, 1998.
+10.35(11) Employment Agreement between the Company and David C. Barr dated August 12, 1998.
+10.36(11) Employment Agreement between the Company and Maryann Timon dated November 11, 1998.
+10.37(11) Employment Agreement between the Company and Marc. D. Rubinger dated November 11, 1998.
+10.38(21) Amended and Restated Stockholders Agreement dated November 15, 1999 by and among Genesis ElderCare
Corp., The Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc., Genesis and the other signatories
thereto.
+10.39(21) Amended and Restated Put/Call Agreement dated November 15, 1999 by and among The Cypress Group L.L.C.,
TPG Partners II, L.P., Nazem, Inc., Genesis and the other signatories thereto.
+99.1(23) Fourth Amended and Restated Credit Agreement dated as of August 20, 1999 by and among Genesis, the
Subsidiaries of Genesis referred to on the signature pages thereto (and such other subsidiaries of
Genesis which may from time to time become Borrowers thereunder in accordance with the provisions
thereof) (collectively with Genesis, the "Borrowers"), the Lenders referred to on the signature pages
thereto (together with other lenders parties thereto from time to time, and their successors and
assigns, the "Lenders"), Mellon Bank, N.A., a national banking association as issuer of Letters of
Credit thereunder (in such capacity, together with its successors and assigns in such capacity, the
"Administrative Agent"), Citicorp USA, Inc. as Syndication Agent, First Union National Bank, a national
banking association as Documentation Agent, and Bank of America, N.A. (as successor to NationsBank,
N.A. and Bank of America, NT&SA), a national banking association as Syndication Agent.
- 116 -
+99.2(24) Forbearance Agreement, dated as of March 20, 2000 among Genesis Health Ventures, Inc., certain
Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of Credit,
Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA, Inc. as Syndication Agent, First
Union National Bank as Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders
and Secured Parties.
+99.3(25) Revolving Credit and Guaranty Agreement, dated as of June 22, 2000, among Genesis Health Ventures,
Inc., a Debtor-in-Possession under Chapter 11 of the Bankruptcy Code as Borrower and Mellon Bank, N.A.
as Administrative Agent and Arranger, First Union National Bank as Syndication Agent and Goldman Sachs.
Credit Partners, L.P., as Documentation Agent.
21 Subsidiaries of the Company
23 Consent of KPMG LLP
23.1 Consent of KPMG LLP
27 Financial Data Schedule
--------------------
+ Management contract or compensatory plan or arrangement
1) Incorporated by reference to Genesis Health Ventures, Inc.'s Current Report
on Form 8-K dated October 10, 1997.
2) Incorporated by reference to Form S-4, dated June 30, 1998 (File No.
333-58221)
3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-40007).
4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
6) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-51670).
7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992.
8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
9) Incorporated by reference to Form S-3, dated June 20, 1995 (File No.
33-9350).
10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ending September 30, 1998.
12) Incorporated by reference to Form S-8, dated May 19, 1998 (File No.
333-53043)
13) Incorporated by reference to the Company's Form 8-K dated November 30,
1993.
14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
15) Incorporated by reference to Amendment No. 7 to the Tender Offer Statement
on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare
Acquisition Corp. on June 20, 1997.
16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997.
- 117 -
17) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form
S-1/A, dated February 29, 1992 (File No. 33-43261).
18) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form 10-K
dated August 31, 1998 (File No. 001-12729)
19) Incorporated by reference to the Company's Amendment No. 1 to Form S-4
filed July 28, 1998 (333-58221).
20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
21) Incorporated by reference to the Company's Report on Form 8-K dated
November 15, 1999.
22) Incorporated by reference to the Company's Form 8-A filed May 11, 1995.
23) Incorporated by reference to the Company's Form 10-Q/A filed September 15,
1999.
24) Incorporated by reference to the Company's Form 10-Q filed May 15, 2000.
25) Incorporated by reference to the Company's Form 10-Q filed August 21, 2000.
(b) Reports on Form 8-K
None
- 118 -
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.
Under date of February 14, 2001, we reported on the consolidated balance sheets
of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the years in the three-year period
ended September 30, 2000, as contained in the Genesis Health Ventures, Inc.
annual report on Form 10-K for the year 2000. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedule in the Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits. In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for costs of start-up activities effective
October 1, 1999.
The audit report on the consolidated financial statements of the Company
referred to above contains an explanatory paragraph that states the Company's
recurring losses from operations, shareholders' deficit, defaults under various
loan agreements and filing, together with its consolidated affiliates, The
Multicare Companies, Inc. for voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code, raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial schedule
referred to above does not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Philadelphia, Pennsylvania
February 14, 2001
- 119 -
Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 2000, 1999 and 1998
(in thousands)
Charged to
Balance at Other Balance
Beginning of Charged to Accounts Deductions at End of
Description Period Operations (1) (2) Period
------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000
Allowance for Doubtful Accounts $ 86,067 45,226 13,466 66,739 $78,020
Year Ended September 30, 1999
Allowance for Doubtful Accounts $ 73,719 54,061 1,500 43,213 $86,067
Year Ended September 30, 1998
Allowance for Doubtful Accounts $ 39,418 18,016 36,497 20,212 $73,719
(1) - Represents amounts related to acquisitions or dispositions. In fiscal
2000, includes $18,494 representing the beginning of period balance of the
Multicare Companies, Inc. Beginning October 1, 2000, Genesis changed its method
of accounting for Multicare from the equity method of accounting to the
consolidation method of accounting.
(2) - Represents amounts written off as uncollectible
- 120 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Amendment No 1 to its
Report to be signed on its behalf on February 15, 2001 by the undersigned duly
authorized.
Genesis Health Ventures, Inc.
By: /s/ George V. Hager, Jr.
-----------------------------------
George V. Hager, Jr.,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on February 15, 2001.
Signature Capacity
---------- --------
/s/ Michael R. Walker
----------------------------
Michael R. Walker Chairman and Chief Executive Officer
/s/ Richard R. Howard
----------------------------
Richard R. Howard Vice Chairman and Director
/s/ Jack R. Anderson
----------------------------
Jack R. Anderson Director
----------------------------
Joseph R. Buckley Director
/s/ James G. Coulter
----------------------------
James G. Coulter Director
/s/ Dr. Philip P. Gerbino
----------------------------
Dr. Philip P. Gerbino Director
/s/ Samuel H. Howard
----------------------------
Samuel H. Howard Director
/s/ Roger C. Lipitz
----------------------------
Roger C. Lipitz Director
/s/ John C. McMeekin
----------------------------
John C. McMeekin Director
/s/ James L. Singleton
----------------------------
James L. Singleton Director
/s/ James B. Williams
----------------------------
James B. Williams Director
/s/ George V. Hager, Jr.
----------------------------
George V. Hager, Jr. Chief Financial Officer
(Principal Accounting Officer)
- 121 -
EXHIBITS INDEX
No. Description
--- -----------
2.1(1) Stock Purchase Agreement dated October 10, 1997 among Genesis Health Ventures, Inc., The Multicare
Companies, Inc., Concord Health Group, Inc., Horizon Associates, Inc., Horizon Medical Equipment and
Supply, Inc., Institutional Health Services, Inc., Care4 L.P., Concord Pharmacy Services, Inc., Compass
Health Services, Inc. and Encare of Massachusetts, Inc.
2.2(1) Asset Purchase Agreement dated October 11, 1997 among Genesis Health Ventures, Inc., The Multicare
Companies, Inc., Health Care Rehab Systems, Inc., Horizon Rehabilitation, Inc., Progressive
Rehabilitation Centers, Inc., and Total Rehabilitation Centers, L.L.C.
2.3(1) Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis
ElderCare Acquisition Corp., Genesis Health Ventures, Inc., and the Multicare Companies, Inc.
2.4(2) Agreement and Plan of Merger dated April 26, 1998, by and among Genesis Health Ventures, Inc., V
Acquisition Corp. and Vitalink Pharmacy Services, Inc.
2.5(19) Amendment Number One to the Plan of Merger dated as of July 7, 1998.
2.6(21) Restructuring Agreement dated October 8, 1999 among The Cypress Group L.L.C., TPG Partners II, L.P.,
Nazem, Inc., Genesis and the other signatories thereto.
3.1(3) The Company's Amended and Restated Articles of Incorporation.
3.2(4) The Company's Amended and Restated Bylaws.
3.3(20) Amendment to the Company's Articles of Incorporation, as filed on March 11, 1994, with the Secretary of
the Commonwealth of Pennsylvania.
3.4(11) Amendment to the Company's Articles of Incorporation, as filed on August 26, 1998, with the Secretary
of the Commonwealth of Pennsylvania.
3.5(21) Amendment to the Company's Amended and Restated Articles of Incorporation, as filed with the Secretary
of the Commonwealth of Pennsylvania.
4.1(3) Specimen of Common Stock Certificate.
4.2(6) Specimen of the Company's First Mortgage Bonds (Series A) due 2007.
4.3(7) Indenture of Mortgage and Deed of Trust, dated as of September 1, 1992, by and among the Company,
Delaware Trust Company and Richard N. Smith.
4.4(22) Rights Agreement between Genesis Health Ventures, Inc. and Mellon Securities Trust Company.
4.5(9) Indenture dated as of June 15, 1995 between the Company and Delaware Trust Company.
4.6(9) Specimen of the Company's 9-3/4% Senior Subordinated Debentures due 2005.
4.7(10) Indenture dated as of October 7, 1996 between the Company and First Union National Bank.
4.8(10) Specimen of the Company's 9-1/4% Senior Subordinated Notes due 2006.
4.9(11) Rights Agreement by and between Genesis Health Ventures, Inc. and Manor Care Inc. dated April 26, 1998.
4.10(11) Indenture dated as of December 23, 1998 between the Company and the Bank of New York.
4.11(11) Specimen of the Company's 9-7/8% Senior Subordinated Debentures due 2009 (Attached as Exhibit A-1 to
the Indenture dated December 23, 1998 between the Company and the Bank of New York attached hereto as
Exhibit 4.11).
4.12(21) Certificate of Designations for the Company's Series H Senior Convertible Participation Cumulative
Preferred Stock.
4.13(21) Certificate of Designations for the Company's Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock.
4.14(21) Form of Warrant issued in connection with the Multicare restructuring transaction.
+10.1(3) The Company's Employee Retirement Plan, adopted January 1, 1989, as amended and related Retirement Plan
Trust Agreement
+10.2(12) The Company's Amended and Restated Stock Option Plan.
+10.3(6) The Company's 1992 Stock Option Plan for Non-Employee Directors
+10.4(6) The Company's Incentive Compensation Program.
+10.5(6) The Company's Execuflex Plan, dated as of January 1, 1992, and related Trust Agreement, dated December
10, 1991.
+10.6(5) Lease dated January 5, 1989, as amended, by and between Towson Building Associates Limited Partnership
and Meridian Healthcare, Inc.
+10.7(5) Sublease dated November 30, 1993, by and between Meridian Healthcare, Inc. and Fairmount Associates, Inc.
+10.8(8) Agreement to Purchase Partnership Interests, made as of March 1 1996, by and among Meridian Health,
Inc., Fairmont Associates, Inc. and MHC Holding Company.
10.9(10) Guaranty and Agreement of Suretyship Regarding Obligations of Lessee and Affiliates from Genesis Health
Ventures, Inc. and its Material Subsidiaries, dated as of October 7, 1996.
10.10(10) Guaranty and Agreement of Suretyship from Genesis Health Ventures, Inc. and its Material Subsidiaries,
dated as of October 7, 1996.
10.11(10) Amended and Restated Lease and Agreement, dated as of October 7, 1996, between Mellon Financial
Services Corporation #4, as Lessor, and Genesis Eldercare Properties, Inc., as Lessee.
10.12(10) Amended and Restated Participation Agreement, dated as of October 7, 1996, among Genesis Eldercare
Properties, Inc., as Lessee, Mellon Financial Services Corporation #4, as Lessor, Persons Named on
Schedule I, as Lenders, and Mellon Bank, N.A. not in its individual capacity except as expressly stated
therein, but solely as Agent.
10.13(10) Management and Affiliation Agreement, dated as of August 31, 1996, by and between Genesis ElderCare
Network Services, Inc., the Company and AGE Institute of Florida, Inc.
10.14(10) Acquisition Loan and Security Agreement, dated as of August 31, 1996, between Genesis Health Ventures,
Inc. and AGE Institute of Florida, Inc.
10.15(14) Amended and Restated Lease Agreement dated as of October 7, 1996 between Mellon Financial Services
Corporation #4, as Lessor, and Genesis ElderCare Properties, Inc., as lessee.
10.16(14) Second Amendment to Amended and Restated Participation Agreement dated March 7, 1998 among Genesis
ElderCare Properties, Inc., as lessee, Mellon Financial Services Corporation #4, as lessor; various
financial institutions as lendors and Mellon Bank N.A., a national banking association as Agent for
Lessor and the Lendors.
10.17(15) Third Amended and Restated Credit Agreement dated October 9, 1997 to Genesis Health Ventures, Inc. from
Mellon Bank, N.A., Citicorp USA, Inc., First Union National Bank and NationsBank, N.A.
10.18(15) Credit Agreement dated October 14, 1997 to The Multicare Companies, Inc. from Mellon Bank, N.A.,
Citicorp USA, Inc., First Union National Bank and NationsBank, N.A.
+10.19(1) Management Agreement dated October 9, 1997 among The Multicare Companies, Inc., Genesis Health
Ventures, Inc. and Genesis ElderCare Network Services, Inc.
10.20(15) Stockholders' Agreement dated October 9, 1997 among Genesis ElderCare Corp., The Cypress Group L.L.C.,
TPG Partners II, L.P., Nazem, Inc. and Genesis Health Ventures, Inc.
10.21(15) Put/Call Agreement dated October 9, 1997 among The Cypress Group, L.L.C., TPG Partners, II, L.P.,
Nazem, Inc. and Genesis Health Ventures, Inc.
10.22(15) Letter Agreement dated June 16, 1997 between Genesis Health Ventures, Inc. and Sterns Associates.
10.23(16) Assignment and Assumption Agreement dated January 30, 1998 among Genesis Health Ventures, Inc., Capital
Corp. and AGE Institute of Florida.
10.24(16) Amended and Restated Promissory Note dated January 30, 1998 among Genesis Health Ventures, Inc. and, ET
Capital Corp. and AGE Institute of Florida.
10.25(17) Master Agreement for Infusion Therapy Products and Services, dated June 1, 1991.
10.26(18) Amendment to the Master Agreement for Infusion Therapy Products and Services, as amended on September
19, 1997 and April 26, 1998.
10.27(17) Master Pharmacy Consulting Agreement, dated June 1, 1991 and amended on September 19, 1997 and April
26, 1998
+10.28(18) Amendment to the Master Pharmacy Consulting Agreement, dated May 31, 1991 amended on September 19, 1997
and April 26, 1998.
10.29(17) Amendment to the Master Pharmacy Services Consulting Agreement, as amended on September 19, 1997 and
April 26, 1998.
10.30(17) Master Agreement for Pharmacy Services, dated June 1, 1991 and amended on September 19, 1997 and April
26, 1998.
10.31(18) Amendments to the Master Agreement for Pharmacy Services, as amended on September 19, 1997 and April
26, 1998.
+10.32(11) Employment Agreement between the Company and Michael R. Walker dated August 12, 1998.
+10.33(11) Employment Agreement between the Company and George V. Hager dated August 12, 1998.
+10.34(11) Employment Agreement between the Company and Richard R. Howard dated August 12, 1998.
+10.35(11) Employment Agreement between the Company and David C. Barr dated August 12, 1998.
+10.36(11) Employment Agreement between the Company and Maryann Timon dated November 11, 1998.
+10.37(11) Employment Agreement between the Company and Marc. D. Rubinger dated November 11, 1998.
+10.38(21) Amended and Restated Stockholders Agreement dated November 15, 1999 by and among Genesis ElderCare
Corp., The Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc., Genesis and the other signatories
thereto.
+10.39(21) Amended and Restated Put/Call Agreement dated November 15, 1999 by and among The Cypress Group L.L.C.,
TPG Partners II, L.P., Nazem, Inc., Genesis and the other signatories thereto.
+99.1(23) Fourth Amended and Restated Credit Agreement dated as of August 20, 1999 by and among Genesis, the
Subsidiaries of Genesis referred to on the signature pages thereto (and such other subsidiaries of
Genesis which may from time to time become Borrowers thereunder in accordance with the provisions
thereof) (collectively with Genesis, the "Borrowers"), the Lenders referred to on the signature pages
thereto (together with other lenders parties thereto from time to time, and their successors and
assigns, the "Lenders"), Mellon Bank, N.A., a national banking association as issuer of Letters of
Credit thereunder (in such capacity, together with its successors and assigns in such capacity, the
"Administrative Agent"), Citicorp USA, Inc. as Syndication Agent, First Union National Bank, a national
banking association as Documentation Agent, and Bank of America, N.A. (as successor to NationsBank,
N.A. and Bank of America, NT&SA), a national banking association as Syndication Agent.
+99.2(24) Forbearance Agreement, dated as of March 20, 2000 among Genesis Health Ventures, Inc., certain
Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of Credit,
Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA, Inc. as Syndication Agent, First
Union National Bank as Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders
and Secured Parties.
+99.3(25) Revolving Credit and Guaranty Agreement, dated as of June 22, 2000, among Genesis Health Ventures,
Inc., a Debtor-in-Possession under Chapter 11 of the Bankruptcy Code as Borrower and Mellon Bank, N.A.
as Administrative Agent and Arranger, First Union National Bank as Syndication Agent and Goldman Sachs.
Credit Partners, L.P., as Documentation Agent.
21 Subsidiaries of the Company
23 Consent of KPMG LLP
23.1 Consent of KPMG LLP
27 Financial Data Schedule
--------------------
+ Management contract or compensatory plan or arrangement
1) Incorporated by reference to Genesis Health Ventures, Inc.'s Current Report
on Form 8-K dated October 10, 1997.
2) Incorporated by reference to Form S-4, dated June 30, 1998 (File No.
333-58221)
3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-40007).
4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
6) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-51670).
7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992.
8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
9) Incorporated by reference to Form S-3, dated June 20, 1995 (File No.
33-9350).
10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ending September 30, 1998.
12) Incorporated by reference to Form S-8, dated May 19, 1998 (File No.
333-53043)
13) Incorporated by reference to the Company's Form 8-K dated November 30,
1993.
14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
15) Incorporated by reference to Amendment No. 7 to the Tender Offer Statement
on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare
Acquisition Corp. on June 20, 1997.
16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997.
17) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form
S-1/A, dated February 29, 1992 (File No. 33-43261).
18) Incorporated by reference to the Vitalink Pharmacy Services, Inc. Form 10-K
dated August 31, 1998 (File No. 001-12729)
19) Incorporated by reference to the Company's Amendment No. 1 to Form S-4
filed July 28, 1998 (333-58221).
20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
21) Incorporated by reference to the Company's Report on Form 8-K dated
November 15, 1999.
22) Incorporated by reference to the Company's Form 8-A filed May 11, 1995.
23) Incorporated by reference to the Company's Form 10-Q/A filed September 15,
1999.
24) Incorporated by reference to the Company's Form 10-Q filed May 15, 2000.
25) Incorporated by reference to the Company's Form 10-Q filed August 21, 2000.
(b) Reports on Form 8-K
None