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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of February 8, 1999: 35,227,886 shares of common stock
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TABLE OF CONTENTS
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Page
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS............................................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................21
Part II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................................22
Item 2. Changes in Securities.............................................................22
Item 3. Defaults Upon Senior Securities...................................................22
Item 4. Submission of Matters to a Vote of Security Holders...............................22
Item 5. Other Information.................................................................22
Item 6. Exhibits and Reports on Form 8-K..................................................22
SIGNATURES .........................................................................................23
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" such
as statements concerning Medicaid and Medicare programs and the Company's
ability to meet its liquidity needs and control costs, certain statements in
"Qualitative and Quantitative Disclosures about Market Risk", certain statements
in Notes to Unaudited Condensed Consolidated Financial Statements, such as
certain Pro Forma Financial Information; and other statements contained herein
regarding matters which are not historical facts are forward looking statements
(as such term is defined in the Securities Act of 1933) and because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward looking statements. Factors that
could cause actual results to differ materially include, but are not limited to
those discussed below:
1. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, implementation of the
Medicare prospective payment system and consolidated billing and other
changes in applicable government regulations that might affect the
profitability of the Company.
2. The Company's substantial indebtedness and significant debt service
obligations.
3. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
4. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and, in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
5. The occurrence of changes in the mix of payment sources utilized by the
Company's customers to pay for the Company's services.
6. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
7. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and
changes in the regulatory system, such as changes in certificate of need
laws in the states in which the Company operates or anticipates operating
in the future that facilitate such competition.
8. The Company's ability to identify suitable acquisition candidates, to
consummate or complete development projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
9. The Company's and its payors' and suppliers' ability to implement a Year
2000 readiness program.
These and other factors have been discussed in more detail in the Company's
periodic reports, including its Annual Report on Form 10-K as amended for the
fiscal year ended September 30, 1998.
1
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, September 30,
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1998 1998
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Assets
<S> <C> <C>
Current assets:
Cash and equivalents $ 8,901 $ 4,902
Investments in marketable securities 24,186 26,658
Accounts receivable, net 405,482 376,023
Cost report receivables 63,861 62,257
Inventory 66,703 63,760
Prepaid expenses and other current assets 34,578 40,579
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Total current assets 603,711 574,179
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Property, plant, and equipment, net 608,692 596,562
Notes receivable and other investments 49,785 47,623
Other long-term assets 77,706 73,904
Investments in unconsolidated affiliates 356,149 344,567
Goodwill and other intangibles, net 974,635 990,533
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Total assets $ 2,670,678 $ 2,627,368
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Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 34,160 $ 49,712
Accounts payable and accrued expenses 192,260 218,749
Income taxes payable 4,427 -
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Total current liabilities 230,847 268,461
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Long-term debt 1,439,457 1,358,595
Deferred income taxes 69,357 72,828
Deferred gain and other long-term liabilities 50,959 52,412
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 590,253 issued and outstanding at December 31,
1998 and September 30, 1998 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,227,449 and 35,181,848 at December 31, 1998;
35,225,731 and 35,180,130 at September 30, 1997 704 704
Additional paid-in capital 749,500 749,491
Retained earnings 129,601 124,430
Accumulated other comprehensive income 490 684
Treasury stock, at cost (243) (243)
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Total shareholders' equity 880,058 875,072
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Total liabilities and shareholders' equity $ 2,670,678 $ 2,627,368
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
2
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Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
( in thousands, except share and per share data)
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<CAPTION>
Three months ended
December 31,
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1998 1997
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Net revenues:
Pharmacy and medical supply services $ 236,217 $ 68,696
Inpatient services 176,032 180,805
Other revenue 66,955 53,064
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Total net revenues 479,204 302,565
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Operating expenses:
Operating expenses 393,082 233,342
General corporate expense 14,968 12,037
Depreciation and amortization 17,807 11,686
Lease expense 6,367 6,643
Interest expense, net 27,323 19,643
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Earnings before income taxes, equity in net income (loss)
of unconsolidated affiliates and extraordinary items 19,657 19,214
Income taxes 7,378 7,013
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Earnings before equity in net income (loss) of unconsolidated
affiliates and extraordinary items 12,279 12,201
Equity in net income (loss) of unconsolidated affiliates (892) 621
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Earnings before extraordinary items 11,387 12,822
Extraordinary items, net of tax (1,799) (1,924)
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Net income 9,588 10,898
Preferred stock dividend 4,417 -
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Net income available to common shareholders $ 5,171 $ 10,898
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Per common share data:
Basic
Earnings before extraordinary items $ 0.20 $ 0.37
Net income $ 0.15 $ 0.31
Weighted average shares of common stock and equivalents 35,217,418 35,079,426
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Diluted
Earnings before extraordinary items $ 0.20 $ 0.36
Net income $ 0.15 $ 0.31
Weighted average shares of common stock and equivalents 35,380,732 35,594,481
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
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Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,170 $ 10,898
Net charges included in operations not requiring funds 21,880 14,644
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (29,459) (12,312)
Accounts payable and accrued expenses (22,364) (8,622)
Other, net 911 (527)
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Net cash provided by (used in) operations $ (23,862) $ 4,081
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Cash flows from investing activities:
Capital expenditures (17,551) (10,925)
Payments for acquisitions and related costs, net of cash acquired (4,125) (41,174)
Investments in unconsolidated affiliates (12,474) (326,641)
Cash paid for assets held for sale - (20,109)
Sale of marketable securities 2,472 -
Notes receivable and other investment
and other asset additions, net (2,692) (12,805)
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Net cash used in investing activities (34,370) (411,654)
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Cash flows from financing activities:
Net borrowings (repayments) under working capital revolving credit facility 65,539 (164,800)
Repayment of long term debt and payment of sinking fund requirements (120,429) (1,973)
Proceeds from issuance of long-term debt 120,200 600,000
Debt issuance costs (3,088) (19,648)
Purchase of common stock call options - (4,442)
Stock options exercised 9 313
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Net cash provided by financing activities 62,231 409,450
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Net increase in cash and equivalents: 3,999 1,877
Cash and equivalents
Beginning of period 4,902 11,651
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End of period $ 8,901 $ 13,528
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Supplemental disclosure of cash flow information:
Interest paid $ 35,660 $ 22,550
Income taxes paid $ 186 $ -
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
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GENESIS HEATLH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 1998. The information furnished is unaudited but reflects
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial information for the periods shown. Such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results expected for the full year. Certain prior
period balances have been reclassified to conform with the current period
presentation.
2. Long-Term Debt
Genesis entered into a credit agreement pursuant to which the lenders provided
Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the
"Credit Facility") for the purpose of: refinancing certain existing indebtedness
of Genesis; funding interest and principal payments on the facilities and
certain remaining indebtedness; funding permitted acquisitions; funding Genesis'
commitments in connection with the Vitalink Transaction; and funding Genesis'
and its subsidiaries' working capital for general corporate purposes, including
fees and expenses of the transactions. The Credit Facility consists of three
term loans with original balances of $200,000,000 each (collectively, the "Term
Loans"), a $650,000,000 revolving credit loan (the "Revolving Facility"), which
includes one or more Swing Loans (collectively, the "Swing Loan Facility") in
integral principal multiples of $500,000 up to an aggregate unpaid principal
amount of $20,000,000. The Term Loans amortize in quarterly installments
beginning in Fiscal 1998 through 2005, of which $21,419,000 is payable in Fiscal
1999. The Term Loans consist of (i) a six year term loan with an outstanding
balance of $130,525,000 at December 31, 1998 (the "Tranche A Term Facility");
(ii) a seven year term loan with an outstanding balance of $153,687,000 (the
"Tranche B Term Facility"); and (iii) an eight year term loan with an
outstanding balance of $173,450,000 (the "Tranche C Term Facility"). The
Revolving Facility becomes payable in full on September 30, 2003. The third
amendment to the Credit Facility, dated December 15, 1998, made the financial
covenants for certain periods less restrictive, permitted a portion of the
proceeds of subordinated debt offerings to repay indebtedness under the
Revolving Facility and increased the interest rates applying to the Term Loans
and the Revolving Facility. The revised financial covenants accommodate the
projected impact of PPS beginning in fiscal 1999 and the non-cash charges in the
fourth quarter of fiscal 1998.
The Credit Facility is secured by a first priority security interest in all of
the stock, partnership interests and other equity of all of Genesis' present and
future subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries. Loans under the Credit Facility bear, at
Genesis' option, interest at the per annum Prime Rate as announced by the
administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin (the "Annual Applicable Margin") that is dependent upon a
certain financial ratio test. Loans under the Tranche A Term Facility and
Revolving Facility have an Annual Applicable Margin of .75% for Prime Rate loans
and 2.5% (an effective rate of 7.90% at December 31, 1998) for LIBO Rate loans.
Loans under the Tranche B Term Facility have an Annual Applicable Margin of
1.25% for Prime Rate loans and 3.0% (an effective rate of 8.40% at December 31,
1998) for LIBO Rate loans. Loans under the Tranche C Term Facility have an
Annual Applicable Margin of 1.5% for Prime Rate loans and 3.25% (an effective
rate of 8.65% at December 31, 1998) for LIBO Rate loans. Loans under the Swing
Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial ratios, the above referenced
interest rates are reduced.
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of Genesis and its subsidiaries to dispose of assets, incur
additional indebtedness, make loans and investments, pay dividends, engage in
5
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mergers or consolidations, engage in certain transactions with affiliates and
change control of capital stock, and to make capital expenditures; prohibit the
ability of Genesis and its subsidiaries to prepay debt to other persons, make
material changes in accounting and reporting practices, create liens on assets,
give a negative pledge on assets, make acquisitions and amend or modify
documents; causes Genesis and its affiliates to maintain the Management
Agreement, the Put/Call Agreement, as defined, and corporate separateness; and
will cause Genesis to comply with the terms of other material agreements, as
well as comply with usual and customary covenants for transactions of this
nature.
In December 1998, the Company issued $125,000,000, 9 7/8% Senior Subordinated
Notes due 2009 at a price of 96.1598% resulting in net proceeds of $120,200,000.
Interest on the notes is payable semi-annually on January 15 and July 15 of each
year, commencing July 15, 1999. Approximately $59,900,000 of the net proceeds
were used to repay portions of the Tranche A, B and C Term Facilities and
approximately $59,900,000 of the net proceeds were used to repay a portion of
the Revolving Facility.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share applicable to common shares: (amounts are in thousands except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
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<S> <C> <C>
Basic Earnings Per Share:
Income before extraordinary items $ 6,970 $ 12,822
Extraordinary items (1,799) (1,924)
-------- --------
Net income available to common shareholders $ 5,171 $ 10,898
-------- --------
Weighted average shares 35,217 35,079
-------- --------
Earnings per share before extraordinary items $ 0.20 $ 0.37
-------- --------
Earnings per share $ 0.15 $ 0.31
-------- --------
Diluted Earnings Per Share:
Income before extraordinary items $ 6,970 $ 12,822
Extraordinary items (1,799) (1,924)
-------- --------
Net income available to common shareholders $ 5,171 $ 10,898
-------- --------
Weighted Average Shares & Common Stock Equivalents:
Common shares 35,217 35,079
Dilutive effect of unexcercised stock options 164 515
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Total 35,381 35,594
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Earnings per share before extraordinary items $ 0.20 $ 0.36
-------- --------
Earnings per share $ 0.15 $ 0.31
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</TABLE>
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4. Pro Forma Financial Information
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 "Genesis Preferred"), (ii) $22.50 in cash,
or (iii) a combination of cash and shares of Genesis 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 Genesis Preferred. The Genesis Preferred has a face value of
approximately $295,100,000 and an initial dividend of 5.9375% and generally is
not transferable without the consent of the Company. The Genesis 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. As a result of the
merger, Genesis assumed approximately $87,000,000 of indebtedness Vitalink had
outstanding. The cash portion of the purchase price was funded through
borrowings under the Credit Facility. The Vitalink Transaction is being
accounted for under the purchase method and the related goodwill is being
amortized over a forty year period.
Genesis entered into a stock purchase agreement with Multicare and certain
subsidiaries pursuant to which Genesis acquired all of the outstanding capital
stock and limited partnership interests of certain subsidiaries of Multicare
that are engaged in the business of providing institutional pharmacy services to
third parties for $50,000,000 (the "Pharmacy Purchase"), subject to adjustment.
The Company completed the Pharmacy Purchase effective January 1, 1998, which was
accounted for under the purchase method and the related goodwill is being
amortized over forty years.
The following unaudited pro forma statement of operations information gives
effect to the Vitalink Transaction and the Pharmacy Purchase as though they had
occurred on October 1, 1997, after giving effect to certain adjustments,
including recognition of goodwill amortization, additional depreciation expense
and increased interest expense on debt related to the transaction. The pro forma
financial information, which includes preliminary allocations of purchase price
to goodwill and property, plant and equipment that are subject to change, does
not necessarily reflect the results of operations that would have occurred had
the transactions occurred at the beginning of period presented.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended
Pro Forma Statement of Operations Information: December 31, 1997
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Total net revenue $ 446,298
Income before extraordinary items 11,092
Net income 9,168
Earnings per share, before extraordinary items, diluted 0.31
Earnings per share, diluted $ 0.26
</TABLE>
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5. Summary Financial Information of Unconsolidated Affiliate
The following unaudited summary financial data for the Multicare Companies is as
of, and for the three months ended, December 31, 1998. Multicare is the
Company's only material unconsolidated affiliate.
(in thousands)
December 31, 1998
--------------------
Total assets $ 1,711,274
Long-term debt 735,522
Total liabilities $ 980,614
Three Months Ended
December 31, 1998
--------------------
Revenues $ 168,484
Net loss $ (2,578)
6. Comprehensive Income
In October 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of Statement 130 had no impact on the
Company's net income available to common shareholders. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities be
included in other comprehensive income. The following table sets forth the
computation of comprehensive income (amounts are in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
----------------------- -----------------------
<S> <C> <C>
Net income available to common shareholders $ 5,171 $10,898
Unrealized gain (loss) on marketable securities (194) 89
----------------------- -----------------------
Total comprehensive income $ 4,977 $10,987
----------------------- -----------------------
</TABLE>
Accumulated other comprehensive income, which is composed of net unrealized
gains and losses on marketable securities, was $490,000 and $185,000 at December
31, 1998 and 1997, respectively.
8
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its efforts on
providing an expanding array of specialty medical services to elderly customers.
The Company generates revenues from three sources: pharmacy and medical supply
services, inpatient services and other revenue.
The Company provides pharmacy and medical supply services through its
NeighborCare (SM) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of infusion therapy, medical supplies and equipment provided to
eldercare centers it operates, as well as to independent healthcare providers by
contract. The 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. The Company's institutional pharmacy
and medical supply services were developed to provide the products and support
services required in the healthcare market. Institutional pharmacy services are
designed to help assure quality of care and to control costs at the facilities
served. Medical supply services are designed to assure availability and control
through maintenance of a comprehensive inventory, extensive delivery services
and special ordering and tracking systems. The Company also provides pharmacy
consulting services to assure proper and effective drug therapy. The Company
provides these services through 79 institutional pharmacies (of which one is
jointly-owned) and 14 distribution centers located in its various market areas.
In addition, the Company operates 33 community-based pharmacies which are
located in or near medical centers, hospitals and physician office complexes.
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies, as well as personal service and
consultation by licensed professional pharmacists. Approximately 89% of the
sales attributable to all pharmacy operations in Fiscal 1998 were generated
through external contracts with independent healthcare providers with the
balance attributable to centers owned or leased by the Company.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at its 113 owned and
leased eldercare centers. The 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 employs a Medical Director
to supervise the delivery of healthcare services to residents and a Director of
Nursing to supervise the nursing staff. The Company maintains a corporate
quality assurance program to monitor regulatory compliance and to enhance the
standard of care provided in each center.
The Company includes the following in other revenues: rehabilitation therapy,
management fees, capitation fees, homecare services, physician services,
transportation services, diagnostic services, hospitality services, group
purchasing fees and other healthcare related services.
Certain Transactions
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
9
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to receive (i) .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Genesis Preferred"), (ii) $22.50 in cash,
or (iii) a combination of cash and shares of Genesis 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 Genesis Preferred. The Genesis Preferred has a face
value of approximately $295,100,000 and an initial dividend of 5.9375% and
generally is not transferable without the consent of the Company. The Genesis
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. As a
result of the merger, Genesis assumed approximately $87,000,000 of indebtedness
Vitalink had outstanding. The cash portion of the purchase price was funded
through borrowings under the Credit Facility. See "Liquidity and Capital
Resources."
Pursuant to four agreements with HCR-Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR-Manor Care (the
"Service Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR-Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004, subject to annual renewals
provided therein.
New Courtland
On July 14, 1998, the Company announced that it received notice from
NewCourtland, Inc. ("NewCourtland"), owner of eight nursing centers in the
Philadelphia area, of the termination of its management agreements for these
centers effective July 31, 1998. This notice follows the revocation on June 25,
1998 of the operating license at one of the NewCourtland centers. The center had
a long-standing history of regulatory compliance difficulties dating back many
years prior to Genesis' management. The Company believes that the termination
notice was inappropriate and has instituted suit against NewCourtland and other
related parties to recover unpaid balances due Genesis, the estimated future
operating profits of the terminated management agreements, as well as
consequential damages. The annualized revenue from the contracts is
approximately $3,800,000.
ElderTrust Transactions
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Genesis received an
additional $14,000,000 from the sale of a loan and two additional assisted
living facilities and the recoupment of amounts advanced and expenses incurred
in connection with the formation of ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000,000 which has been
deferred and is being amortized over the ten year term of the lease contracts
with ElderTrust. Additionally, ElderTrust has funded approximately $14,200,000
of a $15,100,000 commitment to finance the development and expansion of three
additional assisted living facilities. Genesis repaid a portion of the revolving
credit component of the Credit Facility with the proceeds from these
transactions. In September 1998, 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 $44,000,000,
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. The Company also
anticipates entering into transactions with ElderTrust in the future.
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Multicare Transaction
In October 1997, Genesis ElderCare Corp., a Delaware Corporation owned 43.6% by
Genesis and the remainder by The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired The Multicare
Companies, Inc. ("Multicare"), pursuant to a tender offer (the "Tender Offer")
and the merger (the "Merger" or the "Multicare Transaction"). Multicare is in
the business of providing eldercare and specialty medical services in selected
geographic regions. Included among the operations acquired by Genesis ElderCare
Corp. are operations relating to the provision of (i) eldercare services
including skilled nursing care, assisted living, Alzheimer's care and related
support activities traditionally provided in eldercare facilities, (ii)
specialty medical services consisting of (1) sub-acute care such as ventilator
care, intravenous therapy and various forms of coma, pain and wound management
and (2) rehabilitation therapies such as occupational, physical and speech
therapy and stroke and orthopedic rehabilitation and (iii) management services
and consulting services to eldercare centers.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for
its services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of (i) $1,991,666 and (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare will be paid by Multicare. 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 subject to adjustment (the "Therapy Purchase") and a stock purchase
agreement (the "Pharmacy Purchase Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis acquired all of the outstanding capital
stock and limited partnership interests of certain subsidiaries of Multicare
that are engaged in the business of providing institutional pharmacy services to
third parties for $50,000,000 (the "Pharmacy Purchase"), subject to adjustment.
The Company completed the Pharmacy Purchase effective January 1, 1998. The
Company completed the Therapy Purchase in October 1997.
In addition, Genesis, Cypress, TPG and Nazem entered into an agreement (the
"Put/Call Agreement") pursuant to which, among other things, Genesis has the
option, on the terms and conditions set forth in the Put/Call Agreement to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter,
at a price determined pursuant to the terms of the Put/Call Agreement. Cypress,
TPG and Nazem have the option, on the terms and conditions set forth in the
Put/Call Agreement, to require Genesis to purchase (the "Put") such Genesis
ElderCare Corp. common stock commencing on October 9, 2002 and for a period of
one year thereafter, at a price determined pursuant to the Put/Call Agreement.
Genesis Eldercare Corp. paid approximately $1,492,000,000 to (i) purchase the
Multicare Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and
expenses incurred in connection with the completion of the Tender Offer, Merger
and the financing transactions in connection with therewith, (iii) refinance
certain indebtedness of Multicare and (iv) make certain cash payments to
employees. Of the funds required to finance the foregoing, approximately
$745,000,000 were furnished as capital contributions by the Genesis Eldercare
Corp. from the sale of its common stock to Cypress, TPG, Nazem and Genesis.
Cypress, TPG and Nazem purchased shares of Genesis ElderCare Corp. common stock
for a purchase price of $210,000,000, $199,500,000 and $10,500,000,
respectively, and Genesis purchased shares of Genesis ElderCare Corp. common
stock for a purchase price of $325,000,000 in consideration for 43.6% of the
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common stock of Genesis ElderCare Corp. The balance of the funds necessary to
finance the foregoing came from (i) the proceeds of loans from a syndicate of
lenders in the aggregate amount of $525,000,000 and (ii) $246,800,000 of bridge
financing which was refinanced upon completion of the sale of 9% Senior
Subordinated Notes due 2007 sold by a subsidiary of Genesis ElderCare Corp. on
August 11, 1997.
Results of Operations
Three months ended December 31, 1998 compared to three months ended December 31,
1997
The Company's total net revenues for the quarter ended December 31, 1998 were
$479,204,000 compared to $302,565,000 for the quarter ended December 31, 1997,
an increase of $176,639,000 or 58%. Pharmacy and medical supply service revenue
increased $167,521,000 to $236,217,000 from $68,696,000, of which approximately
$128,700,000 is attributed to the Vitalink Transaction, approximately
$20,700,000 is attributed to the Multicare Pharmacy Purchase, and the remaining
increase of $18,121,000 is primarily due to other volume growth in the
institutional, medical supply and community based pharmacies. Inpatient service
revenue declined $4,773,000 or 3% to $176,032,000 from $180,805,000, attributed
principally to the Company's October 1, 1998 implementation of the Medicare
Prospective Payment System ("PPS") and an overall decline in census. Under PPS,
the average Medicare rate per day was reduced to approximately $305 per patient
day during the quarter ended December 31, 1998 compared to approximately $364
per patient day for the comparable period last year. There were 121,466 Medicare
patient days during the quarter ended December 31, 1998 compared to 123,161 days
for the comparable period last year. Total patient days declined approximately
9,000 patient days to 1,251,000 during the quarter ended December 31, 1998
compared to 1,260,000 patient days during the comparable period last year. The
decline in overall census is principally attributed to survey and other
regulatory matters at several of the Company's eldercare centers which the
Company believes have been resolved. Other revenues increased approximately
$13,900,000 from $53,064,000 to $66,955,000. This increase is attributed to
growth in capitation fees earned, rehabilitation revenues and other service
related businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $408,050,000 for the quarter ended December
31, 1998 compared to $245,379,000 for the quarter ended December 31, 1997, an
increase of $162,671,000 or 66%, of which approximately $106,000,000 is
attributed to the Vitalink Transaction, approximately $14,700,000 is attributed
to the Multicare Pharmacy Purchase, and the remaining increase of $41,971,000 is
attributed to growth in the institutional pharmacy, medical supply and contract
therapy divisions, capitated expenses, as well as increased costs of
community-based programs.
Increased depreciation and amortization expense of $6,121,000 is attributed to
the depreciation of fixed assets and amortization of goodwill and deferred
financing costs in connection with the Multicare Pharmacy Purchase and the
Vitalink Transaction.
Interest expense increased $7,680,000 or 39%. This increase in interest expense
was primarily due to additional borrowings used to finance the Multicare
Pharmacy Purchase, the Vitalink Transaction, and an increase in the Company's
weighted average borrowing rate on the Credit Facility. This increase is offset
by interest savings as a result of the repayment of indebtedness from proceeds
received in connection with the ElderTrust Transactions.
In connection with the early repayment and restructuring of debt in the quarters
ended December 31, 1998 and 1997, the Company 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 the quarter ended December 31, 1998, the Company accrued $4,417,000 of
dividends on the Genesis Preferred issued in connection with the Vitalink
Transaction.
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Liquidity and Capital Resources
General
Working capital increased $67,146,000 to $372,864,000 at December 31, 1998 from
$305,718,000 at September 30, 1998. Accounts receivable increased approximately
$29,459,000 during this period, of this increase approximately $6,000,000
relates to the impact of a rehabilitation services agreement entered into during
the current quarter and the remaining increase is principally due to the
continuing shift in business mix to ancillary services, particularly the home
medical equipment and infusion therapy lines of business, which typically have a
longer collection period. As a result, days revenue in accounts receivable
increased approximately seven days to 77 days for the quarter ended December 31,
1998 compared to the quarter ended September 30, 1998. Accounts payable and
accrued expenses declined during the quarter ending December 31, 1998,
principally due to the timing of routine operating payments, including interest
and compensation related costs. As a result of the growth in accounts receivable
and the timing of payments, the Company's use of cash flow from operations for
the three months ended December 31, 1998 was approximately $23,900,000 compared
to a source of cash of approximately $4,100,000 for the three months ended
December 31, 1997.
Investing activities for the three months ended December 31, 1998 include
approximately $17,600,000 of capital expenditures primarily related to the
development of assisted living facilities, betterments and expansion of existing
eldercare centers and investment in data processing hardware and software. The
additional investment in unconsolidated affiliates of approximately $12,500,000
during the December 1998 quarter represents the Company's limited partnership
investment in four assisted living properties with which it has entered into a
management contract, and four assisted living properties under development which
it will manage upon completion of construction. During the three months ended
December 31, 1998, other long term assets increased approximately $3,802,000,
principally due to subordinated management fees due from Multicare.
The Vitalink and ElderTrust Transactions
The total 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 Genesis
Preferred. As a result of the merger, Genesis assumed approximately $87,000,000
of indebtedness Vitalink had outstanding. The Genesis Preferred has a face value
of approximately $295,100,000 and an initial dividend of 5.9375% and generally
is not transferable without the consent of the Company. The Genesis Preferred is
convertible into 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 levels and after April 26, 2002, subject to a market-based call premium.
The cash portion of the purchase price was funded through borrowings under the
Credit Facility.
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Genesis received an
additional $14,000,000 from the sale of a loan and two additional assisted
living facilities and the recoupment of amounts advanced and expenses incurred
in connection with the formation of ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000,000 which has been
deferred and is being amortized over the ten year term of the lease contracts
with ElderTrust. Additionally, ElderTrust has funded approximately $14,200,000
of a $15,100,000 commitment to finance the development and expansion of three
additional assisted living facilities. Genesis repaid a portion of the revolving
credit component of its Credit Facility with the proceeds from these
transactions. 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 $44,000,000,
including $35,500,000 in cash and an $8,500,000 note. As part of the
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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. The Company also
anticipates entering into transactions with ElderTrust in the future.
Credit Facility
Genesis entered into a credit agreement pursuant to which the lenders provided
Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the
"Credit Facility") for the purpose of: refinancing certain existing indebtedness
of Genesis; funding interest and principal payments on the facilities and
certain remaining indebtedness; funding permitted acquisitions; funding Genesis'
commitments in connection with the Vitalink Transaction; and funding Genesis'
and its subsidiaries' working capital for general corporate purposes, including
fees and expenses of the transactions. The Credit Facility consists of three
term loans with original balances of $200,000,000 each (collectively, the "Term
Loans"), a $650,000,000 revolving credit loan (the "Revolving Facility"), which
includes one or more Swing Loans (collectively, the "Swing Loan Facility") in
integral principal multiples of $500,000 up to an aggregate unpaid principal
amount of $20,000,000. The Term Loans amortize in quarterly installments
beginning in Fiscal 1998 through 2005, of which $21,419,000 is payable in Fiscal
1999. The Term Loans consist of (i) a six year term loan with an outstanding
balance of $130,525,000 at December 31, 1998 (the "Tranche A Term Facility");
(ii) a seven year term loan with an outstanding balance of $153,687,000 (the
"Tranche B Term Facility"); and (iii) an eight year term loan with an
outstanding balance of $173,450,000 (the "Tranche C Term Facility"). The
Revolving Facility becomes payable in full on September 30, 2003. The third
amendment to the Credit Facility, dated December 15, 1998, made the financial
covenants for certain periods less restrictive, permitted a portion of the
proceeds of subordinated debt offerings to repay indebtedness under the
Revolving Facility and increased the interest rates applying to the Term Loans
and the Revolving Facility. The revised financial covenants accommodate the
projected impact of PPS beginning in fiscal 1999 and the non-cash charges in the
fourth quarter of fiscal 1998.
The Credit Facility is secured by a first priority security interest in all of
the stock, partnership interests and other equity of all of Genesis' present and
future subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries. Loans under the Credit Facility bear, at
Genesis' option, interest at the per annum Prime Rate as announced by the
administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin (the "Annual Applicable Margin") that is dependent upon a
certain financial ratio test. Loans under the Tranche A Term Facility and
Revolving Facility have an Annual Applicable Margin of .75% for Prime Rate
loans and 2.5% (an effective rate of 7.90% at December 31, 1998) for LIBO Rate
loans. Loans under the Tranche B Term Facility have an Annual Applicable Margin
of 1.25% for Prime Rate loans and 3.0% (an effective rate of 8.40% at December
31,, 1998) for LIBO Rate loans. Loans under the Tranche C Term Facility have an
Annual Applicable Margin of 1.5% for Prime Rate loans and 3.25% (an effective
rate of 8.65% at December 31, 1998) for LIBO Rate loans. Loans under the Swing
Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial ratios, the above referenced
interest rates are reduced.
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of Genesis and its subsidiaries to dispose of assets, incur
additional indebtedness, make loans and investments, pay dividends, engage in
mergers or consolidations, engage in certain transactions with affiliates and
change control of capital stock, and to make capital expenditures; prohibit the
ability of Genesis and its subsidiaries to prepay debt to other persons, make
material changes in accounting and reporting practices, create liens on assets,
give a negative pledge on assets, make acquisitions and amend or modify
documents; causes Genesis and its affiliates to maintain the Management
Agreement, the Put/Call Agreement, as defined, and corporate separateness; and
will cause Genesis to comply with the terms of other material agreements, as
well as comply with usual and customary covenants for transactions of this
nature.
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In December 1998, the Company issued $125,000,000, 9 7/8% Senior Subordinated
Notes due 2009, at a price of 96.1598% resulting in net proceeds of
$120,200,000. Interest on the notes is payable semi-annually on January 15 and
July 15 of each year, commencing July 15, 1999. Approximately $59,900,000 of the
net proceeds were used to repay portions of the Tranche A, B and C Term
Facilities and approximately $59,900,000 of the net proceeds were used to repay
a portion of the Revolving Facility.
The Multicare Transaction
In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare Corp.
Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and
for a period of 270 days thereafter, at a price determined pursuant to the terms
of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the
terms and conditions set forth in the Put/Call Agreement, to require Genesis to
purchase (the "Put") such Genesis ElderCare Corp. common stock commencing on
October 9, 2002 and for a period of one year thereafter, at a price determined
pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis
ElderCare Corp. common stock, plus a portion of the Genesis pharmacy business
(the "Calculated Equity Value"). The Calculated Equity Value will be determined
based upon a multiple of Genesis ElderCare Corp.'s earnings before interest,
taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR")
after deduction of certain liabilities, plus a portion of the EBITDAR related to
the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend
on whether the Put or the Call is being exercised. Any payment to Cypress, TPG
or Nazem under the Call or the Put may be in the form of cash or Genesis common
stock at Genesis' option.
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. common stock
will be determined on the basis set forth in the Put/Call Agreement which
provides generally for additional Calculated Equity Value of Genesis ElderCare
Corp. to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of
the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress,
TPG or Nazem; and any payment to Cypress, TPG or Nazem will be limited to
Cypress' TPG's or Nazem's share of the Calculated Equity Value based upon a
formula set forth in the terms of the Put/Call Agreement.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis, an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement, dated
October 9, 1997, by and among the Company, Genesis ElderCare Corp., Cypress, TPG
and Nazem, and Management Agreement and to control the sale or liquidation of
Genesis ElderCare Corp. In the event of such sale, the proceeds from such sale
will be distributed among the parties as contemplated by the formula for the Put
option exercise price and Cypress, TPG and Nazem will retain a claim against
Genesis for the difference, if any, between the proceeds of such sale and the
put option exercise price. In the event of a bankruptcy or change of control of
Genesis, the option price shall be payable solely in cash provided any such
payment will be subordinated to the payment of principal and interest under the
Credit Facility.
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Legislative and Regulatory Issues
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which has adversely impacted the
Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Implementation of the Company's
strategy to expand specialty medical services to independent providers should
reduce the impact of changes in the Medicare and Medicaid reimbursement programs
on the Company as a whole. 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 the Company.
Pursuant to the Balanced Budget Act of 1997 (the "Balance Budget Act")
commencing with cost reporting periods beginning on July 1, 1998, PPS began to
be phased in for skilled nursing facilities at a per diem rate for all covered
Part A skilled nursing facility services as well as many services for which
payment may be made under Part B when a beneficiary who is a resident of a
skilled nursing facility receives covered skilled nursing facility care. The
consolidated per diem rate is adjusted based upon the resource utilization group
("RUG"). In addition to covering skilled nursing facility services, this
consolidated payment will also cover rehabilitation and non-rehabilitation
ancillary services. Physician services, certain nurse practitioner and physician
assistant services, among others, are not included in the per diem rate. For the
first three cost reporting periods beginning on or after July 1, 1998, the per
diem rate will be based on a blend of a facility specific-rate and a federal per
diem rate. In subsequent periods, and for facilities first receiving payments
for Medicare services on or after October 1, 1995, the federal per diem rate
will be used without any facility specific blending.
The Balanced Budget Act also required consolidated billing for skilled nursing
facilities. Under the Balanced Budget Act, the skilled nursing facility must
submit all Medicare claims for Part A and Part B services received by its
residents with the exception of physician, nursing, physician assistant and
certain related services, even if such services were provided by outside
suppliers. Medicare will pay the skilled nursing facilities directly for all
services on the consolidated bill and outside suppliers of services to residents
of the skilled nursing facilities must collect payment from the skilled nursing
facility. Although consolidated billing was scheduled to begin July 1, 1998 for
all services, it has been delayed until further notice for beneficiaries in a
Medicare Part A stay in a skilled nursing facility not yet using PPS and for the
Medicare Part B stay. There can be no assurance that the Company will be able to
provide skilled nursing services at a cost below the established Medicare level.
Effective April 10, 1998, regulations were adopted by the Health Care Financing
Administration, which revise the methodology for determining the reasonable cost
for contract therapy services, including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. Under the regulations, the
reasonable costs for contract therapy services are limited to
geographically-adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect.
The Balanced Budget Act also repealed the Boren Amendment federal payment
standard for Medicaid payments to Medicaid nursing facilities effective October
1, 1997. The Boren Amendment required Medicaid payments to certain health care
providers to be reasonable and adequate in order to cover the costs of
efficiently and economically operated health care facilities. States must now
use a public notice and comment period in order to determine rates and provide
interested parties a reasonable opportunity to
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comment on proposed rates and the justification for and the methodology used in
calculating such rates. There can be no assurance 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 law also grants greater flexibility to states
to establish Medicaid managed care projects without the need to obtain a federal
waiver. Although these waiver projects generally exempt institutional care,
including nursing facilities and institutional pharmacy services, no assurances
can be given that these projects ultimately will not change the reimbursement
system for long-term care, including pharmacy services from fee-for-service to
managed care negotiated or capitated rates. The Company anticipates that federal
and state governments will continue to review and assess alternative health care
delivery systems and payment methodologies.
In July 1998, the Clinton Administration issued a new initiative to promote the
quality of care in nursing homes. This initiative includes, but is not limited
to (i) increased enforcement of nursing home safety and quality regulations;
(ii) increased federal oversight of state inspections of nursing homes; (iii)
prosecution of egregious violations of regulations governing nursing homes; (iv)
the publication of nursing home survey results on the Internet; and (v)
continuation of the development of the Minimum Data Set ("MDS"), a national
automated clinical data system. Accordingly, with this new initiative, it may
become more difficult for eldercare facilities to maintain licensing and
certification. The Company may experience increased costs in connection with
maintaining its licenses and certifications as well as increased enforcement
actions. In addition, beginning January 1, 1999, outpatient therapy services
furnished by a skilled nursing facility to a resident not under a covered Part A
stay or to non-residents who receive outpatient rehabilitation services will be
paid according to the Medicare Physician Fee Schedule.
Anticipated Impact of Healthcare Reform
Based upon assumptions, the Company estimates that the adverse revenue impact of
PPS in Fiscal 1999 will be approximately $28,000,000 on the Genesis centers and
approximately $18,000,000 on the Multicare centers. In each of Fiscal 2000-2002,
the Company estimates the adverse revenue impact of PPS on its Genesis centers
will approximate an additional $8,000,000. The Company estimates that the
adverse revenue impact of PPS on the Multicare eldercare centers will be
approximately an additional $13,000,000 in Fiscal 2000 and an additional
$5,000,000 in each of Fiscal 2001 and 2002. The Genesis eldercare centers began
implementation of PPS on October 1, 1998 and the majority of the Multicare
eldercare centers began implementation of PPS on January 1, 1999. The actual
impact of PPS on the Company's earnings in Fiscal 1999 will depend on many
variables which can not be quantified at this time, including regulatory
changes, patient acuity, patient length of stay, Medicare census, referral
patterns, ability to reduce costs and growth of ancillary business.
Other
The Board of Directors approved a Senior Executive Stock Ownership Program.
Under the terms of the program, certain of the Company's current 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 December 31, 1998, the Company loaned
approximately $3,000,000 to senior executive employees to purchase the Company's
Common Stock.
Certain of the Company's other outstanding loans contain covenants which,
without the prior consent of the lenders, limit certain activities of the
Company. Such covenants contain limitations relating to the merger or
consolidation of the Company and the Company's ability to secure indebtedness,
make guarantees, grant security interests and declare dividends. In addition,
the Company must maintain certain minimum levels of cash flow and debt service
coverage, and must maintain certain ratios of liabilities to net worth. Under
these loans, the Company is restricted from paying cash dividends on the Common
Stock, unless certain conditions are met. The Company has not declared or paid
any cash dividends on its Common Stock since its inception.
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The Company believes that its liquidity needs can be met by expected operating
cash flow and availability of borrowings under its Revolving Facility. At
January 31, 1999, approximately $576,200,000 was outstanding under the
Revolving Facility, and approximately $62,000,000 was available under the
Revolving Facility after giving effect to approximately $11,800,000 in
outstanding letters of credit issued under the Revolving Facility.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles, and the number of calendar days
in a given quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. To date, the
Company has offset its increased operating costs by increasing charges for its
services and expanding its 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."
Year 2000 Compliance
The Company has implemented a process to address its Year 2000 compliance
issues. The process includes (i) an inventory and assessment of the compliance
of the essential systems and equipment of the Company and of year 2000 mission
critical suppliers, customers, and other third parties, (ii) the remediation of
non-compliant systems and equipment, and (iii) contingency planning. The Company
is in the process of conducting its inventory, assessment and remediation of its
information technology ("IT") systems, equipment and non-IT systems and
equipment (embedded technology) and has completed approximately 70% of its
internal inventory and assessment and approximately 30% of the systems and
equipment of critical suppliers, customers and other third parties.
With respect to the Year 2000 compliance of critical third parties, the Company
derives a substantial portion of its revenues from the Medicare and Medicaid
programs. Congress' General Accounting Office ("GAO") concluded in September
1998 that it would be highly unlikely that all Medicare systems will be
compliant on time to ensure the delivery of uninterrupted benefits and services
into the Year 2000. While the Company does not receive payments directly from
Medicare, but from intermediaries, the GAO statement is interpreted to apply as
well to these intermediaries. Recently, the HCFA Administrator asserted that all
systems necessary to make payments to fiscal intermediaries would be compliant.
The Administrator provided further assurance that intermediary systems would
also be compliant well in advance of the deadline. Nonetheless, the Company
intends to actively confirm the Year 2000 readiness status for each intermediary
and to work cooperatively to ensure appropriate continuing payments for services
rendered to all government-insured patients.
The Company is remediating its critical IT and non-IT systems and equipment. The
Company has also begun contingency planning in the event that essential systems
and equipment fail to be Year 2000 compliant. The Company is planning to be Year
2000 complaint for all its essential systems and equipment by September 30,
1999, although there can be no assurance that it will achieve its objective by
such date or by January 1, 2000, or that such potential non-compliance will not
have a material adverse effect on the Company's business, financial condition or
results of operations. In addition there can be no assurance that all of the
Company's critical suppliers and other third parties will be Year 2000 complaint
by January 1, 2000, or that such potential non-compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
18
<PAGE>
The Company currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $1,100,000, of which
approximately $550,000 has been spent through December 31, 1998. The Company's
Year 2000 efforts are ongoing and its overall plan and cost estimations will
continue to evolve, as new information becomes available. The Company's analysis
of its Year 2000 issues is based in part on information from third party
suppliers; there can be no assurance that such information is accurate or
complete.
The failure of the Company or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in interruptions
of normal business work operations. The Company's potential risks include (i)
the inability to deliver patient care related services in the Company's
facilities and / or in non-affiliated facilities, (ii) the delayed receipt of
reimbursement from the Federal or State governments, private payors, or
intermediaries, (iii) the failure of security systems, elevators, heating
systems or other operational systems and equipment of the Company's facilities
and (iv) the inability to receive critical equipment and supplies from vendors.
Each of these events could have a material adverse affect on the Company's
business, results of operations and financial condition.
Contingency plans for the Company's Year 2000-related issues continue to be
developed and include, but are not limited to, identification of alternate
suppliers, alternate technologies and alternate manual systems. The Company is
planning to have contingency plans completed for essential systems and equipment
by June 30, 1999; however, there can be no assurance that it will meet this
objective by such date or by January 1, 2000.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Company or to products or services
offered by the Company, is also intended to be "Year 2000 Readiness Disclosure"
as such term is defined in the Year 2000 Act.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 supersedes
Statement of Financial Accounting Standards No. 14, Financial Reporting of a
Business Enterprise, and establishes new standards for reporting information
about operation segments in annual financial statements and requires selected
information about operating segments in interim financial reports. Statement 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for years
beginning after December 15, 1997, or the Company's fiscal year end September
30, 1999. This statement affects reporting in financial statements only and will
have no impact on the Company's results of operations, financial condition or
liquidity.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("Statement 98-1"). Once the capitalization criteria
of Statement 98-1 have been met, external directs costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the internal-use computer software project (to the extent
of the time spent directly on the project); and interest costs incurred when
developing computer software for internal use should be capitalized. Training
costs and data conversion costs, should be expensed as incurred. Statement 98-1
is effective for financial statements for fiscal years beginning after December
15, 1998, with earlier application encouraged. The Company adopted the
provisions of Statement 98-1 in its fiscal year ended September 30, 1998.
19
<PAGE>
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("Statement 98-5").
Statement 98-5 requires costs of start-up activities, including organizational
costs, to be expensed as incurred. Start-up activities are defined as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting businesses in a new territory, conducting business with a
new process in an existing facility, or commencing a new operation. Statement
98-5 is effective for fiscal years beginning after December 15, 1998 or the
Company's fiscal year ending September 30, 2000. The Company currently estimates
the adoption of Statement 98-5 will result in a charge of approximately
$1,500,000, net of tax, which will be recorded as a cumulative effect of a
change in accounting principle.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters beginning after June 15, 1999. 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.
20
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to changes in interest rates. The Company's objective in
managing its exposure to interest rate changes is to limit the impact of such
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives, the Company primarily uses 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 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 December 31, 1998 is approximately $28,151,000.
The carrying value of fixed rate and variable rate debt approximates fair value.
The table below represents the contractual or notional balances of the Company's
fixed rate and market sensitive instruments at expected maturity dates and the
weighted average interest rates.
<TABLE>
<CAPTION>
Expected Maturity
($ in thousands) 1999 2000 2001 2002 2003 Thereafter Total
----------- ----------- ----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 12,794 $ 14,890 $ 7,174 $ 3,627 $ 3,387 $ 439,184 $ 481,056
Weighted average rate 9.25% 9.08% 9.19% 9.34% 9.36% 9.56% 9.53%
----------- ----------- ----------- ----------- ------------- ------------- ------------
Variable rate debt $ 21,366 $ 28,670 $ 28,670 $ 35,972 $547,299 $ 330,584 $ 992,561
Weighted average rate L+2.59% L+2.57% L+2.57% L+2.55% L+2.50% L+3.13% L+2.69%
----------- ----------- ----------- ----------- ------------- ------------- ------------
Variable to Fixed Swaps $ - $ - $220,000 $ 50,000 $ 100,000 $ 320,000 $ 690,000
Weighted average rate
Pay fixed rate - - 5.50% 5.75% 4.98% 6.83% 6.06%
Weighted average rate
Receive variable rate - - L L L L+1.38% L+1.17%
----------- ----------- ----------- ----------- ------------- ------------- ------------
Fixed to Variable Swaps $ - $ - $ - $ - $ - $ 320,000 $ 320,000
Weighted average rate
Pay variable rate - - - - - L L
Weighted average rate
Receive fixed rate - - - - - 7.58% 7.58%
----------- ----------- ----------- ----------- ------------- ------------- ------------
</TABLE>
L - three-month LIBO rate (approximately 5.40% at December 31, 1998)
21
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 13, 1998, the Company filed a current
report on Form 8K/A amending the current report on
Form 8K dated August 28, 1998 to include or
incorporate by reference certain financial
information regarding the Vitalink Transaction.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: February 12, 1999 /s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr.
Senior Vice President and Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000874265
<NAME> GENESIS HEALTH VENTURES, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 8,901,000
<SECURITIES> 24,186,000
<RECEIVABLES> 470,700,000
<ALLOWANCES> (61,006,000)
<INVENTORY> 66,703,000
<CURRENT-ASSETS> 607,923,000
<PP&E> 740,590,000
<DEPRECIATION> 131,898,000
<TOTAL-ASSETS> 2,674,890,000
<CURRENT-LIABILITIES> 235,059,000
<BONDS> 0
0
6,000
<COMMON> 704,000
<OTHER-SE> 879,348,000
<TOTAL-LIABILITY-AND-EQUITY> 2,674,890,000
<SALES> 479,204,000
<TOTAL-REVENUES> 479,204,000
<CGS> 0
<TOTAL-COSTS> 408,050,000
<OTHER-EXPENSES> 24,174,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,323,000
<INCOME-PRETAX> 19,657,000
<INCOME-TAX> 7,378,000
<INCOME-CONTINUING> 11,387,000
<DISCONTINUED> 0
<EXTRAORDINARY> (1,799,000)
<CHANGES> 0
<NET-INCOME> 5,171,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
