Back to GetFilings.com
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, 1997
[ ] 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)
148 West 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:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
Common Stock, par value $.02 per share New York Stock Exchange
9 3/4% Senior Subordinated Notes 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 stock held by non-affiliates of
the Registrant is $814,587,434 (1). As of December 12, 1997, 35,130,236 shares
of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Proxy Statement to be filed in connection
with its 1998 Annual Meeting are incorporated by reference in Part III of this
Report. Certain exhibits to the Company's Current Report on Form 8-K and 8-K/A
dated October 10, 1997, July 11, 1996, May 3, 1996, November 30, 1995, August
18, 1995, November 30, 1993 and September 19, 1993, Registration Statement on
Form S-1 (File No. 33-40007), Registration Statement on Form S-1 (File No.
33-51670), Registration Statement on Form S-3 (file No. 33-9350) and
Registration Statement on Form S-4 (File No. 333-15267), Annual Reports on
Form 10-K for the fiscal years ended September 30, 1996, 1995, 1993 and 1992,
and Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
1997, March 31, 1996 and March 31, 1994, Registration Statement on Form 8-A
dated May 11, 1995 and the Tender Offer Statement on Schedule 14D-1 filed by
Genesis Eldercare Corp. on June 20, 1997 are incorporated by reference as
Exhibits in Part IV of this Report.
- ----------------------------
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Company's Common Stock outstanding, reduced by
the amount of Common Stock held by officers, directors and shareholders
owning in excess of 10% of the Company's Common Stock, multiplied by the
last reported sale price for the Company's Common Stock on December 12,
1997. 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 2
ITEM 1: BUSINESS
General ...............................................................................................5
Basic Healthcare Services.............................................................................. 6
Specialty Medical Services............................................................................. 7
Management Services and Other.......................................................................... 8
Managed Care Initiatives............................................................................... 9
Revenue Sources........................................................................................ 10
Marketing.............................................................................................. 12
Personnel.............................................................................................. 12
Employee Training and Development...................................................................... 12
Governmental Regulation................................................................................ 13
Competition............................................................................................ 15
Insurance.............................................................................................. 15
ITEM 2: PROPERTIES............................................................................................. 16
ITEM 3: LEGAL PROCEEDINGS...................................................................................... 17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................... 17
ITEM 4.1: EXECUTIVE OFFICERS................................................................................... 18
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.................................................................... 20
ITEM 6: SELECTED FINANCIAL DATA................................................................................ 21
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................... 23
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................ 33
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................................... 54
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................... 54
ITEM 11: EXECUTIVE COMPENSATION................................................................................ 54
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................ 54
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................ 54
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K........................................ 54
Cautionary Statements 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 Medicare and Medicaid programs and the Company's
ability to meet its liquidity needs and control costs and its arrangements
with ElderTrust; certain statements contained in "Business" such as statements
concerning strategy, government regulation, Medicare and Medicaid programs,
managed care initiatives, and recent transactions and competition; certain
statements in "Legal Proceedings" and certain statements in the Notes to
Consolidated Financial Statements, such as certain of the pro forma financial
information; and other statements contained herein regarding matters that 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.
Certain Financial Considerations. The Company has substantial indebtedness
and, as a result, significant debt service obligations. As of September 30,
1997, after giving pro forma effect to the Multicare Transaction and the
related financing (as such item is defined in "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Certain
Transactions") and the use of proceeds therefrom, the Company would have had
approximately $1,028,000,000 of long-term indebtedness which would have
represented 62.8% of its total capitalization. The degree to which the Company
is leveraged could have important consequences, including the following: (i)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes may
be impaired; (ii) a substantial portion of the Company's cash flow from
operations may be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for its
operations; (iii) certain of the Company's borrowings are and will continue to
be at variable rates of interest, which causes the Company to be vulnerable to
increases in interest rates; and (iv) certain of the Company's indebtedness
contains financial and other restrictive covenants, including those
restricting the incurrence of additional indebtedness, the creation of liens,
the payment of dividends, sales of assets and minimum net worth requirements.
Failure by the Company to comply with such covenants may result in an event of
default which, if not cured or waived, could have a material adverse effect on
the Company.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
Although the Company's cash flow from its operations has been sufficient to
meet its debt service obligations in the past, there can be no assurance that
the Company's operating results will continue to be sufficient for payment of
the Company's indebtedness. The Company also has significant long-term
operating lease obligations with respect to certain of its eldercare centers.
Risk of Adverse Effect of Healthcare Reform. In addition to extensive existing
government healthcare regulation, there are numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted, or what effect such proposals would have
on the Company's business. Aspects of certain of these healthcare proposals,
such as reductions in funding of the Medicare and Medicaid programs, potential
changes in reimbursement regulations by the Health Care Financing
Administration ("HCFA"), enhanced pressure to contain healthcare costs by
Medicare, Medicaid and other payors and permitting greater state flexibility
in the administration of Medicaid, could adversely affect the Company. There
can be no assurance that currently proposed or future healthcare legislation
or other changes in the administration or interpretation of governmental
healthcare programs or regulations will not have a material adverse effect on
the Company. Concern about the potential effects of the proposed reform
measures has contributed to the volatility of prices of securities of
companies in healthcare and related
2
industries, including the Company, and may similarly affect the price of the
Company's securities in the future. See "Business -- Governmental Regulation."
Regulation. The federal government and all states in which the Company
operates regulate various aspects of the Company's business. In particular,
the development and operation of eldercare centers and the provision of
healthcare services are subject to federal, state and local laws relating to
the delivery and adequacy of medical care, distribution of pharmaceuticals,
equipment, personnel, operating policies, fire prevention, rate-setting and
compliance with building codes and environmental laws. Eldercare centers are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with various standards, their continued licensing under
state law, certification under the Medicare and Medicaid programs and
continued participation in the Veterans Administration program and the ability
to participate in other third party programs. The failure to obtain or
maintain any required regulatory approvals or licenses could prevent the
Company from offering services or adversely affect its abililty to receive
reimbursement of expenses and could result in the denial of reimbursement, the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicaid or Medicare program,
restrictions on the ability to acquire new facilities or expand existing
facilities and, in extreme cases, revocation of the facility's license or
closure of a facility. There can be no assurance that the facilities owned,
leased or managed by the Company, or the provision of services and supplies by
the Company, will meet or continue to meet the requirements for participation
in the Medicaid or Medicare programs or state licensing authorities will not
adopt changes or new interpretations of existing regulations that would
adversely affect the Company.
Many states have adopted Certificate of Need or similar laws which generally
require that the appropriate state agency approve certain acquisitions and
determine that a need exists for certain bed additions, new services and
capital expenditures or other changes prior to beds and/or new services being
added or capital expenditures being undertaken. To the extent that
Certificates of Need or other similar approvals are required for expansion of
Company operations, either through center acquisitions or expansion or
provision of new services or other changes, such expansion could be adversely
affected by the failure or inability to obtain the necessary approvals,
changes in the standards applicable to such approvals and possible delays and
expenses associated with obtaining such approvals. In addition, in most states
the reduction of beds or the closure of a facility requires the approval of the
appropriate state regulatory agency and if the Company were to reduce beds or
close a facility the Company could be adversely impacted by a failure to
obtain or a delay in obtaining such approval.
The Company is 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 the federal "Stark legislations"
which prohibit, with limited exceptions, the referral of patients for certain
services, including home health services, physical therapy and occupational
therapy, by a physician to an entity in which the physician has an ownership
interest and the federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients or
the purchasing, leasing, ordering or arranging for any goods, facility
services or items for which payment can be made under Medicare and Medicaid. A
violation of the federal "anti-kickback law" could result in the loss of
eligibililty to participate in Medicare and Medicaid programs, or in the
imposition of civil or criminal penalties. The federal government, private
insurers and various state enforcement agencies have increased their scrutiny of
providers, business practices and claims in an effort to identify and prosecute
fraudulent and abusive practices. In addition, the federal government has issued
recent fraud alerts concerning nursing services, double billing, home health
services and the provision of medical supplies to nursing facilities;
accordingly, these areas may come under closer scrutiny by the government. See
"Business -- Governmental Regulation." Furthermore, some states restrict certain
business relationships between physicians and other providers of healthcare
services. Many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of
licensure or eligibility to participate in reimbursement programs and civil
and criminal penalties. These laws vary from state to state, are often vague
and have seldom been interpreted by the courts or regulatory agencies. From
time to time, the Company has 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 the practices of the Company.
In the ordinary course of business, the Company's facilities receive notices
of deficiencies following surveys for failure to comply with various
regulatory requirements. From time to time, survey deficiencies have resulted
in various penalties against certain facilities and the Company. These
penalties have included monetary fines, temporary bans on the admission of new
patients and the placement of restrictions on the Company's ability to obtain
or transfer certificates of need in certain states. There can be no assurance
that future surveys will not result in penalties or sanctions which could have
a material adverse effect on the Company.
Payment by Third Party Payors. For the years ended September 30, 1997, 1996,
and 1995, respectively, the Company derived approximately 39%, 39% and 38% of
its patient service revenue from private pay sources, 24%, 25% and 21% from
Medicare and 37%, 36% and 41% from various state Medicaid agencies. Both
governmental and private third party payors have employed cost containment
measures designed to
3
limit payments made to healthcare providers such as the Company. Those
measures include the adoption of initial and continuing recipient eligibility
criteria which may limit payment for services, the adoption of coverage and
duration criteria which limit the services which will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government payment programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially increase or decrease the rate of program payments to the Company
for its services. There can be no assurance that payments under governmental
and private third party payor programs 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 revenue 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. The majority of the
third-party payor balances are settled within two or three years following the
provision of services. The Company's financial condition and results of
operations may also be affected by the timing of reimbursement payments and
rate adjustments from third-party payors. The Company has from time to time
experienced delays in receiving reimbursement from third-party payors. In
addition, there can be no assurance that centers owned, leased or managed by
the Company, or the provision of services and supplies by the Company, now or
in the future will initially meet or continue to meet the requirements for
participation in such programs. The Company could be adversely affected by the
continuing efforts of governmental and private third party payors to contain
the amount of reimbursement for healthcare services. In an attempt to limit
the federal budget deficit, there have been, and the Company expects that
there will continue to be, a number of proposals to limit Medicare and
Medicaid reimbursement for healthcare services. In certain states there have
been proposals to eliminate the distinction in Medicaid payment for skilled
versus intermediate care services and to establish a case mix prospective
payment system pursuant to which the payment to a facility for a patient is
based upon the patient's condition and need for services. The Company cannot
at this time predict whether any of these proposals will be adopted or, if
adopted and implemented, what effect, if any, such proposals will have on the
Company. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures or the assumption by
healthcare providers of all or a portion of the financial risk through prepaid
capitation arrangements. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue. See "Business -- Revenue Sources."
Managed care organizations and other third party payors have continued to
consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage
of the United States population are increasingly served by a small number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the
extent such organizations terminate the Company as a preferred provider and/or
engage the Company's competitors as a preferred or exclusive provider, the
Company's business could be materially adversely affected.
For those specialty medical services covered by the Medicare program, the
Company is reimbursed for its direct costs plus an allocation of indirect
costs up to a regional limit. As the Company expands is specialty medical
services, the costs of care for these patients are expected to exceed the
regional reimbursement limits. As a result, the Company has submitted and will
be required to submit further exception requests to recover the excess costs
from Medicare. There is no assurance the Company will be able to recover such
excess costs under pending or any future requests. The failure to recover
these excess costs in the future will adversely affect the Company's financial
position and results of operations. The Company is subject to periodic audits
by the Medicare and Medicaid programs, and the paying agencies for these
programs have various rights and remedies against the Company if they assert
that the Company has overcharged the programs or failed to comply with program
requirements. Such payment agencies could seek to require the Company to repay
any overcharges or amounts billed in violations of program requirements, or
could make deductions from future amounts due to the Company. Such agencies
could also impose fines, criminal penalties or program exclusions.
Geographic Payor Concentration. The Company's operations are located in
Connecticut, Delaware, Florida, Illinois, Maryland, Massachusetts, New
Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island,
Vermont, Virginia, West Virginia and Wisconsin. Any adverse change in the
regulatory environment, the reimbursement rates paid under the Medicaid
program or in the supply and demand for services in the states in which the
Company operates, and particularly in Florida, Maryland, Massachusetts, New
Jersey and Pennsylvania, could have a material adverse effect on the Company.
Competition. The healthcare industry is highly competitive. The Company
competes with a variety of other companies in providing eldercare services.
Certain competing companies have greater financial and other resources and may
be more established in their respective communities than the Company.
Competing companies may offer newer or different centers or services than the
Company and may thereby attract the Company's customers who are either
presently customers of its eldercare centers or are otherwise receiving its
eldercare services. See "Business -- Competition."
Risks Associated with Recent Acquisitions and Acquisition Strategy. The
Company has recently completed several acquisitions of eldercare businesses,
including the acquisition of an interest in the Multicare Companies, Inc. The
Company also intends to pursue additional acquisitions in the future. There
can be no assurance that the Company will be able to realize expected
operating and economic efficiencies from its recent acquisitions or from any
future acquisitions or that such acquisitions will not adversely affect the
Company's results of operations or financial condition. In addition, there can
be no assurance that the Company will be able to locate suitable acquisition
candidates in the future, consummate acquisitions on favorable terms or
successfully integrate newly acquired businesses with the Company's
operations. The consummation of acquisitions likely will result in the
incurrence or assumption by the Company of additional indebtedness.
4
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"
or the "Company" refers to Genesis Health Ventures, Inc. and subsidiaries.
On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."),
a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"),
pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On
October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger"
or the "Multicare Transaction") of Acquisition Corp. with and into Multicare
in accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp which will be
consolidated with Genesis. 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 will manage
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 will be 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 Sale 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 and a stock purchase
agreement (the "Pharmacy Sale Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis will acquire all of the outstanding
capital stock and limited partnership interest of certain subsidiaries of
Multicare that are engaged in the business of providing institutional pharmacy
services to third parties for $50,000,000, subject to adjustment.
Information included herein which describes the Company's operations after
October 10, 1997 (e.g. markets served, facilities information, personnel)
includes the Multicare operations; information included herein describing the
Company's historical results prior to October 10, 1997 (e.g. occupancy rates
and revenue sources) does not include the Multicare operations.
Genesis is a leading provider of healthcare and support services to the
elderly. The Company has developed the Genesis ElderCare(SM) delivery model of
integrated healthcare networks to provide
5
cost-effective, outcome-oriented services to the elderly. Through these
integrated healthcare networks, Genesis provides basic healthcare and
specialty medical services to more than 150,000 customers primarily in five
regional markets in the Eastern United States in which over 6,000,000 people
over the age of 65 reside. The networks include 340 eldercare centers with
approximately 42,300 beds (including the impact of the Multicare Transaction.
See "Managements Discussion and Analysis of Financial Condition and Results of
Operations - Certain Transactions" and "Properties"); 18 primary care
physician clinics; approximately 100 physicians, physician assistants and
nurse practitioners; 22 institutional pharmacies and seven medical supply
distribution centers serving over 80,000 beds; 29 community-based pharmacies;
certified rehabilitation agencies providing services through 437 contracts;
and eight home healthcare agencies. Genesis has concentrated its eldercare
networks in five geographic regions in order to achieve operating
efficiencies, economies of scale and significant market share. The Company
also provides transportation and diagnostic services. 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); Chesapeake Region (Southern
Delaware/Eastern Shore of Maryland; Baltimore, Maryland/Washington D.C./
Virginia); Southern Region (Central Florida); and Allegheny Region (West
Virginia/Western Pennsylvania/Eastern Ohio/Illinois/Wisconsin)
Genesis 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, the Company believes it provides
cost-effective care management to achieve superior outcomes and return
customers to the community. The Company believes that its orientation toward
achieving improved customer outcomes through its 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. Specialty medical services revenues have increased at a
compound annual rate of 61% from the fiscal year ended September 30, 1993 to
the fiscal year ended September 30, 1997 and comprise 46% of the Company's
revenues for the fiscal year ended September 30, 1997. Specialty medical
services typically generate higher profit margins than basic healthcare
services and are less capital intensive.
The Company's growth strategy is to enhance its existing eldercare networks,
establish new eldercare networks in markets it deems attractive and broaden
its array of high margin specialty medical services through internal
development and selected acquisitions. Consistent with its strategy, on
October 11, 1997 the Company completed the Multicare Transaction and has made
selected acquisitions of, and investments in, eldercare centers and
rehabilitation, pharmacy, and home healthcare companies. The Company's
long-term strategy is to provide comprehensive eldercare services, in
collaboration with other providers, on a prepaid basis in a managed care
environment. The Company has undertaken several initiatives to position itself
to compete in a managed care environment. These initiatives include: (i)
establishing a managed care division to pursue and administer contracts with
managed care organizations, develop clinical care protocols and monitor the
delivery and utilization of medical care; (ii) developing a clinical
administration and healthcare management information system known as
NetLink(SM) to monitor and measure clinical and patient-outcome data; (iii)
establishing and marketing the Genesis ElderCare(SM) brand name, along with
other trademarks, to increase awareness of the Company's eldercare services in
the healthcare market; (iv) seeking strategic alliances with other healthcare
providers to broaden the Company's continuum of care; (v) creating an
independent eldercare advisory board to formulate new and innovative
approaches in the delivery of care; (vi) establishing Genesis ElderCare (SM)
toll-free telephone lines and (vii) developing adult day care and resource
centers. The Company has decided to accelerate its investments in these
initiatives in fiscal year 1998.
Basic Healthcare Services
Genesis operates 319 eldercare centers (including the impact of the Multicare
Transaction. See "Properties") located in 16 states. 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
6
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.
In addition to programs to meet the healthcare needs of its customers, all
Genesis eldercare centers offer a variety of quality of life programs. These
include the Intergenerational Learning Program that enables residents to
function both as students and as instructors in programs with community
schools, as well as The Magic Mix Program that provides a supervised setting
in which children of working parents can interact with residents of the
centers after school. These programs have received recognition at both local
and national levels.
In eight of its eldercare centers, the Company operates Genesis ElderCare
Focus programs which are dedicated to meeting the special medical, emotional
and psychological needs of Alzheimer's patients. The Focus programs were
developed in conjunction with the Dementia Research Clinic at the Johns
Hopkins University School of Medicine. These units provide an environment that
is designed or modified to assist those with cognitive loss. Clinical experts
have experienced significant success and produced benefits to customers served
in both Alzheimer's day services and dedicated residential units.
The following table sets forth, for the periods indicated, information
regarding the Company's average number of beds in service and the average
occupancy levels at its eldercare centers.
1997 1996 1995
---- ---- ----
Average Beds in Service: (1)(2)
Owned and Leased Facilities 15,132 9,429 8,268
Managed and Jointly-Owned Facilities 6,101 5,030 5,158
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 93% 92%
Managed and Jointly-Owned Facilities 92% 93% 95%
(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
(2) Does not include 164 facilities with approximately 17,600 beds operated by
Multicare. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Certain Transactions."
Specialty Medical Services
The Company emphasizes the delivery of specialty medical services which
typically requires smaller capital investment and generates higher profit
margins than providing basic healthcare services. The Company provides the
specialty medical services described below.
Pharmacy and Medical Supply Services. The Company, through its NeighborCare(SM)
pharmacy subsidiaries, provides pharmacy and other services including infusion
therapy and medical supplies and equipment 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 14 institutional pharmacies (of which four are
jointly-owned) and seven distribution centers located in its various market
areas. In addition, the Company operates 29
7
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 84% of the sales attributable to all
pharmacy operations in Fiscal 1997 were generated through external contracts
with independent healthcare providers with the balance attributable to centers
owned or leased by the Company.
Rehabilitation Therapy. The Company provides an extensive range of
rehabilitation therapy services, including speech pathology, physical therapy
and occupational therapy through seven certified rehabilitation agencies in
all four of its regional market concentrations. These services are provided by
over 1,800 licensed rehabilitation therapists and assistants employed by
Genesis to substantially all of the eldercare centers the Company operates, as
well as by contract to healthcare facilities operated by others.
Subacute Care Programs. The Company 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. The Company provides such care at rates that the Company believes
are substantially below the rates typically charged by acute care hospitals
for comparable services.
Physician Services. The Company employs or has consulting arrangements with
approximately 100 physicians, physician assistants and nurse practitioners to
provide physician services at certain of its eldercare centers. These
physicians, physician assistants and nurse practitioners provide a range of
services, including direct patient care, the design and administration of
clinical programs, such as the Company's subacute care program, as well as
traditional medical director and utilization review services. In the fourth
quarter of fiscal 1997, the Company completed an evaluation of its physician
service business and announced its intention to restructure this business,
including the closure and possible sale of free standing service sites, the
restructuring of physician compensation arrangements and the termination of
certain staff. The Company will continue to access the services of physicians
through partnerships, joint ventures and other relationships, the first of
which is the Company's investment in Doctors Health System, Inc. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Transactions."
Home Healthcare Services. The Company provides home healthcare services to
customers in its markets through eight certified home health agencies owned by
the Company. The Company currently provides these services in all of its
geographic markets. The services offered include skilled nursing care,
physical, occupational and speech therapy, medical social services and home
health aide services. The Company's focus is on providing infusion therapy,
total parenteral nutrition, ventilator care and peritoneal dialysis. The
Company owns a 34% interest in the Visiting Nurses Association in Maryland
("VNA"), an organization which is a leading provider of home healthcare services
in Maryland. Excluding VNA, the Company provided approximately 123,600 home
healthcare visits in Fiscal 1997.
Other Services. The Company's subsidiary, Genesis ElderCare Transportation
Services (GETS), provides a full range of ambulance transportation services to
hospitals, nursing homes, rehabilitation centers, and other healthcare
facilities in the MidAtlantic Region. The Company's subsidiary, Genesis
ElderCare Diagnostic Services (GEDS), provides portable x-ray, Holter
monitoring, ultrasound and echocardiograms primarily to skilled nursing
facilities in the MidAtantic Region.
Management Services and Other
Management Services. The Company provides management services to 210 eldercare
centers (including 164 jointly-owned and managed centers added as a result of
the Multicare Transaction and three centers jointly-owned by Genesis prior to
the Multicare Transaction) pursuant to management agreements that
8
provide generally for the Company's 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, terminate between 1998 and 2017. The Company has extended various
mortgage and other loans to certain facilities under management contract. See
"Notes to Consolidated Financial Statements - Footnote 8 Notes Receivable and
Other Investments."
Genesis provides development services for a fee in an amount equal to five
percent of the total cost of developing and completing facilities developed by
Adult Community Total Services, Inc. "(ACTS). The contract extends through
December 2002 and Genesis is guaranteed a minimum annual development fee of
$1,500,000.
Group Purchasing. The Company's subsidiary, The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), is one of the largest group purchasing
companies in the MidAtlantic region. 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 1,600 members with over 166,000 beds in 30 states and the
District of Columbia.
Other Services. The Company's subsidiary, Genesis ElderCare Hospitality
Services (GEHS), provides contract management services, including dietary,
housekeeping, laundry, pest control, plant operations and facilities
management services to nursing homes, personal care facilities, and retirement
communities. GEHS operates with full time, on site management which are
supported by a regional team of specialists. Including Genesis operated beds,
GEHS provides such contract services to approximately 27,000 long-term care
and residential beds in New Jersey and Pennsylvania.
Managed Care Initiatives
The Company has undertaken several initiatives to position itself to compete
effectively on a prepaid basis in a managed care environment. In January 1995,
the Company established a Managed Care division which currently consists of
121 employees. The Managed Care division is responsible for pursuing and
administering contracts with managed care organizations, developing clinical
care protocol and monitoring the delivery and utilization of medical care. The
Company has begun to develop a clinical administration and healthcare
management information system, known as NetLink(SM), to monitor and measure
clinical and patient outcome data for use by healthcare providers and the
Company. The Company is also seeking strategic alliances with selected
providers in order to further the continuum of care, increase market share and
customer acceptance and create strategic affiliations for negotiating with
payors in a managed care environment. In addition to these initiatives, the
Company has consolidated its core business under the Genesis ElderCare(SM)
brand name in an effort to increase the Company's visibility among current and
potential customers, payors and other healthcare providers. The Company has
also created an independent eldercare advisory board composed of individuals
with distinguished credentials in geriatric care to formulate new and
innovative approaches in the delivery of care. See "Cautionary Statements
Regarding Forward Looking Statements."
The Company has agreed upon the terms of a managed care arrangement with Blue
Cross Blue Shield of Maryland ("BCBSMD") for the Company to: (a) provide and
manage home health care to 275,000 of BCBSMD's managed care members statewide,
(b) manage a complete spectrum of health care needs for approximately 7,000
members of BCBSMD'S Care First Medicare Risk product and (c) become the
preferred provider of skilled nursing and post-acute services for BCBSMD's
indemnity and managed care population in Maryland. The agreement is
retroactive to July 1, 1997 and is projected to generate losses over the
contract period.
9
Revenue Sources
The Company derives its basic healthcare and specialty medical revenue from
private pay sources, state Medicaid programs and Medicare. The Company
classifies payments from persons or entities other than the government as
private pay and other revenue. The private pay and other classification also
includes revenues from commercial insurers, health maintenance organizations
and other charge-based payment sources. Blue Cross and Veterans Administration
payments are included in private pay and other revenues and are made pursuant
to renewable contracts negotiated with these payors. The private pay rates
charged by the Company are influenced primarily by the rates charged by other
providers in the local market and by Medicaid and Medicare reimbursement
rates. Specialty medical revenues are usually reimbursed under casualty and
health insurance coverages. The acuity levels for these insurance patients are
generally higher and require additional staff and increased utilization of
facility resources, resulting in higher payment rates. Individual cases are
either negotiated on a case by case basis with the insurer or the rates are
prescribed through managed care contract provisions.
Medicare is a federally funded and administered health insurance program that
consists of Parts A and B. Participation in Part B is voluntary and is funded
in part through the payment of premiums. Subject to certain limitations,
benefits under Part A include inpatient hospital services, skilled nursing in
an eldercare center and medical services such as physical, speech and
occupational therapy, certain pharmaceuticals and medical supplies. Part B
provides coverage for physician services. Part B also reimburses for medical
services with the exception of pharmaceutical services. Medicare benefits are
not available for intermediate and custodial levels of care; however, medical
and physician services furnished to such patients may be reimbursable under
Part B. Under the Part A reimbursement methodology, each eldercare center
receives an interim payment during the year which is adjusted to reflect
actual allowable direct and indirect costs of services based on the submission
of a cost report at the end of each year. For services not billed through each
eldercare center, the Company's specialty medical operations bill Medicare
directly for nutritional support services, infusion therapy, certain medical
supplies and equipment, physician services and certain therapy services as
provided. Medicare payments for these services may be based on reasonable cost
charges or a fixed-fee schedule determined by Medicare. As the Company is
reimbursed for its direct costs plus an allocation of indirect costs up to a
regional limit, to the extent that the Company expands its specialty medical
services, the costs of care for these patients are expected to exceed the
regional reimbursement limits. As a result, the Company has submitted and will
be required to submit further exception requests to recover such excess costs
from Medicare. There can be no assurances that the Company will be able to
recover such excess costs under pending or any future requests. The failure to
recover these excess costs in the future would adversely affect the Company's
financial position and results of operations. For services not billed through
a facility, the Company's specialty medical operations bill Medicare, when
appropriate, directly for nutritional support services, infusion therapy,
certain medical supplies and equipment, physician services and certain therapy
services provided. Medicare payments for these services may be based on
reasonable cost charges or a fixed-fee schedule determined by Medicare. To
date, adjustments from Medicare and Medicaid audits have not had a material
adverse effect on the Company. There can be no assurances that future
adjustments will not have a material adverse effect on the Company. While
speculation exists surrounding the impact of the August 5, 1997 Balanced
Budget Act of 1997 (the "Act") on the long-term care industry, principally the
establishment of a Medicare prospective payment system, the substantive
details and timing of implementing any such prospective payment system are not
yet known. To date, the Company has not experienced any significant impact to
its business as a consequence of the adoption of the Act. In the future the
Company may choose to participate in the Medicare+ Choice program established
by the Act. The Medicare+ Choice program provides reimbursement under a new
Part C, to such entities as coordinated care plans including HMO's PPO's and
provider sponsored programs. Under the Medicare+ Choice program, the
coordinated care plan would receive monthly payments for each person enrolled.
10
Medicaid is the state administered reimbursement program that covers both
skilled and intermediate long-term care. Although Medicaid programs vary from
state to state, typically they provide for payment for services including
nursing facility services, physician's services, therapy services and
prescription drugs, up to established ceilings, at rates based upon cost
reimbursement principles. Reimbursement rates are typically determined by the
state from cost reports filed annually by each center, on a prospective or
retrospective basis. In a prospective system, a rate is calculated from
historical data and updated using an inflation index. The resulting
prospective rate is final, but in some cases may be adjusted pursuant to an
audit. In this type of payment system, center cost increases during the rate
year do not affect payment levels in that year. In a retrospective system,
final rates are based on reimbursable costs for that year. An interim rate is
calculated from previously filed cost reports, and may include an inflation
factor to account for the time lag between the final cost report settlement
and the rate period. Consequently, center cost increases during any year may
affect revenues in that year. Certain states are scheduled to convert, or have
recently converted, from a retrospective system, which generally recognizes
only two or three levels of care, to a case mix prospective pricing system,
pursuant to which payment to a center for patient services directly considers
the individual patient's condition and need for services. The Company employs
specialists in reimbursement at the corporate level to monitor both Medicaid
and Medicare regulatory developments to comply with all reporting requirements
and to insure appropriate payments.
The following table reflects the allocation of customer service revenues among
these sources of revenue.
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
Private pay and other 39% 39% 38% 41% 42%
Medicaid 37 36 41 43 44
Medicare 24 25 21 16 14
- ------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
- ------------------------------------------------------------------------------
See "Cautionary Statements Regarding Forward Looking Statements."
11
Marketing
Marketing for eldercare centers is focused at the local level and is conducted
primarily by the center administrator and its admissions director who call on
referral sources such as doctors, hospitals, hospital discharge planners,
churches and various community organizations. In addition to those efforts,
the Company's marketing objective is to maintain public awareness of the
eldercare center and its capabilities. The Company takes advantage of its
regional concentrations in its 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 and affiliated eldercare centers. The Company
markets its rehabilitation therapy and institutional pharmacy and medical
supply services through a direct sales force which primarily calls on
eldercare centers, hospitals, clinics and home health agencies. The corporate
business development department, through regional managers, markets the
Company's subacute program 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.
In Fiscal 1996, the Company announced a consolidation of its 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 the Company operates. The Company's
marketing of Genesis ElderCare is aimed at increasing awareness among decision
makers in key professional and business audiences. The Company is using
advertising to promote its brand name in trade, professional and business
publications and to promote services directly to consumers.
The consumer advertising effort is being significantly increased beginning in
January 1998 to build awareness of the Genesis ElderCare brand among family
caregivers and elders living in the community. The advertising effort, which
is concentrated in the Company's key geographic markets, uses television,
consumer magazines, and direct mail to motivate consumers who need any of the
Company's services to call one of the Company's regional toll-free ElderCare
Lines.
Personnel
At November 30, 1997, Genesis and its subsidiaries (including Multicare)
employed over 43,400 people, including approximately 27,900 full-time and
15,500 part-time employees. Approximately 20% of these employees are
physicians and nursing and professional staff. Approximately 15,000 (7,400
full-time and 7,600 part-time) of these employees are employed by Multicare.
The Company currently has collective bargaining agreements which relate to 61
facilities, including 27 facilities operated by Multicare. The agreements
expire at various dates from 1998 through 2001 and cover approximately 4,400
employees. The Company believes that its relationship with its employees is
generally good.
Employee Training and Development
Genesis believes that nursing and professional staff retention and development
has been and continues to be a critical factor in the successful operation of
the Company. 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 the
Company's wage rates for professional nursing staff are commensurate with
market rates. The Company also provides employee benefit programs which
12
management believes, as a package, exceed industry standards. The Company has
not experienced any significant difficulty in attracting or retaining
qualified personnel.
In addition, Genesis has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized
by the Company through a variety of in-house programs as well as a tuition
reimbursement program. The Company has established, company-wide, the Genesis
Nursing Assistant Specialist Program. This program is offered on a joint basis
with community colleges. Classes are held on the employees' time, last for
approximately six months and provide advanced instruction in nursing care. The
Company pays the tuition. When all of the requirements for class participation
have been met through attendance, discussion and examinations, the nurse aide
graduates and is awarded the title of Nursing Assistant Specialist and
receives a salary adjustment. The Company has maintained a retention rate of
77% since 1990 of the nurses aide graduates. Approximately 1,400 nurse 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, the Company continues 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 $2,250 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.
The Company 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 520 participants have graduated from this program.
Governmental Regulation
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. The Company's eldercare centers are
subject to certain federal statutes and regulations and to statutory and
regulatory licensing requirements by state and local authorities. All Genesis
eldercare centers are currently so licensed. In addition, eldercare centers
are subject to various local building codes and other ordinances.
All of the Company's eldercare centers and healthcare services, to the extent
required, are licensed under applicable law. All eldercare centers and
healthcare services, or practitioners providing the services therein, are
certified or approved as providers under one or more of the Medicaid, Medicare
or Veterans Administration programs. Licensing, certification and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. State and local agencies survey all eldercare 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. The Company believes that
its centers are in substantial compliance with the various Medicare and
Medicaid regulatory requirements applicable to them. However, in the ordinary
course of its business, the Company receives 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 center, including the imposition of fines, temporary suspension of
admission of new patients to the center, suspension or decertification from
participation in the Medicare or Medicaid programs and, in extreme
circumstances, revocation of a center's license. These actions may adversely
affect the eldercare centers' ability to continue to operate, the ability of
the Company to provide certain services, and eligibility to participate in the
Medicare, Medicaid or Veterans Administration 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 measures, including
loss of licensure or eligibility to participate in Medicare and Medicaid
programs. Certain of the Company's centers have received notices in the past
from
13
state 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. In all cases, such deficiencies were remedied before any
centers were decertified.
All but 30 of the Genesis and Multicare owned and leased eldercare centers
provide skilled nursing services and are currently certified to receive
benefits provided under Medicare for these services. Additionally, all Genesis
and Multicare eldercare centers are currently certified to receive benefits
under Medicaid. Both initial and continuing qualifications of an eldercare
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.
Under the various Medicaid programs, the federal government supplements 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. Although Medicaid programs vary from state
to state, traditionally they have provided for the payment of certain
expenses, up to established limits, at rates based generally on cost
reimbursement principles.
Most 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 and adverse reimbursement action.
The Company is 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 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. These laws
also include the "Stark legislations" 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 an ownership 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, the Company has 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 the practices of the Company.
Although the Company has contractual arrangements with some healthcare
providers to which the Company pays fees for services rendered or products
provided, the Company believes that its practices are not in violation of
these laws. The Company cannot accurately predict whether enforcement
activities will increase or the effect of any such increase on its business.
There have also been a number of recent federal and state legislative and
regulatory initiatives concerning reimbursement under the Medicare and
Medicaid programs. In particular, the federal government has issued recent
fraud alerts concerning double billing, homehealth services and the provisions
of medical suppliers. Accordingly, it is anticipated that these areas may come
under closer scrutiny by the government. The Company cannot accurately predict
the impact of any such initiatives. See "Cautionary Statements Regarding
Forward Looking Statements."
14
Competition
The Company competes 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 the
Company. Competing companies may offer newer or different centers or services
than the Company and may thereby attract the Company's customers who are
either presently residents of its eldercare centers or are otherwise receiving
its healthcare services.
The Company operates eldercare centers in 16 states. In each market, the
Company's 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 the Company's 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 the Company. In competing for customers, a
center's local reputation is of paramount importance. Referrals typically come
from acute care hospitals, physicians, religious groups, other community
organizations, health maintenance organizations and the customer's families
and friends. 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. See
"Cautionary Statements Regarding Forward Looking Statements."
Genesis competes in providing 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 quality of clinical services, responsiveness to
patient needs, and the ability to provide support in other areas such as third
party reimbursement, information management and patient record-keeping. See
"Cautionary Statements Regarding Forward Looking Statements - Payment by
Third Party Payors."
Insurance
Genesis carries property and general liability insurance, professional
liability insurance, and medical malpractice insurance coverage in amounts
deemed adequate by management. However, there can be no assurance that any
current or future claims will not exceed applicable insurance coverage.
Genesis also requires that physicians practicing at its eldercare centers
carry medical malpractice insurance to cover their individual practice.
15
ITEM 2: PROPERTIES
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Genesis as of November 30, 1997
(excluding the Multicare facilites). Included in Managed Centers are three
jointly-owned facilities with 311 beds. Member centers consist of independently
owned facilities that, for a fee, have access to many of the resources and
capabilities of the Genesis Eldercare Networks, including participation in
Genesis' managed care contracts, preferred provider arrangements and group
purchasing arrangements. These centers typically purchase an array of ancillary
services from Genesis.
Wholly-Owned Member Leased Managed
Centers Centers Centers Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
- --------------------------------------------------------------------------------------------------------------
Pennsylvania 18 2,542 4 353 - - 17 3,031 39 5,926
Maryland 12 1,958 7 1,083 7 1,008 6 912 32 4,961
Florida 6 776 2 333 10 1,231 12 1,328 30 3,668
New Jersey 14 1,836 3 452 2 404 3 396 22 3,088
Massachusetts 8 1,092 - - - - 5 606 13 1,698
Virginia 2 421 1 200 4 670 - - 7 1,291
New Hampshire 7 650 - - 6 608 - - 13 1,258
Delaware 4 504 3 449 - - 1 158 8 1,111
Connecticut 4 615 1 190 1 120 - - 6 925
North Carolina - - - - - - 2 340 2 340
Vermont 2 256 - - - - - - 2 256
West Virginia - - - - 2 180 - - 2 180
- --------------------------------------------------------------------------------------------------------------
Totals 77 10,650 21 3,060 32 4,221 46 6,771 176 24,702
- --------------------------------------------------------------------------------------------------------------
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Multicare (excluding the Genesis
Facilities) at November 30, 1997. Included in Managed Centers are seven
jointly-owned facilities with 883 beds. As a result of the Multicare
Transaction, the wholly-owned, jointly-owned and leased centers of Multicare
are effectively jointly-owned by Genesis through the Company's 44% equity
interest in Multicare and all of the Multicare centers, including the
jointly-owned centers are managed by Genesis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain
Transactions".
Wholly-Owned Leased Managed
Centers Centers Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds
- -----------------------------------------------------------------------------------------------
Massachusetts 3 365 5 742 42 3,212 50 4,319
New Jersey 11 1,425 8 1,294 4 659 23 3,378
Pennsylvania 16 1,805 - - 3 654 19 2,459
West Virginia 15 1,373 4 326 3 192 22 1,891
Ohio 10 896 4 250 - - 14 1,146
Connecticut 5 766 2 250 6 872 13 1,888
Illinois 8 876 1 92 - - 9 968
Wisconsin 6 729 2 231 - - 8 960
Rhode Island 3 373 - - - - 3 373
Virginia 1 90 1 85 - - 2 175
Vermont 1 58 - - - - 1 58
- -----------------------------------------------------------------------------------------------
Totals 79 8,756 27 3,270 58 5,589 164 17,615
- -----------------------------------------------------------------------------------------------
The Company believes that all of its centers are well maintained and are in a
suitable condition for the conduct of its business.
16
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 the Company, would have a material adverse effect on its
financial position. See "Cautionary Statements Regarding Forward Looking
Statements."
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
ITEM 4.1: EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company.
Name Age Position
---- --- --------
Michael R. Walker 49 Chairman and Chief Executive Officer
Richard R. Howard 48 President and Director
David C. Barr 47 Executive Vice President and Chief Operating Officer
Michael G. Bronfein 42 President and Chief Executive Officer, NeighborCare Pharmacies
John F. DePodesta 53 Senior Vice President, Law and Public Policy
George V. Hager, Jr. 41 Senior Vice President and Chief Financial Officer
Marc D. Rubinger 48 Senior Vice President and Chief Information Officer
Maryann Timon 44 Senior Vice President, Managed Care
Kenneth R. Kuhnle 42 Vice President and Treasurer
James V. McKeon 33 Vice President and Corporate Controller
Michael R. Walker is the founder of the Company and has served as Chairman and
Chief Executive Officer of the Company since its inception. In 1981, Mr.
Walker co-founded Health Group Care Centers ("HGCC"). At HGCC, he served as
Chief Financial Officer and, later, as President and Chief Operating Officer.
Prior to its sale in 1985, HGCC operated nursing homes with 4,500 nursing beds
in 12 states. From 1978 to 1981, Mr. Walker was the Vice President and
Treasurer of AID Healthcare Centers, Inc. ("AID"). AID, which owned and
operated 20 nursing centers, was co-founded in 1977 by Mr. Walker as the
nursing home division of Hospital Affiliates International. Mr. Walker holds a
Master of Business Administration degree from Temple University and a Bachelor
of Arts in Business Administration from Franklin and Marshall College. Mr.
Walker serves on the Board of Directors of Renal Treatment Centers, Inc. and
the Board of Trustees of Universal Health Realty & Income Trust.
Richard R. Howard has served as a director of the Company since its inception
and as Chief Operating Officer since June 1986. He joined the Company in
September 1985 as Vice President of Development. Mr. Howard's background in
healthcare includes two years as the Chief Financial Officer of HGCC. Mr.
Howard's experience also includes over ten years with Fidelity Bank,
Philadelphia, Pennsylvania and one year with Equibank, Pittsburgh,
Pennsylvania. Mr. Howard 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 has served as Executive Vice President of the Company since
October 1988. Prior to joining Genesis, Mr. Barr was a principal of a private
consulting firm, Kane Maiwurm Barr, Inc., which provided management consulting
for small and medium-sized firms. Prior to forming this firm, he served as
Executive Vice President of Allegheny Beverage Corporation, a service
conglomerate. During 1984 and 1985, Mr. Barr served with Equibank, Pittsburgh,
Pennsylvania, where he held several positions including Executive Vice
President of Corporate Banking. Mr. Barr graduated in 1972 from the University
of Miami with a Bachelor of Science degree in Accounting.
Michael G. Bronfein joined the Company in June 1996 as the President and Chief
Executive Officer of NeighborCare Pharmacies, Inc. which was acquired by
Genesis in June 1996. Prior to joining NeighborCare in 1991, Mr. Bronfein held
the position of Senior Vice President and Head of Commercial Finance Lending
for Signet Banking Corporation in Maryland, Virginia and Washington, D.C. In
addition to his position with the Company, Mr. Bronfein serves as the Chairman
of the Board of Health Objects Corporation and on the National Board of
Advisors - University of Maryland School of Pharmacy. Mr. Bronfein received a
Bachelors of Science Degree in Accounting from the University of Baltimore. He
is a Certified Public Accountant and is a member of the AICPA and MACPA.
John F. DePodesta joined the Company as Senior Vice President, Law and Public
Policy in January 1996. Mr. DePodesta was previously a partner and currently
is of-counsel in the law firm of Pepper, Hamilton & Scheetz. In addition to
his position with the Company, Mr. DePodesta currently serves as the Executive
Vice President, Law and Regulatory Affairs, and Director of Primus
Telecommunications, Inc., and the Chairman of the Board of Iron Road Railways,
Incorporated, both of which he co-founded in 1994. Mr. DePodesta
18
received a Bachelor of Arts degree from Harvard College in 1966 and his Juris
Doctor from the University of Pennsylvania Law School in 1969. Pepper,
Hamilton & Scheetz performs outside legal services for the Company.
George V. Hager, Jr. has served the Company as Senior Vice President and Chief
Financial Officer since February 1994. Mr. Hager joined the Company in July
1992 as Vice President and Chief Financial Officer. Mr. Hager was previously
partner in charge of the healthcare practice for KPMG Peat Marwick LLP in the
Philadelphia office. Mr. Hager began his career at KPMG Peat Marwick LLP in
1979 and has over 15 years of experience in the healthcare industry. Mr. Hager
received a Bachelor of Arts degree in Economics from Dickinson College in 1978
and a Master of Business Administration degree from Rutgers Graduate School of
Management. He is a certified public accountant and a member of the AICPA and
PICPA.
Marc D. Rubinger has served as Vice President and Chief Information Officer
since November 1995. Prior to joining the Company, Mr. Rubinger served as
General Manager-Decision Support Systems of Shared Medical Systems. From 1975
through 1986, Mr. Rubinger was with Ernst & Young in their national healthcare
consulting practice, most recently as a partner. Mr. Rubinger received a
Bachelor of Arts degree in Bioscience from Binghamton University in 1971 and a
Masters of Health Administration and Planning from The George Washington
University in 1973.
Maryann Timon has served as Senior Vice President for Managed Care since May
1996. From January 1995 through May 1996 she served as Corporate Vice
President of the Managed Care Division. Ms. Timon joined the Company in
December 1990 to form and serve as President of a wholly-owned subsidiary,
Healthcare Services Network. Ms. Timon was previously President of Mercy
Ventures, Inc., a five-company healthcare specialty group owned by Mercy
Medical Center in Baltimore, Maryland. Ms. Timon has 25 years of experience
providing eldercare healthcare services, prior to which she was a healthcare
consultant with RGH Associates in Towson, Maryland. Ms. Timon received an
Associate Degree in Applied Science in Nursing in 1973 from the State
University of New York at Canton, a Bachelor of Science Degree in Nursing in
1976 from the State University of New York at Utica/Rome and a Master of
Gerontological Nursing Degree in 1978 from the University of Rochester. Ms.
Timon also has Master of Business Administration studies from the University
of Baltimore, post graduate studies in Management Development from the Johns
Hopkins School of Public Health and Hygiene, and is certified in Advanced Home
Health Administration from Catholic University.
Kenneth R. Kuhnle has served as Vice President and Treasurer of the Company
since February 1990. He joined Genesis in October 1988 as Reimbursement
Director, which includes responsibility for monitoring government programs as
well as third party reimbursement planning and maximization. Mr. Kuhnle served
as Reimbursement Manager for Beverly Enterprises, owners and operators of
long-term care centers, from January 1986 to October 1988 and as Medicare
Auditor for Aetna Life Insurance Company from November 1982 to December 1985.
He received a Bachelor of Science degree in Business Administration from
Temple University in 1979. Mr. Kuhnle serves as President of the Delaware
Healthcare Facilities Association and President of the Worcester chapter of
the Massachusetts Federation of Nursing Homes.
James V. McKeon has served as Vice President and Corporate Controller of
Genesis since April 1997. Mr. McKeon joined the Company 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 September 1986 until June 1994, Mr. McKeon was employed by KPMG Peat
Marwick 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.
19
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.
Calendar Year High Low
1997
First Quarter $37.87 $28.25
Second Quarter $37.50 $25.38
Third Quarter $39.75 $32.38
Fourth Quarter * $39.62 $21.75
1996
First Quarter $30.12 $23.50
Second Quarter $33.75 $27.12
Third Quarter $31.12 $21.25
Fourth Quarter $31.12 $22.00
* Through December 12, 1997
As of December 12, 1997, 35,130,236 shares of Common Stock were held of record
by 677 shareholders. 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. Certain of the Company's
outstanding loans contain covenants which limit the Company's ability to
declare dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements".
20
ITEM 6: SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
Statement of Operations Data
(in thousands, except per share data)
Net revenues $1,099,823 $671,469 $486,393 $388,616 $219,809
Operating income before capital costs* 184,868 127,024 93,253 69,373 38,129
Earnings before income taxes,
extraordinary items and cumulative effect
of an accounting change 75,232 58,086 40,296 27,710 18,903
Earnings before extraordinary items and
cumulative effect of an accounting change 48,144 37,169 25,531 17,691 11,909
Net income 47,591 37,169 23,608 17,673 11,909
Per common share data (fully diluted):
Earnings before extraordinary items and
cumulative effect of an accounting change $1.34 $1.29 $1.03 $0.84 $0.67
Net income 1.32 1.29 0.97 0.84 0.67
Weighted average shares of common stock
and equivalents 36,306 31,130 28,452 24,820 17,929
- --------------------------------------------------------------------------------------------------------------
Financial Measurements
Operating income before capital costs * as
a percent of revenue 16.8% 18.9% 19.2% 17.8% 17.3%
Earnings before income taxes,
extraordinary items and cumulative effect
of an accounting change as a percent of
revenue 6.8% 8.6% 8.3% 7.1% 8.6%
Return ** (before interest) on average
assets employed 5.7% 6.9% 7.0% 6.2% 7.6%
Return** on average shareholders' equity 8.4% 11.4% 12.3% 11.6% 11.4%
Long-term debt to equity ratio 1.07 .66 1.4 1.3 .67
- --------------------------------------------------------------------------------------------------------------
Operating Data
Payor mix (as a percent of patient
service revenue)
Private pay and other 39% 39% 38% 41% 42%
Medicare 24% 25% 21% 16% 14%
Medicaid 37% 36% 41% 43% 44%
Average owned/leased health center beds 15,132 9,429 8,268 7,530 4,686
Occupancy percentage 91.0% 92.6% 91.9% 91.9% 94.6%
Specialty medical revenue per patient day
- - eldercare centers $33.84 $29.94 $25.06 $17.80 $16.79
Specialty medical revenues - eldercare
services (in thousands) $432,752 $254,663 $154,833 $109,452 $63,790
Average managed life care units and health
center beds 6,101 5,030 10,374 9,992 6,203
Average full-time equivalent personnel 27,700 16,325 12,180 8,623 3,810
- --------------------------------------------------------------------------------------------------------------
21
Balance Sheet Data (in thousands)
Working capital $226,930 $155,491 132,274 $66,854 $50,081
Total assets 1,434,113 950,669 600,389 511,698 236,978
Long-term debt 651,667 338,933 308,052 250,807 83,842
Shareholders' equity $608,021 $514,608 $221,548 $195,466 $125,348
* Capital costs include depreciation and amortization, lease expense and
interest expense.
** Before extraordinary items and cumulative effect of an accounting change.
Please refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a description of significant transactions.
22
ITEM 7: 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 geriatric
patients. The delivery of these services was originally concentrated in the
eldercare centers owned and leased by the Company, but now also includes
managed eldercare centers, independent healthcare facilities, outpatient
clinics and home health care. The Company generates revenues from three
sources: basic healthcare services, specialty medical services and management
services and other. The Company includes in basic healthcare services revenues
all room and board charges for its eldercare customers at its 109 owned and
leased eldercare centers. Specialty medical services include all revenues from
providing rehabilitation therapies, institutional pharmacy and medical supply
services, professional pharmacy services, subacute care programs, home health
care, physician services, and other specialized services to all centers owned,
leased or managed by Genesis, as well as to over 800 independent healthcare
providers. Management services and other include fees earned for management of
eldercare centers, other service related businesses and transactional
revenues. Genesis ElderCare Network Services, manages 210 eldercare centers,
116 of which are jointly-owned (including the impact of the Multicare
Transaction defined in Certain Transactions).
Certain Transactions
Multicare Transaction
On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."),
a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"),
pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On
October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger"
or the "Multicare Transaction") of Acquisition Corp. with and into Multicare
in accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp., which will be
consolidated with Genesis. 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 will manage
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 will be 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
23
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 Sale 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 Sales") and a stock purchase
agreement (the "Pharmacy Sale Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis will acquire all of the outstanding
capital stock and limited partnership interest of certain subsidiaries of
Multicare that are engaged in the business of providing institutional pharmacy
services to third parties for $50,000,000, subject to adjustment. The Company
expects to complete the Pharmacy sale in the first calendar quarter of 1998.
Genesis ElderCare Corp. (the "Multicare Parent") paid approximately
$1,492,000,000 to (i) purchase the shares pursuant to the Tender Offer and the
Merger, (ii) pay fees and expenses to be 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 to
Acquisition Corp. as capital contributions by the Multicare Parent from the
sale by Genesis ElderCare Corp. of its Common Stock ("Genesis Eldercare Corp.
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 approximately 44% of the Common Stock of
the Multicare Parent. 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 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997.
Presbyterian Foundation
Effective January 1, 1997, the Company entered into an agreement to provide
management services for NewCourtland, Inc. ("NewCourtland"), a wholly owned
subsidiary of The Presbyterian Foundation of Philadelphia (the "Presbyterian
Foundation"), a non-profit organization. Under the terms of the agreement,
Genesis provides management services to eight eldercare centers with 1,844
beds located throughout the Delaware Valley.
Geriatric & Medical Companies, Inc.
Effective October 1, 1996, Geriatric & Medical Companies, Inc. ("GMC") merged
with a wholly-owned subsidiary of Genesis (the "GMC Transaction"). Under the
terms of the merger agreement, GMC shareholders received $5.75 per share in
cash for each share of GMC stock. The total consideration paid, including
assumed indebtedness of approximately $132,000,000, was approximately
$223,000,000. The merger was financed in part with approximately $121,250,000
in net proceeds from an offering of 9 1/4% Senior Subordinated Notes issued in
October 1996, (the "1996 Offering"). The remaining consideration was financed
through borrowings under the Company's bank credit facility. The GMC
Transaction added to Genesis 24 owned eldercare centers with approximately
3,300 beds. GMC also operates businesses which provide a number of ancillary
healthcare services including ambulance services; respiratory therapy,
infusion therapy and enteral therapy; distribution of durable medical
equipment and home medical supplies; and information management services.
Doctors Health System, Inc.
At September 30, 1997, the Company held $10,000,000 of convertible preferred
stock of Doctors Health System, Inc. ("Doctors Health"), an independent
physician owned and controlled integrated delivery system and practice
management company based in Maryland. The convertible preferred stock, which is
accounted for under the cost method, carries an 8% cumulative dividend and is
convertible into common stock, and if converted would represent an approximate
10% ownership interest in Doctors Health. Also, the Company loaned $5,000,000 to
Doctors Health at an annual interest rate of 11%.
24
National Health Care Affiliates, Inc.
In July 1996, the Company acquired the outstanding stock of National Health
Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center
Corporation, Eidos, Inc. and Versalink, Inc. (collectively "National Health").
Prior to the closing of the stock acquisitions, an affiliate of a financial
institution purchased nine of the eldercare centers for $67,700,000 and
subsequently leased the centers to a subsidiary of Genesis under operating
lease agreements and a then existing $85,000,000 lease financing facility. The
balance of the total consideration paid to National Health was funded with
available cash of $51,800,000 and assumed indebtedness of $7,900,000. National
Health added 16 eldercare centers in Florida, Virginia and Connecticut with
approximately 2,200 beds to Genesis. National Health also provides enteral
nutrition and rehabilitation therapy services to the eldercare centers which
it owns and leases.
NeighborCare Pharmacies, Inc.
In June 1996, the Company acquired the outstanding stock of NeighborCare
Pharmacies, Inc., ("NeighborCare") a privately held institutional pharmacy,
infusion therapy and retail pharmacy business based in Baltimore, Maryland.
Total consideration was approximately $57,250,000, comprised of approximately
$47,250,000 in cash and 312,744 shares of Genesis common stock.
McKerley Health Care Centers, Inc.
On November 30, 1995, the Company acquired McKerley Health Care Centers
("McKerley") for total consideration of approximately $68,700,000. The
transaction (the "McKerley Transaction") also provided for up to an additional
$6,000,000 of contingent consideration payable upon the achievement of certain
financial objectives through October 1997, of which $4,000,000 was paid in
February 1997. McKerley added to Genesis 15 geriatric care facilities in New
Hampshire and Vermont with a total of 1,535 beds. McKerley also operates a
home healthcare company. The acquisition was financed with borrowings under
the bank credit facilities and assumed indebtedness.
Other Transactions
In March 1996, the Company sold four eldercare centers and a pharmacy in
Indiana for approximately $22,250,000 (the "Indiana Transaction").
In March 1996, the Company acquired for total consideration of approximately
$31,900,000 including the payment of assumed debt, the remaining approximately
71% joint venture interests of four eldercare centers in Maryland and the
remaining 50% joint venture interest of an eldercare center in Florida (the
"Partnership Interest Purchase").
In January 1996, the Company acquired the speech therapy, occupational therapy
and physical therapy services businesses of Medical and Rehab Support
Services, Inc., Professional Rehabilitation Network, Inc. and Healthcare Rehab
Services, Inc. (collectively, the "Therapy Companies") for approximately
$9,300,000. The Therapy Companies provide these services in the Company's
Chesapeake Region. The acquisition was financed with borrowings under the
Company's bank credit facilities.
Prior to January 1, 1996, the Company provided management, development and
marketing services to life care communities operated by Adult Community Total
Services, Inc. ("ACTS"), a Pennsylvania non-profit corporation, pursuant to a
management agreement which was to expire in April 1998. Effective January 1,
1996, Genesis restructured its relationship with ACTS. Under the revised
arrangement, Genesis earned a $2,000,000 restructuring fee and no longer
manages the ACTS life care communities. Genesis continues to provide
development services for a fee in an amount equal to five percent of the total
cost of developing and completing facilities developed by ACTS. The
development portion of the contract has been extended to December 2002 and
Genesis is guaranteed a minimum annual development fee of
25
approximately $1,500,000. Genesis also continues to provide certain ancillary
services to the ACTS communities.
Fiscal 1997 Compared to Fiscal 1996
The Company's total net revenues for fiscal year ended September 30, 1997
("Fiscal 1997") were $1,099,823,000 compared to $671,469,000 for the fiscal
year ended September 30, 1996 ("Fiscal 1996"), an increase of $428,354,000 or
64%. Basic healthcare services increased $201,947,000 or 58%, of which
approximately $132,800,000 is attributable to the GMC Transaction,
approximately $45,800,000 is attributable to the inclusion of the eldercare
centers acquired in the National Health transaction for the full twelve months
in 1997 versus three months in the prior year, approximately $9,900,000 is due
to the inclusion of the eldercare centers acquired in the McKerley Transaction
for the full twelve months in 1997 versus ten months in the prior year, and
the remaining increase of approximately $14,600,000 is due to providing care
to higher acuity patients and to rate increases. This increase was offset by
approximately $1,200,000 due to the termination of operations of three leased
eldercare centers in September 1997 and a decline in overall census. Specialty
medical services revenue increased $211,954,000 or 73% of which approximately
$47,300,000 is attributed to the GMC Transaction, approximately $16,800,000 is
due to the inclusion of the eldercare centers acquired in the National Health
transaction for the full twelve months in 1997 versus three months in the
prior year, approximately $42,200,000 is attributed to the inclusion of the
NeighborCare Pharmacies transaction for the full twelve months in 1997 versus
five months in 1996, approximately $1,500,000 is due to the inclusion of the
eldercare centers acquired in the McKerley Transaction for the full twelve
months in 1997 versus ten months in the prior year, and the remaining increase
of approximately $106,900,000 is primarily due to other volume growth in the
institutional pharmacy, medical supply and contract therapy divisions and
increased acuity in the health centers division. This increase was offset by
approximately $2,400,000 and $300,000 as a result of the fourth quarter of
Fiscal 1997 deconsolidation of the Company's physician services business and
the termination of the operations of three leased eldercare centers in
September 1997, respectively. Specialty medical service revenue per patient
day in the health centers division increased 13% to $33.84 in the twelve
months ended September 30, 1997 compared to $29.94 in the twelve months ended
September 30, 1996 primarily due to treatment of higher acuity patients.
Management services and other income increased $14,453,000 or 44%. This
increase is primarily due to other service business acquired in the GMC
Transaction, offset by other transactional revenues earned in the twelve
months ended September 30, 1996 which included gains recognized in connection
with the sale of an investment, the sale of four eldercare centers and a
pharmacy in Indiana and the sale of a majority interest in one eldercare
center in Maryland.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and debenture conversion expense were $914,955,000
for the twelve months ended September 30, 1997 compared to $543,200,000 for
the twelve months ended September 30, 1997, an increase of $371,755,000 or
68%, which is principally due to the impact of acquisitions, growth in the
institutional pharmacy, medical supply and contract therapy divisions and due
to a $15,000,000 special charge recorded in the fourth quarter of Fiscal 1997.
In the fourth quarter of Fiscal 1997, the Company completed an evaluation of
its physician service business and announced its intentions to restructure
this business, including the closure and possible sale of free standing
service sites, the restructuring of physician compensation arrangements and
the termination of certain staff. In connection with the plan and selected
asset impairments, the Company recorded a fourth quarter pretax charge of
approximately $5,700,000. In addition, the Company reached an agreement with
Blue Cross Blue Shield of Maryland (BCBSMD) to insure, through a
sub-capitation agreement, the health care benefits of approximately 7,000
members of BCBSMD's Care First Medicare product. The capitation risk contract
is currently generating operating losses, which the Company has agreed to
assume retroactive to July 1, 1997. As a result, the Company has recorded a
liability and a pretax special charge of approximately $5,000,000 to accrue
for the estimated loss inherent in the agreement. The special charge also
included a pretax charge of approximately $4,300,000 related to the write-off
of selected assets deemed impaired.
Increased depreciation and amortization, and lease expense are primarily
attributed to the assets aquired in the GMC Transaction, the National Health
transaction, the NeighborCare transaction and the McKerley Transaction.
Interest expense increased $14,177,000 or 57%. This increase in interest
expense was primarily due to additional borrowings used to finance recent
acquisitions, including the 1996 Note Offering used to finance the GMC
Transaction, offset by the repayment of debt associated with proceeds of
$202,280,000 from the May 1996 equity offering, and offset by the conversion
of the Company's 6% Convertible Senior Subordinated Debentures.
26
In connection with the early repayment of debt and the restructuring and
amendment of the Company's bank credit facility in the quarter ended December
31, 1996, the Company recorded an extraordinary item (net of tax) of
approximately $553,000 to write off unamortized deferred financing fees.
Fiscal 1996 Compared to Fiscal 1995
The Company's total net revenues for Fiscal 1996 were $671,469,000 compared to
$486,393,000 for the fiscal year ended September 30, 1995 ("Fiscal 1995"), an
increase of $185,076,000 or 38%. Basic healthcare services increased
$69,895,000 or 25%, approximately $41,652,000 of which is due to the McKerley
Transaction, National Health transaction and the Partnership Interest Purchase
in March 1996 (which was partially offset by the sale of five eldercare
centers in September 1995 and the Indiana Transaction in March 1996), with the
remainder due to a shift in payor mix from Medicaid to Medicare and rate
increases. Specialty medical services revenue increased $110,101,000 or 61%,
of which approximately $57,000,000 is due to acquisitions, with the remainder
due to other volume growth in the institutional pharmacy, medical supply and
contract therapy divisions and increased acuity in the health centers
division. Specialty medical service revenue per patient day in the health
centers division increased 19% to $29.94 in Fiscal 1996 compared to $25.06 in
Fiscal 1995 primarily due to treatment of higher acuity patients. Management
services and other income increased $5,080,000 or 18%. This increase is
primarily due to an increase in service related business revenues (group
purchasing and staff replacement services) of approximately $3,500,000 and an
increase in transactional gains of approximately $2,600,000. Transactional and
other activity in Fiscal 1996 included net gains recognized in connection with
the sale of an investment, the Indiana Transaction and the sale of a majority
interest in one eldercare center in Maryland.
The Company's operating expenses before debenture conversion expense,
depreciation, amortization, lease expense and interest expense were
$543,200,000 for Fiscal 1996 compared to $393,139,000 for Fiscal 1995, an
increase of $150,061,000 or 38%, of which approximately $84,335,000 was due to
the McKerley Transaction, Neighbor Care transaction and National Health
transaction, and the remaining $65,726,000 is attributed to growth in
institutional pharmacy, medical supply and contract therapy business and
inflationary wage and benefit increases.
During Fiscal 1996, the Company converted approximately $42,500,000 of its 6%
Senior Subordinated Convertible Debentures due 2003 (the "Debentures"). In
connection with the early conversion of a portion of the Debentures, the
Company paid approximately $1,245,000 representing the prepayment of interest
to converting debenture holders. The non-recurring cash payment is presented
as debenture conversion expense in the results of operations.
Depreciation and amortization expense increased to $25,374,000 in Fiscal 1996
from $18,793,000 in Fiscal 1995 as a result of Fiscal 1996 acquisitions and
capital expenditures.
Lease expense increased to $18,638,000 in Fiscal 1996 from $13,798,000 in
Fiscal 1995 of which approximately $2,000,000 is related to the McKerley
Transaction and $1,600,000 is related to the National Health transaction.
Interest expense increased $4,560,000 or 22%. This increase reflects increased
debt levels used to fund acquisitions and a higher average prevailing interest
rate due to the June 1995 issuance of $120,000,000 of 9 3/4% Notes, due 2005.
27
Liquidity and Capital Resources
Working capital increased to $226,930,000 at September 30, 1997 from
$155,491,000 at September 30, 1996. Accounts receivable increased to
$205,129,000 at September 30, 1997 from $141,716,000 at September 30, 1996.
Approximately $32,000,000 of this increase relates to the GMC Transaction,
while the remaining approximately $31,400,000 relates primarily to the
continuing shift in business mix to specialty medical services including the
acquisition of NeighborCare in Fiscal 1996. The allowance for doubtful
accounts increased approximately $28,300,000, primarily as a result of
reserves established in connection with the GMC Transaction. Days of revenue
in accounts receivable increased approximately 3 days to 65 days at September
30, 1997 versus September 30, 1996. Cost report receivables increased to
$60,865,000 at September 30, 1997 from $41,575,000 at September 30, 1996.
Approximately $1,900,000 of this increase relates to balances acquired in the
GMC Transaction, and the remaining increase of approximately $17,400,000 is
principally due to an increase in Medicare revenues which are reimbursed on a
retrospective cost basis. The Company's cash flow from operations for the
twelve months ended September 30, 1997 provided cash of $53,354,000 compared
to $36,232,000 for the twelve months ended September 30, 1996, primarily due
to growth in operations.
Investing activities for the twelve months ended September 30, 1997 include
approximately $61,100,000 of capital expenditures primarily related to the
development of assisted living properties, betterments and expansion of
eldercare centers, the purchase of additional corporate office space and
investment in data processing hardware and software.
During the twelve months ended September 30, 1997, notes receivable and other
investments increased approximately $19,000,000 principally due to investments
of approximately $7,500,000 in Doctors Health System, approximately $3,900,000
in Health Objects Corporation, a software development company; approximately
$2,500,000 in Senior LifeChoice L.L.C., an assisted living facility under
development, with the remaining increase due primarily to the GMC Transaction.
During the twelve months ended September 30, 1997, other long term assets
increased approximately $7,100,000, principally due to the GMC Transaction.
In October 1997, in connection with the Multicare Transaction, Genesis entered
into a new credit facility with Mellon Bank, N.A., Citicorp Securities, Inc.,
Citibank N.A., First Union Capital Markets Corp., First Union National Bank
and NationsBank, N.A. (the "Lenders") pursuant to which the Lenders provided
Genesis and its subsidiaries with loan facilities totaling $850,000,000 (the
"Genesis Bank Financing") 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 Merger; and funding
Genesis' and its subsidiaries' working capital and general corporate purposes,
including fees and expenses of the transactions. The Genesis Bank Financing
facilities consist of three $200,000,000 term loans and a $250,000,000
revolving credit loan. The term loans amortize beginning in Fiscal 1998
through Fiscal 2005, of which $19,000,000 is payable in Fiscal 1998. The
revolving credit loan becomes payable in full on September 30, 2003. The
Genesis Bank Financing bears interest at a floating rate equal, at the
Company's option, to prime rate or LIBOR plus a margin up to 3.0%.
The Genesis Bank Financing facilities are 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, the Multicare Parent)
other than the stock of Multicare and its subsidiaries.
The Genesis Bank Financing 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
28
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 below, 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 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 maybe 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; 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 which provides
generally for the preferential return of the stockholders' capital
contributions (subject to certain priorities), a 25% compound annual return on
Cypress', TPG's and Nazem's capital contributions and the remaining Calculated
Equity Value to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp.
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 or 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 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 Genesis Bank Financing.
In November 1996, the Company called for redemption of the then outstanding
Debentures at a redemption price equal to 104.2% of the principal amount. The
Debenture holders had the option to tender Debentures
29
at the redemption price or to convert the Debentures at a conversion price of
$15.104 per share. All of the approximately $43,800,000 of remaining
Debentures outstanding were converted to Common Stock in the quarter ended
December 31, 1996. The conversions improved the Company's leverage.
In October 1996, the Company completed the 1996 Note Offering. The Company
used the net proceeds of approximately $121,250,000 together with borrowings
under its bank credit facilities, to pay the cash portion of the purchase
price of the GMC Transaction, to repay certain debt assumed as a result of the
GMC Transaction and to repurchase GMC accounts receivable which were
previously financed.
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.
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.
In December 1997, the Company announced that its Board of Directors approved
the purchase of long-term call options on up to 1,500,000 shares of the
Company's Common Stock. The call options will be purchased by the Company from
time to time in privately negotiated transactions designed to take advantage
of attractive share price levels, as determined by the Company's management,
in compliance with covenants governing existing financing arrangements. The
timing and the terms of the transactions, including maturities, will depend on
market conditions, the Company's liquidity and covenant requirements under its
financing arrangements, and other considerations. The Board of Directors also
approved a Senior Executive Stock Ownership Program. Under the terms of the
program, certain of the Company's current senior executive employees will be
required to own shares of the Company's Common Stock having 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.
In October 1997, the Company announced its intention to enter into a number of
financing arrangements with ElderTrust, Inc. ("ElderTrust")a newly formed
Maryland healthcare real estate investment trust. The arrangements include the
sale/leaseback of several assisted living, skilled nursing and office building
properties, as well as a subordinated note. Subject to the successful
completion of ElderTrust's initial public offering anticipated in the first
calendar quarter of 1998, the Company expects to receive approximately
$68,000,000 in cash as a result of the proposed sale of these properties and
investments. The arrangements also include a commitment to ElderTrust to
borrow $42,900,000 from ElderTrust to finance the development and expansion of
additional assisted living properties and skilled nursing facilities. This
commitment is expected to be funded in the coming 18 months. Under the terms
of these agreements, Genesis is obligated to sell and ElderTrust is obligated
to purchase these facilities under sale / leaseback arrangements once defined
occupancy
30
targets have been reached or a specific time period has elapsed. The
arrangements also include the refinancing by Genesis and an affiliate of
approximately $16,000,000 to fund term loans on existing facilities currently
in the early stages of operations and to fund construction of properties
currently under development. Under the terms of these loans, Genesis and its
affiliate are obligated to sell and ElderTrust is obligated to purchase these
facilities under sale/leaseback arrangements once defined occupancy targets
have been reached or a specific time period has elapsed. Additionally, Genesis
intends to enter into similar sale/leaseback arrangements for an additional
$100,000,000 in facilities in 1998. These transactions are aimed toward
reducing the Company's leverage and to re-deploy capital. No assurance can be
given that these transactions will be completed.
The Company believes that its liquidity needs can be met by expected operating
cash flow and availability of borrowings under its credit facilities. At
December 12, 1997, approximately $710,933,000 was outstanding under the
Genesis Bank Financing facilities, and approximately $124,842,000 was
available under the credit facilities after giving effect to approximately
$13,558,000 in outstanding letters of credit issued under the credit
facilities.
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."
31
New Accounting Pronouncements
In February 1997, the FASB issued Statement 128, "Earnings Per Share". This
statement simplifies the standards for computing earnings per share ("EPS")
and makes them more comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement of
all entities with complex capital structures. Statement 128 also requires a
reconciliation of the numerator and denominator of the diluted EPS
calculation. The new standard is required to be adopted by all public
companies for reporting periods ending after December 15, 1997, (the Company's
first quarter of fiscal 1998). Had Statement 128 been adopted in the first
quarter of Fiscal 1997, basic and diluted EPS would have been computed for the
twelve months ended September 30, 1997 as follows:
Weighted
Average Earnings Per
(in thousands except per share data) Net Income Shares Share
- -----------------------------------------------------------------------------------------------------------
Basic EPS - net income $47,591 34,558 $1.38
- -----------------------------------------------------------------------------------------------------------
Effect of assumed conversion of debt 303 437
Incremental shares from assumed exercise of
dilutive stock options - 1,125
- -----------------------------------------------------------------------------------------------------------
Diluted EPS - net income $47,894 36,120 $1.33
- -----------------------------------------------------------------------------------------------------------
32
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1997.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genesis
Health Ventures, Inc. and Subsidiaries as of September 30, 1997 and 1996, and
the results of their operations, and their cash flows for each of the years in
the three-year period ended September 30, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
November 19, 1997
33
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Balance Sheets
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands except share data)
Assets
Current assets:
Cash and equivalents $ 11,651 $ 12,763
Investments in marketable securities 14,729 5,517
Accounts receivable, net of allowance for doubtful accounts
of $39,418 in 1997 and $11,131 in 1996 205,129 141,716
Cost report receivables 60,865 41,575
Income tax receivable 7,820 -
Inventory 25,568 17,051
Prepaid expenses and other current assets 26,675 14,099
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 352,437 232,721
- ----------------------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net 578,397 350,929
Notes receivable and other investments 111,601 92,574
Other long-term assets 31,722 24,595
Goodwill and other intangibles, net 359,956 249,850
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,434,113 $ 950,669
==================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 47,547 $ 33,781
Accrued expenses 33,835 15,331
Current installments of long-term debt 8,273 3,720
Accrued compensation 23,116 18,630
Accrued interest 12,736 5,342
Income taxes payable - 426
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 125,507 77,230
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 651,667 338,933
Deferred income taxes 37,745 13,812
Deferred gain and other long-term liabilities 11,173 6,086
Shareholders' equity:
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,117,075 and 35,071,474 at September 30, 1997;
31,981,393 and 31,935,792 at September 30, 1996 702 640
Additional paid-in capital 457,232 411,472
Retained earnings 150,330 102,739
Treasury stock, at cost (243) (243)
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 608,021 514,608
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,434,113 $ 950,669
==================================================================================================================================
See accompanying notes to consolidated financial statements
34
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Statements of Operations
Year ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Net revenues:
Basic healthcare services $ 549,963 $ 348,016 $ 278,121
Specialty medical services 502,382 290,428 180,327
Management services and other, net 47,478 33,025 27,945
- -----------------------------------------------------------------------------------------------------------------------------------
Total net revenues 1,099,823 671,469 486,393
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 512,317 315,494 237,610
Other operating expenses 346,599 201,866 137,945
General corporate expense 41,039 25,840 17,585
Special charge 15,000 - -
Depreciation and amortization 41,946 25,374 18,793
Lease expense 28,587 18,638 13,798
Interest expense, net 39,103 24,926 20,366
Debenture conversion expense - 1,245 -
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary items 75,232 58,086 40,296
Income taxes 27,088 20,917 14,765
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary items 48,144 37,169 25,531
Extraordinary items, net of tax (553) - (1,923)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 47,591 $ 37,169 $ 23,608
==================================================================================================================================
Per common share data:
Primary:
Earnings before extraordinary items $ 1.35 $ 1.35 $ 1.13
Net income $ 1.33 $ 1.35 $ 1.05
Weighted average shares of common stock and equivalents 35,643,265 27,491,765 22,587,037
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted:
Earnings before extraordinary items $ 1.34 $ 1.29 $ 1.03
Net income $ 1.32 $ 1.29 $ 0.97
Weighted average shares of common stock and equivalents 36,306,500 31,130,045 28,452,436
==================================================================================================================================
See accompanying notes to consolidated financial statements
35
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Statements of Shareholders' Equity
Additional
(Dollars in thousands) Common paid-in Retained Treasury
stock capital earnings stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 $ 291 $ 153,573 $ 41,962 $ (360) $ 195,466
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of additional common stock - 621 - - 621
Issuance of shares from Treasury - - - 117 117
Exercise of common stock options and
issuance of stock bonus awards 3 1,733 - - 1,736
1995 net earnings - - 23,608 - 23,608
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 294 155,927 65,570 (243) 221,548
=================================================================================================================================
Issuance of additional common stock,
net of issuance costs 136 211,529 - - 211,665
Conversion of Debentures 42 41,676 - - 41,718
Exercise of common stock options 5 2,503 - - 2,508
Effect of stock split 163 (163) - - -
1996 net earnings - - 37,169 - 37,169
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 640 411,472 102,739 (243) 514,608
=================================================================================================================================
Exercise of common stock options 4 2,815 - - 2,819
Conversion of Debentures 58 42,945 - - 43,003
1997 net earnings - - 47,591 - 47,591
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ 702 $ 457,232 $ 150,330 $ (243) $ 608,021
=================================================================================================================================
See accompanying notes to consolidated financial statements
36
Genesis Health Ventures, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Year ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 47,591 $ 37,169 $ 23,608
Adjustments to reconcile net income to
net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes 21,023 5,114 (1,270)
Depreciation and amortization 41,946 25,374 18,793
Amortization of deferred gain (460) (460) (460)
Amortization of debt premium (398) - -
Special charge 15,000 - -
Debenture conversion expense - 1,245 -
Extraordinary items, net of tax 553 - 1,923
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable (41,801) (6,256) (25,564)
Cost reports receivable (17,447) (15,647) (15,065)
Inventory (5,938) (2,061) (3,176)
Prepaid expenses and other current assets (4,529) 1,955 3,035
Accounts payable and accrued expenses (4,621) (7,758) 7,235
Accrued compensation and interest 6,239 (949) 1,258
Income taxes payable (3,804) (1,494) 871
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments 5,763 (937) (12,420)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 53,354 36,232 11,188
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of marketable securities (27,022) (3,909) (3,455)
Proceeds on maturity or sale of marketable securities 17,809 1,847 -
Capital expenditures (61,102) (38,645) (24,719)
Payments for acquisitions, net of cash acquired (257,837) (215,874) (8,194)
Proceeds from dispositions of facilities - 21,521 -
Notes receivable and other investment additions, net (12,804) (42,113) (23,074)
Other long term asset (additions) deletions (7,816) (7,871) 9,971
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (348,772) (285,044) (49,471)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings (repayments) under working
capital revolving credit 176,683 50,798 30,100
Repayment of long term debt (7,946) (2,539) (102,450)
Proceeds from issuance of long-term debt 126,500 - 119,700
Debt issuance costs (3,750) - (4,332)
Proceeds from issuance of common stock - 211,250 100
Stock issuance costs - (9,585) -
Debenture conversion expense - (1,245) -
Stock options exercised 2,819 2,508 1,736
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 294,306 251,187 44,854
- ---------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (1,112) 2,375 6,571
Cash and equivalents
Beginning of year 12,763 10,388 3,817
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $ 11,651 $ 12,763 $ 10,388
=================================================================================================================================
Supplemental disclosure of cash flow information
Interest paid $ 40,869 $ 24,926 $ 18,175
Income taxes paid $ 12,357 $ 22,374 $ 13,037
=================================================================================================================================
See accompanying notes to consolidated financial statements
37
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Genesis Health
Ventures, Inc. and its wholly-owned subsidiaries (the "Company" or "Genesis").
All significant intercompany accounts and transactions have been eliminated in
consolidation. All dollars, except per share amounts, and shares are expressed
in thousands. All other amounts are expressed in whole numbers.
Business
The Company provides a broad range of healthcare services to the geriatric
population, principally within four geographic markets in the eastern United
States. These services include basic healthcare services traditionally
provided in eldercare centers; specialty medical services, such as
rehabilitation therapy, institutional pharmacy and medical supply services,
community-based pharmacies and subacute care; and management services to
independent geriatric care providers.
Property, Plant and Equipment
Land, land improvements, buildings, and equipment are stated at cost.
Subsequent additions are recorded at cost. Depreciation is calculated on the
straight-line method over estimated useful lives of 20-35 years for land
improvements and buildings, and three to fifteen years for equipment,
furniture and fixtures. 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.
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.
Contractual Adjustments
Patient revenues are recorded based on standard charges applicable to all
patients. Under Medicare, Medicaid, and other cost-based reimbursement
programs, each facility is reimbursed for services rendered to covered program
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. These
revisions are made in the year such amounts are determined.
Cash Equivalents
Short-term investments which have a maturity of ninety days or less at
acquisition are considered cash equivalents.
38
Investments in Marketable Securities
Investments in marketable securities available for sale are recorded at their
fair market value, with any unrealized gains or losses recognized as a
component of shareholders' equity, until realized.
Deferred Financing Costs
Financing costs have been deferred and are being amortized on a straight-line
basis over the term of the related debt. Deferred financing costs, net of
accumulated amortization were $12,939 and $8,056 at September 30, 1997 and
1996, respectively, and are included in other long term assets.
Goodwill
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
ten to forty years. Goodwill, before accumulated amortization of $20,900 and
$11,900, was $371,900 and $254,000 at September 30, 1997 and 1996,
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.
Intangibles and Long-Lived Assets
In March, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (Statement) No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". Statement 121 provides guidance for recognition and measurement
of impairment of long-lived assets, certain identifiable intangibles and
goodwill related both to assets to be held and used and assets to be disposed
of. The Company's adoption of Statement 121 in the year ended September 30,
1997 did not have a significant impact on its consolidated financial
statements
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 Per Share
Primary earnings per share is based on the average number of shares of common
stock outstanding during the period and the dilutive effect of stock options
and other common stock equivalents. Fully diluted earnings per share reflect
the conversion of the Convertible Senior Subordinated Debentures due 2003 as
if such conversion had occurred on the date of issuance and the related
interest expense had not been incurred.
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 generally accepted accounting principles. Actual results could
differ from those estimates.
39
New Accounting Pronouncements
In February 1997, the FASB issued Statement 128, "Earnings Per Share"
("Statement 128"). This statement simplifies the standards for computing
earnings per share ("EPS") and makes them more comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS on the face
of the income statement of all entities with complex capital structures.
Statement 128 also requires a reconciliation of the numerator and denominator
of the diluted EPS calculation. Statement 128 is required to be adopted by all
public companies for reporting periods ending after December 15, 1997, (the
Company's first quarter of fiscal 1998). Had Statement 128 been adopted in the
first quarter of fiscal 1997, basic and diluted EPS would have been computed
for the twelve months ended September 30, 1997 as follows:
Weighted
Average Earnings Per
Net Income Shares Share
- -----------------------------------------------------------------------------------------------------------
Basic EPS - net income $47,591 34,558 $1.38
- -----------------------------------------------------------------------------------------------------------
Effect of assumed conversion of debt 303 437
Incremental shares from assumed exercise of
dilutive stock options - 1,125
- -----------------------------------------------------------------------------------------------------------
Diluted EPS - net income $47,894 36,120 $1.33
- -----------------------------------------------------------------------------------------------------------
(2) Acquisitions/Dispositions
On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."),
a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"),
pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On
October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger"
or the "Multicare Transaction") of Acquisition Corp. with and into Multicare
in accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp., which will be
consolidated with Genesis. 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 will manage
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 will be 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) $1,992 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 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 Sale 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 subject to adjustment (the "Therapy Sales") and a
stock purchase agreement (the "Pharmacy Sale Agreement") with Multicare and
certain subsidiaries pursuant to which Genesis will acquire all of the
outstanding capital stock and limited partnership interest of certain
subsidiaries of Multicare that are engaged in the business of providing
institutional pharmacy services to third parties for $50,000 subject to
adjustment. The Company expects to complete the pharmacy sale in the first
calendar quarter of 1998.
Genesis Eldercare Corp. (the "Multicare Parent") paid approximately $1,492,000
to (i) purchase the Shares pursuant to the Tender Offer and the Merger, (ii)
pay fees and expenses to be 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 were furnished to Acquisition Corp. as
40
capital contributions by the Multicare Parent from the sale by Genesis
ElderCare Corp. of its Common Stock ("Genesis ElderCare Corp. 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,
$199,500 and $10,500, respectively, and Genesis purchased shares of Genesis
ElderCare Corp. Common Stock for a purchase price of $325,000 in consideration
for approximately 44% of the Common Stock of the Multicare Parent. 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 and (ii)
$246,800 of bridge financing which was refinanced upon the completion of the
sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by
Acquisition Corp. on August 11, 1997.
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, or TPG or Nazem; 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 which
provides generally for the preferential return of the stockholders' capital
contributions (subject to certain priorities), a 25% compound annual return on
Cypress', TPG's and Nazem's capital contributions and the remaining Calculated
Equity Value to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp.
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 or 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 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 Genesis Bank Financing.
Effective October 1, 1996, Geriatric & Medical Companies, Inc. ("GMC") merged
with a wholly-owned subsidiary of Genesis (The "GMC Transaction"). Under the
terms of the merger agreement, GMC shareholders received $5.75 per share in
cash for each share of GMC stock. The total consideration paid, including
assumed indebtedness of approximately $132,000, is approximately $223,000. The
merger was financed in part with approximately $121,250 in net proceeds from
an offering of 9 1/4% Senior Subordinated Notes issued in October of 1996. The
remaining consideration was financed through borrowings under the Company's
bank credit facility. The GMC Transaction, added to Genesis 24 owned eldercare
centers with approximately 3,300 beds. GMC also operates businesses which
provide a number of ancillary healthcare services including ambulance
services; respiratory therapy, infusion therapy and enteral therapy;
distribution of durable medical equipment and home medical supplies; and
information management services. The acquisition was accounted for as a
purchase.
In July 1996, the Company acquired the outstanding stock of National Health
Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center
Corporation, Eidos, Inc. and Versalink, Inc. (collectively "National Health").
Prior to the closing of the stock acquisitions, an affiliate of a financial
institution purchased nine of the eldercare centers for $67,700 and
subsequently leased the centers to a subsidiary of Genesis under operating
lease agreements and a then existing $85,000 lease financing facility. The
balance of the total consideration paid to National Health was funded with
available cash of $51,800 and assumed indebtedness of $7,900. National Health
added 16 eldercare centers in Florida, Virginia and Connecticut with
approximately 2,200 beds to Genesis. National Health also provides enteral
nutrition and rehabilitation therapy services to the eldercare centers which
it owns and leases. The acquisition was accounted for as a purchase.
In June 1996, the Company acquired the outstanding stock of NeighborCare
Pharmacies, Inc. ("NeighborCare") a privately held institutional pharmacy,
infusion therapy and retail pharmacy business based in Baltimore, Maryland.
Total consideration was approximately $57,250, comprised of approximately
$47,250 in cash and 312,744 shares of Genesis common stock. The acquisition
was accounted for as a purchase.
In March 1996, the Company sold four eldercare centers and a pharmacy in
Indiana for approximately $22,250. The net sale proceeds were used to repay
indebtedness under the Company's credit facility.
In March 1996, the Company acquired for total consideration of approximately
$31,900, including the payment of assumed debt, the remaining approximately
71% joint venture interests of four eldercare centers in Maryland and the
remaining 50% joint venture interest of an eldercare center in Florida. The
acquisition was accounted for as a purchase.
41
In January 1996, the Company acquired the speech therapy, occupational therapy
and physical therapy services businesses of Medical and Rehab Support
Services, Inc., Professional Rehabilitation Network, Inc. and Healthcare Rehab
Services, Inc. (collectively, "Therapy Companies") for approximately $9,300.
The Therapy Companies provide these services in the Company's Chesapeake
region. The acquisition was financed with borrowings under the Company's bank
credit facilities. The acquisition was accounted for as a purchase.
Prior to January 1, 1996, the Company provided management, development and
marketing services to life care communities operated by Adult Community Total
Services, Inc. (ACTS), a Pennsylvania non-profit corporation, pursuant to a
management agreement which was to expire in April 1998. Effective January 1,
1996, Genesis restructured its relationship with ACTS. Under the revised
arrangement, Genesis earned a $2,000 restructuring fee and no longer manages
the ACTS life care communities. Genesis continues to provide development
services for a fee in an amount equal to five percent of the total cost of
developing and completing facilities developed by ACTS. The development
portion of the contract has been extended to December 2002 and Genesis is
guaranteed a minimum annual development fee of approximately $1,500. Genesis
also continues to provide certain ancillary services to the ACTS communities.
On November 30, 1995, the Company acquired McKerley Health Care Centers
("McKerley") for total consideration of approximately $68,700. The transaction
(the "McKerley Transaction") also provided for up to an additional $6,000 of
contingent consideration payable upon the achievement of certain financial
objectives through October 1997, of which $4,000 was paid in February 1997.
McKerley added to Genesis 15 geriatric care facilities in New Hampshire and
Vermont with a total of 1,535 beds. McKerley also operates a home healthcare
company. The acquisition was financed with borrowings under the credit
facility and assumed indebtedness. The acquisition was accounted for as a
purchase.
The following unaudited pro forma statement of operations information gives
effect to the GMC, National Health, NeighborCare and McKerley transactions
described above as though they had occurred on October 1, 1995, after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense, increased interest expense on debt related to the
acquisition and related income tax effects. In addition, the following pro
forma information entitled "1997 Including Multicare" incorporates the pro
forma effect of the Multicare Transaction had it occurred on October 1, 1996.
The pro forma financial information does not necessarily reflect the results
of operations that would have occurred had the acquisitions occurred at the
beginning of the respective fiscal years.
Year Ended September 30,
1997 Including
(Unaudited) Multicare 1996
- -----------------------------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
Total net revenues $1,794,659 $983,633
Earnings before debenture conversion expense and
extraordinary item 47,308 46,993
Net income 44,536 46,196
Primary earnings per share before debenture
conversion expense and extraordinary item 1.33 1.48
Fully diluted earnings per share before debenture
conversion expense and extraordinary item $1.31 $1.40
- -----------------------------------------------------------------------------------------------------
42
(3) Property, Plant and Equipment
Property, plant and equipment at September 30, 1997 and 1996 consist of the
following:
September 30,
1997 1996
- ------------------------------------------------------------------------------
Land $38,163 $23,517
Land improvements 5,064 4,565
Buildings 471,520 298,918
Equipment, furniture and fixtures 120,734 69,422
Construction in progress 36,456 20,344
- ------------------------------------------------------------------------------
671,937 416,766
Less accumulated depreciation 93,540 65,837
- ------------------------------------------------------------------------------
Net property, plant and equipment $578,397 $350,929
- ------------------------------------------------------------------------------
(4) Long-term Debt
Long-term debt at September 30, 1997 and 1996 was as follows:
September 30,
1997 1996
- ------------------------------------------------------------------------------
Secured - due 1998 to 2034;
6.75% to 10.75% (weighted average interest rate
1997 - 7.76%; 1996 - 7.43%) $401,484 $147,359
Unsecured - due 1998 to 2008
5.50% to 11.00% (weighted average interest rate
1997 - 9.43%, 1996 - 9.71%) 252,670 151,815
Convertible Senior Subordinated Debentures due 2003 - 6% - 43,762
- ------------------------------------------------------------------------------
654,154 342,936
Plus:
Debt premium, net of amortization 6,032 -
Less:
Debt discount, net of amortization 246 283
Current installments and short-term borrowings 8,273 3,720
- ------------------------------------------------------------------------------
$651,667 $338,933
- ------------------------------------------------------------------------------
At September 30, 1997 and 1996, the Company's long-term debt included
approximately $300,000 and $120,350 of floating rate debt based on prime or
LIBOR with weighted average interest rates of 7.10% and 6.87%, respectively.
At September 30, 1997 and 1996, the Company's long-term debt included
approximately $354,154 and $222,412 of fixed rate debt with weighted average
interest rates of 9.42% and 8.62%, respectively.
In October 1997, subsequent to fiscal year end and in connection with the
Multicare Transaction, Genesis entered into a new credit facility with Mellon
Bank, N.A., Citicorp Securities, Inc., Citibank N.A., First Union Capital
Markets Corp., First Union National Bank and NationsBank, N.A. (the "Lenders")
pursuant to which the Lenders provided Genesis and its subsidiaries with loan
facilities totaling $850,000 (the "Genesis Bank Financing") 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 Merger; and funding Genesis' and its subsidiaries' working capital
and general corporate purposes, including fees and expenses of the
transactions. The Genesis Bank Financing facilities consist of three $200,000
term loans and a $250,000 revolving credit loan. The term loans amortize
beginning in fiscal 1998 through 2005, of which $19,000 is payable in fiscal
1998. The revolving credit loan becomes payable in full on September 30, 2003.
The Genesis Bank Financing bears interest at a floating rate equal, at the
Company's option, to prime rate or LIBOR plus a margin up to 3.0%.
43
The Genesis Bank Financing facilities are 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, the Multicare Parent)
other than the stock of Multicare, and its subsidiaries.
The Genesis Bank Financing 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, 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 October 1996, the Company completed an offering of $125,000 9 1/4% Senior
Subordinated Notes due 2006. The Company used the net proceeds of
approximately $121,250, together with borrowings under the bank credit
facility, to pay the cash portion of the purchase price of the GMC
Transaction, to repay certain debt assumed as a result of the GMC Transaction
and to repurchase GMC accounts receivable which were previously financed.
In November 1996, the Company called for redemption of the then outstanding 6%
Convertible Senior Subordinated Debentures (the Debentures) at a redemption
price equal to 104.2% of the principal amount. The Debenture holders had the
option to tender Debentures at the redemption price or to convert the
Debentures into common stock at a conversion price of $15.104 per share. In
connection with the early conversion of a portion of the Debentures converted
during fiscal 1996, the Company paid approximately $1,245 representing the
prepayment of interest to converting debenture holders. The non-recurring cash
payment is presented as debenture conversion expense in the 1996 statement of
operations.
In June 1995, the Company completed an offering of $120,000 of 9 3/4 % Senior
Subordinated Notes due 2005 (the Notes). Interest is payable on the Notes on
June 15 and December 15 of each year commencing December 15, 1995. 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 bank credit
facility.
At September 30, 1997, sinking fund requirements and installments of long-term
debt are as follows:
Principal
Year ending September 30, Amount
- ----------------------------------------------------------------------------
1998 $8,273
1999 21,407
2000 4,009
2001 3,197
2002 2,959
Thereafter $614,309
- ----------------------------------------------------------------------------
The Company enters into interest rate swap agreements to manage interest costs
and risks associated with changing interest rates. At September 30, 1997 the
notional principal amount of these agreements totaled $400,000. These
agreements effectively convert underlying variable-rate debt based on LIBOR
into
44
fixed-rate debt whereby the Company makes quarterly payments at a weighted
average fixed rate of 5.45% and receives quarterly payments at a floating rate
based on three month LIBOR (approximately 5.78% at September 30, 1997).
At September 30, 1996, the Company held an interest rate swap agreement with a
notional amount of $20,000 whereby the Company makes quarterly payments at a
floating rate based on six-month LIBOR (5.75% at September 30, 1996) and
receives quarterly payments at a fixed rate of 6.86%. This agreement has since
been terminated.
Interest of $2,156 in 1997, $1,191 in 1996 and $457 in 1995, was capitalized
in connection with facility construction and renovations.
During fiscal 1997 and 1995, the Company recorded extraordinary losses, net of
tax, of $553 and $1,923, respectively related to the early retirement of debt.
The Company is restricted from declaring any dividends or authorizing any
other distribution on account of ownership of its capital stock unless certain
conditions are met.
(5) 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, 1997 were as follows:
Minimum
Year ending September 30, Payment
- -------------------------------------------------------------------------
1998 $22,853
1999 21,701
2000 19,134
2001 18,468
2002 13,149
- -------------------------------------------------------------------------
Excluded from the future minimum lease payments above in the year 2001 is
approximately $67,000 related to a residual value guarantee due under the
lease financing facility in connection with the National Health transaction.
The Company has an option to purchase seven leased eldercare care facilities
at the end of their ten year lease term in 2003 for $59,000.
(6) Patient Service Revenue
The distribution of net patient service revenue by class of payor for the
years ended September 30, 1997, 1996 and 1995 was as follows:
Year ended September 30,
Class of payor 1997 1996 1995
- ---------------------------------------------------------------------------
Private pay and other $414,187 $251,244 $175,206
Medicaid 385,313 229,838 185,612
Medicare 252,845 157,362 97,630
- ---------------------------------------------------------------------------
$1,052,345 $638,444 $458,448
- ---------------------------------------------------------------------------
The above revenue amounts are net of third-party contractual allowances of
$213,250, $122,136 and $98,495, in 1997, 1996 and 1995, respectively. The
Company has recorded cost report receivables from
45
third-party payors (i.e., Medicare and Medicaid) of $60,865 and $41,575 at
September 30, 1997 and 1996, respectively. These amounts at September 30, 1997
are due primarily from Massachusetts ($10,086), Pennsylvania ($5,928), Florida
($3,368) and Medicare ($41,261) for the 1994 through 1997 cost reporting
periods.
(7) Income Taxes
Total income tax expense for the years ended September 30, 1997, 1996 and 1995
was as follows:
Year ended September 30,
1997 1996 1995
- -------------------------------------------------------------------------------
Income before extraordinary item $27,088 $20,917 $14,765
Extraordinary item (318) - (1,130)
- -------------------------------------------------------------------------------
Total $26,770 $20,917 $13,635
- -------------------------------------------------------------------------------
The components of the provision for income taxes for the years ended September
30, 1997, 1996 and 1995 were as follows:
Year ended September 30,
1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal $5,370 $14,508 $13,484
State 695 1,295 2,551
- -------------------------------------------------------------------------------
6,065 15,803 16,035
- -------------------------------------------------------------------------------
Deferred:
Federal 20,781 4,595 (650)
State 242 519 (620)
- -------------------------------------------------------------------------------
21,023 5,114 (1,270)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Total $27,088 $20,917 $14,765
- -------------------------------------------------------------------------------
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 and
extraordinary items as a result of the following:
Year ended September 30,
1997 1996 1995
- -------------------------------------------------------------------------------
Computed "expected" tax expense $26,331 $ 20,330 $ 14,104
- -Increase (reduction) in income taxes
resulting from :
State and local income taxes, net of
federal tax benefits 364 1,179 1,255
Amortization of goodwill 693 235 197
Targeted jobs tax credits (300) - (528)
Tax exempt interest - (770) -
Other, net - (57) (263)
- -------------------------------------------------------------------------------
Total income tax expense $27,088 $20,917 $14,765
- -------------------------------------------------------------------------------
46
The sources of the differences between consolidated earnings for financial
statement purposes and tax purposes and the tax effects are as follows:
Year ended September 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Excess tax depreciation expense versus book
depreciation $2,525 $1,157 $1,064
Excess tax gain versus book gain (200) (895) (2,879)
Amortization of deferred gain on sale and leaseback - 49 103
Utilization of net operating loss carryforward 200 (600) -
Accrued liabilities and reserves 15,000 676 (501)
Goodwill 3,575 3,661 920
Prepaid rent - 1,146 -
Other (77) (80) 23
- -------------------------------------------------------------------------------------------------------------
Net deferred tax provision $21,023 $5,114 $(1,270)
- -------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1997 and 1996 are presented below:
September 30,
1997 1996
- ------------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Accounts receivable $5,480 $1,411
Accrued compensation 601 601
Amortization of deferred gain 47 247
Debt premium 2,144 -
Accrued liabilities and reserves 7,966 -
Net operating loss carryforwards 4,000 4,000
Other, net - 13
- ------------------------------------------------------------------------------------------------------------
Deferred tax assets 20,238 6,272
- ------------------------------------------------------------------------------------------------------------
Valuation allowance (3,400) (3,400)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets $16,838 $2,872
- ------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
Goodwill and other intangibles (10,695) (6,176)
Depreciation (43,888) (8,534)
Accrued liabilities and reserves - (828)
Prepaid rent - (1,146)
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liability (54,583) (16,684)
- ------------------------------------------------------------------------------------------------------------
Net deferred liability $(37,745) $(13,812)
- ------------------------------------------------------------------------------------------------------------
At September 30, 1997 and 1996, the Company has state net operating loss
carryforwards (net of federal tax benefit) of $4,000, respectively. The
related deferred tax assets are available to reduce future state income taxes
payable, subject to applicable carryforward rules and limitations. Due to
these limitations, the Company has established valuation allowances of $3,400.
The net operating loss carryforwards expire in years 1998 through 2002.
Management believes that by using prudent and feasible tax planning strategies
it would realize approximately $600 of the state net operating losses prior to
expiration.
47
(8) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 1997 and 1996 consist
of the following:
September 30,
1997 1996
- ---------------------------------------------------------------------------------------------------
Mortgage notes and other notes receivable $92,164 $76,092
Investments in non marketable securities 16,550 14,050
Investments in unconsolidated partnerships and joint ventures 2,887 2,432
- ---------------------------------------------------------------------------------------------------
$111,601 $92,574
- ---------------------------------------------------------------------------------------------------
Mortgage notes and other notes receivable at September 30, 1997 bear interest
at rates ranging from 7 1/2% to 13% and mature at various times ranging from
1998 to 2006. Approximately $77,338 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.
In 1996, the Company extended a 10 1/4%, $45,000 mortgage loan and a 13%,
$10,000 working capital loan to refinance the bank indebtedness of 11 managed
eldercare centers in Florida and to eliminate the Company's guarantee of
$18,500 of such indebtedness. The Company extended its existing management
agreement for these Florida eldercare centers through 2006.
In addition to the $10,000 working capital loan described above, the Company
has agreed to provide third parties, including facilities under management
contract, with $9,100 of working capital lines of credit. The unused portion
of working capital lines of credit was $3,639 at September 30, 1997.
At September 30, 1997, the Company holds $10,000 of convertible preferred
stock of Doctors Health System, Inc. ("Doctors Health"), an independent
physician owned and controlled integrated delivery system and practice
management company based in Maryland. The convertible preferred stock, which
is accounted for under the cost method, carries an 8% cumulative dividend and
is convertible into common stock, and if converted would represent an
approximate 10% ownership interest in Doctors Health. Also, the Company has
lent to Doctors Health $5,000 at an annual interest rate of 11%.
Investments in unconsolidated partnerships and joint ventures are accounted
for under the equity method.
(9) Other Long-Term Assets
Other long-term assets at September 30, 1997 and 1996 consist of the
following:
September 30,
1997 1996
- -----------------------------------------------------------------------------------------------------
Deferred financing fees, net $12,939 $8,056
Property deposits and funds held in escrow 7,056 6,765
Funds held by trustee 1,661 1,692
Other, net 10,066 8,082
- -----------------------------------------------------------------------------------------------------
$31,722 $24,595
- -----------------------------------------------------------------------------------------------------
48
(10) Management Services and Other Income, net
Included in management services and other income, net were the following:
Year ended September 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
Fees earned in connection with management agreements $18,959 $18,227 $19,214
Service related businesses 28,043 9,023 5,523
Transactional items, net 476 5,775 3,208
- ---------------------------------------------------------------------------------------------------------
$47,478 $33,025 $27,945
- ---------------------------------------------------------------------------------------------------------
(11) Stock Option Plans
The Company has two stock option plans (the "Employee Plan" and the "Directors
Plan"). Under the Employee Plan, 4,500,000 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
excercisable 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 years from the
date of grant. All options granted under the 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 for the three years ended September 30, 1997.
Option Price Available
per Share Outstanding Exercisable for Grant
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 $2.22 - $17.00 1,610,103 730,605 76,467
- -------------------------------------------------------------------------------------------------------------
Authorized - - - 1,050,000
Granted 19.67 - 20.25 740,625 - (740,625)
Became Exercisable - - 400,692 -
Exercised 5.33 - 16.83 (204,585) (204,585) -
Canceled - (51,975) - 51,975
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $2.22 - $20.25 2,094,168 926,712 437,817
- -------------------------------------------------------------------------------------------------------------
Authorized - - - 750,000
Granted 19.50 - 31.87 1,010,998 - (1,010,998)
Became Exercisable - - 509,070 -
Exercised 5.33 - 20.25 (275,455) (275,455) -
Canceled - (136,269) - 136,269
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $2.22 - $31.87 2,693,442 1,160,327 313,088
- -------------------------------------------------------------------------------------------------------------
Authorized - - - 750,000
Granted 25.00 - 35.25 933,672 - (933,672)
Became Exercisable - - 695,087 -
Exercised 5.33 - 32.88 (191,774) (191,774) -
Canceled - (13,515) - 13,515
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $2.22 - $35.25 3,421,825 1,663,640 142,931
- -------------------------------------------------------------------------------------------------------------
In March 1992, the Company adopted, and in February 1993, the shareholders
approved, the Company's 1992 Stock Option Plan for Non-Employee Directors (the
"Directors Plan"). Pursuant to the Directors Plan, options may be granted for
an aggregate of 225,000 shares of common stock. The Director Plan terminates
ten years after its approval by the shareholders. At September 30, 1997, there
were 108,000 options outstanding and excercisable at grant prices ranging from
$7.33 to $35.25.
The Company has adopted the disclosure-only provisions of Statement No. 123,
"Accounting for Stock-Based Compensation", and applies APB No. 25 in
accounting for its plans and, accordingly, has not
49
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 income would have been changed to the proforma amounts indicated
below:
September 30,
1997 1996
- -----------------------------------------------------------------------------------------------------------
Net income - as reported $47,591 $37,169
Net income - pro forma 38,955 31,627
Net income per share - as reported 1.32 1.29
Net income per share - pro forma $1.08 $1.11
- -----------------------------------------------------------------------------------------------------------
The fair value of stock options granted in 1996 and 1997 is estimated at the
grant date using the Black-Scholes option-pricing model with the following
assumptions for 1996 and 1997; dividend yield of 0%; expected volatility of
37.3%; a risk-free return of 5.9%; and expected lives of approximately 8
years.
The following table summarizes information for stock options of the Employee
Plan and the Director Plan outstanding at September 30, 1997:
Weighted Average Weighted
Remaining Number Average
Range of Exercise Price Number Outstanding Contractual Life Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------
$1.00 - $10.00 430,219 5.09 430,219 $6.77
$10.01 - $15.00 121,325 6.36 89,125 $10.61
$15.01 - $20.00 634,975 6.94 500,350 $16.79
$20.01 - $25.00 1,139,624 8.63 378,749 $22.82
$25.01 - $30.00 796,232 8.43 317,860 $29.25
$30.01 - $35.00 75,000 8.68 25,000 $31.87
$35.01 - $40.00 332,450 9.43 30,337 $35.25
- -----------------------------------------------------------------------------------------------------------
3,529,825 8.06 1,771,640 $21.89
- -----------------------------------------------------------------------------------------------------------
(12) Retirement Plan
The Company has a defined contribution plan covering all employees having
1,000 hours or more of service and one year of service in a plan year.
Employees' contributions to the plan may be matched by the Company based on
years of service. The Company matches 50% of employee contributions up to 3%
of the employee's annual gross salary.
Additionally, the Plan provides for discretionary employer contributions, in
the form of Company common stock and/or cash, based on profits of the Company.
The Company recorded retirement plan expense (including GMC Plans) for the
401(k) match and the discretionary contribution of approximately $3,516 $1,877
and $1,128, for the years ended September 30, 1997, 1996 and 1995,
respectively. Certain employees of GMC participate in separate plans qualified
under Section 401(k) of the Internal Revenue Code. Beginning January 1, 1998,
these plans will be merged into the Genesis Health Ventures, Inc. Retirement
Plan.
50
(13) Commitments and Contingencies
In October 1997, subsequent to the fiscal year end, the Company announced its
intention to enter into a number of financing arrangements with ElderTrust,
Inc. ("ElderTrust") a newly formed Maryland healthcare real estate investment
trust. The arrangements include the sale/leaseback of several assisted living,
skilled nursing and office building properties, as well as a subordinated
note. Subject to the completion of ElderTrust's initial public offering
anticipated in the first calendar quarter of 1998, the Company expects to
receive approximately $68,000 in cash as a result of the proposed sale of
these properties and investments. The arrangements also include a commitment
to ElderTrust to borrow from ElderTrust $42,900 to finance the development and
expansion of additional assisted living properties and skilled nursing
facilities. This commitment is expected to be funded in the coming 18 months.
Under the terms of these agreements, Genesis is obligated to sell and
ElderTrust is obligated to purchase these facilities under sale/leaseback
arrangements once defined occupancy targets have been reached or a specific
time period has elapsed. The arrangements also include the refinancing by
Genesis and an affiliate of approximately $16,000 to fund term loans on
existing facilities currently in the early stages of operations and to fund
construction of properties currently under development. Under the terms of
these loans, Genesis and its affiliate are obligated to sell and ElderTrust is
obligated to purchase these facilities under sale/leaseback arrangements once
defined occupancy targets have been reached or a specific time period has
elapsed. Additionally, Genesis intends to enter into similar sale/leaseback
arrangements for an additional $100,000 in facilities in 1998. These
transactions are aimed toward reducing the Company's leverage and to re-deploy
capital. No assurance can be given that these transactions will be completed.
In August 1995, the Company entered into a software license agreement for a
clinical operating system. The total commitment under the license agreement is
$12,000 of which the Company has paid $4,500. The license agreement provides
for a refund of amounts paid in the event the software does not meet the
acceptance requirements as defined in the license agreement. The Company has
estimated the cost to install the system and related hardware, not including
amounts paid for the software license, to be approximately $18,000 through
fiscal 1998, of which approximately $12,800 has been expended through
September 30, 1997
The Company is self insured for the majority of its workers' compensation and
health insurance claims. The Company's maximum exposure is $500 per occurrence
for workers' compensation and $75 per year, per participant for health
insurance. The Company has elected to reinsure $490 in excess of the first $10
per occurrence for workers' compensation claims, through its wholly-owned
captive insurance company, Liberty Health Corp., LTD. The Company carries
excess insurance with commercial carriers for losses above $500 per workers'
compensation claim, and $75 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.
The Company has guaranteed $14,195 of indebtedness of others. 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. The Company
does not anticipate any material losses as a result of these commitments.
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 the Company, would have a material adverse effect on its
consolidated financial position or results of operations.
(14) Special Charge
In the fourth quarter of fiscal 1997, the Company completed an evaluation of
its physician service business and announced its intentions to restructure
this business, including the closure and possible sale of free standing
service sites, the restructuring of physician compensation arrangements and
the termination of certain staff. In connection with the plan and selected
asset impairments, the Company recorded a fourth quarter pre-tax special
charge of approximately $5,700.
The Company reached an agreement with Blue Cross Blue Shield of Maryland
(BCBSMD) to insure, through a sub-capitation agreement, the health care
benefits of approximately 7,000 members of BCBSMD's Care First Medicare risk
product. The capitation risk contract is currently generating operating
losses, which the Company has agreed to assume retroactive to July 1, 1997. As
a result, the Company has recorded a liability and a pre-tax special charge of
$5,000 in the fourth quarter of 1997 to accrue for the estimated loss inherent
in the agreement.
The special charge also included a pretax charge of approximately $4,300
related to the write-off of selected assets deemed impaired.
51
(15) Fair Value of Financial Instruments
The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), cost report receivables,
prepaid expenses and other current assets, accounts payable, accrued expenses,
accrued compensation, accrued interest and income taxes receivable and payable
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.
It was not practicable to estimate the fair value of investments in non
marketable equity securities, or unconsolidated partnerships and joint
ventures.
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 it's interest rate swap agreements outstanding
at September 30, 1997 and 1996 is approximately $2,052 and $94, respectively.
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 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. At
September 30, 1997 and 1996, the carrying value of fixed rate debt of $354,154
and $222,586, respectively approximates market value.
The fair value of the Company's floating rate debt approximates its fair
value.
52
(16) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows:
Fully-diluted
Earnings Per
Earnings Before Share Before
Debenture Debenture
Conversion Conversion
Expense and Expense and Fully-diluted
Total Net Extraordinary Extraordinary Earnings
Revenues Item Net Income Item Per Share
- ---------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31, 1996 $258,544 $11,508 $10,955 $0.33 $0.31
March 31, 1997 273,263 13,494 13,494 0.37 0.37
June 30, 1997 284,463 15,556 15,556 0.43 0.43
September 30, 1997 283,553 7,586 7,586 0.21 0.21
- ---------------------------------------------------------------------------------------------------------------
$1,099,823 $48,144 $47,591 $1.34 $1.32
Quarter ended:
December 31, 1995 $132,778 $6,556 $5,858 $0.25 $0.23
March 31, 1996 154,739 7,810 $7,810 0.30 0.30
June 30, 1996 172,836 10,190 10,091 0.35 0.35
September 30, 1996 211,115 13,410 13,410 0.40 0.40
- ---------------------------------------------------------------------------------------------------------------
$671,469 $37,966 $37,169 $1.31 $1.29
53
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
Incorporated by reference from the Company's 1998 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K, except information
concerning certain Executive Officers of the Company which is set forth in
Item 4.1 of this Report.
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1998 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's 1998 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1998 proxy statement to be filed
pursuant to General Instruction G(3) to the Form 10-K.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a)(2) Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 1997, 1996, and 1995. 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.
54
(a)(3) Exhibits
No Description
2.1(1) Agreement and Plan of Reorganization, dated September 19,
1993, by and among Genesis Health Ventures, Inc., a
Pennsylvania corporation ("Genesis"), MI Acquisition
Corporation, a Pennsylvania corporation and a wholly-owned
subsidiary of Genesis, MHC Acquisition Corporation, a
Pennsylvania corporation and a wholly-owned subsidiary of
Genesis, PEI Acquisition Corporation, a Pennsylvania
corporation and a wholly-owned subsidiary of Genesis, TW
Acquisition Corporation, a Pennsylvania corporation and a
wholly-owned subsidiary of Genesis, SRS Acquisition, a
Pennsylvania corporation and a wholly-owned subsidiary of
Genesis, Meridian Healthcare, Inc., a Maryland corporation,
Meridian Inc., a Maryland corporation ("MI"), Pharmacy
Equities, Inc., a Maryland corporation, The Tidewater
Healthcare Shared Services Group, Inc., a Maryland
corporation, Staff Replacement Services, Inc., a Maryland
corporation, Michael J. Batza, Jr., Edward A. Burchell, Earl
L. Linehan, Roger C. Lipitz and Arnold I. Richman
(collectively the "Reorganization Agreement").
2.2(2) Amended and Restated Amendment to Reorganization Agreement
dated November 23, 1993.
2.3(3) Agreement made as of the 18th day of August, 1995 by and
among Genesis Health Ventures, Inc., a Pennsylvania
corporation, and Accumed, Inc., a New Hampshire corporation,
McKerley Health Care Centers, Inc., a New Hampshire
corporation, McKerley Health Care Center-Concord, Inc., a
New Hampshire corporation, McKerley Health Facilities, a New
Hampshire general partnership and McKerley Health Care
Center-Concord, L.P., a New Hampshire limited partnership
(collectively, the "Purchase Agreement").
2.4(4) Amendment Number One to Purchase Agreement dated November
30, 1995.
2.5(13) Stock Purchase Agreement, dated April 21, 1996, by and among
Genesis Health Ventures, Inc., a Pennsylvania corporation,
and NeighborCare Pharmacies, Inc., a Maryland corporation,
Professional Pharmacy Services, Inc., a Maryland
corporation, Medical Services Group, Inc., a Maryland
corporation, CareCard, Inc., a Maryland corporation,
Transport Services, Inc., a Maryland corporation, Michael G.
Bronfein, Jessica Bronfein, Stanton G. Ades, Renee Ades, The
Chase Manhattan Bank, N.A. and PPS Acquisition Corp., a
Maryland corporation and a wholly-owned subsidiary of
Genesis Health Ventures, Inc.
2.6(13) Merger Agreement, dated April 21, 1996, by and among
Professional Pharmacies, Inc., Genesis Health Ventures, Inc.
and PPS Acquisition Corp.
2.7(14) Purchase Agreement, dated May 3, 1996, by and among Mark E.
Hamister, Oliver C. Hamister, George E. Hamister, Julia L.
Hamister, The George E. Hamister Trust, The Oliver C.
Hamister Trust, National health Care Affiliates, Inc., Oak
Hill Health Care Center, Inc., Derby Nursing Center
Corporation, Delaware Avenue Partnership, EIDOS, Inc.,
VersaLink Inc., certain other individuals and Genesis Health
Ventures, Inc.
2.8(14) Purchase Agreement Addendum, dated July 24, 1996, by and
among Mark E. Hamister, Oliver C. Hamister, George E.
Hamister, Julia L. Hamister, The George E. Hamister Trust,
The Oliver C. Hamister Trust, National Health Care
Affiliates, Inc., Oak Hill Health Care Center, Inc., Derby
Nursing Center Corporation, Delaware Avenue
55
Partnership, EIDOS, Inc., VersaLink Inc., certain other
individuals and Genesis Health Ventures, Inc.
2.9(16) Agreement and Plan of Merger, dated as of July 11, 1996,
by and among Genesis Health Ventures, Inc., a Pennsylvania
corporation, Acquisition Corporation, a Delaware
corporation, and Geriatric & Medical Companies, Inc., a
Delaware corporation.
2.10(20) 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.
2.11(20) 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.
2.12(20) 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.
3.1(5) The Company's Amended and Restated Articles of
Incorporation.
3.2(5) The Company's Amended and Restated Bylaws.
3.3(9) Amendment to the Company's Articles of Incorporation, as
filed on March 11, 1994, with the Secretary of the
Commonwealth of Pennsylvania.
4.1(2) Indenture dated as of November 30, 1993, between the
Company and First Fidelity Bank, N.A., Pennsylvania.
4.2(5) Specimen of Common Stock Certificate.
4.3(6) Specimen of the Company's First Mortgage Bonds (Series A)
due 2007.
4.4(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.
4.5(12) Rights Agreement between Genesis Health Ventures, Inc.and
Mellon Securities Trust Company.
4.6(15) Indenture dated as of June 15, 1995 between the Company
and Delaware Trust Company.
4.7(15) Specimen of the Company's 9-3/4% Senior Subordinated
Debentures due 2005.
4.8(17) Indenture dated as of October 7, 1996 between the Company
and First Union National Bank
4.9(17) Specimen of the Company's 9-1/4% Senior Subordinated Notes
due 2006.
+10.1(5) The Company's Employee Retirement Plan, adopted January
1,1989, as amended and related Retirement Plan Trust
Agreement
+10.2(11) The Company's Amended and Restated Stock Option Plan.
+10.3(5) Employment Agreement between the Company and Richard R.
Howard dated April 1, 1991.
+10.4(9) Letter Amendment to Employment Agreement of Richard R.
Howard, dated April 6, 1994.
+10.5(5) Employment Agreement between the Company and David C.
Barr, Dated April 1, 1991.
+10.6(8) Letter Amendment to Employment Agreement of David C. Barr,
dated April 6, 1994.
56
+10.7(5) Lease Agreement, dated October 1, 1990, between Salisbury
Medical Office Building General Partnership ("SMOBGP") and
Team Rehabilitation, Inc.
+10.8(5) Lease Agreement, dated October 1, 1989, between SMOBGP and
Genesis Immediate Med Center, Inc.
+10.9(5) Purchase Agreement, dated October 1, 1987, among SMOBGP,
Genesis Pharmacy, Inc. and Genesis Immediate Med Center,
Inc. relating to the purchase of the assets, property and
business of Salisbury Pharmacy and Salisbury Immediate Med
Center.
+10.10(5) Lease, dated October 1, 1989, between SMOBGP and ASCO,
relating to the Salisbury Regional Health Center.
+10.11(9) Ground Lease Agreement dated as of June 26, 1993, by and
between GHV Associates and the Company.
+10.12(9) Lease, dated January 1, 1995, between GHV Associates and
the Company, Team Rehabilitation, Inc. and Genesis
Physician Services, Inc.
10.13(5) Second Amended and Restated Registration Agreement, dated
April 1, 1991, among the Company, the holders of the
Company's Series A Convertible Preferred Stock, the
holders of the Company's Series C Convertible Preferred
Stock, the holders of the Company's Series D Convertible
Preferred Stock, holders of the Company's Series F
Convertible Preferred Stock, and certain holders of the
Company's common stock.
+10.14(5) Agreement, dated April 19, 1991, between Nazem & Company,
III, L.P. and the Company.
+10.15(6) The Company's 1992 Stock Option Plan for Non-Employee
Directors.
+10.16(6) The Company's Incentive Compensation Program.
+10.17(6) The Company's Execuflex Plan, dated as of January 1, 1992,
and related Trust Agreement, dated December 10, 1991.
+10.18(2) Lease Agreement, dated as of November 30, 1993, by and
between Charlesmead Associates Limited Partnership, a
Maryland limited partnership, and MHC Acquisition
Corporation, now known as Meridian Healthcare, Inc., a
Pennsylvania corporation.
+10.19(2) Option Agreement, dated November 30, 1993, by and among
the Sellers identified therein, Charlesmead Associates
Limited Partnership, a Maryland limited partnership, and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.20(2) Lease Agreement, dated as of November 30, 1993, by and
between Cherry Hill Meridian Limited Partnership, a
Maryland limited partnership, and MHC Acquisition
Corporation, now known as Meridian Healthcare, Inc., a
Pennsylvania corporation.
57
+10.21(2) Option Agreement, dated November 30, 1993, by and among
the Sellers, as indicated therein, Cherry Hill Meridian
Limited Partnership, a Maryland limited partnership, and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.22(2) Lease Agreement, dated as of November 30, 1993, by and
between Corsica Hills Associates Limited Partnership and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.23(2) Option Agreement, dated November 30, 1993, by and among
the Sellers, as identified therein, Corsica Hills
Associates Limited Partnership, a Maryland limited
partnership, and MHC Acquisition Corporation, now known as
Meridian Healthcare, Inc., a Pennsylvania corporation.
+10.24(2) Lease Agreement, dated as of November 30, 1993, by and
between Heritage Associates Limited Partnership, a
Maryland limited partnership, and MHC Acquisition
Corporation, now known as Meridian Healthcare, Inc., a
Pennsylvania corporation.
+10.25(2) Option Agreement, dated November 30, 1993, by and among
the Sellers, as identified therein, Heritage Associates
Limited Partnership, a Maryland limited partnership, and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.26(2) Lease Agreement, dated as of November 30, 1993, by and
between Multi-Medical Meridian Limited Partnership, a
Maryland limited partnership, and MHC Acquisition
Corporation, now known as Meridian Healthcare, Inc., a
Pennsylvania corporation.
+10.27(2) Option Agreement, dated November 30, 1993, by and among
the Sellers, as identified therein, Multi-Medical Meridian
Limited Partnership, a Maryland limited partnership, and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.28(2) Lease Agreement, dated as of November 30, 1993, by and
between Severna Associates Limited Partnership, a Maryland
limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania
corporation.
+10.29(2) Option Agreement, dated November 30, 1993, by and among
the Sellers, as identified therein, Severna Associates
Limited Partnership, a Maryland limited partnership, and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.30(2) Lease Agreement, dated as of November 30, 1993, by and
between Westfield Meridian Limited Partnership, a Maryland
limited partnership, and MHC Acquisition Corporation, now
known as Meridian Healthcare, Inc., a Pennsylvania
corporation.
+10.31(2) Option Agreement, dated November 30, 1993, by and among
the Sellers, as identified therein, Westfield Meridian
Limited Partnership, a Maryland limited partnership, and
MHC Acquisition Corporation, now known as Meridian
Healthcare, Inc., a Pennsylvania corporation.
+10.32(9) Management Agreement, dated June 15, 1987, between
Brendenwood MRC Limited Partnership and Meridian Health,
Inc. (f/k/a Meridian, Inc.).
58
+10.33(9) Lease dated January 5, 1989, as amended, by and between
Towson Building Associates Limited Partnership and
Meridian Healthcare, Inc.
+10.34(9) Sublease dated November 30, 1993. By and between Meridian
Healthcare, Inc. and Fairmount Associates, Inc.
+10.35(12) Agreement to Purchase Partnership Interests, made as of
March 1, 1996, by and among Meridian Health, Inc., Fairmont
Associates, Inc. and MHC Holding Company.
10.36(12) Purchase and Sale Agreement, dated January 16, 1996, by
and among Genesis Health Ventures of Indiana, Inc. and
Hallmark Healthcare Limited Partnership, as seller, and
Hunter Acquisitions, L.L.C., as purchaser.
10.37(17) 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
10.38(17) Guaranty and Agreement of Suretyship from Genesis Health
Ventures, Inc. and its Material Subsidiaries, Dated as of
October 7, 1996.
10.39(17) 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.
10.40(17) 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.
10.41(17) 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.
10.42(17) Acquisition Loan and Security Agreement, dated as of
August 31, 1996, between Genesis Health Ventures, Inc. and
AGE Institute of Florida, Inc.
10.43(17) Working Capital Loan and Security Agreement, dated as of
August 31, 1996, between Genesis Health Ventures, Inc. and
AGE Institute of Florida, Inc.
10.44(17) Second Amended and Restated Credit Agreement dated as of
October 7, 1996 by and among Genesis Health Ventures, Inc.
and certain of its subsidiaries, as Borrowers of the
institutions identified herein as Lenders, Mellon Bank,
N.A. as Issuer of Letters of Credit, Mellon Bank, N.A. as
Administrative Agent and Co-Syndication Agent, Citibank,
N.A. as Co-Syndication Agent and other co-agents specified
therein.
10.45(10) Employment Agreement by and between Michael R. Walker and
Genesis Health Ventures, Inc. dated April 1, 1997.
10.46(10) 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.
10.47(10) 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.
10.48(10) Amendment No. 2 to Second Amended and Restated Credit
Agreement, dated as of March 7, 1997 by and among Genesis
Health Ventures, Inc. and certain subsidiaries as Borrowers
and Mellon Bank N.A. Issuer of Letters of Credit, Mellon
Bank N.A. as Administrator Agent and Co-Syndication Agent,
Citibank, N.A. as Co-Syndication Agent, and other Co-Agents.
10.49(19) 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.
10.50(19) 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.
+10.51(20) Management Agreement dated October 9, 1997 among The
Multicare Companies, Inc., Genesis Health Ventures, Inc. and
Genesis ElderCare Network Services, Inc.
10.52(19) 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.
+10.53(19) 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.
10.54(18) Letter Agreement dated June 16, 1997 between Genesis Health
Ventures, Inc. and Sterns Associates.
11 Computation of Per Share Earnings.
21 Subsidiaries of the Company
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
- - ------------------------
+ Management contract or compensatory plan or arrangement
(1) Incorporated by reference to the Company's Form 8-K dated September 19,
1993.
(2) Incorporated by reference to the Company's Form 8-K dated November
30, 1993.
(3) Incorporated by reference to the Company's Form 8-K dated August
18, 1995.
59
(4) Incorporated by reference to the Company's Form 8-K dated November 30, 1995.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-40007).
(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, 1994.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
(11) Incorporated by reference to the Company's Form 8-A dated May 11, 1995.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(13) Incorporated by reference to Form 8-K, as amended, dated May 3, 1996.
(14) Incorporated by reference to Form S-3, dated June 20, 1995 (File No.
33-9350).
(15) Incorporated by reference to Form 8-K, as amended, dated July 11, 1996.
(16) Incorporated by reference to Form S-4, dated October 31, 1996 (File
No.333-15267).
(17) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference to the Tender Offer Statement on Schedule 14D-1
filed by Genesis ElderCare Corp. and Genesis ElderCare Acquisition
Corp. on June 20, 1997.
(19) 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.
(20) Incorporated by reference to Genesis Health Ventures, Inc.'s Current
Report on Form 8-K dated October 10, 1997.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 7, 1997
reporting the formation of Genesis ElderCare Corp. to acquire the
Multicare Companies, Inc., which did not include financial statements.
60
Genesis Health Ventures, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.
Under date of November 19, 1997, we reported on the consolidated balance
sheets of Genesis Health Ventures, Inc. and Subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1997, as contained in the annual report on Form
10-K for the year 1997. 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, present fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 19, 1997
61
Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 1997, 1996 and 1995
(Dollars in thousands)
Charged to
Balance at Other Balance
Beginning Charged to Accounts (1) Deductions (2) at End of
Description of Period Operations Period
- ------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1997
Allowance for Doubtful Accounts $11,131 12,615 27,563 11,891 $39,418
Year Ended September 30, 1996
Allowance for Doubtful Accounts $6,179 4,382 4,748 4,178 $11,131
Year Ended September 30, 1995
Allowance for Doubtful Accounts $4,553 3,013 503 1,890 $6,179
(1) - Represents amounts related to acquisitions
(2) - Represents amounts written off as uncollectible
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
its behalf on December 23, 1997 by the undersigned duly authorized.
Genesis Health Ventures, Inc.
By: /S/ Michael R. Walker
------------------------------------
Michael R. Walker,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on December 23, 1997.
Signature Capacity
- --------- --------
/s/ Michael R. Walker
- --------------------------------
Michael R. Walker Chairman and Chief Executive Officer
/s/ Richard R. Howard
- --------------------------------
Richard R. Howard President and Director
/s/ Samuel H. Howard
- --------------------------------
Samuel H. Howard Director
/s/ Allen R. Freedman
- --------------------------------
Allen R. Freedman Director
/s/ Roger C. Lipitz
- --------------------------------
Roger C. Lipitz Director
/s/ Stephen E. Luongo
- --------------------------------
Stephen E. Luongo Director
/s/ Alan B. Miller
- --------------------------------
Alan B. Miller Director
- --------------------------------
Fred F. Nazem Director
/s/ George V. Hager, Jr.
- --------------------------------
George V. Hager, Jr. Chief Financial Officer
(Principal Accounting Officer)
63