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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of Registrant as specified in its charter)
101 East State Street
Pennsylvania Kennett Square, PA 19348 06-1132947
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
(610) 444-6350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.02 per share OTC-BB
9 3/4% Senior Subordinated Debentures due 2005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days. YES X NO
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of voting and non-voting common stock held
by non-affiliates of the Registrant is $7,599,652(1). As of January 16, 2001,
48,653,344 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock, multiplied by the last
reported sale price for the Company's Common Stock on January 16, 2001. The
information provided shall in no way be construed as an admission that any
officer, director or 10% shareholder in the Company may or may not be
deemed an affiliate of the Company or that he/it is the beneficial owner of
the shares reported as being held by him/it, and any such inference is
hereby disclaimed. The information provided herein is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
INDEX
Page
Cautionary Statements Regarding Forward Looking Statements..................................................... 1
PART I
ITEM 1: BUSINESS
General ............................................................................................ 5
Voluntary Petition for Relief Under Chapter 11 of the United States Bankruptcy Code................... 6
Inpatient Services.................................................................................... 6
Pharmacy and Medical Supply Services.................................................................. 7
Other Services........................................................................................ 8
Revenue Sources....................................................................................... 8
Marketing............................................................................................. 12
Personnel............................................................................................. 12
Employee Training and Development..................................................................... 13
Governmental Regulation............................................................................... 13
Corporate Integrity Program........................................................................... 15
Competition in the Healthcare Services Industry....................................................... 16
Insurance............................................................................................. 17
ITEM 2: PROPERTIES............................................................................................ 19
ITEM 3: LEGAL PROCEEDINGS..................................................................................... 20
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 22
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................................................... 23
ITEM 6: SELECTED FINANCIAL DATA............................................................................... 24
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................. 25
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 48
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................... 49
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................. 92
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 92
ITEM 11: EXECUTIVE COMPENSATION............................................................................... 97
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................... 108
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 110
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K ...................................... 112
Cautionary Statements Regarding Forward Looking Statements
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our ability or
inability to meet our liquidity needs, scheduled debt and interest
payments and expected future capital expenditure requirements, and to
control costs, sell assets and the expected effects of government
regulation on reimbursement for services provided;
o certain statements contained in "Business" concerning strategy;
corporate integrity programs, government regulations and the Medicare
and Medicaid programs;
o certain statements in the Notes to Consolidated Financial Statements
concerning pro forma adjustments; and
o certain statements in "Legal Proceedings" regarding the effects of
litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our bankruptcy cases and our ability to continue as a going concern;
o certain covenant amendments to our debtor-in-possession financing that
may be terminated;
o our default under our senior credit agreement and our senior
subordinated and other notes;
o confirmation of a restructuring plan;
o our substantial indebtedness and significant debt service obligations;
o the effect of planned dispositions of assets;
o our ability or inability to secure the capital and the related cost of
the capital necessary to fund future growth;
o the impact of health care reform, including the Medicare Prospective
Payment System ("PPS"), the Balanced Budget Refinement Act ("BBRA")
and the Benefit Improvement and Protection Act of 2000 ("BIPA") and
the adoption of cost containment measures by the federal and state
governments;
o the adoption of cost containment measures by other third party payors;
o the impact of government regulation, including our ability to operate
in a heavily regulated environment and to satisfy regulatory
authorities;
o the occurrence of changes in the mix of payment sources utilized by
patients to pay for services;
o competition in our industry;
o our ability to consummate or complete development projects or to
profitably operate or successfully integrate enterprises into our
other operations; and
o changes in general economic conditions.
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Our bankruptcy cases and recurring losses, among other things, raise substantial
doubt about our ability to continue as a going concern.
On June 22, 2000, (the "Petition Date") Genesis Health Ventures, Inc. and
certain of its direct and indirect subsidiaries filed for voluntary relief under
Chapter 11 of the United States Code (the "Bankruptcy Code") with the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
On the same date, Genesis' 43.6% owned affiliate, The Multicare Companies, Inc.
("Multicare") and certain of its affiliates also filed for relief under Chapter
11 of the Bankruptcy Code with the Bankruptcy Court (singularly and collectively
referred to herein as "the Chapter 11 cases" or "the bankruptcy cases" unless
the context otherwise requires). Both companies are currently operating as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. These
cases, among other factors such as the Company's recurring losses raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern with the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. However, as a result of the bankruptcy cases and circumstances
relating to this event, including the Company's leveraged financial structure
and losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the protection of
Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate
or settle liabilities, for amounts other than those reflected in the financial
statements. Further, a plan of reorganization could materially change the
amounts reported in the financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. Additionally, a deadline
of December 19, 2000 was established for the assertion of pre-bankruptcy claims
against the Company (commonly referred to as a bar date); including contingent,
unliquidated or disputed claims, which claims could result in an increase in
liabilities subject to compromise as reported in the accompanying consolidated
financial statements. The Company's ability to continue as a going concern is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, the ability to comply with the terms of the
Company's debtor-in-possession financing agreements and the ability to generate
sufficient cash from operations and financing arrangements to meet obligations.
There can be no assurances that the cash flow from our debtor-in-possession
financing and operations will be sufficient to enable us to service our
substantial indebtedness and meet our other obligations.
The Chapter 11 cases constituted a default under the Company's and such
subsidiaries and affiliates various financing arrangements. The Bankruptcy Code
imposes an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
The Bankruptcy Court approved borrowings of up to $250,000,000 in respect to a
debtor-in-possession financing facility for Genesis and $50,000,000 in respect
to a debtor-in-possession financing facility for Multicare. Through January 31,
2001, borrowings under these facilities were $165,000,000.
The debtor-in-possession financing agreements limit, among other things, the
Company's ability to incur additional indebtedness or contingent obligations, to
permit additional liens, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends and to merge or
consolidate with any other person. The debtor-in-possession financing agreements
contain customary representations, warranties and covenants, including certain
financial covenants relating to minimum EBITDA, occupancy and
debtor-in-possession borrowings and maximum capital expenditures. The breach of
any such provisions, to the extent not waived or cured within any applicable
grace or cure periods, could result in the Company's inability to obtain further
advances under the debtor-in-possession financing agreements and the potential
exercise of remedies by the related lenders (without regard to the automatic
stay unless reimposed by the Bankruptcy Court) which could materially impair the
ability of the Company to successfully reorganize under Chapter 11.
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On February 14, 2001, Genesis and Multicare received waivers from their
respective lenders (the "DIP Lenders") under the Genesis DIP Facility and the
Multicare DIP Facility (collectively, the "DIP Facilities") for any event of
default regarding certain financial covenants relating to minimum EBITDA that
may have resulted from asset impairment and other non-recurring charges recorded
by Genesis and Multicare in the fourth quarter of Fiscal 2000. The waivers
extend through December 31, 2000. In addition, Genesis and Multicare received
certain amendments to the DIP Facilities, including an amendment that makes the
minimum EBITDA covenants for both companies less restrictive in future periods
(the "EBITDA Amendment"). The EBITDA Amendment can be terminated by the DIP
Lenders if, on or before April 2, 2001, the Bankruptcy Court has not approved
payments by Genesis and Multicare to the DIP Lenders of amendment fees related
thereto. There can be no assurances that Bankruptcy Court approval for the
amendment fee will be granted, and as a result, there can be no assurances that
the DIP Lenders will not exercise their rights under the DIP Facilities in an
event of default, including but not limited to, precluding future borrowings
under the DIP Facilities.
As a result of the pending status of Bankruptcy Court approval for payment of
the amendment fees, the Company classified the Genesis DIP Facility balance of
$133,000,000 as a current liability in the September 30, 2000 consolidated
balance sheet.
There can be no assurances that cash flow from operations and the
debtor-in-possession financing will be sufficient to enable us to service our
debt and meet our obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Limitations on reimbursement including the implementation of the Medicare
Prospective Payment System and other health care reforms may adversely affect
our business.
We receive revenues from Medicare, Medicaid, private insurance, long-term care
facilities which utilize our specialty medical services, self-pay eldercare
facility residents, and other third party payors. The health care industry is
experiencing a strong trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services to be provided by us.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System pursuant to
the Balanced Budget Act of 1997, as modified by the Medicare Balanced
Budget Refinement Act; and the Benefits Improvement Protection Act of
2000;
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect our business. These changes may also adversely affect long term care
facilities which are customers of our specialty medical businesses, such as
pharmacy and rehabilitation therapy services, which may, in turn, adversely
affect such businesses. There can be no assurance that payments under
governmental and private third party payor programs will be timely, will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. Our financial condition and results of operations may be affected
by the revenue reimbursement process, which in our industry is complex and can
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involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled. See "Business - Revenue Sources" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Extensive regulation by the federal and state governments may adversely affect
our costs of doing business.
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, reimbursement, licensure and
certification of eldercare centers and pharmacy operations, controlled
substances and health planning. Compliance with such regulatory requirements, as
interpreted and amended from time to time, can increase operating costs and
thereby adversely affect the financial viability of our business. Failure to
comply with current or future regulatory requirements could also result in the
imposition of various remedies including (with respect to inpatient services)
fines, restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of a facility or site of
service.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. See "Business - Government Regulation."
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
Changes in applicable laws and regulations, or new interpretations of existing
laws and regulations, could have a material adverse effect on reimbursement,
certification or licensure of our nursing facilities, pharmacies or other
aspects of our business, including eligibility for participation in federal and
state programs, costs of doing business, or the levels of reimbursement from
governmental or private sources. We cannot predict the content or impact of
future legislation and regulations affecting us. There can be no assurance that
regulatory authorities will not adopt changes or new interpretations of existing
regulations that could adversely affect us. See "Business - Revenue Sources" and
"Business - Government Regulation."
We face intense competition in our business.
The healthcare industry is highly competitive. We compete with a variety of
other companies in providing eldercare services, many of which have greater
financial and other resources and may be more established in their respective
communities than us. Competing companies may offer newer or different centers or
services than us and may thereby attract our customers who are either presently
customers of our eldercare centers or are otherwise receiving our eldercare
services.
In addition, as a result of the Vitalink Transaction, HCR Manor Care, a publicly
traded owner of eldercare centers that competes with us, owns 586,240 shares of
Genesis Series G Cumulative Convertible Preferred Stock. That stock is
convertible at the option of HCR Manor Care into approximately 7,880,000 shares
of our Common Stock. See Item 12 "Security Ownership of Certain Beneficial
Owners and Management". Certain service contracts (the "Service Contracts")
permit our NeighborCare(R) pharmacy operations to provide services to HCR Manor
Care constituting approximately eleven percent and four percent of the net
revenues of NeighborCare(R) and Genesis, respectively. These Service Contracts
are the subject of certain litigation. See "Business - Competition", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Certain Transactions and Events-Vitalink
Transaction."
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PART I
ITEM 1: BUSINESS
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania
corporation. As used herein, unless the context otherwise requires, "Genesis,"
the "Company," "we," "our" or "us" refers to Genesis Health Ventures, Inc. and
subsidiaries.
Genesis is a leading provider of healthcare and support services to the elderly.
We have developed the Genesis ElderCare(SM) delivery model of integrated
healthcare networks to provide cost-effective, outcome-oriented services to the
elderly. Genesis provides eldercare in the eastern United States through a
network of skilled nursing and assisted living centers. Genesis provides long
term care support services nationwide including pharmacy, medical equipment and
supplies, rehabilitation, group purchasing, consulting and facility management.
Through these integrated healthcare networks, Genesis provides inpatient,
pharmacy, medical supply and other healthcare services. The networks currently
include 317 owned, leased, managed, jointly-owned and affiliated eldercare
centers with approximately 39,400 beds; an integrated NeighborCare(R) pharmacy
and medical supply operation ("NeighborCare") with over $1,050,000,000 in annual
revenues, including 61 long-term care pharmacies (three are jointly-owned)
serving approximately 253,000 institutional beds; 23 medical supply and home
medical equipment distribution centers (four are jointly-owned) serving over
1,000 eldercare centers with over 80,000 beds; 32 community-based pharmacies
(two are jointly-owned); infusion therapy services; and six certified
rehabilitation agencies providing services through over 600 contracts. We also
provide diagnostic, respiratory and hospitality services in selected markets and
operate a group purchasing organization.
In order to achieve operating efficiencies, economies of scale and significant
market share, Genesis has concentrated its eldercare networks in five geographic
regions in which over 11,400,000 people over the age of 65 reside. The five
geographic markets that Genesis principally serves are: New England Region
(Massachusetts/Connecticut/New Hampshire/Vermont/Rhode Island); Midatlantic
Region (Greater Philadelphia / Delaware Valley/New Jersey); Chesapeake Region
(Southern Delaware/Eastern Shore of Maryland/Baltimore, Maryland/Washington
D.C./Virginia); Southern Region (Central Florida); and Allegheny / Midwest
Region (West Virginia/Western Pennsylvania /Illinois/Wisconsin). The Company
believes that it is the largest operator of eldercare center beds in the states
of New Hampshire, Massachusetts, New Jersey, Pennsylvania, Maryland and West
Virginia.
The Company's eldercare services focus on the central medical and physical
issues facing the more medically demanding elderly. By integrating the talents
of physicians with case management, comprehensive discharge planning and, where
necessary, home support services, we believe we provide cost-effective care
management to achieve superior outcomes and return customers to the community.
We believe that our orientation toward achieving improved customer outcomes
through our eldercare networks has resulted in increased utilization of
specialty medical services, high occupancy of available beds, enhanced quality
payor mix and a broader base of repeat customers.
We have undertaken several initiatives to position the Company to compete in the
current healthcare environment. These initiatives include:
o the development of clinical care protocols to monitor the delivery and
utilization of medical care;
o establishing and marketing the Genesis ElderCare(SM) brand name and
establishing Genesis ElderCare(SM) toll-free telephone lines along
with other trademarks, to increase awareness of our eldercare services
in the healthcare market; and
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o seeking strategic alliances with other healthcare providers to broaden
our continuum of care.
Since we began operations, we have focused our efforts on providing an expanding
array of specialty medical services to elderly customers. We generate revenues
primarily from two segments: pharmacy and medical supply services; and inpatient
services; however, we also derive revenue from other sources.
Voluntary Petition for Relief Under Chapter 11 of the United States Bankruptcy
Code
On June 22, 2000, Genesis Health Ventures, Inc. and certain of its direct and
indirect subsidiaries filed for voluntary relief under Chapter 11 of the United
States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On the same date, Genesis'
43.6% owned affiliate, The Multicare Companies, Inc. ("Multicare") and certain
of its affiliates also filed for relief under Chapter 11 of the Bankruptcy Code
with the Bankruptcy Court (singularly and collectively referred to herein as
"the Chapter 11 cases" or "the bankruptcy cases" unless the context otherwise
requires). Both companies are currently operating as debtors-in-possession
subject to the jurisdiction of the Bankruptcy Court. These cases, among other
factors such as the Company's recurring losses raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern with the realization of assets and the settlement of
liabilities and commitments in the normal course of business. However, as a
result of the bankruptcy cases and circumstances relating to this event,
including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. Additionally, a deadline of December 19, 2000 was
established for the assertion of pre-bankruptcy claims against the Company
(commonly referred to as a bar date); including contingent, unliquidated or
disputed claims, which claims could result in an increase in liabilities subject
to compromise as reported in the accompanying consolidated financial statements.
The Company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the Company's
debtor-in-possession financing agreements and the ability to generate sufficient
cash from operations and financing arrangements to meet obligations.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to eligible individuals. The changes have had a significantly
negative impact on the healthcare industry as a whole and on our cash flows.
Second, the federal reimbursement changes have exacerbated a long-standing
problem of less than fair reimbursement by states for medical services provided
to indigent persons. Third, numerous other factors have adversely affected our
cash flows, including increased labor costs, increased professional and
liability insurance costs and increased interest rates. Finally, as a result of
declining governmental reimbursement rates in the face of rising inflationary
costs, we are too highly leveraged to service our indebtedness, including our
long-term lease obligations. See Business - "Revenue Sources", "Personnel",
"Government Regulation" and "Insurance". Also, see Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Fiscal 2000
Compared to Fiscal 1999."
Inpatient Services
Genesis owns, leases or manages 292 eldercare centers (including 36 standalone
assisted living facilities and 23 transitional care units) located in 15 states.
Our skilled nursing centers offer three levels of care for their customers:
skilled, intermediate and personal. Skilled care provides 24-hour per day
professional services of a registered nurse; intermediate care provides less
intensive nursing care; and personal care provides for the needs of customers
requiring minimal supervision and assistance. Each eldercare center is
supervised by a licensed healthcare administrator and engages the services of a
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Medical Director to supervise the delivery of healthcare services to residents
and a Director of Nursing to supervise the nursing staff. We maintain a
corporate quality assurance program to monitor regulatory compliance and to
enhance the standard of care provided in each center.
Genesis has established and actively markets programs for elderly and other
customers who require subacute levels of medical care. These programs include
ventilator care, intravenous therapy, post-surgical recovery, respiratory
management, orthopedic or neurological rehabilitation, terminal care and various
forms of coma, pain and wound management. Private insurance companies and other
third party payors, including certain state Medicaid programs, have recognized
that treating customers requiring subacute medical care in centers such as those
operated by Genesis is a cost-effective alternative to treatment in an acute
care hospital. We provide such care at rates that we believe are substantially
below the rates typically charged by acute care hospitals for comparable
services.
The following table sets forth, for the periods indicated, information regarding
our average number of beds in service and the average occupancy levels at our
eldercare centers during the respective fiscal years.
2000 1999 1998
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Average Beds in Service: (1)
Owned and Leased Facilities 14,286 15,522 15,137
Managed and Jointly-Owned Facilities 23,779 23,984 24,234
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 91% 91%
Managed and Jointly-Owned Facilities 91% 90% 92%
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(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
Pharmacy and Medical Supply Services
Genesis provides pharmacy and medical supply services through its
NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of prescription and non prescription pharmaceuticals, infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. The
pharmacy services provided in these settings are tailored to meet the needs of
the institutional customer. These services include highly specialized packaging
and dispensing systems, computerized medical records processing and 24-hour
emergency services. NeighborCare provides institutional pharmacy products and
services to the elderly, chronically ill and disabled in long-term care and
alternate sites settings, including skilled nursing facilities, assisted living
facilities, residential and independent living communities and the home. We also
provide pharmacy consulting services to assure proper and effective drug
therapy. We provide these services through 61 institutional pharmacies (three
are jointly-owned) and 23 medical supply and home medical equipment distribution
centers (four are jointly-owned) located in our various market areas. In
addition, we operate 32 community-based pharmacies (two are jointly-owned) which
are located in or near medical centers, hospitals and physician office
complexes. The community-based pharmacies provide prescription and
over-the-counter medications and certain medical supplies as well as personal
service and consultation by licensed professional pharmacists. Approximately 91%
of the sales attributable to all pharmacy operations in the twelve months ended
September 30, 2000 were generated through external contracts with independent
healthcare providers with the balance attributable to centers owned or leased by
us, including the jointly-owned Multicare centers.
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Other Services
Rehabilitation Therapy. We provide an extensive range of rehabilitation therapy
services, including speech pathology, physical therapy and occupational therapy,
through six certified rehabilitation agencies in all five of our regional market
concentrations. These services are provided by approximately 3,200 licensed
rehabilitation therapists and assistants employed or contracted by Genesis to
substantially all of the eldercare centers we operate, as well as by contract to
healthcare facilities operated by others.
Management Services. We provide management services to 190 eldercare centers
pursuant to management agreements that provide generally for the day-to-day
responsibility for the operation and management of the centers. In turn, Genesis
receives management fees, depending on the agreement, computed as either an
overall fixed fee, a fixed fee per customer, a percentage of net revenues of the
center plus an incentive fee, or a percentage of gross revenues of the center
with some incentive clauses. The various management agreements, including option
periods, are scheduled to terminate between 2001 and 2010. We have extended
various mortgage and other loans to certain facilities under management
contract. See "Notes to Consolidated Financial Statements - Footnote 11- Notes
Receivable and Other Investments."
Group Purchasing. We jointly own and operate The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), one of the largest long-term care group
purchasing companies in the country. Tidewater provides purchasing and shared
service programs specially designed to meet the needs of eldercare centers and
other long-term care facilities. Tidewater's services are contracted to
approximately 3,100 members with over 308,000 beds in 45 states and the District
of Columbia.
Other Services. We employ or have consulting arrangements with approximately 81
physicians, physician assistants and nurse practitioners who are primarily
involved in designing and administering clinical programs and directing patient
care. We also provide an array of other specialty medical services in certain
parts of our eldercare network, including portable x-ray and other diagnostic
services; home healthcare services; adult day care services; consulting
services; respiratory health services and hospitality services such as dietary,
housekeeping, laundry, plant operations and facilities management services.
Revenue Sources
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, other third party payors and long term care facilities which utilize
our specialty medical services. The health care industry is experiencing the
effects of the federal and state governments trend toward cost containment, as
government and other third party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with providers. These
cost containment measures, combined with the increasing influence of managed
care payors and competition for patients, generally have resulted in reduced
rates of reimbursement for services provided by us.
The sources and amounts of our patient revenues will be determined by a number
of factors, including licensed bed capacity and occupancy rates of our centers,
the mix of patients and the rates of reimbursement among payors. Likewise
payment for ancillary medical services, including the institutional pharmacy
services of NeighborCare and therapy services provided by our rehabilitation
therapy services business, will vary based upon payor and payment methodologies.
Changes in the case mix of the patients as well as payor mix among private pay,
Medicare, and Medicaid will significantly affect our profitability.
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Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title
XVIII of the Social Security Act), known as "Medicare," has made available to
nearly every American 65 years of age and older a broad program of health
insurance designed to help the nation's elderly meet hospital and other health
care costs. Health insurance coverage has been extended to certain persons under
age 65 qualifying as disabled and those having end-stage renal disease. Medicare
includes three related health insurance programs: (i) hospital insurance ("Part
A"); and (ii) supplementary medical insurance ("Part B"); and (iii) a managed
care option for beneficiaries who are entitled to Part A and enrolled in Part B
("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently
administered by fiscal intermediaries (for Part A and some Part B services) and
carriers (for Part B) under the direction of the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS").
Medicaid (Title XIX of the Social Security Act) is a federal-state matching
program, whereby the federal government, under a needs based formula, matches
funds provided by the participating states for medical assistance to "medically
indigent" persons. The programs are administered by the applicable state welfare
or social service agencies under Federal rules. Although Medicaid programs vary
from state to state, traditionally they have provided for the payment of certain
expenses, up to established limits, at rates determined in accordance with each
state's regulations. For nursing centers, most states pay prospective rates, and
have some form of acuity adjustment. In addition to facility based services,
most states cover an array of medical ancillary services, including
institutional pharmacy. Payment methodologies for these services vary based upon
state preferences and practices permitted under Federal rules.
Medicare and Medicaid are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially affect the timing and/or levels of
payments to us for our services.
We are subject to periodic audits by the Medicare and Medicaid programs, which
have various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements. Such
rights and remedies may include requiring the repayment of any amounts alleged
to be overpayments or in violation of program requirements, or making deductions
from future amounts due to us. Such programs may also impose fines, criminal
penalties or program exclusions. Other payor sources also reserve rights to
conduct audits and make monetary adjustments.
Congress has enacted three major laws during the past five years that have
significantly altered payment for nursing home and medical ancillary services.
The Balanced Budget Act of 1997 ("the 1997 Act"), signed into law on August 5,
1997, reduced federal spending on the Medicare and Medicaid programs. The
Medicare Balanced Budget Refinement Act ("BBRA"), enacted in November 1999
addressed a number of the funding difficulties caused by the 1997 Act. A second
enactment, the Benefits Improvement and Protection Act of 2000 ("BIPA"), was
enacted on December 15, 2000, further modifying the law and restoring additional
funding. The following provides an overview to the impact of each enactment on
Genesis services.
Under the 1997 Act, participating skilled nursing facilities are reimbursed
under a prospective payment system ("PPS") for inpatient Medicare covered
services. The PPS system commenced with a facility's first cost reporting period
beginning on or after July 1, 1998. Under PPS, nursing facilities are paid a
predetermined amount per patient, per day ("per diem") based on the anticipated
costs of treating patients. The per diem rate is determined by classifying each
patient into one of forty-four resource utilization groups ("RUG") using the
information gathered during the minimum data set ("MDS") assesent. There is a
separate per diem rate for each of the RUG classifications. The per diem rate
also covers rehabilitation and non-rehabilitation ancillary services. The law
phased in PPS over a three-year period. PPS reimbursement is based largely on a
nursing facility's costs for the services it provided to Medicare beneficiaries
in the 1994-1995 base year.
As implemented by HCFA, PPS has had an adverse impact on the Medicare revenues
of many skilled nursing facilities. There have been three primary problems.
First, the base year calculations understate costs. Second, the market basket
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index used to trend payments forward does not adequately reflect market
experience. Third, the RUGs case mix allocation is not adequately predictive of
the costs of care for patients, and does not equitably allocate funding,
especially for non-therapy ancillary services.
In November 1999, the BBRA was passed in Congress. This enactment provided
relief for certain reductions in Medicare reimbursement caused by the 1997 Act.
For covered skilled nursing facility services furnished on or after April 1,
2000, the federal per diem rate was increased by 20% for 15 RUG payment
categories. While this provision was initially expected to adjust payment rates
for only six months, HCFA withdrew proposed RUG refinement rules. These payment
add-ons will continue until HCFA completes certain mandated recalculations of
current RUG weightings. For fiscal years 2001 and 2002, the BBRA mandated
federal per diem rates for all RUG categories be increased by an additional 4%
over the required market basket adjustment. The law provided that certain
specific services (such as prostheses and chemotherapy drugs) would be
reimbursed separately from and in addition to the federal per diem rate. A
provision was included that provided that for cost report years beginning on or
after January 1, 2000, skilled nursing facilities could waive the PPS transition
period and elect to receive 100% of the federal per diem rate. The enactment
also lifted for two years the $1,500 cap on rehabilitation therapy services
provided under Medicare Part B.
On December 15, 2000 Congress passed BIPA that, among other provisions,
increases the nursing component of Federal PPS rates by approximately 16.7% for
the period from April 1, 2001 through September 30, 2002. The legislation will
also change the 20% add-on to 3 of the 14 rehabilitation RUG categories to a
6.7% add-on to all 14 rehabilitation RUG categories beginning April 1, 2001. The
Part B consolidated billing provision of BBRA will be repealed except for
Medicare Part B therapy services and, the moratorium on the $1,500 therapy caps
will be extended through calendar year 2002. The Company has not yet evaluated
what effect BIPA will have on its operating results.
The Company's average Medicare rate per patient day in Fiscal 1997, prior to the
implementation of PPS, was over $400. In Fiscal 1998, 1999 and 2000 the average
Medicare rate per patient day was $390, $302 and $294, respectively.
The 1997 Act had provisions that affected amounts paid to NeighborCare for
pharmacy and medical supply products and services. Reimbursement for certain
products covered under Medicare Part B is limited to 95% of the "average
wholesale price." The move to prospective payment systems under the 1997 Act has
made pricing a more important consideration in the selection of pharmacy
providers. Also, Congress included provisions in the 1997 Act that would require
nursing facilities to submit all claims for all Medicare-covered services that
their residents receive, both Medicare Part A and Part B, even if such services
are provided by outside suppliers, including but not limited to pharmacy and
rehabilitation therapy providers, except for certain excluded services
("Consolidated Billing"). The BIPA enacted in December 2000, repealed this
provision except for therapy services.
The 1997 Act included several provisions affecting Medicaid. The 1997 Act
repealed the "Boren Amendment" federal payment standard for Medicaid payments to
nursing facilities effective October 1, 1997. The Boren Amendment required that
Medicaid payments to certain health care providers be reasonable and adequate in
order to cover the costs of efficiently and economically operated healthcare
facilities. Under the 1997 Act, states must now use a public notice and comment
period in order to determine rates and provide interested parties a reasonable
opportunity to comment on proposed rates and the justification for and the
methodology used in calculating such rates. With the repeal of the Federal
payment standards, there can be no assurances that budget constraints or other
factors will not cause states to reduce Medicaid reimbursement to nursing
facilities and pharmacies or that payments to nursing facilities and pharmacies
will be made on timely basis. The 1997 Act also grants greater flexibility to
states to establish Medicaid managed care projects without the need to obtain a
federal waiver. Although these projects generally exempt institutional care,
including nursing facilities and institutional pharmacy services, no assurances
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can be given that these projects ultimately will not change the reimbursement
methodology for nursing facility services or pharmacy services from
fee-for-service to managed care negotiated or capitated rates. We anticipate
that federal and state governments will continue to review and assess
alternative health care delivery systems and payment methodologies.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by HCFA and applicable federal law. In
most states, pharmacy services are priced at the lower of "usual and customary"
charges or cost (which generally is defined as a function of average wholesale
price and may include a profit percentage) plus a dispensing fee. Certain states
have "lowest charge legislation" or "most favored nation provisions" which
require NeighborCare to charge Medicaid no more that its lowest charge to other
consumers in the state. During 2000, Federal Medicaid requirements establishing
payment caps on certain drugs were revised ("Federal Upper Limits"). The final
rulemaking was substantially modified minimizing the impact of the new rules on
NeighborCare operations.
Pharmacy coverage and cost containment are important policy debates at both the
Federal and state levels. Congress has considered proposals to expand Medicare
coverage for out-patient pharmacy services. Enactment of such legislation could
affect institutional pharmacy services. Likewise, a number of states have
proposed cost containment initiatives pending. Changes in payment formulas and
delivery requirements could impact NeighborCare.
Congress and state governments continue to focus on efforts to curb spending on
health care programs such as Medicare and Medicaid. Such efforts have not been
limited to skilled nursing facilities, but have and will most likely include
other services provided by us, including pharmacy and therapy services. We
cannot at this time predict the extent to which these proposals will be adopted
or, if adopted and implemented, what effect, if any, such proposals will have on
us. Efforts to impose reduced allowances, greater discounts and more stringent
cost controls by government and other payors are expected to continue.
The following table reflects the allocation of customer service revenues among
these sources of revenue.
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Private pay and other 41% 47% 45% 39% 39%
Medicaid 43 39 35 37 36
Medicare 16 14 20 24 25
- --------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------
See "Business - Government Regulation."
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care constituting approximately eleven percent and four
percent of the net revenues of NeighborCare and Genesis, respectively. These
service contracts with HCR Manor Care are the subject of certain litigation. See
"Business - Competition", "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of operations -Certain Transactions
and Events-Vitalink Transaction."
NeighborCare pharmacy operations provide services to Mariner Post-Acute Network,
Inc. and Mariner Health Group, Inc. (collectively, "Mariner") under certain
service contracts. On January 18, 2000, Mariner filed voluntary petitions under
Chapter 11 with the Bankruptcy Court. To date, the service contracts with
Mariner have been honored; however, Mariner has certain rights under the
protection of the Bankruptcy Court to reject these contracts, which represent
six percent and two percent of the net revenues of NeighborCare and Genesis,
respectively. Genesis participates as a member of the official Mariner unsecured
creditors committee.
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Marketing
Marketing for eldercare centers is focused at the local level and is conducted
primarily by the center administrator and its admissions director, with support
from a dedicated regional marketing staff, who call on referral sources such as
doctors, hospitals, hospital discharge planners, churches and various community
organizations. In addition to those efforts, our marketing objective is to
maintain public awareness of the eldercare center and its capabilities. We take
advantage of our regional concentrations in our marketing efforts, where
appropriate, through consolidated marketing programs which benefit more than one
center.
Genesis markets specialty medical services to its managed eldercare centers, as
well as to independent healthcare providers, in addition to providing such
services to its owned, leased, managed and affiliated eldercare centers. We
market our rehabilitation therapy services, institutional pharmacy, medical
supply and other services through a direct sales force which primarily calls on
eldercare centers, hospitals, clinics and home health agencies.
The corporate managed care department, through regional managers, markets our
services directly to insurance companies, managed care organizations and other
third party payors. In addition, the marketing department supports the eldercare
centers in developing promotional materials and literature focusing on the
Company's philosophy of care, services provided and quality clinical standards.
See "Governmental Regulation" for a discussion of the federal and state laws
which limit financial and other arrangements between healthcare providers.
We operate our core business under the name Genesis ElderCare(SM). The Genesis
ElderCare logo and service mark have been featured in a series of print
advertisements in publications serving the regional markets in which we operate.
Our marketing of Genesis ElderCare is aimed at increasing awareness among
decision makers in key professional and business audiences. We are using
advertising, including our toll free ElderCare Lines, to promote our brand name
in trade, professional and business publications and to promote services
directly to consumers.
Personnel
At December 31, 2000, Genesis and its subsidiaries (including Multicare)
employed over 46,000 people, including approximately 33,000 full-time and 13,000
part-time employees. Approximately 19% of these employees are physicians, nurses
and professional staff. Approximately 13,000 of these employees are employed by
Multicare.
Including Multicare, we currently have 81 facilities that are covered by, or are
negotiating, collective bargaining agreements. The agreements expire at various
dates from 2001 through 2005 and cover approximately 5,100 employees. Although
we have been subject to an aggressive union organizing campaign by the Service
Employees International Union ("SEIU"), we have experienced little impact at the
facility level. We believe that our relationship with our employees is generally
good.
The Company and the industry continue to experience significant shortages in
qualified professional clinical staff. We compete with other healthcare
providers and with non-healthcare providers for both professional and
non-professional employees. As the demand for these services continually exceeds
the supply of available and qualified staff, the Company and our competitors
have been forced to offer more attractive wage and benefit packages to these
professionals and to utilize outside contractors for these services at premium
rates. Furthermore, the competitive arena for this shrinking labor market has
created high turnover among clinical professional staff as many seek to take
advantage of the supply of available positions, each offering new and more
attractive wage and benefit packages. In addition to the wage pressures inherent
in this environment, the cost of training new employees amid the high turnover
rates has caused added pressure on our operating margins. While we have been
able to retain the services of an adequate number of qualified personnel to
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staff our facilities appropriately and maintain our standards of quality care,
there can be no assurance that continued shortages will not in the future affect
our ability to attract and maintain an adequate staff of qualified healthcare
personnel. A lack of qualified personnel at a facility could result in
significant increases in labor costs at such facility or otherwise adversely
affect operations at such facility. Any of these developments could adversely
affect our operating results or expansion plans.
Employee Training and Development
Genesis believes that nursing and professional staff retention and development
has been and continues to be a critical factor in our successful operation. In
response to this challenge, a compensation program which provides for annual
merit reviews as well as financial and quality of care incentives has been
implemented to promote center staff motivation and productivity and to reduce
turnover rates. Management believes that our wage rates for professional nursing
staff are commensurate with market rates.
In addition, Genesis has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized
through a variety of in-house programs as well as a tuition reimbursement
program. We have established, company-wide, the Genesis Nursing Assistant
Specialist Program, which is offered on a joint basis with community colleges.
Classes are held on the employees' time, at our cost, last for approximately six
months and provide advanced instruction in nursing care. When all of the
requirements for class participation have been met through attendance,
discussion and examinations, the nurses aide graduates and is awarded the title
of Nursing Assistant Specialist and receives a salary adjustment. We have
maintained a retention rate of 82% since 1990 of the nurses aide graduates.
Approximately 1,800 nurses aides have graduated from the Genesis Nursing
Assistant Specialist Program and received an increase in salary. As the nurse
aide continues through the career ladder, we continue to provide incentives. At
the next level, Senior Nursing Assistant Specialist, the employee receives
another increase in salary and additional tuition reimbursement of up to $2,500
toward becoming a Licensed Practical Nurse ("LPN") or Registered Nurse ("RN")
and at the Senior Nursing Assistant Specialist Coordinator level, tuition
reimbursement increases to a maximum of $3,000 per year towards a nursing
degree. Similar program are currently under development for both pharmacy
technicians and nursing assistants who work in the assisted living environment.
We began a junior level management and leadership training program in 1990
referred to as the Pilot Light Program. The target audience for this training is
RN's and LPN's occupying charge nurse positions within the Company's nursing
centers as well as junior level managers throughout the Genesis networks. Over
1,100 participants have graduated from this program.
Government Regulation
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. For our eldercare centers, this regulation relates, among other
things, to the adequacy of physical plant and equipment, qualifications of
personnel, standards of care and operational requirements. For pharmacy and
medical supply products and services, this regulation relates, among other
things, to operational requirements, reimbursement, documentation, licensure,
certification and regulation of controlled substances. Compliance with such
regulatory requirements, as interpreted and amended from time to time, can
increase operating costs and thereby adversely affect the financial viability of
our business. Failure to comply with current or future regulatory requirements
could also result in the imposition of various remedies including fines,
restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of the facility.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. Following this pronouncement, it has become
more difficult for nursing facilities to maintain licensing and certification.
- 13 -
We have experienced and expect to continue to experience increased costs in
connection with maintaining our licenses and certifications as well as increased
enforcement actions.
All of our eldercare centers and healthcare services, to the extent required,
are licensed under applicable law. All skilled nursing centers and healthcare
services, or practitioners providing the services therein, are certified or
approved as providers under one or more of the Medicaid and Medicare programs.
Generally, assisted living centers are not eligible to be certified under
Medicare or Medicaid. Licensing, certification and other applicable standards
vary from jurisdiction to jurisdiction and are revised periodically. State and
local agencies survey all skilled nursing centers on a regular basis to
determine whether such centers are in compliance with governmental operating and
health standards and conditions for participation in government sponsored third
party payor programs. We believe that our eldercare centers and other sites of
service are in substantial compliance with the various Medicare, Medicaid and
state regulatory requirements applicable to them. However, in the ordinary
course of our business, we receive notices of deficiencies for failure to comply
with various regulatory requirements. Genesis reviews such notices and takes
appropriate corrective action. In most cases, Genesis and the reviewing agency
will agree upon the measures to be taken to bring the center into compliance
with regulatory requirements. In some cases or upon repeat violations, the
reviewing agency may take various adverse actions against a provider, including
but not limited to:
o the imposition of fines;
o suspension of payments for new admissions to the center;
o in extreme circumstances, decertification from participation in the
Medicare or Medicaid programs and revocation of a center's license.
These actions may adversely affect a centers' ability to continue to operate,
the ability to provide certain services, and / or eligibility to participate in
the Medicare or Medicaid programs or to receive payments from other payors.
Additionally, actions taken against one center may subject other centers under
common control or ownership to adverse remedies. Certain of our centers have
received notices in the past from state and federal agencies that, as a result
of certain alleged deficiencies, the agency was taking steps to decertify the
centers from participation in Medicare and Medicaid programs. However, except as
discussed below, all such centers have taken appropriate corrective action such
that they were not decertified from the program(s).
In March 1999, the Company voluntarily closed an eldercare center in the state
of Florida following notice of possible decertification from Florida's
regulatory agency. We believe the agency's actions were inappropriate and caused
the center to lose its economic viability which, in our opinion, necessitated
the closing of the center. In addition, a Multicare center in West Virginia was
decertified from the Medicare and Medicaid programs in 1999, but was immediately
reinstated.
All of our owned and leased skilled nursing centers are currently certified to
receive benefits provided under Medicare for these services. Additionally, all
Genesis and Multicare skilled nursing centers are currently certified to receive
benefits under Medicaid. Both initial and continuing qualifications of a skilled
nursing center to participate in such programs depend upon many factors
including accommodations, equipment, services, patient care, safety, personnel,
physical environment, and adequate policies, procedures and controls.
Many states in which Genesis operates have adopted Certificate of Need or
similar laws which generally require that a state agency approve certain
acquisitions and determine that the need for certain bed additions, new
services, and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other
changes, or the expenditure of capital. State approvals are generally issued for
a specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
centers, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the center's license
- 14 -
and adverse reimbursement action. During the past year, several states have
passed legislation altering their Certificate of Need requirements. Virginia
will phase out its requirement. Maryland is studying a similar action. These
changes are not expected to materially alter our business opportunities.
We are also subject to federal and state laws which govern financial and other
arrangements between healthcare providers. These laws often prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. These laws include:
o the "anti-kickback" provisions of the federal Medicare and Medicaid
programs, which prohibit, among other things, knowingly and willfully
soliciting, receiving, offering or paying any remuneration (including
any kickback, bribe or rebate) directly or indirectly in return for or
to induce the referral of an individual to a person for the furnishing
or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid;
and
o the "Stark laws" which prohibit, with limited exceptions, the referral
of patients by physicians for certain services, including home health
services, physical therapy and occupational therapy, to an entity in
which the physician has a financial interest.
In addition, some states restrict certain business relationships between
physicians and other providers of healthcare services. Many states prohibit
business corporations from providing, or holding themselves out as a provider of
medical care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. From time to time, we have sought guidance as to the
interpretation of these laws; however, there can be no assurance that such laws
will ultimately be interpreted in a manner consistent with our practices.
There have also been a number of recent federal and state legislative and
regulatory initiatives concerning reimbursement under the Medicare and Medicaid
programs. During the past two years, the Office of the Inspector General, HHS
has issued a series of voluntary compliance guidelines. These compliance
guidelines provide guidance on acceptable practices. Skilled nursing facility
services and DMEPOS supplier performance practices have been among the services
addressed in these publications. Our Regulatory Compliance Advisory Committee is
working to assure that our practices conform. The Office of the Inspector
General, HHS also issues fraud alerts and advisory opinions. Directives
concerning double billing, home health services and the provision of medical
supplies to nursing facilities have been released. It is anticipated that areas
addressed by these advisories may come under closer scrutiny by the government.
While we have focused our internal compliance reviews to assure our practices
conform with government instructions, we cannot accurately predict the impact of
any such initiatives. See "Cautionary Statements Regarding Forward Looking
Statements" and "Revenue Sources".
Corporate Integrity Program
The Genesis Corporate Integrity Program (the "Integrity Program") was developed
to assure that we continue to achieve our goal of providing a high level of care
and service in a manner consistent with all applicable state and federal laws
and regulations, and our internal standard of conduct. This program is intended
to allow personnel to prevent, detect and resolve any conduct or action that
fails to satisfy all applicable laws and our standard of conduct.
The Company has a Corporate Compliance Officer responsible for administering the
Integrity Program. The Corporate Compliance Officer, with the concurrence of the
Chief Executive Officer or the Board of Directors, may use any of the Company's
- 15 -
resources to evaluate and resolve compliance issues. The Compliance Officer
reports significant compliance issues to the Board of Directors, including the
results of investigations and any subsequent disciplinary or remedial actions
taken.
In December 1998, the Company established the Corporate Integrity Hotline (the
"Hotline"), which offers a toll-free number available to all employees of
Genesis to report non-compliance issues. Employee calls to the hotline are kept
anonymous. All calls reporting alleged non-compliance are logged, investigated,
addressed and remedied by appropriate company officials.
In 1999, two subcommittees were established to further ensure the effectiveness
of the Integrity Program. The Regulatory Compliance Advisory Committee ("RCAC")
was formed to ensure that a mechanism exists to monitor federal and state
regulations which effect the Company and to ensure that existing regulations are
being adhered to throughout the organization. The RCAC is comprised of senior
level management and meets bimonthly to discuss regulatory issues which
potentially impact the Company. The Corporate Integrity Subcommittee (the "CIS")
was established to ensure a mechanism exists for the Company to monitory
compliance issues. Potential compliance issues are referred by the Corporate
Compliance Officer to members of the CIS for investigation. The CIS members are
senior members of the risk management, human resources, legal, clinical
practices and internal audit departments.
Periodically, the Company receives information from the Department of Health and
Human Services Office of Inspector General (HHS OIG) regarding individuals and
providers that are excluded from participation in Medicare, Medicaid and other
federal healthcare programs. Providers include medical directors, attending
physicians, vendors, consultants and therapists. On a monthly basis, management
compares the information provided by the HHS OIG to data bases containing
providers and individuals doing businesses with Genesis. Any potential matches
are investigated and any necessary corrective action is taken to ensure we cease
doing businesses with such providers and individuals.
Competition in the Healthcare Services Industry
We compete with a variety of other companies in providing healthcare services.
Certain competing companies have greater financial and other resources and may
be more established in their respective communities than us. Competing companies
may offer newer or different centers or services than us and may thereby attract
our customers who are either presently residents of our eldercare centers or are
otherwise receiving our healthcare services.
As a result of the Vitalink Transaction, HCR Manor Care, a publicly traded owner
of eldercare centers that competes with us in certain markets, owns 586,240
shares of Genesis Series G Cumulative Convertible Preferred Stock (the "Series G
Preferred") which are convertible at the option of the holder into approximately
7,880,000 shares of our Common Stock. See Item 12 "Security Ownership of Certain
Beneficial Owners and Management". Pursuant to certain service contracts (the
"Service Contracts"), our NeighborCare pharmacy operations provide services to
HCR Manor Care constituting approximately four percent and eleven percent of the
consolidated net revenues of Genesis and NeighborCare, respectively in fiscal
2000. These Service Contracts are the subject of certain litigation. See "Legal
Proceedings".
We operate eldercare centers in 15 states. In each market, our eldercare centers
may compete for customers with rehabilitation hospitals; subacute units of
hospitals; skilled or intermediate nursing centers; and personal care or
residential centers which offer comparable services to those offered by our
centers.
Certain of these providers are operated by not-for-profit organizations and
similar businesses which can finance capital expenditures on a tax-exempt basis
or receive charitable contributions unavailable to us. In competing for
customers, a center's local reputation is of paramount importance. Referrals
- 16 -
typically come from acute care hospitals; physicians; religious groups; health
maintenance organizations; the customer's families and friends; and other
community organizations.
Members of a customer's family generally actively participate in selecting an
eldercare center. Competition for subacute patients is intense among hospitals
with long-term care capability, rehabilitation hospitals and other specialty
providers and is expected to remain so in the future. Important competitive
factors include the reputation in the community; services offered; the
appearance of a center; and the cost of services.
Genesis competes in providing pharmacy, medical supply and other specialty
medical services with a variety of different companies. Generally, this
competition is national, regional and local in nature. The primary competitive
factors in the specialty medical services business are similar to those in the
eldercare center business and include reputation; the cost of services; the
quality of clinical services; responsiveness to customer needs; and the ability
to provide support in other areas such as third party reimbursement, information
management and patient record-keeping.
Insurance
The Company carries property, general and professional liability coverage on
behalf of itself and its subsidiaries in amounts deemed adequate by management.
However, there can be no assurance that any current or future claims will not
exceed applicable insurance coverage.
The Company has experienced an adverse effect on operating cash flow beginning
in the third quarter of 2000 due to an increase in the cost of certain of its
insurance programs and the timing of funding new policies. Rising costs of
eldercare malpractice litigation involving nursing care operators and losses
stemming from these malpractice lawsuits has caused many insurance providers to
raise the cost of insurance premiums or refuse to write insurance policies for
nursing homes. Accordingly, the costs of general and professional liability and
property insurance premiums have increased. In addition, as a result of the
Company's current financial condition it is unable to continue certain self
insured programs and has replaced these programs with outside insurance
carriers.
Prior to June 1, 2000, the Company purchased general and professional liability
insurance coverage ("GL/PL") from various commercial insurers on a first dollar
coverage basis. Beginning with the June 1, 2000 policy, the Company has
purchased GL/PL coverage from a commercial insurer subject to a $500,000 per
claim retention, except in Florida, where the retention is $2,500,000 per claim.
On an annual basis, the cost of the GL/PL has increased by approximately
$7,000,000, for the policy year ending June 1, 2001 as compared to the policy
year ended June 1, 2000.
Workers' compensation insurance has been maintained as statutorily required, or
in certain jurisdictions for certain periods, the Company has qualified as
exempt ("self insured"). Most of the commercial insurance purchased is loss
sensitive in nature. As a result, the Company is responsible for adverse loss
development or, in some cases, may be entitled to refunds if losses are below
certain levels. The Company believes that adequate reserves are in place to
cover the ultimate liability related to workers' compensation.
The Company maintains a wholly owned captive insurance subsidiary, Liberty
Health Corp., LTD ("LHC") to provide reinsurance for the Company and others. LHC
has, or is currently, reinsuring certain windstorm, workers' compensation and
GL/PL deductibles. The Company, based on independent actuarial studies, believes
that LHC's reserves are sufficient to meet their obligations. LHC continues to
operate as a going concern, and has been excluded from the Company's Chapter 11
cases.
The Company provides several health insurance options to its employees. Prior to
Fiscal 1999, the Company offered a self-insured 80/20 indemnity plan (the "80/20
Plan") and several fully insured HMO's. In late Fiscal 1999, a new self insured
indemnity plan (the "Choice Plan") was developed and made available to a limited
- 17 -
number of employees. The Choice Plan became available to all employees in
January 2000. The Choice Plan enabled employees to take advantage of much lower
co-pays that were competitive with HMO co-pays, while still allowing them to go
to any provider in the 80/20 Plan preferred provider organization. In Fiscal
2000, the medical and pharmacy utilization levels under the Choice Plan and the
80/20 Plan were greater than the Company anticipated, resulting in additional
health insurance costs of approximately $28,000,000. Effective April 1, 2001,
the Choice Plan will be eliminated from the Company's benefit program and
employee copays for prescriptions will be increased.
- 18 -
ITEM 2: PROPERTIES
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Genesis as of December 31, 2000. Included
in the center count are 36 standalone assisted living facilities with 3,333
units and 23 skilled nursing facilities with 792 assisted living units. Certain
properties are leased by the respective operating entities from third parties.
The inability of Genesis to make rental payments under these leases could result
in loss of the leased property through eviction or other proceedings. Certain
leases do not provide for non disturbance from the mortgagee of the fee interest
in the property and consequently each such lease is subject to termination in
the event that the mortgage is foreclosed following a default by the owner.
Included in Managed Centers are 131 jointly-owned facilities with 16,047 beds /
assisted living units, including the Multicare centers. Also included in Managed
Centers are 24 transitional care units with 621 beds located in hospitals
principally in the state of Massachusetts. Member Centers consist of
independently owned facilities that, for a fee, have access to many of the
resources and capabilities of the Genesis Eldercare Network, including
participation in Genesis' managed care contracts, preferred provider
arrangements and group purchasing arrangements. These centers typically purchase
an array of services from Genesis.
Wholly-Owned Leased Managed Member
Centers Centers Centers (1) Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
- ------------------------------------------------------------------------------------------------------------------------------------
Maryland 13 1,759 6 801 13 1,805 15 2,848 47 7,213
Pennsylvania 17 2,315 4 459 29 3,899 3 375 53 7,048
New Jersey 8 1,640 4 670 30 3,717 2 375 44 6,402
Massachusetts 6 712 1 132 53 4,786 - - 60 5,630
Connecticut 4 615 - - 14 1,717 - - 18 2,332
West Virginia - - 2 180 23 1,952 - - 25 2,132
Florida 12 1,559 1 120 1 120 1 120 15 1,919
New Hampshire 9 916 4 364 1 90 - - 14 1,370
Delaware 4 502 - - 3 319 3 449 10 1,270
Virginia 4 619 1 240 1 90 6 949
Wisconsin - - - - 7 951 - - 7 951
Illinois - - - - 9 919 - - 9 919
Rhode Island - - - - 3 373 - - 3 373
North Carolina - - - - 2 340 - - 2 340
Vermont 2 256 - - 1 58 - - 3 314
District of Columbia - - - - - - 1 189 1 189
- ------------------------------------------------------------------------------------------------------------------------------------
Totals 79 10,893 23 2,966 190 21,136 25 4,356 317 39,351
- ------------------------------------------------------------------------------------------------------------------------------------
We have 2 owned and 107 leased pharmacy and medical supply locations in 41
states.
We believe that all of our physical properties are well maintained and are in a
suitable condition for the conduct of our business.
(1) - Includes 96 centers with 11,305 beds owned or leased by Multicare. Prior
to October 1, 2000, Genesis accounted for its 43.6% owned investment in
Multicare using the equity method of accounting. Upon consummation of a
restructuring transaction, more fully described in Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Multicare
Transaction and its Restructuring", Genesis consolidated the financial results
of Multicare.
- 19 -
ITEM 3: LEGAL PROCEEDINGS
Genesis is a party to litigation arising in the ordinary course of business.
Genesis does not believe the results of such litigation, even if the outcome is
unfavorable to us, would have a material adverse effect on our financial
position. See "Cautionary Statements Regarding Forward Looking Statements."
The Genesis and Vitalink Actions Against HCR Manor Care
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services
(d/b/a NeighborCare(R)), a subsidiary of Genesis, filed multiple lawsuits
requesting injunctive relief and compensatory damages against HCR Manor Care,
Inc. ("HCR Manor Care"), two of its subsidiaries and two of its principals. The
lawsuits arise from HCR Manor Care's threatened termination of long-term
pharmacy services contracts effective June 1, 1999. Vitalink filed a complaint
against HCR Manor Care and two of its subsidiaries in Baltimore City, Maryland
circuit court (the "Maryland State Court Action"). Genesis filed a complaint
against HCR Manor Care, a subsidiary, and two of its principals in federal
district court in Delaware including, among other counts, securities fraud (the
"Delaware Federal Action"). Vitalink has also instituted an arbitration action
before the American Arbitration Association (the "Arbitration"). In these
actions, Vitalink is seeking a declaration that it has a right to provide
pharmacy, infusion therapy and related services to all of HCR Manor Care's
facilities and a declaration that HCR Manor Care's threatened termination of the
long-term pharmacy service contracts was unlawful. Genesis and Vitalink also
seek over $100,000,000 in compensatory damages and enforcement of a 10-year
non-competition clause.
Genesis acquired Vitalink from Manor Care in August 1998. In 1991, Vitalink and
Manor Care had entered into long-term master pharmacy, infusion therapy and
related agreements which gave Vitalink the right to provide pharmacy services to
all facilities owned or licensed by Manor Care and its affiliates. On July 10,
1998, Manor Care advised Vitalink and Genesis that Manor Care would not provide
notice of non-renewal of the master service agreements; accordingly the terms of
the pharmacy service agreements were extended to September, 2004. Under the
master service agreements, Genesis and Vitalink receive revenues at the rate of
approximately $107,000,000 per year.
By agreement dated May 13, 1999, the parties agreed to consolidate the Maryland
State Court Action relating to the master service agreements with the
Arbitration matter. Accordingly, on May 25, 1999, the Maryland State Court
Action was dismissed voluntarily. Until such time as a final decision is
rendered in said Arbitration, or by the Bankruptcy Court, as appropriate, the
parties have agreed to maintain the master service agreements in full force and
effect.
HCR Manor Care and its subsidiaries have pleaded counterclaims in the
Arbitration seeking damages for Vitalink's alleged overbilling for products and
services provided to HCR Manor Care, a declaration that HCR Manor Care had the
right to terminate the master service agreements, and a declaration that
Vitalink does not have the right to provide pharmacy, infusion therapy and
related services to facilities owned by HCR prior to its merger with Manor Care.
According to an expert report submitted by HCR Manor Care on May 8, 2000, HCR
Manor Care is seeking $17,800,000 in compensatory damages for alleged
overbilling by Vitalink between September 1, 1998 and March 31, 2000.
On January 14, 2000, HCR Manor Care moved to dismiss Vitalink's claims in the
Arbitration that it has a right to provide pharmacy and related services to the
HCR Manor Care facilities not previously under the control of Manor Care. On May
17, 2000, the Arbitrator ordered the dismissal of Vitalink's claims seeking a
declaratory judgment and injunctive relief for denial of Vitalink's right to
service the additional HCR Manor Care facilities, but sustained Vitalink's claim
seeking compensatory damages against HCR Manor Care for denial of that right.
- 20 -
Trial in the arbitration was originally scheduled to begin on June 12, 2000. On
May 23, 2000, however, the Arbitrator postponed the trial indefinitely due to
Vitalink's potential bankruptcy filing. In connection with this stay, the
parties agreed that HCR Manor Care may pay, on an interim basis, NeighborCare 90
percent of the face amount of all invoices for pharmaceutical and infusion
therapy goods and services that NeighborCare renders to respondents under the
Master Service Agreements. The remaining 10 percent must be held in a segregated
account by Manor Care. After Genesis and its affiliates, including Vitalink,
filed voluntary petitions for restructuring under Chapter 11 of the Bankruptcy
Code on June 22, 2000, the Arbitration was automatically stayed pursuant to 11
U.S.C. ss. 362(a).
On August 1, 2000, HCR Manor Care moved to lift the automatic stay and compel
arbitration. On September 5, 2000, the Bankruptcy Court denied that motion, with
leave to refile in 90 days. On December 8, 2000, Manor Care renewed its motion
to lift the stay in the arbitration. On January 16, 2001, Genesis filed a motion
to assume the master service agreements asserting that the determination of the
Bankruptcy Court will supersede a significant number of issues in the
Arbitration. The Bankruptcy Court has not yet ruled on these motions. As a
result, the Arbitration remains stayed to date.
On June 29, 1999, defendants moved to dismiss or stay Genesis' securities fraud
complaint filed in the Delaware Federal Action. On March 22, 2000, HCR Manor
Care's motion was denied with respect to its motion to dismiss the complaint,
but was granted to the extent that the action was stayed pending a decision in
the Arbitration. Accordingly, Genesis still maintains the Delaware Federal
Action. As a result of Genesis' Chapter 11 filing, this action is also
automatically stayed pursuant to 11 U.S.C. ss. 362(a).
The Vitalink Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel, filed an
additional complaint against Omnicare, Inc. ("Omnicare") and Heartland
Healthcare Services (a joint venture between Omnicare and HCR Manor Care)
seeking injunctive relief and compensatory and punitive damages. The complaint
includes counts for tortious interference with Vitalink's contractual rights
under its exclusive long-term service contracts with HCR Manor Care. On November
12, 1999, in response to a motion filed by the defendants, that action was
stayed pending a decision in the Arbitration.
The HCR Manor Care Action Against Genesis in Delaware
On August 27, 1999, Manor Care Inc., a wholly owned subsidiary of HCR Manor Care
Inc., filed a lawsuit against Genesis in federal district court in Delaware
based upon Section 11 and Section 12 of the Securities Act. Manor Care Inc.
alleges that in connection with the sale of the Genesis Series G Preferred Stock
issued as part of the purchase price to acquire Vitalink, Genesis failed to
disclose or made misrepresentations related to the effects of the conversion to
the prospective payment system on Genesis' earnings, the restructuring of the
Genesis ElderCare Corp. Joint Venture, the impact of the operations of Genesis'
Multicare affiliate on Genesis' earnings, the status of Genesis' labor
relations, Genesis' ability to declare dividends on the Series G Preferred
Stock, the value of the conversion right attached to the Series G Preferred
Stock, and information relating to the ratio of combined fixed charges and
preference dividends to earnings. Manor Care, Inc. seeks, among other things,
compensatory damages and rescission of the purchase of the Series G Preferred
Stock.
On November 23, 1999, Genesis moved to dismiss this action on the ground, among
others, that Manor Care's complaint failed to plead fraud with particularity. On
September 29, 2000, the Court granted that motion in part and denied it in part.
Specifically, the Court dismissed all of defendants' allegations except those
concerning the Company's labor relations and the ratio of combined fixed charges
and preference dividends to earnings.
- 21 -
On January 18, 2000, Genesis moved to consolidate this action with the action
brought against HCR Manor Care in Delaware federal court. That motion has been
fully submitted and is awaiting decision. As a result of Genesis' Chapter 11
filing, this action is also automatically stayed pursuant to 11 U.S.C. ss.
362(a).
The HCR Manor Care Action Against Genesis in Ohio
On December 22, 1999, Manor Care filed a lawsuit against Genesis and others in
the United States District Court for the Northern District of Ohio. Manor Care
alleges, among other things, that the Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred") and Series I Senior
Convertible Exchangeable Participating Cumulative Preferred Stock (the "Series I
Preferred") were issued in violation of the terms of the Series G Preferred and
the Rights Agreement dated as of April 26, 1998 between Genesis and Manor Care.
Manor Care seeks, among other things, damages and rescission or cancellation of
the Series H and Series I Preferred. On February 29, 2000, Genesis moved to
dismiss this action on the ground, among others, that Manor Care's complaint
failed to state a cause of action. This motion has been fully submitted,
including supplemental briefing by both parties, and is awaiting decision. As a
result of Genesis' Chapter 11 filing, this action is also automatically stayed
pursuant to 11 U.S.C. ss. 362(a).
Genesis is not able to predict the results of such litigation. However, if the
outcome is unfavorable to us, and the claims of HCR Manor Care are upheld, such
results would have a material adverse effect on our financial position. See
"Cautionary Statement Regarding Forward-Looking Statements."
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
- 22 -
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table indicates the high and low sale prices per share, as
reported on the New York Stock Exchange through June 22, 2000 and on the OTC
Bulletin Board thereafter.
Calendar Year High Low
------------- ---- ---
2000
First Quarter $3.50 $0.56
Second Quarter $0.75 $0.02
Third Quarter $0.31 $0.06
Fourth Quarter $0.20 $0.03
1999
First Quarter $9.50 $3.50
Second Quarter $7.69 $3.00
Third Quarter $4.00 $1.88
Fourth Quarter $2.94 $1.94
As of December 31, 2000, 48,653,344 shares of Common Stock were held of record
by 770 shareholders. In addition, there were 589,714 outstanding shares of
Series G Preferred Stock which are convertible into 7,926,411 shares of Common
Stock; 24,369 shares of Series H Preferred Stock which are convertible into
27,850,590 shares of Common Stock; and 17,631 shares of Series I Preferred Stock
which are convertible into 20,149,410 shares of non-voting common stock. The
Company has not paid any cash dividends on its Common Stock since its inception
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. At September 30, 2000 there were approximately $34,921,000,
$13,258,000 and $9,562,000 of accrued but unpaid dividends on the Series G
Preferred, the Series H Preferred and the Series I Preferred, respectively,
which are subject to compromise in connection with the Chapter 11 Cases.
Certain of the Company's outstanding loans contain covenants which limit our
ability to declare and pay dividends. In addition, the Company's current
financial condition limits our ability to declare and pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements". Also, see Item 12 "Security Ownership of
Certain Beneficial Owners and Management".
- 23 -
ITEM 6: SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Statement of Operations Data
(in thousands, except per share data)
Net revenues $2,433,858 $1,866,426 $1,405,305 $1,099,823 $ 671,469
Operating income (loss) before capital
costs* (208,997) 85,879 134,690 184,868 127,024
Earnings (loss) before extraordinary items,
cumulative effect of accounting change and
after preferred dividends (873,043) (287,950) (23,976) 48,144 37,169
Net income (loss) attributable to common
shareholders (883,455) (290,050) (25,900) 47,591 37,169
Per common share data (Diluted):
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change (18.55) (8.11) (0.68) 1.34 1.29
Net income (loss) attributable to common
shareholders $ (18.77) $ (8.17) $ (0.74) $ 1.33 $ 1.29
Weighted average shares of common stock and
equivalents 47,077 35,485 35,159 36,120 31,058
- ------------------------------------------------------------------------------------------------------------------------------------
Other Financial Data
Operating income (loss) before capital
costs* as a percent of revenue (8.6%) 4.6% 9.6% 16.8% 18.9%
Capital expenditures (in thousands) $ 51,981 $ 77,943 $ 56,663 $ 61,102 $38,645
Operating Data
Payor Mix (as a percent of patient service
revenue)
Private pay and other 41% 47% 45% 39% 39%
Medicare 16% 14% 20% 24% 25%
Medicaid 43% 39% 35% 37% 36%
Average owned/leased eldercare center
beds 14,286 15,522 15,137 15,132 9,429
Occupancy Percentage 90.7% 90.7% 91.5% 91.0% 92.6%
Average managed eldercare center beds 23,779 23,984 24,234 6,101 5,030
Average full-time equivalent personnel 40,450 40,500 37,708 27,700 16,325
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (in thousands)
Working capital $ 304,241 $ 235,704 $ 243,461 $ 166,065 $ 113,916
Total assets 3,127,899 2,429,914 2,627,368 1,434,113 950,669
Liabilities subject to compromise 2,446,673 - - - -
Long-term debt 10,441 1,484,510 1,358,595 651,667 338,933
Redeemable preferred stock - (subject to compromise) 442,820 - - - -
Shareholders' equity (deficit) $ (246,926) $ 587,890 $ 875,072 $ 608,021 $ 514,608
* Capital costs include depreciation and amortization, lease expense, interest
expense and the Multicare joint venture restructuring cost incurred in 2000.
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Certain Transactions and Events" for a description of
significant transactions.
- 24 -
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Since we began operations in July 1985, we have focused our efforts on providing
an expanding array of specialty medical services to elderly customers. We
generate revenues primarily from two sources: pharmacy and medical supply
services, and inpatient services however, we also derive revenue from other
sources.
We include in inpatient services revenue all room and board charges and
ancillary service revenue for our eldercare customers at our 198 owned, leased
and Multicare jointly-owned eldercare centers.
We provide pharmacy and medical supply services through our NeighborCare(R)
pharmacy subsidiaries. Included in pharmacy and medical supply service revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. We
provide these services through 61 institutional pharmacies (three are
jointly-owned) and 23 medical supply and home medical equipment distribution
centers (four are jointly-owned) located in our various market areas. In
addition, we operate 32 community-based pharmacies (two are jointly-owned) which
are located in or near medical centers, hospitals and physician office
complexes. The community-based pharmacies provide prescription and
over-the-counter medications and certain medical supplies, as well as personal
service and consultation by licensed professional pharmacists.
We include the following service revenue in other revenues: rehabilitation
therapy services, management fees, capitation fees, consulting services,
homecare services, physician services, transportation services, diagnostic
services, hospitality services, group purchasing fees, respiratory health
services and other healthcare related services.
Certain Transactions and Events
Liquidity and Going Concern Assumption
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern with the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. However, as a result of the Chapter 11 cases and circumstances
relating to this event, including the Company's leveraged financial structure
and losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the protection of
Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate
or settle liabilities, for amounts other than those reflected in the financial
statements. Further, a plan of reorganization could materially change the
amounts reported in the financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. The Company's ability to
continue as a going concern is dependent upon, among other things, confirmation
of a plan of reorganization, future profitable operations, the ability to comply
with the terms of the Company's debtor-in-possession financing agreements and
the ability to generate sufficient cash flow from operations and financing
arrangements to meet obligations.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to individuals. The changes have had a significant adverse
impact on the healthcare industry as a whole and on our cash flows. Second, the
federal reimbursement changes have exacerbated a long-standing problem of less
then fair reimbursement by the states for medical services provided to indigent
persons under the various state Medicaid programs. Third, numerous other factors
- 25 -
have adversely affected our cash flows, including increased labor costs,
increased professional liability and other insurance costs, and increased
interest rates. Finally, as a result of declining governmental reimbursement
rates and in the face of rising inflationary costs, we were too highly leveraged
to service our debt, including our long-term lease obligations. See Business -
"Revenue Sources", "Personnel", "Government Regulation", and "Insurance". Also
see Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Fiscal 2000 Compared to Fiscal 1999".
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
to receive:
o .045 shares of Genesis Series G Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Series G Preferred"),
o $22.50 in cash, or
o a combination of cash and shares of Series G Preferred (collectively,
the "Merger Consideration"). The Merger Consideration paid to
stockholders of Vitalink to acquire their shares (including shares
which may have been issued upon the exercise of outstanding options)
was $590,200,000, of which 50% was paid in cash and 50% in Series G
Preferred.
At September 30, 2000 there were approximately $34,921,000 in dividends in
arrears on the Series G Preferred which are recorded on the accompanying balance
sheet as liabilities subject to compromise. The holders of the Series G
Preferred are entitled to be paid in additional shares of Series G Preferred to
the extent that dividends are not declared and paid or funds continue not to be
legally available for the payment of dividends after four consecutive quarterly
periods, as defined. To date, the Company has not issued additional shares of
Series G Preferred in lieu of cash dividends.
Pursuant to four agreements with HCR Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR Manor Care (the
"Service Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004. See "Legal Proceedings".
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
- 26 -
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put/call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. common stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to sell (the "Put") such Genesis ElderCare
Corp. common stock at a price determined pursuant to the Put/Call Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 (the "Therapy Purchase") and a stock purchase agreement (the
"Pharmacy Purchase Agreement") with Multicare and certain subsidiaries pursuant
to which Genesis acquired all of the outstanding capital stock and limited
partnership interests of certain subsidiaries of Multicare that were engaged in
the business of providing institutional pharmacy services to third parties for
$50,000,000 (the "Pharmacy Purchase"). The Company completed the Pharmacy
Purchase effective January 1, 1998. The Company completed the Therapy Purchase
in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred"), which were
issued to Cypress, TPG and Nazem, or their affiliated investment
funds, in proportion to their respective investments in Genesis
ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, (the "Series I Preferred")
which were issued to Cypress, TPG and Nazem, or their affiliated
investment funds, in proportion to their respective investments in
Genesis ElderCare Corp.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
- 27 -
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis Common Stock and a ten year warrant to purchase 2,000,000 shares of
Genesis Common Stock at an exercise price of $5.00 per share. See Item 12
"Security Ownership of Certain Beneficial Owners and Management".
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis Common Stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an irrevocable
proxy to vote their shares of common stock of Genesis ElderCare Corp.
on all matters to be voted on by shareholders, including the election
of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions receive the
approval of at least one designee of each of Cypress, TPG and Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
o provide that Genesis may appoint 100% of the members of the operating
committee of the board of directors of Genesis ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis Common Stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
- 28 -
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which would
constitute a change in control, as defined in the Restructuring
Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part of a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting sec