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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of Registrant as specified in its charter)
101 East State Street
Pennsylvania Kennett Square, PA 19348 06-1132947
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
(610) 444-6350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, par value $.02 per share New York Stock Exchange
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 $94,229,235(1). As of December 16, 1999,
48,634,444 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by us with the SEC under the Exchange Act
are incorporated in this annual report by this reference:
SEC Filings Period
- --------------------------------------- ----------------------------
Certain portions of our Proxy Statement To be filed in connection
into Part III of this Report with our 2000 Annual Meeting
- ------------
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock, multiplied by the last
reported sale price for the Company's Common Stock on December 16, 1999.
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
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Cautionary Statements Regarding Forward Looking Statements ....................1
PART I
ITEM 1: BUSINESS
General ..............................................................5
Pharmacy and Medical Supply Services..................................6
Inpatient Services....................................................6
Other Services........................................................7
Revenue Sources.......................................................7
Marketing............................................................11
Personnel............................................................11
Employee Training and Development....................................12
Governmental Regulation..............................................12
Competition in the Healthcare Services Industry......................15
Insurance............................................................15
ITEM 2: PROPERTIES...........................................................16
ITEM 3: LEGAL PROCEEDINGS....................................................17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................18
ITEM 4.1: EXECUTIVE OFFICERS.................................................19
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS....................................21
ITEM 6: SELECTED FINANCIAL DATA..............................................22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................23
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........39
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................40
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................74
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................74
ITEM 11: EXECUTIVE COMPENSATION..............................................74
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......74
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................74
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K......74
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
to meet our liquidity needs, scheduled debt and interest payments and
expected future capital expenditure requirements, and to control
costs; the expected effects of government regulation on reimbursement
for services provided and on the costs of doing business; and the
expected effects of the "Year 2000" problem;
o certain statements contained in "Business" concerning strategy;
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 substantial indebtedness and significant debt service
obligations;
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"), 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
our patients to pay for our 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;
o the "Year 2000 problem", including the possible failure of our
payors, suppliers and other third parties to adequately remediate
Year 2000 issues; and
o changes in general economic conditions.
There can be no assurances that the cash flow from our operations will be
sufficient to enable us to service our substantial indebtedness and meet our
other obligations.
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 1999, we had approximately $1,484,510,000 of
long-term indebtedness, excluding the current portion of indebtedness of
$37,126,000, which represented 72% of our total capitalization. We also have
significant long-term operating lease obligations with respect to certain of our
eldercare centers and other sites of service. The degree to which we are
leveraged could have important consequences, including, but not limited to the
following:
1
o our ability to obtain additional financing in the future for working
capital, capital expenditures or other purposes may be limited or
impaired;
o a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available to us for our
operations;
o our operating flexibility is limited by restrictions contained in
some of our debt agreements which set forth minimum net worth
requirements and/or limit our ability to incur additional
indebtedness, to enter into other financial transactions and to pay
dividends;
o our degree of leverage may make us more vulnerable to industry
downturns and less competitive, may reduce our flexibility in
responding to changing business and industry conditions and may limit
our ability to pursue other business opportunities, to finance our
future operations or capital needs, and to implement our business
strategy; and
o certain of our borrowings are and will continue to be at variable
rates of interest, which exposes us to the risk of greater interest
rates.
We expect to satisfy required payments of principal and interest on our
indebtedness from our cash flow from operations. Our ability to generate
sufficient cash flows from operations depends on a number of internal and
external factors affecting our business and operations, including factors beyond
our control, such as prevailing industry conditions. There can be no assurances
that cash flow from operations will be sufficient to enable us to service our
debt and meet our other obligations. If such cash flow is insufficient, we may
be required to refinance and/or restructure all or a portion of our existing
debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing or restructuring would be possible or that
any such sales of assets or additional financing could be achieved. Also, the
ability of our Multicare affiliate to meet its obligations is dependent upon its
ability to consummate certain asset sales. There can be no assurances that such
asset sales will be consummated by Multicare. 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
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
2
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
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. Certain service contracts (the "Service Contracts") permit
3
our NeighborCare pharmacy operations to provide services to HCR Manor Care
constituting approximately ten percent and five percent of the net revenues of
NeighborCare(sm) 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-Vitalink Transaction."
We may experience adverse effects because of risks associated with our
acquisitions.
During the past several years, we acquired several eldercare and pharmacy
businesses. There can be no assurance that we will be able to realize expected
operating and economic efficiencies from our recent acquisitions or from any
future acquisitions or that such acquisitions will not adversely affect our
results of operations or financial condition. In addition, there can be no
assurance that we will be able to successfully integrate newly acquired
businesses with our operations.
The "Year 2000 problem" may adversely affect us.
If our efforts to address Year 2000 compliance issues (as defined in the
Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000
Act")) were not successful, or if the systems of our suppliers are not
compliant, we may be unable to engage in normal business activities for a
period of time after January 1, 2000. Our potential risks include:
o the inability to deliver patient care related services;
o the delayed receipt of reimbursement from the federal or state
governments, or other payors;
o the failure of security systems, elevators, heating systems or other
operational systems and equipment;
o the inability to obtain critical equipment and supplies from vendors;
and,
o the loss of existing or potential clients and damage to our
reputation in the industry.
Each of these events could have a material adverse effect on our business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."
4
PART I
ITEM 1: BUSINESS
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania
corporation. As used herein, unless the context otherwise requires, "Genesis,"
the "Company," "we," "our" or "us" refers to Genesis Health Ventures, Inc. and
subsidiaries. The following discussion of our operations after October 10, 1997
(e.g. markets served, facilities information, personnel) includes the Multicare
operations; to the extent that the discussion includes our operations prior to
October 10, 1997 (e.g. occupancy rates and revenue sources) it does not include
the Multicare operations.
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 to approximately 700,000
customers, including approximately 41,000 customers who are residents in
eldercare facilities. The networks include 368 eldercare centers with
approximately 45,000 beds; 19 medical supply distribution centers serving over
1,000 eldercare centers with over 80,000 beds; an integrated NeighborCare(SM)
pharmacy and medical supply operation with over $980,000,000 in annual revenues,
including 69 long-term care pharmacies serving approximately 238,000
institutional beds; 34 community-based pharmacies; infusion therapy services;
and certified rehabilitation agencies providing services through over 600
contracts. We also provide diagnostic 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 14,500,000 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/Eastern Ohio/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 and monitor the delivery
and utilization of medical care;
5
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;
o seeking strategic alliances with other healthcare providers to
broaden our continuum of care; and
o creating an independent eldercare advisory board to formulate new and
innovative approaches in the delivery 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.
Pharmacy and Medical Supply Services
Genesis provides pharmacy and medical supply services through its
NeighborCare(SM) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of 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 69 institutional pharmacies (one is
jointly-owned) and 19 medical supply distribution centers located in our various
market areas. In addition, we operate 34 community-based pharmacies which are
located in or near medical centers, hospitals and physician office complexes.
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies as well as personal service and
consultation by licensed professional pharmacists. Approximately 91% of the
sales attributable to all pharmacy operations in the twelve months ended
September 30, 1999 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.
Inpatient Services
Genesis owns, leases or manages 339 eldercare centers (including 49 standalone
assisted living facilities and 14 transitional care units) located in 16 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
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
6
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.
1999 1998 1997
----------------------------------------------------------------------------------------------------------------
Average Beds in Service: (1)
Owned and Leased Facilities 15,522 15,137 15,132
Managed and Jointly-Owned Facilities 23,984 24,234 6,101
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities 91% 91% 91%
Managed and Jointly-Owned Facilities 90% 92% 92%
----------------------------------------------------------------------------------------------------------------
(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
Other Services
Rehabilitation Therapy. We provide an extensive range of rehabilitation therapy
services, including speech pathology, physical therapy and occupational therapy,
through seven certified rehabilitation agencies in all five of our regional
market concentrations. These services are provided by approximately 2,600
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 230 eldercare centers
pursuant to management agreements that provide generally for our 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 2000 and 2017. We have extended
various mortgage and other loans to certain facilities under management
contract. See "Notes to Consolidated Financial Statements - Footnote 9 Notes
Receivable and Other Investments."
Group Purchasing. We jointly own and operate The Tidewater Healthcare Shared
Services Group, Inc. ("Tidewater"), one of the largest group purchasing
companies in the Midatlantic region. Tidewater provides purchasing and shared
service programs specially designed to meet the needs of eldercare centers and
other long-term care facilities. Tidewater's services are contracted to
approximately 2,750 members with over 271,500 beds in 44 states and the District
of Columbia.
Other Services. We employ or have consulting arrangements with approximately 112
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; consulting 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
7
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 rate of our centers,
the mix of patients and the rates of reimbursement among payors. Changes in the
case mix of the patients as well as payor mix among private pay, Medicare, and
Medicaid will significantly affect our profitability.
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 cooperative
program, whereby, the federal government supplements funds provided by the
participating states for medical assistance to "medically indigent" persons. The
programs are administered by the applicable state welfare or social service
agencies. Although Medicaid programs vary from state to state, traditionally
they have provided for the payment of certain expenses, up to established
limits, at rates determined in accordance with each state's regulations. Most
states pay prospective rates, and have some form of acuity adjustment.
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.
The Balanced Budget Act of 1997 (the "1997 Act"), signed into law on August 5,
1997, seeks to achieve a balanced federal budget, by, among other things,
reducing federal spending on the Medicare and Medicaid programs. Most
significantly, under the 1997 Act, nursing facilities are reimbursed under a
prospective payment system ("PPS") which commenced with a facility's first cost
reporting period beginning on or after July 1, 1998. PPS is being phased in over
a three-year period and has an adverse impact on the Medicare revenues of many
skilled nursing facilities. 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. 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 a resource utilization group ("RUG") using the information gathered
during the minimum data set ("MDS") assessment. 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.
8
Facilities that did not receive any Medicare payments prior to October 1, 1995
are reimbursed one hundred percent (100%) based on the federal per diem rates
beginning with their first cost reporting period on or after July 1, 1998. For
nursing facilities that received Medicare payments before October 1, 1995, there
is a three-year transition period. During the transition period, the per diem
rates are comprised of a blend between a "facility-specific" rate and a
"federal" (prospective) rate, as follows: (a) for the first cost reporting
period, the "facility specific" percentage is seventy-five percent (75%) and the
federal per diem percentage is 25%. These percentages change to fifty/fifty
(50%-50%) and to twenty-five/seventy-five (25%-75%) for the second and third
cost reporting periods. The facility-specific rate is based on the costs for
certain Medicare-covered services that the facility provided during its base
year, which is the facility's first cost reporting period beginning after
September 30, 1994. The facility specific rate is updated by the "nursing
facility market basket increase," minus one percent, through federal fiscal year
1999, and by the full market basket increase thereafter. The federal rate is
wage and case mix adjusted, and within each metropolitan statistical area and
rural area within each state, there is a federal rate for each RUG
classification.
The 1997 Act also 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." Also,
pricing has become a more important consideration in the selection of pharmacy
providers since the advent of PPS.
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 1997 Act initially required Consolidated Billing
to be effective on July 1, 1998, with a transition period through December 31,
1998 for those nursing facilities lacking the systems and billing capability to
comply. However, in a final rule issued in July 1999, HCFA announced that all
skilled nursing facilities must begin Consolidated Billing as of the date the
facility shifts to PPS, for those residents who are in a covered Part A stay.
Outside suppliers of services to residents of the facility must collect payment
from the facility. For those skilled nursing facility residents who are not in a
covered Part A stay (for example, residents who have exhausted their available
days of coverage under the Part A nursing facility benefit), the final rule
postponed Consolidated Billing indefinitely.
In November 1999, the Medicare Balanced Budget Refinement Act ("Refinement Act")
was passed in Congress. The Refinement Act addresses certain reductions in
Medicare reimbursement caused by the 1997 Act, including:
o For covered skilled nursing facility services furnished on or after
April 1, 2000, and before October 1, 2000 (or a later date if HCFA
does not complete certain mandated reviews of current RUG
weightings), for 15 RUG categories, the federal per diem rate will be
increased by 20%;
o For fiscal years 2001 and 2002, the federal per diem rates shall be
increased by an additional 4%;
o For cost report years beginning on or after January 1, 2000,
skilled nursing facilities may waive the PPS transition period and
elect to receive 100% of the federal per diem rate;
o Through the cost reporting period beginning in October, 2000, certain
specific services (such as prostheses and chemotherapy drugs) may be
reimbursed separately from and in addition to the federal per diem
rate; and,
o The elimination of the $1,500 cap on rehabilitation therapy services
provided under Medicare Part B.
9
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. 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. 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 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.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of the 1997 Act, the Refinement
Act, the interpretation or administration of such legislation or other
legislation which affects our business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that
these changes will not adversely affect our business.
In addition, 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.
Managed care organizations and other third party payors have continued to
increase their influence over the delivery of healthcare services. Consequently,
the healthcare needs of a large percentage of the United States population are
increasingly served by a relatively small number of managed care organizations
and other third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate us or choose not to utilize us as a provider,
and/or engage our competitors as a preferred or exclusive provider, our business
could be materially adversely affected. In addition, private payors, including
managed care payors increasingly are demanding discounted fee structures or the
assumption by healthcare providers of all or a portion of the financial risk
through prepaid capitation arrangements.
The following table reflects the allocation of customer service revenues among
these sources of revenue.
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Private pay and other 47% 45% 39% 39% 38%
Medicaid 39 35 37 36 41
Medicare 14 20 24 25 21
- ------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
- ------------------------------------------------------------------------------------------------
See "Business - Government Regulation."
10
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 and affiliated eldercare centers. We market our
rehabilitation therapy and 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.
In 1996, we announced a consolidation of 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 November 30, 1999, Genesis and its subsidiaries (including Multicare)
employed over 48,000 people, including approximately 34,500 full-time and 13,500
part-time employees. Approximately 18% of these employees are physicians and
nursing and professional staff. Approximately 15,100 of these employees are
employed by Multicare.
We currently have 66 facilities that are covered by, or are negotiating,
collective bargaining agreements, including 31 facilities operated by Multicare.
The agreements expire at various dates from 2000 through 2003 and cover
approximately 5,200 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. Only three additional
non-union facilities have voted for SEIU representation. We believe that our
relationship with our employees is generally good.
The healthcare industry has at times experienced a shortage of qualified
healthcare personnel. We compete with other healthcare providers and with
non-healthcare providers for both professional and non-professional employees.
While we have been able to retain the services of an adequate number of
qualified personnel to 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.
11
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. We also provide employee benefit
programs which management believes, as a package, exceed industry standards. We
have not experienced any significant difficulty in attracting or retaining
qualified personnel.
In addition, Genesis has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized
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 77% since 1990 of the nurses aide graduates.
Approximately 1,650 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
1,050 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. This initiative includes, but is not limited
to:
o increased enforcement of nursing home safety and quality regulations;
o increased federal oversight of state inspections of nursing homes;
12
o prosecution of egregious violations of regulations governing nursing
homes;
o the publication of nursing home survey results on the Internet;
o in certain cases, immediate imposition of sanctions without any grace
period to correct problems;
o imposition of civil monetary penalties for each instance of "serious
or chronic violation;" and,
o federal and state officials focused enforcement on nursing homes
within chains that have a record of non-compliance with federal
rules.
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.
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).
On July 14, 1998, the Company announced that it received notice from
NewCourtland, Inc. ("NewCourtland"), owner of eight nursing centers in the
Philadelphia area, of the termination of its management agreements for these
centers effective July 31, 1998. This notice follows the revocation on June 25,
1998 of the operating license at one of the NewCourtland centers. The center had
a long-standing history of regulatory compliance difficulties dating back many
years prior to Genesis' management. The Company believes that the termination
notice was inappropriate and has instituted suit against NewCourtland and other
related parties to recover unpaid balances due Genesis, the estimated future
operating profits of the terminated management agreements, as well as
consequential damages. The annualized revenue from the contracts was
approximately $3,800,000.
In March, 1999, the Company voluntarily closed a center in the state of Florida
following notice of possible decertification from Florida's regulatory agency.
13
We believe that 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. Assisted
living facilities are not eligible to be certified under Medicare or Medicaid.
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
and adverse reimbursement action.
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.
Although we have contractual arrangements with some healthcare providers to
which we pay fees for services rendered or products provided, we believe that
our practices are not in violation of these laws. We cannot accurately predict
whether enforcement activities will increase or the effect of any such increase
on our business. There have also been a number of recent federal and state
legislative and regulatory initiatives concerning reimbursement under the
Medicare and Medicaid programs. In particular, the federal government has issued
14
recent fraud alerts concerning double billing, home health services and the
provision of medical supplies to nursing facilities. Accordingly, it is
anticipated that these areas may come under closer scrutiny by the government.
We cannot accurately predict the impact of any such initiatives. See "Cautionary
Statements Regarding Forward Looking Statements" and "Business - Revenue
Sources."
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. Pursuant to certain service contracts (the
"Service Contracts"), our NeighborCare pharmacy operations provide services to
HCR Manor Care constituting approximately five percent and ten percent of the
net revenues of Genesis and NeighborCare, respectively. These Service Contracts
are the subject of certain litigation. See "Legal Proceedings"
We operate eldercare centers in 16 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
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
Genesis carries property and general liability insurance, professional liability
insurance, and medical malpractice insurance coverage in amounts deemed adequate
by management. However, there can be no assurance that any current or future
claims will not exceed applicable insurance coverage. Genesis also requires that
physicians practicing at its eldercare centers carry medical malpractice
insurance to cover their individual practices.
15
ITEM 2: PROPERTIES
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Genesis as of November 30, 1999. Included
in the center count are 49 standalone assisted living facilities with 3,493
units and 18 skilled nursing facilities with 552 assisted living units. Certain
properties are leased by the respective operating entities from third parties.
The inability of the 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 130 jointly-owned facilities with
14,557 beds / assisted living units, including the Multicare centers. Also
included in Managed Centers are 19 transitional care units with 587 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,(sm) 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 Centers Total
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
- ----------------------------------------------------------------------------------------------------------------------------------
Pennsylvania 17 2,430 4 471 34 4,459 6 765 61 8,125
New Jersey 11 1,726 4 652 30 3,863 4 622 49 6,863
Massachusetts 8 1,025 1 112 63 5,728 - - 72 6,865
Maryland 13 2,084 7 990 8 1,095 13 2,470 41 6,639
Florida 6 822 7 921 11 1,228 1 120 25 3,091
Connecticut 4 615 - - 14 1,717 - - 18 2,332
West Virginia - - 2 180 23 1,970 - - 25 2,150
Delaware 4 504 - - 4 439 3 449 11 1,392
Virginia 2 362 4 595 2 175 1 200 9 1,332
New Hampshire 8 811 5 466 1 90 - - 14 1,367
Ohio - - - - 14 1,128 - - 14 1,128
Illinois - - - - 11 1,036 - - 11 1,036
Wisconsin - - - - 8 952 - - 8 952
Vermont 2 256 - - 2 119 - - 4 375
Rhode Island - - - - 3 365 - - 3 365
North Carolina - - - - 2 340 - - 2 340
District of Columbia - - - - - - 1 189 1 189
- ----------------------------------------------------------------------------------------------------------------------------------
Totals 75 10,635 34 4,387 230 24,704 29 4,815 368 44,541
- ----------------------------------------------------------------------------------------------------------------------------------
We anticipate Multicare will sell 28 eldercare centers with approximately 2,700
beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year
2000. We may manage these facilities subsequent to the sale. There can be no
assurances that the sale transactions will be consummated.
We have 3 owned and 109 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.
16
ITEM 3: LEGAL PROCEEDINGS
Genesis is a party to litigation arising in the ordinary course of business.
Genesis does not believe the results of such litigation, even if the outcome is
unfavorable to us, would have a material adverse effect on our financial
position. See "Cautionary Statements Regarding Forward Looking Statements."
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services
(d/b/a NeighborCare(sm)), a subsidiary of Genesis, filed multiple lawsuits
requesting injunctive relief and compensatory damages against HCR Manor Care,
Inc. and two of its subsidiaries and principals. The lawsuits arise from HCR
Manor Care's threatened termination of two 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. Genesis filed
a complaint against HCR Manor Care and two of its subsidiaries and principals in
federal district court in Delaware including, among other counts, securities
fraud. Vitalink has also instituted an arbitration action in Maryland. Vitalink
is also seeking an injunction preventing HCR Manor Care's threatened termination
of two of its long term pharmacy service contracts and a declaration that it has
a right to provide pharmacy, infusion therapy and related services to all of HCR
Manor Care's facilities. Genesis and Vitalink 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 entered into long term master pharmacy agreements which gave Vitalink
the right to provide pharmacy services to all facilities owned or licensed by
Manor Care and its affiliates. In 1998, the terms of the pharmacy service
agreements were extended to September, 2004. Under the two master service
agreements, Genesis and Vitalink receive revenues at the rate of approximately
$100,000,000 per year. By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Claims relating to the master service
agreements with the Arbitration matter. Until such time as a final decision is
rendered in said Arbitration, the parties have agreed to maintain the master
service agreements in full force and effect. Genesis still maintains its
Delaware federal court complaint. On July 26, 1999, NeighborCare, through its
Maryland counsel, filed an additional complaint against Omnicare Inc. and
Heartland Healthcare (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 three exclusive long term service contracts with HCR Manor Care. 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 pay system, the restructuring of the Multicare joint venture,
the impact of the acquisition of Multicare, the status of Genesis labor
relations, Genesis' ability to declare dividends on 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 recission of the purchase of the Series G Preferred Stock.
On December 22, 1999 Manor Care filed a lawsuit against Genesis and others in
the United States District Court for the Western 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.
17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 11, 1999, we held a Special Meeting of our shareholders. Proxies
were solicited and the Special Meeting held to consider and act upon the
following matters:
o To approve an amendment to Genesis' articles of incorporation
increasing the number of authorized shares of common stock from
60,000,000 to 200,000,000 shares and creating a class of non-voting
common stock;
o To approve, in connection with the restructuring of the joint venture
relating to our ownership of The Multicare Companies, Inc. and in
accordance with the rules of The New York Stock Exchange, the
issuance of the following securities:
o 12,500,000 shares of our voting common stock;
o warrants to purchase 2,000,000 shares of our voting common stock;
o 24,369 shares of our Series H Senior Convertible Participating
Cumulative Preferred Stock, which is initially convertible into
27,850,590 shares of our voting common stock; and
o 17,631 shares of our Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, which is initially
convertible into 20,149,410 shares of our non-voting common stock.
These securities were proposed to be issued in transactions described in the
proxy statement dated October 14, 1999 in connection with the Restructuring
Agreement. In exchange for these securities Genesis received, among other
things, $50,000,000 in additional equity capital. . (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Transactions - Multicare Transaction and its Restructuring").
All matters were approved at the Shareholders' Meeting on November 11, 1999.
18
ITEM 4.1: EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive
officers of the Company.
Name Age Position
- ---- ---- --------
Michael R. Walker 51 Chairman and Chief Executive Officer
Richard R. Howard 50 Vice Chairman and Director
David C. Barr 49 Vice Chairman
George V. Hager, Jr. 43 Executive Vice President and Chief Financial Officer
Maryann Timon 46 Senior Vice President, Managed Care
Marc D. Rubinger 50 Senior Vice President and Chief Information Officer
Richard Pell, Jr. 51 Senior Vice President, Administration and Chief Compliance Officer
Barbara J. Hauswald 40 Vice President and Treasurer
James V. McKeon 35 Vice President and Corporate Controller
Michael R. Walker is the founder of Genesis and has served as Chairman and Chief
Executive Officer of Genesis since its inception. In 1981, Mr. Walker co-founded
Health Group Care Centers ("HGCC"). At HGCC, he served as Chief Financial
Officer and, later, as President and Chief Operating Officer. Prior to its sale
in 1985, HGCC operated nursing homes with 4,500 nursing beds in 12 states. From
1978 to 1981, Mr. Walker was the Vice President and Treasurer of AID Healthcare
Centers, Inc. ("AID"). AID, which owned and operated 20 nursing centers, was
co-founded in 1977 by Mr. Walker as the nursing home division of Hospital
Affiliates International. Mr. Walker holds a Master of Business Administration
degree from Temple University and a Bachelor of Arts in Business Administration
from Franklin and Marshall College. Mr. Walker has served as Chairman of the
Board of Trustees of ElderTrust since its inception in January 1998.
Richard R. Howard has served as one of our directors since our inception, as
Vice President of Development from September 1985 to June 1986, as President and
Chief Operating Officer from June 1986 to April 1997, as President from April
1997 to November 1998 and as Vice Chairman since November 1998. Mr. Howard's
background in healthcare includes two years as the Chief Financial Officer of
HGCC. Mr. Howard's experience also includes over ten years with Fidelity Bank,
Philadelphia, Pennsylvania and one year with Equibank, Pittsburgh, Pennsylvania.
Mr. Howard is a graduate of the Wharton School, University of Pennsylvania,
where he received a Bachelor of Science degree in Economics in 1971.
David C. Barr has served as Executive Vice President of Genesis since October
1988, as Chief Operating Officer since April 1997 and as Vice Chairman since
November 1998. Prior to joining Genesis, Mr. Barr was a principal of a private
consulting firm, Kane Maiwurm Barr, Inc., which provided management consulting
for small and medium-sized firms. Prior to forming this firm, he served as
Executive Vice President of Allegheny Beverage Corporation, a service
conglomerate. During 1984 and 1985, Mr. Barr served with Equibank, Pittsburgh,
Pennsylvania, where he held several positions including Executive Vice President
of Corporate Banking. Mr. Barr graduated in 1972 from the University of Miami
with a Bachelor of Science degree in Accounting.
George V. Hager, Jr. has served us as Executive Vice President and Chief
Financial Officer since May, 1999 and Senior Vice President and Chief Financial
Officer since February 1994. Mr. Hager joined Genesis in July 1992 as Vice
President and Chief Financial Officer. Mr. Hager was previously partner in
charge of the healthcare practice for KPMG LLP in the Philadelphia office. Mr.
Hager began his career at KPMG LLP in 1979 and has over 20 years of experience
in the healthcare industry. Mr. Hager received a Bachelor of Arts degree in
Economics from Dickinson College in 1978 and a Master of Business Administration
degree from Rutgers Graduate School of Management. He is a certified public
accountant and a member of the AICPA and PICPA.
19
Maryann Timon has served as Senior Vice President for Managed Care since May
1996. From January 1995 through May 1996 she served as Corporate Vice President
of the Managed Care Division. Ms. Timon joined Genesis in December 1990 to form
and serve as President of a wholly-owned subsidiary, Healthcare Services
Network. Ms. Timon was previously President of Mercy Ventures, Inc., a
five-company healthcare specialty group owned by Mercy Medical Center in
Baltimore, Maryland. Ms. Timon has 25 years of experience providing eldercare
healthcare services. Ms. Timon received an Associate Degree in Applied Science
in Nursing in 1973 from the State University of New York at Canton, a Bachelor
of Science Degree in Nursing in 1976 from the State University of New York at
Utica/Rome and a Master of Gerontological Nursing Degree in 1978 from the
University of Rochester.
Marc D. Rubinger has served as Senior Vice President and Chief Information
Officer since April 1997. From November 1995 to April 1997, Mr. Rubinger served
as Vice President and Chief Information Officer. Prior to joining Genesis, Mr.
Rubinger served as General Manager-Decision Support Systems of Shared Medical
Systems. From 1975 through 1986, Mr. Rubinger was with Ernst & Young in their
national healthcare consulting practice, most recently as a partner. Mr.
Rubinger received a Bachelor of Arts degree in Bioscience from Binghamton
University in 1971 and a Masters of Health Administration and Planning from The
George Washington University in 1973.
Richard Pell, Jr. has served as Senior Vice President-Administration and Chief
Compliance Officer of Genesis since April 1998. Mr. Pell oversees the following
areas: Human Resources, Law, Government Relations, Public Relations, Marketing
and Corporate Support Services. Prior to joining Genesis, Mr. Pell was the
Director of the Veterans Affairs Medical Center in Martinsburg, West Virginia
and Chief of Staff for the Department of Veterans Affairs for the previous nine
years. He received a Bachelor of Science Degree in Economics from the University
of Pennsylvania in 1970 and a Masters Degree in Health Care Administration from
the Mt. Sinai School of Medicine, City University of New York in 1975.
Barbara J. Hauswald has served as Vice President and Treasurer since April 1998.
Prior to joining Genesis, Ms. Hauswald served as First Vice President in the
Health Care Banking Department of Mellon Bank N.A. Ms. Hauswald has over 16
years of commercial banking experience. She received a Bachelor of Science
degree in Commerce in 1981 from the University of Virginia.
James V. McKeon has served as Vice President and Corporate Controller of Genesis
since April 1997. Mr. McKeon joined us in June 1994 as Director of Financial
Reporting and Investor Relations and served as Vice President of Finance and
Investor Relations from November 1995 to April 1997. From September 1986 until
June 1994, Mr. McKeon was employed by KPMG LLP, most recently as Senior Manager.
He received a Bachelor of Science degree in Accountancy from Villanova
University in 1986. Mr. McKeon is a certified public accountant and a member of
the AICPA and PICPA.
20
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table indicates the high and low sale prices per share, as
reported on the New York Stock Exchange.
Calendar Year High Low
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
1998
First Quarter $39.75 $24.88
Second Quarter $28.38 $21.25
Third Quarter $25.50 $11.06
Fourth Quarter $15.00 $7.00
* Through December 16, 1999
As of December 16, 1999, 48,634,444 shares of Common Stock were held of record
by 772 shareholders. In addition, there was 590,189 outstanding shares of Series
G Preferred Stock which are convertible into 7,932,796 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. Certain of the Company's outstanding loans contain covenants which limit
the Company's ability to declare dividends. At September 30, 1999 there were
approximately $15,100,000 of accrued but unpaid dividends on the Series G
Preferred. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements".
21
ITEM 6: SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
Statement of Operations Data
(in thousands, except per share data)
Net revenues $1,866,426 $1,405,305 $1,099,823 $ 671,469 $ 486,393
Operating income before capital costs* 85,879 134,690 184,868 127,024 93,253
Earnings (loss) before income tax expense
(benefit) and extraordinary items (332,661) (32,134) 75,232 58,086 40,296
Earnings (loss) before extraordinary items (287,950) (23,976) 48,144 37,169 25,531
Net income (loss) available to common shareholders
(290,050) (25,900) 47,591 37,169 23,608
Per common share data (Diluted):
Earnings (loss) before extraordinary items $ (8.11) $ (0.68) $ 1.34 $ 1.29 $ 1.03
Net income (loss) available to common shareholders (8.17) (0.74) 1.33 1.29 0.97
Weighted average shares of common stock and
equivalents 35,485 35,159 36,120 31,058 28,307
- ------------------------------------------------------------------------------------------------------------------------------
Other Financial Data
Operating income before capital costs * as a
percent of revenue 4.6% 9.6% 16.8% 18.9% 19.2%
Capital expenditures (in thousands) $ 77,943 $ 56,663 $ 61,102 $38,645 $ 24,719
Long-term debt to equity ratio 2.53 1.55 1.07 .66 1.4
- ------------------------------------------------------------------------------------------------------------------------------
Operating Data
Payor Mix (as a percent of patient service
revenue)
Private pay and other 47% 45% 39% 39% 38%
Medicare 14% 20% 24% 25% 21%
Medicaid 39% 35% 37% 36% 41%
Average owned/leased eldercare center beds 15,522 15,137 15,132 9,429 8,268
Occupancy Percentage 90.7% 91.5% 91.0% 92.6% 91.9%
Average managed life care units and eldercare
center beds 23,984 24,234 6,101 5,030 10,374
Average full-time equivalent personnel 40,500 37,708 27,700 16,325 12,180
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (in thousands)
Working capital $ 235,704 $ 243,461 $ 166,065 $ 113,916 $ 105,994
Total assets 2,429,914 2,627,368 1,434,113 950,669 600,389
Long-term debt 1,484,510 1,358,595 651,667 338,933 308,052
Shareholders' equity $ 587,890 $ 875,072 $ 608,021 $ 514,608 $ 221,548
* Capital costs include depreciation and amortization, lease expense and
interest expense.
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of significant transactions.
22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Since 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 provide pharmacy and medical supply services through our NeighborCare(SM)
pharmacy subsidiaries. Included in pharmacy and medical supply service revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. We
provide these services through 69 institutional pharmacies (one is
jointly-owned) and 19 medical supply distribution centers located in our various
market areas. In addition, we operate 34 community-based pharmacies which are
located in or near medical centers, hospitals and physician office complexes.
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies, as well as personal service and
consultation by licensed professional pharmacists. NeighborCare purchases
substantially all of its pharmaceuticals, approximately $540,000,000 annually,
through Cardinal Health, Inc. under a five year contract which commenced in May
of 1999. NeighborCare has other sources of supply available to it and has not
experienced difficulty obtaining pharmaceuticals or other supplies used in the
conduct of its business. Approximately 91% of the sales attributable to all
pharmacy operations in the twelve months ended September 30, 1999 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.
We include in inpatient service revenue all room and board charges and ancillary
service revenue for our eldercare customers at our 109 owned and leased
eldercare centers.
We include the following in other revenues: rehabilitation therapy, management
fees, capitation fees, consulting services, homecare services, physician
services, transportation services, diagnostic services, hospitality services,
group purchasing fees and other healthcare related services.
Certain Transactions
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per
share (the "Vitalink Common Stock"), was converted in the merger into the right
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.
23
At September 30, 1999 there were approximately $15,100,000 in dividends in
arrears on the Series G Preferred which are recorded on the accompanying balance
sheet as other long-term liabilities. 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.
Pursuant to four agreements with HCR Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR Manor Care (the
"Service Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004, subject to annual renewals
provided therein. 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".
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 purchase (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 (as
defined below) 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 are 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.
24
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 was
issued to Cypress, TPG and Nazem, or their affiliated investment
funds, in proportion to their respective investments in Genesis
ElderCare Corp., and
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, (the "Series I Preferred")
which was 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.
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.
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;
25
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
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.
26
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 or a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the restructuring transaction, Genesis accounted for its investment in
Multicare using the equity method of accounting. Upon consummation of the
restructuring transaction, Genesis will consolidate the financial results of
Multicare since Genesis will have managerial, operational and financial control
of Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses will be consolidated at
their recorded historical amounts and the financial impact of transactions
between Genesis and Multicare will be eliminated in consolidation. The non-
Genesis shareholders' remaining 56.4% interest in Multicare will be carried as
minority interest based on their proportionate share of Multicare's historical
book equity. For so long as there is a minority interest in Multicare, the
minority shareholders' proportionate share of Multicare's net income or loss
will be recorded through adjustment to minority interest.
In connection with the restructuring transaction, Genesis intends to record a
non-cash charge of approximately $420,000,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred.
ElderTrust Transactions
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Genesis received an
additional $14,000,000 from the sale of a loan and two additional assisted
living facilities and the recoupment of amounts advanced and expenses incurred
in connection with the formation of ElderTrust. The sale of properties to
ElderTrust resulted in a gain of approximately $12,000,000 which has been
deferred and is being amortized over the ten year term of the lease contracts
with ElderTrust. Additionally, ElderTrust has funded approximately $15,100,000
to finance the development and expansion of three additional assisted living
facilities. Genesis repaid a portion of the revolving credit component of the
Credit Facility with the proceeds from these transactions. In September 1998, we
sold our leasehold rights and option to purchase seven eldercare facilities
acquired in our November 1993 acquisition of Meridian Healthcare, Inc. to
ElderTrust for $44,000,000, including $35,500,000 in cash and an $8,500,000
note. As part of the transaction, Genesis will continue to sublease the
facilities for ten years with an option to extend the lease until 2018 at an
initial annual lease obligation of approximately $10,000,000. The transaction
resulted in a gain of approximately $43,700,000 which has been deferred and is
being amortized over the ten year lease term of the lease contracts with
ElderTrust. We also anticipate entering into transactions with ElderTrust in the
future.
New Courtland
On July 14, 1998, the Company announced that it received notice from
NewCourtland, Inc. ("NewCourtland"), owner of eight nursing centers in the
Philadelphia area, of the termination of its management agreements for these
centers effective July 31, 1998. This notice follows the revocation on June 25,
1998 of the operating license at one of the NewCourtland centers. The center had
a long-standing history of regulatory compliance difficulties dating back many
years prior to Genesis' management. The Company believes that the termination
notice was inappropriate and has instituted suit against NewCourtland and other
related parties to recover unpaid balances due Genesis, the estimated future
operating profits of the terminated management agreements, as well as
consequential damages. The annualized revenue from the contracts is
approximately $3,800,000.
27
Fiscal 1999 Compared to Fiscal 1998
Our total net revenues for the fiscal year ended September 30, 1999 ("Fiscal
1999") were $1,866,426,000 compared to $1,405,305,000 for the fiscal year ended
September 30, 1998 ("Fiscal 1998"), an increase of $461,121,000 or 33%. Pharmacy
and medical supply service revenue increased $502,556,000 to $927,334,000 from
$424,778,000, of which approximately $453,324,000 is attributed to the added
revenues as a result of the Vitalink Transaction, approximately $20,720,000 is
attributed to the added revenues as a result of the Multicare Pharmacy Purchase,
and the remainder is primarily due to other volume growth in the institutional,
medical supply and community-based pharmacies. Inpatient service revenue
declined $37,278,000 or 5% to $704,105,000 from $741,383,000. Of this decline,
approximately $2,693,000 is attributed to the revenues of an eldercare center
located in Florida that was closed in March 1999, $5,036,000 is attributed to
the revenues of a Pennsylvania eldercare center for which the lease was
terminated in July 1998 and approximately $42,740,000 is attributed to dilution
in the Company's Medicare rate following our October 1, 1998 implementation of
PPS. These decreases in inpatient service revenue are offset by the positive
impact of rate increases of other payor categories and changes in payor mix.
Under PPS, the average Medicare rate per day was reduced to approximately $302
per patient day during the twelve months ended September 30, 1999 compared to
approximately $390 per patient day for the comparable period last year. There
were 544,997 Medicare patient days during the twelve months ended September 30,
1999 compared to 491,493 for the comparable period last year. Total patient days
declined 63,009 to 4,938,051 during Fiscal 1999 compared to 5,001,060 during
Fiscal 1998. The decline in overall census is principally attributed to 17,462
patient days at the closed Florida eldercare center, 29,733 patient days at the
Pennsylvania eldercare center for which the lease was terminated and the
remaining decline of 15,814 patient days is attributed to a net drop in overall
occupancy. Other revenue declined from $239,144,000 to $234,987,000, or
$4,157,000. This decline is primarily due to reduced rehabilitation service
revenue following our implementation of PPS and the January 1, 1999
implementation of PPS by many of our external rehabilitation customers,
including the Multicare eldercare centers. Additionally, we had reduced
management fees as a result of the termination of eight management contracts and
the negative impact of PPS on the net revenues of the managed eldercare centers.
These declines in other revenue were offset by increases in other service
related business.
Our operating expenses before depreciation, amortization, lease expense, and
interest expense were $1,780,547,000 for the twelve months ended September 30,
1999 compared to $1,270,615,000 for the comparable period in the prior year, an
increase of $509,932,000 or 40%, of which approximately $391,304,000 is
attributed to the added operating expenses as a result of the Vitalink
Transaction, approximately $14,707,000 is attributed to the added operating
expenses as a result of the Multicare Pharmacy Purchase, approximately
$51,565,000 is attributed to an increase in the impairment of assets and other
charges (see discussion and table below), and the remaining increase of
$59,234,000 is attributed to inflationary increases, growth in the institutional
pharmacy, medical supply and contract therapy divisions, capitated expenses, as
well as increased costs of community-based programs. These increases are offset
by reduced operating expenses of approximately $2,273,000 attributed to the
closed Florida eldercare center and $4,605,000 to the Pennsylvania eldercare
center for which the lease was terminated.
In accordance with SFAS 121, we record impairment losses on long-lived assets,
including goodwill, when events and circumstances indicate that long-lived
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
The profitability and liquidity of Genesis and the long term care industry have
been adversely impacted by PPS. The current and projected losses of certain
eldercare centers operating under PPS indicate that these assets are impaired.
We estimated the fair value of these assets by using a multiple of their
operating cash flow based upon market comparisons of similar assets recently
sold or currently under negotiations to sell. After performing this evaluation,
we concluded that the carrying value of certain eldercare centers, including
goodwill and property, plant and equipment, exceeded their fair value by
approximately $9,000,000.
28
In addition to long-lived assets, we performed an evaluation of all of our
assets, contracts, operations and employment arrangements. As a result of this
evaluation, we concluded that the adverse impact of PPS on our liquidity and
profitability necessitated exiting certain businesses and projects. We fully
reserved the carrying value of our transportation business, exited the
operations of six leased eldercare centers at the end of their lease terms,
abandoned certain investments in information systems, recorded the
exit costs of a capitation contract in our Chesapeake region and wrote off
certain unrecoverable development project costs as well as other unrecoverable
assets. In addition, the ability of certain former customers of ours to repay
amounts due for services rendered is less likely due to the adverse impact of
PPS on their liquidity and profitability. As a result, we wrote down certain
notes receivable, advances, trade and third party receivables, due to and from
formerly owned and managed facilities. Also, we entered into the restructuring
of the Multicare joint venture and amended our senior bank credit facility
resulting in, legal and other professional fees. The following table
summarizes the before tax impact of the charges in Fiscal 1999:
Exit costs and write-off of unrecoverable assets of one owned eldercare center
to be sold, and six leased eldercare centers closed or no longer under lease
and an investment in a respiratory services company $ 24,100,000
Investments in information systems abandoned 13,000,000
Exit costs and write-down of the remaining assets of the transportation business 12,700,000
Impairment of long-lived assets of six eldercare centers under SFAS 121 9,000,000
Unrecoverable development project costs 5,600,000
Cost to exit a capitation contract 5,000,000
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Subtotal - terminated operations, discontinued businesses and asset impairments 69,400,000
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Uncollectible trade receivables due to customer bankruptcy or other
liquidity issues