UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (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 whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Note: On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement
for the Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code, (the "Disclosure Statement"), and directed the Debtors to solicit votes
with regard to the approval or rejection of the Debtors' Joint Plan of
Reorganization.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of August 9, 2001: 48,641,456 shares of common stock
TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...........................................2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements..............................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................42
Part II: OTHER INFORMATION
Item 1. Legal Proceedings................................................................43
Item 2. Changes in Securities............................................................46
Item 3. Defaults Upon Senior Securities..................................................46
Item 4. Submission of Matters to a Vote of Security Holders..............................46
Item 5. Other Information................................................................46
Item 6. Exhibits and Reports on Form 8-K.................................................46
SIGNATURES.........................................................................................47
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our
ability or inability to meet our liquidity needs, make
scheduled debt and interest payments, meet expected future
capital expenditure requirements, obtain affordable insurance
coverage and control costs; and the expected effects of
government regulation on reimbursement for services provided
and on the costs of doing business; and
o certain statements in "Legal Proceedings" regarding the
effects of litigation.
Factors that could cause actual results to differ materially include, but are
not limited to, the following:
o our bankruptcy cases and our ability to continue as a going
concern;
o risks associated with operating a business in Chapter 11;
o any delays or the inability to confirm or consummate our plan
of reorganization;
o our ability to comply with the provisions of the Genesis
debtor-in-possession financing facility;
o our substantial indebtedness and significant debt service
obligations;
o our default under our senior credit agreements, the Multicare
debtor-in-possession financing facility, and our senior
subordinated and other notes;
o adverse actions which may be taken by creditors;
o adverse developments with respect to our liquidity or results
of operations;
o the effect of planned dispositions of assets;
o our ability to consummate or complete development projects or
to profitably operate or successfully integrate enterprises
into our other operations;
o our ability or inability to secure the capital and the related
cost of the capital necessary to fund future growth;
o our ability to attract customers given our current financial
position;
o our ability to attract and retain key executives and other
personnel;
2
o the impact of health care rules and regulations, including the
Medicare Prospective Payment System ("PPS"), the Balanced
Budget Refinement Act ("BBRA"), the Benefit Improvement and
Protection Act of 2000 ("BIPA"), the Health Insurance
Portability and Accountability Act ("HIPAA") and the adoption
of any cost containment measures by the federal and state
governments;
o the impact of government regulation, including our ability to
operate in a heavily regulated environment and to satisfy
regulatory authorities;
o the occurrence of changes in the mix of payment sources
utilized by patients to pay for services;
o the adoption of any cost containment measures by other third
party payors;
o competition in our industry; and
o changes in general economic conditions.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. We caution
investors that any forward-looking statements made by us are not guarantees of
future performance. We disclaim any obligation to update any such factors or to
announce publicly the results of any revisions to any of the forward-looking
statements to reflect future events or developments.
Our bankruptcy cases and recurring losses, among other things, raise substantial
doubt about our ability to continue as a going concern.
On June 22, 2000, (the "Petition Date") Genesis Health Ventures, Inc. and
certain of its direct and indirect subsidiaries filed for voluntary relief under
Chapter 11 of the United States Code (the "Bankruptcy Code") with the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
On the same date, Genesis' 43.6% owned affiliate, The Multicare Companies, Inc.
("Multicare") and certain of its affiliates also filed for relief under Chapter
11 of the Bankruptcy Code with the Bankruptcy Court (singularly and collectively
referred to herein as "the Chapter 11 cases" or "the bankruptcy cases" unless
the context otherwise requires). Both companies are currently operating as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. These
cases, among other factors such as the Company's recurring losses and defaults
under various loan agreements, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying unaudited condensed
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern with the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
However, as a result of the bankruptcy cases and circumstances relating to this
event, including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the accompanying
unaudited condensed consolidated financial statements. Further, a plan of
reorganization could materially change the amounts reported in the accompanying
unaudited condensed consolidated financial statements, which do not give effect
to all adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. Additionally, a deadline
of December 19, 2000 was established for the assertion of pre-bankruptcy claims
against the Company (commonly referred to as a bar date); including contingent,
unliquidated or disputed claims, which claims could result in an increase in
liabilities subject to compromise as reported in the accompanying unaudited
condensed consolidated financial statements. The Company's ability to continue
as a going concern is dependent upon, among other things, confirmation of a plan
of reorganization, future profitable operations, the ability to comply with the
terms of the Genesis debtor-in-possession financing agreement and future
financing agreements and the ability to generate sufficient cash from operations
and financing arrangements to meet obligations.
3
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
(Debtors-in-Possession)
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
June 30, September 30,
-------------------------------------------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Restricted cash and equivalents $ 33,853 $ 22,948
Restricted investments in marketable securities 44,529 27,899
Accounts receivable, net of allowance for doubtful accounts 444,442 446,614
Inventory 63,643 65,637
Prepaid expenses and other current assets 63,691 54,223
------------------------------------------------------------------------------------------------------------------------------
Total current assets 650,158 617,321
------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,071,665 1,107,346
Notes receivable and other investments 30,750 39,244
Other long-term assets 98,272 105,726
Investments in unconsolidated affiliates 24,167 22,956
Goodwill and other intangibles, net 1,207,435 1,235,306
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,082,447 $ 3,127,899
------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Deficit:
Current liabilities not subject to compromise:
Debtor-in-possession financing $ 194,000 $ 133,000
Accounts payable and accrued expenses 173,371 180,080
------------------------------------------------------------------------------------------------------------------------------
Total current liabilities not subject to compromise 367,371 313,080
------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 2,432,225 2,446,673
Long-term debt 14,920 10,441
Deferred income taxes 54,082 54,082
Deferred gain and other long-term liabilities 47,897 51,670
Minority interest 47,215 56,059
Redeemable preferred stock, including accrued dividends (subject to compromise) 462,193 442,820
Shareholders' deficit:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 589,714 issued and outstanding at
June 30, 2001 and September 30, 2000 6 6
Common stock, par $.02, authorized 200,000,000 shares, issued and
outstanding 48,641,456 and 48,641,194 at June 30, 2001
and September 30, 2000 973 973
Additional paid-in capital 803,202 803,202
Accumulated deficit (1,146,900) (1,049,075)
Accumulated other comprehensive loss (494) (1,789)
Treasury stock, at cost (243) (243)
-------------------------------------------------------------------------------------------------------------------------------
Total shareholders' deficit (343,456) (246,926)
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 3,082,447 $ 3,127,899
-------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
Genesis Health Ventures, Inc. and Subsidiaries
(Debtors-in-Possession)
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Three months ended Nine months ended
June 30, June 30,
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Net revenues:
Inpatient services $ 344,479 $ 331,650 $ 1,012,453 $ 989,061
Pharmacy and medical supply services 263,591 240,330 774,766 697,179
Other revenue 42,671 43,871 122,623 121,338
-----------------------------------------------------------------------------------------------------------------------------------
Total net revenues 650,741 615,851 1,909,842 1,807,578
-----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses 586,768 551,485 1,731,421 1,596,212
Debt restructuring, reorganization costs and other charges 20,014 36,202 48,220 80,315
Gain on sale of eldercare center - - (1,770) -
Loss on sale of eldercare centers - 7,922 2,310 7,922
Multicare joint venture restructuring charge - - - 420,000
Depreciation and amortization 26,688 29,423 80,076 87,578
Lease expense 9,024 9,661 27,525 28,674
Interest expense (contractual interest for the three and nine months
ended June 30, 2001 is $50,848 and $166,961, respectively) 27,067 61,180 92,834 170,682
-----------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, minority interest, equity in net loss of
unconsolidated affiliates and cumulative effect
of accounting change (18,820) (80,022) (70,774) (583,805)
Income tax benefit - (20,233) - (35,968)
-----------------------------------------------------------------------------------------------------------------------------------
Loss before minority interest, equity in net loss of
unconsolidated affiliates and cumulative effect
of accounting change (18,820) (59,789) (70,774) (547,837)
Minority interest 2,077 10,928 8,292 25,223
Equity in net loss of unconsolidated affiliates (173) (660) (1,219) (1,928)
-----------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (16,916) (49,521) (63,701) (524,542)
Cumulative effect of accounting change - - - (10,412)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss (16,916) (49,521) (63,701) (534,954)
Preferred stock dividends 11,375 11,416 34,124 31,097
-----------------------------------------------------------------------------------------------------------------------------------
Loss attributed to common shareholders $ (28,291) $ (60,937) $ (97,825) $ (566,051)
-----------------------------------------------------------------------------------------------------------------------------------
Per common share data:
Basic and Diluted
Loss before cumulative effect of accounting change $ (0.58) $ (1.25) $ (2.01) $ (11.94)
Net loss $ (0.58) $ (1.25) $ (2.01) $ (12.16)
Weighted average shares of common stock 48,641,456 48,641,154 48,641,456 46,542,614
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
Genesis Health Ventures, Inc. and Subsidiaries
(Debtors-in-Possession)
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine months ended
June 30,
----------------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (63,701) $ (534,954)
Net charges included in operations not requiring funds 146,978 543,301
Changes in current assets and liabilities excluding the effects of acquisitions
Accounts receivable (25,085) (49,060)
Accounts payable and accrued expenses (35,542) (61,056)
Other, net (3,116) 570
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities before debt restructuring,
reorganization costs and other charges 19,534 (101,199)
----------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring, reorganization costs and other charges (35,070) -
----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (15,536) (101,199)
----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of restricted investments in marketable securities (15,335) (1,119)
Proceeds on sale of eldercare centers 7,010 33,000
Capital expenditures (32,530) (40,006)
Proceeds from unconsolidated affiliates - 1,383
Notes receivable and other investments, and
other long-term asset additions, net 5,923 (10,345)
----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,932) (17,087)
----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving credit facilities 62,006 140,868
Repayment of long-term debt and payment of sinking fund requirements (633) (83,339)
Proceeds from issuance of long-term debt - 10,000
Proceeds from issuance of common stock - 50,000
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 61,373 117,529
----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 10,905 (757)
Restricted cash and equivalents
Beginning of period 22,948 16,364
----------------------------------------------------------------------------------------------------------------------------
End of period $ 33,853 $ 15,607
----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
Genesis Health Ventures, Inc. and Subsidiaries
(Debtors-in-Possession)
Notes To Unaudited Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
Genesis Health Ventures, Inc. and its subsidiaries, ("the Company", "Genesis",
"we", or "our") provide a broad range of healthcare services to the geriatric
population, principally within five geographic markets in the eastern United
States. These services include healthcare services traditionally provided in
nursing and assisted living centers and specialty medical services; such as
rehabilitation therapy, institutional pharmacy and medical supply services,
community-based pharmacies and management services, provided to independent
geriatric care providers.
Prior to October 1, 1999, Genesis accounted for its 43.6% owned investment in
The Multicare Companies, Inc. ("Multicare") using the equity method of
accounting. Upon consummation of a restructuring transaction, more fully
described in Footnote 6 - Multicare Transaction and its Restructuring, Genesis
consolidated the financial results of Multicare since Genesis has managerial,
operational and financial control of Multicare under the terms of the
Restructuring Agreement. Accordingly, Multicare's assets, liabilities, revenues
and expenses are consolidated at their recorded historical amounts and the
financial impact of transactions between Genesis and Multicare are eliminated in
consolidation. The non-Genesis shareholders' remaining 56.4% interest in
Multicare is carried as minority interest based on their proportionate share of
Multicare's historical book equity. For so long as there is a minority interest
in Multicare, the minority shareholders' proportionate share of Multicare's net
income or loss will be recorded through an adjustment to minority interest. If
losses applicable to the minority shareholders exceed the minority interest in
the equity of Multicare, such excess and future losses applicable to the
minority shareholders will be charged to the consolidated results of Genesis.
Other than Multicare, investments in unconsolidated affiliated companies, owned
20% to 50% inclusive, are stated at cost of acquisition plus the Company's
equity in undistributed net income (loss) since acquisition. The change in the
equity in net income (loss) of these companies is reflected as a component of
net income or loss on the accompanying unaudited condensed consolidated
statements of operations.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 2000. The accompanying unaudited condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. See Footnote 2 - Voluntary Petitions for Relief Under
Chapter 11 of the United States Bankruptcy Code.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared in accordance with accounting principles generally accepted
in the United States of America. In the opinion of management, the unaudited
condensed consolidated financial statements include all necessary adjustments
(consisting of normal recurring accruals and, subsequent to the Petition Date,
all adjustments pursuant to the American Institute of Certified Public
Accountants ("AICPA") Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7")) for a fair
presentation of the financial position and results of operations for the periods
presented. SOP 90-7 requires a segregation of liabilities subject to compromise
by the Bankruptcy Court as of the Petition Date and identification of all
transactions and events that are directly associated with the reorganization of
the Company. Pursuant to SOP 90-7, prepetition liabilities are reported on the
basis of the expected amounts of such allowed claims, as opposed to the amounts
for which those claims may be settled. Under a confirmed final plan of
reorganization, those claims may be settled at amounts substantially less than
their allowed amounts.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
7
2. Voluntary Petition for Relief Under Chapter 11 of the United States
Bankruptcy Code
General.
On June 22, 2000, (the "Petition Date") Genesis Health Ventures, Inc. and
certain of its direct and indirect subsidiaries filed for voluntary relief under
Chapter 11 of the United States Code (the "Bankruptcy Code") with the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
On the same date, Multicare and certain of its affiliates also filed for relief
under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court (singularly
and collectively referred to herein as "the Chapter 11 cases" or "the bankruptcy
cases" unless the context otherwise requires). Both companies are currently
operating as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain prepetition wages, salaries, benefits and other employee
obligations, as well as to continue in place the Debtors' various employee
compensation programs and procedures. On that date, the Bankruptcy Court also
authorized the Debtors to pay, among other claims, the prepetition claims of
certain critical vendors and patients. All other unsecured prepetition
liabilities are classified in the unaudited condensed consolidated balance sheet
as liabilities subject to compromise. The Debtors intend to remain in possession
of their assets and continue in the management and operation of their properties
and businesses, and to pay the post-petition claims of their various vendors and
providers in the ordinary course of business.
Except for relief that might otherwise be granted by the Bankruptcy Court
overseeing the Chapter 11 cases, and further subject to certain statutory
exceptions, the automatic stay protection afforded by Chapter 11 of the
Bankruptcy Code cases prevents any creditor or other third parties from taking
any action in connection with any defaults under prepetition debt obligations or
agreements of the Company and those of its subsidiaries or affiliates which are
debtors in the Chapter 11 cases (the "Debtors").
Plan of reorganization.
On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement for the
Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code,
(the "Disclosure Statement"), and authorized the Debtors to solicit votes with
regard to the approval or rejection of the Debtors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, dated July 6, 2001 (as amended or as
may be amended, the "Plan"). The Bankruptcy Court has established July 6, 2001
as the record date for determining parties entitled to vote on the Plan and has
approved the voting, balloting and solicitation procedures for the Plan. Also,
the Bankruptcy Court established procedures for objecting to the confirmation of
the Plan and scheduled a confirmation hearing for the Plan for August 28, 2001
(the "Confirmation Hearing").
The Plan calls for the merger of Genesis and Multicare under the Genesis banner,
and is supported by both Genesis and Multicare senior bank lenders and the
official statutory committees of unsecured creditors in both the Genesis
Debtors' cases and Multicare Debtors' cases. The Plan provides for the issuance
of new notes and new common and preferred stock by Genesis. Approximately 93
percent of the new common stock will be issued to the Genesis and Multicare
senior secured creditors and approximately seven percent of the new common stock
to the Genesis and Multicare unsecured creditors. Genesis unsecured creditors
will also receive warrants to purchase up to approximately seven percent of the
new common stock and Multicare unsecured creditors will receive warrants to
purchase up to approximately four percent of the new common stock. Existing
holders of Genesis preferred stock, and Genesis and Multicare common stock will
not receive any distribution under the Plan.
8
The Plan is based on extensive negotiations with the holders of the largest
claims against the Debtors. The Debtors believe that approval of the Plan is
their best chance for emerging from Chapter 11 and returning their businesses to
profitability. The confirmation and consummation of the Plan are subject to a
number of material conditions including, without limitation, the receipt of the
requisite acceptances from various creditor classes to confirm the Plan and the
Bankruptcy Court's determination that the Plan satisfies the statutory
requirements for confirmation under the Bankruptcy Code. Despite the support of
the official statutory committees of both Genesis and Multicare, GMS Group LLC
("GMS"), a member of the official statutory committee of the Genesis unsecured
creditors for the Genesis Debtors and, together with its customers, the
purported holder of approximately $172,000,000 of Genesis senior subordinated
notes is urging all general unsecured creditors to vote against the Plan on the
basis that it is not fair and equitable to junior classes of claims. The Debtors
believe that GMS's contentions are without merit. The deadline to file
objections to the Plan is August 17, 2001. The Court will consider any
objections to the Plan at the Confirmation Hearing scheduled for August 28,
2001. There can be no assurances that the Plan as submitted will be confirmed or
consummated.
In the event the Plan is confirmed, continuation of the business thereafter is
dependent on our ability to achieve successful future operations.
Debtor-in-possession financing.
The Bankruptcy Court approved, on a final basis, borrowings of up to
$250,000,000 in respect of the Genesis debtor-in-possession financing facility
(the "Genesis DIP Facility") with Mellon Bank, N.A., as Agent, and a syndicate
of lenders. The Bankruptcy Court also approved, on a final basis, borrowings of
up to $50,000,000 in respect of the Multicare debtor-in-possession financing
facility (the "Multicare DIP Facility") with Mellon Bank, N.A., as Agent, and a
syndicate of lenders. The Genesis and Multicare Debtors intend to utilize the
DIP Facilities of the respective companies and existing cash flows to fund
ongoing operations during the Chapter 11 cases. As of June 30, 2001, and August
10, 2001, approximately $194,000,000 and $212,000,000, respectively, of
borrowings under the Genesis DIP Facility were outstanding and no borrowings
were outstanding under the Multicare DIP Facility.
On June 29, 2001, the Genesis DIP Facility was amended to, among other things,
provide for a $40,000,000 increase in the borrowing limits. Except in certain
limited circumstances, the amended Genesis DIP Facility restricts the use of
such increase to finance the purchase of certain assets.
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare or Genesis as a result of this event. In July 2001,
the Company notified the Multicare DIP Lenders that the Company desired to
reduce the Multicare DIP Facility commitment limit to $10,000,000 from
$50,000,000. Additionally, the Company may notify the Multicare DIP Lenders to
terminate the Multicare DIP Facility as there are no borrowings expected to be
drawn against the Multicare DIP Facility.
Exit financing facility.
Genesis and Multicare have contemplated and are planning for emergence from
bankruptcy. The Plan requires that certain administrative claims and any amounts
outstanding under the Genesis DIP Facility and the Multicare DIP Facility be
paid on the effective date of such emergence. In addition, the reorganized
Genesis will require both working capital financing and financing for its
potential acquisitions. On June 21, 2001, Genesis and Multicare filed a motion
with and received authorization from the Bankruptcy Court to (1) enter into an
exit financing facility commitment letter and certain fee letters with a
syndicate of lenders, and (2) make payments for fees and expenses related
thereto. The exit financing of $415,000,000 will consist of the following
facilities: (1) a $125,000,000 revolving line of credit; (2) a $235,000,000 term
loan; and (3) a $55,000,000 delayed draw term loan, (collectively the "Exit
Financing Facility"). The Exit Financing Facility will bear interest at a
variable base rate plus a margin or LIBOR plus a margin.
Other.
On or about May 14, 2001, the official committee of Multicare unsecured
creditors (the "Multicare Creditors' Committee") appointed in the Multicare
Chapter 11 cases filed a motion (the "Trustee Motion") with the Bankruptcy Court
requesting entry of an order directing the appointment of a trustee in the
Multicare cases. The Debtors and the Multicare Creditors' Committee reached an
agreement concerning the terms of the plan and, as part of the agreement, the
Multicare Creditors' Committee withdrew the Trustee Motion.
9
Liabilities subject to compromise.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of June 30, 2001 and
September 30, 2000 follows (in thousands):
June 30, September 30,
2001 2000
---------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $1,484,904 $1,483,898
Senior subordinated notes 616,643 616,488
Revenue bonds and other indebtedness 128,639 156,937
--------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $2,230,186 $2,257,323
--------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 64,897 67,574
Accrued interest (including a $28,331 swap
termination fee) 87,471 86,855
Accrued preferred stock dividends on Series G
Preferred Stock 49,671 34,921
--------------------------------------------------------------------------------------------------
$2,432,225 $2,446,673
--------------------------------------------------------------------------------------------------
Genesis has managed Multicare pursuant to certain management services agreements
since 1997. Those agreements were negotiated with the majority owners of
Multicare at that time. As of the Petition Date, approximately $36,000,000 in
deferred fees under the management services agreements, and approximately
$57,000,000 on account of pharmacy, rehabilitation, and other ancillary services
provided by Genesis to the Multicare Debtors remained outstanding. Following the
Petition Date, the Multicare Debtors reviewed and evaluated these claims and
their defenses thereto, as well as certain claims that the Multicare Debtors may
have against the Genesis Debtors. After consideration of the merits of the
claims between the Multicare Debtors and Genesis, and after a series of
settlement discussions and negotiations between the parties, a settlement
agreement (the "Genesis/Multicare Settlement") was reached whereby each side
shall set off their claims against one another and waive and release any and all
claims against one another that they may have. The Company will seek approval of
the Genesis / Multicare Settlement in connection with confirmation of the Plan.
10
A summary of the principal categories of debt restructuring and reorganization
costs follows (in thousands):
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Legal, accounting, bank and consulting fees $ 10,628 $ 11,102 $ 28,840 $ 16,095
Exit costs of terminated businesses 4,264 - 4,904 -
Employee benefit related costs 3,022 - 8,876 -
Interest rate swap termination - - - 28,300
Stock option redemption plan - - - 7,720
---------------------------------------------------------------------------------------------------------
$ 17,914 $ 11,102 $ 42,620 $ 52,115
---------------------------------------------------------------------------------------------------------
3. Other Charges
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
(in thousands) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Other Charges:
Qui tam settlement reserve $ 2,100 $ - $ 2,100 $ -
Exit costs and write-offs of unrecoverable
assets of a closed eldercare center - 6,100 - 9,200
Reserve of trade accounts receivable due
from healthcare providers that filed for
chapter 11 protection - 19,000 - 19,000
Renegotiated pharmacy contract charge - - 3,500 -
---------------------------------------------------------------------------------------------------------
$ 2,100 $ 25,100 $ 5,600 $ 28,200
---------------------------------------------------------------------------------------------------------
Certain Debtors of Genesis have agreed to enter into a settlement agreement with
the Department of Justice to resolve four pending qui tam suits filed by private
citizens under the federal False Claims Act. Each action will be dismissed and a
release executed, consistent with the settlement agreement for a total payment
of approximately $2,100,000 (accrued for during the three months ended June 30,
2001). The Genesis Debtors dispute the allegations asserted in these actions,
and the agreement will contain no admission of liability. The settlement
agreement will resolve all claims against the Genesis Debtors in connection with
these suits.
During the three months ended June 30, 2000, the Company decided to close two
underperforming owned eldercare centers with 415 combined beds. As a result, a
charge of $6,100,000 was recorded to account for certain impaired assets of the
two owned eldercare centers.
During the nine months ended June 30, 2001, we renegotiated the pharmacy supply
agreement with our principal supplier of pharmacy related products. These
negotiations resulted in more beneficial credit terms and reductions to the
pricing on certain products. In connection with this renegotiation, the company
paid $3,500,000.
During the nine months ended June 30, 2000, the Company decided to close three
underperforming owned eldercare centers with 545 combined beds. As a result, a
charge of approximately $9,200,000 was recorded to account for certain impaired
assets of the three owned eldercare centers.
During the nine months ended June 30, 2000, the Company recorded a charge of
approximately $19,000,000 to reserve certain trade receivables due from
healthcare providers that filed for bankruptcy protection.
11
4. Certain Significant Risks and Uncertainties
Going Concern
In connection with the Chapter 11 cases, the Company expects that the Plan will
be approved by its creditors and confirmed by the Bankruptcy Court overseeing
the Company's Chapter 11 cases. In the event the plan of reorganization is
accepted, continuation of the business thereafter is dependent on our ability to
achieve successful future operations. The Company's ability to continue as a
going concern is dependent upon, among other things, confirmation of the Plan,
future profitable operations, the ability to comply with the terms of the
Genesis DIP Facility and future financing agreements and the ability to generate
sufficient cash from operations and financing arrangements to meet obligations.
There can be no assurances the Company will be successful in achieving a
confirmed plan of reorganization, future profitable operations, compliance with
the terms of the Genesis DIP Facility and sufficient cash flows from operations
and financing arrangements to meet obligations.
Following the Petition Date, Genesis continues to pay interest on approximately
$1,100,000,000 of certain prepetition senior long term debt obligations, which
has, in part, resulted in Genesis' active borrowing under the Genesis DIP
Facility. Multicare discontinued paying interest on virtually all of its
prepetition long term debt obligations following the Petition Date, which has,
in part, resulted in Multicare's ability to fund capital and working capital
needs through operations without borrowing under the Multicare DIP Facility.
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare or Genesis as a result of this event. In July 2001,
the Company notified the Multicare DIP Lenders that the Company desired to
reduce the Multicare DIP Facility commitment limit to $10,000,000 from
$50,000,000. Additionally, the Company may notify the Multicare DIP Lenders to
terminate the Multicare DIP Facility as there are no borrowings expected to be
drawn against the Multicare DIP Facility.
An event of default and any related borrowing restrictions placed under the
Genesis DIP Facility could have a material adverse effect on the financial
position of Genesis, resulting in factors including, but not limited to:
o Genesis' inability to continue funding prepetition senior long
term debt interest obligations, which could be disruptive to the
ongoing reorganization process;
o Genesis' inability to extend required letters of credit in the
ordinary course of business;
o Genesis' inability to fund capital and working capital
requirements; and
o Genesis' and / or Multicare's inability to successfully
reorganize.
12
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care facilities which
utilize our specialty medical services. The healthcare industry is experiencing
the effects of the federal and state governments' trend toward cost containment,
as government and other third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers.
These cost containment measures, combined with the increasing influence of
managed care payors and competition for patients, have resulted in reduced rates
of reimbursement for services provided by the Company.
Congress has enacted three major laws during the past five years that have
significantly altered payment for nursing home and medical ancillary services.
The Balanced Budget Act of 1997 ("the 1997 Act"), signed into law on August 5,
1997, reduced federal spending on the Medicare and Medicaid programs. As
implemented by the Centers for Medicare and Medicaid Services ("CMS"), formerly
the Health Care Financing Administration ("HCFA"), the 1997 Act has had an
adverse impact on the Medicare revenues of many skilled nursing facilities.
There have been three primary problems with the 1997 Act. First, the base year
calculations understate costs. Second, the market basket index used to trend
payments forward does not adequately reflect market experience. Third, the
Resource Utilization Groups ("RUGs") case mix allocation is not adequately
predictive of the costs of care for patients, and does not equitably allocate
funding, especially for non-therapy ancillary services. The Medicare Balanced
Budget Refinement Act ("BBRA"), enacted in November 1999, addressed a number of
the funding difficulties caused by the 1997 Act. A second enactment, the
Benefits Improvement and Protection Act of 2000 ("BIPA"), was enacted on
December 15, 2000, further modifying the law and restoring additional funding.
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by CMS 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 our institutional pharmacy and medical supply operation
("NeighborCare(R)") to charge Medicaid no more than its lowest charge to other
consumers in the state. During 2000, Federal Medicaid requirements establishing
payment caps on certain drugs were revised ("Federal Upper Limits"). The final
rule relating to Federal Upper Limits was substantially modified, reducing the
impact of the new rules on NeighborCare operations. It is our understanding that
the CMS will consider another iteration of generic drug price revisions before
the end of 2001. It is too soon to predict the potential impact of such changes.
Pharmacy coverage and cost containment are important policy debates at both the
Federal and state levels. Congress has considered proposals to expand Medicare
coverage for outpatient pharmacy services. Enactment of such legislation could
affect institutional pharmacy services. Likewise, a number of states have
proposed cost containment initiatives pending. Changes in payment formulas and
delivery requirements could impact NeighborCare. Recently the President
announced a plan for discount purchasing of prescription drugs for Medicare
beneficiaries. Details of the plan are just coming public. Implementation could
affect institutional pharmacy services.
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.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that any
future healthcare legislation will not adversely affect the Company's business.
There can be no assurance that payments under governmental and private third
13
party payor programs will be timely, will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs. The Company's
financial condition and results of operations may be affected by the
reimbursement process, which in the Company's industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled.
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care constituting approximately eleven percent and four
percent of the net revenues of NeighborCare and Genesis, respectively. These
service contracts with HCR Manor Care are the subject of certain litigation. See
"Legal Proceedings".
NeighborCare pharmacy operations provide services to Mariner Post-Acute Network,
Inc. and Mariner Health Group, Inc. (collectively, "Mariner") under certain
service contracts. On January 18, 2000, Mariner filed voluntary petitions under
Chapter 11 with the Bankruptcy Court. To date, the service contracts with
Mariner have been honored; however, Mariner has certain rights under the
protection of the Bankruptcy Court to reject these contracts, which represent
six percent and two percent of the net revenues of NeighborCare and Genesis,
respectively. Genesis participates as a member of the official Mariner unsecured
creditors committee.
5. Long-Term Debt
Long-term debt at June 30, 2001 and September 30, 2000 consists of the following
(in thousands):
June 30, September 30,
2001 2000
------------------------------------------------------------------------------------------------------------
Secured debt
Debtor-in-possession financing facilities $ 194,000 $ 133,000
Credit facilities 1,484,904 1,483,897
Mortgage and other secured debt, including unamortized
debt premium 135,223 158,756
------------------------------------------------------------------------------------------------------------
Total secured debt 1,814,127 1,775,653
Unsecured debt
Senior subordinated notes, net of unamortized debt discount 616,643 616,488
Notes payable and other unsecured debt 8,336 8,623
------------------------------------------------------------------------------------------------------------
Total unsecured debt 624,979 625,111
Total Debt 2,439,106 2,400,764
Less:
Current portion of long-term debt (194,000) (133,000)
Long term debt subject to compromise (2,230,186) (2,257,323)
------------------------------------------------------------------------------------------------------------
Long-term debt $ 14,920 $ 10,441
------------------------------------------------------------------------------------------------------------
In connection with the Chapter 11 cases, no principal or interest payments have
been made on certain indebtedness incurred by the Company prior to June 22, 2000
("Prepetition Debt"). With regard to Multicare, no principal or interest
payments have been made on $424,110,000 of the Multicare Credit Facility,
$250,000,000 of senior subordinated notes and $30,206,000 of other indebtedness.
Multicare continues to pay interest on an aggregate outstanding balance of
$9,920,000 in connection with two secured loans of subsidiaries not party to the
Chapter 11 cases. With regard to Genesis, no principal or interest payments have
been made on $371,590,000 of senior subordinated notes and approximately
$95,000,000 of other indebtedness. Subsequent to June 22, 2000, Genesis repaid
$40,000,000 of Tranche II Prepetition Debt under the Genesis Credit Facility and
all interest incurred prior to June 22, 2000 on Prepetition Debt under the
Genesis Credit Facility as adequate protection. Interest incurred on
$1,060,794,000 of Prepetition Debt under the Genesis Credit Facility subsequent
to June 22, 2000 continues to be paid as billed. Genesis is also current in
paying interest on balances outstanding under the Genesis Debtor-in-Possession
Financing.
14
Secured Debt
Genesis Debtor-in-Possession Financing
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by the Company and
those of its subsidiaries and affiliates which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code and (excluding Multicare
and its direct and indirect subsidiaries), b) authorization for the Company to
enter into a secured debtor-in-possession revolving credit facility with a group
of banks led by Mellon Bank, N. A., (the "Genesis DIP Facility") and authorizing
advances in the interim period of up to $150,000,000 out of a possible
$250,000,000 facility. On July 18, 2000, the Bankruptcy Court entered the Final
Order approving the $250,000,000 Genesis DIP Facility and permitting full usage
thereunder. Usage under the Genesis DIP Facility is subject to a Borrowing Base
which provides for maximum borrowings (subject to the $250,000,000 commitment
limit) by the Company equal to the sum of (i) up to 90% of outstanding eligible
accounts receivable, as defined and (ii) up to $175,000,000 against real
property. The Genesis DIP Facility, which is classified as a current liability,
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the Eurodollar Rate ("LIBO Rate") plus 3.75%. Proceeds of
the Genesis DIP Facility are available for general working capital purposes and
as a condition of the loan, were required to refinance the $40,000,000
outstanding under the Company's prepetition priority Tranche II sub-facility.
Additionally, $44,000,000 of proceeds were used to satisfy all unpaid interest
and rent obligations to the senior secured creditors under the Fourth Amended
and Restated Credit Agreement dated August 20, 1999 and the Synthetic Lease
dated October 7, 1996 as adequate protection for any diminution in value of the
prepetition senior secured lenders in these facilities, respectively. The
Company will continue to pay interest and rent pursuant to these agreements as
adequate protection. Interest is accrued and paid at the Prime Rate as announced
by the administrative agent, or the applicable Adjusted LIBO Rate plus, in
either event, a margin that is dependent upon a certain financial ratio test.
Pursuant to the agreement, the Company and each of its subsidiaries named as
borrowers or guarantors under the Genesis DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Genesis DIP Facility) in all unencumbered pre- and post-
petition property of the Company. The Genesis DIP Facility also has priority
over the liens on all collateral pledged under (i) the Genesis Credit Facility
(later defined), (ii) the Synthetic Lease dated October 7, 1996 and (iii) other
obligations covered by the Collateral Agency Agreement, including any Swap
Agreement, which collateral includes, but is not limited to, all personal
property, including bank accounts and investment property, accounts receivable,
inventory, equipment, and general intangibles, substantially all fee-owned real
property, and the capital stock of Genesis and its borrower and guarantor
subsidiaries.
The Genesis DIP Facility limits, among other things, the Company's ability to
incur additional indebtedness or contingent obligations, to permit additional
liens, to make additional acquisitions, to sell or dispose of assets, to create
or incur liens on assets, to pay dividends and to merge or consolidate with any
other person. The Genesis DIP Facility contains customary representations,
warranties and covenants, including certain financial covenants relating to
Minimum EBITDA, occupancy and Genesis DIP Facility usage amounts and maximum
capital expenditures. The breach of any such provisions, to the extent not
waived or cured within any applicable grace or cure periods, could result in the
Company's inability to obtain further advances under the Genesis DIP Facility
and the potential exercise of remedies by the Genesis DIP Facility lenders
(without regard to the automatic stay unless reimposed by the Bankruptcy Court)
which could materially impair the ability of the Company to successfully
reorganize under Chapter 11.
15
On February 14, 2001, Genesis received a waiver from its lenders (the "Genesis
DIP Lenders") under the Genesis DIP Facility for any event of default regarding
certain financial covenants relating to Minimum EBITDA that may have resulted
from asset impairment and other non-recurring charges recorded by Genesis in the
fourth quarter of Fiscal 2000. The waiver concerning the Minimum EBITDA covenant
requirements extended through December 31, 2000. In addition, Genesis received
certain amendments to the Genesis DIP Facility, including an amendment that
makes the Minimum EBITDA covenant less restrictive in future periods (the
"Genesis EBITDA Amendment"). On April 4, 2001, the Bankruptcy Court granted
approval for the payment of an amendment fee related thereto.
On June 29, 2001, the Genesis DIP Facility was amended to, among other things,
provide for a $40,000,000 increase in the borrowing limits, thereby increasing
the commitment limit to $290,000,000. Except in certain limited circumstances,
the amended Genesis DIP Facility restricts the use of such increase to finance
the purchase of the certain assets. The Bankruptcy Court granted approval for
the amendment to the Genesis DIP Facility, and the payment of an amendment fee
related thereto. Through August 10, 2001, borrowings outstanding under the
Genesis DIP Facility were $212,000,000. The Genesis DIP Facility provides for
the issuance of up to $25,000,000 in standby letters of credit. Through August
10, 2001, there were $2,451,000 in letters of credit issued thereunder, for a
total utilization under the Genesis DIP Facility of $214,451,000.
Multicare Debtor-in-Possession Financing
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by Multicare and
those of its affiliates which had filed petitions for reorganization under
Chapter 11 of the Bankruptcy Code and b) authorization for Multicare to enter
into a secured debtor-in-possession revolving credit facility with a group of
banks led by Mellon Bank, N. A., (the "Multicare DIP Facility") and authorizing
advances in the interim period of up to $30,000,000 out of a possible
$50,000,000. On July 18, 2000, the Bankruptcy Court entered the Final Order
approving the $50,000,000 Multicare DIP Facility and permitting full usage
thereunder. Usage under the Multicare DIP Facility is subject to a Borrowing
Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable, as defined, and a real estate component. The Multicare DIP Facility
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP
Facility are available for general working capital purposes.
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare or Genesis as a result of this event. In July 2001,
the Company notified the Multicare DIP Lenders that the Company desired to
reduce the Multicare DIP Facility commitment limit to $10,000,000 from
$50,000,000. Additionally, the Company may notify the Multicare DIP Lenders to
terminate the Multicare DIP Facility as there are no borrowings expected to be
drawn against the Multicare DIP facility.
Genesis Credit Facility
Genesis and certain of its subsidiaries (excluding Multicare) are borrowers
under a prepetition credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility"). As of June 30, 2001, $1,060,794,000 was outstanding under the
Genesis Credit Facility, which is classified as a liability subject to
compromise.
Subject to liens granted under the Genesis DIP Facility, the Genesis Credit
Facility (as amended) is secured by a first priority security interest in all of
the stock, partnership interests and other equity of all of Genesis' present and
future subsidiaries (including Genesis ElderCare Corp.) other than the stock of
Multicare and its subsidiaries, and also by first priority security interests in
substantially all personal property, excluding inventory, including accounts
receivable, equipment and general intangibles. Mortgages on substantially all of
Genesis' subsidiaries' real property were also granted.
Genesis is in default under the Genesis Credit Facility. Interest under the
Genesis Credit Facility incurred prior to and subsequent to the Petition Date
has been paid, or is accrued and paid when due.
16
Multicare Credit Facility
Multicare and certain of its subsidiaries are borrowers under a prepetition
credit facility totaling $525,000,000 (the "Multicare Credit Facility"). As of
June 30, 2001, $424,110,000 was outstanding under the Multicare Credit Facility,
which is classified as a liability subject to compromise.
Subject to liens granted under the Multicare DIP Facility, the Multicare Credit
Facility (as amended) is secured by first priority security interests (subject
to certain exceptions) in all personal property, including inventory, accounts
receivable, equipment and general intangibles. Mortgages on certain of
Multicare's subsidiaries' real property were also granted.
Multicare is in default under the Multicare Credit Facility and has not made any
scheduled interest payments since March 29, 2000.
Mortgage and Other Secured Debt
At June 30, 2001, the Company has $135,223,000 of mortgage and other secured
debt consisting principally of secured revenue bonds and secured bank loans,
including loans insured by the Department of Housing and Urban Development. With
the exception of $14,920,000, the aggregate balance of mortgage and other
secured debt is classified as liabilities subject to compromise.
Unsecured Debt
Senior Subordinated Notes
At June 30, 2001, the following senior subordinated notes, net of discounts,
were outstanding (in thousands):
Issuer Maturity Date Interest Rate Outstanding Balance
------------------------------------------------------------------------------------------------------------
Genesis 2009 9.88% $120,979
Genesis 2006 9.25% 125,000
Genesis 2005 9.75% 120,000
Genesis Matured and untendered 9.38% 1,590
Multicare 2007 9.00% 249,074
------------------------------------------------------------------------------------------------------------
$616,643
Genesis and Multicare are in default of the indenture agreements of the above
referenced senior subordinated notes. The outstanding balances of the senior
subordinated notes are classified as liabilities subject to compromise.
Notes Payable and Other Unsecured Debt
Notes payable and other unsecured debt principally consists of seller notes due
to the previous owners of businesses acquired.
6. 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."
17
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 October 9, 1997 (the "Multicare
Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a
put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement")
relating to their respective ownership interests in Genesis ElderCare Corp.
pursuant to which, among other things, Genesis had the option to purchase (the
"Call") Genesis ElderCare Corp. common stock held by Cypress, TPG and Nazem at a
price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG
and Nazem had the option to sell (the "Put") such Genesis ElderCare Corp. common
stock at a price determined pursuant to the Put/Call Agreement.
On October 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.
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
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.
In connection with the restructuring transaction, Genesis recorded a non-cash
charge of approximately $420,000,000 during the quarter ended December 31, 1999,
representing the estimated cost to terminate the Put in consideration for the
issuance of the Series H Preferred and Series I Preferred. The cost to terminate
the Put was estimated based upon the Company's assessment that no incremental
value was realized by Genesis as a result of the changes in the equity ownership
structure of Multicare brought about by the restructuring of the Multicare joint
venture.
18
7. Loss Per Share
The following table sets forth the computation of basic and diluted loss
attributed to common shares (in thousands, except per share data):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per Share:
Loss before cumulative effect of
accounting change $ (28,291) $ (60,937) $ (97,825) $ (555,639)
Cumulative effect of accounting
change - - - (10,412)
-------------------------------------------------------------------------------------------------------
Net loss attributed to common
shareholders $ (28,291) $ (60,937) $ (97,825) $ (566,051)
-------------------------------------------------------------------------------------------------------
Weighted average shares 48,641 48,641 48,641 46,543
-------------------------------------------------------------------------------------------------------
Loss per share before cumulative
effect of accounting change $ (0.58) $ (1.25) $ (2.01) $ (11.94)
Cumulative effect of accounting
change - - - (0.22)
-------------------------------------------------------------------------------------------------------
Loss per share $ (0.58) $ (1.25) $ (2.01) $ (12.16)
-------------------------------------------------------------------------------------------------------
For the three and nine months ended June 30, 2001 and 2000, no exercise of stock
options is assumed since their effect is antidilutive.
8. Comprehensive Loss
The following table sets forth the computation of comprehensive loss (in
thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
Loss attributed to common
shareholders $ (28,291) $ (60,937) $ (97,825) $ (566,051)
Unrealized gain (loss) on
marketable securities (105) (154) 1,295 (750)
-----------------------------------------------------------------------------------------------------
Total comprehensive loss $ (28,396) $ (61,091) $ (96,530) $ (566,801)
-----------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss, which is composed of net unrealized gains
and losses on marketable securities, was ($494,000) and ($1,789,000) at June 30,
2001 and September 30, 2000, respectively.
19
9. Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities",
("SOP 98-5") which requires the costs of start-up activities be expensed as
incurred, rather than capitalized and subsequently amortized. The adoption of
SOP 98-5 resulted in the write-off of $10,412,000, net of tax, of unamortized
start-up costs and is reflected as a cumulative effect of accounting change in
the unaudited condensed consolidated statements of operations for the nine
months ended June 30, 2000.
10. Segment Information
The Company's principal operating segments are identified by the types of
products and services from which revenues are derived and are consistent with
the reporting structure of the Company's internal organization.
The Company has two reportable segments: (1) Pharmacy and medical supplies
services and (2) Inpatient services.
The Company provides pharmacy and medical supply services through its
NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of infusion therapy, medical supplies and equipment provided to
eldercare centers it operates, as well as to independent healthcare providers by
contract. The Company provides these services through 61 institutional
pharmacies (three are jointly-owned) and 20 medical supply and home medical
equipment distribution centers (four are jointly-owned) located in its various
market areas. In addition, the Company operates 29 community-based pharmacies
(two are jointly-owned) which are located in or near medical centers, hospitals
and physician office complexes. The community-based pharmacies provide
prescription and over-the-counter medications and certain medical supplies, as
well as personal service and consultation by licensed professional pharmacists.
Approximately 91% of the sales attributable to all pharmacy operations in Fiscal
2000 were generated through external contracts with independent healthcare
providers with the balance attributable to centers owned or leased by the
Company, including the jointly-owned Multicare centers.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at its 191 owned and
leased eldercare centers, including the jointly-owned Multicare centers. The
centers offer three levels of care for their customers: skilled, intermediate
and personal.
The accounting policies of the segments are the same as those of the
consolidated company. All intersegment sales prices are market based. The
Company evaluates performance of its operating segments based on income before
interest, income taxes, depreciation, amortization, rent and nonrecurring items.
20
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column represents operating
information of business units below the prescribed quantitative thresholds.
These business units derive revenues from the following services: rehabilitation
therapy, management services, consulting services, homecare services, physician
services, transportation services, diagnostic services, hospitality services,
respiratory health services, group purchasing fees and other healthcare related
services. In addition, the "Other" column includes the elimination of
intersegment transactions.
(in thousands) Pharmacy and
Medical
Supply Inpatient
Three months ended Services Services Other Total
----------------------------------------------------------------------------------------------------------
June 30, 2001
----------------------------------------------------------------------------------------------------------
Revenue from external customers $ 263,591 $ 344,479 $42,671 $ 650,741
Revenue from intersegment
Customers 25,525 - 49,332 74,857
Operating income (1) 26,347 44,772 (7,146) 63,973
Total assets 1,049,675 1,724,187 308,585 3,082,447
----------------------------------------------------------------------------------------------------------
June 30, 2000
----------------------------------------------------------------------------------------------------------
Revenue from external customers $ 240,330 $ 331,650 $ 43,871 $ 615,851
Revenue from intersegment
Customers 25,560 - 48,074 73,634
Operating income (1) 23,163 50,159 (8,956) 64,366
Total assets 1,082,993 1,758,026 606,535 3,447,554
----------------------------------------------------------------------------------------------------------
(in thousands) Pharmacy and
Medical
Supply Inpatient
Nine months ended Services Services Other Total
----------------------------------------------------------------------------------------------------------
June 30, 2001
----------------------------------------------------------------------------------------------------------
Revenue from external customers $ 774,766 $ 1,012,453 $122,623 $ 1,909,842
Revenue from intersegment
customers 72,783 - 145,537 218,320
Operating income (1) 71,469 130,340 (23,388) 178,421
Total assets 1,049,675 1,724,187 308,585 3,082,447
----------------------------------------------------------------------------------------------------------
June 30, 2000
----------------------------------------------------------------------------------------------------------
Revenue from external customers $ 697,179 $ 989,061 $ 121,338 $ 1,807,578
Revenue from intersegment
customers 77,329 - 134,034 211,363
Operating income (1) 76,908 146,907 (12,449) 211,366
Total assets 1,082,993 1,758,026 606,535 3,447,554
----------------------------------------------------------------------------------------------------------
(1) Operating income is defined as income before interest, income taxes,
depreciation, amortization, rent and nonrecurring items. The Company's segment
information does not include an allocation of overhead costs, which for the
inpatient services segment are between 3% - 4% of inpatient services net
revenues, and for the pharmacy and medical supply segment are approximately 1%
of the net revenues of that segment.
21
11. Restricted Assets
The Company's cash balance at June 30, 2001 was approximately $33,853,000
($33,853,000 held by Multicare and $0 held by Genesis). As a result of certain
restrictions placed on Multicare and Genesis by their respective senior credit
agreements and the automatic stay provisions imposed by the Bankruptcy Court,
Genesis and Multicare are precluded from freely transferring funds through
intercompany loans, advances or cash dividends. Consequently, the $33,853,000 of
cash and other assets held by Multicare at June 30, 2001 is not available to
Genesis.
At June 30, 2001, the Company reported restricted investments in marketable
securities of $44,529,000 which are held by Liberty Health Corp. LTD. ("LHC"),
Genesis' wholly-owned captive insurance subsidiary incorporated under the laws
of Bermuda. The investments held by LHC are restricted by statutory capital
requirements in Bermuda. In addition, certain of these investments are pledged
as security for letters of credit issued by LHC. As a result of such
restrictions and encumbrances, Genesis and LHC are precluded from freely
transferring funds through intercompany loans, advances or cash dividends. LHC
is not a party to the Chapter 11 cases.
12. ElderTrust Transactions
Effective January 31, 2001, we restructured our relationship with ElderTrust, a
Maryland healthcare real estate investment trust (the "ElderTrust
Transactions"). The related agreements encompass, among other things, the
resolution of leases and mortgages for 33 properties operated by Genesis and
Multicare either directly or through joint ventures. Under its agreement,
Genesis assumed the ElderTrust leases subject to certain modifications,
including a reduction in Genesis' annual lease expense of $745,000; extended the
maturity and reduced the principal balances of loans for three assisted living
properties by $8,500,000 by satisfaction of an ElderTrust obligation of like
amount; and acquired a building previously leased from ElderTrust, which is
located on the campus of a Genesis skilled nursing facility, for $1,250,000. In
its agreement with ElderTrust, Multicare sold three owned assisted living
properties that were mortgaged to ElderTrust for principal amounts totaling
$19,650,000 in exchange for the outstanding indebtedness. ElderTrust leases the
properties back to Multicare under a new ten-year lease with annual rents of
$792,000. The net impact of these transactions to the Company was a gain of
$2,229,000, which has been deferred over the average term of the lease
agreements.
22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since we began operations in July 1985, we have focused our efforts on providing
an expanding array of specialty medical services to elderly customers. We
generate revenues primarily from two sources: pharmacy and medical supply
services, and inpatient services; however, we also derive revenue from other
sources.
We include in inpatient services revenue all room and board charges and
ancillary service revenue for our eldercare customers at our 191 owned, leased
and Multicare jointly-owned eldercare centers.
We provide pharmacy and medical supply services through our NeighborCare(R)
pharmacy subsidiaries. Included in pharmacy and medical supply service revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by Genesis, as well as to independent healthcare providers by contract. We
provide these services through 61 institutional pharmacies (three are
jointly-owned) and 20 medical supply and home medical equipment distribution
centers (four are jointly-owned) located in our various market areas. In
addition, we operate 29 community-based pharmacies (two are jointly-owned) which
are located in or near medical centers, hospitals and physician office
complexes. The community-based pharmacies provide prescription and
over-the-counter medications and certain medical supplies, as well as personal
service and consultation by licensed professional pharmacists.
We include the following service revenue in other revenues: rehabilitation
therapy services, management fees charged to 88 independently and jointly owned
eldercare centers, consulting services, homecare services, physician services,
transportation services, diagnostic services, hospitality services, group
purchasing fees, respiratory health services and other healthcare related
services.
Certain Transactions and Events
Liquidity and Going Concern Assumption
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern with the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. However, as a result of the Bankruptcy cases and
circumstances relating to this event, including the Company's leveraged
financial structure, losses from operations and defaults under various loan
agreements, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a confirmed plan of reorganization could materially change the amounts
reported in the financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a confirmed plan of reorganization. The Company's
ability to continue as a going concern is dependent upon, among other things,
confirmation of a plan of reorganization, future profitable operations, the
ability to comply with the terms of the Genesis debtor-in-possession financing
agreement and future financing agreements and the ability to generate sufficient
cash flow from operations and financing arrangements to meet obligations.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to eligible individuals. The changes have had a significant
negative impact on the healthcare industry as a whole and on our cash flows.
Second, the federal reimbursement changes have exacerbated a long-standing
problem of less than fair reimbursement by the states for medical services
provided to indigent persons under the various state Medicaid programs. Third,
numerous other factors have adversely affected our cash flows, including
increased labor costs, increased professional liability and other insurance
costs, and increased interest rates. Finally, as a result of declining
governmental reimbursement rates and in the face of rising inflationary costs,
we were too highly leveraged to service our debt, including our long-term lease
obligations.
23
On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement for the
Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code,
(the "Disclosure Statement"), and authorized the Debtors to solicit votes with
regard to the approval or rejection of the Debtors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, dated July 6, 2001 (as amended or as
may be amended, the "Plan"). The Bankruptcy Court has established July 6, 2001
as the record date for determining parties entitled to vote on the Plan and has
approved the voting, balloting and solicitation procedures for the Plan. Also,
the Bankruptcy Court established procedures for objecting to the confirmation of
the Plan and scheduled a confirmation hearing for the Plan for August 28, 2001
(the "Confirmation Hearing").
The Plan calls for the merger of Genesis and Multicare under the Genesis banner,
and is supported by both Genesis and Multicare senior bank lenders and the
official statutory committees of unsecured creditors in both the Genesis
Debtors' cases and Multicare Debtors' cases. The Plan provides for the issuance
of new notes and new common and preferred stock by Genesis. Approximately 93
percent of the new common stock will be issued to the Genesis and Multicare
senior secured creditors and approximately seven percent of the new common stock
to the Genesis and Multicare unsecured creditors. Genesis unsecured creditors
will also receive warrants to purchase up to approximately seven percent of the
new common stock and Multicare unsecured creditors will receive warrants to
purchase up to approximately four percent of the new common stock. Existing
holders of Genesis preferred stock, and Genesis and Multicare common stock will
not receive any distribution under the Plan.
The Plan is based on extensive negotiations with the holders of the largest
claims against the Debtors. The Debtors believe that approval of the Plan is
their best chance for emerging from Chapter 11 and returning their businesses to
profitability. The confirmation and consummation of the Plan are subject to a
number of material conditions including, without limitation, the receipt of the
requisite acceptances from various creditor classes to confirm the Plan and the
Bankruptcy Court's determination that the Plan satisfies the statutory
requirements for confirmation under the Bankruptcy Code. Despite the support of
the official statutory committees of both Genesis and Multicare, GMS Group LLC
("GMS"), a member of the official statutory committee of the Genesis unsecured
creditors for the Genesis Debtors and, together with its customers, the
purported holder of approximately $172,000,000 of Genesis senior subordinated
notes is urging all general unsecured creditors to vote against the Plan on the
basis that it is not fair and equitable to junior classes of claims. The Debtors
believe that GMS's contentions are without merit. The deadline to file
objections to the Plan is August 17, 2001. The Court will consider any
objections to the Plan at the Confirmation Hearing scheduled for August 28,
2001. There can be no assurances that the Plan as submitted will be confirmed or
consummated.
In the event the Plan is confirmed, continuation of the business thereafter is
dependent on our ability to achieve successful future operations.
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".
24
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
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
(the "Merger"). In connection with their investments in the common stock of
Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a
stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders
Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call
agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to
their respective ownership interests in Genesis ElderCare Corp. pursuant to
which, among other things, Genesis had the option to purchase (the "Call")
Genesis ElderCare Corp. common stock held by Cypress, TPG and Nazem at a price
determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and
Nazem had the option to sell (the "Put") such Genesis ElderCare Corp. common
stock at a price determined pursuant to the Put/Call Agreement.
On October 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.
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
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.
ElderTrust Transactions
Effective January 31, 2001, we restructured our relationship with ElderTrust, a
Maryland healthcare real estate investment trust (the "ElderTrust
Transactions"). The related agreements encompass, among other things, the
resolution of leases and mortgages for 33 properties operated by Genesis and
Multicare either directly or through joint ventures. Under its agreement,
Genesis assumed the ElderTrust leases subject to certain modifications,
including a reduction in Genesis' annual lease expense of $745,000; extended the
maturity and reduced the principal balances of loans for three assisted living
properties by $8,500,000 by satisfaction of an ElderTrust obligation of like
amount; and acquired a building previously leased from ElderTrust, which is
located on the campus of a Genesis skilled nursing facility, for $1,250,000. In
its agreement with ElderTrust, Multicare sold three owned assisted living
properties that were mortgaged to ElderTrust for principal amounts totaling
$19,650,000 in exchange for the outstanding indebtedness. ElderTrust leases the
properties back to Multicare under a new ten-year lease with annual rents of
$792,000. The net impact of these transactions to the Company was a gain of
$2,229,000, which has been deferred over the average term of the lease
agreements.
25
AGE Institute
In the fourth fiscal quarter of 2000, we received notice from the AGE Holdings,
Inc., a not-for-profit owner / sponsor of 20 eldercare centers with
approximately 2,400 beds, that it wished to discontinue our management contracts
and ancillary service contracts (the "AGE Contracts"). Effective October 31,
2000, the AGE Contracts were terminated. In fiscal 2000, the AGE Contracts
generated approximately $19,000,000 in revenue and $2,000,000 in operating
income.
On November 27, 2000, Genesis Health Ventures, Inc., along with several
subsidiaries, filed an adversary proceeding in the Genesis bankruptcy cases
against four related nursing home owners (AGE Institute of Pennsylvania, Inc.;
AGE Institute of Massachusetts, Inc.; AGE Institute of Florida, Inc.; and
Delaware Valley Convalescent Homes, Inc.); and their parent company AGE
Holdings, Inc. (collectively, the "AGE Entities"). The complaint seeks to
recover approximately $20,800,000 owed to Genesis through the AGE Contracts, by
which Genesis provided services to 20 nursing homes owned by the defendants in
Pennsylvania, Massachusetts and Florida. The complaint asserts counts against
all defendants for breach of contract, civil conspiracy and unjust enrichment,
and against AGE Institute of Pennsylvania, Inc. and AGE Institute of
Massachusetts, Inc. for breach of certain trust indentures. In response, the AGE
Entities filed counterclaims against the Genesis Debtors alleging violations of
RICO, fraud, lender liability, breach of fiduciary duty, breach of management
agreements, breach of professional standards / professional negligence,
conversion, interference with business relations, and conspiracy. The
counterclaims seek punitive, compensatory, and / exemplary damages, as well as
claims to invalidate certain working capital and subordinated loan obligations
of the AGE Entities to the Genesis Debtors. The counterclaims further seek
administrative expense treatment of any amount found due to the AGE Entities for
post-petition damages. While the Genesis Debtors believe that the counterclaims
have no merit, in the event the AGE Entities were to prevail on their
counterclaims, such counterclaims could exceed the claims of the Genesis Debtors
against the AGE Entities. The AGE Entities have filed proofs of claim (in
unliquidated amounts) in the Genesis Bankruptcy Cases in connection with
their counterclaims. It is anticipated that the adversary proceeding will not be
tried until the summer of 2002. It should be noted that any recovery against the
AGE Entities is uncertain.
Sale of Ohio Operations
In the third fiscal quarter of 2000, effective May 31, 2000, Multicare sold 14
eldercare centers with 1,128 beds located in the state of Ohio for approximately
$33,000,000. The Company recorded a loss on sale of the Ohio properties of
approximately $7,922,000.
Results of Operations
Three months ended June 30, 2001 compared to three months ended June 30, 2000
The Company's total net revenues for the quarter ended June 30, 2001 were
$650,741,000 compared to $615,851,000 for the quarter ended June 30, 2000, an
increase of $34,890,000, or 6%.
Inpatient service revenue increased $12,829,000, or 4%, to $344,479,000 from
$331,650,000. Of this increase, approximately $2,824,000 is attributed to the
consolidation of two eldercare centers previously under joint ownership that
became wholly-owned effective July 1, 2000 (the "P&R Transaction").
Approximately $551,000 of the increase resulted from the consolidation of one
additional eldercare center previously under joint ownership that became
wholly-owned effective January 31, 2001 in connection with the ElderTrust
Transactions. Approximately $20,719,000 is principally attributed to increased
payment rates and higher Medicare, private pay and insurance patient days
("Quality Mix") as a percentage of total patient days. The Company's average
rate per patient day for the quarter ended June 30, 2001 was $165 compared to
$155 for the comparable period in the prior year. This increase in the average
rate per patient day is principally driven by the effects of the BIPA on our
average Medicare rate per patient day, which increased to $336 for the quarter
ended June 30, 2001 compared to $299 for the comparable period in the prior
year. The Company's revenue Quality Mix for the quarter ended June 30, 2001 was
51.8% compared to 50.8% for the comparable period in the prior year. These rate
26
and mix increases are offset by a decrease in revenue of approximately
$11,265,000 resulting from the sale, closure or lease terminations of certain
eldercare centers. Total patient days decreased 110,935 to 2,025,241 during the
quarter ended June 30, 2001 compared to 2,136,176 during the comparable period
last year. Of this decrease, 101,716 patient days are attributed to the sale,
closure or lease terminations of certain eldercare centers; offset by the
consolidation of 26,348 patient days of three eldercare centers following the
P&R and Eldertrust Transactions. The remaining decrease of 35,567 patient days
is the result of a decrease in overall occupancy.
Pharmacy and medical supply service revenue was $263,591,000 for the quarter
ended June 30, 2001 compared to $240,330,000 for the quarter ended June 30,
2000. Pharmacy and medical supply service revenues increased approximately
$23,261,000, or 10%, due primarily to net revenue growth with external
customers.
Other revenues decreased approximately $1,200,000 from $43,871,000 to
$42,671,000. This decline is partially attributed to a reduction in revenue of
approximately $2,000,000 resulting from the termination of certain management
contracts, primarily contracts with AGE Institute. The remaining increase of
approximately $800,000 is attributed to a net increase in revenues of other
service businesses offset by a decline in interest income and development fee
revenue.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $35,283,000, or 6%, to $586,768,000 for the
quarter ended June 30, 2001 from $551,485,000 for the comparable period in the
prior year. This net increase is attributed to approximately $3,320,000 from the
consolidation of the operating expenses of three eldercare centers following the
P&R and ElderTrust Transactions, approximately $3,940,000 is attributed to
increases in the cost of certain self-insured employee health coverage,
approximately $2,101,000 is attributed to higher bad debt provisions;
approximately $17,100,000 is attributed to an increase in pharmacy and medical
supply cost of sales ($13,800,000 of which is attributed to pharmacy and medical
supply revenue volume growth, and $3,300,000 is attributed to changes in
customer and product mix); and is offset by $9,037,000 of operating cost savings
resulting from the sale, closure or lease terminations of certain eldercare
centers. The remaining increase in operating expenses of approximately
$17,859,000 is attributed to growth in labor related costs, property and
liability insurance related costs and general inflationary cost increases.
The operating cost growth is attributed to continued pressure on wage and
benefit related costs in all of our operating businesses. The Company and the
industry continue to experience significant shortages in qualified professional
clinical staff. As the demand for these services continually exceeds the supply
of available and qualified staff, the Company and our competitors have been
forced to offer more attractive wage and benefit packages to these professionals
and to utilize outside contractors for these services at premium rates.
Furthermore, the competitive arena for this shrinking labor market has created
high turnover among clinical professional staff as many seek to take advantage
of the supply of available positions, many offering new and more attractive wage
and benefit packages. In addition to the wage pressures inherent in this
environment, the cost of training new employees amid the high turnover rates has
caused added pressure on our operating margins. In addition to labor pressures,
the Company and industry continue to experience an adverse effect on operating
profits due to an increase in the cost of certain of its insurance programs.
Rising costs of eldercare malpractice litigation involving nursing care
operators and losses stemming from these malpractice lawsuits has caused many
insurance providers to raise the cost of insurance premiums or refuse to write
insurance policies for nursing homes. Accordingly, the costs of general and
professional liability and property insurance premiums have increased. Also, the
impact of government regulation in a heavily regulated environment has adversely
impacted our ability to reduce costs. The pressures on operating expenses
described above are coupled with the effects of the federal and state
governments' and other third party payors' trend toward imposing lower
reimbursement rates, resulting in our inability to grow revenues at a rate that
equals or exceeds the growth in our cost levels. The downward trend of
reimbursement rates to nursing care operators and the cost pressures previously
described have adversely impacted customers of our ancillary service businesses,
resulting in pricing pressures in those businesses.
27
During the three months ended June 30, 2001 and 2000, the Company recorded
charges in connection with debt restructuring, reorganization costs and other
charges; and the loss on the sale of eldercare centers. The following table and
discussion provides additional information on these charges.
2001 2000
---------------------------------------------------------------------------------------------------------
Debt Restructuring and Reorganization Costs:
Professional, bank and other fees $ 10,628,000 $ 11,102,000
Employee benefit related costs 3,022,000 -
Exit costs of terminated businesses 4,264,000 -
---------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 17,914,000 $ 11,102,000
---------------------------------------------------------------------------------------------------------
Other Charges:
Qui tam settlement reserve $ 2,100,000 $ -
Exit costs and write-offs of unrecoverable assets of closed
eldercare centers - 6,100,000
Reserve of trade accounts receivable due from healthcare
providers that filed for chapter 11 protection $ - $ 19,000,000
---------------------------------------------------------------------------------------------------------
Total other charges $ 2,100,000 $ 25,100,000
---------------------------------------------------------------------------------------------------------
Total debt restructuring, reorganization costs and other
charges $ 20,014,000 $ 36,202,000
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Loss on sale of eldercare centers $ - $ 7,922,000
---------------------------------------------------------------------------------------------------------
During the three months ended June 30, 2001, we incurred approximately
$17,914,000 of legal, bank, accounting and other costs in connection with our
debt restructuring and the Chapter 11 cases. Of these charges, approximately
$10,628,000 is attributed to professional, bank and other fees and approximately
$3,022,000 pertains to certain salary and benefit related costs, principally for
a court approved special recognition program. In addition, we incurred
approximately $4,264,000 of costs associated with exiting certain terminated
businesses. The Company expects that such debt restructuring, reorganization
costs and other charges will continue at current, and perhaps accelerated,
levels throughout the course of our Chapter 11 cases.
During the three months ended June 30, 2000, the Company continued discussions
with its lenders under the Genesis and Multicare Credit Facilities to revise the
Company's capital structure. During the discussion period, Genesis and Multicare
did not make certain scheduled principal and interest payments under the Genesis
and Multicare Credit Facilities or certain scheduled interest payments under
certain of the Genesis senior subordinated debt agreements. In connection with
the potential debt restructuring, the Company incurred during the three months
ended June 30, 2000 legal, bank, accounting and other professional fees of
approximately $11,102,000.
Certain Debtors of Genesis have agreed to enter into a settlement agreement with
the Department of Justice to resolve four pending qui tam suits filed by private
citizens under the federal False Claims Act. Each action will be dismissed and a
release executed, consistent with the settlement agreement for a total payment
of approximately $2,100,000 (accrued for during the three months ended June 30,
2001). The Genesis Debtors dispute the allegations asserted in these actions,
and the agreement will contain no admission of liability. The settlement
agreement will resolve all claims against the Genesis Debtors in connection with
these suits.
During the quarter ended June 30, 2000, the Company decided to close two
underperforming owned eldercare centers with 415 combined beds. As a result, a
charge of $6,100,000 was recorded to account for certain impaired assets of the
two owned eldercare centers.
During the quarter ended June 30, 2000, the Company recorded a charge of
approximately $19,000,000 to reserve certain trade receivables due from
healthcare providers that filed for bankruptcy protection.
28
Effective May 31, 2000, Multicare sold 14 eldercare centers with 1,128 beds
located in the state of Ohio for approximately $33,000,000. The Company recorded
a loss on sale of the Ohio properties of approximately $7,922,000 for the
quarter ended June 30, 2000.
Depreciation and amortization expense decreased $2,735,000, principally
attributed to the fourth quarter of fiscal 2000 write-off of impaired goodwill
and property, plant and equipment and the sale, closure or lease terminations of
certain eldercare centers.
Lease expense decreased $637,000, of which approximately $641,000 is attributed
to the sale, closure or lease terminations of certain eldercare centers, offset
by an increase of approximately $306,000 attributed to the consolidation of two
leased eldercare centers in connection of the P&R Transaction. The remaining
decrease of approximately $302,000 is due to the effects of the ElderTrust
Transactions; partially offset by growth in the cost of a variable rate lease
financing facility and scheduled increases in fixed lease rates.
Interest expense decreased $34,113,000. In accordance with SOP 90-7, the Company
ceased accruing interest following the Petition Date on certain long-term debt
instruments classified as liabilities subject to compromise. The Company's
contractual interest expense for the three months ended June 30, 2001 was
$50,848,000, leaving $23,781,000 of interest expense unaccrued for that period
as a result of the Chapter 11 filings. Contractual interest expense for the
three months ended June 30, 2001 decreased by $10,332,000 compared to
$61,180,000 for the same period in the prior year. Approximately $14,262,000 of
the decrease is primarily attributed to a lower weighted average borrowing rate
and offset by additional net capital and working capital borrowings under the
Genesis DIP Facility resulting in additional interest expense of approximately
$3,930,000.
As a result of the Company's Chapter 11 filings and uncertainties regarding its
ability to generate sufficient taxable income to utilize future net operating
loss carryforwards, the Company recorded a valuation allowance on all
incremental net operating loss carryforward benefits during the three months
ended June 30, 2001 and consequently, did not report an income tax benefit for
the three months ended June 30, 2001. The Company reported a $20,233,000 tax
benefit for the three months ended June 30, 2000.
Equity in net loss of unconsolidated affiliates for the three months ended June
30, 2001 was $173,000 compared to $660,000 for the comparable period in the
prior year, which is attributed to changes in the earnings / losses reported by
the Company's unconsolidated affiliates, as well as the P&R Transaction.
Minority interest decreased $8,851,000 during the three months ended June 30,
2001 to $2,077,000 compared to $10,928,000 for the comparable period in the
prior year. This decrease is principally attributed to a lower net loss reported
by Multicare and the resulting Genesis' Multicare joint venture partners' 56.4%
interest in the Multicare net loss for the period. The Multicare net loss was
reduced during the three months ended June 30, 2001 compared to the comparable
period in the prior year, principally due to lower interest expense recognition
under SOP 90-7.
Preferred stock dividends decreased $41,000 to $11,375,000 during the three
months ended June 30, 2001 compared to $11,416,000 for the comparable period in
the prior year.
Nine months ended June 30, 2001 compared to nine months ended June 30, 2000
The Company's total net revenues for the nine months ended June 30, 2001 were
$1,909,842,000 compared to $1,807,578,000 for the nine months ended June 30,
2000, an increase of $102,264,000, or 6%.
29
Inpatient service revenue increased $23,392,000, or 2%, to $1,012,453,000 from
$989,061,000. Of this increase, approximately $8,922,000 is attributed to the
consolidation of two eldercare centers previously under joint ownership that
became wholly-owned effective July 1, 2000 (the "P&R Transaction").
Approximately $877,000 of the increase resulted from the consolidation of one
additional eldercare center previously under joint ownership that became
wholly-owned effective January 31, 2001 in connection with the ElderTrust
Transactions. Approximately $62,234,000 is principally attributed to increased
payment rates and higher Medicare, private pay and insurance patient days
("Quality Mix") as a percentage of total patient days. The Company's average
rate per patient day for the nine months ended June 30, 2001 was $165 compared
to $152 for the comparable period in the prior year. This increase in the
average rate per patient day is principally driven by the effect of the BBRA and
BIPA on our average Medicare rate per patient day, which increased to $323 for
the nine months ended June 30, 2001 compared to $292 for the comparable period
in the prior year. The Company's revenue Quality Mix for the nine months ended
June 30, 2001 was 51.1% compared to 50.0% for the comparable period in the prior
year. These rate and mix increases are offset by a decrease in revenue of
approximately $48,641,000 resulting from the sale, closure or lease terminations
of certain eldercare centers. Total patient days decreased 393,746 to 6,123,416
during the nine months ended June 30, 2001 compared to 6,517,162 during the
comparable period last year. Of this decrease, 384,424 patient days are
attributed to the sale, closure or lease terminations of certain eldercare
centers; offset by the consolidation of 71,020 patient days of three eldercare
centers following the P&R and Eldertrust Transactions. A decrease of 22,385 days
compared to the comparable period last year is attributed to one additional
calendar day in the June 30, 2000 period due to a leap year. The remaining
decrease of 57,957 patient days is the result of a decrease in overall
occupancy.
Pharmacy and medical supply service revenue was $774,766,000 for the nine months
ended June 30, 2001 compared to $697,179,000 for the nine months ended June 30,
2000. Pharmacy and medical supply service revenues increased approximately
$77,587,000, or 11%, due primarily to net revenue growth with external
customers.
Other revenues increased approximately $1,285,000 from $121,338,000 to
$122,623,000. Approximately $6,685,000 of this increase is attributed to a net
increase in revenues of other service businesses, offset by a decline in
interest income and development fee revenue. The remaining reduction in other
revenue of approximately $5,400,000 is attributed to the termination of certain
management contracts, primarily with AGE Institute.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $135,209,000, or 8%, to $1,731,421,000 for the
nine months ended June 30, 2001 from $1,596,212,000 for the comparable period in
the prior year. Of the net increase, approximately $9,161,000 is attributed to
the consolidation of the operating expenses of three eldercare centers following
the P&R and ElderTrust Transactions, approximately $11,633,000 is attributed to
increases in the cost of certain self-insured employee health coverage,
approximately $6,877,000 is attributed to higher bad debt provisions;
approximately $66,100,000 is attributed to an increase in pharmacy and medical
supply cost of sales ($46,000,000 of which is attributed to pharmacy and medical
supply revenue volume growth, and $20,100,000 is attributed to changes in
customer and product mix); and is offset by $43,477,000 of operating cost
savings resulting from the sale, closure or lease terminations of certain
eldercare centers. The remaining increase in operating expenses of approximately
$84,915,000 is attributed to growth in labor related costs, property and
liability insurance related costs and general inflationary cost increases.
The operating cost growth is attributed to continued pressure on wage and
benefit related costs in all of our operating businesses. The Company and the
industry continue to experience significant shortages in qualified professional
clinical staff. As the demand for these services continually exceeds the supply
of available and qualified staff, the Company and our competitors have been
forced to offer more attractive wage and benefit packages to these professionals
and to utilize outside contractors for these services at premium rates.
Furthermore, the competitive arena for this shrinking labor market has created
high turnover among clinical professional staff as many seek to take advantage
of the supply of available positions, many offering new and more attractive wage
and benefit packages. In addition to the wage pressures inherent in this
environment, the cost of training new employees amid the high turnover rates has
caused added pressure on our operating margins. In addition to labor pressures,
the Company and industry continue to experience an adverse effect on operating
30
profits due to an increase in the cost of certain of its insurance programs.
Rising costs of eldercare malpractice litigation involving nursing care
operators and losses stemming from these malpractice lawsuits has caused many
insurance providers to raise the cost of insurance premiums or refuse to write
insurance policies for nursing homes. Accordingly, the costs of general and
professional liability and property insurance premiums have increased. Also, the
impact of government regulation in a heavily regulated environment has adversely
impacted our ability to reduce costs. The pressures on operating expenses
described above are coupled with the effects of the federal and state
governments' and other third party payors' trend toward imposing lower
reimbursement rates, resulting in our inability to grow revenues at a rate that
equals or exceeds the growth in our cost levels. The downward trend of
reimbursement rates to nursing care operators and the cost pressures previously
described have adversely impacted customers of our ancillary service businesses,
resulting in pricing pressures in those businesses.
During the nine months ended June 30, 2001 and 2000, the Company recorded
charges in connection with the Multicare joint venture restructuring; debt
restructuring, reorganization costs and other charges; and a gain/loss on the
sale of eldercare centers. The following table and discussion provides
additional information on these charges.
2001 2000
---------------------------------------------------------------------------------------------------------
Debt Restructuring and Reorganization Costs:
Professional, bank and other fees $ 28,840,000 $ 16,095,000
Interest Rate Swap Termination - 28,300,000
Employee benefit related costs 8,876,000 -
Stock option redemption program - 7,720,000
Exit costs of terminated businesses 4,904,000 -
---------------------------------------------------------------------------------------------------------
Total debt restructuring and reorganization costs $ 42,620,000 $ 52,115,000
---------------------------------------------------------------------------------------------------------
Other Charges:
Qui tam settlement reserve $ 2,100,000 $ -
Exit costs and write-offs of unrecoverable assets of closed
eldercare centers - 9,200,000
Reserve of trade accounts receivable due from healthcare
providers that filed for chapter 11 protection - 19,000,000
Renegotiated pharmacy contract charge 3,500,000 -
---------------------------------------------------------------------------------------------------------
Total other charges $ 5,600,000 $ 28,200,000
---------------------------------------------------------------------------------------------------------
Total debt restructuring, reorganization costs and other
charges $ 48,220,000 $ 80,315,000
---------------------------------------------------------------------------------------------------------
Gain on sale of an eldercare center $ (1,770,000) $ -
---------------------------------------------------------------------------------------------------------
Loss on sale of eldercare centers $ 2,310,000 $ 7,922,000
---------------------------------------------------------------------------------------------------------
Multicare joint-venture restructuring $ - $ 420,000,000
---------------------------------------------------------------------------------------------------------
During the nine months ended June 30, 2001, we incurred approximately
$42,620,000 of legal, bank, accounting and other costs in connection with our
debt restructuring and the Chapter 11 cases. Of these charges, approximately
$28,840,000 is attributed to professional, bank and other fees and approximately
$8,876,000 pertains to certain salary and benefit related costs, principally for
a court approved special recognition program. In addition, we incurred
approximately $4,904,000 of costs associated with exiting certain terminated
businesses. The Company expects that such debt restructuring, reorganization
costs and other charges will continue at current, and perhaps accelerated,
levels throughout the course of our Chapter 11 cases.
During the nine months ended June 30, 2000, the Company began discussions with
its lenders under the Genesis and Multicare Credit Facilities to revise the
Company's capital structure. During the discussion period, Genesis and Multicare
did not make certain scheduled principal and interest payments under the Genesis
and Multicare Credit Facilities or certain scheduled interest payments under
certain of the Genesis senior subordinated debt agreements. In connection with
the potential debt restructuring, the Company incurred during the nine months
ended June 30, 2000 legal, bank, accounting and other professional fees of
approximately $16,095,000. As a result of the nonpayment of interest under the
Genesis Credit Facility, certain provisions under existing interest rate swap
arrangements with Citibank were triggered. Citibank notified Genesis that they
elected to force early termination of the interest rate swap arrangements, and
asserted a $28,300,000 obligation.
31
During the nine months ended June 30, 2000, the Company recorded a non-cash pre
tax charge of $7,720,000 for a stock option redemption program (the "Redemption
Program") under which current Genesis employees and directors elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan was approved by shareholder vote at the
Company's 2000 Annual Meeting. As a result of the Company's worsening financial
condition and other considerations, the Company determined not to proceed with
the Redemption Program, and therefore the $7,720,000 charge recorded in the
first quarter of fiscal 2000 was subsequently reversed. The elections made by
optionees would have resulted in the redemption of approximately 4,600,000 stock
options in exchange for approximately 4,000,000 shares of Genesis Common Stock.
Certain Debtors of Genesis have agreed to enter into a settlement agreement with
the Department of Justice to resolve four pending qui tam suits filed by private
citizens under the federal False Claims Act. Each action will be dismissed and a
release executed, consistent with the settlement agreement for a total payment
of approximately $2,100,000 (accrued for during the three months ended June 30,
2001). The Genesis Debtors dispute the allegations asserted in these actions,
and the agreement will contain no admission of liability. The settlement
agreement will resolve all claims against the Genesis Debtors in connection with
these suits.
During the nine months ended June 30, 2001, we renegotiated the pharmacy supply
agreement with our principal supplier of pharmacy related products. These
negotiations resulted in more beneficial credit terms and reductions to the
pricing on certain products. In connection with this renegotiation, the company
paid $3,500,000.
During the nine months ended June 30, 2000, the Company decided to close three
underperforming owned eldercare centers with 545 combined beds. As a result, a
charge of approximately $9,200,000 was recorded to account for certain impaired
assets of the three owned eldercare centers.
During the quarter ended June 30, 2000, the Company recorded a charge of
approximately $19,000,000 to reserve certain trade receivables due from
healthcare providers that filed for bankruptcy protection.
In October of 2000, the Company sold an idle 232 bed eldercare center for cash
consideration of approximately $7,000,000, resulting in a net gain of
approximately $1,770,000. In April of 2001, the Company sold an underperforming
121 bed eldercare center for cash consideration of approximately $461,000. The
sale resulted in a net loss of approximately $2,310,000.
Effective May 31, 2000, Multicare sold 14 eldercare centers with 1,128 beds
located in the state of Ohio for approximately $33,000,000. The Company recorded
a loss on sale of the Ohio properties of approximately $7,922,000 for the nine
months ended June 30, 2000.
In connection with the restructuring transaction in the nine months ended June
30, 2000, Genesis recorded a non-cash charge of approximately $420,000,000
representing the estimated cost to terminate the Put in consideration for the
issuance of the Series H Preferred and Series I Preferred. The cost to terminate
the Put was estimated based upon our assessment that no incremental value was
realized by Genesis as a result of the changes in the equity ownership structure
of Multicare brought about by the restructuring of the Multicare joint venture.
Depreciation and amortization expense decreased $7,502,000, principally
attributed to the fourth quarter of fiscal 2000 write-off of impaired goodwill
and property, plant and equipment and the sale, closure or lease terminations of
certain eldercare centers.
32
Lease expense decreased $1,149,000, of which approximately $1,799,000 is
attributed to the sale, closure or lease terminations of certain eldercare
centers, offset by an increase of approximately $914,000 attributed to the
consolidation of two leased eldercare centers in connection with the P&R
Transaction. The remaining increase of approximately $264,000 is attributed to
growth in the cost of a variable rate lease financing facility and scheduled
increases in fixed lease rates; offset by the effects of the ElderTrust
Transactions.
Interest expense decreased $77,848,000. In accordance with SOP 90-7, the Company
ceased accruing interest following the Petition Date on certain long-term debt
instruments classified as liabilities subject to compromise. The Company's
contractual interest expense for the nine months ended June 30, 2001 was
$166,961,000, leaving $74,127,000 of interest expense unaccrued for that period
as a result of the Chapter 11 filings. Contractual interest expense for the nine
months ended June 30, 2001 decreased by $3,721,000 compared to $170,682,000 for
the same period in the prior year. Approximately $16,601,000 of the decrease is
primarily attributed to a lower weighted average borrowing rate and offset by
additional net capital and working capital borrowings under the Genesis DIP
Facility resulting in additional interest expense of approximately $12,880,000.
As a result of the Company's Chapter 11 filings and uncertainties regarding its
ability to generate sufficient taxable income to utilize future net operating
loss carryforwards, the Company recorded a valuation allowance on all
incremental net operating loss carryforward benefits during the nine months
ended June 30, 2001 and consequently, did not report an income tax benefit for
the nine months ended June 30, 2001. The Company reported a $35,968,000 tax
benefit for the nine months ended June 30, 2000.
Equity in net loss of unconsolidated affiliates for the nine months ended June
30, 2001 was $1,219,000 compared to $1,928,000 for the comparable period in the
prior year, which is attributed to changes in the earnings / losses reported by
the Company's unconsolidated affiliates, as well as the P&R Transaction.
Minority interest decreased $16,931,000 during the nine months ended June 30,
2001 to $8,292,000 compared to $25,223,000 for the comparable period in the
prior year. This decrease is principally attributed to a lower net loss reported
by Multicare and the resulting Genesis' Multicare joint venture partners' 56.4%
interest in the Multicare net loss for the period. The Multicare net loss was
reduced during the nine months ended June 30, 2001 compared to the comparable
period in the prior year, principally due to lower interest expense recognition
under SOP 90-7.
Effective October 1, 1999, Genesis adopted the provisions of the American
Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be
expensed as incurred. For the nine months ended June 30, 2000, the cumulative
effect of expensing all unamortized start-up costs at October 1, 1999 was
$16,400,000 pre tax and $10,412,000 after tax.
Preferred stock dividends increased $3,027,000 to $34,124,000 during the nine
months ended June 30, 2001 compared to $31,097,000 for the comparable period in
the prior year. This increase is attributed to a full nine months of accrued
dividends for the nine months ended June 30, 2001, in connection with the
issuance of Series H and Series I Preferred Stock in mid-November, 1999, offset
partially by there being one additional day in the nine months ended June 30,
2000 due to a leap year.
33
Liquidity and Capital Resources
Chapter 11 Bankruptcy and Debtor-In-Possession Financing
On June 22, 2000 (the "Petition Date"), the Company and substantially all of its
subsidiaries and affiliates, filed voluntary petitions in the United States
Bankruptcy Court for the District of Delaware under the Bankruptcy Code. While
this action constituted a default under the Company's and such subsidiaries and
affiliates various financing arrangements, Section 362(a) of the Bankruptcy Code
imposes an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by the Company and
those of its subsidiaries and affiliates which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code and (excluding Multicare
and its direct and indirect subsidiaries), b) authorization for Genesis to enter
into a secured debtor-in-possession revolving credit facility with a group of
banks led by Mellon Bank, N. A., (the "Genesis DIP Facility") and authorizing
advances in the interim period of up to $150,000,000 out of a possible
$250,000,000 facility. On July 18, 2000, the Bankruptcy Court entered the Final
Order approving the $250,000,000 Genesis DIP Facility and permitting full usage
thereunder. Usage under the Genesis DIP Facility is subject to a Borrowing Base
which provides for maximum borrowings (subject to the $250,000,000 commitment
limit) by the Company equal to the sum of (i) up to 90% of outstanding eligible
accounts receivable, as defined and (ii) up to $175,000,000 against real
property. The Genesis DIP Facility, which is classified as a current liability,
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the Eurodollar ("LIBO") Rate plus 3.75%. Proceeds of the
Genesis DIP Facility are available for general working capital purposes and as a
condition of the loan, were required to refinance the $40,000,000 outstanding
under the Company's prepetition priority Tranche II sub-facility. Additionally,
$44,000,000 of proceeds were used to satisfy all unpaid interest and rent
obligations to the senior secured creditors under the Fourth Amended and
Restated Credit Agreement dated August 20, 1999 and the Synthetic Lease dated
October 7, 1996 as adequate protection for any diminution in value of the
prepetition senior secured lenders in these facilities, respectively. The
Company will continue to pay interest and rent pursuant to these agreements as
adequate protection. Interest is accrued and paid at the Prime Rate as announced
by the administrative agent, or the applicable Adjusted LIBO Rate plus, in
either event, a margin that is dependent upon a certain financial ratio test. As
of June 30, 2001 borrowings outstanding under the Genesis DIP Facility were
$194,000,000.
On June 29, 2001, the Genesis DIP Facility was amended to, among other things,
provide for a $40,000,000 increase in the borrowing limits, thereby increasing
the commitment limit to $290,000,000. Except in certain limited circumstances,
the amended Genesis DIP Facility restricts the use of such increase to finance
the purchase of the certain assets. The Bankruptcy Court granted approval for
the amendment to the Genesis DIP Facility, and the payment of an amendment fee
related thereto. Through August 10, 2001, borrowings outstanding under the
Genesis DIP Facility were $212,000,000. The Genesis DIP Facility provides for
the issuance of up to $25,000,000 in standby letters of credit. Through August
10, 2001, there were $2,451,000 in letters of credit issued thereunder, for a
total utilization under the Genesis DIP Facility of $214,451,000.
Pursuant to the agreement, the Company and each of its subsidiaries named as
borrowers or guarantors under the Genesis DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Genesis DIP Facility) in all unencumbered pre- and post-
petition property of the Company. The Genesis DIP Facility also has priority
over the liens on all collateral pledged under (i) the Genesis Credit Facility,
(ii) the Synthetic Lease dated October 7, 1996 and (iii) other obligations
covered by the Collateral Agency Agreement, including any Swap Agreement, which
collateral includes, but is not limited to, all personal property, including
bank accounts and investment property, accounts receivable, inventory,
equipment, and general intangibles, substantially all fee owned real property,
and the capital stock of Genesis and its borrower and guarantor subsidiaries.
34
The Genesis DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Genesis DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to Minimum EBITDA, occupancy and Genesis DIP Facility usage amounts and
maximum capital expenditures. The breach of any such provisions, to the extent
not waived or cured within any applicable grace or cure periods, could result in
the Company's inability to obtain further advances under the Genesis DIP
Facility and the potential exercise of remedies by the Genesis DIP Facility
lenders (without regard to the automatic stay unless reimposed by the Bankruptcy
Court) which could materially impair the ability of the Company to successfully
reorganize under Chapter 11.
On February 14, 2001, Genesis received a waiver from its lenders (the "Genesis
DIP Lenders") under the Genesis DIP Facility for any event of default regarding
certain financial covenants relating to Minimum EBITDA that may have resulted
from asset impairment and other non-recurring charges recorded by Genesis in the
fourth quarter of Fiscal 2000. The waiver concerning the Minimum EBITDA covenant
requirements extended through December 31, 2000. In addition, Genesis received
certain amendments to the Genesis DIP Facility, including an amendment that
makes the Minimum EBITDA covenant less restrictive in future periods (the
"Genesis EBITDA Amendment"). On April 4, 2001, the Bankruptcy Court granted
approval for the payment of an amendment fee related thereto.
Following the Petition Date, Genesis continues to pay interest on approximately
$1,100,000,000 of certain prepetition senior long term debt obligations, which
has, in part, resulted in Genesis' active borrowing under the Genesis DIP
Facility. An event of default and any related borrowing restrictions placed
under the Genesis DIP Facility could have a material adverse effect on the
financial position of Genesis, resulting in factors, including, but not limited
to, Genesis' inability to:
o continue funding prepetition senior long term debt interest
obligations, which could be disruptive to ongoing
reorganization negotiations;
o extend required letters of credit in the ordinary course of
business;
o fund capital and working capital requirements; and
o successfully reorganize.
On June 22, 2000, Multicare and substantially all of its affiliates, filed
voluntary petitions in the United States Bankruptcy Court for the District of
Delaware under the Bankruptcy Code. While this action constituted a default
under Multicare's and such affiliates various financing arrangements, Section
362(a) of the Bankruptcy Code imposes an automatic stay that generally precludes
creditors and other interested parties under such arrangements from taking any
remedial action in response to any such resulting default without prior
Bankruptcy Court approval. Among the orders entered by the Bankruptcy Court on
June 23, 2000 were orders approving on an interim basis, a) the use of cash
collateral by Multicare and those of its affiliates which had filed petitions
for reorganization under Chapter 11 of the Bankruptcy Code and (b) authorization
for Multicare to enter into a secured debtor-in-possession revolving credit
facility with a group of banks led by Mellon Bank, N. A., (the "Multicare DIP
Facility") and authorizing advances in the interim period of up to $30,000,000
out of a possible $50,000,000. On July 18, 2000, the Bankruptcy Court entered
the Final Order approving the $50,000,000 Multicare DIP Facility and permitting
full usage thereunder. Usage under the Multicare DIP Facility is subject to a
Borrowing Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable, as defined, and a real estate component. The Multicare DIP Facility
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP
Facility are available for general working capital purposes. Through August 7,
2001, there has been no usage under the Multicare DIP Facility, other than for
standby letters of credit. The Multicare DIP Facility provides for the issuance
of up to $20,000,000 in standby letters of credit. Through August 7, 2001 there
was $1,479,000 in letters of credit issued thereunder.
Multicare discontinued paying interest on virtually all of its prepetition long
term debt obligations following the Petition Date, which has, in part, resulted
in Multicare's ability to fund capital and working capital needs through
operations without borrowing under the Multicare DIP Facility.
35
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare or Genesis as a result of this event. In July 2001,
the Company notified the Multicare DIP Lenders that the Company desired to
reduce the Multicare DIP Facility commitment limit to $10,000,000 from
$50,000,000. Additionally, the Company may notify the Multicare DIP Lenders
to terminate the Multicare DIP Facility as there are no borrowings expected to
be drawn against the Multicare DIP Facility.
Under the Bankruptcy Code, actions to collect prepetition indebtedness are
enjoined and other contractual obligations generally may not be enforced against
the Company. In addition, the Company may reject executory contracts and lease
obligations. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. If the Company
is able to successfully reorganize, substantially all unsecured liabilities as
of the petition date would be subject to modification under a plan of
reorganization to be voted upon by all impaired classes of creditors and equity
security holders and approved by the Bankruptcy Court.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain prepetition wages, salaries, benefits and other employee
obligations, as well as to continue in place the Debtors' various employee
compensation programs and procedures. On that date, the Bankruptcy Court also
authorized the Debtors to pay, among other claims, the prepetition claims of
certain critical vendors and patients. All other unsecured prepetition
liabilities are classified in the consolidated balance sheet as liabilities
subject to compromise. The Debtors intend to remain in possession of their
assets and continue in the management and operation of their properties and
businesses, and to pay the post-petition claims of their various vendors and
providers in the ordinary course of business.
On or about May 14, 2001, the official committee of Multicare unsecured
creditors (the "Multicare Creditors' Committee") appointed in the Multicare
Chapter 11 cases filed a motion (the "Trustee Motion") with the Bankruptcy Court
requesting entry of an order directing the appointment of a trustee in the
Multicare cases. The Debtors and the Multicare Creditors' Committee reached an
agreement concerning the terms of the plan and, as part of the agreement, the
Multicare Creditors' Committee withdrew the Trustee Motion.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of June 30, 2001 and
September 30, 2000 follows (in thousands):
June 30, September 30,
2001 2000
---------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $1,484,904 $1,483,898
Senior subordinated notes 616,643 616,488
Revenue bonds and other indebtedness 128,639 156,937
---------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $2,230,186 $2,257,323
---------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 64,897 67,574
Accrued interest (including a $28,331 swap
termination fee) 87,471 86,855
Accrued preferred stock dividends on Series G
Preferred Stock 49,671 34,921
---------------------------------------------------------------------------------------------------------
$2,432,225 $2,446,673
---------------------------------------------------------------------------------------------------------
36
Genesis has managed Multicare pursuant to certain management services agreements
since 1997. Those agreements were negotiated with the majority owners of
Multicare at that time. As of the Petition Date, approximately $36,000,000 in
deferred fees under the management services agreements, and approximately
$57,000,000 on account of pharmacy, rehabilitation, and other ancillary services
provided by Genesis to the Multicare Debtors remained outstanding. Following the
Petition Date, the Multicare Debtors reviewed and evaluated these claims and
their defenses thereto, as well as certain claims that the Multicare Debtors may
have against the Genesis Debtors. After consideration of the merits of the
claims between the Multicare Debtors and Genesis, and after a series of
settlement discussions and negotiations between the parties, a settlement
agreement (the "Genesis/Multicare Settlement") was reached whereby each side
shall set off their claims against one another and waive and release any and all
claims against one another that they may have. The Company will seek approval of
the Genesis / Multicare Settlement in connection with confirmation of the Plan.
A summary of the principal categories of debt restructuring and reorganization
costs follows (in thousands):
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs:
Legal, accounting, bank and consulting fees $ 10,628 $ 11,102 $ 28,840 $ 16,095
Exit costs of terminated businesses 4,264 - 4,904 -
Employee benefit related costs 3,022 - 8,876 -
Interest rate swap termination - - - 28,300
Stock option redemption plan - - - 7,720
----------------------------------------------------------------------------------------------------------
$ 17,914 $ 11,102 $ 42,620 $ 52,115
----------------------------------------------------------------------------------------------------------
General Operations
At June 30, 2001, the Company reported working capital of $282,787,000 as
compared to working capital of $304,241,000 at September 30, 2000. Genesis' cash
flow from operations for the nine months ended June 30, 2001 was a use of cash
of $15,536,000 compared to a use of cash of $101,199,000 for the nine months
ended June 30, 2000. The improvement of operating cash flows is principally due
to operational growth, improved receivable collections and the timing of
payments to vendors and employees, offset by payments made during the nine
months ended June 30, 2001 of approximately $35,070,000 for debt restructuring
and reorganization costs. The Company's days sales outstanding for the three
months ended June 30, 2001 was unchanged at 64 days compared to the three months
ended March 31, 2001. The Company's cash balance at June 30, 2001 was
approximately $33,853,000 ($33,853,000 held by Multicare and $0 held by
Genesis). As a result of certain restrictions placed on Multicare and Genesis by
their respective senior credit agreements and the automatic stay provisions
imposed by the Bankruptcy Court, Genesis and Multicare are precluded from freely
transferring funds through intercompany loans, advances or cash dividends.
Consequently, the $33,853,000 of cash held by Multicare at June 30, 2001 is not
available to Genesis.
At June 30, 2001, the Company reported restricted investments in marketable
securities of $44,529,000, which are held by Liberty Health Corp. LTD. ("LHC"),
Genesis' wholly-owned captive insurance subsidiary incorporated under the laws
of Bermuda. The investments held by LHC are restricted by statutory capital
requirements in Bermuda. In addition, certain of these investments are pledged
as security for letters of credit issued by LHC. As a result of such
restrictions and encumbrances, Genesis and LHC are precluded from freely
transferring funds through intercompany loans, advances or cash dividends. LHC
is not a party to the Chapter 11 cases.
Investing activities for the nine months ended June 30, 2001 include
approximately $32,530,000 of capital expenditures compared to approximately
$40,006,000 for the comparable period of the prior year. Capital expenditures
consist primarily of betterments and expansion of eldercare centers and
investments in data processing hardware and software. In order to maintain our
physical properties in a suitable condition to conduct our business and meet
regulatory requirements, the Company expects to continue to incur capital
expenditure costs at levels at or above those for the nine months ended June 30,
2001 for the foreseeable future. Cash flows provided by investing activities for
the nine months ended June 30, 2001 and 2000 include approximately $7,010,000
and $33,000,000, respectively, of cash proceeds from the sale of eldercare
centers.
37
Financing activities for the nine months ended June 30, 2001 include net
borrowings of $61,000,000 under the Genesis DIP Facility.
The Company incurred approximately $42,620,000 of debt restructuring and
reorganization costs for the nine months ended June 30, 2001. The Company
anticipates that such costs will be incurred throughout the duration of the
bankruptcy.
The Company has prepetition long-term debt obligations of approximately
$2,230,186,000 at June 30, 2001, which are classified as liabilities subject to
compromise. Due to the failure to make required debt service payments, meet
certain financial covenants and the commencement of the Chapter 11 cases, the
Company is in default under substantially all of the related debt agreements.
The automatic stay protection afforded by the Chapter 11 cases prevents any
action from being taken with regard to any of the defaults under the prepetition
debt agreements. The Company continues to pay interest on approximately
$1,060,794,000 of the prepetition debt obligations as adequate protection.
For the nine months ended June 30, 2001, the Company incurred approximately
$27,525,000 of lease obligation costs and expects to continue to incur lease
costs at levels approximating those for the nine months ended June 30, 2001 for
the foreseeable future.
The Company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the Genesis DIP Facility and
future financing agreements and the ability to generate sufficient cash from
operations and financing arrangements to meet obligations. There can be no
assurances the Company will be successful in achieving a confirmed plan of
reorganization, future profitable operations, compliance with the terms of the
Genesis DIP Facility and sufficient cash flows from operations and financing
arrangements to meet obligations.
Although management believes that cash flow from operations, coupled with
available borrowings under the DIP Facilities will be sufficient to fund the
Company's working capital requirements throughout the bankruptcy proceedings,
there can be no assurances that such capital resources will be sufficient to
fund operations until such time as the Company is able to achieve a plan of
reorganization that will be acceptable to creditors and confirmed by the
Bankruptcy Court.
Genesis and Multicare have contemplated and are planning for emergence from
bankruptcy. The Plan requires that certain administrative claims and any amounts
outstanding under the Genesis DIP Facility and the Multicare DIP Facility be
paid on the effective date of such emergence. In addition, the reorganized
Genesis will require both working capital financing and financing for its
potential acquisitions. On June 21, 2001, Genesis and Multicare filed a motion
with and received authorization from the Bankruptcy Court to (1) enter into an
exit financing facility commitment letter and certain fee letters with a
syndicate of lenders, and (2) make payments for fees and expenses related
thereto. The exit financing of $415,000,000 will consist of the following
facilities: (1) a $125,000,000 revolving line of credit; (2) a $235,000,000 term
loan; and (3) a $55,000,000 delayed draw term loan, (collectively the "Exit
Financing Facility"). The Exit Financing Facility will bear interest at a
variable base rate plus a margin or LIBOR plus a margin.
Insurance
The Company continues to experience an adverse effect on operating cash flow due
to an increase in the cost of certain of its insurance programs and the timing
of funding new policies. Rising costs of eldercare malpractice litigation
involving nursing care operators and losses stemming from these malpractice
lawsuits have caused many insurance providers to raise the cost of insurance
premiums or refuse to write insurance policies for nursing homes. Accordingly,
the costs of general and professional liability and property insurance premiums
continue to rise.
38
Prior to June 1, 2000, the Company purchased general and professional liability
insurance coverage ("GL/PL") from various commercial insurers on a first dollar
coverage basis. Beginning with the June 1, 2000 policy, the Company purchased
GL/PL coverage from a commercial insurer subject to a per claim retention. As of
June 1, 2001, the self insured retention increased from $500,000 per claim to
$750,000 for all states except in Florida, where the retention remains
$2,500,000 per claim. On an annual basis, the cost of insurance has increased by
approximately $1,200,000, for the policy year ending June 1, 2002 as compared to
the policy year ended June 1, 2001.
LHC, the Company's wholly owned captive insurance subsidiary, provides
reinsurance for the Company and others. LHC has, or is currently, reinsuring
certain windstorm, workers' compensation and GL/PL retentions. The Company,
based on independent actuarial studies, believes that LHC's reserves are
sufficient to meet their obligations. LHC continues to operate as a going
concern, and has been excluded from the Company's Chapter 11 cases.
The Company provides several health insurance options to its employees. Prior to
Fiscal 1999, the Company offered a self-insured 80/20 indemnity plan (the "80/20
Plan") and several fully insured HMO's. In late Fiscal 1999, a new self insured
indemnity plan (the "Choice Plan") was developed and made available to a limited
number of employees. The Choice Plan became available to all employees in
January 2000. The Choice Plan enabled employees to take advantage of much lower
co-pays that were competitive with HMO co-pays, while still allowing them to go
to any provider in the 80/20 Plan preferred provider organization. In Fiscal
2000, the medical and pharmacy utilization levels under the Choice Plan and the
80/20 Plan were greater than the Company anticipated, resulting in additional
health insurance costs of approximately $28,000,000. Effective April 1, 2001,
the Choice Plan was eliminated from the Company's benefit program and employee
co-pays for prescriptions were increased.
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care facilities which
utilize our specialty medical services. The healthcare industry is experiencing
the effects of the federal and state governments' trend toward cost containment,
as government and other third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers.
These cost containment measures, combined with the increasing influence of
managed care payors and competition for patients, have resulted in reduced rates
of reimbursement for services provided by the Company.
Congress has enacted three major laws during the past five years that have
significantly altered payment for nursing home and medical ancillary services.
The Balanced Budget Act of 1997 ("the 1997 Act"), signed into law on August 5,
1997, reduced federal spending on the Medicare and Medicaid programs. As
implemented by the Centers for Medicare and Medicaid Services ("CMS"), formerly
the Health Care Financing Administration ("HCFA"), the 1997 Act has had an
adverse impact on the Medicare revenues of many skilled nursing facilities.
There have been three primary problems with the 1997 Act. First, the base year
calculations understate costs. Second, the market basket index used to trend
payments forward does not adequately reflect market experience. Third, the RUGs
case mix allocation is not adequately predictive of the costs of care for
patients, and does not equitably allocate funding, especially for non-therapy
ancillary services. The Medicare Balanced Budget Refinement Act ("BBRA"),
enacted in November 1999 addressed a number of the funding difficulties caused
by the 1997 Act. A second enactment, the Benefits Improvement and Protection Act
of 2000 ("BIPA"), was enacted on December 15, 2000, further modifying the law
and restoring additional funding.
39
The reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by CMS 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 our institutional pharmacy and medical supply operation
("NeighborCare(R)") to charge Medicaid no more than its lowest charge to other
consumers in the state. During 2000, Federal Medicaid requirements establishing
payment caps on certain drugs were revised ("Federal Upper Limits"). The final
rule relating to Federal Upper Limits was substantially modified, reducing the
impact of the new rules on NeighborCare operations. It is our understanding that
CMS will consider another iteration of generic drug price revisions before the
end of 2001. It is too soon to predict the potential impact of such changes.
Pharmacy coverage and cost containment are important policy debates at both the
Federal and state levels. Congress has considered proposals to expand Medicare
coverage for outpatient pharmacy services. Enactment of such legislation could
affect institutional pharmacy services. Likewise, a number of states have
proposed cost containment initiatives pending. Changes in payment formulas and
delivery requirements could impact NeighborCare. Recently the President
announced a plan for discount purchasing of prescription drugs for Medicare
beneficiaries. Details of the plan are just coming public. Implementation could
affect institutional pharmacy services.
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.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that any
future healthcare legislation will not adversely affect the Company's business.
There can be no assurance that payments under governmental and private third
party payor programs will be timely, will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs. The Company's
financial condition and results of operations may be affected by the
reimbursement process, which in the Company's industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled.
Certain service contracts permit our NeighborCare pharmacy operations to provide
services to HCR Manor Care constituting approximately eleven percent and four
percent of the net revenues of NeighborCare and Genesis, respectively. These
service contracts with HCR Manor Care are the subject of certain litigation. See
"Legal Proceedings".
NeighborCare pharmacy operations provide services to Mariner Post-Acute Network,
Inc. and Mariner Health Group, Inc. (collectively, "Mariner") under certain
service contracts. On January 18, 2000, Mariner filed voluntary petitions under
Chapter 11 with the Bankruptcy Court. To date, the service contracts with
Mariner have been honored; however, Mariner has certain rights under the
protection of the Bankruptcy Court to reject these contracts, which represent
six percent and two percent of the net revenues of NeighborCare and Genesis,
respectively. Genesis participates as a member of the official Mariner unsecured
creditors committee.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997
Balanced Budget Act, the Balanced Budget Refinement Act and the Benefits
Improvement Protection Act of 2000 has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs which has adversely impacted the
Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Within the statutory framework
of the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings and interpretations which may further affect payments
made under those programs. Further, the federal and state governments may reduce
the funds available under those programs in the future or require more stringent
utilization and quality reviews of eldercare centers or other providers. There
can be no assurances that adjustments from Medicare or Medicaid audits will not
have a material adverse effect on us.
40
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. Following this pronouncement, it has become
more difficult for nursing facilities to maintain licensing and certification.
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.
The Company faces additional federal requirements that mandate major changes in
the transmission and retention of health information. The Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") was enacted to ensure,
first, that employees can retain and at times transfer their health insurance
when they change jobs, and secondly, to simplify health care administrative
processes. This simplification includes expanded protection of the privacy and
security of personal medical data and requires for the adoption of standards for
the exchange of electronic health information. Among the standards that the
Department of Health and Human Services will adopt pursuant to HIPAA are
standards for the following: electronic transactions and code sets; unique
identifiers for providers, employers, health plans and individuals; security and
electronic signatures; privacy; and enforcement.
Although HIPAA was intended to ultimately reduce administrative expenses and
burdens faced within the healthcare industry, the Company believes that
implementation of this law will result in significant costs. The Company has
approximately two years to comply with the regulation. The Company has
established a HIPAA task force consisting of both clinical and information
services professionals focused on HIPAA compliance. The Company has estimated
the cost over the next twelve months to be approximately $765,000 and has not
yet quantified the cost to future periods.
On December 15, 2000, Congress passed the Benefit Improvement and Protection Act
of 2000 that, among other provisions, increases the nursing component of Federal
PPS rates by approximately 16.7% for the period from April 1, 2001 through
September 30, 2002. The legislation will also change the 20% add-on to 3 of the
14 rehabilitation RUG categories to a 6.7% add-on to all 14 rehabilitation RUG
categories beginning April 1, 2001. The Part B consolidated billing provision of
BBRA will be repealed except for Medicare Part B therapy services and, the
moratorium on the $1,500 therapy caps will be extended through calendar year
2002. Final fiscal year 2002 rules for skilled nursing facilities under PPS were
issued July 31, 2001. The final rules were in line with expectations.
PPS and other existing and future legislation and regulation have already, and
may in the future, adversely affect our pharmacy and medical supply revenue, and
other specialty medial services.
Seasonality
Our earnings generally fluctuate from quarter to quarter. This seasonality is
related to a combination of factors which include the timing of Medicaid rate
increases, seasonal census cycles, and the number of calendar days in a given
quarter.
41
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 2001, the Company had $1,678,904,000 of debt subject to variable
market rates of interest, of which $1,484,904,000 is classified as a liability
subject to compromise as a result of our Chapter 11 filings. Genesis continues
to accrue and pay interest on approximately $1,254,794,000 of Genesis' variable
rate debt. Multicare, as a result of its Chapter 11 cases, ceased accruing and
paying interest on all of its variable rate debt following the Petition Date. At
June 30, 2001, Genesis and Multicare have no interest rate swap agreements
outstanding to manage exposure to increases in market rates of interest.
42
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Genesis and Vitalink Actions Against HCR Manor Care
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink
Pharmacy Services (d/b/a NeighborCare(R)), a subsidiary of
Genesis, filed multiple lawsuits requesting injunctive relief
and compensatory damages against HCR Manor Care, Inc. ("HCR
Manor Care"), two of its subsidiaries and two of its
principals. The lawsuits arise from HCR Manor Care's
threatened termination of long-term pharmacy services
contracts effective June 1, 1999. Vitalink filed a complaint
against HCR Manor Care and two of its subsidiaries in
Baltimore City, Maryland circuit court (the "Maryland State
Court Action"). Genesis filed a complaint against HCR Manor
Care, a subsidiary, and two of its principals in federal
district court in Delaware including, among other counts,
securities fraud (the "Delaware Federal Action"). Vitalink
has also instituted an arbitration action before the American
Arbitration Association (the "Arbitration"). In these
actions, Vitalink is seeking a declaration that it has a
right to provide pharmacy, infusion therapy and related
services to all of HCR Manor Care's facilities and a
declaration that HCR Manor Care's threatened termination of
the long-term pharmacy service contracts was unlawful.
Genesis and Vitalink also seek over $100,000,000 in
compensatory damages and enforcement of a 10-year
non-competition clause.
Genesis acquired Vitalink from Manor Care in August 1998. In
1991, Vitalink and Manor Care had entered into long-term
master pharmacy, infusion therapy and related agreements
which gave Vitalink the right to provide pharmacy services to
all facilities owned or licensed by Manor Care and its
affiliates. On July 10, 1998, Manor Care advised Vitalink and
Genesis that Manor Care would not provide notice of
non-renewal of the master service agreements; accordingly the
terms of the pharmacy service agreements were extended to
September 2004. Under the master service agreements, Genesis
and Vitalink receive revenues at the rate of approximately
$107,000,000 per year.
By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Action relating to the
master service agreements with the Arbitration matter.
Accordingly, on May 25, 1999, the Maryland State Court Action
was dismissed voluntarily. Until such time as a final
decision is rendered in said Arbitration, or by the
Bankruptcy Court, as appropriate, the parties have agreed to
maintain the master service agreements in full force and
effect.
HCR Manor Care and its subsidiaries have pleaded
counterclaims in the Arbitration seeking damages for
Vitalink's alleged overbilling for products and services
provided to HCR Manor Care, a declaration that HCR Manor Care
had the right to terminate the master service agreements, and
a declaration that Vitalink does not have the right to
provide pharmacy, infusion therapy and related services to
facilities owned by HCR prior to its merger with Manor Care.
According to an expert report submitted by HCR Manor Care on
May 8, 2000, HCR Manor Care is seeking $17,800,000 in
compensatory damages for alleged overbilling by Vitalink
between September 1, 1998 and March 31, 2000.
43
On January 14, 2000, HCR Manor Care moved to dismiss
Vitalink's claims in the Arbitration that it has a right to
provide pharmacy and related services to the HCR Manor Care
facilities not previously under the control of Manor Care. On
May 17, 2000, the Arbitrator ordered the dismissal of
Vitalink's claims seeking a declaratory judgment and
injunctive relief for denial of Vitalink's right to service
the additional HCR Manor Care facilities, but sustained
Vitalink's claim seeking compensatory damages against HCR
Manor Care for denial of that right.
Trial in the arbitration was originally scheduled to begin on
June 12, 2000. On May 23, 2000, however, the Arbitrator
postponed the trial indefinitely due to Vitalink's potential
bankruptcy filing. In connection with this stay, the parties
agreed that HCR Manor Care may pay, on an interim basis,
NeighborCare 90 percent of the face amount of all invoices
for pharmaceutical and infusion therapy goods and services
that NeighborCare renders to respondents under the Master
Service Agreements. The remaining 10 percent must be held in
a segregated account by Manor Care. After Genesis and its
affiliates, including Vitalink, filed voluntary petitions for
restructuring under Chapter 11 of the Bankruptcy Code on June
22, 2000, the Arbitration was automatically stayed pursuant
to 11 U.S.C. ss. 362(a).
On August 1, 2000, HCR Manor Care moved to lift the automatic
stay and compel arbitration. On September 5, 2000, the
Bankruptcy Court denied that motion, with leave to refile in
90 days. On December 8, 2000, Manor Care renewed its motion
to lift the stay in the arbitration. On January 16, 2001,
Genesis filed a motion to assume the master service
agreements asserting that the determination of the Bankruptcy
Court will supersede a significant number of issues in the
Arbitration. On February 6, 2001, the Bankruptcy Court
granted Manor Care's renewed motion to lift the stay in the
Arbitration, and postponed consideration of Genesis' motion
to assume the master service agreements until after the
Arbitration is completed. The arbitration commenced July 30,
2001 and is ongoing.
On June 29, 1999, defendants moved to dismiss or stay
Genesis' securities fraud complaint filed in the Delaware
Federal Action. On March 22, 2000, HCR Manor Care's motion
was denied with respect to its motion to dismiss the
complaint, but was granted to the extent that the action was
stayed pending a decision in the Arbitration. Accordingly,
Genesis still maintains the Delaware Federal Action. As a
result of Genesis' Chapter 11 filing, this action is also
automatically stayed pursuant to 11 U.S.C. ss. 362(a).
The Vitalink Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel,
filed an additional complaint against Omnicare, Inc.
("Omnicare") and Heartland Healthcare Services (a joint
venture between Omnicare and HCR Manor Care) seeking
injunctive relief and compensatory and punitive damages. The
complaint includes counts for tortious interference with
Vitalink's contractual rights under its exclusive long-term
service contracts with HCR Manor Care. On November 12, 1999,
in response to a motion filed by the defendants, that action
was stayed pending a decision in the Arbitration.
44
The HCR Manor Care Action Against Genesis in Delaware
On August 27, 1999, Manor Care Inc., a wholly owned
subsidiary of HCR Manor Care Inc., filed a lawsuit against
Genesis in federal district court in Delaware based upon
Section 11 and Section 12 of the Securities Act. Manor Care
Inc. alleges that in connection with the sale of the Genesis
Series G Preferred Stock issued as part of the purchase price
to acquire Vitalink, Genesis failed to disclose or made
misrepresentations related to the effects of the conversion
to the prospective payment system on Genesis' earnings, the
restructuring of the Genesis ElderCare Corp. Joint Venture,
the impact of the operations of Genesis' Multicare affiliate
on Genesis' earnings, the status of Genesis' labor relations,
Genesis' ability to declare dividends on the Series G
Preferred Stock, the value of the conversion right attached
to the Series G Preferred Stock, and information relating to
the ratio of combined fixed charges and preference dividends
to earnings. Manor Care, Inc. seeks, among other things,
compensatory damages and rescission of the purchase of the
Series G Preferred Stock.
On November 23, 1999, Genesis moved to dismiss this action on
the grounds, among others, that Manor Care's complaint failed
to plead fraud with particularity. On September 29, 2000, the
Court granted that motion in part and denied it in part.
Specifically, the Court dismissed all of defendants'
allegations except those concerning the Company's labor
relations and the ratio of combined fixed charges and
preference dividends to earnings.
On January 18, 2000, Genesis moved to consolidate this action
with the action brought against HCR Manor Care in Delaware
federal court. That motion has been fully submitted and is
awaiting decision. As a result of Genesis' Chapter 11 filing,
this action is also automatically stayed pursuant to 11
U.S.C. ss. 362(a).
The HCR Manor Care Action Against Genesis in Ohio
On December 22, 1999, Manor Care filed a lawsuit against
Genesis and others in the United States District Court for
the Northern District of Ohio. Manor Care alleges, among
other things, that the Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred") and Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock (the "Series I
Preferred") were issued in violation of the terms of the
Series G Preferred and the Rights Agreement dated as of April
26, 1998 between Genesis and Manor Care. Manor Care seeks,
among other things, damages and rescission or cancellation of
the Series H and Series I Preferred. On February 29, 2000,
Genesis moved to dismiss this action on the ground, among
others, that Manor Care's complaint failed to state a cause
of action. This motion has been fully submitted, including
supplemental briefing by both parties, and is awaiting
decision. As a result of Genesis' Chapter 11 filing, this
action is also automatically stayed pursuant to 11 U.S.C. ss.
362(a).
Genesis is not able to predict the results of such
litigation. However, if the outcome is unfavorable to us, and
the claims of HCR Manor Care are upheld, such results would
have a material adverse effect on our financial position. See
"Cautionary Statement Regarding Forward-Looking Statements"
and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources - Revenue Sources."
45
Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities
On June 22, 2000, the Company and certain of its subsidiaries
and affiliates filed voluntary petitions with the United
States Bankruptcy Court for the District of Delaware to
reorganize their capital structure under Chapter 11 of the
United States Bankruptcy Code. As a result of the Chapter 11
cases, no principal or interest payments will be made on
certain indebtedness incurred by the Company prior to June 22,
2000, including, among others, senior subordinated notes,
until a plan of reorganization defining the payment terms has
been approved by the Bankruptcy Court.
Multicare is currently in default of certain financial
covenant requirements of the Multicare DIP Facility. The
Company does not intend to cure or seek waivers for this event
of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance
of standby letters of credit. To date, cash provided from
Multicare operating activities has been sufficient to fund
working capital and capital requirements. In addition, at June
30, 2001, Multicare held over $33,000,000 of cash and cash
equivalents. In light of these factors, the Company does not
believe there is any significant impact or risk to Multicare
or Genesis as a result of this event. In July 2001, the
Company notified the Multicare DIP Lenders that the Company
desired to reduce the Multicare DIP Facility commitment limit
to $10,000,000 from $50,000,000. Additionally, the Company may
notify the Multicare DIP Lenders to terminate the Multicare
DIP Facility as there are no borrowings expected to be drawn
against the Multicare DIP Facility.
Additional information regarding the Chapter 11 cases is set
forth elsewhere in this Form 10-Q, including Note 2 to the
Unaudited Condensed Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Amended Disclosure Statement for Debtors'
Joint Plan of Reorganization dated July 6,
2001.
2.2 Amended Debtors' Joint Plan of
Reorganization under Chapter 11 of the
Bankruptcy Code dated July 6, 2001.
99.1 Third Amendment, dated as of June 29, 2001,
to the Revolving Credit and Guaranty
Agreement, dated as of June 22, 2000 among
Genesis Health Ventures, Inc. and certain of
its lenders.
(b) Reports on Form 8-K
On June 19, 2001 the Company filed a Report on Form
8-K reporting that Genesis Health Ventures, Inc. and
The Multicare Companies, Inc. filed a joint plan of
reorganization in the U.S. Bankruptcy Court for the
District of Delaware on June 5, 2001. The Report on
Form 8-K does not include financial statements.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: August 14, 2001 /s/ James V. McKeon
----------------------------------------------
James V. McKeon
Senior Vice President and Corporate Controller
47