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0000950116-02-002865.txt : 20021230
0000950116-02-002865.hdr.sgml : 20021230
20021230132910
ACCESSION NUMBER: 0000950116-02-002865
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20020930
FILED AS OF DATE: 20021230
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GENESIS HEALTH VENTURES INC /PA
CENTRAL INDEX KEY: 0000874265
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051]
IRS NUMBER: 061132947
STATE OF INCORPORATION: PA
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-33217
FILM NUMBER: 02871430
BUSINESS ADDRESS:
STREET 1: 101 EAST STATE STREET
CITY: KENNETT SQUARE
STATE: PA
ZIP: 19348
BUSINESS PHONE: 6104446350
MAIL ADDRESS:
STREET 1: 101 EAST STATE STREET
CITY: KENNETT SQUARE
STATE: PA
ZIP: 19348
10-K
1
ten-k.htm
10-K
Prepared and filed by St Ives Burrups
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
![](tickedbox.gif) |
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 2002 |
OR
![](emptybox.gif) |
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 0-33217
GENESIS HEALTH VENTURES, INC.
(Exact name of Registrant
as specified in its charter)
Pennsylvania
(State or other jurisdiction ofincorporation
or organization) |
101 East State Street
Kennett Square, PA 19348
(Address of principal executive
offices including zip code) |
06-1132947
(I.R.S. Employer
Identification Number) |
(610) 444-6350
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act:
NONE
Securities registered pursuant to
Section 12(g) of the Act:
Title of each class
Common Stock, par value $.02 per
share
Warrants to purchase common stock, par value $.02 per share, exercisable until
October 2, 2002
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES ![](tickedbox.gif) |
NO ![](emptybox.gif) |
Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (subsection
229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of voting
and non-voting common stock held by non-affiliates of the registrant is $513,882,000(1).
As of December 23, 2002, 41,023,763 shares of the registrant’s common
stock were outstanding and 550,022 shares are to be issued in connection with
the registrant’s joint plan of reorganization confirmed by the Bankruptcy
Court on September 20, 2001.
Indicate by check mark whether
the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act)
YES (2) |
NO ![](emptybox.gif) |
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the
registrant has filed all documents and 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.
YES |
NO ![](emptybox.gif) |
DOCUMENTS INCORPORATED BY REFERENCE
NONE
(1)
| The aggregate market value of
the voting and non-voting common stock set forth above equals the number
of shares of the registrant’s common stock outstanding, reduced by
the number of shares of common stock held by officers, directors and shareholders
owning in excess of 10% of the registrant’s common stock, multiplied
by the last reported sale price for the registrant’s common stock
on December 23, 2002. The information provided shall in no way be construed
as an admission that any officer, director or 10% shareholder of the registrant
may or may not be deemed an affiliate of the registrant or that he/it is
the beneficial owner of the shares reported as being held by him/it, and
any such inference is hereby disclaimed. The information provided herein
is included solely for record keeping purposes of the Securities and Exchange
Commission. |
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(2) |
The registrant meets the definition
of “accelerated filer” (as defined by Rule12b-2 of the Act).
However, the registrant notes that the phase-in period for accelerated deadlines
of quarterly and annual reports will begin for reports filed by companies
that meet the definition of “accelerated filer” as of the end
of their first fiscal year ending on or after December 15, 2002. Accordingly,
such rules do not currently apply to the registrant. |
INDEX
PART I
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Cautionary Statements Regarding
Forward Looking Statements
As used herein, unless the context otherwise
requires, “Genesis,” the “Company,”“we,”
“our” or “us” refers to Genesis Health Ventures, Inc.
and our subsidiaries.
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:
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statements contained in “Risk
Factors”; |
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certain statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and our notes to our consolidated financial statements, such as our ability
to meet our liquidity needs, scheduled debt and interest payments, and expected
future capital expenditure requirements; the expected effects of government
regulation on reimbursement for services provided; and our ability to successfully
implement our strategic objectives and achieve certain performance improvement
initiatives within our pharmacy services segment; the expected financial
impact of severance and related costs; the expected reduction in medical
supply revenues; the expected receipt of a $22 million breakup fee; the
expected costs in fiscal 2003 and the foreseeable future; estimates in our
critical accounting policies including, our allowance for doubtful accounts,
our anticipated impact of long-lived asset impairments and our ability to
provide for loss reserves for self-insured programs; and our ability to maintain
restricted investments in marketable securities representing
the level of outstanding insurance losses we expect to pay; |
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certain statements contained
in “Business” concerning strategy, corporate integrity programs,
insurance coverage, environmental matters, government regulations and the
Medicare and Medicaid programs, and reimbursement for services provided;
and |
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certain statements in “Legal
Proceedings” regarding the effects of litigation. |
The forward-looking statements involve known
and unknown risks, uncertainties and other factors that are, in some cases,
beyond our control. You are cautioned that these statements are not guarantees
of future performance and that actual results and trends in the future may
differ materially.
Factors that could cause actual
results to differ materially include, but are not limited to the following,
which are discussed more fully in “Risk Factors”:
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| changes in the reimbursement
rates or methods of payment from Medicare and Medicaid, or the implementation
of other measures to reduce the reimbursement for our services; |
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| the expiration of enactments
providing for additional governmental funding; |
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changes in pharmacy legislation
and payment formulas; |
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the impact of federal and state
regulations; |
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changes in payor mix and payment
methodologies; |
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further consolidation of managed
care organizations and other third party payors; |
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competition in our businesses; |
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an increase in insurance costs
and potential liability for losses not covered by, or in excess of, our
insurance; |
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competition for qualified staff
in the healthcare industry; |
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our ability to control operating
costs and generate sufficient cash flow to meet operational and financial
requirements; |
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an economic downturn or changes
in the laws affecting our business in those markets in which we operate; |
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the impact of our reliance on
one pharmacy supplier to provide a significant portion of our pharmacy products; |
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the impact of acquisitions and/or
a possible sale or spin-off of our eldercare business; |
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the ability to implement and
achieve certain strategic objectives; |
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the difficulty in evaluating
certain of our financial information due to a lack of comparability following
the emergence from bankruptcy; and |
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acts of God or public authorities,
war, civil unrest, terrorism, fire, floods, earthquakes and other matters
beyond our control. |
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In addition to these factors and any risks and uncertainties
specifically identified in the text surrounding forward-looking statements,
any statements in this report or the reports and other documents filed by
us with the SEC that warn of risks or uncertainties associated with future
results, events or circumstances also identify factors that could cause actual
results to differ materially from those expressed in or implied by the forward-looking
statements.
All subsequent written and oral
forward-looking statements attributable to us or any person acting on
our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. We do not undertake any obligation
to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date of this report or to reflect
the occurrence of unanticipated events, except as may be required under applicable
securities law.
Risk Factors
Changes in the reimbursement rates or methods
of payment from Medicare and Medicaid have adversely affected our revenues
and operating margins and additional changes in Medicare and Medicaid or the
implementation of other measures to reduce the reimbursement for our services
may further negatively impact us.
We currently receive over 60% of our revenues from Medicare
and Medicaid. The healthcare industry is experiencing a strong trend toward
cost containment, as the government seeks to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers.
These cost containment measures generally have resulted in reduced rates
of reimbursement for services that we provide, including skilled nursing
facility services, pharmacy services and therapy services.
Legislative and regulatory action have resulted in continuing
changes to Medicare and Medicaid reimbursement programs. These changes have
negatively affected us, and include the following:
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the adoption of the Medicare
prospective payment system pursuant to the Balanced Budget Act of 1997,
as modified by the Medicare Balanced Budget Refinement Act; |
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adoption of the Benefits Improvement
Protection Act of 2000; and |
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the repeal of the Boren Amendment
federal payment standard for Medicaid payments to nursing facilities. |
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. Further, within the statutory
framework of the Medicare and Medicaid programs, there are a substantial number
of areas subject to administrative rulings and interpretations that 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.
The Benefits Improvement and Protection
Act enactment mandates a phase out of intergovernmental transfer transactions
by states whereby states inflate the payments to certain public facilities
to increase federal matching funds. This action may reduce federal support
for a number of state Medicaid plans. The reduced federal payments may adversely
affect aggregate available funds, thereby requiring states to reduce payments
to all providers. We operate in several of the states that will experience
a contraction of federal matching funds.
With the repeal of the federal payment
standards, there can be no assurances that budget constraints or other factors
will not cause states to reduce Medicaid reimbursement to nursing facilities
and pharmacies or that payments to nursing facilities and pharmacies will
be made on a timely basis.
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Additionally, the recent economic downturn may reduce
state spending on Medicaid programs. Recent data compiled by the National
Conference of State Legislatures indicates that the recent economic downturn
has had a detrimental effect on state revenues. Historically, these budget
pressures have translated into reductions in state spending. Given that
Medicaid outlays are a significant component of state budgets, we expect
continuing cost containment pressures on Medicaid outlays for nursing homes
and pharmacy services in the states in which we operate.
Effective October 1, 2002,
our revenues are adversely affected by expiring Medicare provisions; although
Congress may restore a portion of lost Medicare revenues.
A number of provisions of the Balanced Budget Refinement
Act and the Benefits Improvement and Protection Act enactments, providing
additional funding for Medicare participating skilled nursing facilities,
expired on September 30, 2002. The expiration of these provisions
is estimated to reduce our Medicare per diems per beneficiary, on average,
by $34.
On April 23, 2002, the Centers
for Medicare and Medicaid Services issued a press statement announcing
that the agency would not proceed with its previously announced changes
in the skilled nursing facility case-mix classification system. In
its announcement, the Centers for Medicare and Medicaid Services clarified
that case-mix refinements would be postponed for a full year. It
issued notice of fiscal year 2003 rates in the Federal Register, July 31,
2002. Effective October 1, 2002, rates will be increased by a 2.6% annual
market basket adjustment. The Centers for Medicare and Medicaid Services
estimates that, even with this upward adjustment, average Medicare rates
will be 8.8% lower than the current year because of the reduced payment
caused by the expiring statutory add-ons.
We estimate that the “Skilled
Nursing Facilities Medicare Cliff,” factoring in the administrative
decision not to proceed with changes in the case-mix refinements
at this time and without factoring in any additional Congressional action,
will expose the skilled nursing facility sector to a 10% reduction. For
us, this reduction could have an adverse annual revenue and operating
income impact from continuing operations beginning October 1, 2002 of approximately $28 million
after taking into consideration the 2.6% annual market basket adjustment.
The Skilled Nursing Facility
Medicare Cliff could adversely impact the liquidity of our pharmacy and
other service related business customers, resulting in their inability
to pay us, or to pay us timely, for our products and services. This factor,
coupled with the adverse impact of the Skilled Nursing Facility Medicare
Cliff to the liquidity of our eldercare business, could require us to
borrow in order to fund our working capital needs, and in turn, cause
us to become more highly leveraged.
There may be additional provisions
in the Medicare legislation affecting our other businesses. Congress may
consider changes affecting pharmacy, rehabilitation therapy, diagnostic
services and the payment for services in other health settings. There
are two issues in particular that could have measurable negative impact,
practitioner fee schedules and caps on Medicare Part B therapies. Absent
Congressional action, the formula driven payment structure for calendar
year 2003 physician and non-physician fee schedules will be reduced
by 4.4%. This reduction affects not only doctors, but also payment for
most professional practitioners including licensed rehabilitation professionals.
Moreover, absent Congressional action, the moratorium on implementing
payment caps on therapy services expires. Medicare Part B therapy services
in calendar year 2003 will be subjected to the caps and are expected to
reduce our annual revenues and operating income approximately $17 million
and $3 million, respectfully.
It is not possible to quantify
fully the effect of recent legislation, the interpretation or administration
of such legislation or any other governmental initiatives on our business.
Accordingly, there can be no assurance that the impact of these changes
or any future healthcare legislation will not further adversely affect
our 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. Our financial condition and results of operations may
be affected by the reimbursement process, which in the healthcare industry
is complex and can involve lengthy delays between the time that revenue
is recognized and the time that reimbursement amounts are settled.
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Changes in pharmacy legislation
and payment formulas could adversely affect our NeighborCare® pharmacy
operations.
Pharmacy coverage and cost containment are important policy
debates at both the federal and state levels. One of the most contentious
issues before the 107th Congress was legislation expanding coverage
under Medicare for outpatient pharmaceutical services. In June, 2002 the House
of Representatives passed a comprehensive measure that would have expanded
coverage administered by pharmacy benefit managers. The Senate deadlocked
in its deliberations. Medicare pharmacy coverage was an important issue during
the 2002 mid-term Congressional elections and, therefore, it is not unreasonable
to expect that the 108th Congress will resume consideration of
a benefit expansion. Many of the measures considered during the 107th
Congress would include institutional long-term care pharmacy as covered
under the definitions of an outpatient Medicare benefit. The measure that
passed the House of Representatives included provisions that would shift responsibility
for pharmacy coverage for dually eligible Medicare beneficiaries from coverage
currently provided under state Medicaid programs to coverage under the new
Medicare benefit. If enacted, this approach could significantly alter the
administration of and payment for long-term care pharmacy services.
A number of states have enacted
or are considering containment initiatives. Many have focused on reducing
what the state Medicaid program will pay for drug acquisition costs. Most
states have lowered payment to a negative percentage of average wholesale
price. Some have attempted to impose more stringent pricing standards. Institutional
pharmacies are often paid a dispensing fee over and above the payment for
the drug. To the extent that changes in the payment for drugs is not accompanied
by an increase in the dispensing fee, margins could erode. Some states have
explored efforts to restrict utilization (preferred drug lists, prior-authorization,
formularies). A few states have attempted to extend the preferred Medicaid
pricing to all Medicare beneficiaries. NeighborCare, our wholly-owned
pharmacy business, has joined with other leading multi-state institutional
pharmacy companies to form the Alliance for Long Term Care Pharmacy (LTCPA)
in an effort to influence the outcomes of both federal and state-specific
legislative and regulatory activities. In this collaboration, LTCPA provides
leadership to responding to specific issues. Presently, LTCPA has engaged
representation in 23 states and Washington, DC. Such efforts are augmented
by the government relations specialists of the various companies and by active
grassroots efforts of pharmacy professionals. These proactive steps have been
successful in an number of instances, but given the budgetary concerns of
both federal and state governments, neither LTCPA nor NeighborCare could assure
that changes in payment formulas and delivery requirements will not have negative
impact going forward.
We conduct business in a heavily
regulated industry, and changes in regulations and violations of regulations
may result in increased costs or sanctions.
Our business is subject to extensive federal, state and,
in some cases, local regulation with respect to, among other things, licensure
and certification of eldercare centers and pharmacy operations, controlled
substances and health planning in addition to reimbursement. For our eldercare
centers, this regulation relates, among other things, to the adequacy of physical
plant and equipment, qualifications of personnel, standards of care and operational
requirements. For pharmacy and medical supply products and services, this
regulation relates, among other things, to operational requirements, documentation,
licensure, certification and regulation of controlled substances. Compliance
with these regulatory requirements, as interpreted and amended from time to
time, can increase operating costs and thereby adversely affect the financial
viability of our business. Because these laws are amended from time to time
and are subject to interpretation, we cannot predict when and to what extent
liability may arise. Failure to comply with current or future regulatory requirements
could also result in the imposition of various remedies including (with respect
to inpatient care) fines, restrictions on admission, the revocation of licensure,
decertification, imposition of temporary management or the closure of a facility
or site of service.
We are subject to periodic audits
by the Medicare and Medicaid programs, which have various rights and remedies
against us if they assert that we have overcharged the programs or failed
to comply with program requirements. Rights and remedies available to these
programs include repayment of any amounts alleged to be overpayments or in
violation of program requirements, or making deductions from future amounts
due to us. These programs may also impose fines, criminal penalties or program
exclusions. Other third-party payor sources also reserve rights to conduct
audits and make monetary adjustments.
In the ordinary course of our business,
we receive notices of deficiencies for failure to comply with various regulatory
requirements. We review such notices and takes appropriate corrective action.
In most cases, we and the reviewing agency will agree upon the measures that
will bring the center or service site into compliance with regulatory requirements.
In some cases or upon repeat violations, the reviewing agency may take various
adverse actions against a provider, including but not limited to:
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the imposition of fines; |
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suspension of payments for new
admissions to the center; and |
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in extreme circumstances, decertification
from participation in the Medicare or Medicaid programs and revocation of
a center’s or service site’s license. |
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These actions may adversely affect a provider’s ability
to continue to operate, the ability to provide certain services and/or eligibility
to participate in the Medicare or Medicaid programs or to receive payments
from other payors. Additionally, actions taken against one center or service
site may subject other centers or service sites under common control or ownership
to adverse remedies.
We are also subject to federal and
state laws that govern financial and other arrangements between healthcare
providers. These laws often prohibit certain direct and indirect payments
or fee-splitting arrangements between healthcare providers that are designed
to encourage the referral of patients to a particular provider for medical
products and services. Furthermore, some states restrict certain business
relationships between physicians and other providers of healthcare services.
Many states prohibit business corporations from providing, or holding themselves
out as a provider of, medical care. Possible sanctions for violation of any
of these restrictions or prohibitions include loss of licensure or eligibility
to participate in reimbursement programs and civil and criminal penalties.
These laws vary from state to state, are often vague and have seldom been
interpreted by the courts or regulatory agencies. From time to time, we have
sought guidance as to the interpretation of these laws; however, there can
be no assurance that such laws will ultimately be interpreted in a manner
consistent with our practices.
In July 1998, the federal government
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 licensure 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.
We face additional federal requirements
that mandate major changes in the transmission and retention of health information.
The Health Insurance Portability and Accountability Act of 1996 was enacted
to ensure, first, that employees can retain and at times transfer their health
insurance when they change jobs, and second, to simplify health care administrative
processes. This simplification includes expanded protection of the privacy
and security of personal medical data and requires the adoption of standards
for the exchange of electronic health information. Among the standards that
the Secretary of Health and Human Services will adopt pursuant to the Health
Insurance Portability and Accountability Act are standards for electronic
transactions and code sets, unique identifiers for providers, employers, health
plans and individuals, security and electronic signatures, privacy and enforcement.
Although the Health Insurance Portability and Accountability Act was intended
to ultimately reduce administrative expenses and burdens faced within the
healthcare industry, we believe that implementation of this law will result
in additional costs. Failure to comply with the Health Insurance Portability
and Accountability Act could result in fines and penalties that could have
a material adverse effect on us.
The operation of our eldercare centers
is subject to federal and state laws prohibiting fraud by healthcare providers,
including criminal provisions, which prohibit filing false claims or making
false statements to receive payment or certification under Medicaid, or failing
to refund overpayments or improper payments. Violation of these criminal provisions
is a felony punishable by imprisonment and/or fines. We may be subject to
fines and treble damage claims if it violates the civil provisions that prohibit
the knowing filing of a false claim or the knowing use of false statements
to obtain payment.
State and federal governments are
devoting increased attention and resources to anti-fraud initiatives
against healthcare providers. The Health Insurance Portability and Accountability
Act and the Balanced Budget Act of 1997 expanded the penalties for health
care fraud, including broader provisions for the exclusion of providers from
the Medicaid program. We have established policies and procedures that we
believe are sufficient to ensure that our facilities will operate in substantial
compliance with these anti-fraud and abuse requirements. While we believe
that our business practices are consistent with Medicaid criteria, those criteria
are often vague and subject to change and interpretation. Aggressive anti-fraud
actions, however, could have an adverse effect on our financial position,
results of operations and cash flows.
We are subject to federal and state
laws that impose repackaging, labeling and package insert requirements on
pharmacies that repackage drugs for distribution beyond the regular practice
of dispensing or selling drugs directly to patients at retail outlets. A drug
repackager must register with the Food and Drug Administration, referred to
as the “FDA,” as a manufacturing establishment and is subject
to FDA inspection for compliance with relevant good manufacturing practices.
We hold all the required registrations and licenses and believe that we are
in compliance with all related regulations. In addition, we believe that we
comply with all relevant requirements of the Prescription Drug Marketing Act
for the transfer and shipment of pharmaceuticals. Failure to comply with FDA
regulations could result in fines and other penalties, including loss of licensure
and could have a material adverse effect on our business.
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State laws and regulations could
affect our ability to grow.
Many states in which we operate our business have adopted
certificate of need or similar laws that generally require that a state agency
approve certain acquisitions and determine that the need for certain bed additions,
new services and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other changes
or the expenditure of capital. State approvals are generally issued for a
specified maximum expenditure and require implementation of the proposal within
a specified period of time. Failure to obtain the necessary state approval
can result in the inability to provide the service, to operate the centers,
to complete the acquisition, addition or other change, and can also result
in the imposition of sanctions or adverse action on the center’s license
and adverse reimbursement action. There can be no assurance that we will be
able to obtain certificate of need approval for all future projects requiring
such approval.
Possible changes in the case
mix of patients as well as payor mix and payment methodologies may significantly
affect our profitability.
The sources and amounts of our patient revenues
will be determined by a number of factors, including licensed bed capacity
and occupancy rates of our centers, the mix of patients and the rates of reimbursement
among payors. Likewise, payment for pharmacy and medical supply services,
including the institutional pharmacy services of our NeighborCare® pharmacy
operations and therapy services provided by our rehabilitation therapy services
business, will vary based upon payor and payment methodologies. Changes in
the case mix of the patients as well as payor mix among private pay, Medicare
and Medicaid will significantly affect our profitability. Particularly, any
significant increase in our Medicaid population could have a material adverse
effect on our financial position, results of operations and cash flow, especially
if states operating these programs continue to limit, or more aggressively
seek limits on, reimbursement rates.
Further consolidation of managed
care organizations and other third-party payors may adversely affect our profits.
Managed care organizations and other third-party payors
have continued to consolidate in order to enhance their ability to influence
the delivery of healthcare services. Consequently, the healthcare needs of
a large percentage of the United States population are increasingly served
by a small number of managed care organizations. These organizations generally
enter into service agreements with a limited number of providers for needed
services. To the extent that such organizations terminate us as a preferred
provider and/or engage our competitors as a preferred or exclusive provider,
our business could be materially adversely affected. In addition, private
payors, including managed care payors, increasingly are demanding discounted
fee structures or the assumption by healthcare providers of all or a portion
of the financial risk through prepaid capitation arrangements.
We face intense competition in
our business.
The healthcare industry is highly competitive. We compete
with a variety of other companies in providing eldercare services, many of
which have greater financial and other resources and may be more established
in their respective communities than us. Competing companies may offer newer
or different centers or services than we do and may thereby attract customers
who are either presently customers of our eldercare centers or are otherwise
receiving our eldercare services.
The provision of pharmacy services
in the long-term care industry is highly competitive. NeighborCare is one
of the largest providers of pharmacy services to the long-term care industry
in the United States. In the 41 states we sell pharmacy products and services,
we compete with multiple local, regional and national institutional pharmacies.
Institutional pharmacies compete principally on the basis of quality, cost
effectiveness and service level.
We compete in providing other specialty
medical services with a variety of different companies. Generally, this competition
is national, regional and local in nature. The primary competitive factors
in these businesses are similar to those in the inpatient and pharmacy business
and include reputation, the cost of services, the quality of clinical services,
responsiveness to customer needs, and the ability to provide support in other
areas such as third party reimbursement, information management and patient
record-keeping.
An increase in insurance costs
may adversely affect our operating cash flow, and we may be liable for losses
not covered by or in excess of our insurance.
We have experienced an adverse effect on our operating
cash flow due to an increase in the cost of certain of our insurance programs.
Rising costs of eldercare malpractice litigation, and losses stemming from
these malpractice lawsuits and a constriction of insurers have caused many
insurance carriers to raise the cost of insurance premiums or refuse to write
insurance policies for nursing homes. Also, a tightening of the reinsurance
market has affected property, auto and excess liability insurance carriers.
Accordingly, the costs of all insurance premiums have increased. These problems
are particularly acute in the State of Florida where, because of a greater
number and higher amount of claims, general liability and professional liability
costs have become increasingly expensive. We own or leases approximately 1,500
skilled nursing beds in the State of Florida, representing six percent of
our total owned and leased beds.
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We carry property, workers’ compensation insurance,
general and professional liability coverage on our behalf and on behalf of
our subsidiaries in amounts deemed adequate by management. However, there
can be no assurance that any current or future claims will not exceed applicable
insurance coverage.
In addition, for certain of our
workers’ compensation insurance, professional liability coverage and
health insurance provided to our employees, we are self-insured. Accordingly,
we are liable for payments to be made under those plans. To the extent claims
are greater than estimated, they could adversely affect our financial position,
results of operations and cash flows.
We could experience significant
increases in our operating costs due to intense competition for qualified staff
and minimum staffing laws in the healthcare industry.
We and the healthcare industry continue to experience
shortages in qualified professional clinical staff, including pharmacists.
We compete with other healthcare providers and with non-healthcare providers
for both professional and non-professional employees. As the demand for these
services continually exceeds the supply of available and qualified staff,
we and our competitors have been forced to offer more attractive wage and
benefit packages to these professionals and to utilize outside contractors
for these services at premium rates. Furthermore, the competitive arena for
this shrinking labor market has created high turnover among clinical professional
staff as many seek to take advantage of the supply of available positions,
each offering new and more attractive wage and benefit packages. In addition
to the wage pressures inherent in this environment, the cost of training new
employees amid the high turnover rates has caused added pressure on our operating
margins. Lastly, increased attention to the quality of care provided in skilled
nursing facilities has caused several states to consider minimum staffing
laws that could further increase the gap between demand for and supply of
qualified individuals and lead to higher labor costs. While we have been able
to retain the services of an adequate number of qualified personnel to staff
our facilities appropriately and maintain our standards of quality care, there
can be no assurance that continued shortages will not in the future affect
our ability to attract and maintain an adequate staff of qualified healthcare
personnel. A lack of qualified personnel at a facility could result in significant
increases in labor costs at such facility or otherwise adversely affect operations
at such facility. Any of these developments could adversely affect our operating
results or expansion plans.
If we are unable to control operating
costs and generate sufficient cash flow to meet operational and financial requirements,
including servicing our indebtedness, our business operations may be adversely
affected.
Cost containment and lower reimbursement levels by third-party
payors, including federal and state governments, have had a significant impact
on the healthcare industry as a whole and on our cash flows. Our operating
margins continue to be under pressure because of continuing regulatory scrutiny
and growth in operating expenses, such as labor costs and insurance premiums.
In addition, as a result of competitive pressures, our ability to maintain
operating margins through price increases to private patients is limited.
Further, in connection with our reorganization, we entered into our senior
secured credit facility. If we are unable to service our indebtedness, our
business operations will be adversely affected. Therefore, we will have to
generate sufficient cash flow to meet operational and financing requirements,
which includes servicing our indebtedness. If we are unable to do so, our
business operations and revenues may be materially adversely affected.
If we fail to generate significant
cash flow to service our debt, we may have to refinance all or a portion of
our debt to obtain additional financing.
Our ability to make payments on our existing
and future debt and to pay our expenses will depend on our ability to generate
cash in the future. Our ability to generate cash is subject to various risks
and uncertainties, including those disclosed in this section and prevailing
economic, regulatory and other conditions beyond our control. Based on our
current level of operations, we believe that our cash flow from operations
and other capital resources will be sufficient to meet our liquidity needs
for the foreseeable future. However, we cannot assure you that these capital
resources will be sufficient to enable us to repay our debt and to pay our
expenses. If we do not have enough cash to make these payments, we may be
required to refinance all or part of our debt, sell assets, curtail discretionary
capital expenditures or borrow more money. We cannot assure you that it will
be able to do these things on commercially reasonable terms, if at all. In
addition, the terms of our existing or future debt agreements may restrict
it from pursuing any of these alternatives.
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The agreements governing our existing
debt and preferred stock contain, and future debt may contain, various covenants
that limit our discretion in the operation of our business.
The agreements and instruments governing our existing
debt contain, and the agreements and instruments governing our future debt
may contain, various restrictive covenants that, among other things, require
it to comply with or maintain certain financial tests and ratios and restrict
our ability to:
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incur more debt; |
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pay dividends, redeem stock or
make other distributions; |
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make certain investments; |
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create liens; |
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enter into transactions with
affiliates; |
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make acquisitions; |
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merge or consolidate; and |
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transfer or sell assets. |
Our ability to comply with these covenants is subject to various
risks and uncertainties. In addition, events beyond our control could affect
our ability to comply with and maintain the financial tests and ratios. Any
failure by us to comply with and maintain all applicable financial tests and
ratios and to comply with all applicable covenants could result in an event
of default with respect to, and the acceleration of the maturity of, and the
termination of the commitments to make further extension of credit under a
substantial portion of our debt. If we were unable to repay debt to our senior
lenders, these lenders could proceed against the collateral securing that
debt. Even if we are able to comply with all applicable covenants, the restrictions
on our ability to operate our business in our sole discretion could harm our
business by, among other things, limiting our ability to take advantage of
financing, mergers, acquisitions and other corporate opportunities.
The terms of our outstanding preferred
stock also contain restrictions on our ability to complete certain types of
transactions without the consent of the holders of our preferred stock.
A significant portion of our business
is concentrated in certain markets and the recent economic downturn or changes
in the laws affecting our business in those markets could have a material adverse
effect on our operating results.
We receive approximately 59% of our revenue from operations
in Pennsylvania, New Jersey, Massachusetts and Maryland. The economic condition
of these markets could affect the ability of our customers and third-party
payors to reimburse us for our services through a reduction of disposable
household income or the ultimate reduction of the tax base used to generate
state funding of their respective Medicaid programs. An economic downturn,
or changes in the laws affecting our business in these markets and in surrounding
markets, could have a material adverse effect on our financial position, results
of operations and cash flows.
Our NeighborCare pharmacy operations
purchase a significant portion of our products from one supplier.
Our NeighborCare pharmacy operations obtain approximately
94% of our products from one supplier pursuant to contracts that are terminable
by either party on 90 days’ notice. If these contracts are terminated,
there can be no assurance that NeighborCare’s operations would not be
disrupted or that NeighborCare could obtain the products at similar cost.
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We may make acquisitions
that could subject us to a number of operating risks.
We anticipate that we may make
acquisitions of, investments in and strategic alliances with complementary
businesses to enable us to add services for our core customer base and for
adjacent markets, and to expand each of our businesses geographically. However,
implementation of this strategy entails a number of risks, including:
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inaccurate assessment of undisclosed
liabilities; |
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entry into markets in which we
may have limited or no experience; |
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diversion of management’s
attention from our core business; |
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difficulties in assimilating the operations of an acquired business or in realizing projected efficiencies and cost savings; |
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increase in our indebtedness and a limitation in our ability to access additional capital when needed; and |
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obtaining anticipated revenue synergies or cost reductions are also a risk in many acquisitions. |
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Certain changes may be necessary to integrate the acquired businesses into our operations to assimilate many new employees and to implement reporting, monitoring, compliance and forecasting procedures.
We are exploring strategic business
alternatives, including the sale or spinoff of our ElderCare® business.
On October 2, 2002, we announced that we had retained UBS Warburg LLC and Goldman Sachs & Co. to assist us in exploring various strategic business alternatives, including, but not limited to, the potential sale or spinoff of our ElderCare networks of skilled nursing and assisted living centers. There can be no assurance that we will successfully complete any potential sale or spinoff of the ElderCare business or that any such transaction, if completed, will increase shareholder value.
Financial information related to
our postemergence operations is limited, and, therefore, it is difficult
to compare postemergence financial information with that of prior periods.
Since we emerged from bankruptcy on October 2, 2001, there is limited operating and financial data available from which to analyze our operating results and cash flows. As a result of freshstart reporting, it is difficult to compare information reflecting our results of operations and financial condition after our emergence from bankruptcy to the results of prior periods. See “Selected Financial Data.”
Provisions in Pennsylvania law
and our corporate charter documents could delay or prevent a change in control.
As a Pennsylvania corporation, we are governed by the Pennsylvania Business Corporation Law of 1988, as amended, referred to as “Pennsylvania corporation law.” Pennsylvania corporation law provides that the board of directors of a corporation in discharging its duties, including its response to a potential merger or takeover, may consider the effect of any action upon employees, shareholders, suppliers, customers and creditors of the corporation as well as upon, communities in which offices or other establishments of the corporation are located and all other pertinent factors. In addition, under Pennsylvania corporation law, subject to certain exceptions, a business combination between us and a beneficial owner of more than 20% of our stock may be accomplished only if certain conditions are met.
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Our articles of incorporation contain certain provisions that may affect a person’s decision to implement a takeover of us, including the following provisions:
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a classified board of directors beginning at the first shareholder meeting for the election of directors after October 2, 2002, with each director having a three-year term; |
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a provision providing that certain business combinations involving us, unless approved by at least 75% of the board of directors, will require the affirmative vote of at least 80% of our voting stock; |
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a provision permitting the board of directors to oppose a tender or other offer for our constituents and to consider any pertinent issue in connection with such offer including, but not limited to, the reputation of the offer, the value of the offered securities and any applicable legal or regulatory issues raised by the offer; and |
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the authority to issue preferred stock with rights to be designated by the board of directors. |
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The overall effect of the foregoing provisions may be to deter a future tender offer or other offers to acquire us or our shares. Shareholders might view such an offer to be in their best interest if the offer includes a substantial premium over the market price of the common stock at that time. In addition, these provisions may assist our management in retaining our position and place us in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.
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PART I
ITEM 1: BUSINESS
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania corporation. As used herein, unless the context otherwise requires, “Genesis,” the “Company,”“we,”“our” or “us” refers to Genesis Health Ventures, Inc. and its subsidiaries.
We are a leading provider of healthcare and support services to the elderly. Our operations are comprised of two primary business segments, pharmacy services and inpatient services. These segments are complemented by an array of other service capabilities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Transactions and Events Change in Strategic Direction and Objectives.”
We provide pharmacy services nationwide through our NeighborCare® integrated pharmacy operation that serves approximately 247,000 institutional beds in longterm care settings. We also operate 31 communitybased retail pharmacies.
We provide inpatient services through skilled nursing and assisted living centers
primarily located in the eastern United States. We currently own, lease, manage or
jointlyown 256 eldercare centers with 31,073 beds, of which 20 centers with 2,291 beds have been identified as either
held for sale or discontinued operations. See Managements Discussion and Analysis of Financial Condition and Results of Operations
Certain Transactions and Events Assets Held for Sale and Discontinued Operations.
We also provide rehabilitation services, diagnostic services, respiratory services, hospitality services, group purchasing services and healthcare consulting services.
Description of Business
Pharmacy Services
We provide pharmacy services in 41 states through our NeighborCare pharmacy operations. Our NeighborCare pharmacy operations consist of 59 institutional pharmacies (two are jointlyowned) and 22 medical supply and home medical equipment distribution centers (four are jointlyowned). In addition, we operate 31 communitybased retail pharmacies (two are jointlyowned) which are located in or near medical centers, hospitals and physician office complexes. The communitybased retail pharmacies provide prescription and overthecounter medications and certain medical supplies as well as personal service and consultation by licensed pharmacists.
The largest subsegment, institutional pharmacy services, provides prescription and nonprescription pharmaceuticals, infusion therapy, and medical supplies and equipment to eldercare centers operated by us, as well as to independent healthcare providers by contract.
Approximately 83% of NeighborCare revenues in fiscal 2002 consisted of the provision of prescription and nonprescription pharmaceuticals. Approximately 92% of the sales attributable to all pharmacy operations in the twelve months ended September 30, 2002 were generated through external contracts with independent healthcare providers, with the balance attributable to centers owned or leased by us.
We purchase, repackage and dispense prescription and nonprescription medication in accordance with physician orders and deliver such prescriptions to eldercare centers for administration to individual residents by the eldercare center’s clinical staff. We offer pharmaceuticals to our customers through a unit dose packaging, dispensing and delivery system, typically in 30day supplies. We believe a unit dose delivery system improves control over the provision of drugs and reduces errors in drug administration to eldercare residents.
We obtain approximately 94% of our pharmacy products from one supplier pursuant to a contract that is terminable by either party on 90 days notice. We have not experienced any difficulty in obtaining pharmacy products or supplies used in the conduct of our business.
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We also provide pharmacy consulting services including monitoring and reporting on prescription drug therapy and assisting in compliance with applicable state and federal regulations. Federal and state regulations mandate that longterm care facilities improve the quality of patient care by procuring consultant pharmacist services to monitor and report on prescription drug therapy. Our consulting services include:
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review of each resident’s drug regimen to assess the appropriateness and efficiency of drug therapies, including a review of medical records, monitoring drug interactions with other drugs or food, monitoring laboratory test results and recommending alternate therapies; |
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participation on quality assurance and other committees of our customers; |
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monitoring and reporting on facility-wide drug usage; |
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development and maintenance of pharmaceutical policy and procedure manuals; and |
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assistance with state and federal regulatory compliance as they pertain to patient care. |
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The following table reflects the payor mix of pharmacy service revenues for the respective years ended September 30:
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2002 |
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2001 |
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2000 |
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Long term care facilities and
other |
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58 |
% |
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60 |
% |
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62 |
% |
Medicaid |
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40 |
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37 |
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35 |
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Medicare |
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2 |
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3 |
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3 |
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Total |
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100 |
% |
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100 |
% |
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100 |
% |
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See “Revenue Sources” and “Government Regulation”.
We own, lease, manage or jointlyown 256 eldercare centers having 31,073 beds, including 33 standalone assisted living facilities and 19 transitional care units, located in 15 states, and concentrated in five geographic regions: New England Region (Massachusetts / Connecticut / New Hampshire / Vermont / Rhode Island); Midatlantic Region (Greater Philadelphia / Delaware Valley / New Jersey); Chesapeake Region (Southern Delaware / Eastern Shore of Maryland / Baltimore, Maryland / Washington D.C. / Virginia); Southern Region (Central Florida); and Allegheny / Midwest Region (West Virginia / Western Pennsylvania / Illinois / Wisconsin). We also are affiliated with 25 “member centers” having 4,416 beds that, for a fee, have access to many of the resources and capabilities of our eldercare network. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain
Transactions and Events Change in Strategic Direction and Objectives.”
Our eldercare services focus on the central medical and physical issues facing the more medically demanding elderly. By integrating the talents of physicians with case management, comprehensive discharge planning and, where necessary, home support services, we believe we provide costeffective care management to achieve superior outcomes and return customers to the community. We believe that our orientation toward achieving improved customer outcomes through our eldercare networks has resulted in increased utilization of specialty medical services, high occupancy of available beds, enhanced quality payor mix and a broader base of repeat customers.
Our skilled nursing centers offer three levels of care for our customers: skilled, intermediate and personal. Skilled care provides 24hour per day professional services of a registered nurse; intermediate care provides less intensive nursing care; and personal care provides for the needs of customers requiring minimal supervision and assistance. Each eldercare center is supervised by a licensed healthcare administrator and engages the services of a medical director to supervise the delivery of healthcare services to residents and a director of nursing to supervise the nursing staff. We maintain a corporate quality assurance program to monitor regulatory compliance and to enhance the standard of care provided in each center.
We have established and actively market programs for elderly and other customers who require subacute levels of medical care. These programs include ventilator care, intravenous therapy, postsurgical recovery, respiratory management, orthopedic or neurological rehabilitation, terminal care and various forms of coma, pain and wound management. Private insurance companies and other third party payors, including certain state Medicaid programs, have recognized that treating customers requiring subacute medical care in centers such as those we operate is a costeffective alternative to treatment in an acute care hospital. We provide subacute care at rates that we believe are substantially below the rates typically charged by acute care hospitals for comparable services.
The following table sets forth information regarding our average number of beds in service and the average occupancy levels at our eldercare centers for the respective years ended September 30:
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2002 |
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2001 |
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2000 |
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Average Beds
in Service: (1) (2) |
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Owned and Leased
Facilities |
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24,139 |
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24,783 |
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14,286 |
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Managed and Jointly-Owned
Facilities |
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7,898 |
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9,215 |
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23,779 |
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Occupancy
Based on Average Beds in Service: |
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Owned and Leased
Facilities |
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91 |
% |
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91 |
% |
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91 |
% |
Managed and Jointly-Owned
Facilities |
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91 |
% |
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88 |
% |
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91 |
% |
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(1) |
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In connection with the consummation of our joint plan of reorganization, 10,702 Multicare beds classified as “Managed and JointlyOwned
Facilities” prior to 2001 were reclassified as “Owned and
Leased Facilities.” See “ Reorganization.” |
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(2) |
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Includes 2,291 owned and leased beds, principally located in the states of Wisconsin and Illinois,
which have been identified as either held for sale or discontinued operations. |
The following table reflects the payor mix of inpatient service revenues for the respective years ended September 30:
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2002 |
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2001 |
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2000 |
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Medicaid |
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48 |
% |
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48 |
% |
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49 |
% |
Medicare |
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30 |
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28 |
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25 |
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Private pay and
other |
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22 |
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24 |
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26 |
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Total |
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100 |
% |
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100 |
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100 |
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See “Revenue Sources”
and “Government Regulation”.
Other ServiceRelated Businesses
Rehabilitation Therapy. We provide an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy in all five of our eldercare regional market concentrations. These services are provided by approximately 3,500 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare centers we operate, as well as by contract to healthcare facilities operated by others and through any one of our 15 certified rehabilitation agencies.
Management Services. We provide management services to 69 eldercare centers and transitional care units, which are the eldercare centers jointlyowned and / or managed referred to in Inpatient Services above, pursuant to management agreements that provide generally for the daytoday responsibility for the operation and management of the centers. In turn, we receive management fees, depending on the agreement, computed as either an overall fixed fee, a fixed fee per customer, a percentage of net revenues of the center plus an incentive fee, or a percentage of gross revenues of the center with some incentive clauses. The various management agreements, including renewal option periods, are scheduled to terminate between 2003 and 2011.
Tidewater Group Purchasing. We own and operate The Tidewater Healthcare Shared Services Group, Inc., one of the largest longterm care group purchasing companies in the country. We have negotiated contracts with 78 national and 175 regional vendors. Tidewater provides purchasing and shared service programs specially designed to meet the needs of eldercare centers and other longterm care facilities. Tidewater's services are contracted to approximately 4,000 members with over 400,000 beds in 46 states and the District of Columbia.
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Other Services. We employ 68 physicians, physician assistants and nurse practitioners that are primarily involved in designing and administering clinical programs and directing patient care. We also provide an array of other specialty medical services in certain parts of our eldercare network, including portable xray and other diagnostic services; home healthcare services; consulting services; respiratory health services and hospitality services such as dietary, housekeeping, laundry, plant operations and facilities management services.
We are exploring strategic business alternatives, including the sale or
spinoff of our eldercare assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Transactions and Events Change in Strategic Direction and Objectives.”
The following table sets forth the amount of our total net revenue from continuing operations contributed by our business segments and other businesses after the elimination of intercompany revenues for the fiscal periods presented (in thousands):
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2002 |
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2001 |
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2000 |
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Inpatient services |
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1,330,993 |
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$ |
1,255,525 |
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$ |
1,227,250 |
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Pharmacy services |
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1,123,854 |
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1,036,245 |
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949,829 |
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Other revenue |
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168,832 |
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160,401 |
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150,548 |
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$ |
2,623,679 |
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$ |
2,452,171 |
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$ |
2,327,627 |
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See note 22 to our consolidated
financial statements “Segment Information” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations” for additional disclosure of financial information
regarding our segments.
Also, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations General” for a discussion of our reportable segments and our other businesses.
Also, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations Seasonality”,
for a description of the seasonality of our business.
We receive revenues from Medicare, Medicaid, private insurance, selfpay residents, other third party payors and long term care facilities that utilize our pharmacy and other service related businesses. The healthcare industry is experiencing the effects of the trend toward cost containment as federal and state governments and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, generally have resulted in reduced rates of reimbursement for services provided by us.
The sources and amounts of our patient revenues will be determined by a number of factors, including licensed bed capacity and occupancy rates of our centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including the institutional pharmacy services of NeighborCare and therapy services provided by our rehabilitation therapy services business, will vary based upon payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among private pay, Medicare, and Medicaid will significantly affect our profitability.
Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act), known as “Medicare,” has made available to nearly every United States citizen 65 years of age and older a broad program of health insurance designed to help the nation’s elderly meet hospital and other health care costs. Health insurance coverage has been extended to certain persons under the age of 65 qualifying as disabled and those having endstage renal disease. Medicare includes three related health insurance programs: (i) hospital insurance referred to as Medicare Part A; (ii) supplementary medical insurance, referred to as Medicare Part B; and (iii) a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B, referred to as Medicare+Choice or Medicare Part C. The Medicare program is currently administered by fiscal intermediaries (for Medicare Part A and s
ome Medicare Part B services) and carriers (for Medicare Part B) under the direction of the Centers for Medicare and Medicaid Services a division of the Department of Health and Human Services.
Medicaid (Title XIX of the Social Security Act) is a federalstate matching program, whereby the federal government, under a needs based formula, matches funds provided by the participating states for medical assistance to "medically indigent" persons. The programs are administered by the applicable state welfare or social service agencies under federal rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates determined in accordance with each state’s regulations. For skilled nursing centers, most states pay prospective rates, and have some form of acuity adjustment. In addition to facility based services, most states cover an array of medical ancillary services, including those services provided by institutional pharmacies. Payment methodologies for these services vary based upon state preferences and practices permitted under federal rules.
Medicare and Medicaid are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the timing and/or levels of payments to us for our services.
We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. These rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. Such programs may also impose fines, criminal penalties or program exclusions. Other third party payor sources also reserve rights to conduct audits and make monetary adjustments.
Laws Affecting Revenues. Congress has enacted three major laws during the past six years that have significantly altered payment for nursing home and medical ancillary services. The Balanced Budget Act of 1997, signed into law on August 5, 1997, reduced federal spending on Medicare and Medicaid programs. The Medicare Balanced Budget Refinement Act, enacted in November 1999 addressed a number of the funding difficulties caused by the Balanced Budget Act of 1997. The Benefits Improvement and Protection Act of 2000, was enacted on December 15, 2000, further modifying the law and restoring additional funding. The following provides a brief summary of these laws and an overview of the impact of these enactments on us.
Under the Balanced Budget Act of 1997, participating skilled nursing facilities are reimbursed under a prospective payment system for inpatient Medicare covered services. We often refer to the prospective payment system as PPS. The PPS commenced with a facility's first cost reporting period beginning on or after July 1, 1998. Under PPS, nursing facilities are paid a predetermined amount per patient, per day (“per diem”) based on the anticipated costs of treating patients. The per diem rate is determined by classifying each patient into one of fortyfour resource utilization groups using the information gathered as a result of each patients minimum data set assessment. We often refer to a resource utilization group as a RUG. There is a separate per diem rate for each of the RUG classifications. The per diem rate also covers rehabilitation and nonrehabilitation ancillary services. The law phased in PPS over a threeyear period.
As implemented by the Centers for Medicare and Medicaid Services, the PPS has had an adverse impact on the Medicare revenues of many skilled nursing facilities. There have been three primary problems. First, the base year calculations understate costs. Second, the market basket index used to trend payments forward does not adequately reflect market experience. Third, the RUG case mix allocation is not adequately predictive of the costs of care for patients, and does not equitably allocate funding, especially for nontherapy ancillary services.
In November 1999, the Balanced Budget Refinement Act was passed in Congress. This enactment provided relief for certain reductions in Medicare reimbursement caused by the Balanced Budget Act of 1997. For covered skilled nursing facility services furnished on or after April 1, 2000, the federal per diem rate was increased by 20% for 15 RUG payment categories. While this provision was initially expected to adjust payment rates for only six months, the Centers for Medicare and Medicaid Services withdrew proposed RUG refinement rules. These payment addons will continue until the Centers for Medicare and Medicaid Services completes certain mandated recalculations of current RUG weightings. On April 23, 2002, the Centers for Medicare and Medicaid Services issued a press statement announcing that the agency would not proceed with its previously announced changes in the skilled nursing facility casemix classification system. In its announcement, the Cente
rs for Medicare and Medicaid Services clarified that casemix refinements would be postponed for a full year (through our fiscal year 2003).
For fiscal years 2001 and 2002, the Balanced Budget Refinement Act mandated the federal per diem rates for all RUG categories be increased by an additional 4% over the required market basket adjustment. The law provided that certain specific services (such as prostheses and chemotherapy drugs) would be reimbursed separately from and in addition to the federal per diem rate. A provision was included that provided for cost report years beginning on or after January 1, 2000, skilled nursing facilities could waive the PPS transition period and elect to receive 100% of the federal per diem rate. The enactment also lifted for two years a $1,500 cap on rehabilitation therapy services provided under Medicare Part B.
On December 15, 2000, Congress passed the Benefits Improvement and Protection Act that increased the nursing component of federal PPS rates by 16.7% for the period from April 1, 2001 through September 30, 2002. The legislation also changed the 20% addon to 3 of the 14 rehabilitation RUG categories to a 6.7% addon to all 14 rehabilitation RUG categories beginning April 1, 2001. The Medicare Part B consolidated billing provision of the Balanced Budget Refinement Act was repealed except for Medicare Part B therapy services and the moratorium on the $1,500 therapy caps which was extended through calendar year 2002. These changes have had a positive impact on operating results.
A number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act enactments which provided additional funding for Medicare participating skilled nursing facilities expired on September 30, 2002. The expiration of these provisions has reduced our Medicare per diems per beneficiary, on average, by $34.
The Centers for Medicare and Medicaid Services issued notice of fiscal year 2003 rates for the skilled nursing facilities PPS in the Federal Register, July 31, 2002. Effective October 1, 2002, rates will be increased by a 2.6% annual market basket adjustment. The Centers for Medicare and Medicaid Services estimate that, even with this upward adjustment, average Medicare rates will be 8.8% lower than the current year because of the reduced payment caused by the expiring statutory addons.
We estimate that the “Skilled Nursing Facilities Medicare Cliff,” factoring in the administrative decision not to proceed with changes in the casemix refinements at this time and without factoring in any additional Congressional action, will expose the skilled nursing facility sector to a 10% reduction. For us, this reduction could have an adverse annual revenue and operating income impact from continuing operations beginning October 1, 2002 of approximately $28 million after taking into consideration the 2.6% annual market basket adjustment.
The Skilled Nursing Facility Medicare Cliff could adversely impact the liquidity of our pharmacy and other service related business customers, resulting in their inability to pay us, or to pay us timely, for our products and services. This factor, coupled with the adverse impact of the Skilled Nursing Facility Medicare Cliff to the liquidity of our eldercare business, could require us to borrow in order to fund our working capital needs, and in turn, cause us to become more highly leveraged.
There may be additional provisions in the Medicare legislation affecting our other businesses.
Congress may consider changes affecting pharmacy, rehabilitation therapy, diagnostic services and the payment for services in other health
settings. There are two issues in particular that could have measurable negative impact, practitioner fee schedules and caps on Medicare Part B
therapies. Absent Congressional action, the formula driven payment structure for calendar year 2003 physician and nonphysician fee schedules
will be reduced by 4.4%. This reduction affects not only doctors, but also payment for most professional practitioners including licensed
rehabilitation professionals. Moreover, absent Congressional action, the moratorium on implementing payment caps on therapy services expires.
Medicare Part B therapy services in calendar year 2003 will be subjected to the caps and are expected to reduce our annual revenues and operating
income approximately $17 million and $3 million, respectfully.
The prospects for legislative relief are uncertain. The 107th Congress adjourned without resolving Medicare provider issues. The 108th Congress begins January 7, 2003. During the 107th Congress, the House of Representatives passed a package of Medicare amendments (late June 2002). Under the Housepassed measure, portions of the expiring provisions would be retained. The Balanced Budget Refinement Act increase of 4% would expire, and the 16.6% addon of the Benefits Improvement and Protection Act to the nursing portion of the skilled nursing facility PPS rates would be reduced to 12% in 2003, 10% in 2004, and 8% in 2005. Under this proposal, fiscal year 2003 rates would be 5.2% lower than those of the current year. Several attempts were made to secure Senate consideration of a slightly more favorable package of legislative amendments. Prospects for expeditious action by the incoming Congress are uncertain.
It is not possible to quantify fully the effect of potential legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on our business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not further adversely affect our business. There can be no assurance that payments under governmental and private thirdparty payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.
Our average Medicare rate per patient day in fiscal 1997, prior to the implementation of the PPS, was over $400. In Fiscal 1998, 1999, 2000, 2001 and 2002, the average Medicare rate per patient day was $390, $302, $294, $323 and $336, respectively.
The Balance Budget Act of 1997 contains provisions that have affected amounts paid to our NeighborCare pharmacy operations for pharmacy and medical supply products and services. Reimbursement for certain products covered under Medicare Part B is limited to 95% of the "average wholesale price." The move to PPS under the Balance Budget Act of 1997 has made pricing a more important consideration in the selection of pharmacy providers. Also, Congress included provisions in the Balance Budget Act of 1997 that would require nursing facilities to submit all claims for Medicarecovered services that their residents receive, both Medicare Part A and Medicare Part B, even if such services are provided by outside suppliers, including but not limited to pharmacy and rehabilitation therapy providers, except for certain excluded services. The Benefits Improvement and Protection Act, enacted in December 2000, repealed this provision, except for therapy services.
The Balance Budget Act of 1997 included several provisions affecting Medicaid. The Balance Budget Act of 1997 repealed the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities effective October 1, 1997. The Boren Amendment required that Medicaid payments to certain healthcare providers be reasonable and adequate in order to cover the costs of efficiently and economically operated healthcare facilities. Under the Balance Budget Act of 1997, states must now use a public notice and comment period in order to determine rates and provide interested parties a reasonable opportunity to comment on proposed rates and the justification for and the methodology used in calculating such rates. With the repeal of the federal payment standards, there can be no assurances that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to nursing facilities and pharmacies or that payments to nursing facili
ties and pharmacies will be made on a timely basis. The Balance Budget Act of 1997 also grants greater flexibility to states to establish Medicaid managed care projects without the need to obtain a federal waiver. Although these projects generally exempt institutional care, including nursing facilities and institutional pharmacy services, no assurances can be given that these projects ultimately will not change the reimbursement methodology for nursing facility services or institutional pharmacy services from feeforservice to managed care negotiated or capitated rates. We anticipate that federal and state governments will continue to review and assess alternative health care delivery systems and payment methodologies.
The Benefits Improvement and Protection Act enacted a phase out of intergovernmental transfer transactions by states whereby states artificially inflate the payments to certain public facilities to increase federal matching funds. This action may reduce federal support for a number of state Medicaid plans. The reduced federal payments may impact aggregate available funds requiring states to further contain payments to providers. We operate in several of the states that will experience a contraction of federal matching funds.
There are numerous reports affirming that the recent economic downturn has had a detrimental affect on state revenues. Historically these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for nursing homes and pharmacy services in the states in which we operate.
The reimbursement rates for pharmacy services under Medicaid are determined on a statebystate basis subject to review by the Centers for Medicare and Medicaid Services 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 to charge Medicaid no more than its lowest charge to other consumers in the state. Since 2000, federal Medicaid requirements establishing payment caps on certain drugs have been periodically revised. NeighborCare has participated in the efforts to review and interact with the Centers for Medicare and Medicaid Services on the revisions. This proactive involvement has helped in modifyi
ng the rate structures and thereby minimizing the impact of the new rules on NeighborCare’s operations.
Pharmacy coverage and cost containment are important policy debates at both the federal and state levels. One of the most contentious issues before the 107th Congress was legislation expanding coverage under Medicare for outpatient pharmaceutical services. In June, 2002 the House of Representatives passed a comprehensive measure that would have expanded coverage administered by pharmacy benefit managers. The Senate deadlocked in its deliberations. Medicare pharmacy coverage was an important issue during the 2002 midterm Congressional elections and, therefore, it is not unreasonable to expect that the 108th Congress will resume consideration of a benefit expansion. Many of the measures considered during the 107th Congress would include institutional longterm care pharmacy as covered under the definitions of an outpatient Medicare benefit. The measure that passed the House of Representatives included provisions that would
shift responsibility for pharmacy coverage for dually eligible Medicare beneficiaries from coverage currently provided under state Medicaid programs to coverage under the new Medicare benefit. If enacted, this approach could significantly alter the administration of and payment for longterm care pharmacy services.
A number of states have enacted or are considering containment initiatives. Many have focused on reducing what the state Medicaid program will pay for drug acquisition costs. Most states have lowered payment to a negative percentage of average wholesale price. Some have attempted to impose more stringent pricing standards. Institutional pharmacies are often paid a dispensing fee over and above the payment for the drug. To the extent that changes in the payment for drugs are not accompanied by an increase in the dispensing fee, margins could erode. Some states have explored efforts to restrict utilization (preferred drug lists, priorauthorization, formularies). A few states have attempted to extend the preferred Medicaid pricing to all Medicare beneficiaries.
NeighborCare has joined with other leading multistate institutional pharmacy companies to form the Alliance for Long Term Care Pharmacy (LTCPA) in an effort to influence the outcomes of both federal and statespecific legislative and regulatory activities. In this collaboration, LTCPA provides leadership to responding to specific issues. Presently, LTCPA has engaged representation in 23 states and Washington, DC. Such efforts are augmented by the government relations specialists of the various companies and by active grassroots efforts of pharmacy professionals. These proactive steps have been successful in an number of instances, but given the budgetary concerns of both federal and state governments. There can be no assurance that changes in payment formulas and delivery requirements will not have a negative impact going forward.
Federal 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 and pharmacy services, but have and will most likely include other services provided by us, including 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.
Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, licensure, certification and health planning. For our eldercare centers, this regulation relates, among other things, to the adequacy of physical plant and equipment, qualifications of personnel, standards of care and operational requirements. For pharmacy and medical supply products and services, this regulation relates, among other things, to operational requirements, reimbursement, documentation, licensure, certification and regulation of controlled substances. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, the revocation of licensu
re, decertification, imposition of temporary management or the closure of the facility.
All of our eldercare centers and healthcare services, to the extent required, are licensed under applicable law. All skilled nursing centers and healthcare services, or practitioners providing the services therein, are certified or approved as providers under one or more of the Medicaid and Medicare programs. Generally, assisted living centers are not eligible to be certified under Medicare or Medicaid. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State and local agencies survey all skilled nursing centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government sponsored third party payor programs. We believe that our eldercare centers and other sites of service are in substantial compliance with the various Medicare, Medicaid and state regulatory requirements applicable to
them. However, in the ordinary course of our business, we receive notices of deficiencies for failure to comply with various regulatory requirements. We review such notices and take appropriate corrective action. In most cases, we and the reviewing agency will agree upon the measures to be taken to bring the center into compliance with regulatory requirements. In some cases, the reviewing agency may take various adverse actions against a provider, including but not limited to:
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the imposition of fines; |
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suspension of payments for all or new admissions to the center; and |
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in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and revocation of a center’s or site of service’s license. |
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These actions may adversely affect a center’s ability to continue to operate, ability to provide certain services, and/or eligibility to participate in the Medicare or Medicaid programs or to receive payments from other payors. Certain of our centers have received notices in the past from state and federal agencies that, as a result of certain alleged deficiencies, the agency was taking steps to decertify
the centers from participation in Medicare and Medicaid programs.
All of our owned and leased skilled nursing centers are currently certified to receive benefits provided under Medicare. Additionally, all of our skilled nursing centers are currently certified to receive benefits under Medicaid. Both initial and continuing qualifications of a skilled nursing center to participate in such programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls.
During 2002, the Centers for Medicare and Medicaid Services piloted a new nursing home quality initiative in six states. Our facilities cooperated in these initiatives to generate improved reporting and public awareness. Based on the success of the pilot program the Centers for Medicare and Medicaid Services has announced its intention to roll out the program nationwide within the coming few months. In addition to the changes being driven by public agencies, a number of nursing home companies in conjunction with several national trade associations have signed a quality covenant. This covenant establishes quality benchmarks the signing companies are striving to obtain.
Many states in which we operate have adopted certificate of need or similar laws which generally require that a state agency approve certain acquisitions and determine that the need for certain bed additions, new services, and capital expenditures or other changes exist prior to the acquisition or addition of beds or services, the implementation of other changes, or the expenditure of capital. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in:
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the inability to provide the service; |
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the inability to operate the centers; |
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the inability to complete the acquisition, addition or other change; and |
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the imposition of sanctions or adverse action on the center's license and adverse reimbursement action. |
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During recent years several states have passed legislation altering their certificate of need requirements. Virginia is expected to phase out its certificate of need requirement, and Maryland is studying a similar action. These changes are not expected to materially alter our business opportunities.
We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or feesplitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:
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the “anti-kickback” provisions of the federal Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid; and |
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the “Stark laws” which prohibit, with limited exceptions, the referral of patients by physicians for certain services, including home health services, physical therapy and occupational therapy, to an entity in which the physician has a financial interest. |
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In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as a provider of medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. From time to time, we have sought guidance as to the interpretation of these laws, however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with our practices.
There have also been a number of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. During the past few years, the Department of Health and Human Services has issued a series of voluntary compliance guidelines. These compliance guidelines provide guidance on acceptable practices. Skilled nursing facility services and durable medical equipment, prosthetics, orthotics, supplies, and supplier performance practices have been among the services addressed in these publications. Our Corporate Integrity Program is working to assure that our practices conform. The Department of Health and Human Services also issues fraud alerts and advisory opinions. Directives concerning double billing, home health services and the
provision of medical supplies to nursing facilities have been released. It is
anticipated that areas addressed by these advisories may come under closer scrutiny by the government. While we have focused our internal compliance reviews to assure our practices conform with government instructions, we cannot accurately predict the impact of any such initiatives. See “Cautionary Statements
Regarding Forward Looking Statements” and “ Revenue Sources.”
We face additional federal requirements that mandate major changes in the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 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 the adoption of standards for the exchange of electronic health information. Among the standards that the Department of Health and Human Services may adopt pursuant to the Health Insurance Portability and Accountability Act 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 the Health Insurance Portability and Accountability Act was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law will result in additional costs. We have established a Health Insurance Portability and Accountability Act task force consisting of clinical, financial and information services professionals focused on the Health Insurance Portability and Accountability Act compliance.
The Department of Health and Human Services has released two rules to date mandating the use of new standards with respect to certain health care transactions and health information. The first rule establishes uniform standards for common health care transactions, including:
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health care claims information; |
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plan eligibility, referral certification and authorization; |
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claims status; |
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plan enrollment and disenrollment; |
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payment and remittance advice; |
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plan premium payments; and |
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coordination of benefits. |
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Second, the Department of Health and Human Services has released standards relating to the privacy of individually identifiable health information. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom we disclose information. The Department of Health and Human Services has proposed rules governing the security of health information, but has not yet issued these rules in final form.
The Department of Health and Human Services finalized the transaction standards on August 17, 2000. While we initially were required to comply with them by October 16, 2002, Congress passed legislation in December 2001 that delays for one year (until October 16, 2003) the compliance date, but only for entities that submit a compliance plan to the Department of Health and Human Services by the original implementation deadline. The Department of Health and Human Services issued the privacy standards on December 28, 2000, and, after certain delays, they became effective on April 14, 2001, with a compliance date of April 14, 2003. Once the Department of Health and Human Services has issued the security regulations in final form, affected parties will have approximately two years to be fully compliant. Sanctions for failing to comply with the Health Insurance Portability and Accountability Act health information practices provisions include criminal penalties and civil
sanctions.
Management is in the process of
evaluating the effect of Health Insurance Portability and Accountability Act
on us. At this time, management anticipates that we will be able to fully
comply with those Health Insurance Portability and Accountability Act requirements
that have been adopted. However, management cannot at this time estimate the
cost of compliance, nor can management estimate the cost of compliance with
standards that have not yet been finalized by the Department of Health and
Human Services.
It is not possible to fully quantify the effect of recent legislation, the interpretation or administration of such legislation or any other governmental initiatives on our business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not adversely affect our 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. Our financial condition and results of operations may be affected by the reimbursement process, which in our industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.
Marketing for eldercare centers
is focused at the local level and is conducted primarily by a dedicated regional
marketing staff, who call on referral sources such as hospitals, hospital
discharge planners, doctors, churches and various community organizations.
In addition to those efforts, our marketing objective is to maintain public
awareness of our eldercare centers and their capabilities. We take advantage
of our regional concentrations in our marketing efforts, where appropriate,
through consolidated marketing programs, which benefit more than one center. Tollfree regional phone lines assist the marketing
staff and direct referral sources, which speeds admissions by automated tracking
of bed availability and specialty care capabilities for each of our centers
and all of our affiliated centers.
We market specialty medical services to independent healthcare providers, in addition to providing such services to our owned, leased, managed and affiliated eldercare centers. We market our institutional pharmacy services, rehabilitation therapy services, group purchasing, respiratory therapy, diagnostic services and consulting services through a direct sales force which primarily calls on eldercare centers, hospitals, clinics and home health agencies.
In addition, a corporate marketing
department supports the eldercare centers and service companies in developing
promotional materials and literature focusing on our philosophy of care,
services provided and quality clinical standards as well as providing
industry research. See “Government Regulation” for a discussion
of the federal and state laws which limit financial and other arrangements
between healthcare providers.
We operate our core business under the names Genesis ElderCareand NeighborCare. Our logos, trademarks and service marks are featured in print advertisements in publications serving the regional markets in which we operate. Our marketing is aimed at increasing awareness among decision makers in key professional and business audiences. We are using advertising, including our toll free Genesis ElderCare lines, to promote our brand names in trade, professional and business publications and to promote services directly to consumers.
At September 30, 2002, we employed over 44,000 people, including approximately 32,000 fulltime and 12,000 parttime employees. Approximately 19% of these employees are pharmacists, physicians, nurses and other clinical professional staff.
We currently have 66 facilities
that are covered by, or are negotiating, collective bargaining agreements.
The agreements expire at various dates from December 2002 through 2006 and
cover approximately 4,800 employees. We believe that our relationship with
our employees is generally good.
We and our industry continue to experience shortages in qualified clinical professional staff, including pharmacists. We compete with other healthcare providers and with nonhealthcare providers for both professional and nonprofessional employees. As the demand for these services continually exceeds the supply of available and qualified staff, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals and to utilize outside contractors for these services at premium rates. Furthermore, the competitive arena for this shrinking labor market has created high turnover among clinical professional staff as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages. In addition to the wage pressures inherent in this environment, the cost of training new employees amid the high turnover rates has created added pressure on our operating
margins. While we have been able to retain the services of an adequate number of qualified personnel to staff our facilities and sites of service appropriately and maintain our standards of quality care, there can be no assurance that continued shortages will not affect our ability to attract and maintain an adequate staff of qualified healthcare personnel in the future. A lack of qualified personnel at a facility could result in significant increases in labor costs at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect our operating results or expansion plans. See “Risk Factors.”
Employee Training and Development
We believe that nursing and professional staff retention and development has been and continues to be a critical factor in our successful operation. In response to this challenge, a compensation program which provides for annual merit reviews as well as financial and quality of care incentives has been implemented to promote staff motivation and productivity and to reduce turnover rates. Management believes that our wage rates for professional nursing and pharmacy staff are commensurate with market rates.
In addition, we have established
an internal training and development program for both nurse assistants and
nurses. Employee training is emphasized through a variety of inhouse
programs as well as a tuition reimbursement program. We have established,
the Genesis Nursing Assistant Specialist Program. Classes, which are held
on the employee’s time, at our cost, last for approximately six months
and provide advanced instruction in nursing care. When all of the requirements
for class participation have been met, the nurse aides graduate and are awarded
the title of geriatric nursing assistant specialist and they are given a salary
adjustment. The geriatric nursing assistant specialist then takes on additional
responsibilities, acting in an enhanced, leadership roll in the center. As
a geriatric nursing assistant specialist continues along his/her career path,
we provide further incentives.
Similar programs are currently under development for both pharmacy technicians and nursing assistants who work in the assisted living environment. In addition, plans are underway to include specialized studies in the areas of end of life and/or dementia for future geriatric nursing assistant specialists.
We began a junior level management and leadership training program in 1990 referred to as the Pilot Light Program. The target audience for this training is registered nurses and licensed practical nurses occupying charge nurse positions within our nursing centers as well as our junior level corporate managers. Over 1,300 participants have graduated from this program.
Corporate Integrity Program
Our Corporate Integrity Program was developed to assure that we continue to achieve our goal of providing a high level of care and service in a manner consistent with all applicable state and federal laws and regulations, and our internal standard of conduct. This program is intended to allow personnel to prevent, detect and resolve any conduct or action that fails to satisfy all applicable laws and our standard of conduct.
We have a corporate compliance officer responsible for administering the Corporate Integrity Program. The corporate compliance officer, with the approval of the chief executive officer or the board of directors, may use any of our resources to evaluate and resolve compliance issues. The corporate compliance officer reports significant compliance issues to the board of directors.
We established the Corporate Integrity Program hotline, which offers a tollfree number available to all of our employees to report noncompliance issues. Employee calls to the hotline will be kept anonymous unless the employee waves his/her right to anonymity. All calls reporting alleged noncompliance are logged, investigated, addressed and remedied by appropriate company officials.
The corporate integrity subcommittee was established to ensure a mechanism exists for us to monitor compliance issues. The corporate integrity subcommittee members are senior members of the reimbursement, risk management, human resources, legal, clinical practices, internal audit and operations departments.
Periodically, we receive information from the Department of Health and Human Services regarding individuals and providers that are excluded from participation in Medicare, Medicaid and other federal healthcare programs. Providers may include medical directors, attending physicians, vendors, consultants and therapists. On a monthly basis, management compares the information provided by the Department of Health and Human Services to databases containing providers and individuals doing business with us. Any potential matches are investigated and any necessary corrective action is taken to ensure we cease doing business with that provider and/or individual.
Competition in the Healthcare Services Industry
We compete with a variety of other companies in providing healthcare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than us. Competing companies may offer newer or different centers or services than us and may thereby attract our customers who are either presently residents of our eldercare centers or are otherwise receiving our healthcare services.
The provision of pharmacy services in the longterm care industry is highly competitive. NeighborCare is one of the largest providers of pharmacy services to the longterm care industry in the United States. In the 41 states we sell pharmacy products and services, we compete with multiple local, regional and national institutional pharmacies. Institutional pharmacies compete principally on the basis of quality, cost effectiveness and service level. In addition, we compete with multiple local, regional and national retail pharmacies; many of whom are more established in the markets in which we operate.
We operate eldercare centers in 15 states. In each market, our eldercare centers may compete for customers with rehabilitation hospitals, subacute units of hospitals, skilled or intermediate nursing centers, and personal care or residential centers. Certain of these providers are operated by notforprofit organizations and similar businesses that can finance capital expenditures on a taxexempt basis or receive charitable contributions unavailable to us. In competing for customers, a center's local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, health maintenance organizations, the customer's families and friends, and other community organizations.
Members of a customer's family generally actively participate in the selection of an eldercare center. Competition for subacute patients is intense among acute care hospitals with longterm care capability, rehabilitation hospitals and other specialty providers and is expected to remain so in the future. Important competitive factors include the reputation in the community, services offered, the appearance of a center, and the cost of services.
We compete in providing other specialty medical services with a variety of different companies. Generally, this competition is national, regional and local in nature. The primary competitive factors in these businesses are similar to those in the inpatient and pharmacy business and include reputation, the cost of services, the quality of clinical services, responsiveness to customer needs, and the ability to provide support in other areas such as third party reimbursement, information management and patient recordkeeping. See “Risk Factors.”
We have experienced an adverse effect on our operating cash flow due to an increase in the cost of certain of our insurance programs. Rising costs of eldercare malpractice litigation, and losses stemming from these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. Also, a tightening of the reinsurance market has affected property, auto and excess liability insurance carriers. Accordingly, the costs of all insurance premiums have increased. These problems are particularly acute in the State of Florida where, because of a greater number and higher amount of claims, general liability and professional liability costs have become increasingly expensive. We own or lease approximately 1,500 skilled nursing beds in the State of Florida, representing six percent of our total owned and leased beds.
Prior to June 1, 2000, we purchased general and professional liability insurance coverage from various commercial insurers on a first dollar coverage basis. Beginning with the June 1, 2000 policy, we have purchased general and professional liability insurance coverage from a commercial insurer subject to per claim retentions. These retentions are insured by our whollyowned captive insurance company, Liberty Health Corp., LTD. Liberty Health Corp. is currently insuring workers’ compensation, auto and general and professional liability insurance retentions.
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Workers’ compensation insurance has been maintained as statutorily required, or in certain jurisdictions for certain periods, we have qualified as exempt or selfinsured. Most of the commercial insurance purchased is loss sensitive in nature. As a result, we are responsible for adverse loss development.
We provide several health insurance options to our employees, including a selfinsured health plan and several fullyinsured health maintenance organizations.
We believe that adequate reserves are in place to cover the ultimate liability related to general and professional liability, workers’ compensation and health insurance claims exposure. However, there can be no assurance that any current or future claims will not exceed applicable insurance coverage.
We are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Management does not believe that we will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect our capital expenditures, results of operations or financial condition.
On October 2, 2001, the effective date, we and The Multicare Companies, Inc., our 43.6% owned affiliate, consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September 20, 2001 order entered by the U.S. Bankruptcy Court for the District of Delaware approving our joint plan of reorganization. We have been operating out of bankruptcy since October 2, 2001.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Transactions and Events” for a further description of the nature and results of our reorganization and a description of other recent matters impacting our business and results of operations.
See “Risk Factors”.
Our Internet address is www.ghv.com. Information contained on our website is not part of this annual report on Form 10K. We make available free of charge on www.ghv.com our annual report on Form 10K, quarterly reports on Form 10Q and current reports on Form 8K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exhange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
In addition, you may request a copy
of these filings (excluding exhibits) at no cost by writing or telephoning
us at the following address or telephone number:
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, PA 19348
Attention: Investor Relations
Telephone: (610) 9252000
Pharmacy Sites of Service
The following table provides information by state as of November 30, 2002 regarding the pharmacy service locations owned or leased by our NeighborCare pharmacy operations.
All but three of these sites are leased. Our inability to make rental payments under these leases could result in loss of the leased property through eviction or other proceedings. Certain leases do not provide for nondisturbance from the mortgagee of the fee interest in the property and consequently these leases are subject to
termination in the event that the mortgage is foreclosed following a default by the owner.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
Pharmacies |
|
|
Medical
Supply/
Home Medical
Equipment Sites |
|
|
Community
Based
Pharmacies |
|
|
Total |
|
|
Total
Square
Feet |
|
|
|
Pennsylvania |
|
|
5 |
|
|
4 |
|
|
2 |
|
|
11 |
|
|
208,724 |
|
Maryland |
|
|
6 |
|
|
5 |
|
|
27 |
|
|
38 |
|
|
204,272 |
|
New Jersey |
|
|
4 |
|
|
1 |
|
|
1 |
|
|
6 |
|
|
200,592 |
|
Virginia |
|
|
4 |
|
|
2 |
|
|
1 |
|
|
7 |
|
|
76,628 |
|
Florida |
|
|
3 |
|
|
2 |
|
|
- |
|
|
5 |
|
|
62,499 |
|
California |
|
|
4 |
|
|
1 |
|
|
- |
|
|
5 |
|
|
59,187 |
|
Indiana |
|
|
3 |
|
|
- |
|
|
- |
|
|
3 |
|
|
38,500 |
|
Wisconsin |
|
|
4 |
|
|
- |
|
|
- |
|
|
4 |
|
|
37,112 |
|
Massachusetts |
|
|
2 |
|
|
1 |
|
|
- |
|
|
3 |
|
|
30,265 |
|
South Carolina |
|
|
3 |
|
|
1 |
|
|
- |
|
|
4 |
|
|
26,899 |
|
Connecticut |
|
|
1 |
|
|
1 |
|
|
- |
|
|
2 |
|
|
24,960 |
|
Illinois |
|
|
4 |
|
|
1 |
|
|
- |
|
|
5 |
|
|
22,777 |
|
Rhode Island |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
21,600 |
|
New Hampshire |
|
|
1 |
|
|
1 |
|
|
- |
|
|
2 |
|
|
20,000 |
|
Ohio |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
16,200 |
|
West Virginia |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
15,794 |
|
Colorado |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
15,238 |
|
Oklahoma |
|
|
1 |
|
|
1 |
|
|
- |
|
|
2 |
|
|
14,905 |
|
Michigan |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
12,000 |
|
Oregon |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
10,000 |
|
North Carolina |
|
|
2 |
|
|
- |
|
|
- |
|
|
2 |
|
|
9,700 |
|
Iowa |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
6,803 |
|
New York |
|
|
2 |
|
|
1 |
|
|
- |
|
|
3 |
|
|
6,000 |
|
Kentucky |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
5,000 |
|
Texas |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
3,262 |
|
Washington |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
|
2,971 |
|
|
|
Totals |
|
|
59 |
|
|
22 |
|
|
31 |
|
|
112 |
|
|
1,151,888 |
|
|
|
Two institutional pharmacies, four medical supply / home medical equipment sites and two community based pharmacies are jointlyowned by us and independent thirdparties.
We believe that our physical properties are well maintained and are in a suitable condition for the conduct of our business.
25
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Inpatient Sites of Service
The following table provides information by state as
of November 30, 2002 regarding the eldercare centers we own, lease and manage. Included in the
center count are 33 standalone assisted living facilities with 3,003 units and 19 skilled
nursing facilities with 666 assisted living units. Certain properties are leased by the respective
operating entities from third parties. If we are unable to make rental payments under these leases
it could result in loss of the leased property through eviction or other proceedings. Certain leases
do not provide for nondisturbance from the mortgagee of the fee interest in the property and
consequently these leases are subject to termination in the event that the mortgage is foreclosed
following a default by the owner.
|
|
|
Wholly-Owned
Centers |
|
|
Leased
Centers |
|
|
Managed
Centers (1) |
|
|
Total |
|
|
|
|
|
|
Centers |
|
|
Beds |
|
|
Centers |
|
|
Beds |
|
|
Centers |
|
|
Beds |
|
|
Centers |
|
|
Beds |
|
|
|
Pennsylvania |
|
|
29 |
|
|
3,778 |
|
|
7 |
|
|
688 |
|
|
9 |
|
|
1,633 |
|
|
45 |
|
|
6,099 |
|
New Jersey |
|
|
20 |
|
|
3,095 |
|
|
12 |
|
|
1,976 |
|
|
8 |
|
|
747 |
|
|
40 |
|
|
5,818 |
|
Maryland |
|
|
13 |
|
|
1,686 |
|
|
6 |
|
|
843 |
|
|
12 |
|
|
1,675 |
|
|
31 |
|
|
4,204 |
|
Massachusetts |
|
|
13 |
|
|
1,742 |
|
|
2 |
|
|
250 |
|
|
28 |
|
|
1,961 |
|
|
43 |
|
|
3,953 |
|
West Virginia |
|
|
14 |
|
|
1,306 |
|
|
5 |
|
|
394 |
|
|
4 |
|
|
270 |
|
|
23 |
|
|
1,970 |
|
Florida |
|
|
13 |
|
|
1,626 |
|
|
2 |
|
|
178 |
|
|
|
|
|
|
|
|
15 |
|
|
1,804 |
|
Connecticut |
|
|
10 |
|
|
1,511 |
|
|
|
|
|
|
|
|
2 |
|
|
168 |
|
|
12 |
|
|
1,679 |
|
New Hampshire |
|
|
8 |
|
|
814 |
|
|
4 |
|
|
366 |
|
|
1 |
|
|
85 |
|
|
13 |
|
|
1,265 |
|
Illinois |
|
|
9 |
|
|
919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
919 |
|
Delaware |
|
|
4 |
|
|
502 |
|
|
|
|
|
|
|
|
3 |
|
|
319 |
|
|
7 |
|
|
821 |
|
Virginia |
|
|
4 |
|
|
556 |
|
|
1 |
|
|
240 |
|
|
|
|
|
|
|
|
5 |
|
|
796 |
|
Wisconsin |
|
|
5 |
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
718 |
|
Rhode Island |
|
|
3 |
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
373 |
|
North Carolina |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
340 |
|
|
2 |
|
|
340 |
|
Vermont |
|
|
3 |
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
314 |
|
|
Totals |
|
|
148 |
|
|
18,940 |
|
|
39 |
|
|
4,935 |
|
|
69 |
|
|
7,198 |
|
|
256 |
|
|
31,073 |
|
|
(1) Managed centers include 31 centers with 4,312 beds that are jointlyowned by us and independent thirdparties. Also included in “managed centers” are 19 transitional
care units with 481 beds located in hospitals principally in the state of Massachusetts.
Included in the total centers listed above are 20 centers with 2,291 beds that have been identified as either held for sale or discontinued operations, principally in the states of Illinois and Wisconsin.
We believe that our physical properties are well maintained and are in a suitable condition for the conduct of our business.
We are a party to litigation arising in the ordinary course of business. See “Cautionary Statements Regarding Forward Looking Statements.”
U.S. ex rel Scherfel v. Genesis Health Ventures et al.
In this action, brought in United States District Court for the District of New Jersey on March 16, 2000, the plaintiff alleges that a pharmacy purchased by NeighborCare failed to process Medicaid credits for returned medications. The allegations are vaguely alleged for other jurisdictions. While the action was under seal in United States District Court, we fully cooperated with the Department of Justice’s evaluation of the allegations. On or about March 2001, the Department of Justice declined to intervene in the suit and prosecute the allegations. The U.S. District court action is no longer under seal but remains administratively stayed pending resolution of the bankruptcy issues.
The plaintiff filed a proof of claim
in our bankruptcy proceedings initially for approximately $650 million and
more recently submitted an amended claim in the amount of approximately $325
million. We believe the allegations have no merit and have objected to the
proof of claim. In connection with an estimation of the proof of claim in
the bankruptcy proceeding, Debtors filed a motion for summary judgment urging
that the claim be estimated at zero. On or about January 24, 2002, the bankruptcy
court granted Debtors’ motion and estimated the claim at zero. On or about
February 11, 2002, the plaintiff appealed the bankruptcy court’s granting
of summary judgment to the U.S. District Court in Delaware and sought an injunction
preventing the distribution of assets according to the joint plan of reorganization.
The injunction was subsequently denied by the U.S. District Court for several
reasons, including that the plaintiff was unlikely to succeed on the merits.
When the injunction was denied by the U.S. District Court, the assets previously
reserved for the plaintiff’s claim were distributed in accordance with
the joint plan of reorganization. A hearing on the merits of the appeal was held
by teleconference on or about November 11, 2002, and a final decision from
the U.S. District Court is pending.
Litigation Relating to Manor Care, Inc.
We and our affiliates and Manor Care, Inc. and its affiliates had outstanding legal actions against each other stemming from the acquisition by our NeighborCare subsidiary of Manor Care’s pharmacy subsidiary, Vitalink. Set forth below are descriptions of all of these legal actions.
Manor Care, Inc. v. Genesis Health Ventures, Inc.
On August 17, 1999, Manor Care filed a lawsuit in the United States District Court for the District of Delaware against us. In this action, plaintiff brings claims under the federal securities laws resulting from alleged misrepresentations and omissions made by us in connection with Manor Care’s acquisition of our series G preferred stock as compensation for its sale of Vitalink to us. Plaintiff seeks compensatory damages of unspecified amount, rescission of Manor Care’s purchase of the series G preferred stock, and the return of the consideration paid by Manor Care at the time of our acquisition of Vitalink from Manor Care.
We filed a motion to dismiss this action. On September 29, 2000, the Court granted that motion in part and denied it in part. Specifically, the Court dismissed plaintiff’s allegations regarding purportedly fraudulent statements concerning: our knowledge as to certain legislative changes to the Medicare program; the effect of our affiliate Multicare on our earnings; our intent with respect to the issuance of preferred stock; and our ability to declare dividends on the series G preferred stock. Accordingly, the only allegations that were not dismissed from this action concern our alleged failure to include certain financial information in the registration statement we filed in connection with its acquisition of Vitalink, and allegedly fraudulent statements concerning our labor relations. Our motion to consolidate this action with the action Genesis Health Ventures Inc. v. HCR Manor Care, Inc., Manor Care, Inc., Paul A. Ormond, and Stewart Bainum, Jr., described
above, has been denied.
On October 22, 2001, plaintiff filed a motion to reconsider the Court’s decision to dismiss this action in part, and we filed our opposition to that motion. On December 5, 2001, we filed a motion to dismiss the entire action pursuant to our joint plan of reorganization and the Bankruptcy Court’s order confirming that reorganization plan, which extinguish plaintiff’s claims against us except to the extent that those claims may be applied as setoff or recoupment against claims brought by us. (As discussed below, the defendants repled the claims in this action as affirmative defenses of setoff or recoupment against the claims we have filed in Genesis Health Ventures, Inc. v. HCR Manor Care, Inc., Civil Action No. 99287 (D. Del.)).
On August 15, 2002, Genesis announced that Genesis and HCR Manor Care, Inc. have agreed to withdraw all outstanding legal actions against each other stemming from this matter.
27
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Motion to Assume the Master Service Agreements, filed in In re Genesis Health Ventures, Inc.
On January 16, 2001, NeighborCare filed a motion with the United States Bankruptcy Court for the District of Delaware seeking to assume the Master Service Agreements in its chapter 11 case. This motion was heard at the same time the Bankruptcy Court considered Manor Care's motion to lift the automatic stay. The Bankruptcy Court postponed any decision on the motion to assume pending the outcome of the AAA Arbitration. This issue is still pending.
NeighborCare Pharmacy Services, Inc. v. Omnicare, Inc. and Heartland Healthcare Services
On July 26, 1999, NeighborCare filed an action in the Circuit Court for Baltimore County, Maryland against Omnicare, Inc. and Heartland Healthcare Services, a joint venture between Omnicare and Manor Care. In this action, NeighborCare seeks injunctive relief, and compensatory and punitive damages of not less than $200 million, in connection with defendants' tortious interference with the Master Service Agreements.
The two defendants each filed motions to dismiss, or, in the alternative, to stay this action pending the resolution of the AAA Arbitration. On November 12, 1999, the Court granted the motions to stay, and set a January 31, 2000 hearing date for the motions to dismiss. Defendants subsequently withdrew their motions to dismiss prior to the hearing date.
NeighborCare Pharmacy Services, Inc. v. HCR Manor Care, Inc., Manor Care, Inc.and ManorCare Health Services, Inc.
On May 7, 1999, our whollyowned subsidiary, NeighborCare, filed a demand for arbitration under the commercial arbitration rules of the American Arbitration Association against HCR Manor Care, Inc., Manor Care, Inc. and ManorCare Health Services, Inc, collectively referred to as the respondents. The AAA arbitration principally concerns two longterm master service agreements between NeighborCare and ManorCare Health Services, Inc. Pursuant to one of these agreements, referred to as the master pharmacy agreement, NeighborCare provides pharmacy services to longterm care facilities owned or operated by Manor Care. Pursuant to the other agreement, referred to as the master infusion therapy agreement, NeighborCare provides infusion therapy products and services to Manor Care longterm care facilities.
In the AAA arbitration, NeighborCare sought injunctive relief and compensatory damages in connection with respondents' attempt to terminate the master service agreements, and respondents' failure to provide NeighborCare with the right to serve as the preferred provider of pharmacy and infusion therapy services to all Manor Care longterm care facilities pursuant to the master service agreements.
Respondents filed counterclaims requesting declaratory relief approving the purported termination of the master service agreements, as well as counterclaims seeking compensatory damages in connection with alleged overcharges under the two agreements.
The arbitrator, on May 17, 2000, declined to dismiss NeighborCare's claims for money damages for breach of its contractual right to serve as the preferred provider to all Manor Care longterm care facilities. However, the arbitrator did dismiss, without prejudice, NeighborCare's claim for specific performance of that right.
On June 15, 2000, in anticipation of our possible bankruptcy filing, the arbitrator stayed the AAA arbitration. In connection with this stay, the parties agreed that respondents may pay NeighborCare 90% 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 parties agreed, however, that respondents must continue to pay NeighborCare the full face amount of all invoices for pharmacy consulting services under the master service agreements.
On February 14, 2002, the arbitrator ruled in favor of NeighborCare. The arbitrator found that Manor Care did not lawfully terminate its service contracts with NeighborCare. As a result, the contracts between NeighborCare and Manor Care, which expire in October 2004, remain in full force until that time. The arbitrator also determined that NeighborCare had the right to damages because it was not offered the opportunity to service facilities owned and operated by Healthcare & Retirement Corporation of America, Inc., which was deemed to be an affiliate of Manor Care under the contract. The arbitrator awarded us $23.4 million, plus prejudgment interest, in compensatory damages. In addition, the arbitrator terminated his prior ruling that allowed Manor Care to withhold 10% of the payments owed to NeighborCare and Manor Care paid us an additional $9.1 million in funds representing the amounts withheld during the course of the AAA arbitration pursuant to the ar
bitrator's prior ruling.
In response to postdecision motions filed by NeighborCare and by respondents, the Arbitrator recalculated NeighborCare's damages, reducing them by approximately $2 million, and ruled that NeighborCare was not obligated, as a result of certain past events, to renegotiate the prices it offers to respondents for pharmacy and infusion therapy products and services.
Genesis Health Ventures, Inc. v. HCR Manor Care, Inc., Manor Care, Inc., Paul A. Ormond, and Stewart Bainum, Jr.
On May 7, 1999, we filed an action in the United States District Court for the District of Delaware against HCR Manor Care, Inc., Manor Care, Inc., Paul A. Ormond, and Stewart Bainum, Jr. In this action, we seek compensatory and punitive damages exceeding $2 million for federal securities fraud, commonlaw fraud, negligent misrepresentation and controlling person liability in connection with material misrepresentations and omissions made by defendants during the course of our acquisition of Vitalink. We further seek injunctive relief with respect to Manor Care's failure to dispose of its ownership interests in Heartland Healthcare Services, a competitor of NeighborCare, pursuant to a noncompetition provision found in a side agreement between Genesis, Vitalink and Manor Care.
Defendants filed a motion to dismiss or stay this action pending the resolution of the AAA arbitration. On March 22, 2000, the Court denied the defendants' motion to dismiss, but granted the motion to stay the case pending resolution of the AAA arbitration.
Manor Care of America, Inc. v. Genesis Health Ventures, Inc., the Cypress Group L.L.C., TPG Partners II, L.P., and Nazem, Inc.
On December 22, 1999, MCAI filed a lawsuit in the United States District Court for the Northern District of Ohio against us, the Cypress Group L.L.C., TPG Partners II, L.P., and Nazem, Inc. In this action, MCAI brings claims of federal securities fraud in connection with alleged misrepresentations and omissions made by us in connection with our issuance of Series H Preferred Stock and Series I Preferred Stock (the "Senior Preferred Stock") on or about November 15, 1999. In connection with the issuance of the Senior Preferred Stock, MCAI also brings state law breachofcontract claims with respect to our purported obligations under (1) a Rights Agreement entered into between us and MCAI at the time of our acquisition of Vitalink from MCAI, and (2) the terms of the Series G Preferred Stock issued to MCAI in connection with the Vitalink transaction. MCAI seeks rescission of the Senior Preferred Stock and unspecified monetary damages.
On February 29, 2000, we filed a motion to dismiss this action on the ground, among others, that the sole federal claim alleged fails to state a cause of action under federal securities laws. That motion has been fully briefed. In response to our reorganization, the Court, on July 19, 2000, stayed this action and ordered the case closed subject to reopening upon written motion.
Withdrawal of Outstanding Legal Actions
On August 15, 2002, we and Manor Care agreed to withdraw all of the remaining pending legal actions described above against each other stemming from the acquisition by our subsidiary, NeighborCare, of Manor Care's pharmacy subsidiary, Vitalink. We and Manor Care have also agreed to withdraw the prior pharmacy service agreement and have entered into a new pharmacy service agreement. The new pharmacy service agreement will run through January 2006 and covers approximately 200 Manor Care facilities. The new pharmacy service agreement replaced the agreement we had between us and Manor Care that was set to expire in 2004.
The pricing of the new pharmacy service agreement has been reduced by approximately $12.5 million annually based upon current sales volumes. The new pharmacy service agreement is retroactive to June 1, 2002.
On August 1, 2002, Omnicare, Inc. filed a lawsuit in the Court of Chancery, County of New Castle, State
of Delaware against NCS, its directors, we and Geneva Sub and subsequently filed an amended complaint on August 12, 2002 and a second amended
complaint on September 23, 2002, referred to as the “Omnicare complaint.” In the Omnicare complaint, Omnicare alleged, among other
things, that by agreeing to the terms of the voting agreements and the merger agreement, the named NCS directors breached their statutory obligation
to manage NCS and breached their fiduciary duties to NCS and NCS stockholders; that the grant of proxy under the voting agreements violated NCS's
certificate of incorporation and resulted in the shares of NCS class B common stock subject to those agreements (which carry 10 votes per share)
being converted automatically into shares of NCS class A common stock (which carry 1 vote per share); and that the termination fee that would be
paid by NCS to us under some circumstances is unreasonably high and therefore unenforceable. Omnicare also alleges that we and Geneva Sub aided and
abetted the NCS directors in breaching their fiduciary duties to NCS stockholders by entering into the voting agreements and merger agreement.
Omnicare asked the court to (i) declare that the NCS class B shares subject to the voting agreements had been irrevocably converted into NCS class A
shares; (ii) declare the merger agreement null and void; (iii) preliminarily and permanently enjoin NCS, the NCS directors, us and Geneva Sub from
taking further steps or actions with respect to the voting agreements and the merger agreement; (iv) preliminarily and permanently enjoin us and
Geneva Sub from aiding and abetting the named NCS directors from breaching their fiduciary duties; (v) declare the termination fee unreasonable,
invalid and unenforceable; and (vi) grant Omnicare such other relief as the court deems just and proper, including the cost and disbursements of
the action and reasonable attorneys' fees.
On August 7, 2002, Dolphin Limited Partnership L.L.P. ("Dolphin"), on behalf of all holders of
NCS Class A common stock (other than the named NCS defendant directors), filed a lawsuit in the Court of Chancery, County of New Castle,
State of Delaware against NCS, its directors, us and Genesis Sub (sic). In its complaint, Dolphin alleges that the named NCS directors breached
their fiduciary duties to holders of NCS Class A common stock by, among other things, entering into the voting agreements and the merger
agreement, and refusing to consider Omnicare's bid and not conditioning the NCS transaction on the approval of the holders of the
NCS Class A common stock as a separate class. Dolphin also alleged that we aided and abetted the named NCS directors in breaching their
fiduciary duties to the holders of NCS Class A common stock. Dolphin asked the court to (i) declare that the action is a class action
and certify Dolphin as the class representative and Dolphin's counsel as the class counsel; (ii) enjoin, preliminarily and permanently,
the NCS transaction; (iii) direct that the NCS transaction be conditioned on the approval of the holders of NCS Class A common stock as
a separate class; (iv) rescind the NCS transaction in the event that it occurs prior to the court's final judgment or award the holders
of NCS Class A common stock recissory damages; (v) direct that the named defendants account to Dolphin and the holders of NCS Class A
common stock for all damages caused by the defendants and account for all profits and any special benefits obtained as a result of the
alleged breaches of fiduciary duties; (vi) award Dolphin the costs and disbursements of the action, including a reasonable allowance
for the fees and expenses of Dolphin's attorneys and experts; and (vii) grant Dolphin and the holders of NCS Class A common stock such
further relief as the court deems just and proper.
On December 11, 2002, the Court of Chancery of the State of Delaware, pursuant to an order
of the Delaware Supreme Court dated December 10, 2002 which reversed prior rulings of the Court of Chancery, entered an order
preliminarily enjoining implementation of the merger between Geneva Sub and NCS pending further proceedings. On December 15, 2002, we
and Omnicare entered into a Termination and Settlement Agreement. Pursuant to the Termination and Settlement Agreement, we agreed to
terminate the merger agreement on Monday, December 16, 2002 by sending notice thereof to NCS, and Omnicare agreed to pay to Genesis,
an amount in cash equal to $22 million less any termination fees paid by or on behalf of NCS to Genesis under the merger agreement.
In addition, pursuant to the Termination and Settlement Agreement, Genesis and Omnicare each agreed to release the other party from
any claims arising from the merger agreement and not to commence any action against the other party arising out of or in connection
with the merger agreement. On December 16, 2002, Genesis terminated the merger agreement in accordance with its terms and provided written notice to NCS. On December 17, NCS paid us a termination fee of $6 million, as provided in the merger agreeement. The remainder of the $22 million agreed to with Omnicare will be paid if and when Omnicare subsequently announced its merger agreement with NCS.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 2002.
We will hold our 2003 Annual Meeting of Shareholders on April 9, 2003.
Pursuant to the proxy rules under the Securities and Exchange Act of 1934, as amended, our shareholders are notified that
the deadline for providing us timely notice of any shareholder proposal to be submitted outside of the Rule 14a8 process
for consideration at our 2003 annual meeting of shareholders will be February 1, 2003. As to all matters which we do
not have notice on or prior to February 1, 2003, discretionary authority shall be granted to the persons designated
in our proxy related to the 2003 annual meeting to vote on such proposal. With respect to inclusion of shareholder
proposals in our proxy materials related to the 2003 annual meeting, a shareholder proposal must be submitted to us
at our office located at 101 East State Street, Kennett Square, Pennsylvania 19348, by February 1, 2003.
Any such proposal must also comply with the proxy rules under the Exchange Act, including Rule 14a8.
The following table sets forth certain information with respect to our executive officers.
Name |
|
|
Age |
|
|
Position |
|
Robert H. Fish |
|
|
52 |
|
|
Interim Chairman
and Chief Executive Officer |
|
George V. Hager, Jr. |
|
|
46 |
|
|
Executive Vice President and
Chief Financial Officer |
|
Richard L. Castor |
|
|
47 |
|
|
Senior Vice President and Chief
Information Officer |
|
Barbara J. Hauswald |
|
|
43 |
|
|
Senior Vice President and Treasurer |
|
James V. McKeon |
|
|
38 |
|
|
Senior Vice President and Corporate
Controller |
|
Richard Pell, Jr. |
|
|
54 |
|
|
Senior Vice President, Administration
and Chief Compliance Officer |
|
Robert A. Smith |
|
|
54 |
|
|
President and Chief Operating
Officer, NeighborCare Pharmacy |
|
James W. Tabak, Esquire |
|
|
43 |
|
|
Senior Vice President, Human
Resources |
|
James J. Wankmiller, Esquire |
|
|
48 |
|
|
Senior Vice President, General
Counsel and Corporate Secretary |
|
Robert H. Fish has served as our director since October 2001, interim chief
executive officer since June 2002 and interim chairman since November 2002.
He is a managing partner of SonomaSeacrest, LLC, a Californiabased
healthcare practice specializing in strategic planning, performance improvement,
and merger and acquisition issues. Prior to joining Sonoma, Mr. Fish served as
president and chief executive officer of St. Joseph Health System and president
and chief executive officer of ValleyCare Health System. Mr. Fish holds a Bachelor
of Arts degree in Sociology and Anthropology from Whittier College and a Masters in
Hospital Administration from the University of California at Berkeley.
George V. Hager, Jr. serves as our executive
vice president and chief financial officer and is responsible for corporate finance, treasury,
investor relations, information services, third party reimbursement, risk management, real
estate and property management. Mr. Hager joined us in 1992 as vice president and chief
financial officer and was named senior vice president and chief financial officer in 1994.
He holds a Bachelor of Arts degree in Economics from Dickinson College and a Master of
Business Administration degree from Rutgers Graduate School of Management.
Richard L. Castor has served as our senior
vice president and chief information officer since June 2001, chief technology
officer since December 2000, and as president of our wholly-owned subsidiary, HealthObjects
Corporation, a software development company, since March 1998. Prior to that time, Mr.
Castor served as chief technology officer for Aetna for 2 years. Mr. Castor received a
Bachelor of Science degree in Computer Science from Denison University in 1977.
Barbara J. Hauswald has served as our senior
vice president since April 2000, and joined us as vice president and treasurer in April 1998.
Prior to joining us, Ms. Hauswald served as first vice president in the health care banking
department of Mellon Bank N.A. She received a Bachelor of Science degree in Commerce in
1981 from the University of Virginia.
James V. McKeon has served as our senior
vice president and corporate controller since April 2000. Mr. McKeon joined us in June 1994
as director of financial reporting and investor relations and served as our vice president
of finance and investor relations from November 1995 to April 1997. From April 1997 to
April 2000, Mr. McKeon served as our vice president and corporate controller. He received
a Bachelor of Science degree in Accountancy from Villanova University in 1986.
Richard Pell, Jr. has served as our senior
vice presidentadministration and chief compliance officer since April 1998. Mr. Pell
oversees the following areas: human resources, law, government relations, public relations,
staff development and corporate communications. He received a Bachelor of Science Degree
in Economics from the University of Pennsylvania in 1970 and a Masters Degree in Health Care
Administration from the Mt. Sinai School of Medicine, City University of New York in 1975.
Robert A. Smith has served as our president
and chief operating officer of NeighborCare, our institutional pharmacy business since
May 2001. Prior to being named president, Mr. Smith served as executive vice president
and chief operating officer of NeighborCare’s Allegheny region since November 1999.
He served as senior vice president of NeighborCare’s Allegheny region since
August 1998, a position he held with Vitalink Pharmacy Services prior to its acquisition
by NeighborCare. Mr. Smith has held senior management positions in several longterm
care pharmacy organizations since 1988 and holds a Bachelor of Science degree in Pharmacy
from Duquesne University.
James W. Tabak, Esquire has served as our
senior vice president of human resources since April 2000. Mr. Tabak oversees and directs
the function of the human resource department including human resource planning, employment,
training and development, labor relations, compensation, benefits and merit review system.
From January 1992, Mr. Tabak served as our associate general counsel and
vice president of human resources. He holds a Bachelor of Science degree in Political
Science from the University of Pennsylvania and a law degree from The Boston University School of Law.
James J. Wankmiller, Esquire has served as
our senior vice president, general counsel and corporate secretary since April 2000. Mr.
Wankmiller joined us in October 1996 as vice president and general counsel. Mr. Wankmiller
received his Bachelor of Science degree from St. Joseph’s University in 1976 and his
Juris Doctorate degree from Villanova University School of Law in 1980. He also serves on
the legal subcommittee of the American Health Care Association.
32
Back to Index
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock currently trades on the Nasdaq
National Market under the symbol “GHVI”. From October 15, 2001 until February 7,
2002 our common stock traded on the OTC Bulletin Board under the symbol “GHVE”.
Our common stock that was cancelled in connection with our reorganization was traded on the
New York Stock Exchange through June 22, 2000 and on the OTC Bulletin Board thereafter. The
following table indicates, for each of the quarters in the fiscal year ended September 30,
2002, the range of high and low closing prices of our common stock as reported on the OTC
Bulletin Board through February 7, 2002 and on the Nasdaq National Market thereafter.
The following table also indicates, for each of the quarters in the fiscal year ended
September 30, 2001, the range of high and low closing prices of our common stock that
was cancelled in connection with our reorganization as reported on the OTC Bulletin Board.
Fiscal Year Ending |
|
High |
|
|
Low |
September 30, 2002 |
|
|
|
|
|
First Quarter |
$ |
26.00 |
|
$ |
19.20 |
Second Quarter |
$ |
21.00 |
|
$ |
13.74 |
Third Quarter |
$ |
21.23 |
|
$ |
17.70 |
Fourth Quarter |
$ |
19.50 |
|
$ |
14.25 |
September 30, 2001 |
|
|
|
|
|
First Quarter |
$ |
0.20 |
|
$ |
0.03 |
Second Quarter |
$ |
0.41 |
|
$ |
0.11 |
Third Quarter |
$ |
0.36 |
|
$ |
0.02 |
Fourth Quarter |
$ |
0.08 |
|
$ |
0.01 |
As of December 23, 2002, there were 6,369 shareholders
of record of our common stock. We have never declared or paid cash dividends on our
common stock. Our ability to pay dividends on our common stock is restricted by our senior
credit facility and senior secured note agreements. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources”. Management does not anticipate the payment of cash
dividends on our common stock in the foreseeable future.
See “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters Equity
Compensation Plans” for disclosure regarding our equity
compensation plans.
On October 2, 2001, we and Multicare consummated
a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a
September 20, 2001 order entered by the Bankruptcy Court approving our joint plan of
reorganization. In connection with our joint plan of reorganization, we issued or will
issue the following securities without registration under the Securities Act of 1933 in
reliance on Section 1145 of the Bankruptcy Code and the Bankruptcy Court order confirming
our joint plan of reorganization:
|
|
41,000,000 shares of our common
stock to our and Multicare’s creditors as identified in our joint
plan of reorganization. We issued 40,449,978 of these shares on various
dates from October 2, 2001 to December 23, 2002 and, as of December 23,
2002, 550,022 of these shares of common stock have not yet been issued;
|
|
|
|
|
|
$242.6 million of senior secured
notes on October 2, 2001 to our and Multicares senior secured creditors
as identified in our joint plan of reorganization; |
|
|
|
|
|
warrants to our and Multicare’s
unsecured creditors as identified in our joint plan of reorganization on
various dates in fiscal 2002. The warrants were
exercisable to purchase up to 4,559,475 shares of our common stock, subject
to adjustment. The warrants, which expired on October 2, 2002, had an exercise
price of $20.33 per share of our common stock, subject to adjustment; and |
|
|
|
|
|
425,946 shares of our Series
A convertible preferred stock to our and Multicare’s senior secured
creditors as identified in our joint plan of reorganization on various dates
in fiscal 2002. |
Each share of Series A convertible preferred stock is
convertible at any time and from time to time, at the option of the holder (optional conversion)
and all shares of Series A convertible preferred stock will be converted at any time after the
first anniversary of the date of original issuance of shares of Series A convertible preferred
stock if the average market price for a share of our common stock for 20 consecutive trading days
exceeds $30.00 (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), at our option (a mandatory conversion), in each case into fully paid and nonassessable shares of our common stock.
Each share of Series A convertible preferred stock is
convertible into the number of shares of our common stock which results from dividing (x) the
liquidation preference of $100 per each such share plus all accrued and unpaid dividends by
(y) the conversion price per share of $20.33 subject to adjustment, provided that, upon any
conversion of shares of Series A convertible preferred stock, we will have the right to pay
to the converting holder in cash the accrued and unpaid dividends on the shares of Series A
convertible preferred stock to be converted.
|
|
Successor
Company |
|
|
Predecessor
Company |
|
|
|
|
(Years ended September 30,
) |
|
|
2002 |
|
|
|
|
2001 |
|
|
|
2000 |
|
|
1999 |
|
|
1998 |
|
|
|
|
Statement of Operations Data
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
2,623,679 |
|
|
|
$ |
2,452,171 |
|
|
$ |
2,327,627 |
|
$ |
1,843,270 |
|
$ |
1,380,534 |
|
Income (loss) from continuing
operations |
|
|
73,794 |
|
|
|
|
(1,247,824 |
) |
|
|
(877,751 |
) |
|
(286,954 |
) |
|
(11,388 |
) |
Net
income (loss) attributable to common shareholders |
|
|
70,167 |
|
|
|
|
247,009 |
|
|
|
(883,455 |
) |
|
(290,050 |
) |
|
(25,900 |
) |
Per common share data (diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations |
|
|
1.76 |
|
|
|
|
(25.65 |
) |
|
|
(18.65 |
) |
|
(8.09 |
) |
|
(0.32 |
) |
Net
income (loss) attributable to common shareholders |
|
$ |
1.68 |
|
|
|
$ |
5.08 |
|
|
$ |
(18.77 |
) |
$ |
(8.17 |
) |
$ |
(0.74 |
) |
Weighted average common shares
diluted |
|
|
43,351 |
|
|
|
|
48,641 |
|
|
|
47,077 |
|
|
35,485 |
|
|
35,159 |
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands) |
|
$ |
51,635 |
|
|
|
$ |
43,721 |
|
|
$ |
51,981 |
|
$ |
77,943 |
|
$ |
56,663 |
|
Operating Data:
Inpatient Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payor
Mix |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
|
|
48 |
% |
|
|
|
48 |
% |
|
|
49 |
% |
|
52 |
% |
|
49 |
% |
Medicare |
|
|
30 |
% |
|
|
|
28 |
% |
|
|
25 |
% |
|
24 |
% |
|
26 |
% |
Private pay and other |
|
|
22 |
% |
|
|
|
24 |
% |
|
|
26 |
% |
|
24 |
% |
|
25 |
% |
Average owned/leased eldercare
center beds (1) |
|
|
24,139 |
|
|
|
|
24,783 |
|
|
|
14,286 |
|
|
15,522 |
|
|
15,137 |
|
Occupancy Percentage |
|
|
91 |
% |
|
|
|
91 |
% |
|
|
91 |
% |
|
91 |
% |
|
92 |
% |
Average managed eldercare center
beds (1) |
|
|
7,898 |
|
|
|
|
9,215 |
|
|
|
23,779 |
|
|
23,984 |
|
|
24,234 |
|
Pharmacy Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payor Mix |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term care facilities and other |
|
|
58 |
% |
|
|
|
60 |
% |
|
|
62 |
% |
|
63 |
% |
|
70 |
% |
Medicaid |
|
|
40 |
% |
|
|
|
37 |
% |
|
|
35 |
% |
|
33 |
% |
|
23 |
% |
Medicare |
|
|
2 |
% |
|
|
|
3 |
% |
|
|
3 |
% |
|
4 |
% |
|
7 |
% |
Average institutional pharmacy
beds served |
|
|
247,114 |
|
|
|
|
253,224 |
|
|
|
244,409 |
|
|
245,277 |
|
|
109,520 |
|
|
|
Successor
Company |
|
|
|
|
Predecessor
Company |
|
|
|
|
(As of September 30,) |
|
|
2002 |
|
|
|
2001 |
|
|
|
|
2000 |
|
|
1999 |
|
|
1998 |
|
|
|
|
Balance Sheet Data (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
449,006 |
|
|
$ |
282,016 |
|
|
|
$ |
304,241 |
|
$ |
235,704 |
|
$ |
243,461 |
|
Total assets |
|
|
1,989,495 |
|
|
|
1,839,220 |
|
|
|
|
3,127,899 |
|
|
2,429,914 |
|
|
2,627,368 |
|
Liabilities subject to compromise |
|
|
|
|
|
|
|
|
|
|
|
2,446,673 |
|
|
|
|
|
|
|
Long-term debt |
|
|
648,939 |
|
|
|
603,268 |
|
|
|
|
10,441 |
|
|
1,484,510 |
|
|
1,358,595 |
|
Redeemable preferred stock |
|
|
44,765 |
|
|
|
42,600 |
|
|
|
|
442,820 |
|
|
|
|
|
|
|
Shareholders’ equity (deficit) |
|
$ |
914,123 |
|
|
$ |
834,858 |
|
|
|
$ |
(246,926 |
) |
$ |
587,890 |
|
$ |
875,072 |
|
(1) |
In connection with
the consummation of the our joint plan or reorganization, 10,702 Multicare
beds previously classified as “Managed and Jointly-Owned Facilities”
were reclassified as “Owned and Leased Facilities.” See “Business
Reorganization.” |
Please refer to “Management's Discussion and
Analysis of Financial Condition and Results of Operations Certain Transactions and
Events” for a description of significant transactions. See also “Management’s
Discussion and Analysis of Financial Condition and Results of Operations Results of
Operations Factors Affecting Comparability of Financial Information.”
The statement of operations data from continuing
operations for all prior year periods has been adjusted for operations identified as discontinued. Operating data of the Predecessor Company has not been adjusted
to exclude discontinued operations. See “Management's Discussion
and Analysis of Financial Condition and Results of Operations Certain Transactions and
Events Assets Held for Sale and Discontinued Operations.”
35
Back to Index
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a leading provider of healthcare and support
services to the elderly. Our operations are comprised of two primary business segments,
pharmacy services and inpatient services. These segments are complemented by an array of other service
capabilities. See “ Certain Transactions and Events Change in
Strategic
Direction and Objectives.”
We provide pharmacy services nationwide through
59 institutional pharmacies (two are jointlyowned) and 22 medical supply and home medical
equipment distribution centers (four are jointlyowned). In addition, we operate 31
communitybased retail pharmacies (two are jointlyowned) which are located in or
near medical centers, hospitals and physician office complexes.
We provide inpatient services through skilled
nursing and assisted living centers primarily located in the eastern United States. We currently
own, lease, manage or jointly-own 256 eldercare centers with 31,073 beds of which 20 centers with 2,291 beds
have been identified as either held for sale or discontinued operations. See “ Certain Transactions and Events Assets Held for Sale and Discontinued Operations.” We include the
revenues of our owned and our leased centers in inpatient service revenues in our consolidated
statements of operations. Management fees earned from our managed and / or jointlyowned
centers are included in other revenues in our consolidated statements of operations.
We also provide rehabilitation services, diagnostic
services, respiratory services, hospitality services, group purchasing services and healthcare
consulting services, the revenues for which are included in other revenues in our consolidated
statements of operations.
Certain Transactions and Events
On June 22, 2000, we and certain of our 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, our 43.6% owned affiliate,
The Multicare Companies, Inc., and certain of its direct and indirect subsidiaries, 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”, “our bankruptcy” or other general references to these cases, unless
the context otherwise requires).
Our and Multicare’s financial difficulties
were attributed to a number of factors. First, the federal government made fundamental changes
to the reimbursement for medical services provided to individuals. The changes had a significant
adverse impact on the healthcare industry as a whole and on our and Multicare’s cash
flows. Second, the federal reimbursement changes exacerbated a longstanding problem of
inadequate reimbursement by the states for medical services provided to indigent persons under
the various state Medicaid programs. Third, numerous other factors adversely affected our and
Multicare’s 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 and Multicare
were too highly leveraged to service our debt, including our longterm lease
obligations.
On October 2, 2001, the effective date, we and
Multicare consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code
pursuant to a September 20, 2001 order entered by the U.S. Bankruptcy Court approving our joint
plan of reorganization. The principal provisions of our joint plan of reorganization were as
follows:
|
|
Multicare became our wholly-owned
subsidiary. We previously owned 43.6% of Multicare and managed its skilled
nursing and assisted living facilities under the Genesis Eldercare brand
name; |
|
|
|
|
|
New senior notes, new convertible
preferred stock, new common stock and new warrants were issued to our and
Multicare’s creditors. Approximately 93% of new common stock, $242.6
million in new senior notes and new preferred stock with a liquidation preference
of $42.6 million were issued to our and Multicare’s senior secured
creditors. New one year warrants to purchase an additional 11% of the new
common stock were issued, and approximately 7% of the new common stock have been or will
be issued to our and Multicare’s unsecured creditors; |
|
|
|
|
|
Holders of our and Multicare’s
pre-Chapter 11 preferred and common stock received no distribution and those
instruments were canceled; |
|
|
|
|
|
Claims between us and Multicare
were set-off against one another and any remaining claims were waived and
released; and |
|
|
|
|
|
A new board of directors was
constituted. |
On October 2, 2001, and in connection with the
consummation of the Plan, we entered into a senior credit facility agreement consisting of
the following: (1) a $150 million revolving line of credit (the “Revolving Credit
Facility”); (2) a $285 million term loan (the “Term Loan”) and (3) an $80
million delayed draw term loan (the “Delayed Draw Term Loan”) (collectively
the “Senior Credit Facility”).
In accordance with SOP 907 (as defined
below under “FreshStart Reporting”), we recorded all expenses incurred
as a result of the bankruptcy filing separately as debt restructuring and reorganization
costs. A summary of the principal categories of debt restructuring and reorganization
costs from continuing operations follows (in thousands):
|
|
|
Successor
Company |
|
|
|
|
Predecessor
Company |
|
|
|
|
|
|
2002 |
|
|
2001 |
|
2000 |
|
|
|
|
Professional, bank and other
fees |
|
$ |
2,570 |
|
|
|
$ |
59,393 |
|
$ |
29,935 |
|
Employee benefit related costs,
including severance |
|
|
|
|
|
|
|
16,786 |
|
|
4,529 |
|
Exit costs of terminated businesses |
|
|
|
|
|
|
|
5,877 |
|
|
|
|
Fresh start valuation adjustments
(1) |
|
|
|
|
|
|
|
1,001,351 |
|
|
|
|
Interest rate swap termination
charge |
|
|
|
|
|
|
|
|
|
|
28,331 |
|
Post confirmation mortgage adjustment |
|
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,270 |
|
|
|
$ |
1,083,407 |
|
$ |
62,795 |
|
|
|
|
(1) |
|
Fresh-start valuation adjustments on assets held for sale and discontinued operations totaling $32.4 million were reclassified as a component of the loss on discontinued operations for the twelve months ended September 30, 2001. |
Upon emergence from our Chapter 11 proceedings, we
adopted the principles of freshstart reporting in accordance with the American Institute
of Certified Public Accountants Statement of Position 907, “Financial Reporting
By Entities in Reorganization Under the Bankruptcy Code” (“SOP 907”)
/ (“freshstart reporting”). For financial reporting purposes, we adopted
the provisions of freshstart reporting effective September 30, 2001. In connection
with the adoption of freshstart reporting, a new entity was deemed created for financial
reporting purposes, the provisions of our joint plan of reorganization were implemented,
assets and liabilities were adjusted to their estimated fair values and our accumulated deficit
was eliminated.
On July 28, 2002, we and our wholly-owned
subsidiary, Geneva Sub, Inc., entered into an agreement and plan of merger
(the “Merger Agreement”) with NCS HealthCare, Inc. (“NCS”),
pursuant to which NCS was to become a wholly-owned subsidiary of us (the
“NCS Transaction”). NCS provides institutional pharmacy services
to approximately 196,000 long-term care and assisted living beds in 36
states.
Under the terms of the Merger
Agreement, each share of NCS class A and class B common stock were to be
converted into 0.1 of a share of our common stock. In connection with the
NCS Transaction, two NCS stockholders holding approximately 65% of the voting
power of NCS entered into voting agreements with us and NCS (“Voting
Agreements”) in which they agreed to vote all of their shares of NCS class A and class B common stock
in favor of the adoption of the Merger Agreement and against certain other actions
specified in the Voting Agreements, and in which they granted a limited proxy to us in furtherance of these actions.
After the Merger Agreement was
entered, Omnicare, Inc. made a cash tender offer for all of the NCS shares, at a price per share of $3.50 in cash. In
addition, seven separate lawsuits (one of which was filed by Omnicare) were filed alleging in general that certain
officers and directors of NCS breached their fiduciary duties to the NCS
stockholders by entering into the Merger Agreement and the Voting Agreements,
and sought to invalidate the Voting Agreements and enjoin the merger.
On December 11, 2002,
the Court of Chancery of the State of Delaware, pursuant to an order
of the Delaware Supreme Court dated December 10, 2002 which reversed prior determinations
of the Court of Chancery, entered an order preliminary enjoining
the consummation of the NCS transaction pending further proceedings.
On December 15, 2002, we entered into a termination and settlement
agreement with Omnicare whereby we agreed to terminate the Merger Agreement on December 16, 2002 and Omnicare agreed to pay to us $22 million. In addition, we and Omnicare each agreed to release the other from any claims arising from the Merger Agreement and not commence any action against one another
in connection with the Merger Agreement. On December 16, 2002 we provided notice to NCS terminating the Merger Agreement.
Change in Strategic Direction and Objectives:
Since our inception, our principal business plan was to
build networks of skilled nursing and assisted living centers in concentrated
geographic markets and broaden our array of higher margin specialty medical
services; principally institutional pharmacy and rehabilitation services.
This “network” strategy was in response to payors’ increasing
desire to contract with fewer companies to meet their total delivery care
needs. By offering a broad array of services, we sought to create an integrated
delivery system connecting our eldercare centers and ancillary service capabilities
to hospitals, physicians, managed care plans and other providers in a seamless
delivery network.
In the mid to late 1990’s,
we made significant acquisitions of, and investments in, both eldercare and
pharmacy operations. These acquired businesses principally operated in existing
market concentrations or in contiguous markets deemed attractive to build
future eldercare networks. Our stated mission during this period was to “redefine
how eldercare is delivered in America by using a coordinated, comprehensive
approach that helps older adults define and live a full life”. Our eldercare
centers were at the core of the network strategy and stated mission.
Leading up to and during our Chapter
11 proceedings, the eldercare segment of our business suffered from significant
cuts and pressures in funding sources, nursing labor cost increases in excess
of inflation, intensified regulatory oversight and intervention, and increases
in the cost of medical malpractice insurance. Also, during this time period,
changes in reimbursement policies caused a greater focus on drug costs and
utilization by customers of our pharmacy segment, putting pressure on pharmacy
pricing and revenue growth. Despite these pricing pressures, we were able
to grow pharmacy revenues at between 8%-9% per year between fiscal 1999
and 2001 through, among other things, new customer sales, higher drug pricing
and higher drug utilization from existing customers. In fiscal 1997, 65% and
22% of our total revenues were from inpatient services and pharmacy services,
respectively. By fiscal 2002, 51% and 43% of our total revenues were from
inpatient services and pharmacy services, respectively.
38
Back to Index
Upon emergence from Chapter 11 proceedings in October 2001,
a new board of directors was constituted. In the second fiscal quarter of
2002, the board of directors approved the engagement of strategic consulting
firms in an effort to:
|
|
evaluate our business portfolio; |
|
|
|
|
|
identify means to optimize each
business line; and |
|
|
|
|
|
evaluate market perceptions of
us and to recommend strategic alternatives to enhance shareholder value
and improve operating margins. |
Strategic consultants were also engaged to evaluate certain
components of our pharmacy operations in an effort to improve operating margins
of that segment.
The conclusions reached and recommendations
made in connection with these evaluations suggest greater growth potential
and less exposure to regulatory risk in our pharmacy segment than the eldercare
segment. Consequently, it is management’s intention to shift our long-term
strategic focus away from the eldercare network strategy in favor of a greater
commitment to the institutional pharmacy business. This fundamental shift
in strategic direction is expected to strengthen our financial position, tighten
our business focus and improve competitiveness in the pharmacy segment.
In October of 2002, we announced
that we retained UBS Warburg LLC and Goldman Sachs & Co. to assist in
exploring certain strategic alternatives, including but not limited to, the
potential sale or spin-off of our eldercare assets.
In addition to our long-term
strategy to invest in the pharmacy segment, management established the following
short-term strategic objectives:
|
|
evaluate and reduce overhead
costs; |
|
|
|
|
|
implement pharmacy segment margin
expansion plans; |
|
|
|
|
|
pursue operational efficiencies
in the inpatient services segment; |
|
|
|
|
|
retain a permanent chief executive
officer; |
|
|
|
|
|
pursue selective acquisitions;
and |
|
|
|
|
|
evaluate and rationalize under-performing
assets and business lines. |
Our progress to date on each of these objectives is as
follow:
Evaluate and reduce overhead
costs. In the fourth fiscal quarter of 2002, we completed an annualized
$16 million expense reduction program, which included the elimination of over
130 positions, coupled with cuts to certain non-labor expenses.
Implement pharmacy segment margin
expansion plans. The primary elements of our pharmacy segment margin expansion
plans include reducing product acquisition costs, improving labor utilization,
evaluating segment specific overhead costs, implementing operational best
demonstrated practices and improving credit administration. Beginning in the
fourth fiscal quarter of 2002, NeighborCare has begun implementation of certain
best demonstrated practice initiatives in five of its seven pharmacy regions,
and will expand to all pharmacy regions in fiscal 2003.
Pursue operational efficiencies
in the inpatient services segment. The primary elements of our inpatient
services segment operational efficiency improvements include a continued focus
on increasing quality payor mix, improving labor utilization, consolidating
key business processes and better leveraging our existing infrastructure within
our core markets to improve occupancy.
Retain a permanent chief executive
officer. We have engaged an outside executive search firm to identify
and recruit a permanent chief executive officer.
Pursue selective acquisitions. We continue
to critically evaluate selective acquisitions, particularly pharmacy and
other health service related businesses.
Evaluate and rationalize under-performing
assets and business lines. In the normal course of business, we continually
evaluate the performance of our operating units, with an emphasis on selling
or closing under-performing or non-strategic assets.
Strategic planning, severance and other related
costs.
We have incurred costs that are attributable to our long term
objective of transforming to a pharmacy based business and our short term
objectives discussed above. These costs are expected to continue
for the foreseeable future and are segregated in the statement of operations
as “strategic planning, severance and other related costs”. Details
of these costs and the amounts incurred, but not paid at September 30, 2002
follow (in thousands):
|
|
2002
Expense |
|
Accrued
at
September 30, 2002 |
|
|
|
Severance and related costs |
$ |
16,410 |
|
$ |
1,100 |
|
Strategic consulting fees |
|
4,730 |
|
|
621 |
|
Asset impairments |
|
4,875 |
|
|
|
|
|
|
Total |
$ |
26,015 |
|
$ |
1,721 |
|
|
Severance and related costs. In the third
fiscal quarter of 2002, Michael R. Walker resigned as our chief executive
officer. Our board of directors appointed Robert H. Fish as interim chief
executive officer. Also, in the third quarter of fiscal 2002, David C. Barr
resigned as vice chairman. Mr. Barr was responsible for oversight of the Genesis
Health Services entities which include pharmacy, rehabilitation therapy, respiratory
health services, hospitality services group purchasing, consulting and diagnostic
services. We recognized $12.6 million in severance and related costs relating
to the transition agreements with Mr. Walker and Mr. Barr.
In fiscal 2002, we announced an
expense reduction program, which included the termination of over 100 individuals
resulting in $3.8 million of severance related costs. At September 30, 2002,
$1.1 million remains unpaid, which is expected to be paid during fiscal 2003.
Subsequent to the fiscal year end,
in October 2002, Richard R. Howard resigned as vice chairman. Mr. Howard was
responsible for oversight of Genesis ElderCare’s regional operations,
as well as clinical practice, real estate and property management. We expect
to recognize $4.7 million in severance and related costs in the first quarter
of fiscal 2003 in connection with Mr. Howard’s transition agreement.
See “Cautionary Statements Regarding Forward Looking Statements”.
Strategic consulting fees.
During fiscal 2002, we engaged several strategic consulting firms at a cost
of $4.7 million, in connection with several of our new strategic objectives.
Initially, these firms were engaged to assist the board of directors and management
in the evaluation of our existing business model and the development of our
strategic alternatives. Additional services were procured to assist in the
evaluation of our pharmacy sales and marketing function and the bid selection
process in connection with the potential sale of the eldercare business.
We entered into a separate consulting
engagement to evaluate certain components of our pharmacy operations in an
effort to improve operating margins of that segment. The resulting performance
improvement initiatives are generally focused in the areas of:
|
|
customer account management;
and |
|
|
|
|
|
operational cost reductions through
best demonstrated practices, centralized repackaging and automated dispensing
enhancements. |
We recognize the cost of such consulting fees as the services
are performed, and expect to incur $2.0 million of additional consulting fees
in fiscal 2003, principally to continue the pharmacy performance improvement
initiatives. These performance improvement initiatives are expected to be
fully operational by fiscal 2004. If successful, we believe we can improve
current pharmacy operating income by as much as $18 million per year. See
“Cautionary Statements Regarding Forward Looking Statements”.
Asset Impairments. In the fourth quarter of fiscal 2002,
we incurred $4.9 million of asset impairment charges consisting of the write-down
in carrying value of two idle eldercare real estate properties and the exit
of an internet based business-to-business joint-venture partnership. We expect
to incur an additional $2 million of costs in fiscal 2003 in order to complete
our exit of the internet based business-to-business joint venture partnership.
See “Cautionary Statements Regarding Forward Looking Statements”.
Medical Supplies Service Agreement
During the third quarter of fiscal 2002, NeighborCare
entered into a seven year agreement with Medline Industries, Inc. for the
fulfillment of NeighborCare's bulk medical supply services to its customers.
Under the agreement, Medline will provide order intake, warehousing, delivery
and invoicing services. NeighborCare will earn a service fee from Medline
for providing sales and marketing services, calculated as a percentage of
the revenues earned by Medline for sales to NeighborCare customers. As a result
of this agreement, NeighborCare will no longer recognize revenue for the sale
of bulk medical supplies to its customers. The agreement does not include
certain products and services that NeighborCare will continue to sell directly
to customers. It is estimated that the agreement will result in an annual
reduction of medical supply revenue of approximately $45 million with no significant
impact on operating or net income.
Arbitration Award
On February 14, 2002, an arbitrator ruled in favor
of NeighborCare on all claims and counterclaims in the lawsuit involving HCR
Manor Care, Inc. and certain of its affiliates. The arbitrator found that
HCR Manor Care did not lawfully terminate the Master Service Agreements with
NeighborCare, so that those contracts remain in full force and effect until
the end of September 2004. The arbitrator awarded NeighborCare $21.9 million
in damages, which were recognized in fiscal 2002, for respondents’ failure
to allow NeighborCare to exercise its right under the Master Service Agreements
to service facilities owned and operated by a subsidiary of respondent HCR
Manor Care. In addition, the arbitrator terminated his prior ruling that allowed
respondents to withhold 10% of their payments to NeighborCare, and respondents
paid NeighborCare $9.1 million in funds representing the amounts withheld
during the course of the Arbitration pursuant to the arbitrator’s prior
ruling.
See — “Legal Proceedings”.
Amended Pharmacy Service Agreement with HCR Manor Care
On August 15, 2002, we announced that we
and HCR Manor Care, Inc. have agreed to withdraw all outstanding legal actions
against each other stemming from the acquisition by our subsidiary, NeighborCare,
of HCR Manor Cares pharmacy subsidiary, Vitalink. We and HCR Manor Care
have also agreed to withdraw the prior pharmacy service agreement and have
entered into a new pharmacy service agreement. The new pharmacy service agreement
will run through January 2006 and covers approximately 200 of HCR Manor Cares
facilities. The new pharmacy service agreement replaces the current pharmacy
service agreement between the two companies that was set to expire in 2004.
The pricing in the new pharmacy service agreement
has been reduced by approximately $12.5 million annually based upon current
sales volumes, and is retroactive to June 1, 2002.
See — “Legal Proceedings”.
Amended Pharmacy Service Agreement with Mariner Post-Acute Network, Inc.
Our NeighborCare pharmacy operations provide services
to 58 centers operated by Mariner Post-Acute Network. Inc., referred to as
“Mariner,” which represents four percent and two percent of net
revenues of NeighborCare and Genesis, respectively. On January 18, 2000, Mariner
filed voluntary petitions under Chapter 11 with the Bankruptcy Court, giving
Mariner certain rights under protection of the Bankruptcy Court to reject
the service contracts for those centers.
Effective November 1, 2001, the Mariner Bankruptcy Court
approved a settlement between NeighborCare and Mariner relating to these Mariner
service contracts, whereby, among other things: the form of the contracts was
restated and new pricing was implemented; and the term of the contracts was
extended for eighteen months through April 30, 2003, except that Mariner
has the right to terminate a limited number of service contracts in the
event of the disposition or closure of the subject facility. There can be no assurance that these services
will continue to be provided after the contracts current terms expire.
Assets Held for Sale and Discontinued Operations
On September 30, 2001, we adopted the provisions of Statement
of Financial Accounting Standards, No. 144 Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS
144). Under SFAS 144, discontinued businesses or assets held for sale
are removed from the results of continuing operations. During fiscal 2002,
we classified our ambulance business, all eldercare centers located in the
states of Wisconsin and Illinois, five eldercare centers in other states and
one medical supply distribution site as either held for sale or closed. The results of operations in the current and prior year periods,
along with any costs to exit such businesses in the current year period, are
classified as discontinued operations in the consolidated statements of operations.
Businesses sold or closed prior to our adoption of SFAS 144 continue to be
reported in the results of continuing operations.
We intend to sell our assets held
for sale within the next year and, accordingly, have classified the $46.1
million carrying value as assets held for sale in the consolidated balance
sheet.
The following table sets forth the
components of income (loss) from discontinued operations (in thousands):
|
|
Successor
Company |
|
|
|
|
Predecessor
Company |
|
|
|
|
|
|
2002 |
|
|
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) of
discontinued businesses |
$ |
541 |
|
|
|
$ |
(15,085 |
) |
$ |
7,720 |
|
Loss on discontinuation of businesses |
|
(6,487 |
) |
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
2,319 |
|
|
|
|
|
|
|
(3,012 |
) |
|
|
|
Income (loss) from discontinued
operations, net of taxes |
$ |
(3,627 |
) |
|
|
$ |
(15,085 |
) |
$ |
4,708 |
|
|
|
|
The loss on discontinuation of businesses includes
the write-down of assets to estimated net realizable value.
Sale of Ohio Operations
In fiscal 2000, effective May 31, 2000, Multicare sold
14 eldercare centers with 1,128 beds located in the state of Ohio for $33
million. We recorded a loss on the sale of the Ohio properties of $7.9 million.
Vitalink Transaction
In fiscal 1998, effective August 28, 1998, we
consummated the merger agreement with Vitalink Pharmacy Services, Inc., referred
to as Vitalink, pursuant to which Vitalink merged with and into our wholly-owned
subsidiary. Vitalink provides pharmaceutical products and services, enteral
and parenteral therapy supplies and services, urological and ostomy products,
intravenous products and services and pharmacy consulting services to independent
healthcare facilities.
Multicare Transaction and Restructuring
In fiscal 1998, effective October 1, 1997, Genesis
ElderCare Corp., a Delaware corporation owned 43.6% by us, acquired Multicare,
pursuant to a tender offer and merger (the “Multicare Transaction”).
Multicare was in the business of providing eldercare and specialty medical
services in selected geographic regions. In connection with the Multicare
Transaction, we entered into a management agreement pursuant to which we managed
Multicare’s operations. We also entered into an asset purchase agreement
with Multicare and certain of its subsidiaries pursuant to which we acquired
all of the assets used in Multicare’s outpatient and inpatient rehabilitation
therapy business, and a stock purchase agreement with Multicare and certain
subsidiaries pursuant to which we acquired all of the outstanding capital
stock and limited partnership interest of certain subsidiaries of Multicare
that were engaged in the business of providing institutional pharmacy services
to third parties.
In fiscal 2000, we entered into a restructuring agreement
with our Multicare joint-venture partners which resulted in certain changes
in control such that we began consolidating the financial statements of Multicare
effective October 1, 1999. This restructuring agreement also resulted in the
termination of a put option between us and the Multicare joint venture partners.
We issued $420 million of redeemable preferred stock as consideration for
the termination of the put option, which was recorded as the Multicare joint
venture restructuring charge in the consolidated statements of operations.
Results of Operations
Factors Affecting Comparability of Financial Information
As a consequence of the implementation of fresh-start reporting
effective September 30, 2001, the financial information presented in the consolidated
statement of operations and the statement of cash flows for the twelve months
ended September 30, 2002 are generally not comparable to the financial results
for the corresponding periods in fiscal 2001. To highlight the lack of comparability,
a solid vertical line separates the pre-emergence financial information from
the post-emergence financial information in the accompanying consolidated
financial statements and the notes thereto. Any financial information herein
labeled “Predecessor Company” refers to periods prior to the adoption
of fresh-start reporting, while those labeled “Successor Company”
refer to periods following adoption of fresh-start reporting.
The lack of comparability in the
accompanying consolidated financial statements is most apparent in our capital
costs (lease, interest, depreciation and amortization), as well as with minority
interests, debt restructuring and reorganization costs, and preferred dividends.
We believe that business segment operating revenue and operating income of
the Predecessor Company are generally comparable to those of the Successor
Company.
Fiscal 2002, fiscal 2001 and fiscal 2000 financial
information has been adjusted to exclude operations identified as either held
for sale or discontinued since our September 30, 2001 adoption of SFAS No.
144. Properties identified as held for sale or discontinued prior to our September
30, 2001 adoption of SFAS No. 144 continue to be reflected in the results
from continuing operations. See “ Certain Transactions and Events
Assets Held for Sale and Discontinued Operations”.
Operating income is defined as income
after operating expenses as they appear on the our consolidated statements
of operations and is calculated by subtracting salaries, wages and benefits;
cost of sales; other operating expenses and strategic planning, severance
and related costs from net revenues.
Fiscal 2002 Compared to Fiscal 2001:
Consolidated Results
Revenues
For the twelve months ended September 30, 2002,
revenues grew $171.5 million, or 7%, to $2,623.7 million compared
to $2,452.2 million for the same period in the prior year. Of
this growth, external pharmacy services revenue increased by $87.6
million, inpatient services revenue grew by $75.5 million and
all other business lines grew $8.4 million. See “Segment
Results” discussed further in this section for a discussion
of revenue fluctations.
Operating Expenses
Salaries, wages and benefits for the twelve months
ended September 30, 2002 increased $63.2 million, or 6%, to $1,108.6 million
from $1,045.4 million for the same period in the prior year. This increase
was offset by reductions of $9.3 million resulting from divested eldercare
centers exited in the twelve months ended September 30, 2001. Salaries, wages
and benefits cost, considering the impact of divested eldercare centers, increased
$72.5 million, or 7%, driven by operational growth, inflationary cost increases
and the relative mix of employed labor versus agency labor costs. Expressed
as a percentage of revenues, adjusted on a same-store-basis for the impact
of divested eldercare centers, salaries, wages and benefits were relatively
unchanged for the twelve months ended September 30, 2002 at 42.3% compared
to 42.5% for the same period in the prior year.
Cost of sales increased $62.7 million,
or 10%, for the twelve months ended September 30, 2002 to $705.5 million from
$642.8 million in the same period in the prior year. Of this increase, approximately
$54.3 million is attributed to pharmacy revenue growth, with the remaining
$8.4 million attributed to margin compression related to changes in payor
and product mix.
Our other operating expenses, including
our general and administrative expenses, decreased $83.3 million, or 13%,
for the twelve months ended September 30, 2002 to $554.1 million compared
to $637.4 million in the prior year. Of this reduction, $101.6 million relates
to costs recorded in the twelve months ended September 30, 2001 in connection
with certain uncollectible receivables, insurance related costs and other
charges included in other operating expenses (included in other
operating expenses and described more fully in the comparison of fiscal 2001
and 2000). After considering these costs and the loss of other operating costs
of divested eldercare centers ($4.3 million for the twelve months ended September
30, 2001), other operating expenses increased $22.6 million, or 4%.
For the twelve months ended September
30, 2002, we incurred $26 million of costs that are attributable to our change
in strategic direction and objectives. These costs are expected to continue
for the foreseeable future below the levels incurred in the current year and
are segregated in the statement of operations as “strategic planning,
severance and related costs”. There were no strategic planning, severance
and related costs incurred in fiscal 2001. For a detailed discussion of these
costs, see “ Certain Transactions and Events Change in Strategic
Direction and Objectives - Strategic Planning, Severance and Related Costs”.
As a result of the factors described
above, operating income increased $102.9 million, to $229.4 million for twelve
months ended September 30, 2002 from $126.5 million for the same period in
the prior year.
Capital Costs and Other
During the twelve months ended September 30, 2002, we recorded
a net gain of $21.9 million resulting from the award in the Manor Care arbitration.
In addition, we also recorded $1.9 million of gains on other legal settlements
in the twelve months ended September 30, 2002.
In October 2000, we sold an idle
232 bed eldercare center for cash consideration of $7 million, resulting in
a net gain on sale of $1.8 million. In April 2001, we sold an operational
121 bed eldercare center for cash consideration of $0.5 million, resulting
in a net loss of $2.3 million. The impact of these transactions was a net
loss on sale of eldercare centers of approximately $0.5 million.
Depreciation and amortization expense
decreased $41.3 million to $63.1 million for the twelve months ended September
30, 2002 compared to $104.4 million for the same period in the prior year.
The decrease was primarily caused by the impact of fresh-start reporting on
the carrying value of our property, plant and equipment, which were adjusted
to their estimated fair values as of September 30, 2001, and our September
30, 2001 adoption of an accounting pronouncement which no longer requires
the amortization of goodwill.
Lease expense decreased $7.3 million
for the twelve months ended September 30, 2002, to $27.7 million compared
to $35 million for the same period in the prior year. Of this decrease, $2.1
million is attributed to the divestitures or lease modifications of certain
leased eldercare centers. The remaining decrease of $5.2 million is principally
attributed to the discharge in bankruptcy of our lease financing facility.
Interest expense decreased $70.6
million for the twelve months ended September 30, 2002 to $48 million, compared
to $118.6 million for the same period in the prior year. For the twelve months
ended September 30, 2001, in accordance with SOP 90-7, we ceased accruing
interest following the petition date, June 22, 2000, on certain long-term
debt instruments classified as liabilities subject to compromise. Our contractual
interest expense for the twelve months ended September 30, 2001 was $214 million,
leaving $95.4 million of interest expense unaccrued for that period as a result
of the Chapter 11 cases. Interest expense for the twelve months ended September
30, 2002 has been accrued at the contractual rates. Contractual interest expense
for the twelve months ended September 30, 2002 decreased by $166 million compared
to the same period in the prior year. This decrease is attributed to the overall
reduction of debt levels following our emergence from bankruptcy in addition
to a lower weighted average borrowing rate.
During the twelve months ended September 30, 2002, we
recorded $4.3 million of debt restructuring and reorganization costs. $2.6
million related to post confirmation liabilities payable to the United States
Trustee related to Chapter 11 cases that remained open. With the exception
of three open cases, all other Chapter 11 cases were closed in July 2002.
The remaining $1.7 million represents a post confirmation charge resulting
from a settlement reached with the lender of a pre-petition mortgage obligation
for an amount that exceeded the estimated loan value established in the September
30, 2001 fresh-start balance sheet by $1.7 million. During the twelve months
ended September 30, 2001, we recorded $1,083.4 million of debt restructuring
and reorganization costs, consisting of legal, bank, accounting and other
costs of $59.4 million; $16.8 million for certain bankruptcy related salary
and benefit related costs, principally for a court approved special recognition
program; $5.9 million of costs associated with the divestiture of certain
businesses; and fresh-start valuation adjustments of $1,001.3 million. Fresh-start
valuation adjustments were recorded pursuant to the provisions of SOP 90-7,
which require entities to record their assets and their liabilities at estimated
fair values. The fresh-start valuation adjustment as described relates only
to continuing operations and is principally the result of the elimination
of predecessor company goodwill and the revaluation of property, plant and
equipment to estimated fair values.
Income tax expense for the twelve
months ended September 30, 2002 of $42.8 million was offset by a $10.3 million
tax credit realized pursuant to the Job Creation and Worker Assistance Act
of 2002. Our income tax expense is estimated using an effective tax rate of
39%. We did not record any income tax expense for the twelve months ended
September 30, 2001 due to our operating losses.
Equity in net earnings of unconsolidated
affiliates for the twelve months ended September 30, 2002 was $1.6 million
compared to equity in net loss of unconsolidated affiliates of $10.2 million
for the same period in the prior year, which is attributed to changes in the
earnings / losses reported by our unconsolidated affiliates.
Minority interests decreased $26.3
million during the twelve months ended September 30, 2002 to a loss of $2.8
million compared to income of $23.5 million for the comparable period in the
prior year. This decrease is primarily due to the 56.4% interest in the net
losses of Multicare attributable to the joint venture partners during the
twelve months ended September 30, 2001. Upon our emergence from bankruptcy,
we and Multicare merged, effectively terminating the joint venture and any
interest the joint venture partners had in Multicare.
Preferred stock dividends decreased
$43.0 million to $2.6 million during the twelve months ended September 30,
2002 compared to $45.6 million for the comparable period in the prior year.
This decrease is attributed to the cancellation of our predecessor company
preferred stock and related dividends, and offset with dividends on $42.6
million of the preferred stock issued in connection with our joint plan of
reorganization. At September 30, 2002, there were 421,796 shares of preferred
stock outstanding.
Losses from discontinued operations
decreased $11.5 million for the twelve months ended September 30, 2002, to
$3.6 million from $15.1 million for the same period in the prior year. During
the twelve months ended September 30, 2002, we identified 22 businesses as
either held for sale or discontinued operations. The results of operations
in the current year and prior year periods, along with any costs to exit such
businesses in the current year period, have been classified as discontinued
operations in the consolidated statements of operations. Businesses sold or
closed prior to our October 1, 2001 adoption of SFAS 144 continue to be reported
in the results of continuing operations. The decrease in losses from discontinued
operations for the twelve months ended September 30, 2002 compared to the
same period in the prior year is principally due to the level of fixed asset
write-downs to fair value in the 2001 period by the discontinued businesses
in connection with their adoption of fresh start reporting. See “ Certain
Transactions and Events Assets Held For Sale and Discontinued Operations”.
We recognized a $1,509.9 million
extraordinary gain during the twelve months ended September 30, 2001 in connection
with the discharge of liabilities subject to compromise pursuant to our joint plan
of reorganization.
Segment Results
We have two reportable segments: (1) inpatient services
and (2) pharmacy services. For a reconciliation of segment financial information
to the consolidated statements of operations, see note 22 to our consolidated
financial statements “Segment Information.”
45
Back to Index
Inpatient Services
Inpatient services revenue increased $75.5 million, or 6%,
to $1,331 million for the twelve months ended September 30, 2002 from $1,255.5
million for the same period in the previous year. Of this increase, $88 million
is principally attributed to increased payment rates. Our average rate per
patient day for the twelve months ended September 30, 2002 was $183 compared
to $169 for the comparable period in the prior year. This increase in the
average rate per patient day is principally driven by the full year effect
of the April, 2001 implementation of the Benefits Improvement and Protection
Act on our average Medicare rate per patient day ($336 in 2002 versus $326
in 2001), as well as increased Medicaid rates ($137 in 2002 versus $127 in
2001) in certain states, most notably in the states of Maryland and Florida.
Our non-Medicaid revenue mix (“Quality Mix”) for the twelve months
ended September 30, 2002 was 50.1% and relatively unchanged compared to 50.0%
for the comparable period in the prior year. Our rate increases are offset
by a decrease in revenue of $12.5 million resulting from eldercare center
divestitures. Total patient days decreased 132,038 to 7,287,876 during the
twelve months ended September 30, 2002 compared to 7,419,914 during the comparable
period last year. Of this decrease, 121,768 patient days are attributed to
eldercare center divestitures and decreased operating census of 19,709 patient
days as the result of a decline in overall occupancy; offset by the addition
of 9,439 patient days of two new eldercare centers.
Operating expenses for the twelve
months ended September 30, 2002 increased $50.2 million, or 5%, to $1,160.8
million from $1,110.6 million for the same period in the prior year. The primary
cost for this segment is salary, wage and benefit costs, which increased $26.6
million, or 4% for the twelve months ended September 30, 2002 to $645 million
from $618.4 million for the same period in the prior year. This increase is
net of $9.3 million of reduced salary, wage and benefit costs resulting from
eldercare center divestitures. Salary, wage and benefit costs, considering
the impact of divested eldercare centers, increased $35.9 million, or 6%,
driven by inflationary cost increases and the relative mix of employed labor
versus agency labor costs. As a percentage of net revenue, salary, wage and
benefit costs, once adjusted for the impact of divested eldercare centers,
was 48.5% for the twelve months ended September 30, 2002 compared to 49% for
the comparable period in the prior year. The decline in this ratio is attributed
to a disproportionate increase in revenue as a result of the full year impact
of the Benefits Improvement Protection Act in 2002 as compared to the increase
in labor related costs. The inpatient services segment has experienced continued
pressure on wage and benefit related costs mitigated by less reliance on agency
labor (primarily nursing costs) resulting from improved hiring and retention
trends. Other operating expenses, once reduced for the impact of divested
eldercare centers ($4.2 million for the twelve months ended September 30,
2001), increased $27.8 million, or 6%, to $515.8 million for the twelve months
ended September 30, 2002 compared to $488 million for the same period last
year. The increase was primarily driven by $9.4 million of additional ancillary
supply costs to treat a higher acuity customer base, increased property and
general liability insurance of $9.5 million and other operating costs of $11.0
million; offset by decreased agency labor costs (principally nursing costs)
of $2.1 million. External labor agencies charge us a premium labor rate compared
to salary, wage and benefits earned by employees.
As a result of the factors described
above, operating income increased $25.4 million, or 18%, to $170.2 million
for the twelve months ended September 30, 2002 from $144.8 million for the
same period in the prior year. Operating income margin improved to 12.8% in
the twelve months ended September 30, 2002 from 11.5% for the same period
in the prior year. Operating income of our segments does not include an allocation
of corporate overhead costs and certain other adjustments.
46
Back to Index
Pharmacy Services
Pharmacy services revenue (before intersegment eliminations)
increased $90 million, or 8%, to $1,224.4 million for the twelve months ended
September 30, 2002 compared to $1,134.4 million for twelve months ended September
30, 2001. Revenues from intersegment customers, which are eliminated in consolidation,
increased $2.4 million, or 2%, to $100.5 million for the twelve months ended
September 30, 2002 compared to $98.1 million for the same period in the prior
year. The increase in pharmacy service revenues with external customers increased
$87.6 million, or 8%, due to favorable changes in bed mix and patient acuity,
and increased product pricing.
Cost of sales (before intersegment
eliminations) increased $61.3 million, or 9%, for the twelve months ended
September 30, 2002, to $764 million from $702.7 million for the same period
in the prior year. Of this growth, $55.7 million is attributed to pharmacy
and medical supply revenue growth, and $5.6 million is due to margin compression
related changes in payor mix and reductions in reimbursement rates. As a percentage
of revenue, cost of sales for the twelve months ended September 30, 2002 and
2001 was 62%. Other operating expenses for this segment, including salaries,
wages and benefits, increased $17 million, or 5%, to $348.1 million for the
twelve months ended September 30, 2002 compared to $331.1 million for the
same period in the prior year. As a percentage of revenue, other operating
costs declined to 28% for the twelve months ended September 30, 2002 from
29% for the comparable period in the prior year. This decline is attributed
to improved cost control and the leveraging of fixed costs against increased
revenues.
As a result of the factors described above, operating
income increased $11.7 million, or 12% to $112.3 million for twelve months
ended September 30, 2002 from $100.6 million for the same period in the prior
year. Operating income margin improved to 9.2% in the twelve months ended
September 30, 2002 from 8.9% in the same period in the current year. Operating
income of our segments does not include an allocation of corporate overhead
costs and certain other adjustments.
Fiscal 2001 Compared to Fiscal
2000:
Consolidated Results
Revenues
For the twelve months ended September 30, 2001, net revenues
increased $124.6 million, or 5%, to $2,452.2 million from $2,327.6 million.
Of this growth, external pharmacy services revenue increased by $86.4 million,
inpatient service revenue increased $28.3 million and all other business lines
grew $9.9 million. See “Segment Results” discussed further in
this section.
Salaries, wages and benefits for the twelve months
ended September 30, 2001 increased $10.1 million, or 1%, to $1,045.4 million
from $1,035.3 million for the same period in the prior year. This increase
is offset by net reductions of $24.3 million resulting from divested eldercare
centers exited and new eldercare centers under operation in the twelve months
ended September 30, 2000. Salaries, wages and benefits cost, considering the
impact of divested and new eldercare centers, increased $34.4 million or 3%
driven by operational growth, inflationary cost increases and the relative
mix of employed labor versus agency labor costs. Expressed as a percentage
of revenues, adjusted on a same-store-basis for the impact of divested and
new eldercare centers, salaries, wages and benefits decreased for the twelve
months ended September 30, 2001 to 42.6% compared to 44.6% for the same period
in the prior year. This decrease as a percentage of revenue resulted from
net revenue growth in our pharmacy segment which is our least labor intensive
business, and therefore did not require proportional increases in labor related
costs.
Cost of sales increased $68.8 million,
or 12%, for the twelve months ended September 30, 2001 to $642.8 million from
$574 million in the same period in the prior year. Of this increase, $52.2
million is attributed primarily to pharmacy revenue growth, with the remaining
$16.6 million attributed to margin compression related to changes in payor
and product mix.
Our other operating expenses, including
our general and administrative expenses, decreased $230.4 million, or 27%,
for the twelve months ended September 30, 2001 to $637.5 million from $867.9
million in the prior year. Of the net decrease, $273.1 million is attributed
to a decrease in certain charges for the twelve month periods ended September
30, 2001 and 2000 equaling $101.6 million and $374.7 million, respectively
(included in other operating expenses and described more fully in the paragraphs
and tables that follow). In addition, operating expense was reduced by approximately
$18.6 million for the net operating cost savings resulting from divested and
new eldercare centers. Agency labor costs, including nursing agency costs,
increased approximately $12.8 million in the twelve months September 30, 2001.
The remaining operating cost growth of $48.5 million is attributed to operational
growth and general inflationary cost increases.
During fiscal 2001, we recorded costs in connection with
certain uncollectible receivables, insurance related costs and other charges
included in other operating expenses. The following table and discussion provides
additional information on these charges (in thousands):
|
2001 |
|
|
|
Notes
receivable, advances, and trade receivables, due from affiliated businesses
formerly
owned or managed deemed uncollectible |
$ |
30,048 |
|
Uncollectible
trade receivables |
|
39,249 |
|
Self-insured
and related program costs |
|
15,110 |
|
Other charges |
|
17,231 |
|
|
|
Total
uncollectible receivable, insurance related and other charges included
in other
operating expenses |
$ |
101,638 |
|
|
|
In fiscal 2001, we performed periodic assessments of the collectibility
of amounts due from certain affiliated businesses in light of the adverse
impact of PPS on their liquidity and profitability. As a result of our assessment,
the carrying value of notes receivable, advances and trade receivables due
from affiliates was written down by $30 million.
In fiscal 2001, we performed a re-evaluation
of our allowance for doubtful accounts triggered by deteriorations in the
agings of certain categories of receivables. We believe that such deteriorations
in the agings were due to several prolonged negative factors related to the
operational effects of the bankruptcy filings such as personnel shortages
and the time demands required in normalizing relations with vendors and addressing
a multitude of bankruptcy issues. As a result of this re-evaluation, we determined
that an increase in the allowance for doubtful accounts of $39.2 million was
necessary.
In fiscal 2001, as a result of adverse
claims development we re-evaluated the levels of reserves established for
certain selfinsured health and workers’ compensation benefits
and other insurance related programs. These charges were $15.1 million.
In addition, we incurred charges
of $17.2 million during fiscal 2001, principally related to contract and litigation
matters and settlements, and certain other charges.
During fiscal 2000, we recorded
charges in connection with the impairment of long-lived assets and other impairments
and charges. The following table and discussion provides additional information
on these charges (in thousands):
|
2000 |
|
|
|
Impairment of
long-lived assets |
$ |
234,009 |
|
Exit
costs and write-off of unrecoverable assets of six eldercare centers closed
or
leases terminated |
|
28,363 |
|
Investments
in information systems development abandoned in fiscal 2000 |
|
19,200 |
|
Uncollectible
trade and notes receivable due to customer bankruptcy or other
liquidity issues |
|
41,955 |
|
Other
charges, including third party appeal issues and other cost settlement
balances
deemed uncollectible and insurance related adjustments |
|
51,181 |
|
|
|
Total
asset impairments and other charges included in other operating expenses |
$ |
374,708 |
|
|
|
During fiscal 2000, in connection with our budget
preparations for the forthcoming year and in accordance with Statement of
Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of” (“SFAS No.
121”), we reviewed the current and projected undiscounted cash flows
of our eldercare centers and our NeighborCare pharmacy operations. This review
indicated that the assets of certain eldercare centers were impaired. The
fair market value of businesses deemed potentially impaired were then estimated
and compared to the carrying values of the long-lived assets. Any excess long-lived
asset carrying value over the estimated fair value was written-off. Fair value
was estimated using a per bed value determined by us. The total loss for SFAS
No. 121 impairments of $234 million is associated with 49 eldercare centers.
No impairment charge was assessed on the long-lived assets of our NeighborCare
pharmacy operations. The impairment charge recorded resulted in the write-off
of $185 million of goodwill and $34.6 million of property, plant and equipment.
During fiscal 2000, we closed or
were in the process of closing or terminating the leases of six underperforming
eldercare centers with 842 combined beds. As a result, a charge of $28.4 million
was recorded to account for certain impaired and abandoned assets of these
eldercare centers.
As a result of our Chapter 11 bankruptcy
filing and curtailment in funding availability, we assessed the recoverability
of our investment in certain information systems developed internally for
the operating needs of our institutional pharmacy and infusion therapy businesses.
Our assessment determined that $19.2 million of the carrying value of our
investment in these systems was unrecoverable through estimated future product
sales to third parties and future operating efficiencies.
During fiscal 2000, we performed
periodic assessments of the collectibility of amounts due from certain affiliated
businesses in light of the adverse impact of PPS on their liquidity and profitability.
In certain cases, customers filed for protection under Chapter 11 of the Bankruptcy
Code. As a result of our assessment, the carrying value of notes receivable,
advances and trade receivables due from these customers was written down $42
million.
In the fourth quarter of fiscal
2000, we performed an assessment of the collectibility of certain aged amounts
due from third party payors and concluded that $12.5 million was unrecoverable.
In addition, as a result of adverse claims development we reevaluated the
levels of reserves established for certain self-insured and other programs,
including workers’ compensation and general liability insurance, resulting
in a charge of $35.2 million.
As a result of the factors described
above, operating income increased $276.1 million to $126.5 million for the
twelve months ended September 30, 2001 from an operating loss of $149.6 million
in the prior year.
Capital costs and other
During the twelve months ended September 30, 2001, we
sold an idle 232 bed eldercare center for cash consideration of $7 million,
resulting in a net gain of $1.8 million; and we sold an underperforming 121
bed eldercare center for cash consideration of $0.5 million, resulting in
a net loss of $2.3 million. The impact of these transactions was a net loss
on sale of eldercare centers of $0.5 million for the twelve months ended September
30, 2001. During the twelve months ended September 30, 2000, effective May
31, 2000, Multicare sold 14 eldercare centers with 1,128 beds located in the
state of Ohio for $33 million. As a result of this transaction, we recorded
a loss on sale of the Ohio properties of $7.9 million.
In connection with the restructuring
of our Multicare joint venture partnership in the first fiscal quarter of
2000, we recorded a noncash charge of $420 million representing the
estimated cost to terminate a put option in consideration for the issuance
of preferred stock. The cost to terminate the put option was estimated based
upon our assessment that no incremental value was realized by us 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 $10 million, 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 $2.8 million,
of which $2.2 million is attributed to the closures or lease terminations
of certain eldercare centers, offset by an increase of $1.2 million attributed
to the consolidation of two newly leased eldercare centers. The remaining
decrease of $1.8 million is principally attributed to a decline in the weighted
average borrowing rate associated with a lease financing facility.
Interest expense decreased $84.3
million. In accordance with SOP 90-7, we ceased accruing interest following
the petition date, June 22, 2000, on certain long-term debt instruments classified
as liabilities subject to compromise. Our contractual interest expense for
the twelve months ended September 30, 2001 was $214 million, leaving $95.4
million of interest expense unaccrued for that period as a result of the Chapter
11 filings. Contractual interest expense for the twelve months ended September
30, 2001 decreased by $17.5 million compared to $231.5 million for the same
period in the prior year. Approximately, $34.4 million of the decrease is
primarily attributed to a lower weighted average borrowing rate, offset by
additional net capital and working capital borrowings under the Genesis debtor-in-possession
financing facility resulting in additional interest expense of $16.9 million.
During the twelve month periods ending September 30, 2001
and 2000 we recorded charges in connection with debt restructuring and reorganization
costs of $1,083.4 million and $62.8 million, respectively. In the twelve months
ended September 30, 2001, we recorded legal, bank, accounting and other costs
of $59.4 million in connection with the Chapter 11 cases; $16.8 million for
certain bankruptcy related salary and benefit related costs, principally for
a court approved special recognition program; $5.9 million of costs associated
with the divestiture of certain businesses and fresh-start valuation adjustments
of $1,001.3 million. Fresh-start valuation adjustments were recorded pursuant
to the provisions of SOP 90-7, which require entities to record their assets
and their liabilities at estimated fair values. The fresh-start valuation
adjustment as described relates only to continuing operations and is principally
the result of the elimination of predecessor company goodwill and the revaluation
of property, plant and equipment to estimated fair values. During the twelve
months ended September 30, 2000, we recorded legal, bank, accounting and other
costs of $29.9 million in connection with the Chapter 11 cases and $4.5 million
for certain bankruptcy related salary and benefit related costs, principally
for a court approved special recognition program. Also during the twelve months
ended September 30, 2000, as a result of the nonpayment of interest under
our then existing credit facility, certain provisions under existing interest
rate swap arrangements with Citibank were triggered. Citibank notified us
that they elected to force early termination of the interest rate swap arrangements,
and asserted a $28.3 million obligation.
Equity in net loss of unconsolidated
affiliates for the twelve months ended September 30, 2001 was $10.2 million
compared to $2.4 million for the comparable period in the prior year. This
increase of $7.8 million is attributed to changes in the earnings / losses
reported by our unconsolidated affiliates.
Minority interests decreased $108.9
million during the twelve months ended September 30, 2001 to $23.5 million
compared to $132.4 million for the comparable period in the prior year. This
decrease is principally attributed to a lower net loss reported by Multicare
and the resulting Multicare joint venture partners’ 56.4% interest in
the Multicare net loss for the period. The Multicare net loss was reduced
during the twelve months ended September 30, 2001 compared to the comparable
period in the prior year, principally due to lower asset impairment charges
and lower interest expense recognition under SOP 90-7.
As a result of the consummation
of our joint plan of reorganization, and in accordance with the provisions
of SOP 907, we recorded a $1,509.9 million extraordinary gain on the
discharge of certain of our indebtedness in the twelve months ended September
30, 2001.
Effective October 1, 1999, we 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 twelve months ended September 30, 2000, the cumulative effect of expensing
all unamortized start-up costs at October 1, 1999 was $16.4 million pre tax
and $10.4 million after tax.
Preferred stock dividends increased
$3 million to $45.6 million during the twelve months ended September 30, 2001
compared to $42.6 million for the comparable period in the prior year. This
increase is attributed to a full twelve months of accrued dividends on our
predecessor company preferred stock for the twelve months ended September 30,
2001 compared to ten and one-half months in the 2000 period.
Segment Results
Inpatient Services
Inpatient service revenue increased
$28.3 million in the twelve months ended September 30, 2001 to $1,255.5 million
from $1,227.3 million in the prior year. Of this increase, $71.4 million is
principally attributed to increased payment rates. Our average rate per patient
day for the twelve months ended September 30, 2001 was $169 compared to $153
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 implementation of
the Balanced Budget Refinement Act and the Benefits Improvement and Protection
Act on our average Medicare rate per patient day ($326 in 2001 versus $291 in
2000). Our non-Medicaid revenue mix (“Quality Mix”) for the twelve
months ended September 30, 2001 was 50.0% compared to 49.3% for the comparable
period in the prior year. Our rate increases are offset by a net decrease in
revenue of $43.1 million resulting from eldercare center divestitures and new
eldercare centers under operation. Total patient days decreased 438,318 to 7,419,914
during the twelve months ended September 30, 2001 compared to 7,858,232 during
the comparable period last year. Of this decrease, 374,373 patient days are
attributed to eldercare center divestitures, offset by the consolidation of
new eldercare centers under operation. A decrease of 20,329 patient days compared
to the comparable period in the prior year is attributed to one additional calendar
day in fiscal 2000 due to a leap year. The remaining decrease of 43,616 is the
result of a decrease in overall occupancy.
During fiscal 2000, the majority of our eldercare
centers located in the state of New Jersey transferred their hospitality function
from in-house employees to agency labor employed by our wholly-owned hospitality
services business. That fundamental change resulted in a significant reduction
in the salaries, wages and benefits expense of the inpatient segment and a
corresponding increase in agency purchased services recorded as a component
of other operating expenses. Consequently, the ensuing discussion of operating
expenses includes both salaries, wages and benefits and other operating costs
on a consolidated basis for ease of analysis when comparing the 2001 and 2000
fiscal periods. Operating expenses for the twelve months ended September 30,
2001 increased $43.2 million to $1,110.7 million from $1,067.5 million for
the same period in the prior year. In fiscal 2001, as a result of adverse
claims development we reevaluated the levels of reserves established for certain
self-insured health and workers’ compensation benefits and other insurance
related programs. For the inpatient services segment, these charges were $5.5
million. These increases are reduced by net operating cost savings of approximately
$36.8 million for eldercare center divestitures and new eldercare centers
under operation. Considering the impact of divested and new eldercare centers
and selfinsured benefit program charges, operating expenses increased
$74.5 million, or 7%, driven by inflationary cost increases and continued
pressure on wage and benefit related costs, including a greater reliance on
agency labor (primarily nursing costs) in fiscal 2001 compared to fiscal 2000.
As a result of the factors described
above, operating income declined $14.9 million, or 9%, to $144.9 million for
the twelve months ended September 30, 2001 from $159.8 million in the prior
year. Operating income margin declined to 11.5% in the twelve months ended
September 30, 2001 compared to 13% for the same period in the prior year.
Operating income of our segments does not include an allocation of corporate
overhead costs and certain other adjustments.
Pharmacy Services
Pharmacy services revenue (before intersegment eliminations)
increased $84.6 million, or 8%, to $1,134.4 million for the twelve months
ended September 30, 2001 compared to $1,049.8 million for twelve months ended
September 30, 2000. Revenues from intersegment customers, which are eliminated
in consolidation, decreased $1.8 million, or 2%, to $98.1 million for the
twelve months ended September 30, 2001 compared to $99.9 million for the same
period in the prior year, due to eldercare center divestitures. The increase
in pharmacy service revenues with external customers was $86.4 million or
9% due to favorable changes in bed mix and patient acuity, and increased product
pricing.
Cost of sales (before intersegment
eliminations) increased $70.1 million, or 11%, for the twelve months ended
September 30, 2001, to $702.7 million from $632.6 million for the same period
in the prior year. Of this growth, $51 million is attributed to pharmacy services
revenue growth, and $19.1 million is due to margin compression, related changes
in payor mix and reductions in reimbursement rates. As a percentage of revenue,
cost of sales for the twelve months ended September 30, 2001 and 2000 were
62% and 60%, respectively. Other operating expenses for this segment, including
salaries, wages and benefits, increased $2.9 million, or 1%, to $331.1 million
for the twelve months ended September 30, 2001 compared to $328.2 million
for the same period in the prior year. As a percentage of revenue, other operating
costs declined to 29% for the twelve months ended September 30, 2001 from
31% for the comparable period in the prior year. This decline is attributed
to improved cost control and the leveraging of fixed costs against increased
revenues.
As a result of the factors described
above, operating income increased $11.7 million, or 13% to $100.6 million
for twelve months ended September 30, 2001 from $88.9 million for the same
period in the prior year. Operating income margin improved to 8.9% in the
twelve months ended September 30, 2001 from 8.5% for the same period in the
prior year. Operating income of our segments does not include an allocation
of corporate overhead costs and certain other adjustments.
Liquidity and Capital Resources
Working Capital and Cash Flows
At September 30, 2002, we had cash and equivalents of
$148 million, net working capital of $449 million and $149.1 million of unused
commitment under our $150 million Revolving Credit Facility.
At September 30, 2002, we had restricted
investments in marketable securities of $86.1 million, which are held by Liberty
Health Corp. LTD., referred to as LHC, our 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, we and LHC
are precluded from freely transferring funds through intercompany loans, advances
or cash dividends.
Our cash flow from operations before debt restructuring
and reorganization costs for the twelve months ended September 30, 2002 generated
cash of $233.4 million compared to $51.7 million for the twelve months ended
September 30, 2001, principally due to higher levels of operating income,
reduced interest and lease payments following our reorganization, improvement
in the collection of accounts receivable, receipt of $21.9 million in cash
proceeds for an arbitration award and the timing of vendor payments and employee
wages. During the second quarter of fiscal 2002, we borrowed $42 million from
the Delayed Draw Term Loan to finance the repayment of all trade balances
due to NeighborCare® Pharmacy’s primary supplier of pharmacy
products. This change in credit terms resulted in reduced pharmacy product
acquisition costs, partially offset by an increase in interest expense on
the incremental Delayed Draw Term Loan borrowings. Assuming no future changes
in variable rates of interest, the net impact of this transaction is positive
to our cash flows. Cash payments for debt restructuring and reorganization
costs were $54.2 million for the twelve months ended September 30, 2002 compared
to $44.4 million for the same period in the prior year. We believe that cash
flow from operations, along with available borrowings under our Revolving
Credit Facility, are sufficient to meet our current liquidity needs.
Our days sales outstanding at September
30, 2002 was 54 days compared to 60 days at September 30, 2001. This reduction
is principally due to improvement in the collection of accounts receivable.
Our net cash used in investing activities
for the twelve months ended September 30, 2002 was $94.8 million, and includes
$51.6 million of capital expenditures. Capital expenditures consist primarily
of betterments and expansion of eldercare centers and investments in computer
hardware and software. In order to maintain our physical properties in a suitable
condition to conduct our business and meet regulatory requirements, we expect
to continue to incur capital expenditure costs at levels at or above those
for the twelve months ended September 30, 2002 for the foreseeable future.
Our investing activities for the
twelve months ended September 30, 2002 also include $33.9 million in net
investments in restricted investments in marketable securities, representing
the current period funding of self-insured workers’ compensation and
general / professional liability insurance retentions held by LHC, and $10.5
million in connection with the exercise of an option to purchase three formerly
leased eldercare centers.
Our cash flows from investing activities
for the twelve months ended September 30, 2002 and 2001 include $3 million
and $7 million, respectively, of cash proceeds from the sale of eldercare
center assets.
Our financing activities for the
twelve months ended September 30, 2002, resulted in net cash inflows of $31.5
million, and include $80 million of cash proceeds from borrowings under
the Delayed Draw Term Loan, of which $10 million were used to finance the
price of the purchase option to purchase three previously leased eldercare
centers, and $28 million was used to refinance several mortgages at more
favorable rates of interest. The Delayed Draw Term Loan was amended in December
2001 to allow $42 million of available credit under that loan to be used
to restructure credit terms with NeighborCare pharmacy’s primary supplier
of pharmacy products, as previously discussed. The Delayed Draw Term Loan
is fully drawn at September 30, 2002 and is being repaid with no additional
borrowings available under the Delayed Draw Term Loan.
The Senior Credit Facility requires
that we achieve certain levels of fixed versus variable interest rate exposure.
We were required to either enter into interest rate swap agreements that effectively
fix or cap the interest cost on at least 50% of our consolidated debt or refinance
such debt to achieve a mix of fixed rate debt of at least 50%. In order to
meet this requirement, we entered into interest rate swap agreements that
effectively convert underlying variable rate debt into fixed rate debt, as
well as a cap agreement. At September 30, 2002, after considering the $275
million notional principal amount of these agreements, our effective debt
mix is 48% variable rate and 52% fixed rate. See — “Quantitative
and Qualitative Disclosures About Market Risk.”
The Senior Credit Facility contains
an annual excess cash flow payment requirement. At the end of each fiscal
year, we are required to prepare an excess cash flow calculation as defined
in the senior credit agreement. Of the amount determined as excess cash flow,
75% is to be paid to our senior lenders in the form of a mandatory payment
by December 31 of each year. As of September 30, 2002, we estimate that $27
million will be paid on or near December 31, 2002 pursuant to the excess cash
flow recapture provision, and as a result, this estimated level of payment
has been classified in our consolidated balance sheet under the current installments
of long-term debt.
The agreements and instruments governing our existing debt
contain, and the agreements and instruments governing Genesis’ future
debt may contain, various restrictive covenants that, among other things,
require us to comply with or maintain certain financial tests and ratios and
restrict our ability to:
|
|
incur more debt;
|
|
|
pay dividends, redeem stock or
make other distributions;
|
|
|
make certain investments;
|
|
|
create liens;
|
|
|
enter into transactions with
affiliates;
|
|
|
make acquisitions;
|
|
|
merge or consolidate; and
|
|
|
transfer or sell assets. |
The Senior Credit Facility requires us to maintain compliance
with certain financial and nonfinancial covenants, including minimum
EBITDAR (as defined); limitations on capital expenditures, maximum leverage
ratios, minimum fixed charge coverage ratios and minimum net worth.
On October 2, 2001 and in connection
with the consummation of our joint plan of reorganization, we entered an indenture
agreement in the principal amount of $242.6 million (the “Senior Secured
Notes”). The Senior Secured Notes bear interest at LIBOR plus 5.0% (6.79%
at September 30, 2002), and amortize one percent each year and mature on April
2, 2007. The Senior Secured Notes are secured by a junior lien on real property
and related fixtures of substantially all of the our subsidiaries, subject
to liens granted to the lenders’ interests subject to the Senior Credit
Facility. The Senior Secured Notes may be prepaid at any time without penalty,
subject to restrictions in place under the Senior Credit Facility. Compliance
with certain financial and non-financial covenants is required, but they are
less restrictive than those required by the Senior Credit Facility.
For the twelve months ended September
30, 2002, we incurred $41.3 million of lease obligation costs and expect to
continue to incur lease costs at or above levels approximating those for the
twelve months ended September 30, 2002 for the foreseeable future. We classify
operating lease costs associated with our eldercare centers and corporate
office sites as lease expense in the consolidated statement of operations,
while the operating lease costs of pharmacy and other health service sites
are included within other operating expenses. For the twelve months ended
September 30, 2002, our lease expense was reduced $5 million in connection
with the amortization of net unfavorable lease credits established in fresh-start
reporting. Consequently, our cash basis lease cost was $45.8 million.
We believe that we have adequate
capital resources at our disposal to fund currently anticipated capital expenditures
as well as current and projected debt service requirements.
Proposed NCS Transaction
In connection with our proposed merger with NCS, we incurred
legal, bank and transaction related costs. Such costs do not exceed the $22
million break-up fee we anticipate receiving in the first and second quarters
of fiscal 2003. We will recognize a gain in the first quarter of fiscal 2003
representing the $22 million break-up fee less the costs we incurred in connection
with the proposed NCS Transaction.
We have future obligations for debt repayments, capital
leases and future minimum rentals under operating leases. The obligations
as of September 30, 2002 are summarized as follows (in thousands):
|
|
|
|
Payments
Due by Period |
|
|
|
Contractual
Obligation |
Total |
|
Less
than 1 year |
|
1-3
years |
|
4-5
years |
|
Thereafter |
|
|
|
Long-term debt |
$ |
679,402 |
|
$ |
37,011 |
|
$ |
19,616 |
|
$ |
566,278 |
|
$ |
56,497 |
|
Capital lease obligations |
|
10,281 |
|
|
3,733 |
|
|
4,568 |
|
|
1,980 |
|
|
|
|
Operating leases |
|
217,901 |
|
|
41,290 |
|
|
73,757 |
|
|
52,180 |
|
|
50,674 |
|
|
|
|
$ |
907,584 |
|
$ |
82,034 |
|
$ |
97,941 |
|
$ |
620,438 |
|
$ |
107,171 |
|
|
|
Certain of our underlying long-term debt and
lease obligations require us to maintain compliance with financial and nonfinancial
covenants, including minimum EBITDAR (as defined); limitations on capital
expenditures, maximum leverage ratios, minimum fixed charge coverage ratios
and minimum net worth. Failure to meet these covenants or the occurrence of
other defaults, such as non-payment, could result in the acceleration of the
maturity of such obligations.
We also have contingent obligations
related to outstanding lines of credit, letters of credit and guarantees.
These commitments as of September 30, 2002 are summarized as follows (in thousands):
|
|
|
|
Amount
of Commitment Expiration Per Period |
|
|
|
Off-Balance
Sheet Commitments |
Total |
|
Less
than 1 year |
|
1-3
years |
|
4-5
years |
|
Thereafter |
|
|
|
Lines
of credit |
$ |
4,960 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
4,960 |
|
Letters
of credit |
|
894 |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
Guarantees |
|
22,856 |
|
|
|
|
|
5,778 |
|
|
265 |
|
|
16,813 |
|
|
|
|
$ |
28,710 |
|
$ |
894 |
|
$ |
5,778 |
|
$ |
265 |
|
$ |
21,773 |
|
|
|
Requests for providing commitments to extend
financial guarantees and extend credit are reviewed and approved by senior
management. Management regularly reviews all outstanding commitments, letters
of credit and financial guarantees, and the results of these reviews are considered
in assessing the need for any reserves for possible credit and guarantee loss.
We have extended $7.4 million in
working capital lines of credit to certain jointly owned and managed companies,
of which $5.0 million were unused at September 30, 2002. Credit risk represents
the accounting loss that would be recognized at the reporting date if the
affiliate companies were unable to repay any amounts utilized under the working
capital lines of credit. Commitments to extend credit to third parties are
conditional agreements generally having fixed expiration or termination dates
and specific interest rates and purposes.
We have posted $0.9 million of outstanding
letters of credit. The letters of credit guarantee performance to third parties
of various trade activities. The letters of credit are not recorded as liabilities
on our balance sheet unless they are probable of being utilized by the third
party. The financial risk approximates the amount of outstanding letters of
credit.
We are a party to joint venture
partnerships whereby our ownership interests are 50% or less of the total
capital of the partnerships. We account for these partnerships using the equity
method of accounting and, therefore, the assets, liabilities and operating
results of these partnerships are not consolidated with ours. The carrying
value of our investment in joint venture partnerships is $14.1 million at
September 30, 2002. Our share of the income (loss) of these partnerships for
the years ended September 30, 2002, 2001 and 2000 was $1.6 million, $(10.2)
million and $(2.4) million, respectively. Although we are not contractually
obligated to fund operating losses of these partnerships, in certain cases,
we have extended credit to such joint venture partnerships in the past and
may decide to do so in the future in order to realize economic benefits from
our joint venture relationship. Management assesses the creditworthiness of
such partnerships in the same manner it does other thirdparties. We
have provided $11.5 million of financial guarantees related to loan commitments
of four jointly owned and managed companies. We have also provided $11.3 million
of financial guarantees related to lease obligations of one jointlyowned
and managed company that operates four eldercare centers. The guarantees are
not recorded as liabilities on our balance sheet unless we are required to
perform under the guarantee. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to
perform completely as contracted. The credit risk amounts are equal to the
contractual amounts, assuming that the amounts are fully advanced and that
no amounts could be recovered from other parties.
Our business activities do not include the use of unconsolidated
special purpose entities.
Warrants
In connection with our reorganization, we issued warrants
to purchase 4,559,475 shares of our common stock. This represents 11% of the
common stock issued in connection with our joint plan of reorganization. The
warrants, which expired on October 2, 2002, had an exercise price of $20.33
per share of common stock.
Income Taxes
Pursuant to the Job Creation and Worker Assistance Act
of 2002, which extended the net operating loss carryback period to five years,
we were able to carryback certain net operating loss (“NOL”) carryforwards
originating in the year ended September 30, 2001. This enabled us to recover
$10.3 million in federal tax refunds during the twelve months ended September
30, 2002, which offset tax expense calculated at our estimated effective tax
rate of approximately 39%.
Following consummation of our joint
plan of reorganization, and after reduction for (1) the aforementioned NOL
carrybacks and (2) cancellation of prepetition indebtedness as provided under
Section 108 of the Internal Revenue Code, we had NOL carryforwards of $278
million, which expire between September 30, 2020 and September 30, 2021. Under
applicable limitations imposed by Section 382 of the Internal Revenue Code,
our ability to utilize these loss carryforwards became subject to annual limitation
of $43.3 million, inclusive of a separate limitation for Multicare. During
the year ended September 30, 2002, we utilized $8 million of loss carryforwards.
Pursuant to SOP 90-7, the income tax benefit of the NOL utilization served
to reduce goodwill. We have NOL carryforwards of $270 million remaining at
September 30, 2002. There can be no assurances that we will be able to utilize
these NOL’s and, consequently, a 100% valuation allowance against these
NOL’s has been provided. Other deferred tax assets include $3.3 million
for built-in losses recognized by Multicare during the fiscal year ended September
30, 2002 in excess of its separate limitation under Section 382.
Revenue Sources
We receive revenues from Medicare, Medicaid,
private insurance, self-pay residents, other third party payors and long-term
care facilities which utilize our pharmacy and other 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 we provide.
On December 15, 2000, Congress passed
the Benefits Improvement and Protection Act that increased the nursing component
of federal PPS rates by 16.7% for the period from April 1, 2001 through September
30, 2002. The legislation also changed 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 Balanced Budget
Refinement Act was repealed except for Medicare Part B therapy services and
the moratorium on the $1,500 therapy caps was extended through calendar year
2002. These changes have had a positive impact on operating results.
A number of provisions of the Balanced
Budget Refinement Act and the Benefits Improvement and Protection Act enactments
providing additional funding for Medicare participating skilled nursing facilities
expired on September 30, 2002. The expiration of these provisions has
reduced our Medicare per diems per beneficiary, on average, by $34.
The prospects for legislative relief
are uncertain. The 107th Congress adjourned without resolving Medicare
provider issues. The 108th Congress begins January 7, 2003. During
the 107th Congress, the House of Representatives passed a package
of Medicare amendments (late June 2002). Under the House-passed measure, portions
of the expiring provisions would be retained. The Balanced Budget Refinement
Act increase of 4% would expire, and the 16.6% add-on of the Benefits Improvement
and Protection Act to the nursing portion of the skilled nursing facility
prospective payment system rates would be reduced to 12% in 2003, 10% in 2004,
and 8% in 2005. Under this proposal, fiscal year 2003 rates would be 5.2%
lower than those of the current year. Several attempts were made to secure
Senate consideration of a slightly more favorable package of legislative amendments.
Prospects for expeditious action by the incoming Congress are uncertain.
The Centers for Medicare and Medicaid Services
issued notice of fiscal year 2003 rates for Skilled Nursing Facility PPS in
the Federal Register, July 31, 2002. Effective October 1, 2002, rates
were increased by a 2.6% annual market basket adjustment. The Centers for
Medicare and Medicaid Services estimates that, even with this upward adjustment,
average Medicare rates will be 8.8% lower than the current year because of
the reduced payment caused by the expiring statutory add-ons.
Our estimate of the impact of the
“Skilled Nursing Facilities Medicare Cliff”, factoring in the
administrative decision not to proceed with changes in the case-mix refinements
at this time and without factoring in any additional Congressional action,
exposes the skilled nursing facility sector to a 10% reduction. For us, this
reduction could have an adverse impact to annual revenue and operating income
from continuing operations beginning October 1, 2002 of approximately $28
million after taking into consideration the 2.6% annual market basket adjustment.
There may be additional provisions in the Medicare legislation affecting our
other businesses. Congress may consider changes affecting pharmacy, rehabilitation
therapy, diagnostic services and the payment for services in other health
settings. There are two issues in particular that could have measurable negative
impact, practitioner fee schedules and caps on Medicare Part B therapies.
Absent Congressional action, the formula driven payment structure for calendar
year 2003 physician and non-physician fee schedules will be reduced by 4.4%.
This reduction affects not only doctors, but also payment for most professional
practitioners including licensed rehabilitation professionals. Moreover, absent
Congressional action, the moratorium on implementing payment caps on therapy
services expires. Medicare Part B therapy services in calendar year 2003 will
be subject to the caps and are expected to reduce our revenues and operating
income by approximately $17 million and $3 million, respectively.
A number of states have enacted or are considering
containment initiatives. Many have focused on reducing what the state Medicaid
program will pay for drug acquisition costs. Most states have lowered payment
to a negative percentage of average wholesale price. Some have attempted to
impose more stringent pricing standards. Institutional pharmacies are often
paid a dispensing fee over and above the payment for the drug. To the extent
that changes in the payment for drugs are not accompanied by an increase in
the dispensing fee, margins could erode. Some states have explored efforts
to restrict utilization (preferred drug lists, prior-authorization, formularies).
A few states have attempted to extend the preferred Medicaid pricing to all
Medicare beneficiaries.
NeighborCare has joined with other leading multi-state institutional
pharmacy companies to form the Alliance for Long Term Care Pharmacy (LTCPA)
in an effort to influence the outcomes of both federal and state-specific
legislative and regulatory activities. In this collaboration, LTCPA provides
leadership to responding to specific issues. Presently, LTCPA has engaged
representation in 23 states and Washington, DC. Such efforts are augmented
by the government relations specialists of the various companies and by active
grassroots efforts of pharmacy professionals. These proactive steps have been
successful in an number of instances, but given the budgetary concerns of
both federal and state governments. There can be no assurance that changes
in payment formulas and delivery requirements will not have a negative impact
going forward.
It is not possible to quantify fully the effect
of potential legislative changes, the interpretation or administration of
such legislation or any other governmental initiatives on our business. Accordingly,
there can be no assurance that the impact of these changes or any future healthcare
legislation will not further adversely affect our 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. Our financial condition and results
of operations may be affected by the reimbursement process, which in the healthcare
industry is complex and can involve lengthy delays between the time that revenue
is recognized and the time that reimbursement amounts are settled.
Recent Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)
No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13 and Technical Corrections as of April 2002”
(“SFAS 145”). SFAS 145 rescinds SFAS No. 4, “Reporting
Gains and Losses from Extinguishment of Debt”, which required that
gains and losses from extinguishment of debt that were included in the determination
of net income be aggregated and, if material, classified as an extraordinary
item, net of the related income tax effect. Under SFAS 145, gains or losses
from extinguishment of debt should be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion No. 30 (“APB
30”), “Reporting Results of Operations Reporting the
Effects of Disposal of a Segment of a Business.”Applying the criteria
in APB 30 will distinguish transactions that are part of an entity’s
recurring operations from those that are unusual or infrequent or that meet
the criteria for classification as an extraordinary item. SFAS 145 is effective
for fiscal years beginning after May 15, 2002 for provisions related to SFAS
No. 4, effective for all transactions occurring after May 15, 2002 for provisions
related to SFAS No. 13 and effective for all financial statements issued on
or after May 15, 2002 for all other provisions of SFAS 145. Beginning in our
fiscal year 2003, we expect the most significant impact of the adoption of
SFAS 145 will be the change in classification of any gains or losses on the
extinguishment of debt that were classified as extraordinary items in prior
periods that do not meet the new criteria of APB 30 for classification as
extraordinary items. This reclassification will include the $1,509.9 million
extraordinary gain recognized in fiscal 2001 in connection with the discharge
of liabilities subject to compromise upon emergence from Chapter 11 bankruptcy.
In July 2002, the FASB issued SFAS
No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”
(“SFAS No. 146”). SFAS No. 146 addresses significant issues regarding
the recognition, measurement, and reporting of costs associated with exit
and disposal activities, including restructuring activities. SFAS No. 146
also addresses recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or relocate employees,
and termination benefits provided to employees that are involuntarily terminated
under the terms of a onetime benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred compensation contract. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation
No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Guarantees of Indebtedness of Others”(the
Interpretation), which addresses the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
guarantees. The Interpretation also requires the recognition of a liability
by a guarantor at the inception of certain guarantees. The new requirements
are effective for interim and annual financial statements ending after December
15, 2002. The Interpretation requires the guarantor to recognize a liability
for the non-contingent component of the guarantee. This is the obligation
to stand ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair value
of the guarantee at inception. The recognition of the liability is required
even if it is not probable that payments will be required under the guarantee
or if the guarantee was issued with a premium payment or as part of a transaction
with multiple elements. We will apply the recognition and measurement provisions
for all guarantees entered into or modified after December 31, 2002. In addition,
we will adopt the disclosure requirements of the Interpretation for the quarter
ended December 31, 2002. We do not expect the adoption of the Interpretation
to have a material impact on our consolidated financial statements.
Critical Accounting Policies
In December 2001, the SEC issued Financial Reporting Release No. 60, “Cautionary Advice Regarding
Disclosure About Critical Accounting Policies,” referred to as “FR 60,” suggesting that companies provide additional
disclosure and commentary on those accounting policies considered most critical. FR 60 considers an accounting policy to be critical
if it is important to the registrant’s financial condition and results, and requires significant judgment and estimates on the part
of management in its application. Our critical accounting estimates and the related assumptions are evaluated periodically as conditions
warrant, and changes to such estimates are recorded as new information or changed conditions require revision. Application of the critical
accounting policies requires management's significant judgments, often as the result of the need to make estimates of matters that are inherently
uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. Our senior
management has reviewed these critical accounting policies and estimates with our audit committee. We believe that the following represents our
critical accounting policies as contemplated by FR 60. For a summary of all of our significant accounting policies, including critical accounting
policies discussed below, see note 1 “Summary of Significant Accounting Policies” to our consolidated financial statements.
Allowance for Doubtful Accounts
We utilize the “Aging Method” to evaluate the adequacy of our allowance for doubtful accounts.
This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each
type of payor. We have developed estimated standard allowance requirement percentages by utilizing historical collection trends and our
understanding of the nature and collectibility of receivables in the various aging categories and the various segments of our business.
The standard allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics.
The allowance for doubtful accounts is determined utilizing the aging method described above while also considering accounts specifically
identified as uncollectible. Accounts receivable that we specifically estimate to be uncollectible, based upon the age of the receivables,
the results of collection efforts or other circumstances, are fully reserved for in the allowance for doubtful accounts until they are
writtenoff.
In fiscal 2001, we performed a reevaluation of our allowance for doubtful accounts triggered by
deterioration in the agings of certain categories of receivables. We believe that such deteriorations were due to several prolonged negative
factors related to the operational effects of our bankruptcy filings, personnel shortages, the time demands required in normalizing relations
with vendors and addressing a multitude of other bankruptcy issues. As a result of this reevaluation, we determined that an increase to
the allowance for doubtful accounts of $39.2 million was necessary, and certain changes to the aging method resulting in higher levels of allowance
for doubtful accounts requirements were also necessary.
In fiscal 2000, we performed a specific account review for certain large customers in light of the adverse impact of
PPS on their liquidity and profitability. In certain cases, these customers filed for protection under Chapter 11 of the Bankruptcy Code. As a result
of these assessments, we determined that an increase to the allowance for doubtful accounts of $42 million was necessary. Because such adjustments
were based upon a specific account review of several high risk customers, no significant changes to the aging method were deemed necessary.
Back to Index
Over the past three years, and in connection with the adjustments made in fiscal 2000 and 2001, we have continued to refine our assumptions and methodologies underlying the aging method. We believe the assumptions used in aging method employed in fiscal 2002, coupled with continued improvements in our collection patterns, suggest that our allowance for doubtful accounts is adequately provided for at September 30, 2002. However, because the assumptions underlying the aging method are based upon historical collection data, there is a risk that our current assumptions are not reflective of more recent collection patterns. Changes in overall collection patterns can be caused by market conditions and/or budgetary constraints of government funded programs such as Medicare and Medicaid. Such changes can adversely impact the collectibility of receivables, but not be addressed in a timely fashion when using the aging method, until updates to our periodic historical collection studies
are completed and implemented.
At least annually, we update our historical collection studies in order to evaluate the propriety of the assumptions underlying the aging method. Any changes to the underlying assumptions are implemented immediately. Changes to these assumptions can have a material impact on our bad debt expense, which is reported in the consolidated statements of operations as a component of other operating expenses.
Loss Reserves For Certain SelfInsured Programs
General and Professional Liability and Workers Compensation
General and professional liability costs for the longterm care industry have become increasingly expensive. Specifically, rising costs of eldercare malpractice litigation, and losses stemming from these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the State of Florida where, because certain laws allow for significantly higher liability awards than in other states, general liability and professional liability costs have increased substantially. We own or lease approximately 1,500 skilled nursing beds in the State of Florida, representing six percent of our total owned and leased beds.
Prior to June 1, 2000, we had first dollar coverage for general and professional liability costs with third party
insurers; accordingly, we have no exposure for claims prior to that date. Effective June 1, 2000, we began insuring a substantial portion of our
professional liability risks through our whollyowned insurance company, LHC. Specifically, we are responsible for the first dollar of each
claim (on a claimsmade basis), up to a selfinsurance retention limit determined by the individual policies, subject to aggregate limits
for each policy year. The selfinsured retention limits amount to $14 million, $19 million and $22 million for the policy years ended May 31, 2001,
2002 and 2003, respectively. For policy years 2001 and 2002, any costs above these retention limits are covered by third party insurance carriers.
For policy year 2003 (June 2002 to May 2003), we have retained an additional selfinsurance layer of $5 million. Since the June 1, 2000
inception of the selfinsurance program through September 30, 2002, our cumulative selfinsurance retention levels are $42 million and
our provision for these losses is $28.2. Assuming our actual losses were to reach our retention
limits in each of the three policy years, our additional exposure is approximately $13.8 million which, if incurred, would be recognized as an increase
to our other operating expenses in our consolidated statements of operations in the period such exposure became known. In addition, we have
provided $3.7 million for the estimated costs of claims incurred but not reported as of September 30, 2002.
Beginning in 1994, we insured our workers compensation exposure, principally via selfinsurance retentions and large deductible programs. We in turn insured these programs through our whollyowned captive, LHC. In addition, we inherited legacy workers compensation programs from acquisitions we completed.
Over the past three years, the majority of our workers compensation coverage was structured as follows: For policy year 2001 (June 1, 2000 May 31, 2001) we were insured on a first dollar coverage basis for our Multicare subsidiaries, and insured through an incurred loss retrospectively rated policy for our nonMulticare subsidiaries; and for policy years 20022003 (June 1, 2001 May 31, 2003) we have large deductible programs, the deductibles for which are insured through LHC.
For policy year 2001, our incurred losses recognized through September 30, 2002 were $15.5 million. Our development factors are updated quarterly and are based upon commonly used industry standards. Any changes to the incurred losses are recognized quarterly as an adjustment to salaries, wages and benefits in our consolidated statements of operations. We are insured through a third party insurer for aggregate claims in excess of $44.1 million.
For policy years 2002 and 2003, LHC insures us up to the first $0.5 million per incident. All claims above $0.5 million per incident are insured through a thirdparty insurer. We have aggregate selfinsured retentions of $48 million and $52.8 million in policy years 2002 and 2003, respectively. Claims above these aggregate limits are insured through a third partyinsurer as of September 30, 2002. Our provision for losses in these policy years is $30.1 million as of September 30, 2002. Our reserve levels are evaluated on a quarterly basis. Any necessary adjustments are recognized as an adjustment to salaries, wages and benefits in our consolidated statements of operations.
We record outstanding losses and loss expenses for both general and professional liability and workers compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s judgment using our past experience and industry experience. As of September 30, 2002, our estimated range of discounted exposure for these liabilities is $57.1 million to $74 million. Our recorded reserves for these liabilities were $59.2 million as of September 30, 2002 of which $2.1 million is included in accrued expenses and the remainder in selfinsurance liability reserves in our consolidated balance sheet. We (through LHC) have restricted investments in marketable securities of $86.1 million at September 30, 2002 which are substantially restricted to securing the outstanding claim losses of LHC.
General and professional liability and workers compensation claims are discounted at a rate of 4.5% in 2002 and 2001, which estimates the present value of funds required to pay losses at a future date. Had we provided losses at undiscounted levels at September 30, 2002 and 2001, the reserve for outstanding losses and loss expenses would have been increased by approximately $6.6 million in 2002 and $6 million in 2001.
We believe that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred as of September 30, 2002, but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. It is at least reasonably possible that we will revise our estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.
Health Insurance
We offer employees an option to participate in a selfinsured health plan. Health claims under this plan are selfinsured with a stoploss umbrella policy in place to limit maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. We maintain an accrual for claims that have been incurred but not yet reported to the plan administrator and therefore have not been paid. The incurred but not reported reserve is based on the historical claim lag period and current payment trends of health insurance claims (generally 23 months).
We charge our employees a portion of the cost of our selfinsured health plan, and we determine this charge at the beginning of each plan year based upon historical and projected medical utilization data, along with projected inflationary increases in medical costs. Any differences between our projections and our actual experience are borne by us. A one percent variance between our projections and the actual medical utilization or inflationary increases in cost would result in a $0.5 million change in our expense, which would be reflected in salaries, wages and benefits in our consolidated statements of operations.
Revenue Recognition / Contractual Allowances
Within our pharmacy and other ancillary service businesses, we record revenues at the time services or products are provided or delivered to the customer. Upon delivery of products or services, we have no additional performance obligation to the customer. We receive payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private thirdparty insurers and longterm care facilities.
Within our pharmacy services segment, we record an estimated contractual allowance against nonprivate pay revenues and accounts receivable. Accordingly, the net revenues and accounts receivable reported in our financial statements are recorded at the amount expected to be received. Contractual allowances are adjusted to actual as cash is received and claims are reconciled. We evaluate the following criteria in developing the estimated contractual allowance percentages each month: historical contractual allowance trends based on actual claims paid by third party payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in customer base, product mix, payor mix reimbursement levels or other issues that may impact contractual allowances.
Within our inpatient services segment, revenue is recognized in the period the related services are rendered. We derive a substantial portion of our inpatient services revenue under Medicaid and Medicare reimbursement systems.
Within our inpatient services segment, under certain prospective Medicaid systems and Medicare we are reimbursed at a predetermined rate based upon the historical cost to provide the service, demographics of the site of service and the acuity of the customer. The differences between the established billing rates and the predetermined rates are recorded as contractual adjustments and deducted from revenues. Under a prospective reimbursement system, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined rate.
We recorded contractual adjustments from continuing operations of $533.3 million, $503.2 million and $471.3 million in fiscal year 2002, 2001 and 2000, respectively.
Longlived Asset Impairments
We account for longlived
assets, other than goodwill with an indefinite useful life, in accordance with
the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of LongLived Assets. This statement requires that longlived
assets be reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by comparison of the carrying amount
of an asset to the future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized to the extent the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of are reported
at the lower of the carrying amount or the fair value less costs to sell.
With regard to goodwill, we adopted SFAS No. 142 on September 30, 2001 in accordance with the early adoptions provisions of SOP 907. SFAS No. 142 provides that goodwill no
longer be amortized on a recurring basis but rather is subject to periodic impairment testing. Prior to adopting SFAS No. 142, we amortized
goodwill over periods not exceeding 40 years. The impairment test requires us to compare the fair value of our businesses to their
carrying value including assigned goodwill. SFAS No.142 requires an impairment test annually.
In addition, goodwill is tested more frequently if changes in circumstances or the occurrence of events indicate impairment exists. We performed the annual impairment test effective
September 30, 2002. Virtually all of our goodwill is ascribed to our pharmacy services segment, and the results of this test indicated that the
fair value of our pharmacy services segment exceeded carrying amounts.
We use a multiple of future pharmacy services cash flows to determine fair value. Our judgment is required in the estimation of cash flows results and to determine the appropriate multiple. Our estimate of future pharmacy services cash flows is derived from our operating budget for the forthcoming fiscal year, less an estimated corporate overhead allocation calculated as one percent of budgeted pharmacy segment revenues. The multiple is determined from comparable industry transactions. Future operating results and multiples could reasonably differ from the estimates. However, given the substantial margin by which fair value exceeded carrying amounts in the latest goodwill impairment review, we do not anticipate a material impact on the financial statements from differences in these assumptions.
In fiscal years 2001 and 2000, we recorded material adjustments to the carrying value of longlived assets.
In fiscal 2001, we recognized a $253 million writedown of our property, plant and equipment in connection with our adoption of freshstart reporting. Freshstart reporting requires companies that emerge from reorganization to adjust their longlived assets to fair value. We estimated fair value by using both thirdparty appraisals and commonly used discounted cash flow techniques. These adjustments were recognized as freshstart valuation adjustments and recorded as debt restructuring and reorganization costs in the consolidated statements of operations.
In fiscal 2000, in connection with our budget preparations for the forthcoming year and in accordance with SFAS No. 121, the predecessor of SFAS No. 144, we reviewed the then current and projected undiscounted cash flows of our eldercare centers. This review indicated that the assets of 49 eldercare centers were potentially impaired. The fair market value of businesses deemed potentially impaired were then compared to the carrying values of the longlived assets. Fair value was estimated using a per bed value determined by us. Any excess longlived asset carrying value over the estimated fair value was writtenoff. This evaluation resulted in the writedown of $234 million of longlived assets. These adjustments were recognized as a component of other operating expenses in the consolidated statements of operations.
We manage the operations of 69 eldercare centers.
Under a majority of these arrangements, we employ the operational staff of
the managed business for ease of benefit administration and bill the related
wage and benefit costs on a dollar-for-dollar basis to the owner of the managed
property. In this capacity, we operate as an agent on behalf of the managed
property owner and are not the primary obligor in the context of a traditional
employee / employer relationship. Historically, we have treated these transactions
on a “net basis”, thereby not reflecting the billed labor and
benefit costs as a component of our net revenue or expenses. For the twelve
months ended September 30, 2002, 2001 and 2000 we billed our managed clients
$140.5 million, $153.6 million, and $154.7 million, respectively for such
labor related costs.
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.
The healthcare industry is labor intensive. Wages and other
labor costs are especially sensitive to inflation and marketplace labor shortages.
To date, we have offset our increased operating costs by increasing charges
for our services and expanding our services. We have also implemented cost
control measures to limit increases in operating costs and expenses but cannot
predict its ability to control such operating cost increases in the future.
See “Cautionary Statements Regarding Forward Looking Statements”,
“Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations Fiscal 2002 Compared to
Fiscal 2001”.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes. We employ established policies and procedures to manage our exposure to changes in interest rates. Our objective in managing exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objective, we primarily use interest rate swap and cap agreements to manage net exposure to interest rate changes related to our portfolio of borrowings. We do not enter into such arrangements for trading purposes.
The information below summarizes our
market risks associated with debt obligations and other significant financial
instruments as of September 30, 2002. Fair values were based upon confirmations from third party financial institutions, if available, or based on discounted cash flows using market rates of
interest as of the end of the reported period. For debt obligations, the table
presents principal cash flows and related interest rates by expected fiscal
year of maturity. For interest rate swaps and caps, the table presents the notional
amounts and related weighted-average interest rates by fiscal year of maturity.
The variable rates presented are the average forward rates for the term of each
contract.
|
Expected
Maturity Date |
|
Total |
|
Fair
Value |
|
|
|
($ in thousands) |
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt |
$ |
4,104 |
|
$ |
3,910 |
|
$ |
3,554 |
|
$ |
3,582 |
|
$ |
4,340 |
|
$ |
56,497 |
|
$ |
75,987 |
|
$ |
92,936 |
|
Weighted average rate |
|
8.16 |
% |
|
8.54 |
% |
|
8.55 |
% |
|
8.46 |
% |
|
7.60 |
% |
|
9.05 |
% |
|
8.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate debt |
$ |
32,907 |
|
$ |
6,076 |
|
$ |
6,076 |
|
$ |
6,076 |
|
$ |
552,280 |
|
$ |
|
|
$ |
603,415 |
|
$ |
603,415 |
|
Weighted average rate |
|
L+3.61 |
% |
|
L+4.10 |
% |
|
L+4.10 |
% |
|
L+4.10 |
% |
|
L+4.13 |
% |
|
|
|
|
L+4.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to fixed
swaps (2) |
$ |
|
|
$ |
|
|
$ |
75,000 |
|
$ |
|
|
$ |
125,000 |
|
$ |
|
|
$ |
200,000 |
|
$ |
(4,454 |
) |
Pay fixed rate |
|
|
|
|
|
|
|
3.10 |
% |
|
|
|
|
3.77 |
% |
|
|
|
|
3.52 |
% |
|
|
|
Receive variable rate |
|
|
|
|
|
|
|
L |
|
|
|
|
|
L |
|
|
|
|
|
L |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap (1) |
$ |
|
|
$ |
75,000 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
75,000 |
|
$ |
398 |
|
|
|
L
= |
three-month
LIBOR (approximately 1.79% at September 30, 2002) |
|
|
(1) |
The interest
rate cap pays interest to us when LIBOR exceeds 3%.
The amount paid to us is equal to the notional principal
balance of $75 million multiplied by (LIBOR minus 3%)
in those periods in which LIBOR exceeds 3%. We purchased
the interest rate cap for $0.7 million which is being
amortized to interest expense over the two year term
of the underlying agreement. |
|
|
(2) |
Amounts under expected maturity dates
represent notional amounts. |
Our wholly-owned subsidiary,
Liberty Health Corporation, LTD, holds investments in marketable
securities. Securities that are affected by market rates of interest
at September 30, 2002 amounted to $19.1 million. A 1% change in
the rate of interest would result in a change to operating income
of $0.2 million annually.
62
Back to Index
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
Page |
|
|
Independent Auditors’
Report |
64 |
|
|
Consolidated
Balance Sheets as of September 30, 2002 and 2001 (Successor) |
65 |
|
|
Consolidated
Statements of Operations for the years ended September
30, 2002 (Successor), 2001 and 2000 (Predecessor) |
66 |
|
|
Consolidated
Statements of Shareholders’ Equity (Deficit) for the years
ended September
30, 2002 (Successor), 2001 and 2000 (Predecessor) |
67 |
|
|
Consolidated
Statements of Cash Flows for the years ended September
30, 2002 (Successor), 2001 and 2000 (Predecessor) |
68 |
|
|
Notes to Consolidated
Financial Statements |
69 |
|
|
63
Back to Index
Independent Auditors’ Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.
We have audited the accompanying consolidated balance sheets of Genesis Health Ventures, Inc. and subsidiaries (the “Company”) as of September 30, 2002 and 2001 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the years in the three year period ended September 30, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three year period ended September 30, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for the costs of startup activities effective October 1, 1999.
As described in note 3 to the consolidated financial statements, on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the “Plan”) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “freshstart” reporting. As a result, the consolidated information prior to September 30, 2001 is presented on a different cost basis than that as of and subsequent to September 30, 2001 and, therefore, is not comparable.
/s/ KPMG LLP
Philadelphia, Pennsylvania
November 20, 2002, except as to note 25,
which is as of December 15, 2002
64
Back to Index
Genesis
Health Ventures, Inc. and Subsidiaries,
Consolidated Balance Sheets
|
|
Successor
Company |
|
|
|
September
30,
2002 |
|
|
September
30,
2001 |
|
|
|
(in thousands, except share and per share data) |
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash
and equivalents |
$ |
148,030 |
|
$ |
32,139 |
Restricted
investments in marketable securities |
|
15,074 |
|
|
12,932 |
Accounts
receivable, net of allowance for doubtful accounts |
|
|
|
|
|
of
$55,791 in 2002 and $83,125 in 2001 |
|
369,969 |
|
|
399,816 |
Inventory |
|
64,734 |
|
|
65,222 |
Prepaid
expenses and other current assets |
|
47,850 |
|
|
35,753 |
Assets
held for sale |
|
46,134 |
|
|
- |
|
Total
current assets |
|
691,791 |
|
|
545,862 |
|
Property, plant and equipment,
net |
|
795,928 |
|
|
822,740 |
Restricted investments in marketable
securities |
|
71,073 |
|
|
38,693 |
Notes receivable and other investments |
|
17,034 |
|
|
14,539 |
Other long-term assets |
|
34,008 |
|
|
45,698 |
Investments in unconsolidated
affiliates |
|
14,143 |
|
|
12,504 |
Identifiable intangible assets,
net |
|
25,795 |
|
|
33,591 |
Goodwill |
|
339,723 |
|
|
325,593 |
|
Total
assets |
$ |
1,989,495 |
|
$ |
1,839,220 |
|
Liabilities and Shareholders’
Equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Current
installments of long-term debt |
$ |
40,744 |
|
$ |
41,241 |
Accounts
payable |
|
56,244 |
|
|
46,429 |
Accrued
expenses |
|
28,723 |
|
|
64,692 |
Current
portion of self-insurance liability reserves |
|
15,074 |
|
|
12,932 |
Accrued
compensation |
|
91,546 |
|
|
78,074 |
Accrued
interest |
|
5,517 |
|
|
15,838 |
Income
taxes payable |
|
4,937 |
|
|
4,640 |
|
Total
current liabilities |
|
242,785 |
|
|
263,846 |
|
Long-term debt |
|
648,939 |
|
|
603,268 |
Deferred income taxes |
|
37,191 |
|
|
- |
Self-insurance liability reserves |
|
42,019 |
|
|
26,834 |
Other long-term liabilities |
|
48,989 |
|
|
65,677 |
Minority interests |
|
10,684 |
|
|
2,137 |
Redeemable preferred stock, including
accrued dividends |
|
44,765 |
|
|
42,600 |
Commitments and contingencies |
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
Common
stock - par $0.02, 200,000,000 authorized, 40,683,893 and |
|
|
|
|
|
39,671,279
issued and outstanding, and 811,153 and 1,328,721 |
|
|
|
|
|
to
be issued at September 30, 2002 and 2001, respectively |
|
830 |
|
|
820 |
Additional
paid-in capital |
|
843,625 |
|
|
832,710 |
Retained
earnings |
|
71,303 |
|
|
1,136 |
Accumulated
other comprehensive income (loss) |
|
(1,635 |
) |
|
192 |
|
Total
shareholders’ equity |
|
914,123 |
|
|
834,858 |
|
Total
liabilities and shareholders’ equity |
$ |
1,989,495 |
|
$ |
1,839,220 |
|
See accompanying Notes to Consolidated Financial Statements
65
Back to Index
Genesis Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Operations
|
Successor
Company
Year ended
September
30,
|
|
|
|
Predecessor
Company
Years ended September 30,
|
|
|
|
|
|
|
2002
|
|
|
|
2001
|
|
|
2000
|
|
|
|
|
|
|
(in thousands, except share and per share data) |
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
Inpatient
services |
$ |
1,330,993
|
|
|
$ |
1,255,525 |
|
$ |
1,227,250 |
|
Pharmacy
services |
|
1,123,854 |
|
|
|
1,036,245 |
|
|
949,829 |
|
Other
revenue |
|
168,832 |
|
|
|
160,401 |
|
|
150,548 |
|
|
|
|
|
Total
net revenues |
|
2,623,679 |
|
|
|
2,452,171 |
|
|
2,327,627 |
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits |
|
1,108,630 |
|
|
|
1,045,446 |
|
|
1,035,332 |
|
Cost
of sales |
|
705,524 |
|
|
|
642,836 |
|
|
574,007 |
|
Other
operating expenses |
|
554,112 |
|
|
|
637,429 |
|
|
867,886 |
|
Strategic
planning, severance and other related costs |
|
26,015 |
|
|
|
- |
|
|
- |
|
Gain from arbitration
award and other legal settlements |
|
(23,768 |
) |
|
|
- |
|
|
- |
|
Net loss on sale
of eldercare centers |
|
- |
|
|
|
540 |
|
|
7,922 |
|
Multicare joint
venture restructuring |
|
- |
|
|
|
- |
|
|
420,000 |
|
Depreciation
and amortization expense |
|
63,102 |
|
|
|
104,394 |
|
|
114,346 |
|
Lease expense |
|
27,716 |
|
|
|
35,011 |
|
|
37,852 |
|
Interest expense,
net (contractual interest for the years ended |
|
|
|
|
|
|
|
|
|
|
September
30, 2001 and 2000 was $213,970 and $230,788, respectively) |
|
47,963 |
|
|
|
118,552 |
|
|
202,858 |
|
|
|
|
|
Income
(loss) before debt restructuring and reorganization costs, tax
income expense (benefit), equity in net income (loss) of
unconsolidated
affiliates and minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,385 |
|
|
|
(132,037 |
) |
|
(932,576 |
) |
Debt restructuring
and organization costs |
|
4,270 |
|
|
|
1,083,407 |
|
|
62,795 |
|
|
|
|
|
Income (loss)
before income tax expense (benefit), equity in net |
|
|
|
|
|
|
|
|
|
|
income
(loss) of unconsolidated affiliates and minority interests |
|
110,115 |
|
|
|
(1,215,444 |
) |
|
(995,371 |
) |
Income tax expense
(benefit) |
|
32,463 |
|
|
|
- |
|
|
(30,179 |
) |
|
|
|
|
Income (loss)
before equity in net income (loss) of unconsolidated |
|
|
|
|
|
|
|
|
|
|
affiliates
and minority interests |
|
77,652 |
|
|
|
(1,215,444 |
) |
|
(965,192 |
) |
Equity in net
income (loss) of unconsolidated affiliates |
|
1,579 |
|
|
|
(10,213 |
) |
|
(2,407 |
) |
Minority interests |
|
(2,838 |
) |
|
|
23,456 |
|
|
132,444 |
|
|
|
|
|
Income (loss)
from continuing operations before preferred stock
dividends |
|
76,393 |
|
|
|
(1,202,201 |
) |
|
(835,155 |
) |
Preferred stock
dividends |
|
2,599 |
|
|
|
45,623 |
|
|
42,596 |
|
|
|
|
|
Income (loss)
from continuing operations |
|
73,794 |
|
|
|
(1,247,824 |
) |
|
(877,751 |
) |
Income
(loss) from discontinued operations, net of taxes |
|
(3,627 |
) |
|
|
(15,085 |
) |
|
4,708 |
|
Extraordinary
item, net of taxes |
|
- |
|
|
|
1,509,918 |
|
|
- |
|
Cumulative
effect of accounting change, net of taxes |
|
- |
|
|
|
- |
|
|
(10,412 |
) |
|
|
|
|
Net income (loss)
attributed to common shareholders |
$ |
70,167 |
|
|
$ |
247,009 |
|
$ |
(883,455 |
) |
|
|
|
|
Per Common Share
Data: |
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
$ |
1.79 |
|
|
$ |
(25.65 |
) |
$ |
(18.65 |
) |
Income
(loss) from discontinued operations |
|
(0.09 |
) |
|
|
(0.31 |
) |
|
0.10 |
|
Extraordinary
item |
|
- |
|
|
|
31.04 |
|
|
- |
|
Cumulative
effect of accounting change |
|
- |
|
|
|
- |
|
|
(0.22 |
) |
Net
income (loss) |
$ |
1.70 |
|
|
$ |
5.08 |
|
$ |
(18.77 |
) |
Weighted
average shares |
|
41,225,564 |
|
|
|
48,641,456 |
|
|
47,076,746 |
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
$ |
1.76 |
|
|
$ |
(25.65 |
) |
$ |
(18.65 |
) |
Income
(loss) from discontinued operations |
|
(0.08 |
) |
|
|
(0.31 |
) |
|
0.10 |
|
Extraordinary
item |
|
- |
|
|
|
31.04 |
|
|
- |
|
Cumulative
effect of accounting change |
|
- |
|
|
|
- |
|
|
(0.22 |
) |
Net
income (loss) |
$ |
1.68 |
|
|
$ |
5.08 |
|
$ |
(18.77 |
) |
Weighted
average shares |
|
43,351,187 |
|
|
|
48,641,456 |
|
|
47,076,746 |
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
66
Back to Index
Genesis
Health Ventures, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
|
|
Series
G Cumulative
Convertible Preferred
Stock |
|
|
Common stock |
|
|
Additional
paid-in capital |
|
|
Retained
earnings
(deficit) |
|
|
Accumulated
other
comprehensive
income (loss) |
|
|
Treasury
stock |
|
|
Total shareholders'
equity (deficit) |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 1999 (Predecessor Company) |
$ |
6 |
|
$ |
723 |
|
$ |
753,452 |
|
$ |
(165,620 |
) |
$ |
(428 |
) |
$ |
(243 |
) |
$ |
587,890 |
|
|
|
Issuance of common
stock |
|
- |
|
|
250 |
|
|
49,750 |
|
|
- |
|
|
- |
|
|
- |
|
|
50,000 |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on marketable securities |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(1,361 |
) |
|
- |
|
|
(1,361 |
) |
Net
loss |
|
- |
|
|
- |
|
|
- |
|
|
(840,859 |
) |
|
- |
|
|
- |
|
|
(840,859 |
) |
Preferred
stock dividends |
|
- |
|
|
- |
|
|
- |
|
|
(42,596 |
) |
|
- |
|
|
- |
|
|
(42,596 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(884,816 |
) |
|
|
Balance
at September 30, 2000 (Predecessor Company) |
$ |
6 |
|
$ |
973 |
|
$ |
803,202 |
|
$ |
(1,049,075 |
) |
$ |
(1,789 |
) |
$ |
(243 |
) |
$ |
(246,926 |
) |
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on marketable securities |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,981 |
|
|
- |
|
|
1,981 |
|
Net
income |
|
- |
|
|
- |
|
|
- |
|
|
292,632 |
|
|
- |
|
|
- |
|
|
292,632 |
|
Preferred
stock dividends |
|
- |
|
|
- |
|
|
- |
|
|
(45,623 |
) |
|
- |
|
|
- |
|
|
(45,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248,990 |
|
|
|
Balance
at September 30, 2001 (Predecessor Company) |
$ |
6 |
|
$ |
973 |
|
$ |
803,202 |
|
$ |
(802,066 |
) |
$ |
192 |
|
$ |
(243 |
) |
$ |
2,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fresh start adjustments |
|
(6 |
) |
|
(973 |
) |
|
(803,202 |
) |
|
803,202 |
|
|
- |
|
|
243 |
|
|
(736 |
) |
Issuance of common
stock |
|
- |
|
|
820 |
|
|
832,710 |
|
|
- |
|
|
- |
|
|
- |
|
|
833,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2001 (Successor Company) |
$ |
- |
|
$ |
820 |
|
$ |
832,710 |
|
$ |
1,136 |
|
$ |
192 |
|
$ |
- |
|
$ |
834,858 |
|
|
|
Issuance of common
stock |
|
- |
|
|
10 |
|
|
10,915 |
|
|
- |
|
|
- |
|
|
- |
|
|
10,925 |
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on marketable securities |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
647 |
|
|
- |
|
|
647 |
|
Net
change in fair value of interest rate swap and cap agreements |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(2,474 |
) |
|
- |
|
|
(2,474 |
) |
Net
income |
|
- |
|
|
- |
|
|
- |
|
|
72,766 |
|
|
- |
|
|
- |
|
|
72,766 |
|
Preferred
stock dividends |
|
- |
|
|
- |
|
|
- |
|
|
(2,599 |
) |
|
- |
|
|
- |
|
|
(2,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,340 |
|
|
|
Balance
at September 30, 2002 (Successor Company) |
$ |
- |
|
$ |
830 |
|
$ |
843,625 |
|
$ |
71,303 |
|
$ |
(1,635 |
) |
$ |
- |
|
$ |
914,123 |
|
|
|
See accompanying Notes to Consolidated Financial Statements
67
Back to Index
Genesis
Health Ventures, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
Successor
Company
Year ended
September 30, |
|
|
|
Predecessor
Company
Years ended September 30, |
|
|
|
|
|
|
2002 |
|
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
(in
thousands) |
|
Cash
flow from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributed to common shareholders |
$ |
70,167 |
|
|
$ |
247,009 |
|
$ |
(883,455 |
) |
Adjustments
to reconcile net income (loss) to net cash |
|
|
|
|
|
|
|
|
|
|
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Charges
(credits) included in operations not requiring funds: |
|
|
|
|
|
|
|
|
|
|
Extraordinary
item, net of taxes |
|
- |
|
|
|
(1,524,823 |
) |
|
- |
|
Debt
restructuring and reorganization costs |
|
4,270 |
|
|
|
1,115,785 |
|
|
62,795 |
|
Loss
on impairment of assets and other charges |
|
6,364 |
|
|
|
110,249 |
|
|
372,189 |
|
Multicare
joint venture restructuring charge |
|
- |
|
|
|
- |
|
|
420,000 |
|
Depreciation
and amortization |
|
65,768 |
|
|
|
107,283 |
|
|
116,961 |
|
Provision
for losses on accounts receivable |
|
44,712 |
|
|
|
49,901 |
|
|
45,226 |
|
Arbitration
award and other legal settlements |
|
1,139 |
|
|
|
- |
|
|
- |
|
Non-cash
stock compensation |
|
6,936 |
|
|
|
- |
|
|
- |
|
Equity
in net income (loss) of unconsolidated affiliates and
minority interests |
|
1,259 |
|
|
|
(13,221 |
) |
|
(124,870 |
) |
Amortization
of deferred gains and net unfavorable leases |
|
(5,575 |
) |
|
|
(6,845 |
) |
|
(5,962 |
) |
Loss
on sale of assets, net of gains |
|
- |
|
|
|
540 |
|
|
7,922 |
|
Provision
for deferred taxes |
|
37,693 |
|
|
|
- |
|
|
(27,831 |
) |
Preferred
stock dividends |
|
2,599 |
|
|
|
45,623 |
|
|
42,596 |
|
Cumulative
effect of accounting change, net of tax |
|
- |
|
|
|
- |
|
|
10,412 |
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
(19,633 |
) |
|
|
(40,745 |
) |
|
(75,390 |
) |
Accounts
payable and accrued expenses including $42,000 |
|
|
|
|
|
|
|
|
|
|
refinancing of pharmacy supplier credit terms in 2002 |
|
15,014 |
|
|
|
(26,684 |
) |
|
(32,313 |
) |
Inventory |
|
1,233 |
|
|
|
(236 |
) |
|
(2,331 |
) |
Prepaid
and other current assets |
|
1,441 |
|
|
|
(12,094 |
) |
|
(13,129 |
) |
|
|
|
|
Total
adjustments |
|
163,220 |
|
|
|
(195,267 |
) |
|
796,275 |
|
|
|
|
|
Net
cash provided by (used in) operations before debt
restructuring
and reorganization costs |
|
233,387 |
|
|
|
51,742 |
|
|
(87,180 |
) |
|
|
|
|
Cash
paid for debt restructuring and reorganization costs |
|
(54,202 |
) |
|
|
(44,405 |
) |
|
(16,114 |
) |
|
|
|
|
Net
cash provided by (used in) operating activities |
|
179,185 |
|
|
|
7,337 |
|
|
(103,294 |
) |
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchase
of restricted marketable securities |
|
(86,077 |
) |
|
|
(55,057 |
) |
|
(39,614 |
) |
Proceeds
on maturity or sale of restricted marketable securities |
|
52,202 |
|
|
|
33,311 |
|
|
34,954 |
|
Capital
expenditures |
|
(51,635 |
) |
|
|
(43,721 |
) |
|
(51,981 |
) |
Purchase
of eldercare center |
|
(10,453 |
) |
|
|
- |
|
|
(588 |
) |
Proceeds
from sale of assets |
|
2,955 |
|
|
|
7,010 |
|
|
33,000 |
|
Reductions
in notes receivable and other investments |
|
850 |
|
|
|
1,032 |
|
|
- |
|
Additions
to notes receivable and other investments |
|
(3,505 |
) |
|
|
- |
|
|
(3,083 |
) |
Other |
|
824 |
|
|
|
(1,324 |
) |
|
(6,200 |
) |
|
|
|
|
Net
cash used in investing activities |
|
(94,839 |
) |
|
|
(58,749 |
) |
|
(33,512 |
) |
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Net
borrowings under prepetition working capital revolving
credit facilities |
|
- |
|
|
|
1,006 |
|
|
49,868 |
|
Net
borrowings under Genesis debtor-in-possession financing
facility |
|
- |
|
|
|
63,000 |
|
|
133,000 |
|
Repayment
of Genesis debtor-in-possession financing facility |
|
- |
|
|
|
(196,000 |
) |
|
- |
|
Repayment
of long-term debt and payment of sinking fund requirements |
|
(48,455 |
) |
|
|
(77,990 |
) |
|
(90,295 |
) |
Proceeds
from issuance of long-term debt |
|
80,000 |
|
|
|
285,000 |
|
|
10,000 |
|
Debt
issuance costs |
|
- |
|
|
|
(14,413 |
) |
|
(9,183 |
) |
Issuance
of common stock |
|
- |
|
|
|
- |
|
|
50,000 |
|
|
|
|
|
Net
cash provided by financing activities |
|
31,545 |
|
|
|
60,603 |
|
|
143,390 |
|
|
|
|
|
Net
increase in cash and equivalents |
$ |
115,891 |
|
|
$ |
9,191 |
|
$ |
6,584 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents: |
|
|
|
|
|
|
|
|
|
|
Beginning
of year |
|
32,139 |
|
|
|
22,948 |
|
|
16,364 |
|
|
|
|
|
End
of year |
$ |
148,030 |
|
|
$ |
32,139 |
|
$ |
22,948 |
|
|
|
|
|
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
Interest
paid |
$ |
58,284 |
|
|
$ |
118,057 |
|
$ |
179,215 |
|
Income
taxes paid (received), net |
|
(5,594 |
) |
|
|
- |
|
|
587 |
|
Non-cash
financing activities: |
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock |
|
- |
|
|
|
42,600 |
|
|
420,000 |
|
Captial
leases |
|
10,983 |
|
|
|
3,484 |
|
|
- |
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
68
Back to Index
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization and Description of Business
Genesis Health Ventures, Inc. and subsidiaries (“Genesis” or the “Company”) is a leading provider of healthcare and support services to the elderly. The Company’s operations are comprised of two primary business segments, pharmacy services and inpatient services. These segments are complemented by an array of other service capabilities.
Genesis provides pharmacy services nationwide through 59 institutional pharmacies (two are jointlyowned), 22 medical supply and home medical equipment distribution centers (four are jointlyowned), and 31 communitybased retail pharmacies (two are jointlyowned).
Genesis provides inpatient services
through skilled nursing and assisted living centers primarily located in the
eastern United States. The Company currently has 256 owned, leased, managed
and jointlyowned eldercare centers with 31,073 beds. Revenues of our owned
and leased centers are included in inpatient service revenues in the consolidated
statements of operations. Management fees earned from our managed and jointlyowned
centers are included in other revenues in the consolidated statements of operations.
Genesis also provides rehabilitation
services, diagnostic services, respiratory services, hospitality services, group
purchasing services and healthcare consulting services, the revenues for which
are included in other revenues in the consolidated statements of operations.
Factors Affecting Comparability of Financial Information
As a consequence of the implementation of freshstart reporting effective September 30, 2001 (see note 2 “Reorganization”), the financial information presented in the consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the twelve month period ended September 30, 2002 are generally not comparable to the financial results for the corresponding periods in the previous two years. To highlight the lack of comparability, a solid vertical line separates the preemergence financial information from the postemergence financial information in the accompanying consolidated financial statements and the notes thereto. Any financial information herein labeled “Predecessor Company” refers to periods prior to the adoption of freshstart reporting, while those labeled “Successor Company” refer to periods following the Company’s adoption of freshstart reporting.
The lack of comparability in the accompanying consolidated financial statements is most apparent in the Company’s capital costs (lease, interest, depreciation and amortization), as well as with, minority interests, debt restructuring and reorganization costs, and preferred dividends. Management believes that business segment operating revenues and operating income of the Successor Company are generally comparable to those of the Predecessor Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Successor Company of Genesis Health Ventures, Inc. and its subsidiaries as of September 30, 2002 and 2001 and for the year ended September 30, 2002, and the Predecessor Company of Genesis Health Ventures, Inc. and its subsidiaries for the two years ended September 30, 2001. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 in the consolidated statements of operations.
In accordance with the Company’s plan of reorganization (see note 2 “Reorganization”), The Multicare Companies, Inc. (“Multicare”) became a whollyowned subsidiary of Genesis on October 2, 2001. Under freshstart reporting, the Company consolidated its 100% interest in Multicare as of September 30, 2001. Genesis previously owned 43.6% of Multicare. Following a restructuring transaction effective October 1, 1999, Genesis gained managerial, operational and financial control of Multicare, and consequently consolidated the results of Multicare, with a 56.4% minority interest.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the consolidated financial statements for the periods presented include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.
69
Back to Index
Reclassifications
Certain prior year balances have been reclassified to conform to the current year presentation.
Revenue Recognition / Contractual Allowances
Within the Company’s pharmacy and other ancillary service businesses, the Company records revenues at the time services or products are provided or delivered to the customer. Upon delivery of products or services, the Company has no additional performance obligation to the customer. The Company receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private thirdparty insurers and longterm care facilities.
Within the Company’s pharmacy services segment, the Company records an estimated contractual allowance against nonprivate pay revenues and accounts receivable. Accordingly, the net revenues and accounts receivable reported in the Company’s financial statements are recorded at the amount expected to be received. Contractual allowances are adjusted to actual as cash is received and claims are reconciled. The Company evaluates the following criteria in developing the estimated contractual allowance percentages each month: historical contractual allowance trends based on actual claims paid by third party payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in customer base, product mix, payor mix reimbursement levels or other issues that may impact contractual allowances.
Within the Company’s inpatient services segment, revenue is recognized in the period the related services are rendered. The Company derives a substantial portion of its inpatient revenue under Medicaid and Medicare reimbursement systems.
Within the Company’s inpatient
segment, under certain prospective Medicaid systems and Medicare,
the Company is reimbursed at a predetermined rate based upon
the historical cost to provide the service, demographics of
the site of service and the acuity of the customer. The differences
between the established billing rates and the predetermined
rates are recorded as contractual adjustments and deducted
from revenues.
The Company recorded contractual allowances from
continuing operations of $533.3 million, $503.2 million and
$471.3 million in fiscal year 2002, 2001 and 2000, respectively.
Cash Equivalents
Shortterm investments that have a maturity of ninety days or less at acquisition are considered cash equivalents. Investments in cash equivalents are carried at cost, which approximates fair value. The Company’s cash balances at September 30, 2002 and 2001 include $5 million and $0.1 million of restricted cash, respectively. This restricted cash is held by the Company’s whollyowned captive insurance subsidiary, Liberty Health Corp., LTD (“LHC”) and is substantially restricted to securing the outstanding claims losses of LHC.
70
Back to Index
Restricted Investments in Marketable Securities
Restricted investments in marketable securities, which are comprised of fixed interest securities, equity securities and money market funds are considered to be available for sale and accordingly are reported at fair value with unrealized gains and losses, net of related tax effects, included within accumulated other comprehensive income (loss) as a separate component of shareholders’ equity. Fair values for fixed interest securities and equity securities are based on quoted market prices.
A decline in the market value of any security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.
Premiums and discounts on fixed interest securities are amortized or accreted over the life of the related security as an adjustment to yield. Realized gains and losses for securities classified as available for sale are included in other revenue and are derived using the specific identification method for determining the cost of securities sold.
Marketable securities are held by the Company’s whollyowned captive insurance subsidiary, LHC and are substantially restricted to securing the outstanding claims losses of LHC.
Allowance for Doubtful Accounts
The Company utilizes the “Aging Method” to evaluate the adequacy of its allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each type of payor. The Company has developed estimated standard allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and collectibility of receivables in the various aging categories and the various segments of the Company’s business. The standard allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics. The allowance for doubtful accounts is determined utilizing the aging method described above while also considering accounts specifically identified as uncollectible. Accounts receivable that Company management specifically estimates to be uncollectible,
based upon the age of the receivables, the results of collection efforts or other circumstances, are fully reserved for in the allowance for doubtful accounts until they are writtenoff.
Inventories and Cost of Goods Sold
Inventories, consisting of drugs and supplies, are stated at the lower of cost or market. Cost is determined primarily on the firstin, firstout (“FIFO”) method.
Approximately 91% of the Companys inventory is carried by the pharmacy segment. Physical inventory counts are performed periodically at all sites. As the Company does not utilize a perpetual inventory system, cost of goods sold is estimated between physical counts and is adjusted to actual by recording the results of the periodic physical inventory counts. The Company evaluates the following criteria in developing estimated cost of goods sold:
|
Historical cost of
goods sold trends based on prior physical inventory results;
|
|
Review of cost of goods sold
information reflecting current customer and vendor terms; and
|
|
Consideration and analysis of
changes in customer base and product mix, payor mix, or other issues that
may impact cost of goods sold. |
Property, Plant and Equipment
As part of freshstart reporting,
substantially all property, plant and equipment was revalued
to estimated fair value as of September 30, 2001, which became the
new cost basis. In addition, the depreciable lives of certain assets
were changed. All capital additions made subsequent to September
30, 2001 are stated at cost.
Depreciation is calculated on the straightline method over estimated useful lives of 2035 years for land and building improvements and buildings, and 315 years for equipment, furniture and fixtures and information systems. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations as incurred. Costs of additions and betterments are capitalized. Interest costs associated with construction or renovation are capitalized in the period in which they are incurred.
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The Company accounts for longlived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of LongLived Assets.”This statement requires that longlived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.
Deferred Financing Costs
Financing costs are deferred and are amortized on a straightline basis, which approximates the effective interest method, over the terms of the related debt. Deferred financing costs were $14 million ($10.1 million net of accumulated amortization) and $10.1 million ($9.7 million net of accumulated amortization) at September 30, 2002 and 2001, respectively, and are included in other longterm assets. Amortization of deferred financing fees is included in depreciation and amortization expense in the consolidated statements of operations.
LongLived Assets
The Company accounts for longlived
assets, other than goodwill with an indefinite useful life, in accordance
with the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of LongLived Assets”. This statement requires that
longlived assets be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by comparison of
the carrying amount of an asset to the future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized to the extent the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying amount or the fair value less
costs to sell.
With regard to goodwill, the Company
adopted SFAS No. 142 on September 30, 2001 in accordance with the early adoptions
provisions of SOP 907. SFAS No. 142 provides that goodwill no longer
be amortized on a recurring basis but rather is subject to periodic impairment
testing. Prior to adopting SFAS No. 142, the Company amortized goodwill over
periods not exceeding 40 years. The impairment test requires companies to
compare the fair value of its businesses to their carrying value including
assigned goodwill. SFAS No.142 requires an impairment test annually. In addition,
goodwill is tested more frequently if changes in circumstances or the occurrence
of events indicate impairment exists. The Company performed the annual impairment
test effective September 30, 2002 and the results of this test indicated that
the fair value of the Company’s goodwill exceeded carrying amounts.
In freshstart reporting, the Company’s reorganization value in excess of fair value (goodwill) was allocated to the pharmacy segment and identifiable intangible assets were assigned to the specific reporting units that own those assets.
Loss Reserves For Certain SelfInsured Programs
Certain of the Company’s workers’ compensation, and general and professional liability coverage is provided by the Company’s whollyowned insurance company, Liberty Health Corp., LTD (“LHC”).
Outstanding losses and loss expenses comprise estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary using the past experience of the Company and the industry.
Effective June 1, 2000, the Company began insuring
a substantial portion of its professional liability risks through LHC. Specifically,
the Company is responsible for the first dollar of each claim (on a claimsmade
basis), up to a selfinsurance retention limit determined by the individual
policies, subject to aggregate limits for each policy year. The selfinsured
retention limits amount to $14 million, $19 million and $22 million for the
policy years ended May 31, 2001, 2002 and 2003, respectively. For policy years
2001 and 2002, any costs above these retention limits are covered by third
party insurance carriers. For policy year 2003 (June 2002 to May 2003), the
Company has retained an additional selfinsurance layer of $5 million.
Since the June 1, 2000 inception of the selfinsurance program through
September 30, 2002, the Company’s cumulative selfinsurance retention
levels are $42 million and its provision for these losses is $28.2 million.
Assuming actual losses were to reach the retention limits in each of the three
policy years, the Company’s additional exposure is approximately $13.8
million which, if incurred, would be recognized as an increase to other operating
expenses in the Company’s consolidated statements of operations in the
period such exposure became known. In addition, the Company has provided $3.7
million for the estimated costs of claims incurred but not reported as of September
30, 2002.
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Beginning in 1994, the Company insured its workers compensation exposure, principally via selfinsurance retentions and large deductible programs through LHC.
Over the past three years, the majority of the Company’s workers compensation coverage was structured as follows: For policy year 2001 (June 1, 2000 May 31, 2001) the Company was insured on a first dollar coverage basis for its Multicare subsidiaries, and insured through an incurred loss retrospectively rated policy for its nonMulticare subsidiaries; and for policy years 20022003 (June 1, 2001 May 31, 2003) it has large deductible programs, the deductibles for which are insured through LHC.
For policy year 2001, the Company’s incurred losses recognized through September 30, 2002 were $15.5 million. The Company’s development factors are updated quarterly and are based upon commonly used industry standards. Any changes to the incurred losses are recognized quarterly as an adjustment to salaries, wages and benefits in the Company’s consolidated statements of operations. The Company is insured through a third-party insurer for aggregate claims in excess of $44.1 million.
For policy years 2002 and 2003, the Company is selfinsured up to the first $0.5 million per incident. All claims above $0.5 million per incident are insured through a thirdparty insurer. The Company has aggregate selfinsured retentions of $48 million and $52.8 million in policy years 2002 and 2003, respectively. Claims above these aggregate limits are insured through a third partyinsurer as of September 30, 2002. The Company’s provision for losses in these policy years is $30.1 million. The Company’s reserve levels are evaluated on a quarterly basis. Any necessary adjustments are recognized as an adjustment to salaries, wages and benefits in the Company’s consolidated statements of operations.
The Company records outstanding losses and loss expenses for both general and professional liability and workers compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s judgment using its past experience and industry experience. As of September 30, 2002, the estimated range of discounted exposure for these liabilities is $57.1 million to $74 million. The Company’s recorded reserves for these liabilities were $59.2 million as of September 30, 2002 of which $2.1 million is included in accrued expenses and the remainder in selfinsurance liability reserves in the Company’s consolidated balance sheet. The Company (through LHC) has restricted investments in marketable securities of $86.1 million at September 30, 2002 which are substantially restricted to securing the outstanding claim losses of LHC.
font>
General and professional liability and workers compensation claims are discounted at a rate of 4.5% in 2002 and 2001, which estimates the present value of funds required to pay losses at a future date. Had the Company provided losses at undiscounted levels at September 30, 2002 and 2001, the reserve for outstanding losses and loss expenses would have been increased by approximately $6.6 million in 2002 and $6 million in 2001.
Management believes based on the recommendations
of an independent actuary, that the provision for outstanding
losses and loss expenses will be adequate to cover the ultimate
net cost of losses incurred as of the balance sheet date
but the provision is necessarily an estimate and may ultimately
be settled for a significantly different amounts. It is
at least reasonably possible that management will revise
this estimate significantly in the near term. Any subsequent
revisions are recorded in the period in which
they are determined.
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SelfInsured Health Plan
The Company offers employees
an option to participate in a selfinsured health plan.
Health claims under this plan are selfinsured with
a stoploss umbrella policy in place to limit maximum
potential liability for both individual claims and total
claims for a plan year. Health insurance claims are paid
as they are submitted to the plan administrator. The Company
maintains an accrual for claims that have been incurred
but not yet reported (IBNR) to the plan administrator and
therefore have not been paid. The IBNR reserve is based
on the historical claim lag period and current payment trends
of health insurance claims (generally 23 months).
The liability for the selfinsurance health plan is
recorded in accrued compensation in the accompanying consolidated
balance sheets.
Income Taxes
Income taxes are
accounted for under the asset and liability method. Deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. Provision is
made for deferred income taxes applicable to temporary differences
between financial statement and taxable income. In assessing
the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. To
the extent that the deferred tax asset related to Net Operating
Loss carry forwards are subject to a valuation allowance
due to uncertainty regarding its utilization, the income
tax benefit derived from its future utilization would first
be applied to reduce goodwill recorded in freshstart
accounting pursuant to SOP 90-7.
StockBased Compensation
The Company discloses information relating to stockbased compensation awards in accordance with SFAS No. 123, “Accounting for StockBased Compensation”, (“SFAS 123”), and has elected to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, to such compensation awards. Under the Company’s stock option plan, the Company grants stock options to employees and directors at an exercise price equal to the fair market value on the date of grant. No compensation expense is recorded with respect to such option grants. Compensation expense for options granted to nonemployees is determined in accordance with SFAS 123 as the fair value of the consideration received or the fair value of the equity instruments issued whichever is more reliably measured. Compensation expense for the options granted to nonemployees is remeasured as the underly
ing options vest.
Comprehensive Income (Loss)
Pursuant to the adoption of SFAS No. 130, “Reporting Comprehensive Income”, comprehensive income (loss) includes all changes to shareholders’ equity during a period, except those resulting from investments by and distributions to shareholders. The components of comprehensive income (loss) are shown in the consolidated statements of shareholders’ equity (deficit).
Unfavorable Leases
At September 30, 2002, an unfavorable lease credit of $23.4 million is carried on the consolidated balance sheets in longterm liabilities. The unfavorable lease credit was established at September 30, 2001 in accordance with the implementation of freshstart reporting. Amortization of unfavorable leases is computed using the straightline method over the individual terms of each unfavorable lease. See note 12 “Leases and Lease Commitments”.
Derivative Financial Instruments
The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities an Amendment of FASB Statement No. 133.” The Company is exposed to the impact of interest rate changes. The Company employs established policies and procedures to manage its exposure to changes in interest rates. The Company’s objective in managing exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower our overall borrowing costs. To achieve the objective, the Company primarily uses interest rate swap and cap agreements to manage net exposure to interest rate changes related to its portfolio of borrowings. The Company does not enter into such arrangements for trading purposes. The Company recognizes all derivatives on the balance sheet at fair value. Change
s in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified as an adjustment to interest expense as the underlying hedged item affects earnings.
Reimbursement of Managed Property Labor Costs
The Company manages the operations of 69 eldercare centers.
Under a majority of these arrangements, the Company employs the operational staff of
the managed business for ease of benefit administration and bill the related
wage and benefit costs on a dollar-for-dollar basis to the owner of the managed
property. In this capacity, the Company operates as an agent on behalf of the managed
property owner and is not the primary obligor in the context of a traditional
employee / employer relationship. Historically, the Company has treated these transactions
on a “net basis”, thereby not reflecting the billed labor and
benefit costs as a component of its net revenue or expenses. For the twelve
months ended September 30, 2002, 2001 and 2000 the Company billed its managed clients
$140.5 million, $153.6 million, and $154.7 million, respectively for such
labor related costs.
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Earnings or Loss Per Share
Basic earnings or loss per share is calculated by dividing net income or loss attributed to common shareholders by the weighted average of common shares outstanding during the period. Diluted earnings per share is calculated by using the weighted average of common shares outstanding adjusted to include the potentially dilutive effect of common stock equivalents.
The following table sets forth the computation of basic and diluted earnings per share applicable to common shares (in thousands except per share data):
|
|
Successor
Company |
|
|
|
|
Predecessor
Company |
|
|
|
|
|
2002 |
|
|
|
2001 |
|
|
2000 |
|
|
|
|
Earnings
(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
$ |
73,794 |
|
|
$ |
(1,247,824 |
) |
$ |
(877,751 |
) |
Income
(loss) from discontinued operations |
|
(3,627 |
) |
|
|
(15,085 |
) |
|
4,708 |
|
Extraordinary
item |
|
|
|
|
|
1,509,918 |
|
|
|
|
Cumulative
effect of accounting change |
|
|
|
|
|
|
|
|
(10,412 |
) |
|
|
|
Net
income (loss) attributed to common shareholders basic computation |
|
70,167 |
|
|
|
247,009 |
|
|
(883,455 |
) |
Elimination
of preferred stock dividend requirements upon assumed
conversion
of preferred stock |
|
2,599 |
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) diluted computation |
$ |
72,766 |
|
|
$ |
247,009 |
|
$ |
(883,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding basic computation |
|
41,226 |
|
|
|
48,641 |
|
|
47,077 |
|
Assumed
conversion of preferred stock |
|
2,091 |
|
|
|
|
|
|
|
|
Contingent
consideration related to an acquisition |
|
34 |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding diluted computation |
|
43,351 |
|
|
|
48,641 |
|
|
47,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
$ |
1.79 |
|
|
$ |
(25.65 |
) |
$ |
(18.65 |
) |
Income
(loss) from discontinued operations |
|
(0.09 |
) |
|
|
(0.31 |
) |
|
0.10 |
|
Extraordinary
item |
|
|
|
|
|
31.04 |
|
|
|
|
Cumulative
effect of accounting change |
|
|
|
|
|
|
|
|
(0.22 |
) |
|
|
|
Net
income (loss) attributed to common shareholders |
$ |
1.70 |
|
|
$ |
5.08 |
|
$ |
(18.77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
$ |
1.76 |
|
|
$ |
(25.65 |
) |
$ |
(18.65 |
) |
Income
(loss) from discontinued operations |
|
(0.08 |
) |
|
|
(0.31 |
) |
|
0.10 |
|
Extraordinary
item |
|
|
|
|
|
31.04 |
|
|
|
|
Cumulative
effect of accounting change |
|
|
|
|
|
|
|
|
(0.22 |
) |
|
|
|
Net
income (loss) attributed to common shareholders |
$ |
1.68 |
|
|
$ |
5.08 |
|
$ |
(18.77 |
) |
|
|
|
|
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Use of Estimates
The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Some of the more significant estimates impact accounts receivable, longlived assets and loss reserves for selfinsurance programs. Actual results could differ significantly from those estimates. See note 4 “Certain Significant Risks and Uncertainties.”
Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the American Institute of Certified Public Accountants Statement of Position 985, Reporting on the Costs of StartUp Activities (“SOP 985”). The statement requires costs of startup activities, including organizational costs, to be expensed as incurred. Startup activities are defined as those onetime activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. The cumulative effect of expensing all unamortized startup costs at October 1, 1999 was $16.4 million ($10.4 million after tax).
(2) Reorganization
On June 22, 2000, (the “Petition Date”) Genesis and certain of our 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. and certain of its direct and indirect subsidiaries (“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 other general references to these cases unless the context otherwise requires).
Genesis’ and Multicare’s financial difficulties were attributed to a number of factors. First, the federal government made fundamental changes to the reimbursement for medical services provided to individuals. The changes had a significant adverse impact on the healthcare industry as a whole and on Genesis’ and Multicare’s cash flows. Second, the federal reimbursement changes exacerbated a longstanding problem of inadequate reimbursement by the states for medical services provided to indigent persons under the various states Medicaid programs. Third, numerous other factors adversely affected Genesis’ and Multicare’s 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, Genesis and Multicare were too highly leveraged to service o
ur debt, including our longterm lease obligations.
On October 2, 2001, (the “effective date”), Genesis and Multicare consummated a joint plan of reorganization (the “Plan”) under Chapter 11 of the Bankruptcy Code (the “Reorganization”) pursuant to a September 20, 2001 order entered by the Bankruptcy Court approving the Plan proposed by us and Multicare. The principal provisions of the Plan were as follows:
|
Multicare became Genesis’
wholly-owned subsidiary. Genesis previously owned 43.6% of Multicare and
managed its skilled nursing and assisted living facilities under the Genesis
Eldercare® brand name;
|
|
New senior notes, new convertible
preferred stock, new common stock and new warrants were issued to Genesis’
and Multicare’s creditors. Approximately 93% of new common stock,
$242.6 million in new senior notes and new preferred stock with a liquidation
preference of $42.6 million were issued to Genesis’ and Multicare’s
senior secured creditors. New one year warrants to purchase an additional
11% of the new common stock were issued, and approximately 7% of the new
common stock have been or will be issued to Genesis’ and Multicare’s
unsecured creditors;
|
|
Holders of Genesis’ and
Multicare’s pre-Chapter 11 preferred and common stock received no
distribution and those instruments were canceled;
|
|
Claims between Genesis and Multicare
were set-off against one another and any remaining claims were waived and
released; and
|
|
A new Board of Directors was constituted. |
On October 2, 2001, and in connection with the consummation of the Plan, Genesis entered into a Senior Credit Facility consisting of the following: (1) a $150 million revolving line of credit (the “Revolving Credit Facility”); (2) a $285 million term loan (the “Term Loan”) and (3) an $80 million delayed draw term loan (the “Delayed Draw Term Loan”) (collectively the “Senior Credit Facility”).
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In accordance with SOP 907 (as defined in note 3 “FreshStart Reporting”), Genesis recorded all expenses incurred as a result of the Bankruptcy filing separately as debt restructuring and reorganization costs. A summary of the principal categories of debt restructuring and reorganization costs from continuing operations follows (in thousands):
|
|
Successor Company |
|
|
|
Predecessor
Company |
|
|
|
|
|
2002 |
|
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional, bank and other
fees |
$ |
2,570 |
|
|
$ |
59,393 |
|
$ |
29,935 |
Employee benefit related costs,
including severance |
|
|
|
|
|
16,786 |
|
|
4,529 |
Exit costs of terminated businesses |
|
|
|
|
|
5,877 |
|
|
|
Fresh-start valuation adjustments
(1) |
|
|
|
|
|
1,001,351 |
|
|
|
Interest rate swap termination
charge |
|
|
|
|
|
|
|
|
28,331 |
Post confirmation mortgage adjustment |
|
1,700 |
|
|
|
|
|
|
|
|
|
|
Total |
$ |
4,270 |
|
|
$ |
1,083,407 |
|
$ |
62,795 |
|
|
|
(1) |
Fresh-start valuation adjustments
on assets held for sale and discontinued operations totaling $32.4 million
were reclassified as a component of the loss on discontinued operations
for the year ended September 30, 2001. |
As a result of the consummation of the Plan, the Company recognized an extraordinary gain on debt discharge in 2001 as follows (in thousands):
|
|
|
|
Liabilities subject
to compromise: |
|
|
|
Revolving credit and term loans |
$ |
1,484,904 |
|
Senior subordinated notes |
|
617,510 |
|
Other indebtedness |
|
120,961 |
|
|
|
Long-term debt subject
to compromise |
|
2,223,375 |
|
|
|
Accounts payable and accrued liabilities |
|
64,621 |
|
Accrued interest (including a $28,331 swap termination fee) |
|
87,716 |
|
Accrued preferred stock dividends on Series G Preferred Stock |
|
49,673 |
|
|
|
Subtotal liabilities
subject to compromise |
|
2,425,385 |
|
|
|
Redeemable preferred stock Series H and Series I |
|
468,722 |
|
|
|
Total liabilities subject
to compromise |
|
2,894,107 |
|
|
|
Less: |
|
|
|
Cash payments |
|
25,000 |
|
Value of secured, priority and other claims assumed |
|
143,319 |
|
Value of new Senior Secured Notes |
|
242,605 |
|
Value of Term Loan used to repay synthetic lease facility |
|
50,000 |
|
Carrying value of deferred financing fees of discharged debts |
|
32,230 |
|
Value of Successor Company’s common stock |
|
833,530 |
|
Value of Successor Company’s redeemable preferred stock |
|
42,600 |
|
|
|
Extraordinary gain on debt discharge |
$ |
1,524,823 |
|
|
|
Less: net extraordinary
gain on discontinued operations |
|
(14,905 |
) |
|
|
Extraordinary gain on debt discharge as reported |
$ |
1,509,918 |
|
|
|
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(3) FreshStart Reporting
Upon emergence from our Chapter 11 proceedings, Genesis adopted the principles of freshstart reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 907, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code” (“SOP 907”) / (“freshstart reporting”). For financial reporting purposes, Genesis adopted the provisions of freshstart reporting effective September 30, 2001. In connection with the adoption of freshstart reporting, a new entity was deemed created for financial reporting purposes, the provisions of the Plan were implemented, assets and liabilities were adjusted to their estimated fair values and Genesis’ accumulated deficit was eliminated.
In adopting the requirements of freshstart reporting as of September 30, 2001, the Company was required to value its assets and liabilities at fair value and eliminate its accumulated deficit at September 30, 2001. A $1,525 million reorganization value, before consideration of post filing current and long term liabilities or minority interests was determined by the Company with the assistance of financial advisors in reliance upon various valuation methods, including discounted projected cash flow analysis, price / earnings ratios, and other applicable ratios and economic industry information relevant to the operations of the Company, and through negotiations with the various creditor parties in interest.
The following reconciliation of the Predecessor Company’s consolidated balance sheet as of September 30, 2001 to that of the Successor Company was prepared to present the adjustments that give effect to the reorganization and freshstart reporting.
The adjustments entitled “Reorganization” reflect the consummation of the Plan, including the elimination of existing liabilities subject to compromise and consolidated shareholders’ deficit; and to reflect the estimated $1,525 million reorganization value, which included the establishment of $326 million of reorganization value in excess of amounts allocable to net identifiable assets (goodwill).
The adjustments entitled “FreshStart Adjustments” reflect the adoption of freshstart reporting, including the elimination of minority interest with Multicare and the adjustments to record property, plant and equipment, other longterm assets, and identifiable intangible assets, at their fair values. Management estimated the fair value of its assets and liabilities by utilizing both independent appraisals and commonly used discounted cash flow valuation methods.
Several of the Companys subsidiaries and consolidated joint ventures did not file for Chapter 11 protection. The nonfiling subsidiaries were not subject to the fresh start reporting provisions under SOP 907 and, consequently, their balance sheets are reflected in the consolidated balance sheet at historical carrying value.
(in thousands) |
|
|
Predecessor Company |
|
|
Reorganization |
|
|
Fresh-Start Adjustments |
|
|
Reclassification |
|
|
Successor Company |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
30,552 |
|
$ |
1,587 |
|
$ |
|
|
$ |
|
|
$ |
32,139 |
|
Restricted investments in marketable securities |
|
|
12,932 |
|
|
|
|
|
|
|
|
|
|
|
12,932 |
|
Accounts receivable, net |
|
|
399,816 |
|
|
|
|
|
|
|
|
|
|
|
399,816 |
|
Inventory |
|
|
65,222 |
|
|
|
|
|
|
|
|
|
|
|
65,222 |
|
Prepaid expenses and other current assets |
|
|
35,753 |
|
|
|
|
|
|
|
|
|
|
|
35,753 |
|
|
Total current assets |
|
|
544,275 |
|
|
1,587 |
|
|
|
|
|
|
|
|
545,862 |
|
|
Property, plant and equipment |
|
|
1,382,455 |
|
|
|
|
|
(548,730 |
) |
|
|
|
|
833,725 |
|
Accumulated depreciation |
|
|
(306,797 |
) |
|
|
|
|
295,812 |
|
|
|
|
|
(10,985 |
) |
|
Property, plant and equipment, net |
|
|
1,075,658 |
|
|
|
|
|
(252,918 |
) |
|
|
|
|
822,740 |
|
Restricted investments in marketable securities |
|
|
38,693 |
|
|
|
|
|
|
|
|
|
|
|
38,693 |
|
Notes receivable and other investments |
|
|
18,001 |
|
|
|
|
|
(3,462 |
) |
|
|
|
|
14,539 |
|
Other long-term assets |
|
|
93,973 |
|
|
(25,452 |
) |
|
(22,823 |
) |
|
|
|
|
45,698 |
|
Investments in unconsolidated affiliates |
|
|
12,504 |
|
|
|
|
|
|
|
|
|
|
|
12,504 |
|
Identifiable intangible assets |
|
|
|
|
|
|
|
|
33,591 |
|
|
|
|
|
33,591 |
|
Goodwill |
|
|
1,196,078 |
|
|
|
|
|
(870,485 |
) |
|
|
|
|
325,593 |
|
|
Total
assets |
|
$ |
2,979,182 |
|
$ |
(23,865 |
) |
$ |
(1,116,097 |
) |
$ |
|
|
$ |
1,839,220 |
|
|
78
Back to Index
(in
thousands) |
|
|
Predecessor
Company |
|
|
Reorganization |
|
|
Fresh-Start
Adjustments |
|
|
Reclassification |
|
|
Successor
Company |
|
|
Liabilities and
Shareholders Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current installments of
long-term debt |
|
$ |
196,000 |
|
$ |
(196,000 |
) |
$ |
|
|
$ |
41,241 |
|
$ |
41,241 |
|
Accounts payable |
|
|
46,429 |
|
|
|
|
|
|
|
|
|
|
|
46,429 |
|
Accrued expenses |
|
|
67,904 |
|
|
(5,635 |
) |
|
2,423 |
|
|
|
|
|
64,692 |
|
Current
portion of
self-insurance
liability reserves
|
|
|
12,932 |
|
|
|
|
|
|
|
|
|
|
|
12,932 |
|
Accrued compensation |
|
|
78,074 |
|
|
|
|
|
|
|
|
|
|
|
78,074 |
|
Accrued interest |
|
|
1,599 |
|
|
14,239 |
|
|
|
|
|
|
|
|
15,838 |
|
Income taxes payable |
|
|
4,640 |
|
|
|
|
|
|
|
|
|
|
|
4,640 |
|
|
Total current liabilities |
|
|
407,578 |
|
|
(187,396 |
) |
|
2,423 |
|
|
41,241 |
|
|
263,846 |
|
|
Liabilities subject to
compromise |
|
|
2,425,385 |
|
|
(2,425,385 |
) |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
14,104 |
|
|
626,921 |
|
|
3,484 |
|
|
(41,241 |
) |
|
603,268 |
|
Deferred income taxes |
|
|
53,157 |
|
|
|
|
|
(53,157 |
) |
|
|
|
|
|
|
Self-insurance liability
reserves |
|
|
26,834 |
|
|
|
|
|
|
|
|
|
|
|
26,834 |
|
Deferred gain and other
long-term liabilities |
|
|
41,495 |
|
|
30,500 |
|
|
(6,318 |
) |
|
|
|
|
65,677 |
|
Minority interests |
|
|
30,937 |
|
|
|
|
|
(28,800 |
) |
|
|
|
|
2,137 |
|
Redeemable preferred stock |
|
|
468,722 |
|
|
(426,122 |
) |
|
|
|
|
|
|
|
42,600 |
|
Shareholders
equity (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series G Preferred Stock |
|
|
6 |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Common stock |
|
|
973 |
|
|
(153 |
) |
|
|
|
|
|
|
|
820 |
|
Additional paid-in capital |
|
|
803,202 |
|
|
832,710 |
|
|
|
|
|
(803,202 |
) |
|
832,710 |
|
Retained earnings
(accumulated deficit) |
|
|
(1,293,160 |
) |
|
1,524,823 |
|
|
(1,033,729 |
) |
|
803,202 |
|
|
1,136 |
|
Accumulated other
comprehensive income |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
192 |
|
Treasury stock, at cost |
|
|
(243 |
) |
|
243 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
(deficit) |
|
|
(489,030 |
) |
|
2,357,617 |
|
|
(1,033,729 |
) |
|
|
|
|
834,858 |
|
|
Total liabilities
and shareholders
equity (deficit)
|
|
$ |
2,979,182 |
|
$ |
(23,865 |
) |
$ |
(1,116,097 |
) |
$ |
|
|
$ |
1,839,220 |
|
|
Accounting Pronouncements Adopted in FreshStart Reporting
As of September 30, 2001, and in accordance with the early adoption provisions of SOP 907, the Company adopted the provisions of Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS No. 141”), Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of LongLived Assets” (“SFAS No. 144”).
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Back to Index
The principal provisions of SFAS No. 141 require that all business combinations be accounted for by the purchase method of accounting and identifiable intangible assets are to be recognized apart from goodwill.
The principal provisions of SFAS No. 142 require that goodwill and other intangible assets deemed to have an indefinite useful life are not amortized but rather tested annually for impairment. Under SFAS No. 142, intangible assets that have finite useful lives continue to be amortized over their useful lives. SFAS No. 142 requires companies to test intangible assets for impairment that are not amortized at least annually by comparing the fair value of those assets to their recorded amounts. See note 10 “Goodwill and Identifiable Intangible Assets”.
The principal provisions of SFAS No. 144 address financial accounting and reporting for the impairment or disposal of longlived assets. While SFAS No. 144 supersedes Statement of Accounting Standards No. 121 “Accounting for the Impairment of LongLived Assets and for LongLived Assets to be Disposed of” (“SFAS No. 121”), it retains many of the fundamental provisions of that statement. Under SFAS No. 144, assets held for sale or discontinued businesses are removed from the financial results of continuing operations. See note 21 “Assets Held for Sale and Discontinued Operations”.
(4) Certain Significant Risks and Uncertainties
The Company receives revenues from Medicare, Medicaid, private insurance, selfpay residents, other third party payors and longterm care facilities which utilize our pharmacy and other 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.
The Medicaid and Medicare programs are highly regulated. The failure of the Company or its customers to comply with applicable reimbursement regulations could adversely affect the Companys business. The Company monitors its receivables from thirdparty payor programs and reports such revenues at the net realizable value expected to be received.
The Companys pharmacy segment earned revenues from the following payor sources for the three years ended September 30, 2002:
|
2002 |
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
Long term care facilities and
other |
58 |
% |
|
60 |
% |
|
62 |
% |
Medicaid |
40 |
|
|
37 |
|
|
35 |
|
Medicare |
2 |
|
|
3 |
|
|
3 |
|
|
Total |
100 |
% |
|
100 |
% |
|
100 |
% |
|
The Companys inpatient services segment earned revenues from the following payor sources for the three years ended September 30, 2002:
|
2002 |
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
48 |
% |
|
48 |
% |
|
49 |
% |
Medicare |
30 |
|
|
28 |
|
|
25 |
|
Private pay and other |
22 |
|
|
24 |
|
|
26 |
|
|
Total |
100 |
% |
|
100 |
% |
|
100 |
% |
|
On December 15, 2000, Congress passed the Benefits Improvement Protection Act that increased the nursing component of federal PPS rates by approximately 16.7% for the period from April 1, 2001 through September 30, 2002. The legislation also changed the 20% addon to 3 of the 14 rehabilitation resource utilization group categories to a 6.7% addon to all 14 rehabilitation resource utilization group categories beginning April 1, 2001. The Medicare Part B consolidated billing provision of the Balance Budget Refinement Act was repealed except for Medicare Part B therapy services and the moratorium on the $1,500 therapy caps was extended through calendar year 2002. These changes have had a positive impact on operating results.
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Back to Index
A number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act enactments, providing additional funding for Medicare participating skilled nursing facilities, expired on September 30, 2002. The expiration of these provisions has reduced Genesis Medicare per diems per beneficiary, on average, by $34.
The prospects for legislative relief are uncertain. The House of Representatives passed a package of Medicare amendments in late June 2002. Under the Housepassed measure, portions of the expiring provisions would be retained. The Balanced Budget Refinement Act increase of 4% would expire, and the 16.6% addon of the Benefits Improvement and Protection Act to the nursing portion of the skilled nursing facility prospective payment system rates would be reduced to 12% in 2003, 10% in 2004, and 8% in 2005. Under this proposal, fiscal year 2003 rates would be 5.2% lower than those of the current year. Several attempts have been made to secure Senate consideration of a slightly more favorable package of legislative amendments. It is premature to determine the details of such a compromise initiative.
The Centers for Medicare and Medicaid Services issued notice of fiscal year 2003 rates for SNF PPS in the Federal Register, July 31, 2002. Effective October 1, 2002, rates will be increased by a 2.6% annual market basket adjustment. The Centers for Medicare and Medicaid Services estimates that, even with this upward adjustment, average Medicare rates will be 8.8% lower than the current year because of the reduced payment caused by the expiring statutory addons.
Genesis estimate of the impact of the “Skilled Nursing Facilities Medicare Cliff”, factoring in the administrative decision not to proceed with changes in the casemix refinements at this time and without factoring in any additional Congressional action, exposes the skilled nursing facility sector to a 10% reduction. For Genesis, this reduction could have an adverse impact on annual revenue and operating income from continuing operations beginning October 1, 2002 of approximately $28 million, after taking into consideration the 2.6% annual market basket adjustment.
There may be additional provisions in the Medicare legislation affecting other businesses of Genesis. Congress may consider changes affecting pharmacy, rehabilitation therapy, diagnostic services and the payment for services in other health settings. There are two issues in particular that could have measurable negative impact: practitioner fee schedules and caps on Medicare Part B therapies. Absent Congressional action, the formula driven payment structure for calendar year 2003 physician and nonphysician fee schedules will be reduced by 4.4%. This reduction affects not only doctors, but also payment for most professional practitioners including licensed rehabilitation professionals. Moreover, absent Congressional action, the moratorium on implementing payment caps on therapy services expires. Medicare Part B therapy services in calendar year 2003 will be subjected to the caps and are expected to reduce our revenues and operating
income approximately $17 million and $3 million, respectively.
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.
It is not possible to quantify fully the effect of pending legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on Genesis business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not further adversely affect Genesis business. There can be no assurance that payments under governmental and private thirdparty 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. Genesis financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.
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(5) Significant Transactions and Events
Strategic Planning, Severance and Other Related Costs
Genesis has incurred costs that are directly attributable to the Companys long term objective of transforming to a pharmacybased business and its short term objectives. These costs are expected to continue for the foreseeable future and are segregated in the statements of operations as “strategic planning, severance and other related costs”. Details of these costs and the amounts incurred, but not paid at September 30, 2002 follow (in thousands):
|
|
2002 Expense |
|
|
Accrued at
September 30, 2002 |
|
|
Severance and related costs |
$ |
16,410 |
|
$ |
1,100 |
|
Strategic consulting fees |
|
4,730 |
|
|
621 |
|
Asset impairments |
|
4,875 |
|
|
- |
|
|
Total |
$ |
26,015 |
|
$ |
1,721 |
|
|
Severance and related costs. During 2002, Michael R. Walker resigned as chief executive officer of the Company. The Companys board of directors appointed Robert H. Fish as interim chief executive officer. Also, in fiscal 2002, David C. Barr resigned as vice chairman. Mr. Barr was responsible for oversight of the Genesis Health Services entities which include pharmacy, rehabilitation therapy, respiratory health services, hospitality services group purchasing, consulting and diagnostic services. The Company recognized $12.6 million in severance and related costs relating to the transition agreements with Mr. Walker and Mr. Barr.
During fiscal 2002, the Company announced an expense reduction program, which included the termination of approximately 100 individuals resulting in $3.8 million of severance and related costs. At September 30, 2002, $1.1 million remains unpaid, which is expected to be paid during fiscal 2003.
Subsequent to the fiscal year end, in October 2002, Richard R. Howard resigned as vice chairman. Mr. Howard was responsible for oversight of Genesis ElderCares regional operations, as well as clinical practice, real estate and property management. The Company expects to recognize $4.7 million in severance and related costs in the first quarter of fiscal 2003 in connection with Mr. Howards transition agreement.
Strategic consulting fees. During fiscal 2002, the Company engaged several strategic consulting firms at a cost of $4.7 million, in connection with several of our new strategic objectives. Initially, these firms were engaged to assist the board of directors and management in the evaluation of our existing business model and the development of our strategic alternatives. Additional services were procured to assist in the evaluation of the pharmacy sales and marketing function and the bid selection process in connection with the potential sale of the eldercare business. The Company recognizes the cost of such consulting fees as the services are performed.
Asset impairments. During fiscal 2002, the Company incurred $4.9 million of asset impairment charges consisting of the writedown in carrying value of two idle eldercare real estate properties and the exit of an internetbased businesstobusiness jointventure partnership. The Company expects to incur an additional $2 million (unaudited) of costs in fiscal 2003 in order to complete its exit of the internetbased businesstobusiness joint venture partnership.
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Back to Index
Arbitration Award
On February 14, 2002, an arbitrator ruled in favor of NeighborCare® on all claims and counterclaims in the lawsuit involving HCR Manor Care, Inc. and certain of its affiliates The arbitrator found that HCR Manor Care did not lawfully terminate the Master Service Agreements with NeighborCare, so that those contracts remain in full force and effect until the end of September 2004. The arbitrator awarded NeighborCare $21.9 million in damages for respondents failure to allow NeighborCare to exercise its right under the Master Service Agreements to service facilities owned and operated by a subsidiary of respondent HCR Manor Care. The Company recognized the $21.9 million award as a gain from arbitration award in the consolidated statements of operations. In addition, the arbitrator terminated his prior ruling that allowed respondents to withhold 10% of their payments to NeighborCare, and respondents paid NeighborCare $9.1 million in funds repres
enting the amounts withheld during the course of the Arbitration pursuant to the arbitrators prior ruling.
Amended Pharmacy Service Agreement with HCR Manor Care
On August 15, 2002, the Company announced that Genesis and HCR Manor Care, Inc. have agreed to withdraw all outstanding legal actions against each other stemming from the acquisition by Genesis subsidiary, NeighborCare, of HCR Manor Cares pharmacy subsidiary, Vitalink. Both companies have agreed to withdraw the prior pharmacy service agreement and have entered into a new pharmacy service agreement. The new agreement will run through January 2006 and covers approximately 200 of HCR Manor Cares facilities. The new agreement replaces the current agreement between the two companies that was set to expire in 2004.
Multicare Joint Venture Restructuring
In fiscal 2000, the Company entered into a restructuring agreement with our Multicare jointventure partners which resulted in certain changes in control such that Genesis began consolidating the financial statements of Multicare effective October 1, 1999. This restructuring agreement also resulted in the termination of a put option between us and the Multicare joint venture partners. We issued $420 million of redeemable preferred stock as consideration for the termination of the put option, which was recorded as the Multicare joint venture restructuring charge in the consolidated statements of operations.
Sale of Ohio Operations
On May 31, 2000, Multicare sold 14 eldercare centers with 1,128 beds located in the state of Ohio for $33 million. We recorded a loss on sale of the Ohio properties of $7.9 million.
See also note 2 “Reorganization” and note 21 “Assets Held for Sale and Discontinued Operations”.
(6) Restricted Investments in Marketable Securities
Marketable securities (classified as available for sale) are held by the Companys whollyowned subsidiary, Liberty Health Corporation, LTD (“LHC”), incorporated under the laws of Bermuda. LHC provides various insurance coverages to the Company and to unrelated entities, most of which are managed by the Company.
The current portion of restricted investments in marketable securities represents an estimate of the level of outstanding losses the Company expects to pay in the succeeding year.
83
Back to Index
Marketable securities at September 30, 2002 of Company consist of the following (in thousands):
|
|
Amortized
cost |
|
|
Unrealized
gains |
|
|
Unrealized
losses |
|
|
Fair value |
|
|
Fixed interest securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. mortgage backed securities |
$ |
5,464 |
|
$ |
774 |
|
$ |
- |
|
$ |
6,238 |
|
Corporate bonds |
|
12,209 |
|
|
633 |
|
|
(42 |
) |
|
12,800 |
|
Government bonds |
|
1,413 |
|
|
22 |
|
|
(95 |
) |
|
1,340 |
|
Term deposits |
|
2,495 |
|
|
|
|
|
|
|
|
2,495 |
|
Equity Securities |
|
1,103 |
|
|
|
|
|
|
|
|
1,103 |
|
Money market funds |
|
62,171 |
|
|
|
|
|
|
|
|
62,171 |
|
|
|
$ |
84,855 |
|
$ |
1,429 |
|
$ |
(137 |
) |
$ |
86,147 |
|
|
Less: Current portion of restricted
investments |
|
|
|
|
|
|
|
|
|
|
(15,074 |
) |
|
Long-term restricted investments |
|
|
|
|
|
|
|
|
|
$ |
71,073 |
|
|
Marketable securities at September
30, 2001 of the Company consisted of the following (in thousands):
|
|
Amortized
cost |
|
|
Unrealized
gains |
|
|
Unrealized
losses |
|
|
Fair value |
|
|
Fixed interest securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. mortgage backed securities |
$ |
7,554 |
|
$ |
616 |
|
$ |
- |
|
$ |
8,170 |
|
Corporate bonds |
|
6,600 |
|
|
189 |
|
|
|
|
|
6,789 |
|
Equity securities |
|
1,580 |
|
|
|
|
|
(509 |
) |
|
1,071 |
|
Term deposits |
|
1,497 |
|
|
|
|
|
|
|
|
1,497 |
|
Money market funds |
|
34,098 |
|
|
|
|
|
|
|
|
34,098 |
|
|
|
$ |
51,329 |
|
$ |
805 |
|
$ |
(509 |
) |
$ |
51,625 |
|
|
Less: Current portion of restricted
investments |
|
|
|
|
|
|
|
|
|
|
(12,932 |
) |
|
Long-term restricted investments |
|
|
|
|
|
|
|
|
|
$ |
38,693 |
|
|
Fixed interest securities held at September 30, 2002 mature as follows (in thousands):
|
|
2002 |
|
|
|
|
Amortized
cost |
|
|
Fair
value |
|
|
Due in one year or
less |
$ |
2,365 |
|
$ |
2,381 |
|
Due after 1 year through
5 years |
|
12,892 |
|
|
13,792 |
|
Due after 5 years through
10 years |
|
3,271 |
|
|
3,578 |
|
Over 10 years |
|
558 |
|
|
627 |
|
|
|
|
$ |
19,086 |
|
$ |
20,378 |
|
|
Actual maturities may differ from stated maturities because borrowers have the right to call or prepay certain obligations with or without prepayment penalties.
In the normal course of business, LHCs bankers have issued letters of credit totaling $74.9 million in 2002 and $39.7 million in 2001 in favor of insurers. Cash and cash equivalents in the sum of $2.5 million, term deposits in the sum of $2.5 million and investments with an amortized cost of $81.1 million and a market value of $82.4 million were pledged as security for these letters of credit as of September 30, 2002.
84
Back to Index
(7) Property, Plant and Equipment
Property, plant and equipment at September 30, 2002 and 2001 consist of the following (in thousands):
|
|
|
2002 |
|
|
2001 |
|
|
Land |
|
$ |
79,321 |
|
$ |
86,072 |
|
Buildings and improvements |
|
|
594,446 |
|
|
623,944 |
|
Equipment, furniture and fixtures |
|
|
169,383 |
|
|
112,429 |
|
Construction in progress |
|
|
16,152 |
|
|
11,280 |
|
|
|
|
|
859,302 |
|
|
833,725 |
|
Less accumulated depreciation |
|
|
(63,374 |
) |
|
(10,985 |
) |
|
Property, plant and equipment,
net |
|
$ |
795,928 |
|
$ |
822,740 |
|
|
In accordance with the provisions of freshstart reporting, the Company revalued its property, plant and equipment to estimated fair value at September 30, 2001, with exception to certain subsidiaries that were not party to the Chapter 11 cases. Such subsidiaries property, plant and equipment, and related accumulated depreciation, remain at their historical carrying value.
(8) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 2002 and 2001 consist of the following (in thousands):
|
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes and other notes
receivable |
|
$ |
15,664 |
|
$ |
13,107 |
|
Investments in revenue bonds |
|
|
1,370 |
|
|
1,432 |
|
|
Notes receivable and other investments |
|
$ |
17,034 |
|
$ |
14,539 |
|
|
Mortgage notes and other notes receivable at September 30, 2002 and 2001 bear interest at rates ranging from 7.25% to 10% and mature at various times ranging from 2003 to 2029. The majority of the mortgage notes and other notes are secured by first or second mortgage liens on underlying facilities and personal property, accounts receivable, inventory and / or gross facility receipts, as defined.
The Company has agreed to provide third parties, including facilities under management contract, with $7.4 million of working capital lines of credit. The unused portion of working capital lines of credit was $5 million at September 30, 2002.
Investments in revenue bonds bear interest at rates ranging from 10% to 10.45% and mature at various times between 2011 and 2021. The revenue bonds held were issued by a skilled nursing facility owned by an independent third party and managed by Genesis.
(9) Other LongTerm Assets
Other longterm assets at September 30, 2002 and 2001 consist of the following (in thousands):
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
|
Deferred financing fees, net |
$ |
10,131 |
|
$ |
9,725 |
Cost report receivables, net |
|
4,379 |
|
|
11,217 |
Property deposits and funds held
in escrow |
|
15,985 |
|
|
15,587 |
Other, net |
|
3,513 |
|
|
9,169 |
|
Other long-term assets |
$ |
34,008 |
|
$ |
45,698 |
|
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Back to Index
(10) Goodwill and Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the year ended September 30, 2002 are as follows (in thousands):
|
|
2002 |
|
|
Balance as of September 30, 2001 |
$ |
325,593 |
|
Goodwill acquired during the
year |
|
7,855 |
|
Impairment losses |
|
(2,818 |
) |
Utilization of net operating
losses |
|
(3,149 |
) |
Fresh-start valuation adjustments |
|
12,242 |
|
|
Balance as of September 30, 2002 |
$ |
339,723 |
|
|
The Company recorded $12.2 million of freshstart valuation adjustments representing miscellaneous changes to its initial application of Freshstart reporting. Also, in accordance with SOP 907, the Company utilized $8 million of net operating loss carryforwards which resulted in a $3.1 million reduction in goodwill.
The consolidated statements of operation for the years ended September 30, 2001 and 2000 include $33.5 million and $37.5 million of goodwill amortization, respectively. Following the adoption of SFAS No. 142, no goodwill amortization expense was recognized for the year ended September 30, 2002. The following table adjusts the reported loss from continuing operations and the corresponding loss per share amounts for the years ended September 30, 2001 and 2000 on a pro forma basis assuming the provisions of SFAS No. 142 were adopted effective October 1, 1999 (in thousands, except per share amounts):
|
|
|
Predecessor
Company |
|
|
|
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations as reported |
|
$ |
(1,247,824 |
) |
$ |
(877,751 |
) |
Income (loss)
from continuing operations as adjusted |
|
|
(1,214,332 |
) |
|
(847,651 |
) |
|
|
|
|
|
|
|
|
Earnings (loss)
per share from continuing operations basic and
diluted
as reported |
|
|
(25.65 |
) |
|
(18.65 |
) |
Earnings (loss)
per share from continuing operations basic and
diluted
as adjusted |
|
$ |
(24.97 |
) |
$ |
(18.01 |
) |
|
In adopting the requirements of freshstart reporting, the Company recognized certain identifiable intangible assets, which were established at September 30, 2001 at their estimated fair value and, in accordance with SFAS No. 142, are being amortized on a straightline basis over their estimated useful lives. Identifiable intangible assets at September 30, 2002 and 2001, consist of the following:
Classification |
|
2002 |
|
|
2001 |
|
|
Estimated
Life (Years) |
|
|
|
Customer contracts |
$ |
26,391 |
|
$ |
26,391 |
|
|
2 6 |
|
Trademarks and tradenames |
|
5,000 |
|
|
5,000 |
|
|
5 |
|
Non competition agreements |
|
2,200 |
|
|
2,200 |
|
|
1 - 4 |
|
|
|
|
|
|
Identifiable intangible assets |
$ |
33,591 |
|
$ |
33,591 |
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
(7,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets,
net |
$ |
25,795 |
|
$ |
33,591 |
|
|
|
|
|
|
|
|
|
86
Back to Index
(11) LongTerm Debt
Longterm debt at September 30, 2002 and 2001 consist of the following (in thousands):
|
|
2002 |
|
|
2001 |
|
|
Secured debt |
|
|
|
|
|
|
Senior Credit Facility |
|
|
|
|
|
|
Term Loan |
$ |
281,575 |
|
$ |
285,000 |
|
Delayed Draw Term Loan |
|
79,239 |
|
|
|
|
|
Total Senior Credit Facility |
|
360,814 |
|
|
285,000 |
|
Senior Secured Notes |
|
242,602 |
|
|
242,605 |
|
Mortgages and other secured
debt |
|
86,267 |
|
|
116,904 |
|
|
Total debt |
|
689,683 |
|
|
644,509 |
|
Less: |
|
|
|
|
|
|
Current portion of long-term
debt |
|
(40,744 |
) |
|
(41,241 |
) |
|
Long-term debt |
$ |
648,939 |
|
$ |
603,268 |
|
|
There was no capitalization of interest in 2002, however $2.5 million and $4.4 million in interest was capitalized in 2001 and 2000, respectively, relating to facility construction, systems development and renovations.
Senior Credit Facility
On October 2, 2001, and in connection with the consummation of the Plan, the Company entered into a Senior Credit Facility consisting of the following: (1) a $150 million revolving line of credit (the “Revolving Credit Facility”); (2) a $285 million term loan (the “Term Loan”) and (3) an $80 million delayed draw term loan (the “Delayed Draw Term Loan”) (collectively the “Senior Credit Facility”). The outstanding amounts under the Term Loan and the Delayed Draw Term Loan bear interest at the London Interbank Offered Rate (“LIBOR”) plus 3.50%, or 5.29% at September 30, 2002. The Revolving Credit Facility bears interest based upon a performance related grid, or 6.75% at September 30, 2002. The Revolving Credit Facility was not drawn upon during fiscal 2002.
Pursuant to the Senior Credit Facility, the Company and each of its subsidiaries named as guarantors have granted the lenders first priority liens and security interests in all unencumbered property, including but not limited to: fee owned property, bank accounts, investment property, accounts receivable, equipment and general intangible assets.
The Senior Credit Facility limits,
among other things, the Companys ability
to incur additional indebtedness or contingent obligations, permit additional
liens, to make additional acquisitions, to sell or dispose of assets, to create
or incur liens on assets, to pay dividends on common stock and to merge or consolidate
with any other person or entity.
The Senior Credit Facility requires the Company to maintain compliance with certain financial and nonfinancial covenants, including minimum EBITDAR (as defined); limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth.
The Senior Credit Facility specifically requires that the Company achieve certain levels of fixed versus variable interest rate exposure. The Company was required to either enter into interest rate swap agreements that effectively fix or cap the interest cost on at least 50% of its consolidated debt or refinance such debt to achieve a mix of fixed rate debt of at least 50%. In order to meet this requirement, in September 2002, the Company entered into interest rate swap agreements that effectively convert underlying variable rate debt into fixed rate debt, as well as a cap agreement. At September 30, 2002, after considering the $275 million notional amount of these agreements, the Companys effective debt mix is 48% variable rate and 52% fixed rate.
The Senior Credit Facility contains an annual excess cash flow payment requirement. At the end of each fiscal year, the Company is required to prepare an excess cash flow calculation as defined in the senior credit agreement. Of the amount, determined as excess cash flow, 75% is to be paid to Genesis senior lenders in the form of a mandatory payment by December 31 of each year. As of September 30, 2002, the Company estimates that $27 million will be paid on or near December 31, 2002 pursuant to the excess cash flow recapture provision, and as a result, this estimated level of payment has been classified in the Companys consolidated balance sheet under the current installments of longterm debt.
87
Back to Index
The Revolving Credit Facility is available for general working capital requirements. The Revolving Credit Facility matures on October 2, 2006. Usage under the Revolving Credit Facility is subject to a Borrowing Base (as defined) calculation based upon real property collateral value and a percentage of eligible accounts receivable (as defined). Excluding an $0.9 million posted letter of credit, no borrowings have been made under the Revolving Credit Facility at September 30, 2002.
The Delayed Draw Term Loan, as originally contracted, was to be used to (1) fund the purchase price of a proposed acquisition of a pharmacy operation; (2) pay certain outstanding amounts owed to a real estate investment trust on certain loans secured by mortgages; (3) fund the exercise of an option to purchase three eldercare centers; and (4) to make other Specific Payments (as defined). Once repaid, the Delayed Draw Term Loan cannot be reborrowed. The Delayed Draw Term Loan amortizes at a rate of one percent per year, and matures on April 2, 2007. As a result of subsequent developments in the Companys bid to consummate a proposed acquisition of a pharmacy operation, the Delayed Draw Term Loan was amended in December 2001 to allow available borrowings that were otherwise earmarked for the proposed pharmacy transaction to be used to restructure credit terms with NeighborCare pharmacys primary supplier of pharmacy products.
In the twelve months ended September 30, 2002, the Company borrowed $42 million from the Delayed Draw Term Loan to finance the repayment of all trade balances due to NeighborCares primary supplier of pharmacy products. In addition, the Company utilized $10 million from the Delayed Draw Term Loan to fund the exercise of the purchase option on three eldercare centers, previously described, and the Company utilized $28 million from the Delayed Draw Term Loan to satisfy certain mortgages as previously described. The Delayed Draw Term Loan was fully drawn at September 30, 2002 and is being repaid with no additional borrowings available under the Delayed Draw Term Loan.
Senior Secured Notes
On October 2, 2001, and in connection with the consummation of the Plan, the Company entered an indenture agreement in the principal amount of $242.6 million (the “Senior Secured Notes”). The Senior Secured Notes bear interest at LIBOR plus 5.0% (6.79% at September 30, 2002), and amortize one percent each year and mature on April 2, 2007. The Senior Secured Notes are secured by a junior lien on real property and related fixtures of substantially all of the Companys subsidiaries, subject to liens granted to the lenders interests subject to the Senior Credit Facility. The Senior Secured Notes may be prepaid at any time without penalty, subject to restrictions in place under the Senior Credit Facility. Compliance with certain financial and nonfinancial covenants is required, but they are less restrictive than those required by the Senior Credit Facility.
Other Secured Indebtedness
During the twelve months ended September 30, 2002, the Company refinanced $28 million of other secured indebtedness with proceeds from the Delayed Draw Term Loan and used $9.9 million in cash to make an unscheduled principal payment to reduce outstanding mortgage debt. At September 30, 2002, the Company had $86.3 million of other secured debt consisting principally of revenue bonds, capital lease obligations and secured bank loans, including loans insured by the Department of Housing and Urban Development. These loans are secured by the underlying real and personal property of individual eldercare centers. All of the other secured loans have fixed rates of interest ranging from 3% to 13.45%, with a weighted average rate of 8.78% at September 30, 2002.
88
Back to Index
Sinking fund requirements,
installments of longterm debt and capital leases are as follows (in thousands):
|
|
Principal
Amount |
Years
Ending September 30, |
|
Loans |
|
Capital
Leases |
|
2003 |
$ |
37,011 |
$ |
3,733 |
2004 |
|
9,986 |
|
2,981 |
2005 |
|
9,630 |
|
1,587 |
2006 |
|
9,658 |
|
1,147 |
2007 |
|
556,620 |
|
833 |
Thereafter |
|
56,497 |
|
|
|
(12) Leases and Lease Commitments
The Company leases certain
facilities under operating leases. Future minimum payments for the next five
years under non cancellable operating leases at September 30, 2002 are
as follows (in thousands):
Year ending September 30, |
|
|
Minimum Payment |
|
2003 |
|
$ |
41,290 |
2004 |
|
|
39,481 |
2005 |
|
|
34,276 |
2006 |
|
|
28,736 |
2007 |
|
|
23,444 |
Thereafter |
|
|
50,674 |
|
For the year ended September 30,
2002, the Company incurred $41.3 million of lease obligation costs. The Company classifies operating lease
costs associated with its eldercare centers and corporate office sites as lease expense in the consolidated
statements of operations, while the operating lease costs of pharmacy and other health service sites are
included within other operating expenses.
In connection with the
adoption of freshstart reporting, the Company recorded an unfavorable
lease credit associated with 40 leased properties which is amortized using the
straightline method over the remaining lives of the leases. The unfavorable
component of these lease contracts was estimated using market comparable lease
coverage ratios for similar assets. The unfavorable lease liability at September
30, 2002 of $23.4 million will be amortized as reduction to lease expense over
the remaining lease terms, which have a weighted average term of five and years.
Eighteen of our eldercare centers
are leased from ElderTrust, a real estate investment trust, at an annual lease cash basis cost of $16.7 million.
(13) Income Taxes
Total income tax expense
(benefit) for the years ended September 30, 2002, 2001 and 2000 was as follows
(in thousands):
|
|
|
Successor
Company |
|
|
|
Predecessor
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations before equity in
net income (loss) of unconsolidated affiliates
and
minority interests |
|
$ |
32,463 |
|
|
$ |
|
|
$ |
(30,179 |
) |
Income (loss)
from discontinued operations |
|
|
(2,319 |
) |
|
|
|
|
|
3,012 |
|
Cumulative effect
of accounting change |
|
|
|
|
|
|
|
|
|
(5,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,144 |
|
|
$ |
|
|
$ |
(33,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
89
Back to Index
The components of the
provision (benefit) for income taxes on income (loss) from
continuing operations for the years ended September 30, 2002, 2001 and 2000 was as follows (in thousands):
Successor
Company
|
|
Predecessor
Company
|
|
|
|
2002 |
|
|
|
2001 |
|
|
2000 |
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(10,285 |
) |
|
$ |
|
|
$ |
|
|
State |
|
|
2,736 |
|
|
|
|
|
|
663 |
|
|
|
|
|
|
|
(7,549 |
) |
|
|
|
|
|
663 |
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
35,682 |
|
|
|
|
|
|
(30,842 |
) |
State |
|
|
4,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,012 |
|
|
|
|
|
|
(30,842 |
) |
|
|
|
Total |
|
$ |
32,463 |
|
|
$ |
|
|
$ |
(30,179 |
) |
|
|
|
Total income tax expense
differed from the amounts computed by applying the U.S. federal income tax rate
of 35% to net income from continuing operations before income taxes, equity
in net income (loss) of unconsolidated affiliates and minority interests (in
thousands):
|
|
|
Successor
Company
|
|
|
|
Predecessor
Company
|
|
|
|
|
|
|
|
2002
|
|
|
|
2001
|
|
|
2000
|
|
|
|
|
Computed “expected”
tax (benefit) |
|
$ |
38,540 |
|
|
$ |
(425,405 |
) |
$ |
(348,380 |
) |
Increase (reduction) in income
taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
State
and local income taxes, net of federal tax benefits |
|
|
4,651 |
|
|
|
|
|
|
(431 |
) |
Amortization
of goodwill |
|
|
|
|
|
|
8,750 |
|
|
9,545 |
|
Targeted
jobs tax credits |
|
|
(857 |
) |
|
|
|
|
|
(1,389 |
) |
Carryback
of losses allowed under Job Creation and Worker Assistance Act of 2002 |
|
|
(10,285 |
) |
|
|
|
|
|
|
|
Multicare
joint-venture restructuring charge |
|
|
|
|
|
|
|
|
|
147,000 |
|
Write-off
of non deductible goodwill |
|
|
|
|
|
|
304,500 |
|
|
47,352 |
|
Adequate
protection payments |
|
|
|
|
|
|
40,250 |
|
|
|
|
Change
in valuation allowance |
|
|
|
|
|
|
74,005 |
|
|
115,186 |
|
Other,
net |
|
|
414 |
|
|
|
(2,100 |
) |
|
938 |
|
|
|
|
Total income tax expense (benefit) |
|
$ |
32,463 |
|
|
$ |
|
|
$ |
(30,179 |
) |
|
|
|
90
Back to Index
The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities at September 30, 2002 and 2001 are presented below
(in thousands):
|
|
|
2002
|
|
|
2001
|
|
|
|
Deferred Tax
Assets: |
|
|
|
|
|
|
|
Accrued
liabilities and reserves |
|
$ |
63,296 |
|
$ |
54,396 |
|
Net
operating loss carryforwards |
|
|
100,881 |
|
|
130,423 |
|
Net
unfavorable leases |
|
|
8,800 |
|
|
|
|
Other |
|
|
12,449 |
|
|
12,779 |
|
|
|
Deferred tax
assets |
|
|
185,426 |
|
|
197,598 |
|
|
|
Valuation allowance |
|
|
(100,881 |
) |
|
(127,534 |
) |
|
|
Net deferred
tax assets |
|
|
84,545 |
|
|
70,064 |
|
|
|
Deferred Tax
Liabilities: |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(20,243 |
) |
|
(9,443 |
) |
Goodwill
and other intangibles |
|
|
(58,721 |
) |
|
(49,321 |
) |
Depreciation |
|
|
(33,000 |
) |
|
(11,300 |
) |
Deferred
gain |
|
|
(5,800 |
) |
|
|
|
Other |
|
|
(3,972 |
) |
|
|
|
|
|
Total deferred
tax liability |
|
|
(121,736 |
) |
|
(70,064 |
) |
|
|
Net deferred
tax liability |
|
$ |
37,191 |
|
$ |
|
|
|
|
Pursuant to the Job Creation and Worker
Assistance Act of 2002, which extended the net operating loss carryback period to five years, the Company was able to carryback
certain net operating loss (“NOL”) carryforwards originating in the year ended September 30, 2001. This enabled the
Company to recover $10.3 million in federal tax refunds during the twelve months ended September 30, 2002.
Following consummation of the Plan, and after
reduction for (1) the aforementioned NOL carrybacks and (2) cancellation of prepetition indebtedness as provided under
Section 108 of the Internal Revenue Code, the Company had NOL carryforwards of $278 million, which expire between
September 30, 2020 and September 30, 2021. Under applicable limitations imposed by Section 382 of the Internal Revenue Code,
the Company’s ability to utilize these loss carryforwards became subject to an annual limitation of $43.3 million,
inclusive of a separate limitation for Multicare. During the year ended September 30, 2002, the Company utilized $8 million of
loss carryforwards. Pursuant to SOP 907, the income tax benefit of the NOL utilization served to reduce goodwill.
The Company has NOL carryforwards of $270 million remaining at September 30, 2002. There can be no assurances that the
Company will be able to utilize these NOL’s and, consequently, a 100% valuation allowance against these NOL’s has been provided.
The tax benefit of NOL carryforwards ultimately realized will be recorded as a reduction of goodwill.
Other deferred tax assets include $3.3 million for
builtin losses recognized by Multicare during the fiscal year ended September 30, 2002 in excess of its
separate limitation under Section 382.
(14) Redeemable Preferred Stock
In connection with the consummation of the Plan,
the Company issued 425,946 shares of Series A Convertible Preferred Stock (the “Series A Preferred”).
The Series A Preferred has a liquidation preference of $42.6 million and accrue dividends at the annual rate of 6% payable
in additional shares of Series A Preferred. The Series A Preferred is convertible at any time, at the option of the holders.
Each share of Series A Preferred is convertible into the number of shares of the Company's common stock which results from dividing
(x) the liquidation preference of $100 per each such share plus all accrued and unpaid dividends by (y) the conversion price per share of $20.33. In fiscal 2002, 4,338 shares of Series A Preferred were converted to 21,336 shares of common stock.
The Company has the right to convert all of the shares of Series A Preferred to shares of common stock at any time after the first
anniversary date of the effective date, or October 2, 2002, when the average trading price of the Company’s common stock over the
immediately preceding 30 days is $30.00 or more per share. The Company has the right to redeem the Series A Preferred at any time by
giving 30 days notice to the holders (subject to certain restrictions imposed by the Company’s Senior Credit Facility).
The Series A Preferred are subject to mandatory redemption on October 2, 2010. The conversion rate is $20.33 of liquidation
preference for each share common stock.
The Series A Preferred is reflected in the consolidated balance sheet
under redeemable preferred stock.
91
Back to Index
(15) Shareholders’ Equity
Common Stock
The authorized common stock
consists of 200,000,000 shares, $.02 par value, of which 40,683,893 shares were issued and outstanding
at September 30, 2002. The provisions of the Plan call for the issuance of 41,000,000 shares, of which
811,153 are to be issued when all outstanding claim objections and other disputed claim matters of the
bankruptcy proceedings are resolved.
Warrants
On October 2, 2001, the
Company issued warrants (the “Warrants”), $.02 par value, to purchase 4,559,475 shares of
new common stock at $20.33. The Warrants expired on October 2, 2002.
Restricted Stock Grants
On October 2, 2001, the Board of
Directors authorized the Company to issue 750,000 restricted shares of common stock to certain of its senior
officers. These shares vest quarterly over a five year period ending on
October 1, 2006.
The Company records compensation
expense ratably over each vesting period at $20.33 per vesting share. In fiscal 2002, the Company recognized
$2.5 million of compensation cost for the scheduled vesting of restricted stock grants, which is included in
salaries, wages and benefit costs in the consolidated statements of operations. Also in fiscal 2002, the
Company recognized $4.7 million of compensation cost for the accelerated vesting of restricted stock grants
held by certain key executives whose employment was terminated during the fiscal year. See note
5 “Significant Transactions and Events Strategic Planning, Severance and Other Related
Costs”. The compensation cost for the accelerated vesting of these restricted stock grants is
included in strategic planning, severance and other related costs in the consolidated statements of
operations.
At September 30, 2002, there are
393,825 shares of unvested restricted stock grants.
(16) Stock Option Plans
In fiscal 2002, the Company
adopted the 2001 Stock Option Plan (the “2001 Plan”). The aggregate
number of shares of common stock that may be issued under the 2001 Plan is 3,480,000,
of which 3,305,000 may be issued to nondirectors and 175,000 may be issued
solely to directors.
|
|
|
Option Price
Per Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Available
for Grant
|
|
|
|
Balance at September
30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized |
|
|
|
|
|
|
|
|
|
|
|
3,480,000 |
|
Granted |
|
|
$18.75 - $20.33 |
|
|
2,751,000 |
|
|
|
|
|
(2,751,000 |
) |
Exercisable |
|
|
|
|
|
|
|
|
619,779 |
|
|
|
|
Canceled / Forfeited |
|
|
|
|
|
(392,000 |
) |
|
|
|
|
392,000 |
|
|
|
Balance at September
30, 2002 |
|
|
$18.75 - $20.33 |
|
|
2,359,000 |
|
|
619,779 |
|
|
1,121,000 |
|
|
|
In fiscal 2002, the Company
recognized $0.2 million of compensation cost in connection with the issuance of stock options to consultants.
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The Company has adopted the
disclosureonly provisions of Statement of Financial Accounting Standards No.
123, “Accounting for StockBased Compensation,” (SFAS 123) and applies APB
Opinion No. 25 in accounting for its plans and, accordingly, has not recognized compensation cost
for stock options issued to employees and directors in its financial statements. Had the Company
determined compensation cost based on the fair value at the grant date consistent with the
provisions of SFAS 123, the Company’s net income (loss) would have been changed to the pro forma
amounts indicated below (in thousands):
|
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
|
|
Net income (loss)
- as reported |
|
$ |
70,167 |
|
$ |
247,009 |
|
$ |
(883,455 |
) |
Net income (loss)
- pro forma |
|
|
57,422 |
|
|
247,009 |
|
|
(883,870 |
) |
Net income (loss)
per share - as reported (diluted) |
|
|
1.68 |
|
|
5.08 |
|
|
(18.77 |
) |
Net income (loss)
per share - pro forma (diluted) |
|
$ |
1.38 |
|
$ |
5.08 |
|
$ |
(18.78 |
) |
|
|
The fair value of stock options granted
in 2002 and 2000 is estimated at the grant date using the BlackScholes optionpricing model with the
following assumptions for 2002 and 2000: dividend yield of 0% (2002 and 2000); expected volatility of 36.92%
(2002) and 179.22% (2000); a riskfree return of 3.8% (2002) and 5.17% (2000); and expected lives of 8.1
years (2002) and 6.6 years (2000).
The Company did not make any stock option
grants in 2001 and as a result of the Company’s deteriorating stock price following its voluntary petition
for relief under Chapter 11 Bankruptcy, there were no outstanding stock options with intrinsic value during the
year ended September 30, 2001. Consequently, there is no compensation cost in fiscal 2001 pursuant to the provisions of SFAS 123.
(17) Retirement Plan
The Company’s retirement plan
(the “Retirement Plan”) is a cash deferred profitsharing plan covering all of the employees
of the Company (other than certain employees covered by a collective bargaining agreement) who have completed at
least 500 hours of service and six months of employment. Under the 401(k) component, each employee may elect to contribute a
portion of his or her current compensation up to the maximum permitted by the Internal Revenue Code or 50% (or for more highly
compensated employees a maximum of 4%, in accordance with Company policy) of such employee's annual compensation. The Company
may make a matching contribution each year as determined by the Board of Directors. The Board of Directors may establish this
contribution at any level each year, or may omit such contribution entirely. In addition, there are two deferred
profitsharing plans for those employees that are covered by collective bargaining agreements.
Under the profit sharing provisions of
the Retirement Plan, the Company may make an additional employer contribution as
determined by the Board of Directors each year. The Board of Directors may establish this
contribution at any level each year, or may omit such contribution entirely. It is the Company's
intent that employer contributions under the profit sharing provisions of the Retirement Plan are to be
made only if there are sufficient profits to do so. Profit sharing contributions are allocated among the
accounts of participants in the proportion that their annual compensation bears to the aggregate annual compensation
of all participants. All employee contributions to the Retirement Plan are 100% vested. Company contributions are
vested in accordance with a schedule that generally provides for vesting after six years of service with the Company
(any nonvested amounts that are forfeited by participants are used to reduce the following year’s contribution by the Company).
The Company recorded retirement plan
expense for the 401(k) match and the discretionary contribution of $5.7 million, $7.9 million, and $7.1 million
for the years ended September 30, 2002, 2001 and 2000, respectively.
(18) Loss on Impairment of Assets and Other Charges
Fiscal 2002
In connection with the Company’s
change in strategic direction and objectives, the Company incurred $4.9 million of asset impairment charges
consisting of the writedown in carrying value of two idle eldercare real estate properties and the exit
of an internetbased businesstobusiness jointventure partnership.
See note 5 “Strategic planning, severance and other related costs”.
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During the year ended September 30, 2002,
the Company recorded $4.3 million of debt restructuring and reorganization costs, of which $2.6 million related to post
confirmation liabilities payable to the United States Trustee related to Chapter 11 cases that remained open.
With the exception of three open cases, all other Chapter 11 cases were closed in July 2002.
The remaining $1.7 million represents a post confirmation charge resulting from a settlement reached with the lender
of a prepetition mortgage obligation for an amount that exceeded the estimated loan value established in the September 30, 2001
freshstart balance sheet.
Fiscal 2001
During the twelve months ended
September 30, 2001, the Company recorded costs in connection with certain uncollectible receivables, insurance
related costs and other charges, and debt restructuring and reorganization costs. The following table and
discussion provides additional information on these charges to continuing operations (in thousands):
|
|
|
2001 |
|
|
|
|
|
|
Notes receivable, advances,
and trade receivables, due from affiliated businesses
formerly owned or managed deemed uncollectible |
|
$ |
30,048 |
|
Uncollectible trade receivables |
|
|
39,249 |
|
Self-insured and related program
costs |
|
|
15,110 |
|
Other charges |
|
|
17,231 |
|
|
|
|
|
|
Total uncollectible receivable,
insurance related and other charges (included in
other operating expenses) |
|
$ |
101,638 |
|
|
|
|
|
|
Debt Restructuring and Reorganization
Costs: |
|
|
|
|
Professional, bank and other
fees |
|
$ |
59,393 |
|
Employee benefit related costs,
including severance |
|
|
16,786 |
|
Exit costs of terminated businesses |
|
|
5,877 |
|
Fresh start valuation adjustments |
|
|
1,001,351 |
|
|
|
|
|
|
Total debt restructuring and
reorganization costs |
|
$ |
1,083,407 |
|
|
|
|
|
|
Uncollectible receivable, insurance related costs
and other charges included in other operating expenses
In fiscal 2001, the Company performed periodic
assessments of the collectibility of amounts due from certain affiliated businesses in light of the adverse impact of PPS on
their liquidity and profitability. As a result of our assessment, the carrying value of notes receivable, advances and trade receivables due
from affiliates was written down by $30 million.
In fiscal 2001, the Company performed a reevaluation of its
allowance for doubtful accounts triggered by deterioration in the agings of certain categories of receivables.
Management believed that such deterioration in the agings were due to several prolonged negative factors related to the operational effects of
the bankruptcy filings such as personnel shortages and the time demands required in normalizing relations with vendors and addressing a
multitude of bankruptcy issues. As a result of this reevaluation, the Company determined that an increase in the allowance
for doubtful accounts of $39.2 million was necessary.
In fiscal 2001, as a result of adverse claims development we
reevaluated the levels of reserves established for certain selfinsured health and workers’ compensation benefits and
other insurance related programs. These charges were $15.1 million.
In addition, the Company incurred charges of $17.2 million during
fiscal 2001, principally related to contract and litigation matters and settlements, and certain other charges.
Debt restructuring and reorganization costs
During the twelve months ended September 30, 2001, the Company incurred
$1,083.4 million of legal, bank, accounting, freshstart valuation adjustments and other costs in connection with its debt restructuring
and the Chapter 11 cases. Of these charges, $59.4 million is attributed to professional, bank and other fees and $16.8 million pertains to
certain salary and benefit related costs, principally for a court approved special recognition program. In addition, the Company
incurred $5.9 million of costs associated with exiting certain terminated businesses. Freshstart valuation adjustments of
$1,001.4 million were recorded pursuant to the provisions of SOP 907, which require entities to record their assets and liabilities at fair value.
The freshstart valuation adjustments are principally the result of the elimination of predecessor company goodwill and the revaluation
of property, plant and equipment to estimated fair values.
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Fiscal 2000
During fiscal 2000, the
Company recorded charges in connection with the Multicare joint venture restructuring,
the impairment of longlived assets and other impairments, charges, debt
restructuring and reorganization costs. The following table and discussion provides
additional information on these charges to continuing operations (in thousands):
|
|
|
2000
|
|
|
|
Multicare joint-venture
restructuring |
|
$ |
420,000 |
|
|
|
Impairment of
long-lived assets |
|
$ |
234,009 |
|
Exit costs and
write-off of unrecoverable assets of six eldercare centers closed or
leases terminated |
|
|
28,363 |
|
Investments in
information system development abandoned in fiscal 2000 |
|
|
19,200 |
|
Uncollectible
trade and notes receivable due to customer bankruptcy or other
liquidity issues |
|
|
41,955 |
|
Other charges,
including third party appeal issues and other cost settlement balances
deemed uncollectible and insurance related
adjustments |
|
|
51,181 |
|
|
|
Total asset impairments
and other charges (included in other operating expenses) |
|
$ |
374,708 |
|
|
|
Professional
bank and other costs in connection with the Company’s amended senior
bank credit facility
and the filings under Chapter 11 |
|
$ |
29,935 |
|
Interest rate
swap termination charge |
|
|
28,331 |
|
Employee benefit
related costs |
|
|
4,529 |
|
|
|
Total debt restructuring
and reorganization costs |
|
$ |
62,795 |
|
|
|
Multicare jointventure
restructuring
As discussed in note
5 “Significant Transactions and Events Multicare Joint Ventures Restructuring”, in
connection with the restructuring transaction in the first fiscal quarter of 2000, the Company recorded a
noncash charge of $420 million representing the estimated cost to terminate a put option in consideration
for the issuance of certain redeemable preferred stock. The cost to terminate the put option 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.
Asset impairments and other
charges
During 2000, in connection with the
Company’s budget preparations for the forthcoming year and in accordance with SFAS No. 121, management
reviewed the current and projected undiscounted cash flows of the Company’s eldercare centers and its
NeighborCare pharmacy businesses. This review indicated that the assets of certain eldercare centers were
impaired. The fair market value of businesses deemed potentially impaired were then estimated and compared to
the carrying values of the longlived assets. Any excess longlived asset carrying value over the
estimated fair value was writtenoff. Fair value was estimated using a per bed value determined by Company management.
The total loss for SFAS No. 121 impairments of $234 million was associated with 49 eldercare centers.
No impairment charge was assessed on the longlived assets of the NeighborCare pharmacy businesses.
The impairment charge recorded resulted in the writeoff of $185 million of goodwill and a writedown
of $34.6 million of property, plant and equipment.
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During fiscal 2000, the Company closed
or terminated the leases of six underperforming eldercare centers with 842 combined beds. As a result, a charge
of $28.4 million was recorded to account for certain impaired and abandoned assets of these eldercare
centers.
As a result of the Company’s
Chapter 11 bankruptcy filing and curtailment in funding availability, the Company assessed the recoverability
of our investment in certain information systems developed internally for the operating needs of our
institutional pharmacy and infusion therapy businesses. The Company’s assessment determined that
$19.2 million of the carrying value of our investment in these systems was unrecoverable through estimated
future product sales to third parties and future operating efficiencies.
During fiscal 2000, the Company
performed periodic assessments of the collectibility of amounts due from certain current and former customers
in light of the adverse impact of PPS on their liquidity and profitability. In certain cases, customers filed
for protection under Chapter 11 of the Bankruptcy Code. As a result of the Company’s assessment, the
carrying value of notes receivable, advances and trade receivables due from these customers was written down by $42 million.
The Company performed
an assessment of the collectibility of certain aged amounts due from third party
payors and concluded that $12.5 million was unrecoverable. In addition, as a
result of adverse claims development we reevaluated the levels of reserves established
for certain self-insured and other programs, including workers’ compensation
and general liability insurance, resulting in a charge of $35.2 million.
Debt restructuring and reorganization costs
During the third fiscal quarter of
2000, the Company began discussions with its lenders under the then existing Genesis and Multicare credit
facilities to revise our 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 and Multicare senior subordinated debt agreements.
On June 22, 2000, Genesis and Multicare filed for voluntary relief under Chapter 11 of the Bankruptcy Court.
In connection with the debt restructuring negotiations and for the costs of the subsequent reorganization cases,
the Company incurred legal, bank, accounting and other costs of $29.9 million. As a result of the nonpayment
of interest under certain debt agreements, 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 $28.3 million obligation. In addition, as a result of the
Company’s restructuring and Chapter 11 cases the Company incurred costs of $4.5 million for certain
salary and benefit related costs, principally for a court approved special recognition program.
(19) Commitments and Contingencies
Financial Commitments
Requests for providing commitments
to extend financial guarantees and extend credit are reviewed and approved by senior management. Management
regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of
these reviews are considered in assessing the need for any reserves for possible credit and
guarantee losses.
The Company has posted $0.9
million of outstanding letters of credit. The letters of credit guarantee performance to
third parties of various trade activities. The letters of credit are not recorded as
liabilities on the Company’s balance sheet unless they are probable of being utilized by the
third party. The financial risk approximates the amount of outstanding letters of credit.
The Company has extended $7.4 million
in working capital lines of credit to certain jointly owned and managed companies, of which $5.0 million were
unused at September 30, 2002. Credit risk represents the accounting loss that would be recognized at the
reporting date if the affiliate companies were unable to repay any amounts utilized under the working
capital lines of credit. Commitments to extend credit to third parties are conditional agreements generally
having fixed expiration or termination dates and specific interest rates and purposes.
The Company is a party to joint venture
partnerships whereby its ownership interests are 50% or less of the total capital of the partnerships. Genesis
accounts for these partnerships using the equity method of accounting and, therefore, the assets, liabilities and
operating results of these partnerships are not consolidated with the Company’s. The carrying value of
the Company’s investment in joint ventures is $14.1 million and $12.5 million at September 30, 2002 and 2001,
respectively. The Company’s share of the income (loss) of the partnerships for the years ended
September 30, 2002, 2001 and 2000 was $1.6 million, $(10.2) million and $(2.4) million, respectively. Although
Genesis is not contractually obligated to fund operating losses of these partnerships, in certain cases, it has
extended credit to such joint venture partnerships in the past and may decide to do so in the future in order to
realize economic benefits from our joint venture relationship. Management assesses the creditworthiness of such
partnerships in the same manner it does other thirdparties. The Company has provided $11.5 million of
financial guarantees related to loan commitments of four jointly owned and managed companies.
The Company has also provided $11.3 million of financial guarantees related to lease obligations of
one jointlyowned and managed company that operates four eldercare centers.
The guarantees are not recorded as liabilities on the Company’s balance sheet unless it is required to
perform under the guarantee. Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed to perform completely as contracted. The credit risk amounts are equal
to the contractual amounts, assuming that the amounts are fully advanced and that no amounts
could be recovered from other parties.
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Legal Proceedings
The Company is a party to litigation
arising in the ordinary course of business. With exception to the discussion which follows, the Company does
not believe the results of such litigation, even if the outcome is unfavorable, would have a material adverse
effect on the Company’s financial position.
As of the end of the prior fiscal
year, the Company was engaged in multiple legal and arbitration proceedings with HCR Manor Care and certain
of its affiliates in connection with certain pharmacy services agreements. These matters were settled in fiscal
2002 as discussed in note 5 Significant Transactions and Events.
U.S. ex rel Scherfel v. Genesis Health Ventures et al.
In this action,
brought in United States District Court for the District of New Jersey on March 16, 2000,
the plaintiff alleges that a pharmacy purchased by NeighborCare failed to process Medicaid
credits for returned medications. The allegations are vaguely alleged for other jurisdictions.
While the action was under seal in United States District Court, the Company fully cooperated with the
Department of Justice’s evaluation of the allegations. On or about March 2001, the Department
of Justice declined to intervene in the suit and prosecute the allegations. The U.S. District
court action is no longer under seal but remains administratively stayed pending resolution of
the bankruptcy issues.
The plaintiff filed a proof of
claim in the Companys bankruptcy proceedings initially for approximately $650 million and more recently
submitted an amended claim in the amount of approximately $325 million. The Company believes the allegations
have no merit and have objected to the proof of claim. In connection with an estimation of the proof
of claim in the bankruptcy proceeding, the Company filed a motion for summary judgment urging that the claim
be estimated at zero. On or about January 24, 2002, the bankruptcy court granted the Companys motion and
estimated the claim at zero. On or about February 11, 2002, the plaintiff appealed the bankruptcy
court’s granting of summary judgment to the U.S. District Court in Delaware and sought an
injunction preventing the distribution of assets according to the plan of reorganization.
The injunction was subsequently denied by the U.S. District Court for several reasons,
including that the plaintiff was unlikely to succeed on the merits. When the injunction
was denied by the U.S. District Court, the assets previously reserved for the plaintiff’s
claim were distributed in accordance with the plan of reorganization. A hearing on the merits of
the appeal was held by teleconference on or about November 11, 2002, and a final decision
from the U.S. District Court is pending.
(20) Fair Value of Financial Instruments
The carrying amount and fair value of
financial instruments at September 30, 2002 and 2001 consist of the following (in thousands):
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
Cash and equivalents
|
|
$ |
148,030 |
|
$ |
148,030 |
|
$ |
32,139 |
|
$ |
32,139 |
|
Restricted investments
in marketable securities |
|
|
86,147 |
|
|
86,147 |
|
|
51,625 |
|
|
51,625 |
|
Accounts receivable,
net |
|
|
369,969 |
|
|
369,969 |
|
|
399,816 |
|
|
399,816 |
|
Accounts payable |
|
|
56,244 |
|
|
56,244 |
|
|
46,429 |
|
|
46,429 |
|
Debt, excluding
capital leases |
|
|
679,402 |
|
|
696,351 |
|
|
644,509 |
|
|
658,963 |
|
Pay fixed / receive
variable interest rate swap |
|
|
(4,454 |
) |
|
(4,454 |
) |
|
|
|
|
|
|
Interest rate
cap |
|
|
398 |
|
|
398 |
|
|
|
|
|
|
|
|
|
The carrying value of cash
and equivalents, net accounts receivable and accounts payable is equal to its fair value due to their short
maturity. The Company’s restricted investments in marketable securities are carried
at fair value.
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The fair value of debt, excluding
capital leases, is computed using discounted cash flow analysis, based on the Company’s estimated
incremental borrowing rate at the end of each fiscal period presented.
The fair values of interest rate swap
and cap agreements were determined using confirmations from thirdparty financial institutions.
(21) Assets Held for Sale and Discontinued Operations
On September 30, 2001, the Company adopted
the provisions of SFAS 144. Under SFAS 144, discontinued businesses or assets held for sale are removed from the
results of continuing operations. During fiscal 2002, the Company classified its ambulance business, all eldercare
centers located in the states of Wisconsin and Illinois, five eldercare centers in other states and one medical
supply distribution site as either held for sale or closed. The results of operations in the current and prior
year periods, along with any costs to exit such businesses in the current year period, have been classified as
discontinued operations in the consolidated statements of operations. Businesses sold or closed prior to the
Company’s adoption of SFAS 144 continue to be reported in the results of continuing operations.
We intend to sell our assets held for sale within the
next year and, accordingly, have classified the $46.1 million carrying value as a current asset in the
consolidated balance sheet.
The following table sets forth the
components of income (loss) from discontinued operations for the fiscal periods presented
(in thousands):
|
|
|
Successor
Company
|
|
|
|
Predecessor
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
2001
|
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) of
discontinued businesses |
|
$ |
541 |
|
|
$ |
(15,085 |
) |
$ |
7,720 |
|
Loss on discontinuation of businesses |
|
|
(6,487 |
) |
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
2,319 |
|
|
|
|
|
|
(3,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net of taxes |
|
$ |
(3,627 |
) |
|
$ |
(15,085 |
) |
$ |
4,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss on discontinuation of
businesses includes the writedown of assets to estimated net realizable value.
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(22) 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) inpatient
services and (2) pharmacy services.
The Company includes in inpatient
services revenues all room and board charges and ancillary service revenue for its eldercare customers at the 187
eldercare centers which the Company owns or leases. The centers offer three levels of care for their customers:
skilled, intermediate and personal.
The Company provides pharmacy services through its NeighborCare
pharmacy subsidiaries. Included in pharmacy 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 59 institutional pharmacies and 22 medical supply and home medical equipment
distribution centers located in its various market areas. In addition, the Company operates 31 communitybased pharmacies which are
located in or near medical centers, hospitals and physician office complexes. 92% of the sales attributable to all pharmacy operations are
generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by the
Company.
The accounting policies of the segments
are the same as those of the consolidated organization. All intersegment sales
prices are market based.
The Company’s capital costs in the following segment information (depreciation and amortization, lease expense, and interest), as well as minority interests and preferred dividends for the year ended September 30, 2002 reflect the provisions of the Plan and the impact of freshstart reporting. These costs for periods prior to the Company’s emergence from bankruptcy generally were recorded based on historical costs or contractual agreements and do not reflect the provisions of the Plan. Accordingly, capital costs of the Successor Company for the year ended September 30, 2002 are not comparable to those of the Predecessor Company in prior years.
Summarized financial
information concerning the Company’s reportable
segments is shown in the following table. The “All
other services” category of revenues and operating
income 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, diagnostic services, hospitality
services, group purchasing fees, respiratory health services,
staffing services and other healthcare related services.
The “Corporate” category consists of the Company’s
general and administrative function, for which there is
generally no revenue generated. The “Other adjustments”
category consists of charges that have not been allocated
to our reportable segments or the “All other services”
or “Corporate” categories. This approach to
segment reporting is consistent with the Company’s
internal financial reporting and the information used
by the chief operating decision maker regarding the performance
of our reportable and nonreportable segments.
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|
Successor
Company
|
|
|
Predecessor
Company |
|
|
|
|
|
|
|
|
|
(in thousands) |
2002 |
|
|
2001 (1) |
|
2000 (1) |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Inpatient
services external |
$1,330,993 |
|
|
$1,255,525 |
|
$1,227,250 |
|
Pharmacy
services: |
|
|
|
|
|
|
|
External |
1,123,854 |
|
|
1,036,245 |
|
949,829 |
|
Intersegment |
100,502 |
|
|
98,122 |
|
99,929 |
|
All other services: |
|
|
|
|
|
|
|
External |
168,832 |
|
|
160,401 |
|
150,548 |
|
Intersegment |
172,160 |
|
|
194,323 |
|
186,746 |
|
Elimination of intersegment revenues |
(272,662 |
) |
|
(292,445 |
) |
(286,675 |
) |
|
|
|
|
|
|
|
|
Total
net revenues |
2,623,679
|
|
|
2,452,171 |
|
2,327,627 |
|
|
|
|
|
|
|
|
|
Operating income
(loss) (2): |
|
|
|
|
|
|
|
Inpatient
services |
170,193 |
|
|
144,873 |
|
159,770 |
|
Pharmacy
services |
112,328 |
|
|
100,571 |
|
88,949 |
|
All
other services |
47,092 |
|
|
44,780 |
|
27,653 |
|
Corporate |
(74,200 |
) |
|
(62,126 |
) |
(51,259 |
) |
Other
adjustments (3) |
(26,015 |
) |
|
(101,638 |
) |
(374,708 |
) |
|
|
|
|
|
|
|
|
Total
operating income (loss) |
229,398 |
|
|
126,460 |
|
(149,598 |
) |
|
|
|
|
|
|
|
|
Capital and other: |
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
Gain
from arbitration award and other legal settlements |
23,768 |
|
|
|
|
|
|
Net
loss on sale of eldercare centers |
|
|
|
(540 |
) |
(7,922 |
) |
Multicare
joint venture restructuring |
|
|
|
|
|
(420,000 |
) |
Depreciation
and amortization |
(63,102 |
) |
|
(104,394 |
) |
(114,346 |
) |
Lease
expense |
(27,716 |
) |
|
(35,011 |
) |
(37,852 |
) |
Interest
expense |
(47,963 |
) |
|
(118,552 |
) |
(202,858 |
) |
Debt
restructuring and reorganization costs |
(4,270 |
) |
|
(1,083,407 |
) |
(62,795 |
) |
Income
tax (provision) benefit |
(32,463 |
) |
|
|
|
30,179 |
|
Equity
in net income (loss) of unconsolidated affiliates |
1,579 |
|
|
(10,213 |
) |
(2,407 |
) |
Minority
interests |
(2,838 |
) |
|
23,456 |
|
132,444 |
|
Preferred
stock dividends |
(2,599 |
) |
|
(45,623 |
) |
(42,596 |
) |
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
73,794 |
|
|
(1,247,824 |
) |
(877,751 |
) |
Income
(loss) from discontinued operations, net of taxes |
(3,627 |
) |
|
(15,085 |
) |
4,708 |
|
Extraordinary
item, net of taxes |
|
|
|
1,509,918 |
|
|
|
Cumulative
effect of accounting change, net of taxes |
|
|
|
|
|
(10,412 |
) |
|
|
|
|
|
|
|
|
Net
income (loss) attributed to common
shareholders |
$70,167 |
|
|
$247,009 |
|
$(883,455 |
) |
|
|
|
|
|
|
|
|
100
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|
|
Successor
Company |
|
(in thousands) |
|
September
30,
2002 |
|
September
30, 2001 (1) |
|
Assets: |
|
|
|
|
Inpatient
services (4) |
|
$945,047 |
|
$973,476 |
Pharmacy
services |
|
677,032 |
|
686,361 |
All
other |
|
367,416 |
|
179,383 |
|
|
|
$1,989,495 |
|
$1,839,220 |
|
(1) |
The September 30,
2001 and 2000 periods were restated to conform to the current period presentation
which includes direct overhead costs that support the inpatient services
segment. The summary segment information for pharmacy services has historically
included direct overhead costs. In accordance with our adoption of SFAS
144, all segments were restated to remove discontinued businesses from the
results of continuing operations for the periods ended September 30, 2001
and September 30, 2000. |
|
|
(2) |
Operating income is defined as
income after operating expenses as they appear on the Company’s consolidated
statements of operations and is calculated by subtracting salaries, wages
and benefits, cost of sales, other operating expenses and strategic planning,
severance and other related costs from net revenues. |
|
|
(3) |
For a description of the other
adjustments in fiscal 2002 see note 5 “Significant Transactions
and Events Strategic Planning, Severance and Other Related Costs”,
and for other adjustments in fiscal 2001 and 2000, see note 18
“Loss on Impairment of Assets and Other Charges”. |
|
|
(4) |
Assets of the inpatient services
segment at September 30, 2002 include $46.1 million of assets held for
sale. See note 21 “Assets Held for
Sale and Discontinued Operations”. |
(23) Comprehensive Income (Loss)
The following table sets forth the
computation of comprehensive income (loss) for the years ended September 30,
2002, 2001 and 2000 (in thousands):
|
|
Successor
Company |
|
|
Predecessor
Company |
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed
to common shareholders |
|
$70,167 |
|
|
$247,009 |
|
$(883,455 |
) |
Unrealized (loss) gain on marketable
securities |
|
647 |
|
|
1,981 |
|
(1,361 |
) |
Net change in fair value of interest
rate swap and cap agreements |
|
(2,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$68,340 |
|
|
$248,990 |
|
$(884,816 |
) |
|
|
|
|
|
|
|
|
|
(24) Derivative Financial Instruments
The Company follows the provisions of SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities”,
and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities an Amendment of FASB Statement No. 133.” The
Company utilizes derivative financial instruments, such as interest rate swaps
and caps, to manage changes in market conditions related to debt obligations.
As of September 30, 2002, the Company has a $75 million swap maturing on September
13, 2005, to receive fixed (3.1%) / pay variable (one month LIBOR) and a $125
million swap maturing on September 13, 2007, to receive fixed (3.77%) / pay
variable (one month LIBOR). In addition, the Company has a $75 million cap maturing
on September 13, 2004. The interest rate cap pays interest to the Company when
LIBOR exceeds 3%. The amount paid to the Company is equal to the notional principal
balance of $75 million multiplied by (LIBOR minus 3%) in those periods in which
LIBOR exceeds 3%. We purchased the interest rate cap for $0.7 million which
is being amortized to interest expense over the two year term of the agreement.
Based upon confirmations from third party financial
institutions, the fair value of the interest rate swap agreements and the cap
are ($4.4) million and $0.4 million, respectively, at September 30, 2002.
101
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The Company recognizes all derivatives on the balance
sheet at fair value. Changes in the fair value of a derivative that is designated as and meets all the required criteria for a
cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified to earnings as the underlying
hedged item affects earnings. Amounts reclassified into earnings related to interest rate swap and cap agreements are included in
interest expense. During fiscal 2002, $2.5 million of after tax net unrealized losses related to interest rate swap and caps was
recorded in accumulated other comprehensive income (loss). As of September 30, 2002, $4.0 million has been classified in other long
term liabilities in the consolidated balance sheet related to cash flow hedges. The counterparties to the above derivative
agreements are major international banks.
(25) Subsequent Event
On July 28, 2002, Genesis
entered into an agreement and plan of merger (the “Merger Agreement”)
with NCS HealthCare, Inc. (“NCS”), pursuant to which NCS was to
become a wholly-owned subsidiary of Genesis (the “NCS Transaction”).
NCS provides institutional pharmacy services in 36 states.
Under the terms of the Merger Agreement,
each share of NCS class A and class B common stock were to be converted into 0.1 of a share of Genesis common stock.
In connection with the NCS Transaction, two NCS stockholders holding approximately 65% of the voting power of NCS
entered into voting agreements with Genesis and NCS (“Voting Agreements”) in which they agreed
to vote all of their shares of NCS class A and class B common stock
in favor of the Merger Agreement and against certain other actions
specified in the Voting Agreements.
Since the Merger Agreement was entered into,
Omnicare, Inc. made a cash tender offer for the NCS shares, at a price per share of $3.50 in cash. In addition, seven separate lawsuits (one of which was filed by Omnicare) were filed alleging in
general that certain officers and directors of NCS breached their fiduciary duties to the NCS stockholders by entering into
the Merger Agreement and the Voting Agreements, and sought to invalidate the Voting Agreements and enjoin the merger.
On
December 11, 2002, the Court of Chancery of the State of Delaware,
pursuant to an order of the Delaware Supreme Court dated December
10, 2002 which reversed prior determinations of the Court
of Chancery, entered an order preliminarily enjoining the
consummation of the NCS Transaction pending further proceedings.
On December 15, 2002, Genesis entered into a
termination and settlement agreement with Omnicare whereby Genesis agreed to terminate the Merger Agreement
and Omnicare agreed to pay to the Company $22 million. In addition, Genesis and
Omnicare each agreed to release the other from any claims arising from the Merger Agreement and not commence
any actions against one another in connection with the Merger Agreement.
The Company will recognize a gain in the first quarter of fiscal 2003, representing
the $22 million breakup fee less the costs incurred in connection with
the NCS Transaction.
102
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(26) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows (in thousands):
|
|
Total
Net
Revenues |
|
Income
(Loss)
from
Continuing Operations |
|
Net
Income
(Loss)
Attributed to Common Shareholders |
|
Diluted
Income
(Loss) Per
Common
Share from Continuing Operations |
|
Diluted
Net
Income
(Loss) Per
Common
Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor
Company) |
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended: |
|
|
|
|
|
|
|
|
|
|
|
December 31,
2001 |
|
$638,927 |
|
$15,204 |
|
$15,599 |
|
$0.37 |
|
$0.38 |
|
March 31, 2002 |
|
653,594 |
|
27,835 |
|
24,943 |
|
0.66 |
|
0.59 |
|
June 30, 2002 |
|
660,767 |
|
18,306 |
|
17,453 |
|
0.44 |
|
0.42 |
|
September 30,
2002 |
|
670,391 |
|
12,449 |
|
12,172 |
|
0.30 |
|
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Predecessor
Company) |
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended: |
|
|
|
|
|
|
|
|
|
|
|
December 31,
2000 |
|
$599,928 |
|
$(34,057 |
) |
$(32,811 |
) |
$(0.70 |
) |
$(0.67 |
) |
March 31, 2001 |
|
601,457 |
|
(36,248 |
) |
(36,723 |
) |
(0.75 |
) |
(0.75 |
) |
June 30, 2001 |
|
620,788 |
|
(29,014 |
) |
(28,291 |
) |
(0.60 |
) |
(0.58 |
) |
September 30,
2001 |
|
629,998 |
|
(1,148,505 |
) |
344,834 |
|
(23.61 |
) |
7.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share was calculated
for each threemonth and the twelvemonth period on a standalone
basis. As a result, the sum of the diluted earnings (loss) per share for the
four quarters does not equal the loss per share for the twelve months.
103
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information
with respect to our nonemployee directors.
Name |
Age |
|
Committees of the board
of directors |
|
|
|
|
James H. Bloem |
52 |
|
Audit Committee, Compliance Committee |
James E. Dalton, Jr. |
60 |
|
Executive Committee, Compliance Committee |
James D. Dondero |
40 |
|
Audit Committee, Executive
Committee |
Dr. Philip P. Gerbino |
55 |
|
Audit Committee, Compensation Committee |
Joseph A. LaNasa III |
33 |
|
Compensation Committee, Executive Committee |
James H. Bloem has
served as our director since October 2, 2001. Mr. Bloom is senior vice president and chief financial officer of Humana, Inc. and is responsible for developing business growth strategies and supervising all accounting, actuarial, financial, tax, risk management, treasury, and investor relations activities. Previously, Mr. Bloem has served as executive vice president, then as president of the personal care division of Perrigo Company, the nation’s largest manufacturer of overthecounter pharmaceuticals, personal care, and nutritional products for the store brand market. Mr. Bloem's experience also includes independent financial and business consulting and a law partnership with a specialization in taxation and corporate practice. Mr. Bloem holds a Law degree from Vanderbilt University and a Masters of Business Administration degree from Harvard Business School. He is also a certified public accountant and serves as director of several corporate and educational boards.
Mr. Bloem is a member of the board of directors of the following companies: Bissell, Inc., Nutramax Products, Inc., Van Eerden Company, and
Imperial Graphics, Inc.
James
E. Dalton has served as our director since October 2,
2001. Mr. Daltons extensive management experience
includes senior management positions with several national
healthcare organizations including Quorum Health Group,
Inc., HealthTrust Inc. and Humana and with hospitals in
Virginia and West Virginia. He serves on the board of
directors of a number of health care organizations and
serves on the board of trustees of Universal Health Realty
Income Trust, and the American Hospital Association. He
is a Fellow of the American College of Healthcare Executives
and past chairman of the Federation of American Hospitals.
He holds a Bachelor's degree in Economics from RandolphMacon
College and a Master's degree in Hospital Administration
from the Medical College of Virginia. Mr. Dalton is a
member of the board of directors of the following companies:
Triad Hospitals, Inc., AmSouth Bancorporation, U.S. Oncology,
Inc., Select Medical, Inc., and Universal Health Realty
Income Trust.
James
D. Dondero has served as our director since October 2, 2001.
Mr. Dondero is president of Highland Capital Management, LP
where he has facilitated growth through the creation of 19 separate
portfolios holding in excess of $8 billion. Formerly, Mr. Dondero
served as chief investment officer of Protective Life Insurance
Company’s GIC subsidiary from 1989 to 1993. His portfolio
management experience includes mortgagebacked securities,
investment grade corporates, leveraged bank loans, emerging
markets, derivatives, preferred stocks and common stocks. Mr.
Dondero is a certified public accountant, chartered financial
analyst, a certified management accountant and a member of the
NYSSA. He completed his financial training at Morgan Guaranty
Trust Company and is a graduate of the University of Virginia
with degrees in Accounting and Finance. Mr Donero is a member
of the board of directors of Motient Corporation.
Dr. Philip
P. Gerbino has served as our director since March 16,
2000. Dr. Gerbino is president of the University of the
Sciences in Philadelphia, which includes the Philadelphia
College of Pharmacy, and has been part of the faculty
and administration of that institution for over 25 years.
In addition, he is a national leader in the pharmacy field
and has served as president of the American Pharmaceutical
Association, president of the APhA Academy of Pharmacy
Practice, member of the U.S. Pharmacopeial Advisory Panel
on Geriatrics and as chair of the Commission for Certification
in Geriatric Pharmacy. Dr. Gerbino holds a Bachelor of
Science degree in Pharmacy and a Doctor of Pharmacy degree
from the Philadelphia College of Pharmacy and Science.
Dr. Gerbino is a member of the board of directors of Arrow
Prescription Centers and Health ATOZ.
104
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Joseph A. LaNasa III has served as our director
since October 2, 2001. Mr. LaNasa is a managing director of Goldman Sachs & Co., where he runs
its Special Situations Investing Group which analyzes and invests in the debt of financially troubled
companies. Prior to joining Goldman Sachs, he worked as an attorney at Wachtell, Lipton,
Rosen & Katz and before that he clerked for the honorable Adrian Duplantier in federal
district court in the Eastern District of New Orleans. He graduated magna cum laude from
Harvard Law School and summa cum laude from Georgetown University’s School of Foreign Service.
At present, our board of directors consists of six members and is
not classified.
At the first meeting of shareholders for
the election of directors following the effective date of our articles of incorporation (October 2, 2001)
the board of directors will be divided into three classes, class I, class II and class III, which will be
as nearly equal in number as possible. Each director will serve for a term ending on the date of the third
annual meeting following the annual meeting at which the director was elected; provided, however, that each
director in class I will hold office until the first annual meeting of shareholders following the meeting at
which the director was elected; each director in class II will hold office until the second annual meeting of
shareholders following the meeting at which the director was elected; and each director in class III will hold
office until the third annual meeting of shareholders following the meeting at which the director was elected.
Pursuant to our bylaws as amended, the board
of directors, after an initial one year term following the effectiveness of our joint plan of reorganization, which
became effective on October 2, 2001, will consist of not less than six nor more than 11 directors as may be established
from time to time by a majority vote of the directors in office. Our articles of incorporation provide that the number of
directors fixed in the bylaws may be changed only by receiving the affirmative vote of the holders of at least 80%
of all the shares then entitled to vote on the change, or 75% of the directors in office at the time of vote.
When the number of directors is changed, any increase or
decrease in the number of directorships will be apportioned among the classes so as to make all classes as nearly equal in number
as possible.
Each director serves until his or her successor
is elected and qualified or until his death, retirement, resignation, or removal. Should a vacancy occur or be created,
whether arising through death, resignation, retirement or removal of a director, the vacancy will be filled by a majority vote
of the remaining directors. A director so elected to fill a vacancy will serve for the remainder of the present term of office
of the class to which he or she was elected.
For information regarding our executive officers,
see “Executive Officers of the Registrant.”
Reorganization
Mr. Fish served on
the board of directors at the time of our emergence from bankruptcy and was
subsequently appointed to replace Mr. Walker as interim chief executive officer.
Mr. Fish was named interim chairman of the board upon Mr. Walker’s resignation
from that position. All other executive officers set forth under “Executive
Officers of the Registrant,” were employed by us either prior to or
during our Chapter 11 bankruptcy proceedings. Mr. Walker and Dr. Gerbino were
members of our board of directors either prior to or during our Chapter 11
bankruptcy proceedings. See “Business Reorganization” and
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange
Act requires our directors and executive officers and persons who own more than 10% of a registered
class of our equity securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Officers, directors and
greater than 10% shareholders are required by the SEC regulation to furnish us with copies o
f all Section 16 (a) forms they file.
To our knowledge, based
solely on review of the copies of such reports submitted to us with respect to the fiscal year ended
September 30, 2002, all Section 16 (a) filing requirements applicable to our executive officers, directors and greater than
10% beneficial owners were complied with, except that Marilyn G. Wood filed a late report on Form 4.
105
Back to Index
ITEM 11: EXECUTIVE COMPENSATION
Summary Compensation Table
|
|
Annual
Compensation
|
|
Long
Term Compensation
|
|
All
Other
Compensation ($) (1)
|
|
Name
and Position with
the Company
|
|
Fiscal
Year
|
|
Salary
($)
(2)
|
|
Bonus
($) (4)
|
|
Restricted
Stock Awards
($)
(3)
|
|
Securities
underlying Options/
SARs (5)
|
|
|
Robert
H. Fish Interim
Chief Executive Officer |
|
2002 |
|
$ 274,615 |
|
$ 70,833 |
|
$
|
|
25,000 |
|
$
|
|
|
George
V. Hager, Jr.
Executive Vice President
and Chief Financial Officer |
|
2002
2001 2000 |
|
$
398,078 350,000
356,637 |
|
$
35,000 274,875
|
|
$1,524,750
|
|
75,000
|
|
$
601,698 1,700
2,275 |
|
|
|
Robert
A. Smith President,
NeighborCare Pharmacy |
|
2002
2001 2000 |
|
$
310,003 232,281
187,872 |
|
$
91,800 57,700
|
|
$
304,950
|
|
50,000
|
|
$
1,700 76,219
8,561 |
|
|
|
Robert
A. Reitz President,
MidAtlantic Eldercare
Region |
|
2002
2001 2000 |
|
$
289,620 252,990
252,858 |
|
$
85,239 30,359
|
|
$
254,125
|
|
35,000
|
|
$
1,700 1,700
1,685 |
|
|
|
Michael
R. Walker (former)
Chairman and Chief Executive Officer |
|
2002
2001 2000 |
|
$
574,808 750,000
721,154 |
|
$
485,000 883,813
|
|
$
3,049,500
|
|
225,000
|
|
$5,101,700
1,700 4,525 |
|
|
|
Richard
R. Howard (former)
Vice Chairman |
|
2002
2001 2000 |
|
$
500,000 500,000
505,824 |
|
$
40,000 392,250
|
|
$
1,524,750
|
|
75,000
|
|
$
320,008
3,400 |
|
|
|
David
C. Barr (former)
Vice Chairman |
|
2002
2001 2000 |
|
$
375,000 500,000
502,139 |
|
$
40,000 392,250
|
|
$
1,524,750
|
|
75,000
|
|
$
3,738,364 1,700
2,875 |
|
|
|
Marc
D. Rubinger (former)
Senior Vice President
Business Services |
|
2002
2001 2000 |
|
$
344,018 272,537
244,663 |
|
$
36,080 29,720
|
|
$
203,300
|
|
35,000
|
|
$
1,623,090 1,700
1,723 |
|
|
|
(1) |
|
Includes severance
pay, cash surrender value of life insurance, and note forgiveness as well
as our matching contribution under the 401(k) Retirement Plan and Non Qualified
Deferred Compensation Plan. Mr. Howard received $320,008 of note forgiveness.
Mr. Hager received $599,998 of note forgiveness and $1,700 of 401(k) matching
compensation. Mr. Smith received $1,700 of 401(k) matching compensation.
Mr. Reitz received $1,700 of 401(k) matching compensation. Mr. Walker received
severance pay and 401(k) matching compensation in the amount of $5,100,000
and $1,700, respectively. Mr. Barr received note forgiveness, severance,
surrender value of insurance, and 401(k) matching compensation in the amounts
of $1,938,338, $1,500,000, $298,326, and $1,700, respectively. Mr. Rubinger
received note forgiveness, severance, and 401(k) matching compensation in
the amounts of $1,015,122, $606,268, and $1,700, respectively. |
|
|
|
|
|
(2) |
|
Includes compensation deferred
under the 401(k) Retirement Plan, Non Qualified Deferred Compensation Plan
and other arrangements with us. Other payments made by us under the 401(k)
Retirement Plan, Non Qualified Deferred Compensation Plan and other arrangements
with us are not included. |
|
|
|
|
|
(3) |
|
Restricted stock grants were
authorized by the board of directors on October 2, 2001 and vest quarterly
over a five year period beginning January 1, 2002. Our common stock market
value as of October 2, 2001 was $20.33 per share. On Septermber 30, 2002,
the value of the aggregate restricted stock grants made to Messrs. Hager,
Smith, Reitz, Walker, Howard, Barr and Rubinger was $246,600, $49,320,
$41,100, $0, $246,600, $0 and $0, respectively.
Our common stock market value as of September 30, 2002 was $16.44 per share. |
|
|
|
|
|
106
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(4) |
|
In 2002, Mr. Fish
received a sign-on bonus. In 2002, Mr. Smith received a performance bonus
and a bankruptcy court approved special recognition bonus in the amounts
of $75,000 and $16,800, respectively. In 2002, Mr. Reitz received a performance
bonus and a bankruptcy court approved special recognition bonus in the amounts
of $65,000 and $20,239, respectively. In 2002, Mr. Rubinger received a performance
bonus and a bankruptcy court approved special recognition bonus in the amounts
of $15,000 and $21,080, respectively. All other amounts in 2002 reflect
performance bonuses. |
|
|
|
|
|
|
|
In 2001, Mr. Walker deferred
the receipt of his emergence bonus ($812,812) and the performance bonus
($71,000) into the Non Qualified Deferred Compensation Plan. Mr. Barr deferred
the receipt of his emergence bonus ($361,250) and the performance bonus
($31,000) into the Non Qualified Deferred Compensation Plan. Mr. Hager deferred
the receipt of 50% of his emergence bonus ($137,437) and 50% of his cash
bonus ($11,000) into the Non Qualified Deferred Compensation Plan. Mr. Howard
received an emergence bonus of $361,250 which was not deferred. |
|
|
|
|
|
(5) |
|
Includes options forfeited by
Messrs. Walker and Barr in the amount of 225,000 and 75,000, respectively. |
|
Directors Compensation
Each director who is not our employee
receives an annual fee of $25,000 for serving as a director and $1,500 for each
day during which he participates in a meeting of our board of directors and,
if on a separate day, $1,000 for each day during which he participates in a
meeting of a committee of our board of directors of which he is a member.
Employment Agreements
The amended employment agreements
of Michael R. Walker as our chairman and chief executive officer, and Richard R. Howard and David C. Barr
as our vice chairmen have been terminated.
An employment agreement was entered into with Robert H. Fish, our
interim chief executive officer, effective May 28, 2002, which originally expired on
November 30, 2002, but was extended beyond November 30, 2002, on a month to month basis. The base
salary of Mr. Fish is $850,000 on an annual basis and Mr. Fish received a $70,833 sign-on bonus. Both parties may terminate the employment agreement
for any reason. If Mr. Fishs employment is terminated by us without cause,
he is entitled to his base salary that would have been payable to him for the remainder of his employment term had such termination not occurred.
George V. Hager, Jr., as our executive vice president and chief financial officer, entered
into an amended employment agreement effective October 2, 2001. The agreement currently expires on
October 2, 2005. Unless notice of nonrenewal is given by twothirds of the nonmanagement members
of the board of directors, the current terms of the agreement shall automatically extend an additional year
beginning on the anniversary thereof in 2003. The annual base salary of Mr. Hager currently is $400,000, and
is reviewable by our board of directors at least annually. The agreement may be terminated by us at any time
for Cause (as defined in the employment agreement) upon the vote of not less than twothirds of the
nonmanagement membership of our board of directors. Mr. Hager may terminate his employment agreement
upon notice to us of the occurrence of certain events, including an election by us not to renew the term of
the agreement, as described above. If Mr. Hager terminates his employment following a change in control, he
is entitled to receive, among other things, accrued bonuses and severance pay three times his termination base
salary, plus three times his average incentive compensation award, subject to the terms of the employment
agreement. Upon a change in control, stock options granted to Mr. Hager immediately and fully vest and
restricted stock awarded to him immediately and fully vest. In the event that we terminate
Mr. Hager’s agreement without Cause, or he terminates his employment agreement as described in
the preceding sentence, he is entitled to severance compensation equal to three years base salary, plus
the cash bonuses granted during such period. If Mr. Hager becomes disabled, he will continue to receive
all of his compensation and benefits so long as such period of disability does not exceed 6 consecutive
months or shorter periods aggregating 6 months in any 12 month period. Mr. Hager’s employment
agreement also contains provisions that are intended to limit him from competing with us throughout the
term of the agreement and for a period of two years thereafter.
We have employment contracts with
other key executives. The terms of the contracts consider base compensation, incentive compensation,
severance, and noncompete provisions. These contracts expire over periods from May 5, 2003, to
October 2, 2004.
Transition Agreements
In fiscal 2002 we announce the resignation of Michael R. Walker as our Chief Executive Officer. In connection with his transition agreement, Mr. Walker received $5.1 million of severance, incentive compensation of $0.4 million and life insurance and other related benefits of $0.1 million. In addition, we expensed $2.7 million related to Mr. Walker’s unvested restricted shares of common stock under the 2001 Stock Incentive Plan, which vested upon his resignation. Mr. Walker continues to receive consulting fees of $0.4 million through December 2002.
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In fiscal 2002 we announced that David C. Barr had resigned as our Vice Chairman. In connection with his transition agreement, Mr. Barr received $1.5 million of severance and life insurance and other related benefits of $0.5 million. In addition, we expensed $1.4 million related to Mr. Barr’s unvested restricted shares of common stock under the 2001 Stock Incentive Plan, which vested upon his resignation.
Effective October 28, 2002, we entered into a voluntary separation agreement with Richard R. Howard, our Vice Chairman. Under the agreement, Mr. Howard received $2.8 million of severance, incentive compensation of $0.3 million and life insurance and other related benefits of $0.3 million. In addition, we expensed $1.3 million related to Mr. Howard’s unvested restricted shares of common stock under the 2001 Stock Incentive Plan, which vested upon his resignation.
Messrs. Walker, Barr and Howard’s agreements each have customary noncompete clauses in effect from the date of transition or separation.
2001 Stock Incentive Plan
On October 2, 2001, our board of
directors authorized the issuance of 750,000 shares of restricted common stock to certain
of our senior officers. These shares vest and are issued quarterly over a fiveyear period,
which commenced on February 28, 2002 and will end on October 1, 2006. Upon the resignation of Messrs.
Walker and Barr, 202,500 shares of restricted common stock vested immediately. Upon the termination of
Mr. Rubinger, 8,500 shares of restricted common stock vested immediately and upon the resignation of Mr.
Howard, 60,000 shares of restricted common stock vested immediately. At September 30, 2002, 393,825 shares
of restricted common stock remain unvested and issuable through October 1, 2006.
2001 Stock Option Plan
The purpose of our 2001 Stock
Option Plan is to provide additional incentive to officers, other key employees, and directors of, and
important consultants to us and each present or future parent or subsidiary corporation, by encouraging
them to invest in shares of our common stock, par value $0.02 and thereby acquire a proprietary interest
in us and an increased personal interest in our continued success and progress.
The aggregate number of shares of our
common stock that may be issued under our 2001 Stock Option Plan is 3,480,000. Notwithstanding the foregoing,
in the event of any change in the outstanding shares of our common stock by reason of a stock dividend, stock
split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what our compensation committee of the board of directors deems in its sole discretion to be
similar circumstances, the aggregate number and kind of shares which may be issued under our 2001 Stock Option
Plan shall be appropriately adjusted in a manner determined in the sole discretion of the compensation
committee. Reacquired shares of our common stock, as well as unissued shares, may be used for the purpose
of our 2001 Stock Option Plan. Our common stock subject to options which have terminated unexercised,
either in whole or in part, shall be available for future options granted under our 2001 Stock Option Plan.
As of October 1, 2002, 2,751,000 stock options have been awarded of which 2,506,000 stock options were
awarded to employees, 175,000 stock options were awarded to nonemployee directors and 70,000 stock
options were awarded to nonemployee consultants.
All of our officers and key employees
and officers and key employees of any present or future parent or subsidiary corporation are eligible
to receive an option or options under our 2001 Stock Option Plan. All directors of, and important consultants
to us and of any of our present or future parent or subsidiary corporation are also eligible to receive an
option or options under this 2001 Stock Option Plan. The individuals who receive an option or options shall
be selected by the compensation committee, in its sole discretion unless otherwise stipulated in our 2001
Stock Option Plan. No individual may receive options under our 2001 Stock Option Plan for more than 80% of
the total number of shares of our common stock authorized for issuance under our 2001 Stock Option Plan.
Options Granted
The following table sets forth certain
information concerning stock options granted under the 2001 Stock Option Plan during fiscal 2002 to our chief
executive officers and each of our most highly compensated executive officers:
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Option/SAR Grants in Last Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual
Grants |
|
Potential Realized Value at
Assumed Annual Rates of Stock
Price Appreciation for Option Terms |
|
|
|
|
|
|
Name
|
|
|
Number of Securities Underlying
Options/SARs Granted
|
|
|
Percent of Total Options/
SARs Granted to Employees
in Fiscal Year |
|
|
Exercise Price
($/share) |
|
|
Expiration Date |
|
|
|
5% |
|
|
10% |
|
Robert H. Fish
(1) |
|
|
25,000 |
|
|
0.99 |
% |
$ |
20.33 |
|
|
9/30/11 |
|
$ |
438,545 |
|
$ |
999,363 |
George V. Hager,
Jr. |
|
|
75,000 |
|
|
2.96 |
% |
|
20.33 |
|
|
9/30/11 |
|
|
1,315,635 |
|
|
2,998,088 |
Robert A. Smith |
|
|
50,000 |
|
|
1.98 |
% |
|
20.33 |
|
|
9/30/11 |
|
|
877,090 |
|
|
1,998,726 |
Robert A. Reitz |
|
|
35,000 |
|
|
1.38 |
% |
|
20.33 |
|
|
9/30/11 |
|
|
613,963 |
|
|
1,399,108 |
Michael R. Walker
(3) |
|
|
225,000 |
|
|
8.89 |
% |
|
20.33 |
|
|
8/28/02 |
|
|
|
|
|
|
Richard R. Howard
(2) |
|
|
75,000 |
|
|
2.96 |
% |
|
20.33 |
|
|
2/3/02 |
|
|
|
|
|
|
David C. Barr
(3) |
|
|
75,000 |
|
|
2.96 |
% |
|
20.33 |
|
|
9/21/02 |
|
|
|
|
|
|
Marc D. Rubinger
(2) |
|
|
35,000 |
|
|
1.38 |
% |
|
20.33 |
|
|
12/27/02 |
|
|
|
|
|
|
|
(1) |
|
Options granted to
Mr. Fish were pursuant to his appointment to our board of directors. |
|
|
|
(2) |
|
Options granted to Mr. Howard
and Mr. Rubinger will be canceled if not exercised within 90 days of their
resignation dates of November 3, 2002 and September 27, 2002, respectively.
|
|
|
|
(3) |
|
Options granted to Mr. Walker
and Mr. Barr were not exercised within 90 days of their resignation dates
and are, therefore, forfeited. |
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal YearEnd Option/SAR Values
Name |
Shares Acquired
on Exercise (#) |
Value Realized
($)
(1) |
Number of Unexercised
Securities Underlying
Options/SARs Fiscal Year-End (#) Exercisable/Unexercisable |
Value of Unexercised
In-the-
Money Options/SARs at Fiscal
Year-End ($) Exercisable/
Unexercisable |
|
Robert H. Fish |
|
|
25,000/0 |
0.00/0.00 |
George V. Hager,
Jr. |
|
|
18,750/56,250 |
0.00/0.00 |
Robert A. Smith |
|
|
9,375/40,625 |
0.00/0.00 |
Robert A. Reitz |
|
|
6,563/28,437 |
0.00/0.00 |
Michael R. Walker |
|
|
0/0 |
0.00/0.00 |
Richard R. Howard |
|
|
18,750/56,250 |
0.00/0.00 |
David C. Barr |
|
|
0/0 |
0.00/0.00 |
Marc D. Rubinger |
|
|
6,563/28,437 |
0.00/0.00 |
|
(1) |
|
Stock price at close
of business on September 30, 2002 was $16.44. |
|
Special Recognition Program
On September 5, 2000, we obtained
Bankruptcy Court approval for a special recognition program. The special recognition program was established
to enhance our ability to reward and retain certain key employees during the reorganization.
Cash payments under the special
recognition program were paid out over four payments on the participant’s first pay day following
September 30, 2000, December 31, 2000, May 31, 2001 and October 2, 2001. The aggregate cost of the
cash payments under the special recognition program was $11,200,000. Although Messrs. Walker, Howard,
Barr and Hager were not participants of the special recognition program, each received a board of directors
approved emergence bonus in the respective amounts of $812,812, $361,250, $361,250, and $137,437.
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NonQualified Deferred Compensation Plan
Effective April 1, 2001 we adopted
the Genesis Health Ventures, Inc. Deferred Compensation Plan for a select group of management and / or highly
compensated employees, as such term is defined in the Internal Revenue Code which allows these individuals to
defer receipt of compensation and supplement retirement savings under the Genesis Health Ventures, Inc.
Retirement Plan. In October of 2001, the NonQualified Deferred Compensation Plan was amended and made
available to all highly compensated employees as defined by the IRS (in calendar 2002, employees whose base
salary meets or exceeds $90,000).
Beginning January 1, 2002, eligible
employees were permitted to defer up to 50% of their base salary and up to 100% of their incentive
compensation bonus each year on a pretax basis. Participants are able to select from several
fund choices and their Plan account will raise or decline in value in accordance with the performance
of the funds they have selected.
Retirement Plan
On January 1, 1989, we adopted an
employee Retirement Plan that consists of a 401(k) component and a profit sharing component.
Our retirement plan is a cash deferred profitsharing plan covering all of our employees
(other than certain employees covered by a collective bargaining agreement) who have completed
at least 500 hours of service and six months of employment. Under the 401(k) component, each
employee may elect to contribute a portion of his or her current compensation up to the maximum
permitted by the Internal Revenue Code or 50% (or for more highly compensated employees a maximum
of 4%, in accordance with our policy) of such employee's annual compensation. We may make a matching
contribution each year as determined by the board of directors. The board of directors may establish
this contribution at any level each year, or may omit such contribution entirely.
Under the profit sharing provisions
of the Retirement Plan, we may make an additional employer contribution as determined by the board of
directors each year. The board of directors may establish this contribution at any level each year, or
may omit such contribution entirely. It is our intent that employer contributions under the profit sharing
provisions of the Retirement Plan are to be made only if there are sufficient profits to do so. Profit sharing
contributions are allocated among the accounts of participants in the proportion that their annual compensation
bears to the aggregate annual compensation of all participants. All employee contributions to the Retirement
Plan are 100% vested. Our contributions are vested in accordance with a schedule that generally provides for
vesting after six years of service with us (any nonvested amounts that are forfeited by participants
are used to reduce the following year’s contribution by us).
Senior Executive Stock Ownership Program and Executive Loans
In December, 1997 the board of
directors approved a Senior Executive Stock Ownership Program. Under the terms of the program, certain
of our senior executive employees were required to own shares of our common stock having a market value
based upon a multiple of the executive’s salary. Each executive was required to own the shares
within three years of the date of the adoption of the program. Subject to applicable laws, we were
authorized to lend funds to one or more of the senior executive employees for his or her purchase of
our common stock. As of September 30, 2001, we had outstanding loan and accrued interest balances of
$3,200,000 from the senior executives. The note agreements were amended in fiscal 2000 to adjust the
interest rate to 8% simple interest. Previously, the loans accrued interest based on the market rate
at the date of the loan initiation.
On February 23, 2001, the U.S.
Bankruptcy Court ordered that the remaining loans be forgiven on the earlier of the termination of
the executives’ employment (for reasons other than for cause or for the voluntary resignation
of the executive without “Good Reason” as defined in the employment agreement) or the first
anniversary of our emergence from bankruptcy. Therefore, on or before October 2, 2002, all of these loans
were forgiven and the executives were held harmless for all and any of the tax consequences resulting from
the forgiveness of the loans.
Compensation Committee Interlocks and Insider Participation
Joseph A. LaNasa III is a member of our Compensation Committee.
Mr. LaNasa is employed by Goldman Sachs and Co. as a managing director.
We engaged Goldman Sachs and Co. to act as joint lead
financial advisor together with UBS Warburg in connection with
the potential sale or spin-off of a significant portion of our
capital stock or assets. As compensation for services provided, we
agreed to pay Goldman Sachs and Co. a transaction fee based on the
value of the consummated transaction or transactions.
110
Back to Index
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND OTHER STOCKHOLDER RELATED MATTERS
The following table sets
forth information with respect to the beneficial ownership of our common stock as of December 1, 2002 for:
each person who we know owns beneficially more than 5% of our common stock; each of our most highly compensated
executive officers; each of our directors; and all of our executive officers and directors as a group.
On December 1, 2002 there were 41,561,501 shares of our common stock outstanding, including 550,081 shares
to be issued in connection with our joint plan of reorganization confirmed by the Bankruptcy Court on September
20, 2001.
Unless otherwise noted below, and
subject to applicable community property laws, to our knowledge, each person has sole voting and investment
power over the shares shown as beneficially owned, except to the extent authority is shared by spouses under
applicable law and except as set forth in the footnotes to the table.
The number
of shares beneficially owned by each shareholder is determined
under rules promulgated by the SEC. The information does not
necessarily indicate beneficial ownership for any other purpose.
Beneficial ownership, as set forth in the regulations of the
SEC, includes securities owned by or for the spouse, children
or certain other relatives of such person as well as other securities
as to which the person has or shares voting or investment power
or has the right to acquire within 60 days of December 1, 2002.
The same shares may be beneficially owned by more than one person.
Beneficial ownership may be disclaimed as to certain of the
securities. Shares of common stock issuable upon the exercise of securities currently exercisable or exercisable within 60 days of December 1, 2002 are deemed outstanding for computing the share ownership and percentage ownership of the person holding such securities, but are not deemed outstanding for computing the percentage of any other person.
All addresses for the
executive officers and directors are c/o Genesis Health Ventures, Inc., 101 East State Street,
Kennett Square, Pennsylvania 19348.
111
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|
|
Shares of
Common Stock Beneficially Owned (1)
|
|
|
Percent
of
Common Stock
Owned (1)
|
|
Goldman, Sachs Group
85 Broad Street
New York, NY 10004 (2).. |
|
6,598,780 |
|
|
15.73
|
% |
Highland Capital Management,
L.P.
Two Galleria Tower
13455 Noel Road, Suite 1300
Dallas, TX 75240 (3) |
|
2,997,691 |
|
|
7.18 |
% |
Angelo, Gordon & Co., L.P.
245 Park Avenue
New York, NY 10167 (4) |
|
2,107,148 |
|
|
5.07 |
% |
David C. Barr |
|
|
|
|
* |
|
James H. Bloem (5) |
|
25,000 |
|
|
* |
|
James D. Dondero (3) |
|
2,997,691 |
|
|
7.18 |
% |
Robert H. Fish (6) |
|
25,000 |
|
|
* |
|
Dr. Philip P. Gerbino (7) |
|
25,000 |
|
|
* |
|
Joseph A. LaNasa III (2) |
|
6,598,780 |
|
|
15.73 |
% |
James E. Dalton, Jr. (8) |
|
25,000 |
|
|
* |
|
George V. Hager, Jr. (9) |
|
25,000 |
|
|
* |
|
Richard R. Howard (13) |
|
40,000 |
|
|
* |
|
Robert A. Smith (10) |
|
12,500 |
|
|
* |
|
Robert A. Reitz (11) |
|
8,750 |
|
|
* |
|
Marc D. Rubinger (14) |
|
18,750 |
|
|
* |
|
Michael R. Walker |
|
|
|
|
* |
|
|
|
|
|
|
|
All executive officers and directors
as a group (24 persons) (12) |
|
9,909,096 |
|
|
23.38 |
% |
|
|
|
|
|
|
_________________________
* Less than one percent.
(1) |
|
Includes the number
of shares of common stock into which Series A Preferred is convertible as
of December 1, 2002. |
|
|
|
|
|
(2) |
|
Goldman, Sachs & Co. is a
whollyowned subsidiary of Goldman, Sachs Group. Goldman, Sachs & Co.
direct beneficial ownership consists of (a) 6,220,613 shares of common stock
and (b) 71,799 shares of Series A convertible preferred stock immediately convertible (representing 17.02% of the
outstanding shares of Series A Preferred) which are convertible into 353,167
shares of common stock. Joseph A. LaNasa III, a managing director of Goldman,
Sachs & Co., is a member of our board of directors and was granted 25,000
options to purchase our common stock, which are exercisable within 60 days of December 1, 2002. Mr. LaNasa has an understanding with
Goldman, Sachs Group pursuant to which he holds the options for the benefit
of the Goldman, Sachs Group. Based in part upon a Schedule 13D filed with
the SEC on October 22, 2001. |
|
|
|
|
|
(3) |
|
Includes 1,452,434 shares of
our common stock beneficially and directly owned by Highland
Capital Management, L.P (“Highland Capital”);
82,213 shares of our common stock underlying 16,714 shares
of our Series A convertable preferred stock immediately
convertible and beneficially and directly owned by Highland
Capital; 25,000 stock options to purchase our common stock,
which are exercisable within 60 days of December 1, 2002,
granted under our 2001 Stock Option Plan to Mr. Dondero
(Mr. Dondero has an understanding with Highland Capital
pursuant to which he holds the options for the benefit
of Highland Capital.); 993,848 shares of our common stock
beneficially and directly owned by Highland Crusader Offshore
Partners, L.P. (“Crusader”); 51,328 shares
of common stock underlying 10,435 shares of our Series
A convertible preferred stock immediately convertible
and beneficially and directly owned by Crusader; 239,774
shares of our common stock beneficially and directly owned
by Prospect Street High Income Portfolio Inc (“Prospect”);
13,694 shares of our common stock underlying 2,784 shares
of our Series A convertible preferred stock immediately
convertible and beneficially and directly owned by Prospect;
41,100 shares of our common stock owned by PCMG Trading
Partners XXIII L.P. (PCMG); and 98,300 shares
owned by Mr. Dondero. Highland Capital Management, L.P.
beneficially owns 29,933 shares of our Series A convertible
preferred stock representing 7.10% of the outstanding
shares of our Series A convertible preferred stock. Mr.
Dondero disclaims beneficial ownership of 2,899,391 shares
of our common stock. Based upon a Schedule 13D/A filed
with the SEC on April 8, 2002, on behalf of a group consisting
of Highland Capital, Crusader, Prospect, PCMG and Mr.
Dondero. The general partner of Crusader is Highland Capital.
Highland Capital, as a registered investment advisor,
is the investment advisor for Prospect. The general partner
of Highland Capital is Strand Advisors, Inc., a Delaware
corporation (“Strand”). The general partner
of PCMG is Strand Advisors III, Inc., a Delaware corporation
(“Strand III”). Mr. Dondero is the president
of Highland, Prospect, Strand, and Strand III, and our
director. |
|
112
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(4) |
|
Includes 570 shares
of common stock owned by Angelo, Gordon & Co., L.P. and
2,106,578 shares of common stock held for the account of sixteen
private investment funds for which Angelo, Gordon & Co.,
L.P. acts as a General Manager and/or Investment Adviser.
Based upon a Schedule 13G filed with the SEC on February 11,
2002. |
|
|
|
|
|
(5) |
|
Includes 25,000 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(6) |
|
Includes 25,000 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(7) |
|
Includes 25,000 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(8) |
|
Includes 25,000 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002 |
|
|
|
|
|
(9) |
|
Includes 25,000 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(10) |
|
Includes 12,500 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(11) |
|
Includes 8,750 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(12) |
|
Includes 327,500 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002, and 500,402 shares of our common stock underlying 101,732 shares of our Series A convertible preferred stock which is immediately convertible. |
|
|
|
|
|
(13) |
|
Includes 25,000 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
|
|
|
|
(14) |
|
Includes 8,750 shares of common
stock issuable upon the exercise of stock options that are exercisable within
60 days of December 1, 2002. |
|
113
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Equity Compensation Plans
The following table details
information regarding our existing equity compensation plans as of September 30, 2002:
|
|
|
A |
|
|
B |
|
|
C |
|
|
|
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights |
|
|
Weighted-average
exercise price of outstanding options, warrants
and rights |
|
|
Number
of securities remaining available for future issuance under equity compensation
plans (excluding securities reflected in column A) |
|
|
Equity compensation
plans approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved by security holders |
|
|
2,359,000 |
|
$ |
20.32 |
|
|
1,121,000 |
|
|
The above table represents securities
to be issued upon exercise of outstanding options under our 2001 Stock Option
Plan, which was approved by the Bankruptcy Court. We have not included in
the above table the shares granted pursuant to our 2001 Stock Incentive Plan,
which was approved by the Bankruptcy Court.
114
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ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the
Senior Executive Officer Stock Ownership Plan at September 30, 2001, we had loans
outstanding to Messrs. Howard, Barr, Hager and Rubinger in the principal amounts
of $646,889, $820,962, $624,244 and $492,812, respectively.
On February 23, 2001, the U.S. Bankruptcy Court ordered that
the remaining loans be forgiven on the first anniversary of our
emergence from bankruptcy. Therefore, effective October 2, 2002,
these loans were forgiven and the executives held harmless for all
and any of the tax consequences resulting from the forgiveness of the loans.
Michael R. Walker, our former chairman
and chief executive officer, is chairman of the board for the real estate investment
trust, ElderTrust. ElderTrust leases 18 eldercare centers to us at an annual
lease cost of $16,742,000. A majority of ElderTrust’s owned real estate
was formerly owned by us and sold to ElderTrust in sale lease back transactions.
In the first quarter of 2002, we utilized $23,000,000 from the Delayed Draw
Term Loan to pay certain outstanding amounts owed to Eldertrust on four loans
secured by mortgages. We leased office space to ElderTrust at an annual rate
of $46,000 until the lease was terminated in October 2002. When Mr. Walker served
on our board of directors, he abstained from voting on all board of director
resolutions involving any matter with an ElderTrust entity.
Mr. Joseph A. LaNasa III is an elected member of our board of directors. In this capacity, he will participate and have the opportunity to vote on matters that are presented to our board of directors. Mr. LaNasa is employed by Goldman Sachs & Co. as a managing director. Mr. LaNasa has acquired stock options that were granted under our 2001 Stock Option Plan. He has an understanding with the Goldman Sachs Group pursuant to which he holds the options for the benefit of the Goldman Sachs Group. The Goldman Sachs Group beneficially owns 15.73% of our common stock.
We engaged Goldman Sachs to act as joint lead financial advisor, together with UBS Warburg, in connection with the potential sale or spinoff of a significant portion of our capital stock or assets. As compensation for services provided, we agreed to pay Goldman Sachs a transaction fee based on the value of the consummated transaction or transactions. A termination fee would be payable to Goldman Sachs in the event that a sale transaction fails to close and we receive compensation as a result of the termination. This agreement excludes any transactions involving assets located in Florida, Illinois, or Wisconsin. The Goldman Sachs engagement shall continue under this agreement until February 28, 2003.
Mr. James Dondero is an elected
member of our board of directors. Mr. Dondero has acquired stock options that
were granted under our 2001 Stock Option Plan. In addition to stock held directly
by Mr. Dondero, he may be deemed to beneficially own stock held by Highland
Capital Management, L.P, Highland Crusader Offshore Partners, L.P., Prospect
Street High Income Portfolio Inc., and PCMG Trading Partners XXIII LP. In
total, Mr. Dondero beneficially owns 7.18% of our common stock.
PART IV
ITEM 14: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls
and procedures.
Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a14(c) and 15(d)14(c) under the Securities Exchange Act of 1934, as amended) within 90 days of the filing of this Form 10K (the “Evaluation Date”) and, based on that evaluation, concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to timely alert management to material information relating to Genesis during the period when our periodic reports are being prepared.
(b) Changes in internal controls.
Since the Evaluation Date, there have not been any significant changes to our internal controls or in other factors that could significantly affect
these controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
115
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ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8K
(a)(1) |
The following financial statements
of Genesis Health Ventures, Inc. and Subsidiaries are filed as part of this
Form 10-K in Item 8: |
|
|
|
Independent Auditors’ Report |
|
Consolidated Balance Sheets as
of September 30, 2002 and 2001 (Successor) |
|
Consolidated Statements of Operations
for the years ended
September 30, 2002 (Successor), 2001
and 2000 (Predecessor) |
|
Consolidated Statements of Shareholders’
Equity (Deficit) for the years
ended September 30, 2002 (Successor),
2001 and 2000 (Predecessor) |
|
Consolidated Statements of Cash
Flows for the years ended
September 30, 2002 (Successor), 2001
and 2000 (Predecessor) |
|
Notes to Consolidated Financial
Statements |
|
|
|
|
(a)(2) |
Schedule |
|
|
|
Schedule II - Valuation and Qualifying
Accounts for the years ended September 30, 2002, 2001 and 2000.
Schedule II is included herein on page 123. All other schedules not listed
have been omitted since the required
information is included in the financial statements or the notes thereto,
or is not applicable or required. |
116
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No. |
Description |
|
|
2.1(1) |
Stock Purchase Agreement dated
October 10, 1997 among Genesis Health Ventures, Inc. (the “Company”),
The Multicare Companies, Inc., Concord Health Group, Inc., Horizon Associates,
Inc., Horizon Medical Equipment and Supply, Inc., Institutional Health Services,
Inc., Care4 L.P., Concord Pharmacy Services, Inc., Compass Health Services,
Inc. and Encare of Massachusetts, Inc. |
|
|
2.2(1) |
Asset Purchase Agreement dated
October 11, 1997 among the Company, The Multicare Companies, Inc., Health
Care Rehab Systems, Inc., Horizon Rehabilitation, Inc., Progressive Rehabilitation
Centers, Inc., and Total Rehabilitation Centers, L.L.C. |
|
|
2.3(1) |
Agreement and Plan of Merger
dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis ElderCare
Acquisition Corp., the Company, and the Multicare Companies, Inc. |
|
|
2.4(2) |
Agreement and Plan of Merger,
dated as of April 26, 1998, by and among the Company, V Acquisition Corp.
and Vitalink Pharmacy Services, Inc. |
|
|
2.5(3) |
Amendment Number One, dated as
of July 7, 1998, to the Agreement and Plan of Merger, dated as of April
26, 1998, by and among the Company, V Acquisition Corp. and Vitalink Pharmacy
Services, Inc. |
|
|
2.6(19) |
Agreement and Plan of Merger
by and among the Company, Multicare Acquisition Corp., and Genesis Eldercare
Corp. dated October 2, 2001. |
|
|
2.7(4) |
Debtors’ Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code dated July 6, 2001. |
|
|
2.8(5) |
Technical Amendments to Debtors’
Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated
August 27, 2001. |
|
|
2.9(5) |
Amendments to Debtors’
Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated
to comply with opinion on confirmation dated September 13, 2001. |
|
|
2.10(6) |
Asset Purchase Agreement dated
September 24, 2001, by and among, Mariner PostAcute Network, Inc.
(“MPAN”), Mariner Health Group, Inc. (“MHG”), certain
corporate entities related to MPAN and MHG, the Company and NeighborCare
Pharmacy Services, Inc. |
|
|
3.1(19) |
The Company's Amended and Restated
Articles of Incorporation, as filed with the Secretary of the Commonwealth
of Pennsylvania on October 2, 2001. |
|
|
3.2 |
The Company's Amended and Restated
Bylaws, as amended. |
|
|
4.1(7) |
Specimen of Common Stock Certificate. |
|
|
4.2(8) |
Specimen of the Company's First
Mortgage Bonds (Series A) due 2007. |
|
|
4.3(9) |
Indenture of Mortgage and Deed
of Trust, dated as of September 1, 1992, by and among the Company, Delaware
Trust Company and Richard N. Smith. |
|
|
4.4(19) |
Form of Warrant (included in
Exhibit 10.12). |
|
|
4.5(19) |
Certificate of Designation of
the Series A Convertible Preferred Stock (included in Exhibit 3.1). |
|
|
4.6(19) |
Indenture for Second Priority
Secured Notes due 2007 dated as of October 2, 2001 between the Company,
as issuer, the Guarantors, and the Bank of New York, as Trustee. |
117
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No. |
Description |
|
|
+10.1(10) |
The Company's Employee Retirement
Plan, adopted January 1, 1989, as amended and related Retirement Plan Trust
Agreement. |
|
|
10.2(13) |
Letter Agreement, dated as of
June 16, 1997, between the Company and Sterns Associates. |
|
|
10.3(14) |
Fourth Amended and Restated Credit
Agreement, dated as of August 20, 1999, by and among the Company, the Subsidiaries
of the Company referred to on the signature pages thereto (and such other
subsidiaries of the Company which may from time to time become Borrowers
thereunder in accordance with the provisions thereof) (collectively with
Genesis, the “Borrowers”), the Lenders referred to on the signature
pages thereto (together with other lenders parties thereto from time to
time, and their successors and assigns, the “Lenders”), Mellon
Bank, N.A., a national banking association as issuer of Letters of Credit
thereunder (in such capacity, together with its successors and assigns in
such capacity, the “Administrative Agent”), Citicorp USA, Inc.
as Syndication Agent, First Union National Bank, a national banking association
as Documentation Agent, and Bank of America, N.A. (as successor to NationsBank,
N.A. and Bank of America, NT&SA), a national banking association as
Syndication Agent. |
|
|
10.4(15) |
Forbearance Agreement, dated
as of March 20, 2000, among Genesis Health Ventures, Inc., certain Subsidiaries
thereof, Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of
Credit, Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA,
Inc. as Syndication Agent, First Union National Bank as Documentation Agent,
Bank of America, N.A. as Syndication Agent, and the Lenders and Secured
Parties. |
|
|
10.5(16) |
Revolving Credit and Guaranty
Agreement, dated as of June 22, 2000, among Genesis Health Ventures, Inc.,
a DebtorinPossession under Chapter 11 of the Bankruptcy Code
as Borrower and Mellon Bank, N.A. as Administrative Agent and Arranger,
First Union National Bank as Syndication Agent and Goldman Sachs. Credit
Partners, L.P., as Documentation Agent. |
|
|
+10.6(21) |
2001 Stock Option Plan. |
|
|
+10.7(19) |
Employment Agreement between
the Company and Michael R. Walker dated as of October 2, 2001. |
|
|
+10.8(19) |
Employment Agreement between
the Company and George V. Hager, Jr. dated as of October 2, 2001. |
|
|
+10.9(19) |
Employment Agreement between
the Company and Richard R. Howard dated as of October 2, 2001. |
|
|
+10.10(19) |
Employment Agreement between
the Company and David C. Barr dated as of October 2, 2001. |
|
|
+10.11(19) |
Employment Agreement between
the Company and Robert A. Smith dated as of July 2, 2001 and the amendment
thereto dated October 2, 2001. |
|
|
10.12(19) |
Warrant Agreement by and between
the Company and Mellon Investor Services LLC as Warrant Agent dated as of
October 2, 2001. |
|
|
10.13(19) |
Registration Rights Agreement
between the Company, Goldman Sachs & Co., and Highland Capital Management
L.P., dated as of October 2, 2001, regarding the Company’s Common
Stock. |
|
|
10.14(19) |
Registration Rights Agreement
between the Company, Goldman Sachs & Co., and Highland Capital Management
L.P., dated as of October 2, 2001, regarding the Company’s Second
Priority Secured Notes due 2007. |
|
|
10.15(17) |
Second Amendment and Waiver,
dated as of February 14, 2001, to the Revolving Credit and Guarantee Agreement,
dated as of June 22, 2000, among the Company and certain of its lenders. |
|
|
10.16(18) |
Third Amendment, dated as of
June 29, 2001, to the Revolving Credit and Guaranty Agreement, dated as
of June 22, 2000, among the Company and certain of its lenders. |
|
|
10.17(19) |
Credit, Security, Guaranty and
Pledge Agreement, dated as of October 2, 2001, among the Company, the Guarantors,
the Lenders, First Union Securities, Inc., as CoLead Arranger, Goldman
Sachs Credit Partners L.P., as CoLead Arranger and Syndication Agent,
First Union National Bank, as Administrative Agent and Collateral Agent,
General Electric Capital Corporation, as Collateral Monitoring Agent and
CoDocumentation Agent and CitiCorp USA, Inc., as CoDocumentation
Agent (the “Credit, Security, Guaranty and Pledge Agreement”). |
118
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No. |
Description |
|
|
10.18(20) |
Amendment No. 1, dated as of
December 31, 2001, to the Credit, Security, Guaranty and Pledge Agreement. |
|
|
10.19(24) |
Amendment No. 2, dated as of
June 28, 2002, to the Credit, Security, Guaranty and Pledge Agreement. |
|
|
+10.20 |
Employment Agreement between
the Company and Robert H. Fish dated as of May 28, 2002 and the addendum
thereto dated November 30, 2002. |
|
|
+10.21(22) |
The Company’s Deferred
Compensation Plan. |
|
|
+10.22(23) |
Transition Agreement by and between
the Company and Michael R. Walker, dated as of May 28, 2002. |
|
|
+10.23(23) |
Transition Agreement by and between
the Company and David C. Barr, dated as of June 18, 2002. |
|
|
+10.24 |
Voluntary Separation Agreement
between the Company and Richard R. Howard dated as of October 28, 2002. |
|
|
+10.25(25) |
2001 Stock Incentive Plan. |
|
|
21 |
Subsidiaries of the Company |
|
|
23 |
Consent of KPMG LLP |
|
|
99.1 |
Certificate of Robert H. Fish,
Principal Executive Officer, of the Company dated December 27, 2002 pursuant
to 18 U.S.C. Section 1350. |
|
|
99.2 |
Certificate of George V. Hager,
Jr., Principal Financial Officer, of the Company dated December 27, 2002
pursuant to 18 U.S.C. Section 1350. |
119
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+ |
|
Management contract or compensatory
plan or arrangement. |
1) |
|
Incorporated by reference to
the Company’s Current Report on Form 8K filed on October 10,
1997. |
2) |
|
Incorporated by reference to
the Company’s Registration Statement on Form S4, filed on June
30, 1998 (File No. 33358221). |
3) |
|
Incorporated by reference
to the Company’s Amendment No. 1 to Form S4 filed July 28, 1998
(33358221). |
4) |
|
Incorporated by reference
to the Company’s Current Report on Form 8K filed on June 19,
2001. |
5) |
|
Incorporated by reference to
the Company’s Form T3 filed on September 18, 2001. |
6) |
|
Incorporated by reference to
the Company’s Current Report on Form 8K filed on October 9,
2001. |
7) |
|
Incorporated by reference
to the Company’s Form 8A filed on October 2, 2001. |
8) |
|
Incorporated by reference to
the Company’s Registration Statement on Form S1, dated September
4, 1992 (as amended) (Registration No. 3351670). |
9) |
|
Incorporated by reference
to the Company’s Annual Report on Form 10K for the fiscal year
ended September 30, 1992. |
10) |
|
Incorporated by reference
to the Company's Registration Statement on Form S1, dated June 19,
1991 (Registration No. 3340007). |
11) |
|
Incorporated by reference
to the Company's Annual Report on Form 10K for the fiscal year ended
September 30, 1995. |
12) |
|
Incorporated by reference to
the Company's Quarterly Report on Form 10Q for the quarter ended March
31, 1996 and filed on May 15, 1996. |
13) |
|
Incorporated by reference
to Amendment No. 7 to the Tender Offer Statement on Schedule 14D1
filed by Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp.
on June 20, 1997. |
14) |
|
Incorporated by reference
to the Company’s Quarterly Report on Form 10Q/A for the quarter
ended June 30, 1999 and filed on September 15, 1999. |
15) |
|
Incorporated by reference
to the Company’s Quarterly Report on Form 10Q for the quarter
ended March 31, 2000 and filed on May 15, 2000. |
16) |
|
Incorporated by reference
to the Company’s Quarterly Report on Form 10Q for the quarter
ended June 30, 2000 and filed on August 21, 2000. |
17) |
|
Incorporated by reference to
the Company’s Quarterly Report Form 10Q for the quarter ended
December 31, 2000 and filed on March 22, 2001. |
18) |
|
Incorporated by reference
to the Company’s Quarterly Report on Form 10Q for the quarter
ended June 30, 2001 and filed on August 18, 2001. |
19) |
|
Incorporated by reference to
the Company’s Annual Report on Form 10K for the fiscal year
ended September 30, 2001 and filed on December 28, 2002. |
20) |
|
Incorporated by reference to
the Company’s Quarterly Report for the quarter ended December 31,
2001 and filed on February 14, 2002. |
21) |
|
Incorporated by reference to
the Company’s Registration Statement on Form S8 (File No. 3382200)
filed on February 5, 2002. |
22) |
|
Incorporated by reference to
the Company’s Registration Statement on Form S8 (File No. 3382208)
filed on February 5, 2002. |
23) |
|
Incorporated by reference to
the Company’s Current Report on Form 8K filed on July 1, 2002. |
24) |
|
Incorporated by reference to
the Company’s Quarterly Report on Form 10Q for the quarter ended
June 30, 2002 filed on August 14, 2002. |
25) |
|
Incorporated by reference to
the Company’s Registration Statement on Form S8 (File No. 33
83430) filed on February 26, 2002. |
120
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(b) |
Reports on Form 8-K |
|
|
|
|
On August 16, 2002, the Company
filed a Current Report on Form 8-K under Item 9 reporting that the Company
and ManorCare, Inc. have agreed to withdraw all outstanding legal actions
against each other and entered into a new pharmacy service agreement. |
|
|
|
|
On October 4, 2002, the Company
filed a Current Report on Form 8-K under Item 5 reporting that the Company
retained UBS Warburg LLC and Goldman Sachs & Co. to assist in exploring
strategic business alternatives including, but not limited to, the potential
spin-off of its ElderCare assets. |
|
|
|
|
On December 3, 2002, the Company
filed a Current Report on Form 8-K under Item 5 reporting its financial
results for its fiscal year ended September 30, 2002 including selected
financial reporting. |
|
|
|
|
On December 17, 2002, the Company
filed a Current Report on Form 8-K under Item 5 reporting the termination
of the Genesis/NCS Merger Agreement and related matters. |
121
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Independent Auditors’ Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.
Under date of November 20, 2002, except
as to note 25, which is as of December 15, 2002, we reported on the consolidated
balance sheets of Genesis Health Ventures, Inc. and subsidiaries (the “Company”)
as of September 30, 2002 and 2001 and the related consolidated statements of
operations, shareholders’ equity (deficit) and cash flows for each of
the years in the three year period ended September 30, 2002, as contained in
the Genesis Health Ventures, Inc. annual report on Form 10K for the year
ended September 30, 2002. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial statement
schedule in the Form 10K. This financial statement schedule is the responsibility
of the Company’s management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for the costs of startup activities effective October 1, 1999.
The audit report on the consolidated financial statements of the Company referred to above contains an explanatory paragraph that states that on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the “Plan”) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “freshstart” reporting. As a result, the consolidated information prior to September 30, 2001 is presented on a different cost basis than that as of
and subsequent to September 30, 2001 and, therefore, is not comparable.
/s/ KPMG LLP
Philadelphia, Pennsylvania
November 20, 2002, except as to note 25,
which is as of December 15, 2002
122
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Schedule II
Genesis Health Ventures, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 2002, 2001 and 2000
(in thousands)
Description |
|
|
Balance
at
Beginning of
Period |
|
|
Charged to Operations |
|
|
Charged to
Other Accounts (1) |
|
|
Deductions
(2) |
|
|
Balance
at
End of
Period |
|
|
Year Ended September 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
$ |
83,125 |
|
|
44,712 |
|
|
|
|
|
72,046 |
|
$ |
55,791 |
|
Year Ended September 30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
$ |
78,020 |
|
|
49,901 |
|
|
12,509 |
|
|
57,305 |
|
$ |
83,125 |
|
Year Ended September 30, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
$ |
86,067 |
|
|
45,226 |
|
|
13,466 |
|
|
66,739 |
|
$ |
78,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In
fiscal 2001, represents a reclassification of amounts previously reported
as a direct reduction to trade receivables, rather than an allowance for
doubtful accounts. In fiscal 2000, includes $18,494,000 representing the
beginning of period balance of the Multicare Companies, Inc. Beginning October
1, 2000, Genesis changed its method of accounting for Multicare from the
equity method of accounting to the consolidation method of accounting. |
|
|
|
|
|
|
|
|
|
(2) |
Represents
amounts written off as uncollectible |
|
123
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf on December 27, 2002 by the undersigned thereunto duly authorized.
Genesis Health Ventures, Inc
|
/s/ George V. Hager, Jr.
________________________________
By: George V. Hager,
Jr.,
Executive Vice
President and Chief Financial Officer
|
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 27, 2002.
Signature |
|
Capacity |
|
|
|
|
|
|
|
|
/s/ Robert H. Fish |
|
|
|
|
|
Robert H. Fish |
|
Interim Chairman and Interim
Chief |
|
|
Executive Officer (Principal
Executive Officer) |
|
|
|
|
|
|
|
|
/s/ James H. Bloem |
|
|
|
|
|
James H. Bloem |
|
Director |
|
|
|
|
|
|
|
|
/s/ James E. Dalton, Jr. |
|
|
|
|
|
James E. Dalton, Jr. |
|
Director |
|
|
|
|
|
|
|
|
/s/ James D. Dondero |
|
|
|
|
|
James D. Dondero |
|
Director |
|
|
|
|
|
|
|
|
/s/ Dr. Philip P. Gerbino |
|
|
|
|
|
Dr. Philip P. Gerbino |
|
Director |
|
|
|
|
|
|
|
|
/s/ Joseph A. LaNasa III |
|
|
|
|
|
Joseph A. LaNasa III |
|
Director |
|
|
|
|
|
|
|
|
/s/ George V. Hager, Jr. |
|
|
|
|
|
George V. Hager, Jr. |
|
Chief Financial Officer (Principal
Financial Officer and |
|
|
Principal Accounting Officer) |
124
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CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANESOXLEY ACT OF 2002
I, Robert H. Fish, principal executive officer of Genesis Health Ventures, Inc., certify that:
|
1. |
I have reviewed this
annual report on Form 10-K of Genesis Health Ventures, Inc. and subsidiaries; |
|
|
|
|
|
|
|
|
2. |
Based on my knowledge,
this annual report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report; |
|
|
|
|
|
|
|
|
3. |
Based on my knowledge,
the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report; |
|
|
|
|
|
|
|
|
4. |
The registrant's
other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and have: |
|
|
|
|
|
|
|
|
a) |
designed such disclosure
controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which
this annual report is being prepared; |
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b) |
evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report (the "Evaluation
Date"); and |
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c) |
presented in this annual report
our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date; |
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5. |
The registrant's
other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions): |
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a) |
all significant deficiencies
in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses
in internal controls; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
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6. |
The registrant's
other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses. |
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Date: December 27, 2002
/s/ Robert H. Fish
____________________________
Robert H. Fish
125
Back to Index
I, George V. Hager, Jr., principal financial officer of Genesis Health Ventures, Inc., certify that:
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1. |
I have reviewed this
annual report on Form 10-K of Genesis Health Ventures, Inc. and subsidiaries; |
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2. |
Based on my knowledge,
this annual report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report; |
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3. |
Based on my knowledge,
the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report; |
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4. |
The registrant's
other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and have: |
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a) |
designed such disclosure
controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which
this annual report is being prepared; |
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b) |
evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report (the "Evaluation
Date"); and |
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c) |
presented in this annual report
our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date; |
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5. |
The registrant's
other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions): |
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a) |
all significant deficiencies
in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses
in internal controls; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
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6. |
The registrant's
other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses. |
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Date: December 27, 2002
/s/ George V. Hager, Jr.
____________________________
George V. Hager, Jr.
126
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EX-3
5
ex3-2.txt
EX3-2.TXT
AMENDED AND RESTATED
BYLAWS
of
GENESIS HEALTH VENTURES, INC.
These Bylaws are adopted by the Corporation and are
supplemental to the Pennsylvania Business Corporation Law
as the name shall from time
to time be in effect.
ARTICLE I. SHAREHOLDERS AND DIRECTORS
Section 101.1 Place of Shareholders' Meetings. All meetings of the
shareholders shall be held at such place or places, inside or outside the
Commonwealth of Pennsylvania, as determined by the Board of Directors from time
to time.
Section 101.2 Annual Shareholders' Meeting. The annual meeting of the
shareholders, for the election of directors and the transaction of other
business which is properly brought before such meeting, shall be held in each
calendar year, at a time and place determined by the Board of Directors.
Section 101.3 Special Meetings of Shareholders. Special meetings of the
shareholders may be called at any time by the Board of Directors or the Chairman
of the Board and Chief Executive Officer.
Section 101.4 Conduct of Shareholders' Meetings. The Chairman of the
Board shall preside at all Shareholders' meetings. In the absence of the
Chairman of the Board, the President shall preside or, in his or her absence,
any officer designated by the Board of Directors. The officer presiding over the
shareholders' meeting may establish such rules and regulations for the conduct
of the meeting as he or she may deem to be reasonably necessary or desirable for
the orderly and expeditious conduct of the meeting. Unless the officer presiding
over the shareholders' meeting otherwise requires, shareholders need not vote by
ballot on any questions.
Section 102.1 Management by Board of Directors. The business and
affairs of the Corporation shall be managed by its Board of Directors. The Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute, regulation, the Amended and
Restated Articles of Incorporation or these Amended and Restated Bylaws directed
or required to be exercised or done by the shareholders.
Section 102.2. Nomination for Directors. Beginning with the annual
meeting of the shareholders to be held in 2002, nominations by shareholders for
directors to be elected at a meeting of shareholders and which have not been
previously approved by the Board of Directors must be submitted to the Secretary
of the Corporation in writing, either by personal delivery, nationally
recognized express mail or United States mail, postage prepaid, not later than
(i) with respect to an election to be held at an annual meeting of shareholders,
the latest date upon which shareholder proposals must be submitted to the
Corporation for inclusion in the Corporation's proxy statement relating to such
meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, or other applicable rules or regulations under the federal securities
laws or, if no such rules apply, at least ninety (90) days prior to the date one
year from the date of the immediately preceding annual meeting of shareholders,
and (ii) with respect to an election to be held at a special meeting of
shareholders, the close of business on the tenth day following the date on which
notice of such meeting is first given to shareholders. Each such nomination
shall set forth: (i) the name and address of the shareholder making the
nomination and of the person or persons nominated; (ii) a representation that
the shareholder is a holder of record of capital stock of the Corporation
entitled to vote at such meeting and intends to appear in person or by proxy at
the meeting to vote for the person or persons nominated; (iii) a description of
all arrangements and understandings between the shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations were made by the shareholder; (iv) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated by the
Board of Directors; and (v) the consent of each nominee to serve as a director
of the Corporation if so elected. All late nominations shall be rejected.
Notwithstanding the foregoing, at any time prior to the election of directors at
a meeting of shareholders, the Board of Directors may designate a substitute
nominee to replace any bona fide nominee who was nominated as set forth above
and who, for any reason, becomes unavailable for election as a director.
Section 102.3. Number of Directors. The Board of Directors shall
consist of initially eight (8) directors and, after an initial one year term
following the effectiveness of the Corporation's Plan of Reorganization dated
September 12, 2001, (i) the Board of Directors shall consist of not less than 8
nor more than 13 directors as shall be established from time to time by majority
vote of the members in office of the Board of Directors, and (ii) the Board
shall be divided into three classes in accordance with the Corporation's Amended
and Restated Articles of Incorporation.
Section 102.4. Term of Directors. Each director shall serve until his
successor is elected and qualifies, even though his term of office has otherwise
expired, except in the event of his earlier resignation, removal or
disqualification.
Section 102.5. Resignations of Directors. Any director may resign at
any time. Such resignation shall be in writing, but the acceptance thereof shall
not be necessary to make it effective.
Section 102.6. Vacancies in the Board of Directors. Should a vacancy in
the Board of Directors occur or be created, whether arising through death,
resignation, retirement or removal of a Director, such vacancy shall be filled
by a majority vote of the remaining Directors. A Director so elected to fill a
vacancy shall serve for the remainder of the then present term of office of the
class to which he was elected.
Section 102.7. Compensation of Directors. Unless the Board of Directors
otherwise determines, directors shall not be entitled to any compensation for
their services as directors; provided that directors who are not also employees
of the Corporation shall be reimbursed by the Corporation for all out-of-pocket
expenses actually incurred by such directors in attending meetings of the Board
of Directors or any committees thereof. Any director may serve the Corporation
in other capacities and be entitled to such compensation therefor as is
determined by the Board of Directors.
Section 102.8. Annual Meeting of Directors. An annual meeting of the
Board of Directors shall be held each year immediately following the annual
meeting of the shareholders and at such other times as the Board shall from time
to time designate or as may be designated in any notice from the Secretary
calling the meeting.
Section 102.9. Meetings of the Directors. Meetings of the Board of
Directors may be called by the Chairman or any three members of the Board of
Directors. Any one member of the Board of Directors may request that the
Chairman of the Board of Directors call a meeting of the Board of Directors.
Upon the request of the Chairman or such three directors, it shall be the duty
of the Secretary of the Corporation to fix the date of such meeting to be held
at such time, not less than three (3) business days after the receipt of such
request as the Secretary may determine and to give due notice thereof for any
such meeting to be held at the principal office of the Corporation or at any
other place designated in the notice of the meeting; or, in the alternative, not
less than twenty-four (24) hours after the receipt of such request as the
Secretary may determine and to give due notice thereof for any such meeting
where any director may participate by using a conference telephone or similar
communications equipment, by means of which all such persons participating in
the meeting can hear each other.
Section 102.10. Notice of Directors' Meetings. Whenever notice of a
meeting of the Board of Directors is required, it shall be in writing and shall
be made to each director to his or her address appearing on the books of the
Corporation by hand delivery, first class or express mail (postage prepaid),
courier service (charges prepaid) or by facsimile transmission. Unless otherwise
required by law or these Bylaws, neither the business to be transacted at, nor
the purpose of, any regular meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting.
2
Section 102.11. Reports and Records. The reports of officers and
committees and the records of the proceedings of all committees shall be filed
with the Secretary of the Corporation and presented to the Board of Directors,
if practicable, at its next regular meeting. The Board of Directors shall keep
complete records of its proceedings in a minute book kept for that purpose. When
a director shall request it, the vote of each director upon a particular
question shall be recorded in the minutes.
Section 102.12. Committees. The following committees of the Board of
Directors shall be established by the Board of Directors in addition to any
other committee the Board of Directors may in its discretion establish: (a)
Executive Committee; (b) Audit and Compliance Committee; and (c) Compensation
Committee.
Section 102.13. Executive Committee. The Executive Committee shall
consist of at least three (3) directors. Meetings of the Committee may be called
whenever two or more members of the Committee so request in writing. The
Executive Committee shall have and exercise the authority of the Board of
Directors in the management of the business of the Corporation between the dates
of regular meetings of the Board.
Section 102.14. Audit and Compliance Committee. The Audit and
Compliance Committee shall consist of at least three (3) directors, a majority
of which shall be independent. Meetings of the Audit and Compliance Committee
Committee may be called at any time by the Chairman or Secretary of the Audit
and Compliance Committee, and shall be called whenever two or more members of
the Committee so request in writing. The Audit and Compliance Committee shall
have the following authority, powers and responsibilities:
(a) To recommend each year to the Board the independent
accountants to audit the annual financial statements of the Corporation and its
consolidated subsidiaries and to review the fees charged for such audits or for
special engagements given to such accountants;
(b) To meet with the independent accountants, Chief Executive
Officer, Chief Financial Officer and any other Corporation executives as the
Audit and Compliance Committee deems appropriate at such times as the Audit and
Compliance Committee shall determine to review: (i) the scope of the audit plan;
(ii) the Corporation's financial statements; (iii) the results of external and
internal audits; (iv) the effectiveness of the Corporation's system of internal
controls; (v) any limitations imposed by Corporation personnel on the
independent public accountants; and (vi) such other matters as the Audit and
Compliance Committee shall deem appropriate;
(c) To report to the entire Board at such time as the Audit
and Compliance Committee shall determine;
(d) To take such other action as the Audit and Compliance
Committee shall deem necessary or appropriate to assure that the interests of
the Company are adequately protected.
Section 102.15. Compensation Committee. The Compensation Committee
shall consist of at least two (2) directors. Meetings of the Committee may be
called at any time by the Chairman or Secretary of the Committee, and shall be
called whenever two or more members of the Committee so request in writing. The
Committee shall review compensation of executive officers and make
recommendations to the Board of Directors regarding executive compensation and
shall have such other duties as the Board of Directors prescribes.
Section 102.16. Appointment of Committee Members. The Board of
Directors shall appoint or shall establish a method of appointing the members of
the Executive, Audit and Compensation Committees and of any other committees
established by the Board of Directors, and the Chairman of each such committee,
to serve until the next annual meeting of shareholders.
Section 102.17. Organization and Proceedings. Each committee of the
Board of Directors shall effect its own organization by the appointment of a
Secretary and such other officers, except the Chairman, as it may deem
necessary. The Secretary of the Executive Committee shall be the Secretary of
the Corporation, but the Secretary of the Audit and Compensation Committees and
of any other committee need not be the Secretary of the Corporation. A record of
the proceedings of all committees shall be kept by the Secretary of such
committee and filed and presented as provided in Section 102.12 of these Bylaws.
3
Section 102.18. Committees. In the absence or disqualification of any
member of any committee established by the Board Directors, the members thereof
who are present at any meeting such committee and are not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
director to act at such meeting in the place of such absent or disqualified
member.
Section 103. Absentee Participation in Meetings. A director or
shareholder (as the case may be) may participate in a meeting of the Board of
Directors, a meeting of a committee established by the Board of Directors, or a
meeting of the shareholders, by use of a conference telephone or similar
communications equipment, by means of which all persons participating in the
meeting can hear each other.
ARTICLE II. OFFICERS
Section 201. Officers. The Corporation shall have a Chairman, a
President, a Secretary and a Treasurer, and may have one or more Vice Chairmen,
one or more Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers and other officers and assistant officers as the Board of
Directors may from time to time deem advisable.
Section 202. Election and Term of Officers. The Chairman and Chief
Executive Officer, President and Chief Operating Officer, Secretary, and
Treasurer of the Corporation shall be elected annually by the Board of Directors
at the annual meetings of the Board of Directors. All other officers and
assistant officers shall be elected by the Board of Directors at the time, in
the manner, and for such term as the Board of Directors from time to time
determines. Each officer and assistant officer shall serve until his successor
is duly elected and qualifies, or until he resigns or is removed from office.
Section 203. Compensation. Unless otherwise provided by the Board of
Directors, the compensation of officers and assistant officers shall be fixed by
the Chairman.
Section 204. Chairman and Chief Executive Officer. The Chairman shall
be the chief executive officer of the Corporation, and, subject to the direction
and control of the Board of Directors, shall in general supervise and control
all of the business and affairs of the Corporation. Unless a designation to the
contrary is made at a meeting, the Chairman, when present, shall preside at all
meetings of the shareholders and of the Board of Directors. As authorized by the
Board of Directors, the Chairman may execute and seal, or cause to be sealed,
all instruments requiring such execution. Upon request of the Board of
Directors, the Chairman shall report to it all matters which the interests of
the Corporation may require to be brought to the attention of the Board of
Directors.
Section 205. President and Chief Operating Officer. The president shall
be the chief operating officer of the Corporation. As authorized by the Board of
Directors, the President may execute and seal, or cause to be sealed, all
instruments requiring such execution, except to the extent that signing and
execution thereof is expressly delegated by the Board of Directors to some other
officer or agent of the Corporation. In the absence or disability of the
Chairman, the President, unless otherwise determined by the Board of Directors,
shall perform the duties and exercise the powers of the Chairman.
Section 206. Vice President, Secretary, Treasurer, and Assistant
Officers. In the absence or disability of the President, the Vice President or
Vice Presidents, in the order of their seniority, unless otherwise determined by
the Board of Directors or the Chairman shall perform the duties and exercise the
powers of the President.
The Vice President or Vice Presidents, the Secretary, the
Treasurer, the Assistant Secretary or Secretaries, and the Assistant Treasurer
or Treasurers, shall act under the direction of the Chairman and shall perform
all duties which are prescribed by the Chairman or the Board of Directors.
ARTICLE III. PERSONAL LIABILITY AND INDEMNIFICATION
Section 301.1.1. Personal Liability of Directors.
4
(a) A director of this Corporation shall not be personally
liable for monetary damages as such for any action taken, or any failure to take
any action, unless:
(1) the director has breached or failed to perform
the duties of his office under
Subchapter B of Chapter 17 of the Pennsylvania Business Corporation of 1988
(which, as amended from time to time, is hereafter called the "Business
Corporation Law"); and
(2) the breach or failure to perform constitutes
self-dealing, willful misconduct
or recklessness.
(b) This Section 301.1.1 shall not limit a director's
liability for monetary damages to the extent prohibited by the Business
Corporation Law.
Section 301.1.2. Mandatory Indemnification. The Corporation shall, to
the fullest extent permitted by applicable law, indemnify its directors and
officers who were or are a party or are threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (whether or not such action, suit or
proceeding arises or arose by or in the right of the Corporation or other
entity) by reason of the fact that such director or officer is or was a director
or officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee, general partner, agent or
fiduciary of another corporation, partnership, joint venture, trust or other
enterprise (including service with respect to employee benefit plans), against
expenses (including, but not limited to, attorneys' fees and costs), judgments,
fines (including excise taxes assessed on a person with respect to any employee
benefit plan) and amounts paid in settlement actually and reasonably incurred by
such director or officer in connection with such action, suit or proceeding,
except as otherwise provided in Section 301.1.4 hereof. Persons who were
members, directors or officers of the Corporation prior to the date this Section
is approved by shareholders of the Corporation, but who do not hold such office
on or after such date, shall not be covered by this Section 301.1. A director or
officer of the Corporation entitled to indemnification under this Section
301.1.2 is hereafter called a "person covered by Section 301.1.2 hereof".
Section 301.1.3. Expenses. Expenses incurred by a person covered by
Section 301.1.2 hereof in defending a threatened, pending or completed civil or
criminal action, suit or proceeding shall be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation, except as otherwise provided in Section 301.1.4.
Section 301.1.4. Exceptions. No indemnification under Section 301.1.2
or advancement or reimbursement of expenses under Section 301.1.3 shall be
provided to a person covered by Section 301.1.2 hereof (a) with respect to
expenses or the payment of profits arising from the purchase or sale of
securities of the Corporation in violation of Section 16(b) of the Securities
Exchange Act of 1934; (b) if a final unappealable judgment or award establishes
that such director or officer engaged in self-dealing, willful misconduct or
recklessness; (c) for expenses or liabilities of any type whatsoever (including,
but not limited to, judgments, fines, and amounts paid in settlement) which have
been paid directly to such person by an insurance carrier under a policy of
officers' and directors' liability insurance whose premiums are paid for by the
Corporation or by an individual or entity other than such director or officer;
and (d) for amounts paid in settlement of any threatened, pending or completed
action, suit or proceeding without the written consent of the Corporation, which
written consent shall not be unreasonably withheld. The Board of Directors of
the Corporation is hereby authorized, at any time by resolution, to add to the
above list of exceptions from the right of indemnification under Section 301.1.2
or advancement or reimbursement of expenses under Section 301.1.3, but any such
additional exception shall not apply with respect to any event, act or omission
which has occurred prior to the date that the Board of Directors in fact adopts
such resolution. Any such additional exception may, at any time after its
adoption, be amended, supplemented, waived or terminated by further resolution
of the Board of Directors of the Corporation.
5
Section 301.1.5. Continuation of Rights. The indemnification and
advancement or reimbursement of expenses provided by, or granted pursuant to,
this Section 301.1 shall continue as to a person who has ceased to be a director
or officer of the Corporation, and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 301.1.6. General Provisions.
(a) The term "to the fullest extent permitted by applicable
law", as used in this Section 301.1, shall mean the maximum extent permitted by
public policy, common law or statute. Any person covered by Section 301.1.2
hereof may, to the fullest extent permitted by applicable law, elect to have the
right to indemnification or to advancement or reimbursement of expenses,
interpreted, at such person's option, (i) on the basis of the applicable law on
the date this Section was approved by the shareholders, or (ii) on the basis of
the applicable law in effect at the time of the occurrence of the event or
events giving rise to the action, suit or proceeding, or (iii) on the basis of
the applicable law in effect at the time indemnification is sought.
(b) The right of a person covered by Section 301.1.2 hereof to
be indemnified or to receive an advancement or reimbursement of expenses
pursuant to Section 301.1.3 (i) may also be enforced as a contract right
pursuant to which the person entitled thereto may bring suit as if the
provisions hereof were set forth in a separate written contract between the
Corporation and such person, (ii) to the fullest extent permitted by applicable
law, is intended to be retroactive and shall be available with respect to events
occurring prior to the adoption hereof, and (iii) shall continue to exist after
the rescission or restrictive modification (as determined by such person) of
this Section with respect to events, acts or omissions occurring before such
rescission or restrictive modification is adopted.
(c) If a request for indemnification or for the advancement or
reimbursement of expenses pursuant hereto is not paid in full by the Corporation
within thirty days after a written claim has been received by the Corporation
together with all supporting information reasonably requested by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim (plus interest at the
prime rate announced from time to time by the Corporation's primary banker) and,
if successful in whole or in part, the claimant shall be entitled also to be
paid the expenses (including, but not limited to, attorneys' fees and costs) of
prosecuting such claim. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel or its shareholders) to have made
a determination prior to the commencement of such action that indemnification of
or the advancement or reimbursement of expenses to the claimant is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses, shall be a defense to the action or create a
presumption that the claimant is not so entitled.
(d) The indemnification and advancement or reimbursement of
expenses provided by, or granted pursuant to, this Section 301.1 shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement or reimbursement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or directors or otherwise, both as to action in
such director or officer's official capacity and as to action in another
capacity while holding that office.
(e) Nothing contained in this Section 301.1 shall be construed
to limit the rights and powers the Corporation possesses under the Business
Corporation Law, or otherwise, including, but not limited to, the powers to
purchase and maintain insurance, create funds to secure or insure its
indemnification obligations, and any other rights or powers the Corporation may
otherwise have under applicable law.
(f) The provisions of this Section 301.1 may, at any time (and
whether before or after there is any basis for a claim for indemnification or
for the advancement or reimbursement of expenses pursuant hereto), be amended,
supplemented, waived, or terminated, in whole or in part, with respect to any
person covered by Section 301.1.2 hereof by a written agreement signed by the
Corporation and such person.
(g) The Corporation shall have the right to appoint the
attorney for a person covered by Section 301.1.2 hereof, provided such
appointment is not unreasonable under the circumstances.
Section 301.1.7. Optional Indemnification. The Corporation may, to the
fullest extent permitted by applicable law, indemnify, and advance or reimburse
expenses for, persons in all situations other than that covered by this Section
301.1.
6
ARTICLE IV. SHARES OF CAPITAL STOCK
Section 401. Authority to Sign Share Certificate. Every share
certificate of the Corporation shall be signed by the Chairman and Chief
Executive Officer and by the Secretary or one of the Assistant Secretaries. If
the certificate is signed by a transfer agent or registrar, the signature of any
officer of the Corporation on the certificate may be facsimile, engraved or
printed.
Section 402. Lost or Destroyed Certificates. Any person claiming a
share certificate to be lost, destroyed or wrongfully taken shall receive a
replacement certificate if such shareholder: (a) requests such replacement
certificate before the Corporation has notice that the shares have been acquired
by a bona fide purchaser; (b) files with the Corporation an indemnity bond
deemed sufficient by the Board of Directors; and (c) satisfies any other
reasonable requirements fixed by the Board of Directors.
ARTICLE V. GENERAL
Section 501. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 502. Record Date. The Board of Directors may fix any time prior
to the date of any meeting of shareholders as a record date for the
determination of shareholders entitled to notice of, or to vote at, the meeting,
which time, except in the case of an adjourned meeting, shall be not more than
ninety (90) days prior to the date of the meeting of shareholders. The Board of
Directors may fix any time whatsoever (whether or not the same is more than
ninety (90) days) prior to the date for the payment of any dividend or
distribution, or the date for the allotment of rights, or the date when any
change or conversion or exchange of shares will be made or will go into effect,
as a record date for the determination of the shareholders entitled to receive
payment of any such dividend or distribution, or to receive any such allotment
of rights, or to exercise the rights in respect to any such change, conversion
or exchange of shares.
Section 503. Emergency Bylaws. In the event of any emergency resulting
from an attack on the United States, a nuclear disaster or another catastrophe
as a result of which a quorum cannot be readily assembled and during the
continuance of such emergency, the following Bylaw provisions shall be in
effect, notwithstanding any other provisions of these Bylaws.
(a) A meeting of the Board of Directors or of any committee
thereof may be called by any officer or director upon one hour's notice to all
persons entitled to notice whom, in the sole judgment of the notifier, it is
feasible to notify;
(b) The director or directors in attendance at the meeting of
the Board of Directors or of any committee thereof shall constitute a quorum;
and
(c) These Bylaws may be amended or repealed, in whole or in
part, by a majority vote of the directors attending any meeting of the Board of
Directors, provided such amendment or repeal shall only be effective for the
duration of such emergency.
Section 504. Severability. If any provision of these Bylaws is illegal
or unenforceable as such, such illegality or unenforceability shall not affect
any other provision of these Bylaws and such other provisions shall continue in
full force and effect.
ARTICLE VI. AMENDMENTS
Section 601. Amendment or Repeal by the Board of Directors. Except as
provided by applicable law, these Bylaws may be amended or repealed, in whole or
in part, by a majority vote of the members of the Board of Directors present and
voting at any duly convened regular or special meeting of the Board.
7
Section 602. Amendment or Repeal by Shareholders. These Bylaws may be
amended or repealed, in whole or in part, by shareholders as follows: (i) in the
case of an amendment or repeal that has previously received the approval of the
Board of Directors, by a majority of the votes cast by shareholders at any duly
convened annual or special meeting of the shareholders; and (ii) in the case of
an amendment or repeal that has not previously received the approval of the
Board of Directors, by a vote of shareholders entitled to cast at least 75
percent of the votes which all shareholders are entitled to cast thereon at any
annual or special meeting of the shareholders. This Section 602 may be amended
or repealed, in whole or in part, only by a vote of shareholders entitled to
cast at least 75 percent of the votes which all shareholders are entitled to
cast thereon at any duly convened annual or special meeting of shareholders.
Section 602. Recording Amendments. The text of all amendments to these
Bylaws shall be attached hereto, and a notation of the date of its adoption and
a notation of whether it was adopted by the directors or the shareholders shall
be made in Section 702 hereof.
ARTICLE VII. ADOPTION OF BYLAWS AND RECORD OF AMENDMENTS THERETO
Section 701. Adoption and Effective Date. These Bylaws have been
adopted as the Bylaws of the Corporation this 2nd day of October, 2001, and
shall be effective as of said date.
Section 702. Amendments to Bylaws.
Ratification Date Section Amended
December 31, 2001 Article I, Section 101.5
May 28, 2002 Article I, Sections 101.3, 101.4
and 102.9
Article II, Sections 201, 202,
203, 204, 205 and
206
Article IV, Section 401
November 1, 2002 Article I, Section 102.3
8
ARTICLE I. SHAREHOLDERS AND DIRECTORS
Section 101.3 Special Meetings of Shareholders. Special meetings of the
shareholders may be called at any time by the Board of Directors, the Chairman
of the Board or the Chief Executive Officer.
Section 101.4 Conduct of Shareholders' Meetings. The Chairman of the
Board shall preside at all Shareholders' meetings. In the absence of the
Chairman of the Board, the Chief Executive Officer shall preside. In the absence
of both the Chairman of the Board and the Chief Executive Officer, the President
shall preside or, in his or her absence, any officer designated by the Board of
Directors. The officer presiding over the shareholders' meeting may establish
such rules and regulations for the conduct of the meeting as he or she may deem
to be reasonably necessary or desirable for the orderly and expeditious conduct
of the meeting. Unless the officer presiding over the shareholders' meeting
otherwise requires shareholders need not vote by ballot on any questions.
Section 101.5 Quorum. The presence, in person or by proxy, of
shareholders entitled to cast at least a majority of the votes that all
shareholders are entitled to cast on a particular matter to be acted upon at a
meeting of the shareholders shall constitute a quorum for the purpose of
consideration and action on the matter. To the extent that a quorum is present
with respect to consideration of and action on a particular matter or matters
but a quorum is not present as to another matter or matters, consideration of
and action on the matter or matters for which a quorum is present may occur and,
after such consideration and action, the meeting may be adjourned for purposes
of the consideration of and action on the matter or matters for which a quorum
is not present.
Section 102.3 Number of Directors. The Board of Directors shall consist
of not less than six (6) nor more than eleven (11) directors as shall be
established from time to time by majority vote of the members in office of the
Board of Directors. After an initial one year term following the effectiveness
of the Corporation's Plan of Reorganization dated September 12, 2001, the Board
of Directors shall be divided into three classes in accordance with the
Corporation's Amended and Restated Articles of Incorporation.
Section 102.9 Meetings of the Directors. Meetings of the Board of
Directors may be called by the Chairman, the Chief Executive Officer or any
three members of the Board of Directors. Any one member of the Board of
Directors may request that the Chairman of the Board of Directors or the Chief
Executive Officer call a meeting of the Board of Directors. Upon the request of
the Chairman, the Chief Executive Officer or such three directors, it shall be
the duty of the Secretary of the Corporation to fix the date of such meeting to
be held at such time, not less than three (3) business days after the receipt of
such request as the Secretary may determine and to give due notice thereof for
any such meeting to be held at the principal office of the Corporation or at any
other place designated in the notice of the meeting; or, in the alternative, not
less than twenty-four (24) hours after the receipt of such request as the
Secretary may determine and to give due notice thereof for any such meeting
where any director may participate by using a conference telephone or similar
communications equipment, by means of which all such persons participating in
the meeting can hear each other.
ARTICLE II. OFFICERS
Section 201. Officers. The Corporation shall have a Chairman, a Chief
Executive Officer, a President, a Secretary and a Treasurer, and may have one or
more Vice Chairmen, one or more Vice Presidents, one or more Assistant
Secretaries, and one or more Assistant Treasurers and other officers and
assistant officers as the Board of Directors may from time to time deem
advisable.
Section 202. Election and Term of Officers. The Chairman, Chief
Executive Officer, President and Chief Operating Officer, Secretary, and
Treasurer of the Corporation shall be elected annually by the Board of Directors
at the annual meetings of the Board of Directors. All other officers and
assistant officers shall be elected by the Board of Directors at the time, in
the manner, and for such term as the Board of Directors from time to time
determines. Each officer and assistant officer shall serve until his successor
is duly elected and qualifies, or until he resigns or is removed from office.
9
Section 203. Compensation. Unless otherwise provided by the Board of
Directors, the compensation of officers and assistant officers shall be fixed by
the Chief Executive Officer.
Section 204. Chief Executive Officer; Chairman. The Chief Executive
Officer, subject to the direction, and control of the Board of Directors, shall
in general supervise and control all of the business and affairs of the
Corporation. Unless a designation to the contrary is made at a meeting, the
Chairman, when present, shall preside at all meetings of the shareholders and of
the Board of Directors. As authorized by the Board of Directors, the Chief
Executive Officer may execute and seal, or cause to be sealed, all instruments
requiring such execution. Upon request of the Board of Directors, the Chief
Executive Officer or the Chairman shall report to it all matters which the
interests of the Corporation may require to be brought to the attention of the
Board of Directors.
Section 205. President and Chief Operating Officer. The president shall
be the chief operating officer of the Corporation. As authorized by the Board of
Directors, the President may execute and seal, or cause to be sealed all
instruments requiring such execution, except to the extent that signing and
execution thereof is expressly delegated by the Board of Directors to some other
officer or agent of the Corporation. In the absence or disability of the Chief
Executive Officer, the President, unless otherwise determined by the Board of
Directors, shall perform the duties and exercise the powers of the Chief
Executive Officer.
Section 206. Vice President, Secretary, Treasurer, and Assistant
Officers. In the absence or disability of the President, the Vice President or
Vice Presidents, in the order of their seniority, unless otherwise determined by
the Board of Directors or the Chief Executive Officer shall perform the duties
and exercise the powers of the President.
The Vice President or Vice Presidents, the Secretary, the Treasurer,
the Assistant Secretary or Secretaries, and the Assistant Treasurer or
Treasurers, shall act under the direction of the Chief Executive Officer and
shall perform all duties which are prescribed by the Chief Executive Officer or
the Board of Directors.
ARTICLE IV. SHARES OF CAPITAL STOCK
Section 401. Authority to Sign Share Certificate. Every share
certificate of the Corporation shall be signed by the Chairman or Chief
Executive Officer and by the Secretary or one of the Assistant Secretaries. If
the certificate is signed by a transfer agent or registrar, the signature of any
officer of the Corporation on the certificate may be facsimile, engraved or
printed.
10
EX-10
6
ex10_20.txt
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 28,
2002, (the "Effective Date"), by and between Robert H. Fish (the "Executive")
and Genesis Health Ventures, Inc., a Delaware corporation (the "Company").
WHEREAS, the Board of Directors of the Company (the "Board") desires that
the Company employ the Executive and the Executive desires to furnish services
to the Company on the terms and conditions hereinafter set forth; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth below, the Company and the Executive hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
Executive hereby accepts such employment, on the terms and conditions
hereinafter set forth.
2. Employment Period. The period during which the Executive shall furnish
services to the Company hereunder (the "Employment Period") shall commence on
the Effective Date and shall end on November 30, 2002; provided, however, that
the Employment Period may be extended to such later date as is determined by
mutual agreement of the parties hereto. Nothing in this Section 2 shall limit
the right of the Company or the Executive to terminate the Executive's
employment hereunder on the terms and conditions set forth in Section 6 hereof.
3. Position and Duties. During the Employment Period, the Executive shall
serve as the Interim Chief Executive Officer of the Company and shall have those
powers and duties of a management nature consistent with such position. If,
during the Employment Period, the Chairman of the Board of the Company ceases to
serve in such capacity, the Executive shall also serve as the Interim Chairman
of the Board during the Employment Period until such time as a permanent
Chairman of the Board is appointed and shall have all duties and
responsibilities associated with such position. If, during the Employment
Period, the Company hires a permanent Chief Executive Officer (the "Permanent
CEO"), the Executive shall no longer serve as Interim Chief Executive Officer,
but shall continue to serve during the remainder of the Employment Period in an
executive capacity, assisting the Permanent CEO with matters relating to
management transition and other matters as may be reasonably requested by the
Board or the Permanent CEO. In the performance of his duties hereunder, the
Executive shall report to the Board (or, following the appointment of the
Permanent CEO, to the Permanent CEO) and shall devote substantially all of his
full working time, attention and energies to the business of the Company as
shall be necessary for him to carry out his obligations hereunder. During the
Employment Period, the Executive shall continue to serve as a member of the
Board.
4. Place of Performance. The principal place of performance of the
Executive's duties hereunder shall be at the Company's principal corporate
offices, subject to reasonable travel requirements on behalf of the Company.
5. Compensation and Related Matters.
(a) Inducement Payment. As an inducement for the Executive to enter
into this Agreement and undertake the duties and responsibilities contemplated
hereby, the Company shall pay to the Executive, promptly following the execution
of this Agreement, a lump sum cash inducement payment in the amount of $70,833,
less applicable withholding.
(b) Base Salary. Commencing as of June 1, 2002 and continuing
through the remainder of the Employment Period, the Company shall pay the
Executive an annual base salary at a rate not less than $850,000 per year (the
"Base Salary"), payable in accordance with the Company's regular payroll
practice for its senior executives, as in effect from time to time. Any Base
Salary payable to the Executive during the Employment Period shall be in
addition to any directors' fees to which the Executive would be entitled for
continuing to serve as a member of the Board during the Employment Period.
Notwithstanding the foregoing, payment of all or any portion of amounts referred
to in this Section 5(b) which have not yet been earned by the Executive may be
deferred by the Executive by a writing delivered to the Company.
(c) Equity and Other Incentive Compensation. During the Employment
Period, the Executive shall be eligible for such equity and other incentive
compensation as shall be determined by the Board (or a committee thereof) in its
sole discretion.
(d) Other Benefits. During the Employment Period, the Executive
shall be entitled to participate (subject to uniformly applicable requirements
for participation) in any health, disability, profit sharing, retirement or
insurance plans maintained by the Company from time to time for the benefit of
its senior executives.
(e) Business Expenses. During the Employment Period, the Company
shall, upon submission of proper vouchers in respect thereof, pay or reimburse
the Executive in accordance with the Company's reimbursement and expenses
policies, as in effect from time to time, for all reasonable business expenses
incurred by the Executive in connection with the Company's business, including
but not limited to any such expenses incurred by the Executive prior to the
commencement of the Employment Period in preparation of the Executive's
employment hereunder.
2
(f) Relocation/Temporary Housing. The Company shall, upon submission
of proper vouchers in respect thereof, pay or reimburse the Executive for (i)
the cost of relocating himself and his spouse from their personal residence in
California to a location in proximity to the Company's corporate offices,
including reasonable travel expenses incurred in connection therewith, and (ii)
the cost of obtaining temporary housing for himself and his spouse during the
Employment Period of a nature that is commensurate with the Executive's position
with the Company. In addition, the Company shall make to the Executive
additional payments to cover applicable federal, state and local income and
excise taxes, when and to the extent, if any, that such taxes are payable by the
Executive with respect to benefits provided under clauses (i) and (ii) of this
Section 5(f).
(g) Company-Provided Automobile. During the Employment Period, the
Executive shall be provided with the use of an automobile, at the Company's
expense, which automobile shall be of a class commensurate with the Executive's
position with the Company.
6. Termination. The Executive's employment hereunder may be terminated
under the following circumstances, in each case subject to the provisions of
this Agreement.
(a) Death, The Executive's employment shall terminate upon his
death.
(b) Termination by the Company or by the Executive. The Company
may terminate the Executive's employment during the Employment Period for any
reason, with or without Cause (as hereinafter defined). The Executive may
terminate his employment during the Employment Period for any reason. For
purposes of this Agreement, "Cause" shall mean (i) the Executive's conviction
for the commission of a felony (other than any such conviction resulting from
the Executive's operation of a motor vehicle) or (ii) the Executive's willful
and continued failure to perform substantially those duties reasonably assigned
or delegated to the Executive hereunder (other than any such failure resulting
from the Executive's physical or mental incapacity).
7. Termination Procedure.
(a) Notice of Termination. Any termination of the Executive's
employment by the Company or by the Executive (other than termination pursuant
to Section 6(a) hereof) shall be communicated by written notice of termination
to the other party hereto in accordance with Section 11 hereof.
3
(b) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean (i) if the Executive's employment is terminated by his
death, the date of his death and (ii) if the Executive's employment is
terminated for any other reason, the date on which a written notice of
termination is given or any later date (within 30 days) set forth in such notice
of termination.
8. Compensation Upon Termination.
(a) Death or Termination by the Company. If the Executive's
employment is terminated by reason of his death or by the Company during the
Employment Period for any reason (other than for Cause), the Company shall pay
to the Executive (or his legal representatives or estate or as may be directed
by the legal representatives of his estate, as the case may be) a lump sum in
cash equal to the sum of (i) any unpaid Base Salary due the Executive in respect
of periods through the Date of Termination (the "Accrued Amount") and (ii) the
Base Salary that would have been payable to the Executive for the remainder of
the Employment Period had such termination not occurred.
(b) Termination By the Executive. If the Executive's employment is
terminated by the Executive during the Employment Period for any reason or by
the Company for Cause the Company shall pay to the Executive a lump sum in cash
equal to the Accrued Amount.
9. Successors; Binding Agreement. This Agreement is personal to the
Executive and, without the prior written consent of the Company, shall not be
assignable by the Executive. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives. This Agreement shall inure
to the benefit of and be binding upon the Company and its successors and
assigns. The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
have been required to perform it if no such succession had taken place. As used
in this Agreement, the "Company" shall mean both the Company as defined above or
any such successor that assumes and agrees to perform this Agreement, by
operation of law or otherwise.
10. Indemnification. The Company shall indemnify, to the fullest extent
permitted by applicable state law and the by-laws of the Company, all amounts
(including without limitation judgments, fines, settlement payments, expenses
4
and attorney's fees) incurred or paid by the Executive in connection with any
claim, action, suit, investigation or proceeding arising out of or relating to
the performance by the Executive of services for, or the acting by him as a
director, officer or employee of the Company, any subsidiary of the Company or
any other person or enterprise at the Company's request (collectively,
"Claims"). During the Executive's employment with the Company and following the
termination of the Executive's employment with the Company for any reason, the
Executive shall be covered with respect to any Claims under any director's and
officer's liability insurance policy maintained by the Company which covers
other similarly situated executives of the Company. This Section 10 shall
survive the expiration or earlier termination of this Agreement and the
termination of the Executive's employment hereunder.
11. Notices. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
101 East State Street
Kennett Square, PA 19348
Attention: James Wankmiller
General Counsel
or to such other address as any party may have furnished to the other party in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. Amendment or Modification, Waiver. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing signed by the Executive and an authorized officer of the
Company. No waiver by any party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by any such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
5
13. Miscellaneous. This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto and any prior agreement of the parties
hereto in respect to the subject matter contained herein. This Agreement will be
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania, without regard to its conflicts of law principles, All descriptive
headings of sections and paragraphs in this Agreement are intended solely for
convenience, and no provision of this Agreement is to be construed by reference
to the heading of any section or paragraph. All payments to the Executive under
this Agreement shall be reduced by all applicable withholding required by
federal, state or local law. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENESIS HEALTH VENTURES, INC.
By: /s/ James J. Wankmiller
-----------------------------
Name: James J. Wankmiller
Title: Sr. V.P.
/s/ Robert H. Fish
-------------------------
Robert H. Fish
6
Employment Agreement
Addendum
--------
This Addendum is entered into as of November 30, 2002, by and between
Robert H. Fish (the "Executive") and Genesis Health Ventures, Inc,, a Delaware
corporation (the "Company").
Whereas, the Executive and the Company are parties to an Employment
Agreement (the "Agreement") entered into as of May 28, 2002; and
Whereas, the parties desire to enter into this Addendum setting forth the
terms and conditions extending the employment of the Executive with the Company.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth below, the Company and the Executive hereby agree as follows:
1. Employment. The Company hereby agrees to continue to employ the
Executive, and Executive hereby accepts such continued employment on the terms
and conditions hereinafter set forth.
2. Employment Agreement. The parties agree that the terms and conditions
of the Employment Agreement entered as of May 28, 2002, shall remain in full
force and effect during the Executive's continued employment, with the following
modifications:
a. Employment Period: The Executive shall continue to be employed
by the Company at the end of the employment period on November 30, 2002, on a
month-to-month basis.
b. Termination Procedure: Any termination of the Executive's
employment by the Company (other than by reason of Executives' death or for
Cause) shall be by written notice at the end of the month and shall provide a
minimum of sixty (60) days advance notice.
IN WITNESS WHEREOF, the parties executed this Addendum as of November 30,
2002.
Genesis Health Ventures, Inc.
/s/ James J. Wankmiller
-------------------------------
By: Name: James J. Wankmiller
Title: Sr. V.P.
& General Counsel
/s/ Robert H. Fish
--------------------------
Robert H. Fish
EX-10
7
ex10_24.txt
EXHIBIT 10.24
VOLUNTARY SEPARATION AGREEMENT AND GENERAL RELEASE
This VOLUNTARY SEPARATION AGREEMENT AND GENERAL RELEASE
(the "Agreement"), dated as of the 29th day of October, 2002, is entered into by
and between Genesis Health Ventures, Inc., a Delaware corporation (together with
its subsidiaries and affiliates being collectively referred to herein as the
"Company") and Richard R. Howard (the "Executive").
WHEREAS, the Executive and the Company are parties to an Employment
Agreement dated as of October 2, 2001 (the "Employment Agreement");
WHEREAS, the Executive has agreed to resign from his employment with the
Company and relinquish his position as Vice Chairman of the Company as of the
Effective Date (as hereinafter defined) upon the terms and conditions of this
Agreement; and
WHEREAS, the Executive and the Company desire to set forth their
understanding of the parties rights and obligations resulting from the Executive
ceasing to be employed by the Company as of the Effective Date.
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein, intending to be legally bound, the parties
hereto hereby agree as follows:
Section 1. Termination of Employment; Termination Payment.
(a) Termination of Employment. The Executive's employment with the
Company shall terminate as of the close of business on November 3, 2002 (the
"Effective Date"). The Executive shall relinquish his position as Vice Chairman
of the Company, including all duties and responsibilities associated with such
position, as of the Effective Date.
(b) Removal of Personal Property. In no event later than November 3,
2002, the Executive shall remove all personal property from his office at the
Company's corporate offices, including but not limited to the paintings, books
and other artifacts located in such office as of the Effective Date. On and
after November 3, 2002, the Executive shall not maintain an office or presence
at the Company's corporate offices.
(c) Payments and Benefits. In consideration for the Executive's
agreement to be bound by the terms of this Agreement, including but not limited
to Section 4(c) hereof and the Release set forth in Section 2 hereof, the
Executive shall be entitled to receive from the Company the payments and
benefits set forth in subparagraphs (i) through (v) of this Section 1(c),
provided that the Executive shall not have revoked such Release:
(i) on the later of November 3, 2002 or the eighth day after
the Executive's execution of this Agreement, to the extent there has been no
revocation of the Release by the Executive prior to such date (the "Payment
Date"), the Company shall pay the Executive in a lump sum in cash any accrued
and unpaid base salary or deferred compensation in respect of periods through
the Effective Date;
(ii) on the Payment Date, the Company shall pay the Executive a
lump sum in cash in an amount equal to $3,046,750, less applicable withholding,
of which $2,796,750 represents the severance pay the Executive would have been
entitled under Section 7.4 of the Employment Agreement as if the Executive
terminated his employment for "Good Reason" (as such term is defined in the
Employment Agreement) on the Effective Date and (2) $250,000 represents the
Executive's incentive compensation bonus with respect to the 2002 fiscal year of
the Company.
(iii) for a period of two years beginning on the Payment Date,
the Company will continue to provide, on the same basis as executive officers of
the Company generally, the health benefits (but excluding disability benefits)
provided to the Executive and his spouse and eligible dependants immediately
prior to the Payment Date (provided that the Executive continues to make all
required employee contributions). In the event that the Executive's
participation in any such plan or program is barred by the terms thereof, the
Company shall pay to the Executive an amount equal to the annual contribution,
payments, credits or allocation made by the Company to him, to his account or on
his behalf under such plans and programs from which his continued participation
is barred except that if the Executive's participation in any health or medical
insurance plan or program is barred, the Company shall obtain and pay for, on
the Executive's behalf, individual insurance plans, policies or programs that
provide to the Executive and his spouse and eligible dependants health and
medical insurance coverage which is equivalent to the insurance coverage to
which the Executive and his spouse and eligible dependants were entitled prior
to the Payment Date;
2
(iv) as of the Payment Date, the Company shall provide the
Executive with a life insurance policy in accordance with the Split-Dollar
Insurance Agreement dated June 25, 1991, with a death benefit of at least
$3,000,000 to the Executive's designated beneficiaries, and which shall include
the cash surrender value thereof;
(v) the Executive's outstanding deferred stock grant of 75,000
shares of the common stock of the Company shall fully vest as of the Payment
Date;
(vi) the Executive's outstanding stock options in the amount of
50,000 shares of the common stock of the Company shall fully vest as of the
Payment Date, and
(vii) all of the Executive's stock options in the amount of
75,000 shares of the common stock of the Company must be exercised on or before
February 1, 2003 and any options not exercised on or before February 1, 2003
will be forfeited.
Section 2. Release by the Executive.
(a) The Executive knowingly and voluntarily releases and forever
discharges the Company and the Company's parents, subsidiaries and affiliates,
together with all of their respective past and present directors, managers,
officers, partners, employees and attorneys, and each of their predecessors,
successors and assigns, and any of the foregoing in their capacity as a
shareholder or agent of the Company (collectively, "Releasees") from any and all
claims, charges, complaints, promises, agreements, controversies, liens,
demands, causes of action, obligations, damages and liabilities of any nature
whatsoever, known or unknown, suspected or unsuspected, which against them the
Executive or his executors, administrators, successors or assigns ever had, now
have, or may hereafter claim to have against any of the Releasees by reason of
any matter, cause or thing whatsoever arising on or before the Effective Date
and whether or not previously asserted before any state or federal court or
before any state or federal agency or governmental entity (the "Release"). The
Release includes, without limitation, any rights or claims relating in any way
to the Executive's employment relationship with the Company or any of the
Releasees, or the termination thereof, or arising under any statute or
regulation, including the Age Discrimination in Employment Act of 1967, Title
VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans
with Disabilities Act of 1990, the Employee Retirement Income Security Act of
1974, and the Family Medical Leave Act of 1993, each as amended, or any other
federal, state
3
or local law, regulation, ordinance or common law, or under any policy,
agreement, understanding or promise, whether written or oral, formal or
informal, between any of the Releasees and the Executive.
(b) Nothing herein shall be deemed to release (i) any of the
Executive's rights under this Agreement, (ii) any of the Executive's rights that
have accrued prior to the date hereof under the Company's employee benefit
plans; or (iii) any of the Executive's rights to indemnification under any
indemnification agreement, applicable law and the certificates of incorporation
and bylaws of the Company and/or any subsidiary or parent of the Company.
(c) The Executive represents that the Company has advised him to
consult with an attorney of his choosing prior to signing this Agreement. The
Executive further represents that he understands and agrees that he has the
right and has in fact reviewed this Agreement and, specifically, the Release,
with an attorney of the Executive's choice, The Executive further represents
that he understands and agrees that the Company is under no obligation to offer
him this Agreement, and that the Executive is under no obligation to consent to
the Release, and that he has entered into this Agreement freely and voluntarily.
(d) The Executive shall have twenty-one (21) days to consider this
Agreement and once he has signed this Agreement, the Executive shall have seven
(7) additional days from the date of execution to revoke his consent to the
Release set forth above. Any such revocation shall be made by delivering written
notification to the Chief Executive Officer.
Section 3. Notices. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid as follows:
If to the Executive:
If to the Company:
101 East State Street
Kennett Square, PA 19348
Attention: Robert H. Fish, Interim Chief Executive Officer
4
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
Section 4. Miscellaneous.
(a) Enforcement; Governing Law; Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania without regard to its conflicts of law principles. The Company
shall have the right, without prejudice to any other rights or remedies it might
have under the law which are reserved, to obtain injunctive relief to restrain
any breach or threatened breach by the Executive of this Agreement or otherwise
to specifically enforce any provision of this Agreement; provided, however, that
such right to injunctive relief does not preclude the Company from seeking
monetary damages for a breach by the Executive of this Agreement.
(b) Entire Agreement. This Agreement constitutes the entire
agreement, and supersedes any and all prior agreements, and understandings, both
written and oral, between the parties hereto with respect to the subject matter
hereof, including but not limited to the Employment Agreement and any separation
benefits payable thereunder, except as otherwise provided in Section 5(c) below.
(c) Survival of Certain Employment Agreement Provisions. The Company
and the Executive agree that Sections 9, 10, 11, 13.1 and 13.2 of the Employment
Agreement shall continue in full force and effect following the Effective Date
and that the non-compete term of Section 11.2 shall commence on the Effective
Date.
(d) Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect.
(e) Successors. This Agreement shall be binding upon and shall inure
to the benefit of each of the parties hereto, and their respective heirs,
legatees, executors, administrators, legal representatives, successors and
assigns.
(f) Withholding. All payments made by the Company to the Executive
pursuant to this Agreement shall be reduced by all federal, state, city or
5
other taxes that are required to be withheld pursuant to any law or governmental
regulation.
(g) Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(h) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
GENESIS HEALTH VENTURES, INC.
By: /s/ Robert H. Fish
--------------------------
Name: Robert H. Fish
Title: CEO
/s/ Richard R. Howard
-----------------------------
Richard R. Howard
6
EX-21
8
ex21.htm
EXHIBIT 21
Untitled Document
Back to Index
Exhibit 21 Subsidiaries of the Company
Entity Name |
|
State of
Organization |
|
Academy Nursing Home, Inc. |
|
Massachusetts |
Accumed, Inc. |
|
New Hampshire |
ADS Apple Valley, Inc. |
|
Massachusetts |
ADS Consulting, Inc. |
|
Massachusetts |
ADS Danvers ALF, Inc. |
|
Delaware |
ADS Dartmouth ALF, Inc. |
|
Delaware |
ADS Group, Inc. (The) |
|
Massachusetts |
ADS Hingham ALF, Inc. |
|
Delaware |
ADS Hingham Nursing Facility, Inc. |
|
Massachusetts |
ADS Palm Chelmsford, Inc. |
|
Massachusetts |
ADS Recuperative Center, Inc. |
|
Massachusetts |
ADS Reservoir Waltham, Inc. |
|
Massachusetts |
ADS Senior Housing, Inc. |
|
Massachusetts |
ANR, Inc. (f/k/a Adacom Network Routers, Inc.) |
|
Delaware |
Apple Valley Partnership Holding Company,
Inc. (The) |
|
Pennsylvania |
Applewood Health Resources, Inc. |
|
Delaware |
ASCO Healthcare of New England, Inc. |
|
Maryland |
ASCO Healthcare, Inc. |
|
Maryland |
ASL, Inc. |
|
Massachusetts |
Assisted Living Associates of Berkshire, Inc.
(The) |
|
Pennsylvania |
Assisted Living Associates of Lehigh, Inc.
(The) |
|
Pennsylvania |
Assisted Living Associates of Sanatoga, Inc.
(The) |
|
Pennsylvania |
Automated Professional Accounts, Inc. |
|
West Virginia |
Berks Nursing Homes, Inc. |
|
Pennsylvania |
Brightwood Property, Inc. |
|
West Virginia |
Brinton Manor, Inc. |
|
Delaware |
Burlington Woods Convalescent Center, Inc. |
|
New Jersey |
CareCard, Inc. |
|
Maryland |
Carefleet, Inc. |
|
Pennsylvania |
Cheltenham LTC Management, Inc. |
|
Pennsylvania |
CHG Investment Corp., Inc. |
|
Delaware |
CHNR-I, Inc. |
|
Delaware |
Colonial Hall Health Resources, Inc. |
|
Delaware |
Colonial House Health Resources, Inc. |
|
Delaware |
Compass Health Services, Inc. |
|
West Virginia |
Concord Companion Care, Inc. |
|
Pennsylvania |
Concord Health Group, Inc. |
|
Delaware |
Concord Healthcare Corporation |
|
Delaware |
Concord Healthcare Services, Inc. |
|
Pennsylvania |
Concord Home Health, Inc. |
|
Pennsylvania |
Concord Pharmacy Services, Inc. |
|
Pennsylvania |
Concord Rehab, Inc. d/b/a American Therapy |
|
Pennsylvania |
Concord Service Corporation |
|
Pennsylvania |
Crestview Convalescent Home, Inc. |
|
Pennsylvania |
Crestview North, Inc. |
|
Pennsylvania |
127
Back to Index
Entity Name |
|
State of
Organization |
|
CVNR, Inc. |
|
Delaware |
Dawn View Manor, Inc. |
|
West Virginia |
Delco Apothecary, Inc. |
|
Pennsylvania |
DELM Nursing, Inc. |
|
Pennsylvania |
Denton Healthcare Corporation |
|
Delaware |
Derby Nursing Center Corporation |
|
Connecticut |
Diane Morgan and Associates,
Inc. d/b/a DM & A Rehab |
|
Pennsylvania |
Dover Healthcare Associates,
Inc. |
|
Delaware |
Eastern Medical Supplies, Inc. |
|
Maryland |
Eastern Rehab Services, Inc.
|
|
Maryland |
EIDOS, Inc. |
|
Florida |
ElderCare Resources Corp. f/k/a
Health Resources of Tazewell, Inc. |
|
Delaware |
Elmwood Health Resources, Inc. |
|
Delaware |
Encare of Massachusetts, Inc. |
|
Delaware |
Encare of Pennypack, Inc. |
|
Pennsylvania |
Encare of Quakertown, Inc. |
|
Pennsylvania |
Encare of Wyncote, Inc. |
|
Pennsylvania |
RHS Membership Interest Holding
Company f/k/a Genesis Eldercare Adult Day Health Services, Inc. |
|
Pennsylvania |
Genesis ElderCare Centers
Beverly and Danvers, Inc. f/k/a Genesis ElderCare Centers I, Inc. |
|
Delaware |
Genesis ElderCare Centers II,
Inc. |
|
Delaware |
Genesis ElderCare Centers III,
Inc. |
|
Delaware |
Genesis Eldercare Corp. |
|
Delaware |
Genesis ElderCare Diagnostic
Services, Inc. f/k/a Diversified Diagnostics, Inc. |
|
Pennsylvania |
Genesis Eldercare Home Care Services,
Inc. f/k/a Healthcare Services Network, Inc. |
|
Pennsylvania |
Genesis Eldercare Home Health
Services - Southern, Inc. |
|
Pennsylvania |
Genesis ElderCare Hospitality
Services, Inc. f/k/a HCHS, Inc. |
|
Pennsylvania |
Genesis ElderCare Living Facilities,
Inc. |
|
Pennsylvania |
Genesis Eldercare Management
Services, Inc. f/k/a Bluefield Manor, Inc. |
|
Delaware |
Genesis Eldercare National Centers,
Inc. f/k/a National Health Care Affiliates, Inc. |
|
Florida |
Genesis ElderCare Network Services
of Massachusetts, Inc. |
|
Pennsylvania |
Genesis Eldercare Network Services,
Inc. f/k/a Genesis Management Resources, Inc.
f/k/a Total Care Systems,
Inc. |
|
Pennsylvania |
Genesis ElderCare Partnership
Centers, Inc. |
|
Delaware |
Genesis Eldercare Physician Services,
Inc. f/k/a Genesis Physician Services, Inc.
f/k/a Genesis Health Ventures
Linen Services, Inc. |
|
Pennsylvania |
Genesis Eldercare Properties,
Inc. |
|
Pennsylvania |
Genesis Eldercare Rehabilitation
Management Services, Inc. f/k/a Robindale Medical Services, Inc. |
|
Pennsylvania |
Genesis Eldercare Staffing Services,
Inc. f/k/a Staff Replacement Services, Inc. f/k/a SRS Acquisition Corporation |
|
Pennsylvania |
Genesis Health Services Corporation |
|
Delaware |
Genesis Health Ventures of Arlington,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of Bloomfield,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of Clarks
Summit, Inc. |
|
Pennsylvania |
Genesis Health Ventures of Indiana,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of Lanham,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of Massachusetts,
Inc. |
|
Pennsylvania |
128
Back to Index
Entity Name |
|
State of
Organization |
|
Genesis Health Ventures
of New Garden, Inc. |
|
Pennsylvania |
Genesis Health Ventures of Point
Pleasant, Inc. |
|
Pennsylvania |
Genesis Health Ventures of Salisbury,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of Wayne,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of West
Virginia, Inc. |
|
Pennsylvania |
Genesis Health Ventures of Wilkes-Barre,
Inc. |
|
Pennsylvania |
Genesis Health Ventures of Windsor,
Inc. |
|
Pennsylvania |
Genesis Health Ventures, Inc. |
|
Pennsylvania |
Genesis Healthcare Centers Holdings,
Inc. |
|
Delaware |
Genesis Holdings, Inc. |
|
Delaware |
Genesis Immediate Med Center,
Inc. |
|
Pennsylvania |
Genesis Properties of Delaware
Corporation |
|
Delaware |
Genesis SelectCare Corp. |
|
Pennsylvania |
Genesis/VNA Partnership Holding
Company, Inc. |
|
Pennsylvania |
Genesis-Crozer Partnership Holding
Company, Inc. |
|
Pennsylvania |
Geriatric & Medical Companies,
Inc. f/k/a Geriatric & Medical Centers, Inc. |
|
Delaware |
Geriatric and Medical Services,
Inc. |
|
New Jersey |
Geriatric and Medical Investments
Corporation |
|
Delaware |
GeriMed Corp. |
|
Pennsylvania |
GHV at Salisbury Center, Inc. |
|
Pennsylvania |
Glenmark Associates, Inc. |
|
West Virginia |
Glenmark Associates-Dawn View
Manor, Inc. |
|
West Virginia |
Glenmark Properties, Inc. |
|
West Virginia |
GMA Partnership Holding Company,
Inc. |
|
West Virginia |
GMA-Brightwood, Inc. |
|
West Virginia |
GMA-Construction, Inc. |
|
West Virginia |
GMA-Madison, Inc. |
|
West Virginia |
GMA-Uniontown, Inc. |
|
Pennsylvania |
GMC Leasing Corporation |
|
Delaware |
GMC-LTC Management, Inc. |
|
Pennsylvania |
GMS Insurance Services, Inc. |
|
Pennsylvania |
GMS Management - Tucker, Inc. |
|
Pennsylvania |
GMS Management, Inc. |
|
Pennsylvania |
Governor's House Nursing Home,
Inc. |
|
Delaware |
H.O. Subsidiary, Inc. f/k/a HealthObjects,
Inc. |
|
Maryland |
Health Concepts and Services,
Inc. |
|
Maryland |
Health Resources of Academy Manor,
Inc. |
|
Delaware |
Health Resources of Arcadia,
Inc. |
|
Delaware |
Health Resources of Boardman,
Inc. |
|
Delaware |
Health Resources of Brooklyn,
Inc. |
|
Delaware |
Health Resources of Cedar Grove,
Inc. |
|
New Jersey |
Health Resources of Cinnaminson,
Inc. |
|
New Jersey |
Health Resources of Colchester,
Inc. |
|
Connecticut |
Health Resources of Columbus,
Inc. (f/k/a MRD Realty, Inc.) |
|
Delaware |
Health Resources of Cumberland,
Inc. |
|
Delaware |
Health Resources of Englewood,
Inc. |
|
New Jersey |
Health Resources of Ewing, Inc. |
|
New Jersey |
Health Resources of Farmington,
Inc. |
|
Delaware |
Health Resources of Gardner,
Inc. |
|
Delaware |
129
Back to Index
Entity Name |
|
State of
Organization |
|
Health Resources
of Glastonbury, Inc. |
|
Connecticut |
Health Resources of Groton, Inc. |
|
Delaware |
Health Resources of Karmenta
and Madison, Inc. |
|
Delaware |
Health Resources of Lakeview,
Inc. |
|
New Jersey |
Health Resources of Lemont, Inc, |
|
Delaware |
Health Resources of Marcella,
Inc. |
|
Delaware |
Health Resources of Morristown,
Inc. (f/k/a P.W.O.N. Associates, Inc.) |
|
New Jersey |
Health Resources of Norfolk,
Inc. |
|
Delaware |
Health Resources of North Andover,
Inc. |
|
Delaware |
Health Resources of Norwalk,
Inc. |
|
Connecticut |
Health Resources of Rockville,
Inc. |
|
Delaware |
Health Resources of Solomont/Brookline,
Inc. |
|
Delaware |
Health Resources of Troy Hills,
Inc. (f/k/a F.L. Associates, Inc.) |
|
New Jersey |
Health Resources of Wallingford,
Inc. |
|
Delaware |
Health Resources of Warwick,
Inc. (f/k/a GANCI Acquisition Corp. f/k/a RAC Acquisition Corp.) |
|
Delaware |
Health Resources of Westwood,
Inc. (f/k/a Health Resources of Rhode Island, Inc.) |
|
Delaware |
Healthcare Resources Corp. |
|
Pennsylvania |
HealthObjects Corporation f/k/a
Neighborware Health Systems, Inc. |
|
Maryland |
Helstat, Inc. |
|
West Virginia |
Hilltop Health Care Center, Inc. |
|
Delaware |
HMNH Realty, Inc. |
|
Delaware |
HNCA, Inc. |
|
Pennsylvania |
Horizon Associates, Inc. |
|
West Virginia |
Horizon Medical Equipment and
Supply, Inc. |
|
West Virginia |
Horizon Mobile, Inc. |
|
West Virginia |
Horizon Rehabilitation, Inc. |
|
West Virginia |
House of Campbell (The) |
|
West Virginia |
HR of Charlestown, Inc. |
|
West Virginia |
HRWV Huntington, Inc. |
|
West Virginia |
Innovative Health Care Marketing,
Inc. |
|
Pennsylvania |
Innovative Pharmacy Services,
Inc. |
|
New Jersey |
Institutional Health Care Services,
Inc. |
|
New Jersey |
Keystone Nursing Home, Inc. |
|
Delaware |
Knollwood Manor, Inc. |
|
Pennsylvania |
Knollwood Nursing Home, Inc.
|
|
Delaware |
Lakewood Health Resources, Inc. |
|
Delaware |
Laurel Health Resources, Inc. |
|
Delaware |
Liberty Health Corp. Ltd. |
|
Bermuda |
Life Support Medical Equipment,
Inc. |
|
Pennsylvania |
Life Support Medical, Inc. |
|
Pennsylvania |
Lincoln Nursing Home, Inc. |
|
Delaware |
LRC Holding Company |
|
Delaware |
LWNR, Inc. |
|
Delaware |
Mabri Convalescent Center, Inc. |
|
Connecticut |
Madison Avenue Assisted Living,
Inc. |
|
New Jersey |
Manor Management Corporation
of Georgian Manor, Inc. |
|
Pennsylvania |
Marlinton Partnership Holding
Company, Inc. |
|
West Virginia |
Marlinton Associates, Inc. |
|
West Virginia |
Marshfield Health Resources,
Inc. |
|
Delaware |
McKerley Health Care Center -
Concord, Inc. |
|
New Hampshire |
130
Back to Index
Entity Name |
|
State of
Organization |
|
McKerley Health Care
Centers, Inc. |
|
New Hampshire |
Medical Services Group, Inc. |
|
Maryland |
Meridian Health, Inc. f/k/a MI
Acquisition Corp. |
|
Pennsylvania |
Meridian Healthcare Investments,
Inc. |
|
Maryland |
Meridian Healthcare, Inc. f/k/a
MHC Acquisition Corp. |
|
Pennsylvania |
Metro Pharmaceuticals, Inc. |
|
Pennsylvania |
MHNR, Inc. |
|
Delaware |
MNR, Inc. |
|
Delaware |
Montgomery Nursing Homes, Inc. |
|
Pennsylvania |
Multicare AMC, Inc. |
|
Delaware |
Multicare Companies, Inc. (The)
(a/k/a Century Care Corporation in New Jersey) |
|
Delaware |
Multicare Home Health of Illinois,
Inc. |
|
Delaware |
Multicare Payroll Corp. |
|
New Jersey |
National Pharmacy Service, Inc. |
|
Pennsylvania |
NeighborCare Infusion Services,
Inc. f/k/a Vitalink Infusion Services, Inc. |
|
Delaware |
NeighborCare of Indiana, Inc.
f/k/a TeamCare of Indiana, Inc. |
|
Indiana |
NeighborCare of Northern California,
Inc. f/k/a CompuPharm of Northern California, Inc. |
|
California |
NeighborCare of Oklahoma, Inc.
f/k/a Vitalink Subsidiary, Inc. |
|
Oklahoma |
NeighborCare of Virginia, Inc.
f/k/a TeamCare of Virginia, Inc. |
|
Virginia |
NeighborCare of Wisconsin, Inc.
f/k/a GCI Innovative Pharmacy, Inc. |
|
Wisconsin |
NeighborCare Pharmacies, Inc. |
|
Maryland |
NeighborCare Pharmacy Services,
Inc. f/k/a Vitalink Pharmacy Services, Inc. |
|
Delaware |
NeighborCare-Medisco, Inc. f/k/a
Medisco Pharmacies, Inc. |
|
California |
NeighborCare-ORCA, Inc. f/k/a
White, Mack & Wart, Inc. d/b/a Propac Pharmacy |
|
Oregon |
NeighborCare-TCI, Inc. |
|
Delaware |
Ye Olde Ambulance Company, Inc.
f/k/a Network Ambulance Services, Inc. f/k/a Life Support Ambulance, Inc. |
|
Pennsylvania |
North Madison, Inc. |
|
West Virginia |
Northwestern Management Services,
Inc. |
|
Delaware |
Nursing and Retirement Center
of the Andovers, Inc. |
|
Massachusetts |
Oak Hill Health Care Center,
Inc. |
|
Virginia |
Pharmacy Equities, Inc. |
|
Pennsylvania |
PHC Operating Corp. |
|
Delaware |
Philadelphia Avenue Corporation |
|
Pennsylvania |
Pocahontas Continuous Care Center,
Inc. |
|
West Virginia |
Prescott Nursing Home, Inc. |
|
Massachusetts |
Professional Pharmacy Services,
Inc. |
|
Maryland |
Progressive Rehabilitation Centers,
Inc. (f/k/a Health Resources of Lakewood, Inc.) |
|
Delaware |
Prospect Park LTC Management,
Inc. |
|
Pennsylvania |
Providence Funding Corporation |
|
Delaware |
Providence Health Care, Inc. |
|
Delaware |
Providence Medical, Inc. |
|
Ohio |
Quakertown Manor Convalescent
and Rehabilitation, Inc. |
|
Delaware |
Rest Haven Nursing Home, Inc. |
|
West Virginia |
Ridgeland Health Resources, Inc. |
|
Delaware |
River Pines Health Resources,
Inc. |
|
Delaware |
Rivershores Health Resources,
Inc. |
|
Delaware |
RLNR, Inc. |
|
Delaware |
Rose Healthcare, Inc. |
|
New Jersey |
Roxborough Nursing Home, Inc. |
|
Pennsylvania |
131
Back to Index
Entity Name |
|
State of
Organization |
|
RSNR, Inc. |
|
Delaware |
RVNR, Inc. |
|
Delaware |
S.T.B. Investors, LTD |
|
New York |
Schuylkill Nursing Home, Inc. |
|
Pennsylvania |
Schuylkill Partnership Acquisition
Corp. |
|
Pennsylvania |
Scotchwood Massachusetts Holding
Co., Inc. |
|
Delaware |
Senior Living Ventures, Inc. |
|
Pennsylvania |
Senior Source, Inc. |
|
Massachusetts |
Snow Valley Health Resources,
Inc. |
|
Delaware |
Solomont Family Fall River Venture,
Inc. |
|
Massachusetts |
Solomont Family River Medford
Venture, Inc. |
|
Massachusetts |
State Street Associates, Inc.
(f/k/a Genesis Health Ventures of Brackenridge, Inc.) |
|
Pennsylvania |
Suburban Medical Services, Inc. |
|
Pennsylvania |
SVNR, Inc. |
|
Delaware |
TMC Acquisition Corp. f/k/a Troy
Hills Assisted Living, Inc. |
|
New Jersey |
Transport Services, Inc. |
|
Maryland |
Tri State Mobile Medical Services,
Inc. |
|
West Virginia |
NeighborCare Home Medical Equipment,
Inc. f/k/a United Health Care Services, Inc. |
|
Pennsylvania |
Valley Medical Services, Inc. |
|
Pennsylvania |
Valley Transport Ambulance Service,
Inc. |
|
Pennsylvania |
Versalink, Inc. |
|
Delaware |
Villas Realty & Investments,
Inc. |
|
Pennsylvania |
Walnut LTC Management, Inc. |
|
Pennsylvania |
Wayside Nursing Home, Inc. |
|
Delaware |
Weisenfluh Ambulance Service,
Inc. |
|
Pennsylvania |
West Phila. LTC Management, Inc. |
|
Pennsylvania |
Westford Nursing and Retirement
Center, Inc. |
|
Massachusetts |
Willow Manor Nursing Home, Inc. |
|
Massachusetts |
Wyncote Healthcare Corp. |
|
Pennsylvania |
York LTC Management, Inc. |
|
Pennsylvania |
ADS Home Health, Inc. |
|
Delaware |
ADS Management, Inc. a/k/a ADS/TMCI
Management, Inc. |
|
Massachusetts |
ADS Village Manor, Inc. |
|
Massachusetts |
ADS/Multicare, Inc. |
|
Delaware |
Bethel Health Resources, Inc. |
|
Delaware |
Century Care Management, Inc.
(f/k/a Century Management, Inc.) |
|
Delaware |
Chateau Village Health Resources,
Inc. |
|
Delaware |
ENR, Inc. |
|
Delaware |
Genesis Eldercare Rehabilitation
Services, Inc. f/k/a Team Rehabilitation, Inc. |
|
Pennsylvania |
Health Resources of Middletown
(RI), Inc. |
|
Delaware |
Lake Manor, Inc. |
|
Pennsylvania |
Rose View Manor, Inc. |
|
Pennsylvania |
Stafford Convalescent Center,
Inc. f/k/a MCV Realty, Inc. |
|
Delaware |
Arcadia Associates |
|
Massachusetts |
McKerley Health Facilities |
|
New Hampshire |
Automated HomeCare Systems, L.L.C |
|
Maryland |
Breyut Convalescent Center, L.L.C. |
|
New Jersey |
Encare of Mendham, L.L.C. |
|
New Jersey |
Genesis ElderCare Employment
Services, L.L.C. |
|
Delaware |
Genesis-Georgetown SNF/JV, L.L.C. |
|
Delaware |
132
Back to Index
Entity Name |
|
State of
Organization |
|
Glenmark Limited
Liability Company I |
|
West Virginia |
Health Resources of Bridgeton,
L.L.C. |
|
New Jersey |
Health Resources of Cinnaminson,
L.L.C. |
|
New Jersey |
Health Resources of Cranbury,
L.L.C. (merged with Health Resources of Cranbury, Inc. and
Cranbury Care
Center, Inc. (a non GEC entity) in 09/99) |
|
New Jersey |
Health Resources of Eatontown,
L.L.C. (merged with Laurel Associates, Inc., a non Multicare entity) |
|
New Jersey |
Health Resources of Emery, L.L.C, |
|
New Jersey |
Health Resources of Englewood,
L.L.C. |
|
New Jersey |
Health Resources of Ewing, L.L.C. |
|
New Jersey |
Health Resources of Fairlawn,
L.L.C. |
|
New Jersey |
Health Resources of Jackson,
L.L.C. |
|
New Jersey |
Health Resources of Ridgewood,
L.L.C. |
|
New Jersey |
Health Resources of South Brunswick,
LLC |
|
New Jersey |
Health Resources of West Orange,
L.L.C. |
|
New Jersey |
Main Street Pharmacy, L. L. C. |
|
Maryland |
Pompton Care, L.L.C. |
|
New Jersey |
Respiratory Health Services,
L. L. C. |
|
Maryland |
Roephel Convalescent Center,
L.L.C. |
|
New Jersey |
ADS Apple Valley Limited Partnership |
|
Massachusetts |
ADS Hingham Limited Partnership |
|
Massachusetts |
ASCO Healthcare of New England,
Limited Partnership |
|
Maryland |
Brevard Meridian Limited Partnership |
|
Maryland |
Care4, L.P. |
|
Delaware |
Catonsville Meridian Limited
Partnership |
|
Maryland |
Cumberland Associates of Rhode
Island, L.P. |
|
Delaware |
Easton Meridian Limited Partnership |
|
Maryland |
Edella Street Associates |
|
Pennsylvania |
Genesis ElderCare Centers I,
L. P. |
|
Delaware |
Genesis ElderCare Centers II,
L. P. |
|
Delaware |
Genesis ElderCare Centers III,
L. P. |
|
Delaware |
Genesis Health Ventures of West
Virginia, Limited Partnership |
|
Pennsylvania |
Genesis Properties Limited Partnership |
|
Pennsylvania |
Genesis Properties of Delaware
Ltd. Partnership, L.P. |
|
Delaware |
Greenspring Meridian Limited
Partnership |
|
Maryland |
Groton Associates of Connecticut,
L.P. |
|
Delaware |
Hammonds Lane Meridian Limited
Partnership |
|
Maryland |
Holly Manor Associates of New
Jersey, L.P. |
|
Delaware |
McKerley Health Care Center -
Concord Limited Partnership |
|
New Hampshire |
Mercerville Associates of New
Jersey, L.P. |
|
Delaware |
Meridian Edgewood Limited Partnership |
|
Maryland |
Meridian Perring Limited Partnership |
|
Maryland |
Meridian Valley Limited Partnership |
|
Maryland |
Meridian Valley View Limited
Partnership |
|
Maryland |
Meridian/Constellation Limited
Partnership |
|
Maryland |
Middletown (RI) Associates of
Rhode Island,L.P. |
|
Delaware |
Millville Meridian Limited Partnership |
|
Maryland |
Norristown Nursing and Rehabilitation
Center Associates, L.P. |
|
Pennsylvania |
North Cape Convalescent Center
Associates, L. P. |
|
Pennsylvania |
Northwest Total Care Center Associates,
L. P. |
|
New Jersey |
133
Back to Index
Entity Name |
|
State of
Organization |
|
Philadelphia Avenue
Associates |
|
Pennsylvania |
Point Pleasant Haven Limited
Partnership |
|
West Virginia |
Pompton Associates, L.P. |
|
New Jersey |
Raleigh Manor Limited Partnership |
|
West Virginia |
River Street Associates |
|
Pennsylvania |
Romney Health Care Center Ltd.,
Limited Partnership |
|
West Virginia |
Seminole Meridian Limited Partnership |
|
Maryland |
Sisterville Haven Limited Partnership |
|
West Virginia |
State Street Associates, L.P. |
|
Pennsylvania |
Straus Group-Hopkins House, L.P.
(The) |
|
New Jersey |
Straus Group-Old Bridge, L.P.
(The) |
|
New Jersey |
Straus Group-Quakertown Manor,
L.P. (The) |
|
New Jersey |
Straus Group-Ridgewood, L.P.
(The) |
|
New Jersey |
Teays Valley Haven Limited Partnership
|
|
West Virginia |
Therapy Care Systems, L.P. a/k/a
Therapy Care Systems Limited Partnership |
|
Pennsylvania |
Volusia Meridian Limited Partnership |
|
Maryland |
Wallingford Associates of Connecticut,
L.P. |
|
Delaware |
Warwick Associates of Rhode Island,
L.P. |
|
Delaware |
Westford Nursing and Retirement
Center, Limited Partnership |
|
Massachusetts |
ADS Recuperative Center Limited
Partnership |
|
Massachusetts |
Lake Washington, Ltd. |
|
Florida |
Alliance Pharmacy Services, L.L.C. |
|
Indiana |
Geneva Sub, Inc. |
|
Delaware |
Tidewater Healthcare Shared Services
Group, Inc. The f/k/a TW Acquisition Corp |
|
Pennsylvania |
Genesis Eldercare Rehabilitation
Services, Inc. f/k/a Team Rehabilitation, Inc. |
|
Pennsylvania |
134
EX-23
9
ex23.htm
EXHIBIT 23
Untitled Document
Back to Index
Exhibit 23 Consent of Independent Auditors
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.:
We consent to the incorporation
by reference in the registration statement on Form S3 (No. 333101004),
the registration statement on Form S4 (No. 33398941), and the registration
statements on Form S8 (No. 33382200, No. 33382208, No. 33383430,
No. 333100800) of Genesis Health Ventures, Inc. of our reports dated November
20, 2002, except as to note 25, which is as of December 15, 2002, with respect
to the consolidated balance sheets of Genesis Health Ventures, Inc. and subsidiaries
(the “Company”) as of September 30, 2002 and 2001, and the related
consolidated statements of operations, shareholders’ equity (deficit),
and cash flows for each of the years in the threeyear period ended September
30, 2002, and the related financial statement schedule, which reports appear
in the September 30, 2002 annual report on Form 10K of Genesis Health
Ventures, Inc.
Our reports contain an explanatory paragraph that refers to a change in accounting for the
costs of startup activities effective October 1, 1999.
In addition, our reports contain an
explanatory paragraph that states that on October 2, 2001 the Company consummated
a Joint Plan of Reorganization (the “Plan”) which had been confirmed
by the United States Bankruptcy Court. The Plan resulted in a change in ownership
of the Company and, accordingly, effective September 30, 2001 the Company accounted
for the change in ownership through “freshstart” reporting.
As a result, the consolidated information prior to September 30, 2001 is presented
on a different cost basis than that as of and subsequent to September 30, 2001
and, therefore, is not comparable.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 27, 2002
135
EX-99
10
ex99-1.htm
EXHIBIT 99-1
Untitled Document
Back to Index
Exhibit 99.1 CERTIFICATIONS PURSUANT
TO SECTION 906 OF THE SARBANESOXLEY ACT OF 2002
In connection with the filing of the
Genesis Health Ventures’ Annual Report on Form 10K for the period
ended September 30, 2002 with the Securities and Exchange Commission on the
date hereof (the “Report”), I Robert H. Fish, the principal executive
officer of Genesis Health Ventures, Inc, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002,
that:
1. |
|
The
Report fully complies with the requirements of section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and |
|
|
|
|
|
2. |
|
The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
|
Date: December 27, 2002
/s/ Robert H. Fish
____________________________
Robert H. Fish
136
EX-99
11
ex99-2.htm
EXHIBIT 99-2
Untitled Document
Back to Index
Exhibit 99.2 CERTIFICATIONS
PURSUANT TO SECTION 906 OF THE SARBANESOXLEY ACT OF 2002
In connection with the filing of the
Genesis Health Ventures’ Annual Report on Form 10K for the period
ended September 30, 2002 with the Securities and Exchange Commission on the
date hereof (the “Report”), I George V. Hager, Jr., the principal
financial officer of Genesis Health Ventures, Inc, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act
of 2002, that:
1. |
|
The
Report fully complies with the requirements of section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and |
|
|
|
|
|
2. |
|
The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
|
Date: December 27, 2002
/s/ George V. Hager, Jr.
George V. Hager, Jr.
137
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