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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES FORM 10-Q (Mark One) For the quarterly period
ended March 31, 2003 or For the transition period
from ___________________ to ___________________ Commission File Number:
000-33217 GENESIS HEALTH VENTURES, INC. N/A 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 Indicate by check mark whether the
registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). YES APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections
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 APPLICABLE ONLY TO CORPORATE ISSUERS. As of May 9, 2003: 39,580,793 shares
of the registrant’s common stock were outstanding and 261,441 shares are
to be issued in connection with the registrant’s joint plan of reorganization
confirmed by the Bankruptcy Court on September 20, 2001. TABLE OF CONTENTS CAUTIONARY STATEMENT 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: 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: 1 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. 2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements GENESIS HEALTH VENTURES, INC. See accompanying Notes to Unaudited
Condensed Consolidated Financial Statements. 3 GENESIS HEALTH VENTURES, INC. See accompanying Notes to Unaudited
Condensed Consolidated Financial Statements. 4 GENESIS HEALTH VENTURES, INC. See accompanying Notes to Unaudited
Condensed Consolidated Financial Statements. 5 GENESIS HEALTH VENTURES, INC. See accompanying Notes to Unaudited
Condensed Consolidated Financial Statements. 6 Genesis Health Ventures, Inc. and
Subsidiaries Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania corporation. As used herein, unless the context otherwise requires, “Genesis,” or the “Company,” refers to Genesis Health Ventures, Inc. and its subsidiaries. Genesis is a leading provider of healthcare and support services to the elderly. The Company’s operations are comprised of two primary business segments, inpatient services and pharmacy services. These segments are complemented by an array of other service capabilities. See note 3 “Strategic Planning, Severance and Other Related Costs”. Genesis provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. As of March 31, 2003, Genesis own, leases, manages or jointly-owns 245 eldercare centers with 29,835 beds, of which 27 centers having 3,482 beds have been identified as either held for sale or closed. See note 9 “Assets Held for Sale and Discontinued Operations”. Genesis includes the revenues of its owned and leased centers in inpatient services revenues in the unaudited condensed consolidated statements of operations. Management fees earned from the Company’s managed and / or jointly-owned eldercare centers are included in other revenues in the unaudited condensed consolidated statements of operations. Genesis provides pharmacy services nationwide through its NeighborCare® integrated pharmacy operation that serves approximately 251,000 institutional beds in long-term care settings. The Company also operates 31 community-based retail pharmacies. 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 unaudited condensed consolidated statements
of operations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2002. The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited condensed consolidated financial statements include all necessary adjustments consisting of normal recurring accruals and adjustments for a fair presentation of the financial position and results of operations for the periods presented. 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 unaudited condensed 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, long-lived
assets and loss reserves for self-insurance programs. Actual results could
differ from those estimates. 7 Genesis has incurred costs that are directly attributable to the Company’s long-term objective of
transforming to a pharmacy-based business
and certain of its short-term strategic objectives. These costs are expected to continue for the foreseeable future and are segregated in the unaudited
condensed consolidated statements of operations as “Strategic planning, severance and other related costs”. Details of these costs at
March 31, 2003 follow (in thousands): The Company receives 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 constrained
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 Company’s business. The Company monitors its receivables from third party payor programs and reports such revenues at the net realizable value expected to be received. On December 15, 2000, Congress passed
the Benefits Improvement Protection Act that increased the nursing component
of federal prospective payment system’s rates by approximately 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 resource utilization
group categories (“RUG”) to a 6.7% add-on 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 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 Genesis’ Medicare per diems per beneficiary, on average, by $34, resulting in reduced revenue of approximately $17.2 million in the Company’s first six months of fiscal 2003 (the Medicare Cliff). Effective October 1, 2002, Medicare rates adjusted for the Medicare cliff were increased by a 2.6% annual market basket adjustment. For Genesis, the net impact of these provisions is estimated to adversely impact annual revenue and EBITDA beginning October 1, 2002 by approximately $28 million. For Federal fiscal year 2003, the Centers for Medicare and Medicaid Services used their discretionary authority to continue the payment RUG add-ons. The recently released proposed Federal Budget for fiscal year 2004 suggests that the Centers for Medicare and Medicaid Services will extend the add-ons described in the previous paragraph for the coming year. This decision is reflected in proposed fiscal year 2004 skilled nursing facility prospective payment system rules issued mid-May, 2003. The proposed rules continue the payment add-ons under the same criteria. Additionally, under the proposed rules, fiscal year 2004 payments would be increased by the full market basket increase, or 2.9%. These proposed rules are subject to a 60 day comment period. The Centers for Medicare and Medicaid Services could make changes in the final rules. By law, final rules for coming fiscal year must be issued by August 1st. 8 There are additional provisions in
the Medicare statute affecting pharmacy, rehabilitation therapy, diagnostic
services and the payment for services in other health settings. In February
2003, Congress passed legislation adjusting practitioner fee schedules. The
Congressional action prevented a formula driven reduction in fee schedules.
This restoration of rates affected not only doctors, but also payment for
most professional practitioners including licensed rehabilitation professionals.
In addition, effective January 1, 2003, the moratorium on implementing payment
caps on Medicare Part B rehabilitation therapy services expired. The Centers
for Medicare and Medicaid Services has issued instructions indicating that
the agency will delay enforcement until mid-year and that the agency has
clarified that any implementation would be prospective from the date that
instructions are effective. Once effective, Medicare Part B therapy services
will be subject to the caps
which are expected to reduce revenues and EBITDA by approximately $17 million
and $3 million, respectively. Pharmacy coverage and cost containment
are important policy debates at both the federal and state levels.
In both his State of the Union Address and his budget message, the President
has highlighted his appeal for Medicare modernization and enactment of
a broader
Medicare outpatient drug benefit. Transforming Medicare was a major theme
of the President’s State of the Union address and his proposed fiscal
year 2004 budget. The recently passed First Congressional Budget Resolution
sets aside fiscal authority for implementing a new Medicare pharmacy benefit
program. However, it should be noted that the budget resolution is a non-binding
target. Many of these alternative payment provisions are expected to be considered during the 108th Congress either as part of consideration of the “Medicare Modernization” initiative or as freestanding legislation. It is premature to predict what actions the Congress will enact. Absent additional legislative authority, the Centers for Medicare and Medicaid Services has certain discretionary authority to adjust drug pricing. Effective January 2003, Centers for Medicare and Medicaid Services implemented a directive creating a single national calculation of “average wholesale price” for Medicare purchased drugs and biologicals. A number of states have enacted or
are considering containment initiatives affecting pharmacy services. 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. The recent economic downturn is having a detrimental affect on state revenues in most jurisdictions. Budget shortfalls range from 4-5% of outlays upwards to 20% of outlays in a handful of states. 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. State-specific details are just emerging as state legislatures begin the tasks of approving state budgets. It is not possible to quantify fully the effect of potential legislative or regulatory changes, the 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 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. 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. 9 In February 2003, Genesis’s board of directors approved in principle a plan to spin-off its eldercare operations to the shareholders of Genesis. In the spin-off, each of Genesis’s shareholders will receive a pro rata share of the voting common stock of ElderCare in a special dividend and ElderCare will become a separately traded, publicly held company. The spin-off is motivated by two business purposes: (1) to allow each business to pursue strategies and focus on objectives appropriate to that business, and to assume only those risks inherent in the respective businesses; and (2) to resolve problems that Genesis’s pharmacy services segment (NeighborCare) has with existing or potential customers who object to NeighborCare’s association with Genesis’ inpatient business
segment that competes with those customers. The inpatient services segment and pharmacy services segment are distinct businesses with significant
differences in their markets, products, investment needs and plans for growth. Genesis’s board of directors believes that a separation into
two independent public companies will enhance the ability of each to focus on strategic initiatives and new business opportunities, and to improve
cost structures and operating efficiencies. Following the spin-off, the operations of Genesis’s inpatient services segment, rehabilitation
therapy business, management services and certain other ancillary service businesses will operate under the name Genesis Healthcare Corporation (GHC). The spin-off is subject to several conditions, including financing and GHC’s receipt of an Internal Revenue Service ruling that, for U.S. federal income tax purposes, the spin-off generally will not be taxable. 10 Long-term debt at March 31, 2003 and September 30, 2002 consists of the following (in thousands): The Senior Credit Facility contains a provision requiring prepayment of amounts determined to be excess
cash flow calculated as 75% of cash operating profits, after capital investments, debt repayments and investments, including investments in working
capital, by December 31st of each year based upon earnings for the previous fiscal year. The Company expects that the majority of any proceeds received
upon the sale of assets classified as held for sale will be used to repay Senior Credit Facility debt unless reinvested in similar assets.
See note 17 “Subsequent Events”. During the quarter ended December 31, 2002, the Company repaid $23.8 million of debt
under the Senior Credit Facility pursuant to the excess cash flow recapture provisions. During the quarter ended March 31, 2003, the
Company repaid approximately $20.0 million of Senior Credit Facility Debt, principally with proceeds from the sale of assets. During the quarter ended December 31, 2002, the Company satisfied $16.0 million of mortgage
debt associated with three eldercare properties resulting in a gain on the early extinguishment of debt of $1.1 million. This gain was
reflected in the unaudited condensed consolidated statements of operations under net gain from break-up fee and other settlements. 11 The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six month periods ended March 31, 2003 and 2002 (in thousands, except per share data): Basic earnings per share is calculated by dividing earnings (numerator) by the weighted average number of shares of common stock outstanding during the respective reporting period (denominator). Included in the calculation of basic weighted average shares of 41,641,179 for the current quarter and 41,594,523 for the six months ended are approximately 550,000 shares to be issued in connection with our joint plan of reorganization confirmed by the bankruptcy court. Diluted earnings per share is calculated
in a manner consistent with basic earnings per share except, where applicable,
earnings are increased for the assumed elimination of preferred stock dividend
requirements and the weighted average shares outstanding are increased to
include additional shares from the assumed conversion of preferred stock.
The conversion of preferred stock is assumed for the diluted per share calculation
for the three and six month periods ended March 31, 2002 since their effect
is dilutive. The conversion of preferred stock is not assumed for the diluted
per share calculation for the current quarter since their effect is antidilutive.
The diluted per share calculation of income from continuing operations assumes
the conversion of preferred stock for the six months ended March 31, 2003
as the effect of their conversion is dilutive in that period, however, the
conversion of preferred shares is not assumed in the diluted per share calculation
of loss from discontinued operations or the net income attributed to common
shareholders in that period since their effect is antidilutive. No exercise
of warrants or employee stock options is assumed for the three or six month
periods ended March 31, 2003 or 2002 since their effect is antidilutive. 12 The following table sets forth the computation of comprehensive income for the current quarter and year-to-date compared to the same periods last year (in thousands): During the current fiscal year, all eldercare centers located in the state of Florida, seven eldercare centers located in other states, one rehabilitation clinic and one physician services practice in the state of Maryland, and an internet-based business-to-business joint venture partnership were either held for sale or closed. During fiscal 2002, the Company classified its ambulance business, all eldercare centers located in the states of Wisconsin and Illinois, six eldercare centers in other states and one medical supply distribution site as discontinued. The results of operations in the current and prior year periods, along with any costs to exit such businesses, have been classified as discontinued operations in the unaudited condensed consolidated statements of operations. Interest expense has been allocated to discontinued operations for all periods presented based on debt expected to be repaid in connection with the sale of the assets. The amount of interest expense allocated to discontinued operations for the quarters ended March 31, 2003 and 2002, was $1.3 million and $1.6 million, respectively (after tax, the net impact of these allocations to the loss from discontinued operations is $0.8 million and $1.0 million, respectively). The same allocation for the year-to-date periods through March 31, 2003 and 2002 was $2.8 million and $3.3 million, respectively (after tax, the net impact of these allocations to the loss from discontinued operations is $1.7 million and $2.0 million, respectively). The current portion of the Company’s assets held for sale at March 31, 2003 of $40.3 million is principally related to its properties located in the state of Florida. See note 17 “Subsequent Events”. The long-term portion of the Company’s assets held for sale at March 31, 2003 is primarily related to its properties located in the state of Wisconsin ($17.5 million). 13 The following table sets forth the components of loss from discontinued operations for the current quarter and year-to-date compared to the same periods last year (in thousands): The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value. 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 its 160 owned and leased eldercare centers. 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 operated by Genesis, as well as to independent healthcare providers by contract. The Company provides these services through 59 institutional pharmacies and 16 medical supply and home medical equipment distribution centers located in its various market areas. In addition, the Company operates 31 community-based pharmacies which are located in or near medical centers, hospitals and physician office complexes. For the current year-to-date, 94% 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. Summarized financial information
concerning the Company’s reportable segments is shown in the following
table for the current quarter and year-to-date, compared with the same periods
last year. The “All other services” category of revenues and EBITDA
represents operating information of business units below the prescribed quantitative
thresholds under the Financial Accounting Standards Board Statement No. 131,
“Disclosures about Segments of an Enterprise and Related Information”.
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 non-reportable segments. 14 The following asset information by segment is as of the end of each period presented. 15 At March 31, 2003 and September 30, 2002, the Company reported restricted investments in marketable securities of $87.6 million and $86.1 million, respectively, which are held by Liberty Health Corp. LTD. (“LHC”), Genesis’ wholly-owned captive insurance subsidiary incorporated under the laws of Bermuda. The investments held by LHC are restricted by statutory capital requirements in Bermuda. In addition, certain of these investments are pledged as security for letters of credit issued by LHC. As a result of such restrictions and encumbrances, Genesis and LHC are precluded from freely transferring funds through inter-company loans, advances or cash dividends. The Company’s restricted investments in marketable securities are classified in the unaudited condensed consolidated balance sheets within both current and non-current assets. The current portion of restricted investments in marketable securities represents an estimate of the level of outstanding self-insured losses the Company expects to pay in the succeeding twelve months. In December 2002, the Company entered into a termination and settlement agreement with Omnicare, Inc., whereby the Company agreed to terminate a merger agreement it had entered into with NCS Healthcare, Inc., a provider of institutional pharmacy services. Pursuant to the termination and settlement agreement, the Company agreed to terminate the merger agreement with NCS and Omnicare agreed to pay the Company a $22 million break-up fee. On December 16, 2002, the Company terminated the merger agreement. The Company recognized the break-up fee net of $11.8 million of financing, legal and other costs directly attributable to the proposed merger with NCS. The Company collected $6 million of the break-up fee in December 2002, with the remaining $16 million received in January 2003. In December 2002, the Company satisfied $16 million of mortgage debt associated with three eldercare properties resulting in a gain on the early extinguishment of debt of $1.1 million. 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 interest rate swaps and caps to manage changes in market conditions related to debt obligations. As of March 31, 2003, the Company has a $75 million swap maturing on September 13, 2005, to pay fixed (3.1%) / receive variable (one month LIBOR) and a $125 million swap maturing on September 13, 2007, to pay fixed (3.77%) / receive 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 plus 3%) in those periods
in which LIBOR exceeds 3%. The Company purchased the interest rate cap for $0.7 million which is being amortized to interest expense over the two year term of the agreement. As a component of interest expense, we recorded $1.2 million and $2.2 million of net interest outflows in the current quarter and year-to-date, respectively, for the interest rate swaps and amortization of the rate cap. Based upon confirmations from third party financial institutions, the fair value of the interest rate swap agreements and the interest rate cap agreement is a liability of $6.7 million and an asset of $0.1 million, respectively, at March 31, 2003, which are included in other long-term liabilities in our unaudited condensed consolidated balance sheet. 16 The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based 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): The fair value of stock options granted in 2003 and 2002 is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions for 2003 and 2002: The Company's provision for income taxes from continuing operations for the six months ended March 31, 2003 and 2002 was $18.1 million and $29.7 million, respectively. During the six months ended March 31, 2003 and 2002, the Company utilized Net Operating Loss ("NOL") carryforwards of $0 and $4.4 million, respectively. Pursuant to SOP 90-7, the income tax benefit of any NOL carryforward utilization is applied first as a reduction to goodwill. Tax benefits from utilization of NOL carryforwards, will be recorded at such time and to such extent they are assured beyond a reasonable doubt. 17 In January 2003, FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" with the objective of improving financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a va
riable interest entity is called the "primary beneficiary" of that entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003, with early adoption permitted. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company adopted FIN 46 in January 2003 and, as a result, began consolidating one of its joint venture partnerships that operates four eldercare centers. Genesis holds a majority of the related financial risks and rewards, despite the Company’s lack of voting control in this partnership. This partnership
has assets of $7.3 million, annual revenues of approximately $15.5 million, and de minimus net income. The Company wrote-off $1.7 million of long-term assets related to this partnership, which the Company concluded were impaired. The Company has decided to sell the partnership and expects the sale to occur by the end of Fiscal 2003. Accordingly, the Company has included the results of this entity in the loss from discontinued operations, net of taxes, in its unaudited condensed consolidated statements of operations. In February 2003, the Company announced that it had reached two separate agreements to sell its eldercare assets located in the state of Florida.
In one transaction, Genesis sold four assisted living facilities for $8.5 million in April 2003. In a separate transaction completed in May 2003,
Genesis sold nine skilled nursing facilities and transferred leasehold rights in one skilled nursing facility and one assisted living facility for
$26.3 million, of which $6 million is in the form of a sellers note receivable. The results of these businesses were accounted for as discontinued
operations in the three and six month periods ended March 31, 2003 and 2002. Subsequent to March 31, 2003, the Company made an offer to its employees to tender all their options to
purchase shares of the Company's common stock outstanding under its 2001 Stock Option Plan. The offer included an accelerated vesting of all restricted
shares under its 2001 Stock Incentive Plan. The transaction was expected to be completed in the third fiscal quarter of 2003 with a cost of
approximately $7.5 million ($1.6 million cash). 18 Item 2. 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, inpatient services and pharmacy 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 inpatient services through
skilled nursing and assisted living centers primarily located in the eastern
United States. As of May 2003, we own, lease, manage or jointly-own 229 eldercare
centers with 27,947 beds, of which 11 centers having 1,594 beds have been
identified as either assets held for sale or closed. We include the revenues
of our owned and our leased centers in inpatient services revenues in our
unaudited condensed consolidated statements of operations. Management fees
earned from our managed and/or jointly-owned centers are included in other
revenues in our unaudited condensed consolidated statements of operations. We provide pharmacy services nationwide
to approximately 251,000 beds through 59 institutional pharmacies (five are
jointly-owned) and 16 medical supply and home medical equipment distribution
centers (four are jointly-owned). In addition, we operate 31 community-based
retail pharmacies (two are jointly-owned) which are located in or near medical
centers, hospitals and physician office complexes. 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 unaudited condensed consolidated statements of operations. Certain Transactions and Events 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. 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 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 United States Code with the Bankruptcy Court. We and Multicare emerged from bankruptcy on October 2, 2001 and Multicare became our wholly-owned subsidiary. 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 services 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. 19 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: 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 our pharmacy segment. In addition to our long-term strategy to invest in our pharmacy segment, management established the following short-term strategic objectives: Our progress
to date on each of these objectives is as follows: 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® began implementation of certain best demonstrated practice initiatives. These initiatives were being implemented in all of our pharmacy regions in the second fiscal quarter of 2003. 20 Pursue operational efficiencies in our 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. In January 2003, we named Robert H. Fish as permanent chairman of the board of directors and chief executive officer. Mr. Fish served as our interim chief executive officer since May 2002. 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. On February 6, 2003,
we sold eight skilled nursing centers located in the state of Illinois for
cash of $22.3 million. In February 2003, we also announced that we had reached
two separate agreements to sell our eldercare assets located in the state
of Florida. In one transaction, we sold four assisted living facilities for
$8.5 million in April 2003. In a separate transaction completed in May 2003,
we sold nine skilled nursing facilities and transferred leasehold rights in
one skilled nursing facility and one assisted living facility for $26.3 million,
of which $6 million is in the form of a sellers note receivable. See note
17 “Subsequent Events” in our notes to unaudited condensed
consolidated financial statements. In October 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 business. In February 2003, our board of directors approved in principle a plan to spin-off our eldercare operations to our shareholders. Following the spin-off, the operations of our inpatient services segment, rehabilitation therapy business, management services and certain other ancillary service businesses will operate under the name Genesis Healthcare Corporation (GHC). In the spin-off, each of our shareholders will receive a pro rata share of the voting common stock of GHC in a special dividend declared by us and GHC will become a separately traded, publicly held company. The spin-off is motivated by two business purposes: (1) to allow each business to pursue strategies and focus on objectives appropriate to that business, and to assume only those risks inherent in the respective businesses; and (2) to resolve problems that our NeighborCare® pharmacy services segment has with existing or potential customers who object to NeighborCare’s association with our inpatient business segment that competes with those customers. The inpatient services segment and pharmacy services segment are distinct businesses with significant differences in their markets, products, investment needs and plans for growth. Our board of directors believes that a separation into two independent public companies will enhance the ability of each to focus on strategic initiatives and new business opportunities, and to improve cost structures and operating efficiencies. The spin-off is subject to several conditions, including financing and GHC’s receipt of an Internal Revenue Service ruling that, for U.S. federal income tax purposes, the spin-off generally will not be taxable. 21 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. Certain of these costs are expected to continue for the foreseeable future and are segregated in the unaudited condensed consolidated statement of operations as “Strategic planning, severance and other related costs”. Details of these costs follow (in thousands): Severance and related costs. 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 March 31, 2003, $0.8 million remained unpaid, which is expected to be paid during fiscal 2003. 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 recognized $4.8 million in severance and related costs in the first fiscal quarter of 2003 in connection with Mr. Howard’s transition agreement. The final payment of this agreement was made in the current quarter. We expect to recognize an additional
$9.6 million of employee benefit and related costs in the remainder of Fiscal
2003. The majority of these costs will relate to our offer to our employees
to tender all their options to purchase shares of our common stock outstanding
under our 2001 Stock Option Plan and the accelerated vesting of all restricted
shares under the 2001 Stock Incentive Plan (see “Liquidity
and Capital Resources”). See “Cautionary Statement Regarding
Forward Looking Statements”. Strategic consulting costs. During the current quarter and year-to-date, we incurred strategic consulting costs of $2.6 million and $5.0 million, respectively, in connection with several of our new strategic objectives. Initially, these strategic consulting firms were engaged to assist our 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 or spin-off of the eldercare business. We recognize the cost of such consulting fees as the services are performed, and expect to incur $1.5 million of additional consulting fees through the fourth quarter of 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 profitability by as much as $18 million per year. See “Cautionary Statement Regarding Forward Looking Statements”. Mariner Pharmacy Services Agreement On May 1, 2003, we were notified
by Mariner Health Care, Inc. (Mariner) that it intends to terminate its pharmacy
services agreements with NeighborCare. The effective dates of the terminations
vary by Mariner facility and all occur in our fourth quarter of fiscal 2003.
In the six months ended March 31, 2003 we recognized $19.7 million of revenue
under these contracts, or approximately 3% and 1.5% of NeighborCare’s
and Genesis’ revenue, respectively. We do not believe that the termination
of these agreements will have a material adverse impact on our business. 22 Proposed NCS Transaction 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 our 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. 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 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 related 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, 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 a $22.0 million break-up fee. 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. We recognized the break-up fee net of $11.8 million of financing, legal and other costs directly attributable to the proposed NCS Transaction. We collected $6.0 million of the break-up fee in December 2002, and the remaining $16.0 million in January 2003. Amended Pharmacy Service Agreements On August 15, 2002, we announced that we and HCR Manor Care, Inc. agreed to withdraw all outstanding legal actions against each other stemming from the acquisition by our subsidiary, NeighborCare ®, of HCR Manor Care’s pharmacy subsidiary, Vitalink. We and HCR Manor Care also agreed to withdraw the prior pharmacy service agreement that was set to expire in 2004 and entered into a new pharmacy service agreement. The new pharmacy service agreement runs through January 2006 and covers approximately 200 of HCR Manor Care’s facilities. The pricing in the new pharmacy service agreement was reduced by approximately $12.8 million annually based upon then current sales volumes. In September 2002, we were awarded a contract to serve 6,892 beds owned by the State of New Jersey under a three year agreement with the option for two one year extensions. NeighborCare was the predecessor pharmacy serving these beds under a 1996 agreement of an initial term of three years which was extended through September 30, 2002. The new contract was awarded through New Jersey’s competitive bidding process, and was bid by us at reimbursement rates lower than the prior agreement. The revenue reduction associated with the new pharmacy agreement was approximately $7.2 million annually based upon then current sales volumes. 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 provides order intake, warehousing, delivery and invoicing services. NeighborCare earns 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 no longer recognizes revenue for the sale of bulk medical supplies to its customers. The agreement does not include certain products and services that NeighborCare continues to sell directly to customers. It is estimated that the agreement will result in an annual reduction of pharmacy service revenue of approximately $48 million with no significant impact on operating or net income. 23 Assets Held for Sale and Discontinued Operations During the current fiscal year, all eldercare centers in the state of Florida, seven eldercare centers located in other states, one rehabilitation clinic and one physician services practice in the state of Maryland, and an internet-based business-to-business joint venture partnership were either held for sale or closed. During fiscal 2002, we classified our ambulance business, all eldercare centers located in the states of Wisconsin and Illinois, six eldercare centers in other states and one medical supply distribution site as discontinued. The results of operations in the current and prior year periods, along with any costs to exit such businesses have been classified as discontinued operations in the unaudited condensed consolidated statements of operations. Interest expense has been allocated to discontinued operations for all periods presented based on debt to be repaid in connection with the sale of the assets as required under the Senior Credit Facility (as defined in “ Liquidity and Capital Resources”). The amount of net interest expense allocated to discontinued operations for the quarters ended March 31, 2003 and 2002, was $1.3 million and $1.6 million, respectively (after tax, the net impact of these allocations to the loss from discontinued operations is $0.8 million and $1.0 million, respectively). The same allocation for the year-to-date periods through March 31, 2003 and 2002 was $2.8 million and $3.3 million, respectively (after tax, the net impact of these allocations to the loss from discontinued operations is $1.7 million and $2.0 million, respectively). The current portion of our assets held for sale at March 31, 2003 of $40.3 million is principally related to our properties located in the state of Florida. See note 17 “Subsequent Events”. The long-term portion of our assets held for sale at March 31, 2003 is primarily related to our properties located in the state of Wisconsin ($17.5 million). The following table sets forth the components of loss from discontinued operations for the current quarter and year-to-date compared to the same periods last year (in thousands): The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value. Results of Operations Factors Affecting Comparability of Financial Information Financial information for the quarter and fiscal year-to-date as of March 31, 2003 and 2002 has been adjusted to exclude operations identified as discontinued since our September 30, 2001 adoption of SFAS No. 144. Properties identified as 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”. 24 Reasons for Non-GAAP Financial Disclosure The following discussion contains non-GAAP financial measures. For purposes of
Securities and Exchange Commission Regulation G, a non-GAAP financial measure is a numerical measure of a registrant’s historical or future
financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts,
that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of operations, balance
sheets or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect
of including amounts, that are excluded from the most directly comparable measure so calculated and presented. In this regard, GAAP refers to generally
accepted accounting principles in the United States. Pursuant to the requirements of Regulation G, we have provided reconciliations of the non-GAAP
financial measures to the most directly comparable GAAP financial measures. EBITDA is a non-GAAP financial measure that is presented in the following discussion.
Management believes that the presentation of EBITDA provides useful information to investors regarding our financial condition and results of
operations because EBITDA is useful for evaluating our capacity to incur and service debt, to fund capital expenditures, to expand our business
and to determine the value of our business. We also use EBITDA in our annual budget process. We believe EBITDA facilitates internal comparisons
to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. We define EBITDA as earnings before
interest, taxes, depreciation and amortization of our continuing operations.
EBITDA is calculated through our unaudited condensed consolidated statements
of operations by adding back interest, income tax expense, depreciation and
amortization, equity in net income (loss) of unconsolidated affiliates, minority
interest, preferred stock dividends, debt restructuring and reorganization
costs and net expense (gain) from break-up fee and other settlements to our
income from continuing operations. Other companies may define EBITDA differently
and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of
other companies. EBITDA does not represent income from continuing operations
or cash flow from operations, as defined by generally accepted accounting
principles in the United States. EBITDA should not be considered as a substitute
for these GAAP financial measures, or as an indicator of operating performance
or whether cash flows will be sufficient to fund cash needs, including the
servicing of our debt. Second Quarter Ended March 31, 2003 Compared to Second Quarter Ended March 31, 2002
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Exact name of registrant as specified
in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
Kennett Square, Pennsylvania
(Address of principal executive offices)
(Zip code)
(Registrant's telephone number, including
area code) (610) 444-6350
(Former name, former address and former fiscal year, if changed since
last report) NO
(1) NO
(1)
The registrant meets the definition of “accelerated
filer” (as defined by Rule 12b-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 after December 15, 2002. Accordingly, such rules do not currently
apply to the registrant.
NO
Certain statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and the notes to our unaudited condensed 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 our business; the expected increase
in Medicare rates projected for fiscal 2004; our ability to successfully
implement our strategic objectives, including the completion and the effects
of the spin-off of our eldercare business, the achievement of certain performance
improvement initiatives within our pharmacy services segment in order to
improve current pharmacy profitability, and the sale of certain assets;
the expected reduction of pharmacy service revenue as a result of the medical
supplies service agreement with Medline; the expected effects of the termination
of our pharmacy services agreement with Mariner; the expected strategic
planning, severance and other related costs in fiscal 2003 and the foreseeable
future; estimates in our critical accounting policies including, our allowance
for doubtful accounts, any anticipated impact of long-lived asset impairments
and our ability to provide for loss reserves for self-insured programs;
and the expected repayments of
Senior Credit Facility debt.
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;
the expiration of enactments
providing for additional governmental funding;
changes in pharmacy legislation
and payment formulas;
the impact of federal and state
regulations;
changes in payor mix and payment
methodologies;
further consolidation of managed
care organizations and other third party payors;
competition in our businesses;
an increase in insurance costs
and potential liability for losses not covered by, or in excess of, our
insurance;
competition for qualified staff
in the healthcare industry;
our ability to control operating
costs and generate sufficient cash flow to meet operational and financial
requirements;
an economic downturn or changes
in the laws affecting our business in those markets in which we operate;
the impact of our reliance on
one pharmacy supplier to provide a significant portion of our pharmacy products;
the impact of acquisitions and/or
a spin-off of our eldercare business;
the ability to implement and
achieve certain strategic objectives;
the difficulty in evaluating
certain of our financial information due to a lack of comparability following
the emergence from bankruptcy; and
acts of God or public authorities,
war, civil unrest, terrorism, fire, floods, earthquakes and other matters
beyond our control.
Certain of these risks are described
in more detail in our Annual Report on Form 10-K.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND SEPTEMBER 30, 2002
(IN THOUSANDS)
March 31, 2003
September 30, 2002
Assets:
Current assets:
Cash
and equivalents
$
133,481
$
148,030
Restricted
investments in marketable securities
15,850
15,074
Accounts
receivable, net
370,243
369,969
Inventory
68,003
64,734
Prepaid
expenses and other current assets
46,586
47,850
Assets held
for sale
40,314
46,134
Total
current assets
674,477
691,791
Property, plant and equipment,
net
743,241
795,928
Assets held
for sale
21,551
Restricted investments in marketable
securities
71,769
71,073
Other long-term
assets
39,823
51,042
Investments in unconsolidated
affiliates
12,084
14,143
Identifiable
intangible assets, net
24,726
25,795
Goodwill
341,854
339,723
Total
assets
$
1,929,525
$
1,989,495
Liabilities and Shareholders’
Equity:
Current liabilities:
Current
installments of long-term debt
$
53,606
$
40,744
Accounts
payable and accrued expenses
181,100
202,041
Total
current liabilities
234,706
242,785
Long-term debt
571,616
648,939
Deferred income
taxes
50,089
37,191
Self-insurance
liability reserves
52,347
42,019
Other long-term
liabilities
48,787
48,989
Minority interests
10,901
10,684
Redeemable
preferred stock, including accrued dividends
46,114
44,765
Shareholders’
equity
914,965
914,123
Total
liabilities and shareholders’ equity
$
1,929,525
$
1,989,495
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months
Ended
Three Months
Ended
March 31, 2003
March 31, 2002
Net revenues:
Inpatient
services
$
298,638
$
299,139
Pharmacy services
302,844
279,179
Other
revenue
46,070
42,101
Total
net revenues
647,552
620,419
Operating expenses:
Salaries,
wages and benefits
279,015
258,743
Cost of sales
190,017
178,425
Other
operating expenses
124,038
122,663
Strategic planning,
severance and other related costs
2,593
Net expense
(gain) from break-up fee and other settlements
969
(21,678
)
Depreciation and amortization
expense
16,083
14,686
Lease expense
6,957
6,368
Interest expense
9,889
10,862
Income before debt restructuring
and reorganization costs, income tax expense,
equity in
net income (loss) of unconsolidated affiliates and minority interests
17,991
50,350
Debt restructuring and reorganization
costs
1,700
Income before income tax expense,
equity in net income (loss)
of unconsolidated
affiliates and minority interests
17,991
48,650
Income tax expense
7,018
18,974
Income before equity in net income
(loss) of unconsolidated affiliates and minority interests
10,973
29,676
Equity in net income (loss) of
unconsolidated affiliates
541
(141
)
Minority interests
(1,180
)
(595
)
Income from continuing operations
before preferred stock dividends
10,334
28,940
Preferred stock dividends
666
630
Income from continuing operations
9,668
28,310
Loss from discontinued operations,
net of taxes
(5,004
)
(3,367
)
Net income attributed to common
shareholders
$
4,664
$
24,943
Per Common Share Data:
Basic:
Income from
continuing operations
$
0.23
$
0.69
Loss from discontinued
operations
(0.12
)
(0.08
)
Net income
$
0.11
$
0.61
Weighted average
shares
41,641,179
41,168,498
Diluted:
Income from
continuing operations
$
0.23
$
0.67
Loss from discontinued
operations
(0.12
)
(0.08
)
Net income
$
0.11
$
0.59
Weighted average
shares
41,641,179
43,300,745
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2003
AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Six Months Ended
Six Months Ended
March 31, 2003
March 31, 2002
Net revenues:
Inpatient
services
$
601,533
$
596,634
Pharmacy services
597,911
551,784
Other
revenue
89,119
81,447
Total
net revenues
1,288,563
1,229,865
Operating expenses:
Salaries,
wages and benefits
553,468
512,907
Cost of sales
376,769
350,524
Other
operating expenses
246,523
246,019
Strategic planning,
severance and other related costs
9,838
Net gain from
break-up fee and other settlements
(11,337
)
(21,678
)
Depreciation and amortization
expense
32,195
29,309
Lease expense
13,903
13,084
Interest expense
20,809
21,928
Income before
debt restructuring and reorganization costs, income tax expense,
equity
in net income of unconsolidated affiliates and minority interests
46,395
77,772
Debt restructuring and reorganization
costs
1,700
Income before
income tax expense, equity in net income of unconsolidated affiliates and
minority interests
46,395
76,072
Income tax expense
18,095
29,668
Income before
equity in net income of unconsolidated affiliates and minority interests
28,300
46,404
Equity in net income of unconsolidated
affiliates
592
391
Minority interests
(2,295
)
(752
)
Income from
continuing operations before preferred stock dividends
26,597
46,043
Preferred stock dividends
1,349
1,260
Income from
continuing operations
25,248
44,783
Loss from discontinued operations,
net of taxes
(8,647
)
(4,241
)
Net income
attributed to common shareholders
$
16,601
$
40,542
Per Common Share Data:
Basic:
Income
from continuing operations
$
0.61
$
1.09
Loss from discontinued
operations
(0.21
)
(0.10
)
Net
income
$
0.40
$
0.99
Weighted average
shares
41,594,523
41,102,279
Diluted:
Income
from continuing operations
$
0.61
$
1.07
Loss from discontinued
operations
(0.21
)
(0.10
)
Net
income
$
0.40
$
0.97
Weighted average
shares income from continuing operations
43,829,594
43,230,208
Weighted
average shares net income
41,594,523
43,230,208
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
Six Months Ended
Six Months Ended
March 31, 2003
March 31, 2002
Cash flows from operating activities:
Net income
attributed to common shareholders
$
16,601
$
40,542
Net charges
included in operations not requiring funds
63,019
59,895
Changes in
assets and liabilities:
Accounts
receivable
(22,742
)
(16,247
)
Accounts
payable and accrued expenses
(7,622
)
24,585
Refinancing
of pharmacy supplier credit terms
(42,000
)
Receipt
of break-up fee, net of costs
10,580
Other,
net
4,761
125
Net cash provided
by operating activities before debt restructuring and reorganization costs
64,597
66,900
Cash paid for
debt restructuring and reorganization costs
(993
)
(32,182
)
Net cash provided
by operating activities
63,604
34,718
Cash flows from investing activities:
Capital expenditures
(26,952
)
(19,973
)
Net sales (purchases)
of restricted marketable securities
(909
)
(13,039
)
Acquisition
of rehabiliation services business
(5,436
)
Sale (purchase)
of eldercare assets
29,556
(10,453
)
Other
6,022
5,245
Net cash provided
by (used in) investing activities
2,281
(38,220
)
Cash flows from financing activities:
Repayment of
long-term debt and payment of sinking fund requirements
(63,496
)
(34,349
)
Proceeds from
issuance of long-term debt
80,000
Repurchase
of common stock
(16,938
)
Net cash (used
in) provided by financing activities
(80,434
)
45,651
Net increase (decrease) in cash
and equivalents
$
(14,549
)
$
42,149
Cash and equivalents:
Beginning of period
148,030
32,139
End of period
$
133,481
$
74,288
Supplemental cash flow information:
Interest paid
$
21,093
$
26,932
Income taxes
paid, net
1,916
1,052
Non-cash financing
activities:
Capital
leases
2,592
741
Notes To Unaudited Condensed Consolidated Financial Statements
1.
Business
2.
Basis of Presentation
3.
Strategic Planning, Severance and Other Related Costs
September 30,
Six
Months Ended March 31, 2003
March 31,
Provision
Paid
Severance and
related costs
$
1,100
$
4,868
$
5,198
$
770
Strategic consulting
costs
621
4,970
4,308
1,283
Total
$
1,721
$
9,838
$
9,506
$
2,053
4.
Certain Significant Risks and Uncertainties
5.
Significant Transactions and Events
6.
Long-Term Debt
March 31,
September 30,
2003
2002
Secured debt
Senior
Credit Facility
Term
Loan
$
247,787
$
281,575
Delayed
Draw Term Loan
69,074
79,239
Total
Senior Credit Facility
316,861
360,814
Senior
Secured Notes
240,176
242,602
Mortgage
and other secured debts
68,185
86,267
Total debt
625,222
689,683
Less:
Current
installments of long-term debt
(53,606
)
(40,744
)
Long-term debt
$
571,616
$
648,939
7.
Earnings (Loss) Per Share
Three
Three
Six
Six
months
ended
months
ended
months
ended
months
ended
March 31, 2003
March 31, 2002
March 31, 2003
March 31, 2002
Earnings (loss) used in computation:
Income from continuing operations
basic computation
$
9,668
$
28,310
$
25,248
$
44,783
Elimination of preferred stock
dividend requirements upon assumed
conversion of preferred stock
630
1,349
1,260
Income from continuing operations
diluted computation
$
9,668
$
28,940
$
26,597
$
46,043
Loss from discontinued operations
basic and diluted computation
$
(5,004
)
$
(3,367
)
$
(8,647
)
$
(4,241
)
Net income attributed to common
shareholders basic computation
$
4,664
$
24,943
$
16,601
$
40,542
Elimination of preferred stock
dividend requirements upon
assumed conversion of preferred stock
630
1,260
Net income diluted computation
$
4,664
$
25,573
$
16,601
$
41,802
Shares used in computation:
Weighted average shares outstanding
basic computation
41,641
41,168
41,595
41,102
Assumed conversion of preferred
stock
2,095
2,235
2,095
Contingent consideration related
to an acquisition
38
33
Weighted average shares outstanding
diluted computation,
income from continuing operations and loss from discontinued
operations
41,641
43,301
43,830
43,230
Less assumed conversion of preferred
stock
(2,235
)
Weighted average shares outstanding
diluted computation,
net income attributed to common shareholders
41,641
43,301
41,595
43,230
Earnings per common share:
Basic:
Income from continuing operations
$
0.23
$
0.69
$
0.61
$
1.09
Loss from discontinued operations
(0.12
)
(0.08
)
(0.21
)
(0.10
)
Net income attributed to common
shareholders
0.11
0.61
0.40
0.99
Diluted:
Income from continuing operations
$
0.23
$
0.67
$
0.61
$
1.07
Loss from discontinued
operations
(0.12
)
(0.08
)
(0.21
)
(0.10
)
Net income attributed to common
shareholders
0.11
0.59
0.40
0.97
8.
Comprehensive Income
Three
Three
Six
Six
months
ended
months
ended
months
ended
months
ended
March 31, 2003
March 31, 2002
March 31, 2003
March 31, 2002
Net income attributed to common
shareholders
$
4,664
$
24,943
$
16,601
$
40,542
Unrealized gain (loss) on marketable
securities
98
(266
)
(29
)
(245
)
Net change in fair value of interest
rate swap and cap agreements
(639
)
(1,561
)
Total comprehensive income
$
4,123
$
24,677
$
15,011
$
40,297
9.
Assets Held for Sale and Discontinued Operations
Three
Three
Six
Six
months
ended
months
ended
months
ended
months
ended
March 31, 2003
March 31, 2002
March 31, 2003
March 31, 2002
Net operating loss of discontinued
businesses
$
(3,993
)
$
(438
)
$
(6,578
)
$
(1,870
)
Loss on discontinuation of businesses
(4,258
)
(5,082
)
(7,597
)
(5,082
)
Income tax benefit
3,247
2,153
5,528
2,711
Loss from discontinued operations,
net of taxes
$
(5,004
)
$
(3,367
)
$
(8,647
)
$
(4,241
)
10.
Segment Information
(in
thousands)
Three months
Three months
Six months
Six months
ended
ended
ended
ended
March 31, 2003
March 31, 2002(1)
March 31, 2003
March 31, 2002(1)
Revenues:
Inpatient services
external
$
298,638
$
299,139
$
601,533
$
596,634
Pharmacy services:
External
302,844
279,179
597,911
551,784
Intersegment
19,611
26,629
39,662
52,876
All other services:
External
46,070
42,101
89,119
81,447
Intersegment
37,414
42,951
76,128
85,665
Elimination of intersegment
revenues
(57,025
)
(69,580
)
(115,790
)
(138,541
)
Total net revenues
647,552
620,419
1,288,563
1,229,865
EBITDA(2):
Inpatient services
26,612
35,351
56,564
72,180
Pharmacy services
31,003
26,866
59,204
53,132
All other services
8,966
12,846
18,829
23,892
Corporate
(19,056
)
(20,843
)
(36,697
)
(41,873
)
Other adjustments(3)
(2,593
)
(9,838
)
Total EBITDA
44,932
54,220
88,062
107,331
Capital and other:
Combined:
(969
)
21,678
11,337
21,678
(16,083
)
(14,686
)
(32,195
)
(29,309
)
(9,889
)
(10,862
)
(20,809
)
(21,928
)
(1,700
)
(1,700
)
(7,018
)
(18,974
)
(18,095
)
(29,668
)
541
(141
)
592
391
(1,180
)
(595
)
(2,295
)
(752
)
(666
)
(630
)
(1,349
)
(1,260
)
Income from continuing
operations
9,668
28,310
25,248
44,783
Loss from discontinued
operations, net of taxes
(5,004
)
(3,367
)
(8,647
)
(4,241
)
Net income attributed
to common shareholders
$
4,664
$
24,943
$
16,601
$
40,542
March 31, 2003
September 30,
2002(4)
(in thousands)
Assets:
Inpatient services(5)
$
900,385
$
951,833
Pharmacy services
685,025
677,032
All other
344,115
360,630
1,929,525
1,989,495
(1)
Segment revenue and EBITDA data previously
reported was adjusted to remove discontinued businesses from the results
of continuing operations for the three and six month periods ended March
31, 2002.
(2)
EBITDA is defined as earnings before interest,
taxes, depreciation, and amortization of our continuing operations. EBITDA is
calculated through our unaudited condensed consolidated statements of operations
by adding back interest, income tax expense, depreciation and amortization,
equity in net income (loss) of unconsolidated affiliates, minority interest,
preferred stock dividends, debt restructuring and reorganization costs and
net expense (gain) from break-up fee and other settlements to our income
from continuing operations. EBITDA of the operating segments include the
direct overhead costs attributable to those segments.
(3)
For a description of the other adjustments
in the current quarter and year-to-date see note 3 “Strategic
Planning, Severance and Other Related Costs”.
(4)
$6.8 million of assets previously reported
as “All other” were reclassified at September 30, 2002 to the
inpatient services segment.
(5)
Assets of the inpatient services segment
at March 31, 2003 and September 30, 2002 include $61.9 million and $46.1
million, respectively, of assets held for sale. See note 9 “Assets
Held for Sale and Discontinued Operations”.
11.
Restricted Investments in Marketable Securities
12.
Net Gain from Break-up Fee and Other Settlements
13.
Derivative Financial Instruments
14.
Stock Option Plan
Three
months ended March 31, 2003
Three
months ended March 31, 2002
Six
months ended March 31, 2003
Six
months ended March 31, 2002
Net
income as reported
$
4,664
$
24,943
$
16,601
$
40,542
Deduct:
Total stock-based employee compensation determined under
fair value
based method for all awards, net of related tax effects
(1,260
)
(1,233
)
(2,463
)
(3,914
)
Net
income pro forma
3,404
23,710
14,138
36,628
Earnings
per share:
Basic
as reported
0.11
0.61
0.40
0.99
Basic
pro forma
0.08
0.58
0.34
0.89
Diluted
as reported
0.11
0.59
0.40
0.97
Diluted
pro forma
0.08
0.56
0.34
0.88
Three
months ended March 31, 2003
Three
months ended March 31, 2002
Six
months ended March 31, 2003
Six
months ended March 31, 2002
Volatility
33.44
%
47.57
%
48.04
%
41.15
%
Expected life (in years)
7.3
7.1
7.3
7.1
Rate of return
3.57
%
3.80
%
3.57
%
3.80
%
Dividend yield
0.00
%
0.00
%
0.00
%
0.00
%
15.
Income Taxes
16.
Recently Adopted Accounting Pronouncements
17.
Subsequent Events
•
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.
•
evaluate and reduce overhead
costs;
•
implement pharmacy segment margin
expansion plans and reorganize pharmacy customer management functions;
•
pursue operational efficiencies
in our inpatient services segment;
•
retain a permanent chief executive
officer;
•
pursue selective acquisitions;
and
•
evaluate and rationalize under-performing
assets and business lines.
Accrued
at
September 30,
Six
Months Ended March 31, 2003
Accrued
at
March 31,
2002
Provision
Paid
2003
Severance and
related costs
$
1,100
$
4,868
$
5,198
$
770
Strategic consulting
costs
621
4,970
4,308
1,283
Total
$
1,721
$
9,838
$
9,506
$
2,053
Three
months
ended
March 31,
2003
Three
months
ended
March 31,
2002
Six
months
ended
March 31,
2003
Six
months
ended
March 31,
2002
Net operating loss of discontinued
businesses
$
(3,993
)
$
(438
)
$
(6,578
)
$
(1,870
)
Loss on discontinuation of
businesses
(4,258
)
(5,082
)
(7,597
)
(5,082
)
Income tax benefit
3,247
2,153
5,528
2,711
Loss from discontinued operations,
net of taxes
$
(5,004
)
$
(3,367
)
$
(8,647
)
$
(4,241
)
Reconciliation of income from continuing operations | |||||||
to EBITDA as reported (in thousands) |
Three Months Ended March 31, 2003 |
Three Months Ended March 31, 2002 |
|||||
|
|
||||||
Income from continuing operations as reported | $ | 9,668 | $ | 28,310 | |||
Add back: | |||||||
Preferred stock dividends | 666 | 630 | |||||
Equity in net income or loss of unconsolidated affiliates | -541 | 141 | |||||
Minority interests | 1,180 | 595 | |||||
Income tax expense | 7,018 | 18,974 | |||||
Interest expense | 9,889 | 10,862 | |||||
Depreciation and amortization expense | 16,083 | 14,686 | |||||
Net expense (gain) from break-up fee and other settlements | 969 | (21,678 | ) | ||||
Debt restructuring and reorganization costs | | 1,700 | |||||
|
|
||||||
EBITDA | $ | 44,932 | $ | 54,220 | |||
Consolidated Overview
In the current quarter, revenues were $647.6 million, an increase of $27.1 million, or 4%, over the same period in the prior year. Of this growth, pharmacy services revenue to external customers increased by $23.7 million, inpatient services revenue declined by $0.5 million and all other business lines grew $4.0 million. See “ Segment Results” below for a discussion of inpatient services and pharmacy services revenue fluctuations. The other revenue increase of $4.0 million is principally attributed to growth in our rehabilitation services business.
25
Income from continuing operations for the current quarter declined $18.6 million, or 64%, to $9.7 million compared to $28.3 million for the same period in the prior year. EBITDA for the current quarter was $44.9 million, a decrease of $9.3 million, or 17.1%, compared to the same period in the prior year. The overall decline in EBITDA is attributed to the following fluctuations:
| A $4.1 million dollar increase in the EBITDA of our pharmacy services segment, principally due to revenue growth and the realization of our pharmacy margin expansion initiatives. See “ Segment Results” for a more in-depth discussion of the results of our pharmacy services segment. | |
| A $1.8 million increase in EBITDA due to reduced general and administrative costs following our overhead reduction initiatives | |
| An $8.7 million decline in the EBITDA of our inpatient services segment, principally due to the negative impact of the Medicare Cliff. See “ Segment Results” for a more in-depth discussion of the results of our inpatient services segment. | |
| A $3.9 million decline in all other businesses’ EBITDA, principally due to the adverse development in our self-insured workers compensation programs, an increase in bad debt expense associated with a receivable due from a former customer that filed for bankruptcy protection and an overall decline in the operating performance of our hospitality and diagnostic services businesses. | |
| A $2.6 million decline in EBITDA as a result of costs incurred in connection with our strategic planning, severance and other related costs. See “Certain Transactions and Events Change in Strategic Direction and Objectives”. | |
Capital Costs and Other
In the current quarter, we recognized additional expense of $1.0 million in connection with the proposed NCS transaction (see “Certain Transactions and Events Proposed NCS Transaction”). These costs are reflected in our unaudited condensed consolidated statements of operations as Net expense (gain) from break-up fee and other settlements.
Depreciation and amortization expense increased $1.4 million, or 9.5%, to $16.1 million for the current quarter compared to $14.7 million for the same period in the prior year. The increase is attributed to incremental depreciation expense on capital expenditures made since the prior year quarter in excess of fixed asset retirements, and from the amortization of certain identifiable intangible assets acquired since the prior year quarter.
Interest expense decreased $1.0 million, or 9.0%, for the current quarter to $9.9 million, compared to $10.9 million for the same period in the prior year. This decrease is principally attributed to a reduction in both our weighted average borrowing rate and outstanding debt levels. The decline in our weighted average borrowing rate is due to the refinancing of higher fixed rate mortgages with lower variable rate borrowings, offset by an increase to interest expense from the incremental costs of our derivative financial instruments entered into in the fourth quarter of fiscal 2002, which fixed or capped our interest cost on $275 million of debt.
During the quarter ended March 31, 2002, we recorded debt restructuring and reorganization costs resulting from a settlement reached with a 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 approximately $1.7 million.
Our income tax expense in the current quarter and prior year quarter is estimated at an effective tax rate of 39%.
Equity in net income of unconsolidated affiliates for the current quarter was $0.5 million compared to our equity in net loss of unconsolidated affiliates of $0.1 million for the same period in the prior year. The increase of earnings in the current quarter is due to the improved operating results of managed eldercare centers that we jointly-own.
26
Minority interests expense increased $0.6 million for the current quarter to $1.2 million compared to $0.6 million for the comparable period in the prior year due primarily to the improved operating performance of certain consolidated pharmacy joint-venture partnerships.
Preferred stock dividends were relatively unchanged at $0.7 million and $0.6 million for the current and prior year quarter, respectively. Preferred stock dividends are accrued and paid in the form of additional shares of preferred stock (paid-in-kind).
Loss from discontinued operations, net of taxes, was $5.0 million in the current quarter and $3.4 million in the same period of the prior year. The change is due to a $2.6 million (after tax) write-down of assets classified as discontinued in the current year quarter compared to a similar impairment charge of $3.1 million (after tax) recorded in the same period last year, and the relative results of operations of those businesses identified as discontinued operations. See “ Certain Transactions and Events Assets Held For Sale and Discontinued Operations”.
Segment Results
We have two reportable segments: (1) inpatient services and (2) pharmacy services. For a reconciliation of segment financial information to the unaudited condensed consolidated statements of operations, see note 10 “Segment Information” in the notes to our unaudited condensed consolidated financial statements.
Inpatient Services
Inpatient services revenue decreased $0.5 million to $298.6 million for the current quarter from $299.1 million for the same period in the prior year. Our average rate per patient day for the current quarter was $186 compared to $184 for the comparable period in the prior year. This increase in the average rate per patient day is principally driven by increased average Medicaid rates ($144 in current quarter versus $136 in prior year quarter); offset by a decline in our average Medicare rate per patient day ($313 in current quarter versus $342 in prior year quarter) due to the net impact of the October 1, 2002 expiration of Medicare enactments that provided for additional funding (the Medicare Cliff). Our net rate increases are offset by a decrease in revenue of $1.7 million resulting from an overall decrease in occupancy, partially mitigated by a favorable shift in payor mix. Total patient days decreased 17,940 to 1,603,644 in the current quarter compared to 1,6 21,584 during the comparable period last year. Our occupancy was 91.0% and 92.1% in the current and prior year quarters, respectively.
EBITDA for the inpatient services segment in the current quarter decreased $8.7 million, or 25%, to $26.6 million compared to the same period last year. EBITDA margin declined to 8.9% from 11.8% for the same periods, respectively. Operating margins were adversely impacted by the Medicare Cliff, an overall reduction in occupancy and increases in operating expenses, partially mitigated by the favorable increases in the state Medicaid rates. Operating expenses, including salaries, wages and benefits, and other operating expenses, grew by $8.2 million, or 3%, to $272.0 million in the current quarter compared to the same period in the prior year. The growth in operating expense is principally attributed to the increasing Medicare population in our eldercare centers which generally require a greater level of nursing care and increased ancillary utilization. In addition to a more medically complex population, certain states have imposed mandated increased nursing staff levels in conjunction with increasing Medicaid funding. Nursing labor costs, including both employed and agency labor, increased to $78.58 per patient day in the current quarter, or 6.3%, from the same period in the prior year. This increase is principally driven by inflationary factors and the fact that we are unable to reduce staffing levels proportionately with the reduction in census due to mandatory staffing ratios. 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 expense declined in the quarter by $4.4 million, principally due to reduced agency utilization and lower periodic provisions for patient receivables, offset by increased utility and snow removal costs resulting from the inclement weather this winter compared to last.
27
Pharmacy Services
Pharmacy services revenue (before intersegment eliminations) increased $16.6 million, or 5%, to $322.5 million for the current quarter compared to $305.8 million for the same period in the prior year. Pharmacy service revenues with external customers increased $23.7 million, or 9%, and is attributed to favorable changes in bed mix, patient acuity and product pricing; offset by pricing concessions of $5 million afforded in the extension of material contracts. Revenues are further offset by $12 million due to reduced medical supplies revenue following a third quarter of fiscal 2002 medical supplies services agreement under which NeighborCare ® transferred the fulfillment of its medical supply services to Medline. See “ Certain Transactions and Events Amended Pharmacy Services Agreements” and “ Certain Transactions and Events Medical Supplies Services Agreement”. Revenues from intersegment customers, which are el iminated in consolidation, decreased $7 million, or 26%, to $19.6 million for the current quarter compared to $26.6 million for the same period in the prior year. This decline is principally due to the transition of the medical supply services to Medline. The sale of our eldercare centers in the states of Illinois and Florida is not expected to result in a material change in the gross revenues of our pharmacy segment as those sales included extensions of pharmacy service contracts with NeighborCare. As a result of the sale of those assets, future pharmacy services to those locations will be presented along with revenue of other external customers. Such revenues were reported as intersegment revenues and eliminated in consolidation through the dates of sale.
EBITDA of the pharmacy services segment increased $4.1 million, or 15%, to $31.0 million for the current quarter compared to the same quarter in the prior year. EBITDA margin improved to 9.6% from 8.8% in the same quarter in the prior year. EBITDA growth is attributed to the net growth in revenue previously described, reduced product acquisition costs and the realization of margin expansion initiatives which address operating cost reduction potential related to packaging, labor and quality assurance through enhanced automation and process re-engineering. Cost of sales (before intersegment eliminations) increased $7.1 million, or 4%, for the current quarter, to $201.1 million from $194 million for the same period in the prior year. Of this growth, $10.5 million is attributed to pharmacy revenue volume growth, offset by improvements of $3.4 million primarily attributable to purchasing and clinical initiatives together with increased generic drug availability and u tilization. As a percentage of revenue, cost of sales for the current and prior year quarters was 62.4% and 63.4%, respectively. Other operating expenses for this segment, including salaries, wages and benefits, increased $5.4 million, or 6%, to $90.3 million for the current quarter compared to $84.9 million for the same period in the prior year. As a percentage of revenues, other operating expenses were 28.0% for the current quarter compared to 27.8% in the comparable period in the prior year.
Fiscal Year-to-Date Ended March 31, 2003 Compared to Fiscal Year-to-Date Ended March 31, 2002
The following table reconciles our non-GAAP measure of EBITDA to our income from continuing operations. See “ Reasons for Non-GAAP Financial Disclosure”:
Reconciliation
of income from continuing operations |
|||||||
to EBITDA as reported (in thousands) |
Six Months Ended March 31, 2003 |
Six Months Ended March 31, 2002 |
|||||
Income from continuing operations as reported | $ | 25,248 | $ | 44,783 | |||
Add back: | |||||||
Preferred stock dividends | 1,349 | 1,260 | |||||
Equity in net income of unconsolidated affiliates | (592 | ) | (391 | ) | |||
Minority interests | 2,295 | 752 | |||||
Income tax expense | 18,095 | 29,668 | |||||
Interest expense | 20,809 | 21,928 | |||||
Depreciation and amortization expense | 32,195 | 29,309 | |||||
Net expense (gain) from break-up fee and other settlements | (11,337 | ) | (21,678 | ) | |||
Debt restructuring and reorganization costs | | 1,700 | |||||
EBITDA | $ | 88,062 | $ | 107,331 | |||
28
Consolidated Overview
For the current year-to-date, revenues were $1,288.6 million, an increase of $58.7 million, or 5%, over the same period in the prior year. Of this growth, pharmacy services revenue to external customers increased by $46.1 million, inpatient services revenue increased by $4.9 million and all other business lines grew $7.7 million. See “ Segment Results” below for a discussion of inpatient services and pharmacy services revenue fluctuations. The other revenue increase of $7.7 million is principally attributed to growth in our rehabilitation services business.
Income from continuing operations for the current year-to-date period declined $19.6 million, or 44%, to $25.2 million compared to $44.8 million for the same period in the prior year. EBITDA for the current year-to-date was $88.1 million, a decrease of $19.2 million, or 18%, compared to the same period in the prior year. The overall decline in EBITDA is attributed to the following fluctuations:
• | A $6.1 million dollar increase in the EBITDA of our pharmacy services segment, principally due to revenue growth and the realization of our pharmacy margin expansion initiatives. See “ Segment Results” for a more in-depth discussion of the results of our pharmacy services segment. | |
• | A $5.2 million increase in EBITDA due to reduced general and administrative costs following our overhead reduction initiatives. | |
• | A $15.6 million decline in the EBITDA of our inpatient services segment, principally due to the negative impact of the Medicare Cliff. See “ Segment Results” for a more in-depth discussion of the results of our inpatient services segment. | |
• | A $9.8 million dollar decline in EBITDA as a result of costs incurred in connection with our strategic planning, severance and other related costs. See “Certain Transactions and Events Change in Strategic Direction and Objectives”. | |
• | A $5.1 million decline in all other businesses’ EBITDA, principally due to the adverse development in our self-insured workers compensation programs, an increase in bad debt expense associated with a receivable due from a former customer that filed for bankruptcy protection and an overall decline in the operating performance of our hospitality and diagnostic services businesses. |
Capital Costs and Other
For the current year-to-date period, we recognized a net gain of $10.2 million in connection with the proposed NCS transaction (see “Certain Transactions and Events Proposed NCS Transaction”). In addition, we recorded a $1.1 million gain resulting from the early extinguishment of mortgage debt. These transactions are reflected in our unaudited condensed consolidated statements of operations as Net expense (gain) from break-up fee and other settlements.
Depreciation and amortization expense increased $2.9 million, or 9.8%, to $32.2 million for the current year-to-date compared to $29.3 million for the same period in the prior year. The increase is attributed to incremental depreciation expense on capital expenditures made since the prior year quarter in excess of fixed asset retirements, and from the amortization of certain identifiable intangible assets acquired since the prior year quarter.
Interest expense decreased $1.1 million, or 5.1%, for the current year-to-date period to $20.8 million, compared to $21.9 million for the same period in the prior year. This decrease is principally attributed to a reduction in both our weighted average borrowing rate and outstanding debt levels. The decline in our weighted average borrowing rate is due to the refinancing of higher fixed rate mortgages with lower variable rate borrowings, offset by an increase to interest expense from the incremental costs of our derivative financial instruments entered into in the fourth quarter of fiscal 2002, which fixed or capped our interest cost on $275 million of debt.
In the year-to-date period, we recorded debt restructuring and reorganization costs resulting from a settlement reached with a 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 approximately $1.7 million.
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Our income tax expense in the current and prior year periods is estimated at an effective tax rate of 39%.
Equity in net income of unconsolidated affiliates for the current year-to-date period was $0.6 million compared to our equity in net income of unconsolidated affiliates of $0.4 million for the same period in the prior year. The increase of earnings in the current year period is due to the improved operating results of managed eldercare centers that we jointly-own.
Minority interests expense increased $1.5 million for the current year-to-date period to $2.3 million compared to $0.8 million for the comparable period in the prior year due primarily to the improved operating performance of certain consolidated pharmacy joint-venture partnerships.
Preferred stock dividends were relatively unchanged at $1.3 million for the current and prior year-to-date periods. Preferred stock dividends are accrued and paid in the form of additional shares of preferred stock (paid-in-kind).
Loss from discontinued operations, net of taxes, was $8.6 million in the current year-to-date period and $4.2 million in the same period of the prior year. The change is due to a $4.6 million (after tax) asset write-down of assets classified as discontinued in the current year-to-date compared to a similar impairment charge of $3.1 million (after tax) recorded in the same period last year, and the relative results of operations of those businesses identified as discontinued operations. See “ Certain Transactions and Events Assets Held For Sale and Discontinued Operations”.
Segment Results
Inpatient Services
Inpatient services revenue increased $4.9 million to $601.5 million for the current year-to-date from $596.6 million for the same period in the prior year. Our average rate per patient day for the current year-to-date was $185 compared to $181 for the comparable period in the prior year. This increase in the average rate per patient day is principally driven by increased average Medicaid rates ($144 in current year period versus $135 in the prior year period); offset by a decline in our average Medicare rate per patient day ($311 in current year period versus $343 in the prior year period) due to the net impact of the October 1, 2002 expiration of Medicare enactments that provided for additional funding (the Medicare Cliff). Our net rate increases are offset by a decrease in revenue of $1.9 million resulting from an overall decrease in occupancy, partially mitigated by a favorable shift in payor mix. Total patient days decreased 36,060 to 3,248,982 in the current year-to-date period compared to 3,285,042 during the comparable period last year. Our occupancy was 91.2% and 92.2% in the current and prior year-to-date periods, respectively.
EBITDA for the inpatient services segment in the current year-to-date period decreased $15.6 million, or 22%, to $56.6 million compared to the same period last year. EBITDA margin declined to 9.4% from 12.1% for the same periods, respectively. Operating margins were adversely impacted by the Medicare Cliff, an overall reduction in occupancy and increased operating expenses, partially mitigated by the favorable increases in the state Medicaid rates. Operating expenses, including salaries, wages and benefits, and other operating expenses, grew by $20.5 million, or 4%, to $545.0 million for the current year-to-date period compared to the same period in the prior year. The growth in operating expense is principally attributed to the increasing Medicare population in our eldercare centers which are generally require a greater level of nursing care and increased ancillary utilization. In addition to a more medically complex population, certain states have imposed ma ndated increased nursing staff levels in conjunction with increasing Medicaid funding. Nursing labor costs, including both employed and agency labor, increased to $77.76 per patient day for the current year-to-date, or 6.6%, from the same period in the prior year. This increase is principally driven by inflationary factors and the fact that we are unable to reduce staffing levels proportionately with the reduction in census due to mandatory staffing ratios. 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 expense declined for the current year-to-date period by $5.2 million, principally due to reduced agency utilization and lower periodic provisions for patient receivables, offset by increased ancillary and patient care costs, and increased utility and snow removal costs resulting from the inclement weather this winter compared to last.
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Pharmacy Services
Pharmacy services revenue (before intersegment eliminations) increased $32.9 million, or 5.4%, to $637.6 million for the current year-to-date period compared to $604.7 million for the same period in the prior year. Pharmacy service revenues with external customers increased $46.1 million, or 8.4%, and is attributed to favorable changes in bed mix, patient acuity and product pricing; offset by pricing concessions of $10.0 million afforded in the extension of material contracts. Revenues are further offset by $24.0 million due to reduced medical supplies revenue following a third quarter of fiscal 2002 medical supplies services agreement under which NeighborCare® transferred the fulfillment of its medical supply services to Medline. See “ Certain Transactions and Events Amended Pharmacy Services Agreements” and “ Certain Transactions and Events Medical Supplies Services Agreement”. Revenues from intersegment cus tomers, which are eliminated in consolidation, decreased $13.2 million, or 25%, to $39.7 million for the current year-to-date period compared to $52.9 million for the same period in the prior year. This decline is principally due to the transition of the medical supply services to Medline. The sale of our eldercare centers in the states of Illinois and Florida is not expected to result in a material change in the gross revenues of our pharmacy segment as those sales included extensions of pharmacy service contracts with NeighborCare. As a result of the sale of those assets, future pharmacy services to those locations will be presented along with revenue of other external customers. Such revenues were reported as intersegment revenues and eliminated in consolidation through the dates of sale.
EBITDA of the pharmacy services segment increased $6.1 million, or 11%, to $59.2 million for the current year-to-date compared to the same quarter in the prior year. EBITDA margin improved to 9.2% from 8.8% in the same period in the prior year. EBITDA growth is attributed to the net growth in revenue previously described, reduced product acquisition costs and the realization of margin expansion initiatives which address operating cost reduction potential related to packaging, labor and quality assurance through enhanced automation and process re-engineering. Cost of sales (before intersegment eliminations) increased $18.0 million, or 5%, for the current year-to-date, to $399.3 million from $381.3 million for the same period in the prior year. Of this growth, $20.8 million is attributed to pharmacy revenue volume growth, offset by improvements of $2.8 million primarily attributable to purchasing and clinical initiatives together with increased generic drug availability and utilization. As a percentage of revenue, cost of sales for the current and prior year-to-date periods was 62.6% and 63.1%, respectively. Other operating expenses for this segment, including salaries, wages and benefits, increased $8.8 million, or 5%, to $179.1 million for the current year-to-date compared to $170.3 million for the same period in the prior year. As a percentage of revenues, other operating expenses were 28.1% for the current year-to-date period compared to 28.2% for the comparable period in the prior year.
Liquidity and Capital Resources
Working Capital and Cash Flows
We have a Senior Credit Facility originally 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 Inter-bank Offered Rate (“LIBOR”) plus 3.50%, or approximately 4.78% at March 31, 2003. At March 31, 2003, there was $247.8 million outstanding under the Term Loan and $69 million outstanding under the Delayed Draw Term Loan. Outstanding amounts under the Revolving Credit Facility, if any, bear interest based upon a performance related grid. The Revolving Credit Facility has not been drawn upon to date in the current year.
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At March 31, 2003, we had cash and cash equivalents of $133.5 million, net working capital of $439.8 million and $149.1 million of unused commitment under our $150 million Revolving Credit Facility.
At March 31, 2003, we had restricted investments in marketable securities of $87.6 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 inter-company loans, advances or cash dividends.
Our cash flow from operations before debt restructuring and reorganization costs for the year-to-date period ended March 31, 2003 was $64.6 million compared to $66.9 million for the same period in the prior year. A year-over-year comparison of the primary operating cash flow activities follows:
• | A reduction in cash flow from operations of $20.8 million, net of charges not requiring funds, principally driven by the negative impact of the Medicare cliff; | |
• | Timing of payments for vendor and employee obligations accounted for a $32.2 million decline in cash in the current year versus last; | |
• | Net proceeds received in the current year period of $10.6 from a break-up fee and other settlements (see “Certain Transactions and Events Proposed NCS Transaction”); and | |
• | A use of proceeds in the prior year period from the Delayed Draw Term Loan of $42 million to finance the repayment of all trade balances due to NeighborCare pharmacy’s primary supplier of pharmacy products. |
Cash payments for debt restructuring and reorganization costs were $1.0 million for the current year-to-date period compared to $32.2 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 March 31, 2003 was 51 days compared to 54 days at September 30, 2002.
Our net cash provided by investing activities for the current year-to-date period was $2.3 million, and includes proceeds from the sale of eldercare assets of $29.6 million, offset with $27.0 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 current quarter for the foreseeable future. In the prior year we exercised an option to purchase three formerly leased eldercare centers for $10.5 million.
Our investing activities for the current year-to-date period also include $0.9 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.
Our financing activities for the current year-to-date period resulted in net cash outflows of $80.4 million, and include $63.5 million of debt repayments. Our Senior Credit Facility contains a provision requiring prepayment of amounts determined to be excess cash flow, calculated as 75% of operating profits, after capital investments, debt repayments and investments, including investments in working capital, by December 31st of each year based upon earnings for the previous fiscal year. We expect the majority of any proceeds received upon the sale of assets classified as held for sale to be used to repay the Senior Credit Facility debt unless reinvested in similar assets. Of the $63.5 million of debt repayments made in the current year, $24.8 million is the result of this excess cash flow recapture provision, $17.3 million has been paid from the net proceeds of the sale of eight skilled nursing facilities in the state of Illinois (see “Certain Trans actions and Events Change in Strategic Direction and Objectives”) and $16.0 million of the remaining debt repayments during the year are the result of the early extinguishment of three fixed rate mortgages. Subsequent to March 31, 2003, we received cash proceeds from the sale of our assets located in the state of Florida. We expect to use the cash proceeds of this transaction to reinvest in the business, or if no reinvestment opportunity is appropriate, to repay a portion of the Senior Credit Facility debt.
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Our Senior Credit Facility requires that we achieve certain levels of fixed versus variable interest rate exposure. We are required to enter into interest rate agreements that effectively fix or cap the interest cost on at least 50% of our consolidated debt. In order to meet this requirement, we entered into interest rate swap and cap agreements that effectively convert underlying variable rate debt into fixed rate debt. At March 31, 2003, after considering the $275.0 million notional principal amount of these agreements, 55% of our total debt is subject to rate protection. See “Quantitative and Qualitative Disclosures About Market Risk.”
During the second fiscal quarter of 2003, our board of directors authorized us to repurchase up to $50.0 million of our common stock through privately negotiated third party transactions or in the open market. As of March 31, 2003 we had repurchased $16.9 million of common stock or 1.1 million common shares, representing 2.6% of the common shares outstanding. This use of cash is reflected as a financing activity in our unaudited condensed consolidated statements of cash flows for the six months ended March 31, 2003. Subsequent to March 31, 2003, we have repurchased an additional 0.8 million common shares for $12 million.
Subsequent to March 31, 2003, we made an offer to our employees to tender all their options to purchase shares of our common stock outstanding under our 2001 Stock Option Plan. The offer included an accelerated vesting of all restricted shares under the 2001 Stock Incentive Plan. The transaction was expected to be completed in the third fiscal quarter of 2003 with a cost of approximately $7.5 million ($1.6 million cash).
For the current year-to-date period, we incurred $19.7 million of lease obligation costs and expect to continue to incur lease costs at or above levels approximating those for the current period 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 current year-to-date period, our lease expense associated with our eldercare centers and corporate offices was reduced $2.5 million in connection with the amortization of net unfavorable lease credits established in fresh-start reporting. Consequently, our cash basis lease cost was $22.2 million.
In the six month period April 1, 2003 to September 30, 2003, we expect to incur approximately $11 million of strategic planning, severance and other related costs.
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.
Non-Derivative Off-Balance Sheet Arrangements
We have posted $0.9 million of outstanding letters of credit. The letters of credit guarantee performance to third parties of various trade activities. Our currently outstanding letter of credit serves to collateralize our lease obligation concerning one eldercare center. 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 have extended $7.4 million in working capital lines of credit to certain jointly owned and managed entities, of which $4.9 million were unused at March 31, 2003. Our extension of such working capital lines of credit serves to provide certain of our long-term care affiliates access to working capital to supplement temporary short-falls in cash flows. Credit risk represents the accounting loss that would be recognized at the reporting date if the affiliate companies were deemed 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.
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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 $12.1 million at March 31, 2003. Our share of the income of these partnerships for the six months ended March 31, 2003 and 2002 is $0.6 million and $0.4 million, respectively. The majority of these partnerships operate skilled nursing or assisted living properties. Our business objective is typically to partner with hospitals or other healthcare providers who wish to enter the long-term care business, but do not have the operational expertise to manage such a business. Although we are not contractually obligated to fund operating losses of these partnerships, in certain cas es, 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 third-parties. We have provided $11.5 million of financial guarantees related to loan commitments of four jointly owned and managed companies. We have also provided $11.5 million of financial guarantees related to lease obligations of one jointly-owned 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 counter-parties 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 f rom other parties.
Our business activities do not include the use of unconsolidated special purpose entities.
Income Taxes
At March 31, 2003, we estimate that there remains $270 million of Net Operating Loss (NOL) carryforwards, utilization of which is subject to limitations. There can be no assurances that we will be able to utilize these NOL’s and, consequently, they are subject to a 100% valuation allowance. Pursuant to SOP 90-7, the income tax benefit of any NOL carryforward utilization is applied first as a reduction to goodwill. Tax benefits from utilization of NOL carryforwards, will be recorded at such time and to such extent they are assured beyond a reasonable doubt.
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.
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 at the close of September 30, 2002. The expiration of these provisions has reduced our Medicare per diems per beneficiary, on average, by $34, resulting in reduced revenue of approximately $17.2 million in our first six months of fiscal 2003 (the Medicare cliff). Effective October 1, 2002, Medicare rates adjusted for the Medicare cliff were increased by a 2.6% annual market basket adjustment. For us, this net impact of these provisions is estimated to adversely impact annual revenue and EBITDA beginning October 1, 2002 by approximately $28 million.
For Federal fiscal year 2003 the Centers for Medicare and Medicaid Services used their discretionary authority to continue the payment add-ons. The recently released proposed Federal Budget for fiscal year 2004 suggests that the Centers for Medicare and Medicaid Services will extend the add-ons described in the previous paragraph for the coming year. This decision is reflected in proposed fiscal year 2004 skilled nursing facility prospective payment system rules issued mid-May, 2003. The proposed rules continue the payment add-ons under the same criteria. Additionally, under the proposed rules, fiscal year 2004 payments would be increased by the full market basket increase, or 2.9%. These proposed rules are subject to a 60 day comment period. The Centers for Medicare and Medicaid Services could make changes in the final rules. By law, final rules for coming fiscal year must be issued by August 1.
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The prospects for legislative relief are uncertain. As part of the proposed Federal Budget for fiscal year 2004, the President has advanced a major “Medicare Modernization” initiative. It is not clear whether additional assistance to providers will be included in the details of the President’s plan. Efforts are underway with the trade groups to advocate for skilled nursing facilities prospective payment system relief as part of Congressional consideration of the President’s plan and related Medicare legislation.
There are additional provisions in the Medicare statute affecting pharmacy, rehabilitation therapy, diagnostic services and the payment for services in other health settings. In February 2003, Congress passed legislation adjusting practitioner fee schedules. The Congressional action prevented a formula driven reduction in fee schedules. This restoration of rates affected not only doctors, but also payment for most professional practitioners including licensed rehabilitation professionals. In addition, effective January 1, 2003, the moratorium on implementing payment caps on Medicare Part B rehabilitation therapy services expired. The Centers for Medicare and Medicaid Services has issued instructions indicating that the agency will delay enforcement until mid year and that the agency has clarified that any implementation would be prospective from the date that instructions are effective. Once effective, Medicare Part B therapy service will be subject to the caps which are expected to reduce revenues and EBITDA by approximately $17 million and $3 million, respectively.
Pharmacy coverage and cost containment are important policy debates at both the federal and state levels. In both his State of the Union Address and his budget message, the President has highlighted his appeal for Medicare modernization and enactment of a broader Medicare outpatient drug benefit. Transforming Medicare was a major theme of the President’s State of the Union address and his proposed fiscal year 2004 budget. The recently passed First Congressional Budget Resolution sets aside fiscal authority for implementing a new Medicare pharmacy benefit program. However, it should be noted that the budget resolution is a non-binding target.
Many of these alternative payment provisions are expected to be considered during the 108th Congress either as part of consideration of the “Medicare Modernization” initiative or as freestanding legislation. It is premature to predict what actions the Congress will enact. Absent additional legislative authority, the Centers for Medicare and Medicaid Services has certain discretionary authority to adjust drug pricing. Effective January 2003, Centers for Medicare and Medicaid Services implemented a directive creating a single national calculation of “average wholesale price” for Medicare purchased drugs and biologicals.
A number of states have enacted or are considering containment initiatives affecting pharmacy services. 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.
The recent economic downturn is having a detrimental affect on state revenues in most jurisdictions. Budget shortfalls range from 4-5% of outlays upwards to 20% of outlays in a handful of states. 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. State-specific details are just emerging as state legislatures begin the tasks of approving state budgets. In each of the major states where Genesis ElderCare and NeighborCare provide services we are working with trade groups, consultants and government officials to responsively address the particular services funding issues.
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The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda. During the 107th Congress, the U.S. Senate passed legislation providing states with a temporary increase in the Federal Matching Assistance Percentage. This legislation was not passed, however, it has been reintroduced in both the U.S. Senate and the U.S. House of Representatives. In his proposed Federal Budget for fiscal year 2004, the President offered modest additional fiscal support and advanced several ideas for revising the program. The 108th Congress is expected to consider an array of Medicaid reform proposals. The American Health Care Association, the national trade association for the nursing home sector, has appointed a special work group to assist in evaluating the various Medicaid legislative options and in advocating for preferred reforms. An employee of Genesis Health Ventures is chairing that work group.
It is not possible to quantify fully the effect of potential legislative or regulatory changes, the 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.
Critical Accounting Policies
We consider an accounting policy to be critical if it is important to our 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 managements 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. We believe that the following represents our critical accounting policies, which are described in our most recent annual report on Form 10-K:
| Allowance for Doubtful Accounts | |
| Loss Reserves for Certain Self-Insured Programs | |
| Revenue Recognition / Contractual Allowances | |
| Long-lived Asset Impairments |
Our senior management has reviewed these critical accounting policies and estimates with our audit committee. During the current quarter, we did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting policies.
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS 148) which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in the financial statements of the effects of stock-based compensation. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our annual financial statements for the year ending September 30, 2003 and must also provide the disclosures in our quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period end ed March 31, 2003.
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In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities with the objective of improving financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable inte rest entity is called the primary beneficiary of that entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003, with early adoption permitted. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We adopted FIN 46 in January 2003 and, as a result, began consolidating one of our joint venture partnerships that operates four eldercare centers. We hold a majority of the related financial risks and rewards, despite our lack of voting control in this partnership. This partnership has assets of $7.3 million, annual revenues of approximately $15.5 million, and de minimus net income. We wrote-off $1.7 million of long-term assets related to this partnership, which we concluded were impaired. We have decided to sell this partnership and expect the sale to occur by the end of Fiscal 2003. Accordingly, we have included the results of this entity in the loss from discontinued operations, net of taxes, in our unaudited condensed consolidated statements of operations.
Other
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 current year-to-date period and the same period last year we billed our managed clients $64.9 million and $75.1 million, respectively, for such labor related costs.
Seasonality
Our earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors, which include the timing of Medicaid rate increases and payroll tax obligations, seasonal census cycles, weather conditions and the number of calendar days in a given quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. We have also implemented cost control measures to limit increases in operating costs and expenses but cannot predict our ability to control such operating cost increases in the future. See “Cautionary Statement Regarding Forward Looking Statements.”
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Item 3. 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.
As of March 31, 2003, we have a $75 million interest rate swap agreement maturing on September 13, 2005, to pay fixed (3.1%) / receive variable (one month LIBOR) and a $125 million interest rate swap agreement maturing on September 13, 2007, to pay fixed (3.77%) / receive variable (one month LIBOR). In addition, we have a $75 million interest rate cap agreement maturing on September 13, 2004. 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 agreement. Based upon confirmations from third party financial institutions, the fair value of the interest rate swap agreements and the interest rate cap agreement is a liability of $6.7 million and an asset of $0.1 million, respectiv ely, at March 31, 2003.
As of March 31, 2003, after considering the $275 million notional principal amount of these agreements, 55% of our total debt is subject to rate protection. A 1% increase in LIBOR would result in an increase to our interest expense of $2.8 million annually.
As of March 31, 2003, we held $17 million of investments in marketable securities that were affected by market rates of interest. A 1% change in the rate of interest would result in a change in the market value of the investments of $0.2 million annually.
Item 4. 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 13a-14(c) and 15(d)-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days of the filing of this quarterly report on Form 10-Q (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 us 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.
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PART II : OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to litigation in the ordinary course of business. See “Cautionary Statement 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 subsequently submitted an amended claim in the amount of approximately $325 million. We believe the allegations have no merit and 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 U.S. Bankruptcy Court for the District of Delaware 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 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. On March 27, 2003, the U.S. District Court denied the plaintiff’s appeal and upheld the summary judgment decision rendered by the United States Bankruptcy Court. On or about April 25, 2003, the plaintiff filed an appeal to the Third Circuit Court of Appeals.
Pending DEA Investigation
In August 2001, and March 2002, our pharmacy located in Colorado reported missing inventory and potential diversion to the Drug Enforcement Administration (DEA), the local police and the Colorado Board of Pharmacy. As a result of the pharmacy reporting these incidents, the DEA commenced an audit of the pharmacy's operations. Under the Controlled Substance Act the government may seek the potential value of the inventory diverted as well as other damages. The Civil Division of the U.S. Attorney's Office for the District of Colorado has advised us that there is potential civil liability relating to violations of the Controlled Substance Act. The Colorado facility has cooperated with all requests for information, including making its personnel and documents available to the government. The government and the pharmacy are currently in discussions regarding the allegations.
Item 2. Changes in Securities and Use of Proceeds None
Item 3. Defaults Upon Senior Securities None
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Item 4. Submission of Matters to a Vote of Security Holders
On April 9, 2003, the Company held its annual meeting of shareholders. Proxies were solicited for the meeting pursuant to Regulation 14A of the Securities Exchange Act of 1934.
At the meeting, the following matters were voted on: Robert H. Fish and Joseph A. LaNasa, III were elected to serve until the 2004 annual meeting, or until their respective successors are elected and qualified, James H. Bloem and James D. Dondero were elected to serve until the 2005 annual meeting, or until their respective successors are elected and qualified, and James E. Dalton, Jr. and Dr. Philip P. Gerbino were elected to serve until the 2006 annual meeting, or until their respective successors are elected and qualified. A summary of the voting results follows:
Votes for Election | Votes Withheld | |||
|
|
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Robert H. Fish | 26,622,740 | 1,554,184 | ||
Joseph A. LaNasa, III | 25,348,880 | 2,828,044 | ||
James H. Bloem | 27,575,632 | 601,292 | ||
James D. Dondero | 27,580,574 | 596,350 | ||
James E. Dalton, Jr. | 28,062,625 | 114,299 | ||
Dr. Philip P. Gerbino | 25,138,352 | 3,038,572 |
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
10.1 Employment Agreement between the Company and Robert H. Fish dated as of February 28, 2003. |
99.1 Certificate of Robert H. Fish, Principal Executive Officer, of the Company dated May 15, 2003 pursuant to 18 U.S.C. Section 1350. |
99.2 Certificate of George V. Hager, Jr., Principal Financial Officer, of the Company dated May 15, 2003 pursuant to 18 U.S.C. Section 1350. |
(b) | Reports on Form 8-K |
On February 21, 2003, the Company filed a Current Report on Form 8-K under Item 5 announcing its plans to spin-off the eldercare business in what is expected to be a tax-free transaction to shareholders. That transaction is expected to be completed by the end of the calendar year 2003. |
On May 1, 2003, the Company filed a Current Report on Form 8-K under Item 9 and 12 announcing our financial results for the period ended March 31, 2003 and management’s use of non-GAAP financial information under Regulation G. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Genesis Health Ventures, Inc. |
|
Date: May 15, 2003 |
/s/ George V. Hager, Jr. George V. Hager, Jr., Executive Vice President and Chief Financial Officer |
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CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert H. Fish, principal executive officer of Genesis Health Ventures, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Genesis Health Ventures, Inc. and subsidiaries; | ||
2. | Based on my knowledge, this quarterly 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 quarterly report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly report is being prepared; | ||
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 quarterly report (the "Evaluation Date"); and | ||
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; | ||
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): | ||
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 | ||
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 | ||
6. | The registrant's other certifying officer and I have indicated in this quarterly report whether or not 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. | ||
Date: May 15, 2003
/s/ Robert
H. Fish Robert H. Fish |
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I, George V. Hager, Jr., principal financial officer of Genesis Health Ventures, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Genesis Health Ventures, Inc. and subsidiaries; |
2. | Based on my knowledge, this quarterly 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 quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly report is being prepared; |
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 quarterly report (the "Evaluation Date"); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant's other certifying officer 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 function): |
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 |
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 |
6. | The registrant's other certifying officer and I have indicated in this quarterly report whether or not 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. |
Date: May 15, 2003
/s/ George V. Hager, Jr. George V. Hager, Jr. |
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EMPLOYMENT AGREEMENT
1. | Employment. The Company agrees to continue to employ Executive, and Executive agrees to remain an employee of the Company, for the period stated in Section 2 hereof and upon the terms and conditions herein provided. |
2. | Term. The period of the Executives employment under this Agreement shall commence on the date hereof and shall, unless sooner terminated pursuant to Section 6, continue for a two year period (such period herein referred to as the Term). |
3. | Position and Responsibilities. |
3.1 | Position. The Company agrees to employ Executive in the position of Chief Executive Officer and as Chairman of its Board of Directors (Board), and Executive agrees to perform such services and have such duties and responsibilities, not inconsistent with his position as Chief Executive Officer or as Chairman, customarily associated with and incidental to such positions and as may from time to time be reasonably assigned to him by the Board. Executive further agrees to serve as an executive officer or director of any subsidiaries of the Company without additional compensation. |
3.2 | Duties. During the period of his employment hereunder Executive shall devote all of his business time, attention, skill and efforts to the earnest and faithful performance of his duties; provided, however, that Executive may serve as a member of the board of directors of corporations or similar positions with other organizations which will not present a conflict of interest with the Company or any of its subsidiaries. |
3.3 | Place of Employment. Executive shall perform his duties hereunder at the Companys executive office located in Kennett Square, Pennsylvania, and shall travel to the Companys other offices or locations as may be necessary or appropriate for him to perform his duties hereunder. |
4. | Compensation and Benefits. |
4.1 | Salary. For all services rendered by Executive as Chief Executive Officer, as Chairman or as an officer or director of any subsidiary of the Company during his employment under this Agreement, the Company shall pay Executive a base salary at the annual rate of $850,000. Any base salary payable to the Executive 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 Term, Executives base salary shall be reviewed at least annually, with the first such annual review on the first anniversary of this Agreement. Such review shall be conducted by a committee comprised of individuals designated by the Board from its members (the Compensation Committee), and the Compensation Committee may increase said base salary. The annual base salary payable to Executive in any year is referred to herein as the Base Salary
148; for such year. |
4.2 | Annual Bonus. For each fiscal year of the Company during the term of this Agreement, the Company shall afford Executive the opportunity to earn an incentive bonus (Bonus) under the terms of the Genesis Health Venture, Inc. Incentive Program or similar program. The maximum Bonus payable to Executive under such program(s) shall equal 100% of the Base Salary for such fiscal year, and shall be payable at the discretion of the Compensation Committee, upon the achievement of certain targets which shall be set by the Compensation Committee. Any and all incentive compensation payable pursuant to this clause shall be paid to the Executive via stock awards of Company Stock, which shall contain restrictions on the sale of the stock during the term of this Agreement. |
4.3 | Equity Incentive Stock Options. The Company shall, pursuant to the terms of its stock option plan or any similar plan, grant to Executive options to acquire an aggregate of 600,000 shares of common stock of the Company (Company Stock) which shares shall vest as follows: |
(a) | 150,000 stock option shares upon the execution of this Agreement. |
(b) | 150,000 stock option shares upon the termination of this Agreement pursuant to Section 6.1, 6.2, 6.4, 6.5 or 6.6 herein. |
(c) | 125,000 stock option shares upon the occurrence of one of the following: |
(i) | the sale of the assets of the Company related to the long-term care business; |
(ii) | the spin-off of the assets of the Company related to the long-term care business; or |
(iii) | the spin-off of the assets of the Company related to the pharmacy business. |
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(d) | 175,000 stock option shares upon a strategic transaction directed by the Board of
Directors relating to the Companys pharmacy business or 75,000 stock option shares upon the approval by the Board of a succession
plan relating to the Companys pharmacy business. |
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The exercise price of the shares shall be established per the attached Schedule A. The stock options shall have a three (3) year term. |
4.4 | Participation in Benefit Plans and Perquisites. Executive shall be entitled to participate in each employee benefit plan or perquisite applicable generally to executive officers of the Company (including health, life insurance, long-term disability and deferred compensation benefits, but excluding any severance benefit or termination pay plan) in accordance with the provisions thereof. Notwithstanding the foregoing, Executive shall not be entitled to receive any additional benefits or awards under discretionary plans or programs of the Company unless the Executive Board of the Company (or the Compensation Board) exercises the necessary discretion to provide Executive with such benefits or awards. |
4.5 | Executive Life Insurance. The Company shall provide Executive with term life insurance providing a death benefit of at least $2,500,000 to Executives designated beneficiaries. The life insurance policy shall be assigned to the Executive at the time of his termination. |
4.6 | Vacation and Holidays. Executive shall be entitled to vacation in accordance with the Companys vacation policy in effect from time to time for its executive officers, but not less than five (5) weeks in each full calendar year. Executive shall also be entitled to all paid holidays given by the Company to its senior officers. Vacation days that are not used during any calendar year may not be accrued, nor shall Executive be entitled to compensation for unused vacation days. |
4.7 | Automobile. The Company shall provide Executive with the use of an automobile and shall pay all costs associated with the automobile, to include the gasoline, repairs and insurance for said automobile, for the Term of this Agreement. |
5. | Reimbursement of Expenses. The Company shall pay or reimburse Executive for: |
5.1 | All reasonable business expenses incurred by Executive in performing his obligations under this Agreement in accordance with its business expense policies in effect from time to time. |
5.2 | The Executives reasonable housing costs in the Commonwealth of Pennsylvania for the Term of this Agreement. |
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5.3 | The cost of relocating himself and his spouse from their temporary residence in Pennsylvania back to his residence in California. |
5.4 | The cost of reasonable travel to and from California for the Executive and his spouse. |
6. | Events of Termination of Employment. |
6.1 | Expiration of Term. Executives employment with the Company and its subsidiaries (including his appointment as Chairman) shall cease automatically on the expiration of the term of this Agreement pursuant to Section 2 hereof. |
6.2 | Death or Disability. Executives employment with the Company and its subsidiaries shall automatically terminate on Executives death. Executives employment shall terminate thirty (30) days after Executive is notified that his employment is terminated for Disability (provided Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period). For purposes of this Agreement, Disability means an incapacity due to a physical or mental condition which causes Executive to be unable to substantially perform his duties under this Agreement on a full-time basis for (i) a period of six (6) consecutive months, or (ii) for shorter periods aggregating more than six (6) months in any twelve (12) month period. Disabling Condition shall mean such an incapacity that does not meet the time requirements for Disability. The Compan
y may temporarily relieve Executive from his duties and responsibilities during any period that he has a Disabling Condition, provided that Executive shall be immediately restored to his duties and responsibilities if Executive is able to resume his duties on a full-time basis prior to his termination for Disability. Executive agrees to submit to reasonable medical examination upon the reasonable request, and at the expense, of the Company during any period when he (or his representative) claims that he has a Disabling Condition. |
6.3 | Termination by Company for Cause. |
(a) | The Company may, following any determination by the Board that Cause exists, terminate Executives employment with the Company and its subsidiaries (including his appointment as Chairman) for Cause by notice to Executive describing the reasons for such termination. In the event the Board believes Cause may exist for termination of Executives employment, the Board shall provide written notice to Executive describing the basis for such belief. Executive shall be afforded a reasonable period of time to and shall fully and promptly address, to the extent of Executives knowledge, any concerns raised by the Board regarding the existence of Cause. The Company may temporarily relieve Executive from his duties and responsibilities pending the outcome of any proceeding of the Board to determine if Cause exists; provided that Executive shall be immediately restored to his duties and responsibilities if the Board determines that Cause does not exist
or fails to render a prompt determination following the substantial completion of its investigation. |
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(b) | For purposes of this Section 6.3, Cause means any of the following events with respect to Executive: |
(i) | Executive has been convicted of, or pleads guilty or nolo contendere to, any crime or offense constituting a felony under applicable law (whether or not involving the Company or any of its subsidiaries), including, without limitation, embezzlement, theft, larceny or any crime of moral turpitude which subjects, or if generally known, would subject, the Company or any of its subsidiaries to public ridicule or embarrassment; |
(ii) | Executives commission of a material act of fraud or dishonesty against the Company or any of its subsidiaries, or Executives willful engaging in conduct which is significantly injurious to the Company or any of its subsidiaries, monetarily or otherwise; |
(iii) | Executives abuse of illegal drugs and other controlled substances or Executives habitual intoxication, which conduct continues after written demand for cessation of such conduct is delivered to Executive by the Board; |
(iv) | Any willful, continuous or gross neglect of or refusal to perform Executives duties or responsibilities, in each case which continues after detailed written notice thereof has been given to Executive; or |
(v) | The willful taking of actions by Executive which directly and materially impair Executives ability to perform his duties and responsibilities hereunder, or willful misconduct (including gross and willful violation of any written policies of the Company), provided, however, that Cause shall not include a bona fide disagreement over corporate policy, so long as Executive does not willfully violate on a continuing basis specific written directions from the Board, which directions are consistent with the provisions of this Agreement. |
Action or inaction by Executive shall not be considered willful unless done or omitted by him intentionally and without his reasonable belief that his action or inaction was in the best interests of the Company, and shall not include failure to act by reason of total or partial incapacity due to physical or mental illness. |
6.4 | Resignation by Executive for Good Reason. Upon the occurrence of any event described in this Section 6.4 below, Executive shall have the right to elect to terminate his employment under this Agreement from all (but not less than all) positions with the Company and its subsidiaries by resignation, upon not less than thirty (30) days prior written notice given within ninety (90) days after the event purportedly giving rise |
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to Executives right to elect; provided, however, that the Company has not cured or otherwise corrected such event prior to the expiration of such 30-day period. |
(a) | Any reduction by the Company of Executives Base Salary; |
(b) | The assignment to Executive by the Company of any duties inconsistent with Executives status with the Company or a substantial alteration in the nature of status of
Executives responsibilities from those in effect immediately prior to the date hereof, or a reduction in Executives titles or offices as in
effect immediately prior to the date hereof or any removal of Executive from, or any failure to elect, re-elect or appoint Executive to any such
positions (including, without limitation, the positions of Chief Executive Officer and Chairman of the Board), other than as a result of
Executives death, termination of employment (and other than as a result of Executives Disabling Condition or pending a determination
that Cause exists), or the failure to restore Executive to his responsibilities following his recovery from a Disabling Condition prior to his
employment termination or following a determination that Cause does not exist; |
(c) | Any liquidation or dissolution of the Company, unless the voting common equity interests of an
ongoing entity (other than a liquidating trust) are beneficially owned, directly or indirectly, by the same persons in substantially the same
proportions as such persons ownership immediately prior to such liquidation or dissolution, and such ongoing entity assumes all existing
obligations of the Company to Executive under this Agreement; or |
(d) | Any material breach of this Agreement by the Company. |
6.5 | Resignation by Executive Following A Change in Control. Executive
may resign from the Companys employ
during the ninety (90) day period following a Change in Control of the Company for any reason by providing the Company with a written notice of
termination. For purposes of this Agreement, a Change in Control of the Company means the occurrence of one of the following events: |
(a) | the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) (a Person) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the Outstanding Company Common Stock) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided, however, that for purposes of this Section 1(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Comp
any or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C); |
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(b) | Any time at which individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, than any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; |
(c) | Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a Business Combination), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as
a result of such transaction, owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then- outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation result
ing from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or |
(d) | Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. |
6.6 | Termination by the Company without Cause. In addition to any termination of Executives employment with the Company and its subsidiaries for reasons described in the foregoing provisions of this Section 6, the Company may terminate such employment at any time without Cause. |
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7. | Severance Upon an Event of Termination. |
7.1 | General Provision. Upon termination of Executives employment by the Company during the Term, Executive shall be entitled to no further compensation hereunder other than (i) Executives accrued and unpaid Base Salary through the date of termination, (ii) any benefits accrued and vested under the terms of the Companys employee benefit plans and programs through the date of termination and (iii) any other payments or benefits specifically provided in Section 7 of this Agreement. |
7.2 | Termination Due to Death or Disability. Upon Executives employment termination due to his death or Disability, the Company shall pay to Executive (or to his estate) (i) Executives Base Salary and benefits as if Executives employment had terminated on the last day of the month; (ii) all deferred compensation of any kind, including, without limitation, any amounts earned under any bonus plan, and (iii) if any bonus, under any bonus plan shall be payable in respect of any years ending prior to the date Executives employment terminates, the bonus(es) set forth in section 7.2 (ii) above shall be further pro-rated from the beginning of the fiscal year to the last day of the month of Executives employment termination. In addition, all restricted stock awards made to Executive shall automatically become fully vested as of the date of death (or in the case of Disability, as of the date employment te
rminates). |
7.3 | Termination for Cause. Upon Executives employment termination for Cause, the Company shall pay to Executive all vested deferred compensation. |
7.4 | Severance. Upon Executives employment termination by the Company without Cause or by the Executive for Good Reason or by Executive in accordance with Section 6.5 following a Change in Control, the Company shall, subject to the provisions of Section 9 and 10 below, provide the following to Executive (or, in the event of Executives subsequent death, his beneficiary or beneficiaries or his estate, as provided): |
(a) | Accrued Bonuses. The Company shall pay to Executive (or his estate) in a lump sum at the time of his termination any accrued and unpaid bonuses in respect of years ending prior to the date of termination, and a pro rata bonus for the portion of the year preceding the date of termination in the actual amount that would have been earned based on the Companys actual performance for the year. |
(b) | Benefit Continuation. The Company shall continue to provide, on the same basis as executive officers generally, the health and life insurance benefits (but excluding disability benefits) provided to Executive and his spouse and eligible dependants immediately prior to his date of termination for a period of one (1) year following the date of termination (provided that Executive continues to make all required employee contributions). In the event that Executives participation in any such plan or program is barred by the terms thereof, the Company shall pay to 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 |
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continued participation is barred except that if Executives participation in any health, medical, or life insurance plan or program is barred, the Company shall obtain and pay for, on Executives behalf, individual insurance plans, policies or programs that provide to Executive health, medical and life insurance coverage which is equivalent to the insurance coverage to which Executive was entitled prior to the date of termination. |
(c) | Equity. All restricted stock awards made to Executive shall fully vest following the termination of Executives employment. All vested stock options shall remain exercisable through their original terms with all rights. |
8. | Certain Tax Matters. The Company shall indemnify and hold Executive harmless from and against (i) the imposition of excise tax (the Excise Tax) under Section 4999 of the Internal Revenue Code of 1986, as amended (or any successor provision thereto, the Code), on any payment made or benefit provided by the Company or a subsidiary (including any payment made under this paragraph) and any interest, penalties, and additions to tax imposed in connection therewith, and (ii) any federal, state or local income or employment tax imposed on any payment made pursuant to this paragraph. Executive shall not take the position on any tax return or other filing that any payment made or benefit provided by the Company is subject to the Excise Tax, unless, in the opinion of independent tax counsel reasonably acceptable to the Company, there is no reasonable basis for taking the position that any such
payment or benefit is not subject to the Excise Tax under U.S. tax law then in effect. If the Internal Revenue Service makes a claim that any payment, benefit or portion thereof is subject to the Excise Tax, at the Companys election, and the Companys direction and expense, Executive shall contest such claim; provided, however, that the Company shall advance to Executive the costs and expenses of such contest, as incurred. For the purpose of determining the amount of any payment under clause (ii) of the first sentence of this paragraph, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable individuals in the calendar year in which such indemnity payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the jurisdiction in which Executive is resident, net of the reduction in federal income taxes that is obtained from deduction of such state and loc
al taxes. |
9. | Duties Upon Termination. Executive agrees that he will, upon termination of his employment with the Company for any reason whatsoever, deliver to the Company any and all records, forms, contracts, memoranda, work papers, lists of names or other customer data and any other articles or papers which have come into his possession by reason of his employment with the Company or which he holds for the Company, regardless of whether or not any of said items were prepared by him, and he shall not retain memoranda or copies of any of said items. Executive shall assign to the Company all rights to trade secrets and the products relating to the Companys business developed by him alone or in conjunction with others at any time alike employed by the Company. Notwithstanding anything herein to the contrary, Executive may retain this Agreement, any documents relating to this Agreement and any documents relating to Executive
;s compensation, benefits, retirement plans and deferred compensation plans. |
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10. | Post-Termination Obligations. All payments and benefits to Executive under this Agreement shall be subject to Executives compliance with the following provisions. |
10.1 | Confidential Information. At all times during and after the term of this Agreement, Executive shall not disclose or reveal to any unauthorized person any trade secret or other confidential information relating to the Company, its subsidiaries or its affiliates, or to any businesses operated by them, including, without limitation, any customer lists; and Executive confirms that such information constitutes the exclusive property of the Company. For purposes of this Section 10.1, confidential information shall not include any information that is now known by or readily available to the general public or which becomes known by or readily available to the general public other than as a result of any improper act or omission of Executive. Notwithstanding anything herein to the contrary, during the term of this Agreement, Executive may reveal information, as necessary, pursuant to his conducting Company business.
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10.2 | Competitive Conduct. During the term of this Agreement and for a further period of one (1) years thereafter, Executive shall not, except with the Companys express prior written consent, directly or indirectly, in any capacity for the benefit of any person: |
(a) | solicit any person who is or during such period becomes a customer, supplier, salesman, agent or representative of the Company, in any manner which interferes or might interfere with such persons relationship with the Company, or in an effort to obtain such person as a customer, supplier, salesman, agent or representative of any business in competition with the Company which business conducts operations within fifteen (15) miles of any office or facility owned, leased or operated by the Company or in any county, or similar political subdivision, in which the Company conducts substantial business. |
(b) | establish, engage, own, manage, operate, join or control, or participate in the establishment, ownership (other than as the owner of less than one percent (1%) of the stock of a corporation whose shares are publicly traded) or control of, or be a salesman, agent or representative of any person in any business in competition with the Company if such person has any office or facility, at any location within fifteen (15) miles of any office or facility owned, leased or operated by the Company or conducts substantial business in any county, or similar political subdivision in which the Company conducts substantial business, or act or conduct himself in any manner which he would have reason to believe inimical or contrary to the best interests of the Company. |
10.3 | Scope. If any portion of the covenants contained in Section 9 or 10 or its application is construed to be invalid, illegal or unenforceable, then the other portions and their application shall not be affected thereby and shall be enforceable without regard thereto. If any of the such covenants is determined to be unenforceable because of its scope, duration, geographical area or similar factor, the court making such determination |
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shall have the power to reduce or limit such scope, duration, area or other factor, and such covenant shall then be enforceable in its reduced or limited for. |
11. | Effect of Prior Agreements. This Agreement contains the entire understanding between the parties hereto and, upon effectiveness of this Agreement pursuant to Section 2 hereof, supersedes all prior agreements and discussions between the Company and Executive but is not in any way intended to supersede the Bankruptcy Order. |
12. | General Provisions. |
12.1 | Settlement of Disputes. The Company and Executive agree that any claim, dispute or controversy arising under or in connection with this Agreement, or otherwise in connection with Executives employment by the Company (including, without limitation, any such claim dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Companys employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in Chester County, Pennsylvania (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules (the Rules) of the American Arbitration Association (the AAA) in effect at the time of the arbitration, except that the arbitration shall be selected by alte
rnatively striking form a list of five (5) arbitrators supplied by the AAA. All fees and expenses of the arbitration, including a transcript if either requests, shall be borne equally by the parties. If Executive prevails as to any material issue presented to the arbitrator, the entire cost of such proceedings (including, without limitation, Executives reasonable attorneys fees) shall be borne by the Company. If Executive does not prevail as to any material issue, each party will pay for the fees and expenses of its own attorneys, expert witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the party prevails on a claim for which attorneys fees are recoverable under the Rules). Any action to enforce or vacate the arbitrators award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other that
then arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorneys fees related to such action. |
12.2 | Legal Expenses. Except as otherwise provided in Section 12.1, in the event Executive prevails as to any material issue in any legal proceeding to enforce the terms of this Agreement, the Company shall reimburse Executive for reasonable legal costs incurred in connection therewith. |
12.3 | Mitigation. Executive shall not be obligated to seek other employment or take any other action to mitigate any severance benefits hereunder. |
12.4 | Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Company and Executive and |
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his heirs, executors, legal representatives, successors and permitted assigns. Unless clearly inapplicable, reference herein to the Company shall be deemed to include its successors and permitted assigns. However, neither party may assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any of its or his rights hereunder without prior written consent of the other party, any such attempted assignment, transfer, pledge, encumbrance, hypothecation or other disposition without such consent shall be null and void, without effect. |
12.5 | Severability. In the event any provision of this Agreement or any part hereof is held invalid, such invalidity shall not affect any remaining part of such provision or any other provision, and to this end, the provisions of this Agreement are intended to be and shall be deemed severable. If any court construes any provision of this Agreement to be illegal, void or unenforceable because of the duration or the area or matter covered thereby, such court shall reduce the duration, area or matter of such provision, and, in its reduced form, such provision shall then be enforceable and shall be enforced. |
12.6 | Withholding. Employer may withhold from any amounts payable under this Agreement such taxes and governmentally required withholdings as may be required to be withheld pursuant to any applicable law or regulation. |
13. | Modification and Waiver. |
13.1 | Amendment of Agreement. Except for increases in compensation made as provided in Section 4.1, this Agreement may not be changed or modified except by an instrument in writing signed by both of the parties hereto. |
13.2 | Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. |
14. | Notices. Any notice to be given hereunder shall be in writing and shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: |
To Executive at: |
Robert H. Fish P.O. Box 147 Kennett Square, PA 19348 |
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with a copy: |
To the Company at: Genesis Health Ventures, Inc. 101 East State Street Kennett Square, PA 19348 Attention: Law Department |
And with a copy to: |
Philip P. Gerbino University of the Sciences in Philadelphia 600 South 43rd Street Philadelphia, PA 19104-4495 |
and |
Joseph A. LaNasa, III Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 |
15. | Governing Law. The parties hereto intend that this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. |
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GENESIS HEALTH VENTURES, INC. | ||
By: /s/ James J. Wankmiller | ||
Name: James J. Wankmiller Title: Sr. Vice President, General Counsel |
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/s/ Robert H. Fish | ||
ROBERT H. FISH | ||
Acknowledged on Behalf of the Board: | ||
/s/ Philip P. Gerbino | ||
Name: Philip P. Gerbino
Title: Director |
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SCHEDULE A Vesting Price of the Stock Options set forth in Section 4.3 herein.
(a) | $20.33 for the 150,000 stock option shares which shall vest upon the execution of this Agreement. |
(b) | $20.33 for the 150,000 stock option shares which shall vest upon the termination of this Agreement pursuant to Section 6.1, 6.2, 6.4, 6.5 or 6.6 herein. |
(c) | $17.00 for the 125,000 stock option shares which shall vest upon the occurrence of one of the following: |
(i) | the sale of the assets of the Company related to the long-term care business; |
(ii) | the spin-off of the assets of the Company related to the long-term care business; or |
(iii) | the spin-off of the assets of the Company related to the pharmacy business. |
(d) | $20.33 for the 175,000 stock option shares which shall vest upon a strategic transaction directed by the Board of Directors relating to the Companys pharmacy business, or the 75,000 stock option shares upon the approval by the Board of a succession plan relating to the Companys pharmacy business. |
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Exhibit 99.1 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANESOXLEY ACT OF 2002
In connection with the filing of the Genesis Health Ventures, Inc. Quarterly Report on Form 10Q for the period ended March 31, 2003 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: May 15, 2003
/s/ Robert H. Fish
Robert H. Fish
A signed original of this written statement required by Section 906 has been provided to Genesis Health Ventures, Inc. and will be retained by Genesis Health Ventures, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.2 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANESOXLEY ACT OF 2002
In connection with the filing of the Genesis Health Ventures, Inc. Quarterly Report on Form 10Q for the period ended March 31, 2003 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: May 15, 2003
/s/ George V. Hager, Jr.
George V. Hager, Jr.
A signed original of this written statement required by Section 906 has been provided to Genesis Health Ventures, Inc. and will be retained by Genesis Health Ventures, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.