UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 000-33217
GENESIS HEALTH VENTURES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
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(Address, including zip code, of principal executive offices)
(610) 444-6350
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant has filed all 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 |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of May 9, 2002: 40,288,151 shares of common stock issued and
880,347 are to be issued in connection with a plan confirmed by a court.
TABLE OF CONTENTS
Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS......................2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements.........................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk..31
Part II: OTHER INFORMATION
Item 1. Legal Proceedings...........................................32
Item 2. Changes in Securities and Use of Proceeds ..................34
Item 3. Defaults Upon Senior Securities.............................34
Item 4. Submission of Matters to a Vote of Security Holders.........34
Item 5. Other Information...........................................34
Item 6. Exhibits and Reports on Form 8-K............................34
SIGNATURES....................................................................35
1
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 its
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:
o certain statements in "Management's Discussion and Analysis of Financial
Condition and Results Of Operations," such as our ability to meet our
liquidity needs, scheduled debt and interest payments, expected future
capital expenditure requirements and effect of repayment of trade
payables due to our primary supplier of pharmacy products;
o certain statements in the Notes to Unaudited Condensed Consolidated
Financial Statements concerning pro forma adjustments; and
o certain statements in "Legal Proceedings" regarding the effects of
litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that 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:
o 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;
o changes in pharmacy legislation and payment formulas;
o the expiration of enactments providing for additional governmental
funding;
o efforts of third party payors to control costs;
o the impact of federal and state regulations;
o changes in payor mix and payment methodologies;
o further consolidation of managed care organizations and other third
party payors;
o competition in our business;
o an increase in insurance costs and potential liability for losses not
covered by, or in excess of, our insurance;
o competition for qualified staff in the healthcare industry;
o our ability to control operating costs; and
o an economic downturn or changes in the laws affecting our business in
those markets in which we operate.
These risks are described in more detail in our Annual Report on Form 10-K.
2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
Successor Company Successor Company
------------------------------------------------------------------------------------------------------------------------------------
March 31, 2002 September 30, 2001
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 74,288 $ 32,139
Restricted investments in marketable securities 64,419 51,625
Accounts receivable, net of allowance for doubtful accounts 390,796 399,816
Inventory 66,140 65,222
Prepaid expenses and other current assets 68,334 35,753
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Total current assets 663,977 584,555
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 840,753 822,740
Notes receivable and other investments 12,254 14,539
Other long-term assets 45,492 45,698
Investments in unconsolidated affiliates 13,151 12,504
Identifiable intangible assets, net 29,130 33,591
Goodwill, net 302,478 320,953
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,907,235 $ 1,834,580
====================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 10,417 $ 41,241
Accounts payable and accrued expenses 219,433 244,799
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 229,850 286,040
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Long-term debt 683,272 603,268
Deferred income taxes 2,620 -
Other long-term liabilities 58,412 65,677
Minority interest 10,017 2,137
Redeemable preferred stock, including accrued dividends 43,860 42,600
Shareholders' equity:
Common stock, par $.02, 200,000,000 shares authorized, 40,288,151 and
39,671,279 shares issued and outstanding at March 31, 2002 and September 30,
2001, respectively, and 880,347 and 1,328,721 shares to be issued at
March 31, 2002 and September 30, 2001, respectively 823 820
Additional paid-in capital 836,756 832,710
Retained earnings 41,678 1,136
Accumulated other comprehensive income (loss) (53) 192
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 879,204 834,858
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Total liabilities and shareholders' equity $ 1,907,235 $ 1,834,580
====================================================================================================================================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Successor Company | Predecessor Company
Three months ended | Three months ended
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March 31, 2002 | March 31, 2001
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Net revenues: |
Inpatient services $ 355,416 | $ 330,777
Pharmacy and medical supply services 280,052 | 255,601
Other revenue 43,426 | 37,832
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Total net revenues 678,894 | 624,210
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Operating expenses: |
Salaries, wages and benefits 293,353 | 269,404
Cost of sales 169,049 | 151,735
Other operating expenses 151,976 | 151,664
Gain from arbitration award (21,678) | -
Loss on sale of eldercare center - | 2,310
Depreciation and amortization 16,068 | 26,402
Lease expense 6,600 | 8,944
Interest expense (contractual interest for the three months |
ended March 31, 2001 was $56,703) 12,642 | 31,608
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Income (loss) before debt restructuring and reorganization |
costs, income taxes, equity in net loss of |
unconsolidated affiliates and minority interests 50,884 | (17,857)
Debt restructuring and reorganization costs 1,700 | 10,497
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|
Income (loss) before income taxes, equity in net loss of |
unconsolidated affiliates and minority interests 49,184 | (28,354)
Income taxes 19,182 | -
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Income (loss) before equity in net loss of unconsolidated |
affiliates and minority interests 30,002 | (28,354)
Equity in net loss of unconsolidated affiliates (35) | (814)
Minority interests (595) | 4,387
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Income (loss) from continuing operations before |
preferred stock dividends 29,372 | (24,781)
Preferred stock dividends 630 | 11,249
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Income (loss) from continuing operations 28,742 | (36,030)
Loss from discontinued operations, net of taxes (3,799) | (693)
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Net income (loss) attributed to common shareholders $ 24,943 | $ (36,723)
====================================================================================================================================
|
Per common share data: |
Basic |
Income (loss) from continuing operations $ 0.70 | $ (0.74)
Loss from discontinued operations (0.09) | (0.01)
Net income (loss) $ 0.61 | $ (0.75)
Weighted average shares 41,168,498 | 48,641,456
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Diluted |
Income (loss) from continuing operations $ 0.68 | $ (0.74)
Loss from discontinued operations (0.09) | (0.01)
Net income (loss) $ 0.59 | $ (0.75)
Weighted average shares 43,300,745 | 48,641,456
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Successor Company | Predecessor Company
Six months ended | Six months ended
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March 31, 2002 | March 31, 2001
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Net revenues: |
Inpatient services $ 706,172 | $ 660,807
Pharmacy and medical supply services 553,446 | 511,175
Other revenue 3,407 | 75,337
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Total net revenues 1,343,025 | 1,247,319
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|
Operating expenses: |
Salaries, wages and benefits 582,788 | 538,709
Cost of sales 331,696 | 303,105
Other operating expenses 301,660 | 293,818
Gain from arbitration award (21,678) | -
Gain on sale of eldercare center - | (1,770)
Loss on sale of eldercare center - | 2,310
Depreciation and amortization 31,797 | 53,261
Lease expense 13,519 | 18,197
Interest expense (contractual interest for the six months |
ended March 31, 2001 was $116,113) 25,701 | 65,757
-----------------------------------------------------------------------------------------------------------|----------------------
Income (loss) before debt restructuring and reorganization |
costs, income taxes, equity in net income (loss) of unconsolidated |
affiliates and minority interests 77,542 | (26,068)
Debt restructuring and reorganization costs 1,700 | 24,706
-----------------------------------------------------------------------------------------------------------|----------------------
Income (loss) before income taxes, equity in net income (loss) of |
unconsolidated affiliates and minority interests 75,842 | (50,774)
Income taxes 29,578 | -
-----------------------------------------------------------------------------------------------------------|----------------------
Income (loss) before equity in net income (loss) of unconsolidated |
affiliates and minority interests 46,264 | (50,774)
Equity in net income (loss) of unconsolidated affiliates 580 | (1,030)
Minority interests (752) | 6,198
-----------------------------------------------------------------------------------------------------------|----------------------
Income (loss) from continuing operations before |
preferred stock dividends 46,092 | (45,606)
Preferred stock dividends 1,260 | 22,749
-----------------------------------------------------------------------------------------------------------|----------------------
Income (loss) from continuing operations 44,832 | (68,355)
Loss from discontinued operations, net of taxes (4,290) | (1,179)
-----------------------------------------------------------------------------------------------------------|----------------------
Net income (loss) attributed to common shareholders $ 40,542 | $ (69,534)
===========================================================================================================|======================
|
Per common share data: |
Basic |
Income (loss) from continuing operations $ 1.09 | $ (1.41)
Loss from discontinued operations (0.10) | (0.02)
Net income (loss) $ 0.99 | $ (1.43)
Weighted average shares 41,102,279 | 48,641,456
-----------------------------------------------------------------------------------------------------------|----------------------
Diluted |
Income (loss) from continuing operations $ 1.07 | $ (1.41)
Loss from discontinued operations (0.10) | (0.02)
Net income (loss) $ 0.97 | $ (1.43)
Weighted average shares 43,230,209 | 48,641,456
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Successor Company | Predecessor Company
Six months ended | Six months ended
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March 31, 2002 | March 31, 2001
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Cash flows from operating activities: |
Net income (loss) attributed to common shareholders $ 40,542 | $ (69,534)
Net charges included in operations not requiring funds 59,895 | 116,176
Changes in assets and liabilities: |
Accounts receivable (16,247) | (11,221)
Accounts payable and accrued expenses 24,585 | (17,562)
Refinancing of pharmacy supplier credit terms (42,000) | -
Other, net 125 | (9,326)
-----------------------------------------------------------------------------------------------------------|------------------------
Net cash provided by operating activities before debt |
restructuring and reorganization costs 66,900 | 8,533
-----------------------------------------------------------------------------------------------------------|------------------------
Cash paid for debt restructuring and reorganization costs (32,182) | (21,902)
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Net cash provided by (used in) operating activities 34,718 | (13,369)
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|
Cash flows from investing activities: |
Net purchases of restricted marketable securities (13,039) | (5,195)
Proceeds from sale of eldercare center - | 7,010
Capital expenditures (19,973) | (23,256)
Purchase of eldercare centers (10,453) | -
Notes receivable and other investments, and |
other long-term asset additions, net 5,245 | 3,237
-----------------------------------------------------------------------------------------------------------|------------------------
Net cash used in investing activities (38,220) | (18,204)
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|
Cash flows from financing activities: |
Net borrowings under working capital revolving credit facilities - | 33,349
Repayment of long-term debt and payment of sinking fund requirements (34,349) | (857)
Proceeds from issuance of long-term debt 80,000 | -
-----------------------------------------------------------------------------------------------------------|------------------------
Net cash provided by financing activities 45,651 | 32,492
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|
Net increase (decrease) in cash and equivalents 42,149 | 919
Cash and equivalents: |
Beginning of period 32,139 | 22,948
-----------------------------------------------------------------------------------------------------------|------------------------
End of period $ 74,288 | $ 23,867
===========================================================================================================|========================
Supplemental cash flow information: |
Interest paid $ 26,932 | $ 66,115
Income taxes paid (net of receipts) 1,052 | -
===========================================================================================================|========================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
Genesis Health Ventures, Inc. and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
1. Business
Genesis Health Ventures, Inc. and its subsidiaries ("Genesis" or the "Company")
provide a broad range of healthcare services to the geriatric population,
principally within five geographic markets in the eastern United States. The
Company's operations are comprised of two primary business segments: (1)
inpatient services and (2) pharmacy and medical supply services. Inpatient
services are provided through a network of skilled nursing and assisted living
centers. Pharmacy and medical supply services are provided through long-term
care pharmacies serving approximately 250,000 institutional beds; medical supply
and home medical equipment distribution centers; community-based pharmacies; and
infusion therapy services. Our discernible segments are complemented by an array
of other service capabilities through the Genesis ElderCare(R) delivery model of
integrated healthcare networks.
2. Basis of Presentation
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, 2001.
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 from June 22, 2000 (the "Petition
Date") to September 30, 2001, all adjustments pursuant to the American Institute
of Certified Public Accountants Statement of Position 90-7, "Financial Reporting
By Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), for a
fair presentation of the financial position and results of operations for the
periods presented. Also in accordance with the provisions of SOP 90-7, the
unaudited condensed consolidated balance sheets include all necessary
adjustments incorporating the provisions of fresh-start reporting at September
30, 2001. Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. Factors Affecting Comparability of Financial Information
As a consequence of the implementation of fresh-start reporting effective
September 30, 2001 (see "Footnote 4 - Reorganization"), the financial
information presented in the unaudited condensed consolidated statement of
operations for the three and six months ended March 31, 2002 and the
corresponding statements of cash flows for the six month period ended March 31,
2002 are generally not comparable to the financial results for the corresponding
periods in the prior year. Any financial information herein labeled "Predecessor
Company" refers to periods prior to the adoption of fresh-start reporting, while
those labeled "Successor Company" refer to periods following the Company's
adoption of fresh-start reporting.
The lack of comparability in the accompanying unaudited condensed consolidated
financial statements is most apparent in the Company's capital costs (lease,
interest, depreciation and amortization), as well as with income taxes, minority
interests, debt restructuring and reorganization costs, and preferred dividends.
Management believes that business segment operating revenues and operating
expenses of the Predecessor Company are generally comparable to those of the
Successor Company.
7
4. Reorganization
Background.
On June 22, 2000, Genesis and certain of its direct and indirect subsidiaries
filed for voluntary relief under Chapter 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). On the same date, a 43.6% owned affiliate of
Genesis, The Multicare Companies, Inc. and certain of its direct and indirect
subsidiaries ("Multicare") and certain of its affiliates also filed for relief
under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court (singularly
and collectively referred to herein as "the Chapter 11 cases" unless the context
otherwise requires).
Genesis and Multicare's financial difficulties were attributed to a number of
factors. First, the federal government made fundamental changes to the
reimbursement for medical services provided to individuals. The changes had a
significant adverse impact on the healthcare industry as a whole and on Genesis'
and Multicare's cash flows. Second, the federal reimbursement changes
exacerbated a long-standing problem of inadequate reimbursement by the states
for medical services provided to indigent persons under the various state
Medicaid programs. Third, numerous other factors adversely affected Genesis and
Multicare's cash flows, including increased labor costs, increased professional
liability and other insurance costs, and increased interest rates. Finally, as a
result of declining governmental reimbursement rates and in the face of rising
inflationary costs, Genesis and Multicare were too highly leveraged to service
their debt, including their long-term lease obligations.
On October 2, 2001, (the "Effective Date"), Genesis and Multicare consummated a
joint plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy
Code (the "Reorganization") pursuant to a September 20, 2001 order entered by
the Bankruptcy Court approving the Plan proposed by Genesis and Multicare. The
principal provisions of the Plan were as follows:
o Multicare became a wholly-owned subsidiary of Genesis. Genesis previously
owned 43.6% of Multicare and managed its skilled nursing and assisted
living facilities under the Genesis Eldercare(R) brand name;
o New senior notes, new convertible preferred stock, new common stock and new
warrants were issued to Genesis and Multicare's creditors. Approximately
93% of the Successor Company's new common stock, $242.6 million in new
senior notes and new preferred stock with a liquidation preference of $42.6
million were issued to the Genesis and Multicare senior secured creditors.
New one year warrants to purchase an additional 11% of the new common stock
and approximately 7% of the new common stock have been or will be issued to
the Genesis and Multicare unsecured creditors;
o Holders of Genesis and Multicare pre-chapter 11 preferred and common stock
received no distribution and those instruments were canceled;
o Claims between Genesis and Multicare were set-off against one another and
any remaining claims were waived and released; and
o A new Board of Directors was constituted.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered into a new Senior Credit Facility (defined in
"Footnote 6 - Long-Term Debt").
8
In accordance with SOP 90-7, the Company has recorded all expenses incurred as a
result of the bankruptcy filing separately as debt restructuring and
reorganization costs. A summary of the principal categories of debt
restructuring and reorganization costs are as follows (in thousands):
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
------------------------------------------------------------------------------------------------------------------------------
Three | Three Six | Six
months ended | months ended months ended | months ended
March 31, 2002 | March 31, 2001 March 31, 2002 | March 31, 2001
------------------------------------------------------------------------------------------------------------------------------
Debt restructuring and reorganization costs: | |
Professional, bank and other fees $ - | $ 8,113 $ - | $ 18,212
Employee benefit related costs, | |
including severance - | 1,892 - | 5,854
Exit costs of terminated businesses - | 492 - | 640
Post confirmation mortgage adjustment 1,700 | - 1,700 | -
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$ 1,700 | $ 10,497 $ 1,700 | $ 24,706
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The post confirmation mortgage adjustment recorded during the periods ended
March 31, 2002 is the result of a settlement reached with the lender of a
pre-petition mortgage obligation for an amount that exceeded the estimated loan
value established in the September 30, 2001 fresh-start balance sheet by $1.7
million.
Fresh-Start Reporting.
For financial reporting purposes, the Company adopted the provisions of
fresh-start reporting effective September 30, 2001. In connection with the
adoption of fresh-start reporting, a new entity was deemed created for financial
reporting purposes, the provisions of the Company's reorganization plan were
implemented, assets and liabilities were adjusted to their estimated fair values
and the Company's accumulated deficit was eliminated.
Merger of Genesis and Multicare.
In accordance with the Plan, Multicare became a wholly-owned subsidiary of
Genesis on the Effective Date. Under fresh-start reporting, the Company
consolidated its 100% interest in Multicare as of September 30, 2001. Genesis
previously owned 43.6% of Multicare.
The consummation of the Company's Plan constitutes a change in the controlling
interests of the Company. The provisions of the Plan have a material effect on
the operating results of the Successor Company in periods following the
Reorganization.
The following unaudited pro forma statement of operations information gives
effect to the Plan as if it were consummated on October 1, 2000. The unaudited
pro forma statement of operations information has been prepared to reflect the
consolidation of the financial results of Multicare, with no minority interest.
The pro forma statement of operations information includes consideration for the
Company's new capital structure, the elimination of restructuring related
charges, and changes in depreciation and amortization expense following the
revaluation of assets and liabilities to their estimated fair value. The pro
forma statement of operations information does not necessarily reflect the
results of operations that would have occurred had the Reorganization actually
occurred at the beginning of the period presented.
9
Six Months
Ended
(Unaudited, in thousands, except per share amounts) March 31, 2001
-----------------------------------------------------------------------------------------------------
Pro Forma Statement of Operations Information:
-----------------------------------------------------------------------------------------------------
Total net revenues $ 1,247,319
Net income from continuing operations 22,634
Net income from continuing operations per common share - Basic 0.55
Net income from continuing operations per common share - Diluted $ 0.55
-----------------------------------------------------------------------------------------------------
5. Certain Significant Risks and Uncertainties
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 provided by us.
A number of the provisions of the Balanced Budget Act and the Benefits
Improvement Protection Act enactments providing additional funding for Medicare
participating skilled nursing facilities expire on September 30, 2002. Expiring
provisions are estimated to, on average, reduce per beneficiary per diems by
$34. On April 23, 2002, the Centers for Medicare and Medicaid Services ("CMS")
issued a press statement announcing that the agency would not proceed with its
previously announced changes in the skilled nursing facility case-mix
classification system. In its announcement, CMS made it clear that case-mix
refinements would be postponed for a full year and that the annual market
adjustment for the fiscal year 2003 skilled nursing facility prospective payment
rates would be promulgated as a notice in late July, 2002.
With regard to Congressional consideration, a package of Medicare amendments,
including provider relief provisions, is expected to be enacted before the
current session of Congress adjourns. It is premature to forecast the outcome of
Congressional action.
Our previous estimates of the impact of the "SNF Medicare Cliff" (which included
the anticipated effort of CMS changes in case-mix classification system) was
approximately 18% of the per diem rate; the revised estimate factoring in the
administrative decision not to proceed with changes at this time still exposes
the facility sector to a 10% reduction. For us, this could have an adverse
revenue impact exceeding $35 million. We are very involved with trade
organizations representing the skilled nursing facility sector in aggressively
pursing strategies to minimize the potentially adverse impact.
There may be additional provisions in the Medicare legislation affecting our
other businesses. Congress is expected to consider changes affecting pharmacy,
rehabilitation therapy, diagnostic services and the payment for services in
other health settings.
It is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes or any future healthcare legislation will not adversely
affect our business. There can be no assurance that payments under governmental
and private third party payor programs will be timely, will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs. Our financial condition and results of operations may be affected by
the reimbursement process, which in our industry is complex
10
and can involve lengthy delays between the time that revenue is recognized and
the time that reimbursement amounts are settled.
Legal Proceedings Potentially Affecting Revenues.
Certain service contracts permit the Company's NeighborCare(R) pharmacy
operations to provide services to HCR Manor Care, constituting approximately ten
percent and four percent of the net revenues of NeighborCare and Genesis,
respectively. These service contracts with HCR Manor Care are the subject of
certain litigation. See "Part II: Other Information, Item 1 - Legal Proceedings"
herein and in the Company's Annual Report on Form 10-K. See also "Footnote 13 -
Arbitration Award".
6. Long-Term Debt
Long-term debt at March 31, 2002 and September 30, 2001 consists of the
following (in thousands):
March 31, September 30,
-----------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------
Secured debt
Senior Credit Facility
Term Loan $ 283,575 $ 285,000
Delayed Draw Term Loan 79,485 -
-----------------------------------------------------------------------------------
Total Senior Credit Facility 363,060 285,000
Senior Secured Notes 242,605 242,605
Mortgage and other secured debts 88,024 116,904
-----------------------------------------------------------------------------------
Total debt 693,689 644,509
Less:
Current portion of long-term debt (10,417) (41,241)
-----------------------------------------------------------------------------------
Long-term debt $ 683,272 $ 603,268
-----------------------------------------------------------------------------------
Senior Credit Facility.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered into a Senior Credit Facility consisting of the
following: (1) a $150 million revolving line of credit (the "Revolving Credit
Facility"); (2) a $285 million term loan (the "Term Loan"); and (3) an $80
million delayed draw term loan (the "Delayed Draw Term Loan") (collectively the
"Senior Credit Facility"). The outstanding amounts under the Term Loan and the
Delayed Draw Term Loan bear interest at the London Inter-bank Offered Rate
("LIBOR") plus 3.50%, or approximately 5.53% at March 31, 2002. The outstanding
amounts under the Revolving Credit Facility, if any, bear interest based upon a
performance related grid.
The Senior Credit Facility requires the Successor Company to maintain compliance
with certain financial and non-financial covenants, including minimum EBITDAR
(as defined); limitations on capital expenditures, maximum leverage ratios,
minimum fixed charge coverage ratios and minimum net worth.
In December 2001, the Senior Credit Facility was amended in order to extend the
date by which the Company is required to achieve certain levels of fixed versus
variable interest rate exposure. As amended, by June 30, 2002, the Company is
required to enter into interest rate swap agreements that effectively fix or cap
the interest cost on at least 50% of its consolidated debt. At March 31, 2002,
the Company's debt mix is approximately 13% fixed and 87% variable.
The Revolving Credit Facility is available to fund obligations under the Plan
and for general working capital requirements. The Revolving Credit Facility
matures on October 2, 2006. Usage under the Revolving Credit Facility is subject
to a Borrowing Base (as defined) calculation based upon real property
11
collateral value and a percentage of eligible accounts receivable (as defined).
Excluding an approximately $0.9 million posted letter of credit, no borrowings
were outstanding under the Revolving Credit Facility at March 31, 2002.
The Delayed Draw Term Loan, as originally contracted, was to be used to (1) fund
the purchase price of a proposed acquisition of a pharmacy operation; (2) pay
certain outstanding amounts owed to ElderTrust on certain loans secured by
mortgages; (3) fund the exercise of an option to purchase three eldercare
centers; and (4) to make other Specific Payments (as defined). Once repaid, the
Delayed Draw Term Loan cannot be re-borrowed. The Delayed Draw Term Loan
amortizes at a rate of one percent per year, and matures on April 2, 2007. As a
result of subsequent developments in the Company's bid to consummate a proposed
acquisition of a pharmacy operation, the Delayed Draw Term Loan was amended in
December 2001 to allow available borrowings that were otherwise earmarked for
the proposed pharmacy transaction to be used to restructure credit terms with
NeighborCare(R) pharmacy's primary supplier of pharmacy products.
During the second quarter of fiscal 2002, the Company borrowed approximately $42
million from the Delayed Draw Term Loan to finance the repayment of all trade
balances due to NeighborCare pharmacy's primary supplier of pharmacy products.
Prospectively, this change in credit terms should result in reduced pharmacy
product acquisition costs, partially offset by an increase in interest expense
on the incremental Delayed Draw Term Loan borrowings.
In the six months ended March 31, 2002, the Company utilized approximately $10
million from the Delayed Draw Term Loan to fund the exercise of the purchase
option previously described, and the Company utilized approximately $28 million
from the Delayed Draw Term Loan to satisfy certain mortgages as previously
described. The Delayed Draw Term Loan is fully drawn at March 31, 2002.
Senior Secured Notes.
On the Effective Date, and in connection with the consummation of the Plan, the
Successor Company entered into an indenture agreement in the principal amount of
$242.6 million (the "Senior Secured Notes"). The Senior Secured Notes bear
interest at LIBOR plus 5.0% (approximately 7.03% at March 31, 2002), and
amortize one percent each year and mature on April 2, 2007.
Other Secured Indebtedness.
During the six months ended March 31, 2002, the Company refinanced approximately
$28 million of other secured indebtedness with proceeds from the Delayed Draw
Term Loan. At March 31, 2002, the Company had approximately $88.0 million of
other secured debt consisting principally of revenue bonds and secured bank
loans.
7. Income Taxes
The Company's provision for income taxes for the six months ended March 31, 2002
was $29.6 million. The Company realized a $15.4 million tax benefit through the
realization of Net Operating Loss ("NOL") carryforwards and $2.6 million of
deferred tax liabilities due to temporary differences between book and tax basis
goodwill amortization. Pursuant to SOP 90-7, the income tax benefit of any
future realization of the NOL carryforwards are applied first as a reduction to
goodwill.
12
8. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) attributed to common shares (in thousands, except per share data):
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
-------------------------------------------------------------------------------------------------------------
Three | Three Six | Six
Months | Months Months | Months
Ended | Ended Ended | Ended
March 31, | March 31, March 31, | March 31,
2002 | 2001 2002 | 2001
-------------------------------------------------------------------------------------------------------------
| |
Basic: | |
Numerator: | |
Income (loss) from continuing operations $ 28,742 | $ (36,030) $ 44,832 | $ (68,355)
Loss from discontinued operations (3,799) | (693) (4,290) | (1,179)
Net income (loss) attributed to common | |
shareholders $ 24,943 | $ (36,723) $ 40,542 | $ (69,534)
-------------------------------------------------------------------------------------------------------------
Denominator: | |
Weighted average shares 41,168 | 48,641 41,102 | 48,641
-------------------------------------------------------------------------------------------------------------
Earnings (loss) per share: | |
Income (loss) from continuing operations $ 0.70 | $ (0.74) $ 1.09 | $ (1.41)
Loss from discontinued operations (0.09) | (0.01) (0.10) | (0.02)
Net income (loss) attributed to common | |
shareholders $ 0.61 | $ (0.75) $ 0.99 | $ (1.43)
-------------------------------------------------------------------------------------------------------------
| |
Diluted: | |
Numerator: | |
Income (loss) from continuing operations $ 28,742 | $ (36,030) $ 44,832 | $ (68,355)
Elimination of preferred dividend | |
requirements upon assumed conversion of | |
preferred stock 630 | - 1,260 | -
--------------------------------------------------------------|-------------------------------|--------------
Income (loss) from continuing operations for | |
purposes of diluted calculation 29,372 | (36,030) 46,092 | (68,355)
Loss from discontinued operations (3,799) | (693) (4,290) | (1,179)
Net income (loss) attributed to common | |
shareholders for purposes of diluted | |
calculation $ 25,573 | $ (36,723) $ 41,802 | $ (69,534)
| |
--------------------------------------------------------------|-------------------------------|--------------
Denominator: | |
Weighted average shares - basic 41,168 | 48,641 41,102 | 48,641
Add: | |
Assumed conversion of preferred stock 2,095 | - 2,095 | -
Dilutive effect of contingent issuable stock 38 | - 33 | -
--------------------------------------------------------------|-------------------------------|--------------
Weighted average shares - diluted 43,301 | 48,641 43,230 | 48,641
-------------------------------------------------------------------------------------------------------------
Earnings (loss) per share: | |
Income (loss) from continuing operations $ 0.68 | $ (0.74) $ 1.07 | $ (1.41)
Loss from discontinued operations (0.09) | (0.01) (0.10) | (0.02)
Net income (loss) attributed to common | |
shareholders $ 0.59 | $ (0.75) $ 0.97 | $ (1.43)
-------------------------------------------------------------------------------------------------------------
Basic earnings per share is calculated by dividing net income (numerator) by the
weighted average number of shares of common stock outstanding during the
respective reporting period (denominator). Included in
13
the calculation of basic weighted average shares of 41,168,498 and 41,102,279
for the three and six months ended March 31, 2002, respectively, are 1,366,221
shares to be issued in connection with a plan confirmed by a court, of which,
approximately 480,000 shares were issued subsequent to March 31, 2002.
Diluted earnings per share is calculated in a manner consistent with basic
earnings per share except that the weighted average shares outstanding are
increased to include additional shares from the assumed conversion of Series A
Convertible Preferred Stock and contingent issuable stock. No conversion of
preferred stock is assumed in the three and six months ended March 31, 2001
since their effect is antidilutive, however, the conversion of preferred stock
is assumed in the three and six months ended March 31, 2002 since their effect
is dilutive. No exercise of warrants or employee stock options is assumed for
the three and six months ended March 31, 2002 since their effect is
antidilutive.
9. Comprehensive Income (Loss)
The following table sets forth the computation of comprehensive income (loss)
(in thousands):
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
----------------------------------------------------------------------------------------------------------------
Three | Three Six | Six
Months | Months Months | Months
Ended | Ended Ended | Ended
March 31, | March 31, March 31, | March 31,
2002 | 2001 2002 | 2001
----------------------------------------------------------------------------------------------------------------
| |
Net income (loss) attributed to common | |
shareholders $ 24,943 | $ (36,723) $ 40,542 | $ (69,534)
Unrealized gain (loss) on marketable | |
securities (266) | 713 (245) | 1,400
----------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 24,677 | $ (36,010) $ 40,297 | $ (68,134)
----------------------------------------------------------------------------------------------------------------
10. Discontinued Operations
On October 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards, No. 144 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 144"). Under SFAS
144, discontinued businesses or assets held for sale are removed from the
results of continuing operations. During the six months ended March 31, 2002,
the Company sold its ambulance business and either closed or identified for
closure three eldercare centers. The results of operations in the current and
prior year periods, along with any costs to exit such businesses in the current
year period, have been classified as discontinued operations in the condensed
consolidated statements of operations. Businesses sold or closed prior to the
Company's adoption of SFAS 144 continue to be reported in the results of
continuing operations.
The Company's ambulance business, which was not a reportable segment, has been
available for sale for several years. The ambulance business, which was
purchased in 1996 in connection with an acquisition of eldercare centers in
Pennsylvania and New Jersey, did not align with the Company's core operating
strategies. The three eldercare centers either closed or identified for closure
are components of the Company's inpatient services segment. These closures were
prompted by their lack of historical and projected satisfactory operating
performance.
14
The following table sets forth the components of losses from discontinued
operations (in thousands):
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
-------------------------------------------------------------------------------------------------------------
Three | Three Six | Six
Months | Months Months | Months
Ended | Ended Ended | Ended
March 31, | March 31, March 31, | March 31,
2002 | 2001 2002 | 2001
-------------------------------------------------------------------------------------------------------------
| |
Operating losses of discontinued businesses $ (1,147) | $ (693) $ (1,950) | $ (1,179)
Loss on discontinuation of businesses (5,082) | - (5,082) | -
Income tax benefit 2,430 | - 2,742 | -
-------------------------------------------------------------------------------------------------------------
Loss from discontinued operations, net of | |
taxes $ (3,799) | $ (693) $ (4,290) | $ (1,179)
=============================================================================================================
The loss on discontinuation of businesses includes the write-down of assets to
fair value, less costs to sell and maintain any related long-lived assets
through the estimated sale date.
The following table sets forth the carrying amounts of the major classes of
assets and liabilities of discontinued operations (in thousands):
Successor Successor
Company Company
March 31, September 30,
2002 2001
---------------------------------------------------------------------------------------------------
Current assets $ 4,721 $ 5,529
Non current assets (including property, plant and equipment) 1,811 6,240
Current liabilities $ 1,983 $ 1,622
---------------------------------------------------------------------------------------------------
11. Segment Information
The Company's principal operating segments are identified by the types of
products and services from which revenues are derived and are consistent with
the reporting structure of the Company's internal organization.
The Company has two reportable segments: (1) inpatient services and (2) pharmacy
and medical supplies services.
The Company includes in inpatient services revenues all room and board charges
and ancillary service revenue for its eldercare customers at its 190 owned and
leased eldercare centers. The centers offer three levels of care for their
customers: skilled, intermediate and personal.
The Company provides pharmacy and medical supply services through its
NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of infusion therapy, medical supplies and equipment provided to
eldercare centers it operates, as well as to independent healthcare providers by
contract. The Company provides these services through 64 institutional
pharmacies (eight are jointly-owned) and 23 medical supply and home medical
equipment distribution centers (four are jointly-owned) located in its various
market areas. In addition, the Company operates 31 community-based pharmacies
(two are jointly-owned) which are located in or near medical centers, hospitals
and physician office complexes. The community-based pharmacies provide
prescription and over-the-counter medications and certain medical supplies, as
well as personal service and consultation by licensed professional pharmacists.
15
Approximately 91% of the sales attributable to all pharmacy operations are
generated through external contracts with independent healthcare providers with
the balance attributable to centers owned or leased by the Company.
The accounting policies of the segments are the same as those of the
consolidated organization. All intersegment sales prices are market based.
The carrying value of the Company's assets in the following segment information
at March 31, 2002 and September 30, 2001, and the capital costs (depreciation
and amortization, lease expense, and interest), as well as income taxes,
minority interest and preferred dividends for the three and six months ended
March 31, 2002 reflect the provisions of the Plan and the impact of fresh-start
reporting. These costs for periods prior to the Company's emergence from
bankruptcy generally were recorded based on historical costs or contractual
agreements and do not reflect the provisions of the Plan. Accordingly, capital
costs of the Successor Company for the three and six months ended March 31, 2002
are not comparable to those of the Predecessor Company for the same period in
the prior year.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "All other" category of revenues and operating
income represents operating information of business units below the prescribed
quantitative thresholds. These business units derive revenues from the following
services: rehabilitation therapy, management services, consulting services,
homecare services, physician services, diagnostic services, hospitality
services, group purchasing fees, respiratory health services, staffing services
and other healthcare related services. The "Corporate and other" category
consists of the Company's general and administrative function, for which there
is generally no revenue generated, as well as other unallocated expenses.
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
Three months | Three months Six months | Six months
ended | ended (1) ended | ended (1)
(in thousands) March 31, 2002 | March 31, 2001 March 31, 2002 | March 31, 2001
------------------------------------------------------------------------------------------------------------------
| |
Revenues: | |
Inpatient services - external $ 355,416 | $ 330,777 $ 706,172 | $ 660,807
Pharmacy and medical supply services: | |
External 280,052 | 255,601 553,446 | 511,175
Intersegment 26,629 | 25,088 52,876 | 47,258
All other: | |
External 43,426 | 37,832 83,407 | 75,337
Intersegment 42,951 | 48,637 85,664 | 95,175
Elimination of intersegment revenues (69,580) | (73,725) (138,540) | (142,433)
------------------------------------------------------------------------------------------------------------------
Total net revenues $ 678,894 | $ 624,210 $1,343,025 | $ 1,247,319
------------------------------------------------------------------------------------------------------------------
Operating income (2): | |
Inpatient services $ 45,364 | $ 33,142 $ 91,061 | $ 73,050
Pharmacy and medical supply services 26,845 | 21,225 53,099 | 44,431
All other 12,499 | 13,365 23,573 | 23,860
Corporate and other (20,192) | (16,325) (40,852) | (29,654)
------------------------------------------------------------------------------------------------------------------
Total operating income $ 64,516 | $ 51,407 $ 126,881 | $ 111,687
------------------------------------------------------------------------------------------------------------------
Capital and other: | |
Consolidated: | |
Depreciation and amortization $ 16,068 | $ 26,402 $ 31,797 | $ 53,261
Lease expense 6,600 | 8,944 13,519 | 18,197
Interest expense 12,642 | 31,608 25,701 | 65,757
Gain on arbitration award (21,678) | - (21,678) | -
Gain on sale of eldercare center - | - - | (1,770)
Loss on sale of eldercare center - | 2,310 - | 2,310
Debt restructuring and reorganization | |
costs 1,700 | 10,497 1,700 | 24,706
Income taxes 19,182 | - 29,578 | -
Equity in earnings (loss) of | |
unconsolidated affiliates (35) | (814) 580 | (1,030)
Minority interest (595) | 4,387 (752) | 6,198
Preferred stock dividends 630 | 11,249 1,260 | 22,749
------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing | |
operations 28,742 | (36,030) 44,832 | (68,355)
Loss from discontinued operations, net | |
of taxes (3,799) | (693) (4,290) | (1,179)
------------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to | |
common shareholders $ 24,943 | $ (36,723) $ 40,542 | $ (69,534)
==================================================================================================================
16
Successor Company Successor Company
(in thousands) March 31, 2002 September 30, 2001 (1)
-------------------------------------------------------------------------------------------
Assets:
Inpatient services $ 1,011,023 $ 1,079,791
Pharmacy and medical supply services 695,203 672,234
Other 201,009 82,555
------------------------------------------------------------------------------------------
$ 1,907,235 $ 1,834,580
==========================================================================================
(1) The March 31, 2001 and September 30, 2001 periods were restated to conform
to the current period presentation which considers direct overhead costs in
the calculation of inpatient services operating income and realigns
overhead businesses within the inpatient services segment for the asset
information. The summary segment information for pharmacy and medical
supplies has historically included direct overhead costs. In accordance
with our adoption of SFAS 144, the inpatient services and "all other"
services segments for the periods ended March 31, 2001 were restated to
remove discontinued businesses from the results of continuing operations.
(2) Operating income is defined as income after operating expenses as they
appear on the Company's unaudited condensed consolidated statements of
operations and is calculated by subtracting salaries, wages and benefits,
cost of sales and other operating expenses from net revenues.
12. Restricted Assets
At March 31, 2002 and September 30, 2001, the Company reported restricted
investments in marketable securities of $64.4 million and $51.6 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 intercompany loans, advances or cash dividends.
13. Arbitration Award
On February 14, 2002, the arbitrator ruled in favor of NeighborCare on all
claims and counterclaims in the lawsuit involving Manor Care, Inc. and Manorcare
Health Services, Inc. ("Manor Care"). The arbitrator found that Manor Care did
not lawfully terminate the Master Service Agreements with NeighborCare, so that
those contracts remain in full force and effect until the end of September 2004.
The arbitrator awarded NeighborCare $23.0 million in damages for respondents'
failure to allow NeighborCare to exercise its right under the Master Service
Agreements to service facilities owned and operated by a subsidiary of
respondent Manor Care. In addition, the arbitrator terminated his prior ruling
that allowed respondents to withhold 10% of their payments to NeighborCare, and
respondents paid NeighborCare an additional $8.8 million in funds representing
the amounts withheld during the course of the arbitration pursuant to the
arbitrator's prior ruling.
NeighborCare and respondents have each submitted post-decision motions.
NeighborCare has asserted that the amount of its damages should be adjusted
upward by approximately $1.0 million. Respondents contend that the amount of
damages should be adjusted downward by approximately $2.0 million, and have also
asked the arbitrator to rule that, under the Master Service Agreements,
NeighborCare remains obligated to renegotiate the pricing it offers to
respondents for pharmacy and infusion therapy products and services. The parties
have fully briefed these motions, and anticipate oral argument on the motions in
late May, 2002.
In March 2002, we recorded a net gain of $21.7 million resulting from the award
in the HCR Manor Care arbitration. Cash proceeds from that award were received
in April of 2002. No income has been recorded on the disputed amounts previously
described. See "Part II: Other Information, Item 1 - Legal Proceedings" herein
and in the Company's Annual Report of Form 10-K.
17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since we began operations in July 1985, we have focused our efforts on providing
an expanding array of specialty medical services to elderly customers. We
generate revenues primarily from two sources: inpatient services and pharmacy
and medical supply services. However, we also derive revenue from other sources.
Inpatient services revenues include all room and board charges and ancillary
service revenue for our eldercare customers at our 190 owned and leased
eldercare centers.
We provide pharmacy and medical supply services through our NeighborCare(R)
pharmacy operations. Included in pharmacy and medical supply service revenues
are institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers operated
by us, as well as to independent healthcare providers by contract. We provide
these services through 64 institutional pharmacies (eight are jointly-owned) and
23 medical supply and home medical equipment distribution centers (four are
jointly-owned) located in our various market areas. In addition, we operate 31
community-based pharmacies (two are jointly-owned), which are located in or near
medical centers, hospitals and physician office complexes. The community-based
pharmacies provide prescription and over-the-counter medications and certain
medical supplies, as well as personal service and consultation by licensed
professional pharmacists.
We include the following service revenue in other revenues: rehabilitation
therapy services, management fees, consulting services, homecare services,
physician services, diagnostic services, hospitality services, group purchasing
fees, respiratory health services, staffing services and other healthcare
related services.
Certain Transactions and Events
Reorganization:
Background.
On June 22, 2000, (the "Petition Date") we and certain of our direct and
indirect subsidiaries filed for voluntary relief under Chapter 11 of the United
States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On the same date, our 43.6%
owned affiliate, The Multicare Companies, Inc. and certain of its direct and
indirect subsidiaries ("Multicare") and certain of its affiliates also filed for
relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court
(singularly and collectively referred to herein as "the Chapter 11 cases" unless
the context otherwise requires).
Our and Multicare's financial difficulties were attributed to a number of
factors. First, the federal government made fundamental changes to the
reimbursement for medical services provided to individuals. The changes had a
significant adverse impact on the healthcare industry as a whole and on our and
Multicare's cash flows. Second, the federal reimbursement changes exacerbated a
long-standing problem of inadequate reimbursement by the states for medical
services provided to indigent persons under the various state Medicaid programs.
Third, numerous other factors adversely affected our and Multicare's cash flows,
including increased labor costs, increased professional liability and other
insurance costs, and increased interest rates. Finally, as a result of declining
governmental reimbursement rates and in the face of rising inflationary costs,
we and Multicare were too highly leveraged to service our debt, including our
long-term lease obligations.
On October 2, 2001, (the "Effective Date"), we and Multicare consummated a joint
plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code (the
18
"Reorganization") pursuant to a September 20, 2001 order entered by the
Bankruptcy Court approving the Plan proposed by us, and Multicare. The principal
provisions of the Plan were as follows:
o Multicare became our wholly-owned subsidiary. We previously owned 43.6% of
Multicare and managed its skilled nursing and assisted living facilities
under the Genesis Eldercare(R) brand name;
o New senior notes, new convertible preferred stock, new common stock and new
warrants were issued to our and Multicare's creditors. Approximately 93% of
new common stock, $242.6 million in new senior notes and new preferred
stock with a liquidation preference of $42.6 million were issued to our and
Multicare's senior secured creditors. New one year warrants to purchase an
additional 11% of the new common stock and approximately 7% of the new
common stock have been or will be issued to our and Multicare's unsecured
creditors;
o Holders of our and Multicare's pre-chapter 11 preferred and common stock
received no distribution and those instruments were canceled;
o Claims between us and Multicare were set-off against one another and any
remaining claims were waived and released; and
o A new Board of Directors was constituted.
On the Effective Date, and in connection with the consummation of the Plan, we
entered into a Senior Credit Facility consisting of the following: (1) a $150
million revolving line of credit (the "Revolving Credit Facility"); (2) a $285
million term loan (the "Term Loan") and (3) an $80 million delayed draw term
loan (the "Delayed Draw Term Loan") (collectively the "Senior Credit Facility").
In accordance with SOP 90-7 (as defined below under "Fresh-Start Reporting"), we
recorded all expenses incurred as a result of the Bankruptcy filing separately
as debt restructuring and reorganization costs. A summary of the principal
categories of debt restructuring and reorganization costs are as follows (in
thousands):
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
-----------------------------------------------------------------------------------------------------------------
Three | Three Six | Six
months ended | months ended months ended | months ended
March 31, 2002 | March 31, 2001 March 31, 2002 | March 31, 2001
-----------------------------------------------------------------------------------------------------------------
| |
Debt restructuring and reorganization costs: | |
Professional, bank and other fees $ - | $ 8,113 $ - | $ 18,212
Employee benefit related costs, | |
including severance - | 1,892 - | 5,854
Exit costs of terminated businesses - | 492 - | 640
Post confirmation mortgage | |
adjustment 1,700 | - 1,700 | -
-----------------------------------------------------------------------------------------------------------------
$ 1,700 | $ 10,497 $ 1,700 | $ 24,706
-----------------------------------------------------------------------------------------------------------------
The post confirmation mortgage adjustment recorded during the periods ended
March 31, 2002 is the result of a settlement reached with the lender of a
pre-petition mortgage obligation for an amount that exceeded the estimated loan
value established in the September 30, 2001 fresh-start balance sheet by $1.7
million.
19
Fresh-Start Reporting.
Upon emergence from our Chapter 11 proceedings, we adopted the principles of
fresh-start reporting in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7") / ("fresh-start
reporting"). For financial reporting purposes, we adopted the provisions of
fresh-start reporting effective September 30, 2001. In connection with the
adoption of fresh-start reporting, a new entity was deemed created for
financial reporting purposes, the provisions of our Plan were implemented,
assets and liabilities were adjusted to their estimated fair values and our
accumulated deficit was eliminated.
Factors Affecting Comparability of Financial Information.
As a consequence of the implementation of fresh-start reporting effective
September 30, 2001, the financial information presented in the unaudited
condensed consolidated statement of operations for the three and six months
ended March 31, 2002 and the statement of cash flows for the six months ended
March 31, 2002 are generally not comparable to the financial results for the
corresponding periods in the prior year. Any financial information herein
labeled "Predecessor Company" refers to periods prior to the adoption of
fresh-start reporting, while those labeled "Successor Company" refer to periods
following adoption of fresh-start reporting.
The lack of comparability in the accompanying unaudited condensed consolidated
financial statements is most apparent in our capital costs (lease, interest,
depreciation and amortization), as well as with income taxes, minority
interests, debt restructuring and reorganization costs, and preferred dividends.
We believe that business segment operating revenue and operating expenses of the
Predecessor Company are generally comparable to those of the Successor Company.
Merger of Genesis and Multicare.
In accordance with the Plan, Multicare became our wholly-owned subsidiary on the
Effective Date. Under fresh-start reporting, we consolidated our 100% interest
in Multicare as of September 30, 2001. We previously owned 43.6% of Multicare.
Results of Operations
Three months ended March 31, 2002 compared to three months ended March 31, 2001
Inpatient Services
Inpatient services revenue increased $24.6 million, or 7%, to $355.4 million for
the three months ended March 31, 2002 from $330.8 million for the same period in
the previous year. Approximately $29.4 million is principally attributed to
increased payment rates and higher Medicare, private pay and insurance patient
days ("Quality Mix") as a percentage of total patient days. Our average rate per
patient day for the three months ended March 31, 2002 was $181 compared to $165
for the comparable period in the prior year. This increase in the average rate
per patient day is principally driven by the effect of the Benefits Improvement
Protection Act ("BIPA") on our average Medicare rate per patient day, which
increased to $338 for the three months ended March 31, 2002 compared to $315 for
the comparable period in the prior year. Our revenue Quality Mix for the three
months ended March 31, 2002 was 52.2% compared to 51.3% for the comparable
period in the prior year. These rate and Quality Mix increases are offset by a
decrease in revenue of approximately $4.8 million resulting from the sale,
closure or lease terminations of certain eldercare centers. Total patient days
decreased 56,333 to 1,964,434 during the three months ended March 31, 2002
compared to 2,020,767 during the comparable period last year. Of this decrease,
60,700 patient days are attributed to the sale, closure or lease terminations of
certain eldercare centers discontinued in the prior year period; offset by the
addition of 2,223 patient days of two new eldercare centers. The remaining
increase of 2,144 patient days is the result of an increase in overall
occupancy.
20
Operating expenses for the three months ended March 31, 2002 increased $12.4
million, or 4%, to $310.0 million from $297.6 million for the same period in the
prior year. The primary cost for this segment is salary, wage and benefit costs,
which increased $10.2 million, or 6% for the three month period ended March 31,
2002 to $174.8 million from $164.6 million for the same period in the prior
year. This increase is net of a reduction of approximately $3.3 million in
salary, wage and benefit costs resulting from the sale, closure or lease
terminations of certain eldercare centers. Salary, wage and benefit costs,
considering the impact of exited businesses, increased $13.5 million, or 8%,
driven by inflationary cost increases and the relative mix of employed labor
versus agency labor costs. As a percentage of net revenue, salary, wage and
benefit costs, once adjusted for the impact of exited businesses, increased to
49.2% for the three months ended March 31, 2002, compared to 48.8% for the
comparable period in the prior year. This increase is the result of 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. The impact of these inflationary and volume increases expressed as a
percentage of revenue is offset with a disproportionate per diem rate growth,
largely created by the effect of BIPA, previously discussed. Other operating
expenses, once reduced for the impact of new and exited businesses ($1.7 million
for the three months ended March 31, 2001), increased $3.9 million, or 3%, to
$135.3 million for the three months ended March 31, 2002 compared to $131.3
million for the same period last year. The increase was primarily driven by
additional ancillary supply costs to treat a higher acuity customer base of
approximately $3.0 million, additional bad debt expense of $1.0 million,
increased property and general liability insurance of approximately $0.5 million
and other operating costs of approximately $0.2 million. These increases were
offset by reduced agency labor costs (principally nursing costs) of
approximately $0.8 million. External labor agencies charge the Company a premium
rate for labor compared to salary, wages and benefits earned by employees. The
declining reliance upon such external labor agencies serves to reduce overall
operating expense while increasing salary, wages and benefits costs.
Operating income increased $12.3 million, to $45.4 million for three months
ended March 31, 2002 from $33.1 million in the same period in the prior year.
Pharmacy and medical supply services
Pharmacy and medical supply services revenue (before intersegment eliminations)
increased $26.0 million, or 9%, to $306.7 million for the three months ended
March 31, 2002 compared to $280.7 million for the three months ended March 31,
2001. Revenues from intersegment customers, which are eliminated in
consolidation, increased approximately $1.5 million, or 6%, to $26.6 million for
the three months ended March 31, 2002 compared to $25.1 million for the same
period of the prior year. The remaining increase in net pharmacy and medical
supply service revenues of approximately $24.5 million, or 9%, is due primarily
to rate increases and shifts in customer and product mix with external
customers.
Cost of sales (before intersegment eliminations) increased $18.7 million, or
11%, for the three month period ended March 31, 2002, to $194.7 million from
$176.0 million for the same period in the prior year. Of this growth, $16.3
million is attributed to pharmacy and medical supply revenue growth, and $2.4
million is attributed to changes in customer and product mix. As a percentage of
revenue, cost of sales for the three month period ended March 31, 2002 was 63.5%
compared to 62.7% for the comparable period in the prior year. Other operating
expenses for this segment, including salaries, wages and benefits, increased
$1.7 million, or 2%, to $85.2 million for the three months ended March 31, 2002
compared to $83.5 million for the same period in the prior year. As a percentage
of revenue, other operating costs declined to 28% for the three months ended
March 31, 2002 compared to 30% for the comparable period in the prior year. This
decline is attributed to improved cost control and the absorption of fixed costs
by the relative level of revenue growth.
Operating income increased $5.6 million, to $26.8 million for three months ended
March 31, 2002 from $21.2 million in the same period in the prior year.
During the second quarter of fiscal 2002, we borrowed approximately $42 million
from the Delayed Draw Term Loan to finance the repayment of all trade balances
21
due to NeighborCare(R) pharmacy's primary supplier of pharmacy products.
Prospectively, this change in credit terms should result in reduced pharmacy
product acquisition costs.
All Other
All other includes operating information of business units below the prescribed
quantitative thresholds. These business units derive revenues and expenses 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. Revenues, including
intersegment revenues, from other segments decreased approximately $0.1 million
to $86.4 million from $86.5 million for the three month periods ended March 31,
2002 and March 31, 2001, respectively. The decline was primarily caused by less
management and development fee revenue, offset by growth in other service
related businesses' revenue.
Operating income for all other businesses declined $0.9 million, to $12.5
million for three months ended March 31, 2002 from $13.4 million in the same
period in the prior year.
Corporate and other
The "Corporate and other" category consists of our general and administrative
function and other unallocated amounts, for which there is generally no revenue
generated. Operating expenses increased $3.9 million in the three months ended
March 31, 2002 to $20.2 million compared to $16.3 million in the comparable
period in the prior year. Of this increase, approximately $3.8 million is
related to increased expense levels for our cash based incentive compensation
program and an executive non-cash stock based compensation program,
approximately $1.5 million relates to other unallocated employee benefit costs,
and the remaining increase of approximately $2.1 million is principally
attributed to labor related and other operating expense growth in our corporate
support functions. These increases are offset by a $3.5 million charge
recognized in the three months ended in March 31, 2001 in connection with the
renegotiation of the pharmacy supply agreement with our principle supplier of
pharmacy related products. These negotiations resulted in more beneficial credit
terms and improved pricing on certain products.
Capital costs and other
Our capital costs for the three months ended March 31, 2002 reflect the impact
of fresh-start reporting following our emergence from bankruptcy. Those
adjustments materially changed the recorded amounts of capital costs, most
notably depreciation and amortization, lease expense, interest expense, income
taxes, minority interest and preferred stock dividends, and as a result, will
not be comparable to those for the three months ended March 31, 2001.
Depreciation and amortization expense decreased $10.3 million to $16.1 million
for the three months ended March 31, 2002 compared to $26.4 million for the same
period in the prior year. The decrease was primarily caused by the impact of
fresh-start reporting on the carrying value of our property, plant and
equipment, which were adjusted to their estimated fair values as of September
30, 2001.
Lease expense decreased $2.3 million for the three months ended March 31, 2002,
to $6.6 million compared to $8.9 million for the same period in the prior year.
Of this decrease, approximately $0.9 million is attributed to the sale, closure
or lease terminations or modifications of certain leased eldercare centers. The
remaining decrease of approximately $1.4 million is principally attributed to
the discharge in bankruptcy of our lease financing facility.
Interest expense decreased $19.0 million for the three months ended March 31,
2002, to $12.6 million compared to $31.6 million for the same period in the
prior year. For the three months ended March 31, 2001, in accordance with SOP
90-7, we ceased accruing interest following the Petition Date on certain
long-term debt instruments classified as liabilities subject to compromise. Our
contractual interest expense for the three months ended March 31, 2001 was $56.7
million, leaving $25.1 million of interest expense unaccrued for that period as
a result of the Chapter 11 cases. Interest expense for the three months ended
22
March 31, 2002 has been accrued at the contractual rates. Contractual interest
expense for the three months ended March 31, 2002 decreased by $44.1 million
compared to the same period in the prior year. This decrease is attributed to
the overall reduction of debt levels following our emergence from bankruptcy in
addition to a lower weighted average borrowing rate.
In March 2002, we recorded a net gain of $21.7 million resulting from the award
in the HCR Manor Care arbitration. Cash proceeds from that award were received
in April of 2002. See "Part II: Other Information, Item 1 - Legal Proceedings"
herein and in the Company's Annual Report of Form 10-K.
In April 2001, we sold an operational 121 bed eldercare center for cash
consideration of approximately $0.5 million. The sale resulted in a net loss of
approximately $2.3 million.
During the three months ended March 31, 2002, we recorded a post confirmation
charge resulting from a settlement reached with the lender of a pre-petition
mortgage obligation for an amount that exceeded the estimated loan value
established in the September 30, 2001 fresh-start balance sheet by approximately
$1.7 million. During the same period in the prior year, we recorded legal, bank,
accounting and other costs of approximately $8.1 million in connection with the
Chapter 11 cases. In addition, we incurred costs of $1.9 million in the three
months ended March 31, 2001 for certain bankruptcy related salary and benefit
related costs, principally for a court approved special recognition program.
Also, we incurred approximately $0.5 million of costs associated with exiting
certain terminated businesses.
Income tax increased $19.2 million for the three months ended March 31, 2002
from zero in the same period in the prior year. Our provision for income taxes
for the three months ended March 31, 2002 was $19.2 million. We realized a $7.7
million tax benefit through the realization of Net Operating Loss ("NOL")
carryforwards and $1.3 million of deferred tax liabilities due to temporary
differences between book and tax basis goodwill amortization. Pursuant to SOP
90-7, the income tax benefit of any future realization of the NOL carryforwards
are applied first as a reduction to goodwill.
Minority interest decreased $5.0 million during the three months ended March 31,
2002 to ($0.6) million compared to $4.4 million for the comparable period in the
prior year. This decrease is primarily due to the 56.4% interest in the net
losses of Multicare attributable to the joint venture partners in the three
months ended March 31, 2001. Upon our emergence from bankruptcy, we and
Multicare merged, effectively terminating the joint venture and any interest the
joint venture partners had in Multicare.
Preferred stock dividends decreased $10.6 million to $0.6 million during the
three months ended March 31, 2002 compared to $11.2 million for the comparable
period in the prior year. This decrease is attributed to the cancellation of our
Predecessor Company preferred stock and related dividends, and offset with
dividends on $42.0 million of Series A Redeemable Preferred Stock issued in
connection with the Plan.
Losses from discontinued operations increased $3.1 million for the three months
ended March 31, 2002, to ($3.8) million from ($0.7) million for the same period
in the prior year. On October 1, 2001, we adopted the provisions of Statement of
Financial Accounting Standards, No. 144 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 144").
Under SFAS 144, discontinued businesses or assets held for sale are removed from
the results of continuing operations. During the three months ended March 31,
2002, we sold our ambulance business and either closed or identified for closure
three eldercare centers. The results of operations in the current year and prior
year periods, along with any costs to exit such businesses in the current year
period, have been classified as discontinued operations in the accompanying
financial statements. Businesses sold or closed prior to our adoption of SFAS
144 continue to be reported in the results of continuing operations.
Six months ended March 31, 2002 compared to six months ended March 31, 2001
Inpatient Services
Inpatient services revenue increased $45.4 million, or 7%, to $706.2 million for
the six months ended March 31, 2002 from $660.8 million for the same period in
23
the previous year. Approximately $55.2 million is principally attributed to
increased payment rates and higher Quality Mix as a percentage of total patient
days. Our average rate per patient day for the six months ended March 31, 2002
was $178 compared to $163 for the comparable period in the prior year. This
increase in the average rate per patient day is principally driven by the effect
of BIPA on our average Medicare rate per patient day, which increased to $339
for the six months ended March 31, 2002 compared to $315 for the comparable
period in the prior year. Our revenue Quality Mix for the six months ended March
31, 2002 was 51.3% compared to 50.7% for the comparable period in the prior
year. These rate and Quality Mix increases are offset by a decrease in revenue
of approximately $9.8 million resulting from the sale, closure or lease
terminations of certain eldercare centers. Total patient days decreased 102,632
to 3,995,543 during the six months ended March 31, 2002 compared to 4,098,175
during the comparable period last year. Of this decrease, 111,553 patient days
are attributed to the sale, closure or lease terminations of certain eldercare
centers; offset by the addition of 8,477 patient days of two new eldercare
centers and increased operating census of 444 patient days as the result of an
increase in overall occupancy.
Operating expenses for the six months ended March 31, 2002 increased $27.3
million, or 5%, to $615.1 million from $587.8 million for the same period in the
prior year. The primary cost for this segment is salary, wage and benefit costs,
which increased $15.6 million, or 5% for the six month period ended March 31,
2002 to $346.0 million from $330.4 million for the same period in the prior
year. This increase includes the reduction of approximately $7.0 million in
salary, wage and benefit costs resulting from the sale, closure or lease
terminations of certain eldercare centers. Salary, wage and benefit costs,
considering the impact of exited businesses, increased $22.6 million, or 7%,
driven by inflationary cost increases and the relative mix of employed labor
versus agency labor costs. As a percentage of net revenue, salary, wage and
benefit costs, once adjusted for the impact of exited businesses, was
approximately 50.0% for the six months ended March 31, 2002, relatively
unchanged when compared with the comparable period in the prior year, despite a
disproportionate per diem rate growth, largely created by the effect of BIPA,
previously discussed. 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, once reduced for the impact of exited
businesses ($3.5 million for the six months ended March 31, 2001), increased
$15.2 million, or 6%, to $269.2 million for the six months ended March 31, 2002
compared to $253.9 million for the same period last year. The increase was
primarily driven by additional ancillary supply costs to treat a higher acuity
customer base of approximately $7.7 million, increased property and general
liability insurance of approximately $1.1 million, increased agency labor costs
(principally nursing costs) of approximately $0.7 million, increased bad debt
expense of approximately $0.2 million and other operating costs of approximately
$5.5 million. External labor agencies charge the Company a premium rate for
labor compared to salary, wage and benefits earned by employees.
Operating income increased $18.0 million, to $91.1 million for six months ended
March 31, 2002 from $73.1 million in the same period in the prior year.
Pharmacy and medical supply services
Pharmacy and medical supply services revenue (before intersegment eliminations)
increased $47.9 million, or 9%, to $606.3 million for the six months ended March
31, 2002 compared to $558.4 million for the six months ended March 31, 2001.
Revenues from intersegment customers, which are eliminated in consolidation,
increased approximately $5.6 million, or 12%, to $52.9 million for the six
months ended March 31, 2002 compared to $47.3 million for the same period in the
prior year. The remaining increase in net pharmacy and medical supply service
revenues of approximately $42.3 million, or 8%, is due primarily to rate
increases and shifts in customer and product mix with external customers.
Cost of sales (before intersegment eliminations) increased $33.8 million, or
10%, for the six month period ended March 31, 2002, to $382.5 million from
$348.7 million for the same period in the prior year. Of this growth, $29.9
million is attributed to pharmacy and medical supply revenue growth, and $3.9
million is attributed to changes in customer and product mix. As a percentage of
revenue, cost of sales for the six month period ended March 31, 2002 was 63.1%
compared to 62.5% for the comparable period in the prior year. Other operating
expenses for this segment, including salaries, wages and benefits, increased
$5.3 million, or 3%, to $170.7 million for the six months ended March 31, 2002
compared to $165.4 million for the same period in the prior year. As a
percentage of revenue, other operating costs declined to 28% for the
24
six months ended March 31, 2002 from 30% for the comparable period in the prior
year. This decline is attributed to improved cost control and the absorption of
fixed costs by the relative level of revenue growth.
Operating income increased $8.7 million, to $53.1 million for six months ended
March 31, 2002 from $44.4 million in the same period in the prior year.
During the second quarter of fiscal 2002, we borrowed approximately $42 million
from the Delayed Draw Term Loan to finance the repayment of all trade balances
due to NeighborCare pharmacy's primary supplier of pharmacy products.
Prospectively, this change in credit terms should result in reduced pharmacy
product acquisition costs.
All Other
All other includes operating information of business units below the prescribed
quantitative thresholds. These business units derive revenues and expenses 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. Revenues, including
intersegment revenues, from other segments decreased approximately $1.4 million
to $169.1 million from $170.5 million for the six month periods ended March 31,
2002 and March 31, 2001, respectively. The decline was primarily caused by less
management and development fee revenue, offset by growth in other service
related businesses' revenue.
Operating income for all other businesses remained relatively flat, declining
$0.3 million, to $23.6 million for six months ended March 31, 2002 from $23.9
million in the same period in the prior year.
Corporate and other
The "Corporate and other" category consists of our general and administrative
function and other unallocated amounts, for which there is generally no revenue
generated. Operating expenses increased $11.2 million in the six months ended
March 31, 2002 to $40.9 million compared to $29.7 million in the comparable
period in the prior year. Of this increase, approximately $7.8 million is
related to increased expense levels for our cash based incentive compensation
program and an executive non-cash stock based compensation program,
approximately $2.0 million relates to other unallocated employee benefit costs,
and the remaining increase of approximately $4.9 million is principally
attributed to labor related and other operating expense growth in our corporate
support functions. These increases are offset by a $3.5 million charge
recognized in the six months ended in March 31, 2001 in connection with the
renegotiation of the pharmacy supply agreement with our principle supplier of
pharmacy related products. These negotiations resulted in more beneficial credit
terms and improved pricing on certain products.
Capital costs and other
Our capital costs for the six months ended March 31, 2002 reflect the impact of
fresh-start reporting following our emergence from bankruptcy. Those adjustments
materially changed the recorded amounts of capital costs, most notably
depreciation and amortization, lease expense, interest expense, income taxes,
minority interest and preferred stock dividends, and as a result, will not be
comparable to those for the six months ended March 31, 2001.
Depreciation and amortization expense decreased $21.5 million to $31.8 million
for the six months ended March 31, 2002 compared to $53.3 million for the same
period in the prior year. The decrease was primarily caused by the impact of
fresh-start reporting on the carrying value of our property, plant and
equipment, which were adjusted to their estimated fair values as of September
30, 2001.
Lease expense decreased $4.7 million for the six months ended March 31, 2002, to
$13.5 million compared to $18.2 million for the same period in the prior year.
Of this decrease, approximately $1.8 million is attributed to the sale, closure
or lease terminations or modifications of certain leased eldercare centers. The
25
remaining decrease of approximately $2.9 million is principally attributed to
the discharge in bankruptcy of our lease financing facility.
Interest expense decreased $40.1 million for the six months ended March 31,
2002, to $25.7 million compared to $65.8 million for the same period in the
prior year. For the six months ended March 31, 2001, in accordance with SOP
90-7, we ceased accruing interest following the Petition Date on certain
long-term debt instruments classified as liabilities subject to compromise. Our
contractual interest expense for the six months ended March 31, 2001 was $116.1
million, leaving $50.3 million of interest expense unaccrued for that period as
a result of the Chapter 11 cases. Interest expense for the six months ended
March 31, 2002 has been accrued at the contractual rates. Contractual interest
expense for the six months ended March 31, 2002 decreased by $90.4 million
compared to the same period in the prior year. This decrease is attributed to
the overall reduction of debt levels following our emergence from bankruptcy in
addition to a lower weighted average borrowing rate.
In March 2002, we recorded a net gain of $21.7 million resulting from the award
in the HCR Manor Care arbitration. Cash proceeds from that award were received
in April of 2002. See "Part II: Other Information, Item 1 - Legal Proceedings"
herein and in the Company's Annual Report of Form 10-K.
In October 2000, we sold an idle 232 bed eldercare center for cash consideration
of approximately $7.0 million, resulting in a net gain on sale of approximately
$1.8 million. In April 2001, we sold an operational 121 bed eldercare center for
cash consideration of approximately $0.5 million. The sale resulted in a net
loss sale of approximately $2.3 million.
During the six months ended March 31, 2002, we recorded a post confirmation
charge resulting from a settlement reached with the lender of a pre-petition
mortgage obligation for an amount that exceeded the estimated loan value
established in the September 30, 2001 fresh-start balance sheet by approximately
$1.7 million. During the same period in the prior year, we recorded legal, bank,
accounting and other costs of approximately $18.2 million in connection with the
Chapter 11 cases. In addition, we incurred costs of $5.9 million in the six
months ended March 31, 2001 for certain bankruptcy related salary and benefit
related costs, principally for a court approved special recognition program.
Also, we incurred approximately $0.6 million of costs associated with exiting
certain terminated businesses.
Income tax increased $29.6 million for the six months ended March 31, 2002 from
zero in the same period in the prior year. Our provision for income taxes for
the six months ended March 31, 2002 was $29.6 million. We realized a $15.4
million tax benefit through the realization of Net Operating Loss ("NOL")
carryforwards and $2.6 million of deferred tax liabilities due to temporary
differences between book and tax basis goodwill amortization. Pursuant to SOP
90-7, the income tax benefit of any future realization of the NOL carryforwards
are applied first as a reduction to goodwill.
Minority interest decreased $7.0 million during the six months ended March 31,
2002 to ($0.8) million compared to $6.2 million for the comparable period in the
prior year. This decrease is primarily due to the 56.4% interest in the net
losses of Multicare attributable to the joint venture partners during the six
months ended March 31, 2001. Upon our emergence from bankruptcy, we and
Multicare merged, effectively terminating the joint venture and any interest the
joint venture partners had in Multicare.
Preferred stock dividends decreased $21.4 million to $1.3 million during the six
months ended March 31, 2002 compared to $22.7 million for the comparable period
in the prior year. This decrease is attributed to the cancellation of our
Predecessor Company preferred stock and related dividends, and offset with
dividends on $42.0 million of Series A Redeemable Preferred Stock issued in
connection with the Plan.
Losses from discontinued operations increased $3.1 million for the six months
ended March 31, 2002, to ($4.3) million from ($1.2) million for the same period
in the prior year. On October 1, 2001, we adopted the provisions of Statement of
Financial Accounting Standards, No. 144 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 144").
Under SFAS 144, discontinued businesses or assets held for sale are removed from
the results of continuing operations.
26
During the six months ended March 31, 2002, we sold our ambulance business and
either closed or identified for closure three eldercare centers. The results of
operations in the current year and prior year periods, along with any costs to
exit such businesses in the current year period, have been classified as
discontinued operations in the attached financial highlights and consolidated
statements of operations. Businesses sold or closed prior to our adoption of
SFAS 144 continue to be reported in the results of continuing operations.
Liquidity and Capital Resources
Working Capital and Cash Flows
At March 31, 2002, we had a cash and equivalents of $74.3 million, net working
capital of $434.1 million and approximately $149.1 million of unused commitment
under our $150 million Revolving Credit Facility.
At March 31, 2002, we had restricted investments in marketable securities of
$64.4 million, which are held by Liberty Health Corp. LTD., referred to as LHC,
our wholly-owned captive insurance subsidiary incorporated under the laws of
Bermuda. The investments held by LHC are restricted by statutory capital
requirements in Bermuda. In addition, certain of these investments are pledged
as security for letters of credit issued by LHC. As a result of such
restrictions and encumbrances, we and LHC are precluded from freely transferring
funds through intercompany loans, advances or cash dividends.
Our cash flow from operations before debt restructuring and reorganization costs
for the six months ended March 31, 2002 was a source of cash of $66.9 million
compared to a source of cash of $8.5 million for the six months ended March 31,
2001, principally due to reduced interest and lease payments following our
Reorganization, improvement in the collection of accounts receivable and the
timing of vendor payments and employee wages. During the second quarter of
fiscal 2002, we borrowed approximately $42 million from the Delayed Draw Term
Loan to finance the repayment of all trade balances due to NeighborCare(R)
Pharmacy's primary supplier of pharmacy products. Prospectively, this change in
credit terms should result in reduced pharmacy product acquisition costs,
partially offset by an increase in interest expense on the incremental Delayed
Draw Term Loan borrowings. Assuming no future changes in variable rates of
interest, the net impact of this transaction will be positive to our cash flows.
Cash payments for debt restructuring and reorganization costs were approximately
$32.2 million during the six months ended March 31, 2002 compared to $21.9
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, 2002 was approximately 55 days compared
to approximately 60 days at September 30, 2001.
On January 30, 2002, the Compensation Committee of the Board of Directors
approved a cash-based incentive compensation program that provides for awards to
eligible employees based upon the achievement of certain specified minimum
targets directly related to the consolidated financial performance of the
Company. The incentive compensation program provides for awards to elgible
employees on a graduated basis as actual operating performance exceeds certain
minimum financial targets.
Our net cash used for investing activities for the six months ended March 31,
2002 was $38.2 million, and includes approximately $20.0 million of capital
expenditures. Capital expenditures consist primarily of betterments and
expansion of eldercare centers and investments in data processing hardware and
software. In order to maintain our physical properties in a suitable condition
to conduct our business and meet regulatory requirements, we expect to continue
to incur capital expenditure costs at levels at or above those for the six
months ended March 31, 2002 for the foreseeable future.
Our investing activities for the six months ended March 31, 2002 also include:
approximately $13.0 million in net investments in restricted investments in
marketable securities, representing the current period funding of self insured
workers' compensation and general / professional liability insurance retentions
held by LHC; and approximately $10.5 million in connection with the exercise of
an option to purchase three formerly leased eldercare centers.
Our cash flows from investing activities for the six months ended March 31, 2001
include approximately $7 million of cash proceeds from the sale of an eldercare
center.
27
Our financing activities for the six months ended March 31, 2002, resulted in
net cash inflows of $45.7 million, and include approximately $80.0 million of
cash proceeds from borrowings under the Delayed Draw Term Loan. $10.0 million of
the borrowings were used to finance the price of the purchase option previously
described, and $28.0 million was used to refinance several mortgages at more
favorable rates of interest. The Delayed Draw Term Loan was amended in December
2001 to allow $42.0 million of available credit under that loan to be used to
restructure credit terms with NeighborCare(R) pharmacy's primary supplier of
pharmacy products, as previously discussed.
In December 2001, the Senior Credit Facility was amended in order to extend the
date by which we are required to achieve certain levels of fixed versus variable
interest rate exposure. As amended, by June 30, 2002, we are required the enter
into interest rate swap agreements that effectively fix or cap the interest cost
on at least 50% of our consolidated debt. At March 31, 2002, our debt mix is
approximately 13% fixed and 87% variable.
For the six months ended March 31, 2002, we incurred approximately $13.5 million
of lease obligation costs and expect to continue to incur lease costs at or
above levels approximating those for the six months ended March 31, 2002 for the
foreseeable future.
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.
Financial Commitments
Requests for providing commitments to extend financial guarantees and extend
credit are reviewed and approved by senior management. Management regularly
reviews all outstanding commitments, letters of credit and financial guarantees,
and the results of these reviews are considered in assessing the need for any
reserves for possible credit and guarantee loss.
We have posted $2.9 million of outstanding letters of credit. The letters of
credit guarantee performance to third parties of various trade activities. The
letters of credit are not recorded as liabilities on our balance sheet unless
they are utilized by the third party. The financial risk approximates the amount
of outstanding letters of credit.
We have extended approximately $7.4 million in working capital lines of credit
to certain jointly owned and managed companies, of which $4.9 million were
unused at March 31, 2002. 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.
We are a party to joint venture partnerships whereby our ownership interests are
less than 50% 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. Although we are not contractually obligated to fund operating losses
of these partnerships, in certain cases, we have extended credit to such joint
venture partnerships in the past and may decide to do so in the future in order
to realize economic benefits from our joint venture relationship. Management
assesses the creditworthiness of such partnerships in the same manner it does
other third-parties. We have provided $10.9 million of financial guarantees
related to loan commitments of four jointly owned and managed companies. We have
also provided $11.1 million of financial guarantees related to lease obligations
of one jointly-owned and managed company. 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 from other parties.
28
Warrants
In connection with our Reorganization, we issued warrants (the "Warrants") to
purchase 4,559,475 shares of new common stock. This represents approximately 11%
of the new common stock issued on the Effective Date. The Warrants expire on
October 2, 2002 and have an exercise price of $20.33 per share of new common
stock.
Income Taxes
Our provision for income taxes for the six months ended March 31, 2002 was $29.6
million. We realized a $15.4 million tax benefit through the realization of NOL
carryforwards and $2.6 million of deferred tax liabilities due to temporary
differences between book and tax basis goodwill amortization. Pursuant to SOP
90-7, the income tax benefit of any future realization of the NOL carryforwards
are applied first as a reduction to goodwill.
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 provided by us.
A number of the provisions of the Balanced Budget Act and the Benefits
Improvement Protection Act enactments providing additional funding for Medicare
participating skilled nursing facilities expire on September 30, 2002. Expiring
provisions are estimated to, on average, reduce per beneficiary per diems by
$34. On April 23, 2002, the Centers for Medicare and Medicaid Services ("CMS")
issued a press statement announcing that the agency would not proceed with its
previously announced changes in the skilled nursing facility case-mix
classification system. In its announcement, CMS made it clear that case-mix
refinements would be postponed for a full year and that the annual market
adjustment for the fiscal year 2003 skilled nursing facility prospective payment
rates would be promulgated as a notice in late July, 2002.
With regard to Congressional consideration, a package of Medicare amendments,
including provider relief provisions, is expected to be enacted before the
current session of Congress adjourns. It is premature to forecast the outcome of
Congressional action.
Our previous estimates of the impact of the "SNF Medicare Cliff" (which included
the anticipated effort of CMS changes in case-mix classification system) was
approximately 18% of the per diem rate; the revised estimate factoring in the
administrative decision not to proceed with changes at this time still exposes
the facility sector to a 10% reduction. For us, this could have an adverse
revenue impact exceeding $35 million. We are very involved with trade
organizations representing the skilled nursing facility sector in aggressively
pursing strategies to minimize the potentially adverse impact.
There may be additional provisions in the Medicare legislation affecting our
other businesses. Congress is expected to consider changes affecting pharmacy,
rehabilitation therapy, diagnostic services and the payment for services in
other health settings.
It is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes or any future healthcare legislation will not adversely
affect our business. There can be no assurance that payments under governmental
and private third party payor programs will be timely, will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
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programs. Our financial condition and results of operations may be affected by
the reimbursement process, which in our industry is complex and can involve
lengthy delays between the time that revenue is recognized and the time that
reimbursement amounts are settled.
Certain service contracts permit our NeighborCare(R) pharmacy operations to
provide services to HCR Manor Care, Inc. generating approximately $120 million,
or ten percent and four percent of the net annual revenues, of NeighborCare and
Genesis, respectively. These service contracts with HCR Manor Care are the
subject of certain litigation. See "Part II: Other Information, Item 1 - Legal
Proceedings" herein and in the Company's Annual Report of Form 10-K.
Other
We manage the operations of 74 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 three and six months ended March 31, 2002, we
billed our managed clients approximately $38.3 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, seasonal census cycles, and the number of calendar days in a given
quarter.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes. In the past, we employed
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 have historically used
interest rate swap agreements to manage net exposure to interest rate changes
related to our portfolio of borrowings. As of March 31, 2002, no interest rate
swap agreements were in place.
In December 2001, the Senior Credit Facility was amended in order to extend the
date by which we are required to achieve certain levels of fixed versus variable
interest rate exposure. As amended, by June 30, 2002, we are required to enter
into interest rate swap agreements that effectively fix or cap the interest cost
on at least 50% of our consolidated debt. At March 31, 2002, our debt mix is
approximately 13% fixed and 87% variable.
At March 31, 2002, we had $605.7 million of debt subject to variable market
rates of interest. For each additional percentage point increase in the LIBOR,
we will incur additional interest expense of approximately $6.1 million
annually.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
NeighborCare Pharmacy Services, Inc. v. HCR Manor Care, Inc., Manor Care, Inc.
and ManorCare Health Services, Inc.
On May 7, 1999, our wholly-owned subsidiary, NeighborCare, filed a demand for
arbitration under the commercial arbitration rules of the American Arbitration
Association against HCR Manor Care, Inc., Manor Care, Inc. and ManorCare Health
Services, Inc, collectively referred to as the respondents. The AAA arbitration
principally concerns two long-term master service agreements between
NeighborCare and ManorCare Health Services, Inc. Pursuant to one of these
agreements, referred to as the master pharmacy agreement, NeighborCare provides
pharmacy services to long-term care facilities owned or operated by Manor Care.
Pursuant to the other agreement, referred to as the master infusion therapy
agreement, NeighborCare provides infusion therapy products and services to Manor
Care long-term care facilities.
In the AAA arbitration, NeighborCare sought injunctive relief and compensatory
damages in connection with
o respondents' attempt to terminate the master service agreements, and
o respondents' failure to provide NeighborCare with the right to serve as
the preferred provider of pharmacy and infusion therapy services to all
Manor Care long-term care facilities pursuant to the master service
agreements.
Respondents filed counterclaims requesting declaratory relief approving the
purported termination of the master service agreements, as well as counterclaims
seeking compensatory damages in connection with alleged overcharges under the
two agreements.
The arbitrator, on May 17, 2000, declined to dismiss NeighborCare's claims for
money damages for breach of its contractual right to serve as the preferred
provider to all Manor Care long-term care facilities. However, the arbitrator
did dismiss, without prejudice, NeighborCare's claim for specific performance of
that right.
On June 15, 2000, in anticipation of our possible bankruptcy filing, the
arbitrator stayed the AAA arbitration. In connection with this stay, the parties
agreed that respondents may pay NeighborCare 90% of the face amount of all
invoices for pharmaceutical and infusion therapy goods and services that
NeighborCare renders to respondents under the master service agreements. The
parties agreed, however, that respondents must continue to pay NeighborCare the
full face amount of all invoices for pharmacy consulting services under the
master service agreements.
On February 14, 2002, the arbitrator ruled in favor of NeighborCare. The
arbitrator found that Manor Care did not lawfully terminate its service
contracts with NeighborCare. As a result, the contracts between NeighborCare and
Manor Care, which expire in October 2004, remain in full force until that time.
The arbitrator also determined that NeighborCare had the right to damages
because it was not offered the opportunity to service facilities owned and
operated by Healthcare & Retirement Corporation of America, Inc., which was
deemed to be an affiliate of Manor Care under the contract. The arbitrator
awarded us $23.4 million, plus pre-judgment interest, in compensatory damages.
In addition, the arbitrator terminated his prior ruling that allowed Manor Care
to withhold 10% of the payments owed to NeighborCare and Manor Care paid us an
additional $8.8 million in funds representing the amounts withheld during the
course of the AAA arbitration pursuant to the arbitrator's prior ruling.
NeighborCare and Manor Care have each submitted post-decision motions.
NeighborCare has asserted that the amount of its damages should be adjusted
upward by approximately $1 million. Manor Care contends that the amount of
damages should be adjusted downward by approximately $2 million, and have also
asked the arbitrator to rule that, under the Master Service Agreements,
NeighborCare remains obligated to renegotiate the pricing it offers to
respondents for pharmacy and infusion therapy products and services.
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Genesis Health Ventures, Inc. v. HCR Manor Care, Inc., Manor Care, Inc., Paul A.
Ormond, and Stewart Bainum, Jr.
On May 7, 1999, we filed an action in the United States District Court for the
District of Delaware against HCR Manor Care, Inc., Manor Care, Inc., Paul A.
Ormond, and Stewart Bainum, Jr. In this action, we seek compensatory and
punitive damages exceeding $2 million for federal securities fraud, common-law
fraud, negligent misrepresentation and controlling person liability in
connection with material misrepresentations and omissions made by defendants
during the course of our acquisition of Vitalink. We further seek injunctive
relief with respect to Manor Care's failure to dispose of its ownership
interests in Heartland Healthcare Services, a competitor of NeighborCare,
pursuant to a non-competition provision found in a side agreement between
Genesis, Vitalink and Manor Care.
Defendants filed a motion to dismiss or stay this action pending the resolution
of the AAA arbitration. On March 22, 2000, the Court denied the defendants'
motion to dismiss, but granted the motion to stay the case pending resolution of
the AAA arbitration .
Manor Care, Inc. v. Genesis Health Ventures, Inc.
On August 17, 1999, Manor Care filed a lawsuit in the United States District
Court for the District of Delaware against us. In this action, plaintiff brings
claims under the federal securities laws resulting from alleged
misrepresentations and omissions made by us in connection with Manor Care's
acquisition of our series G preferred stock as compensation for its sale of
Vitalink to us. Plaintiff seeks compensatory damages of unspecified amount,
rescission of Manor Care's purchase of the series G preferred stock, and the
return of the consideration paid by Manor Care at the time of our acquisition of
Vitalink from Manor Care.
We filed a motion to dismiss this action. On September 29, 2000, the Court
granted that motion in part and denied it in part. Specifically, the Court
dismissed plaintiff's allegations regarding purportedly fraudulent statements
concerning: our knowledge as to certain legislative changes to the Medicare
program; the effect of our affiliate Multicare on our earnings; our intent with
respect to the issuance of preferred stock; and our ability to declare dividends
on the series G preferred stock. Accordingly, the only allegations that were not
dismissed from this action concern our alleged failure to include certain
financial information in the registration statement we filed in connection with
its acquisition of Vitalink, and allegedly fraudulent statements concerning our
labor relations. Our motion to consolidate this action with the action Genesis
Health Ventures Inc. v. HCR Manor Care, Inc., Manor Care, Inc., Paul A. Ormond,
and Stewart Bainum, Jr., described above, has been denied.
On October 22, 2001, plaintiff filed a motion to reconsider the Court's decision
to dismiss this action in part, and we filed our opposition to that motion. On
December 5, 2001, we filed a motion to dismiss the entire action pursuant to our
Joint Plan of Reorganization and the Bankruptcy Court's order confirming that
reorganization plan, which extinguish plaintiff's claims against us except to
the extent that those claims may be applied as set-off or recoupment against
claims brought by us. (As discussed below, the defendants repled the claims in
this action as affirmative defenses of set-off or recoupment against the claims
we have filed in Genesis Health Ventures, Inc. v. HCR Manor Care, Inc., Civil
Action No. 99-287 (D. Del.).)
The parties have completed briefing on defendants' motion for reconsideration
and Genesis' motion to dismiss, and the parties await the Court's decision as to
whether oral argument on these motions will be held.
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Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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 thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: May 15, 2002 /s/ George V. Hager, Jr.
--------------------------------------
George V. Hager, Jr.
Executive Vice President and Chief
Financial Officer
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