-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UjqCMXbX7JUHVOtfjgXMJQdoLkDy5LKQfIaOF40oaPpd2TO9YGY5HLArba/YiyXB H1h2ki+yXDt05tSZpt5E9w== 0000950116-00-000241.txt : 20000215 0000950116-00-000241.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950116-00-000241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENESIS HEALTH VENTURES INC /PA CENTRAL INDEX KEY: 0000874265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 061132947 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11666 FILM NUMBER: 539380 BUSINESS ADDRESS: STREET 1: 101 EAST STATE STREET CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: 6104446350 MAIL ADDRESS: STREET 1: 101 EAST STATE STREET CITY: KENNETT SQUARE STATE: PA ZIP: 19348 10-Q 1 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 December 31, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 1-11666 GENESIS HEALTH VENTURES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-1132947 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 101 East State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of February 9, 2000: 48,640,123 shares of common stock TABLE OF CONTENTS
Page ---- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS..........................................................1 Part I: FINANCIAL INFORMATION Item 1. Financial Statements...........................................................................2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................................16 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................28 Part II: OTHER INFORMATION Item 1. Legal Proceedings...............................................................................29 Item 2. Changes in Securities...........................................................................31 Item 3. Defaults Upon Senior Securities.................................................................31 Item 4. Submission of Matters to a Vote of Security Holders.............................................31 Item 5. Other Information...............................................................................31 Item 6. Exhibits and Reports on Form 8-K................................................................31 SIGNATURES........................................................................................................32
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Statements made in this report, and in our other public filings and releases, which are not historical facts contain "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to statements as to: o certain statements in "Management's Discussion and Analysis of Financial Condition and Results Of Operations," such as our ability to meet our liquidity needs, scheduled debt and interest payments and expected future capital expenditure requirements, and to control costs; and the expected effects of government regulation on reimbursement for services provided and on the costs of doing business; 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 any statements are not guarantees of future performance and that actual results and trends in the future may differ materially. Factors that could cause actual results to differ materially include, but are not limited to the following: o our substantial indebtedness and significant debt service obligations; o the effect of planned dispositions of assets; o our ability or inability to secure the capital and the related cost of the capital necessary to fund future growth; o the impact of health care reform, including the Medicare Prospective Payment System ("PPS"), the Balanced Budget Refinement Act ("BBRA") and the adoption of cost containment measures by the federal and state governments; o the adoption of cost containment measures by other third party payors; o the impact of government regulation, including our ability to operate in a heavily regulated environment and to satisfy regulatory authorities; o the occurrence of changes in the mix of payment sources utilized by our patients to pay for our services; o competition in our industry; o our ability to consummate or complete development projects or to profitably operate or successfully integrate enterprises into our other operations; and o changes in general economic conditions. These and other factors have been discussed in more detail in the Company's periodic reports, including its Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 1 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)
December 31, September 30, - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and equivalents $ 20,699 $ 12,397 Investments in marketable securities 35,609 24,599 Accounts receivable, net of allowance for doubtful accounts 472,852 370,472 Inventory 69,500 63,369 Prepaid expenses and other current assets 64,378 46,964 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 663,038 517,801 - -------------------------------------------------------------------------------------------------------------------------------- Property, plant, and equipment, net 1,216,082 612,301 Notes receivable and other investments 43,712 40,075 Other long-term assets 156,738 112,978 Investments in unconsolidated affiliates 19,450 180,882 Goodwill and other intangibles, net 1,447,330 965,877 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $ 3,546,350 $ 2,429,914 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Current installments of long-term debt $ 72,836 $ 37,126 Accounts payable and accrued expenses 288,857 244,971 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 361,693 282,097 - -------------------------------------------------------------------------------------------------------------------------------- Long-term debt 2,242,754 1,484,510 Deferred income taxes 76,328 13,827 Deferred gain and other long-term liabilities 78,684 61,590 Minority interest 176,111 - Redeemable preferred stock 423,335 - Shareholders' equity: Series G Cumulative Convertible Preferred Stock, par $.01, authorized 5,000,000 shares, 589,804 and 590,253 issued and outstanding at December 31, 1999 and September 30, 1999, respectively 6 6 Common stock, par $.02, authorized 60,000,000 shares, issued and outstanding 48,651,815 and 48,639,715 at December 31, 1999; 36,145,678 and 36,133,578 at September 30, 1999 748 723 Additional paid-in capital 803,426 753,452 Retained deficit (615,803) (165,620) Accumulated other comprehensive loss (689) (428) Treasury stock, at cost (243) (243) - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 187,445 587,890 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 3,546,350 $ 2,429,914 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements 2 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Operations (in thousands, except share and per share data)
Three months ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Net revenues: Pharmacy and medical supply services $ 223,907 $ 236,217 Inpatient services 326,327 176,032 Other revenue 36,650 66,955 - ---------------------------------------------------------------------------------------------------------------------- Total net revenues 586,884 479,204 - ---------------------------------------------------------------------------------------------------------------------- Operating expenses: Operating expenses 513,414 408,050 Other charges 7,720 - Multicare joint venture restructuring charge 420,000 - Depreciation and amortization 29,118 17,807 Lease expense 9,527 6,367 Interest expense, net 52,776 27,323 - ---------------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes, minority interest, equity in net loss of unconsolidated affiliates, extraordinary item and cumulative effect of an accounting change (445,671) 19,657 Income tax expense (benefit) (7,280) 7,378 - ---------------------------------------------------------------------------------------------------------------------- Earnings (loss) before minority interest, equity in net loss of unconsolidated affiliates, extraordinary item and cumulative effect of an accounting change (438,391) 12,279 Minority interest 6,927 - Equity in net loss of unconsolidated affiliates - (892) - ---------------------------------------------------------------------------------------------------------------------- Earnings (loss) before extraordinary item and cumulative effect of accounting change (431,464) 11,387 Extraordinary item, net of tax - (1,799) Cumulative effect of accounting change (10,412) - - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) (441,876) 9,588 Preferred stock dividends 8,306 4,911 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) attributed to common shareholders $ (450,182) $ 4,677 - ---------------------------------------------------------------------------------------------------------------------- Per common share data: Basic Earnings (loss) before extraordinary items and cumulative effect of accounting change $ (10.37) $ 0.18 Net income (loss) $ (10.62) $ 0.13 Weighted average shares of common stock 42,389,715 35,217,418 - ---------------------------------------------------------------------------------------------------------------------- Diluted Earnings (loss) before extraordinary items and cumulative effect of accounting change $ (10.37) $ 0.18 Net income (loss) $ (10.62) $ 0.13 Weighted average shares of common stock and equivalents 42,389,715 35,380,732 - ----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements 3 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands)
Three months ended December 31, - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (441,876) $ 9,588 Net charges included in operations not requiring funds 451,117 17,462 Changes in assets and liabilities excluding the effects of acquisitions Accounts receivable (7,875) (29,459) Accounts payable and accrued expenses (33,864) (22,364) Other, net (6,174) 911 - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in operations (38,672) (23,862) - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of marketable securities (11,271) - Proceeds on maturity or sale of marketable securities - 2,472 Capital expenditures (14,314) (17,551) Payments for acquisitions, net of cash acquired - (4,125) (Investments) in and proceeds from unconsolidated affiliates 3,846 (12,474) Notes receivable and other investment and other long-term asset additions, net (11,677) (2,692) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (33,416) (34,370) - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings under working capital revolving credit facilities 39,201 65,539 Repayment of long-term debt and payment of sinking fund requirements (22,778) (120,429) Proceeds from issuance of long-term debt 10,000 120,200 Proceeds from issuance of common stock 50,000 - Debt issuance costs - (3,088) Stock options exercised - 9 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 76,423 62,231 - ---------------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 4,335 3,999 Cash and equivalents Beginning of year 16,364 4,902 - ---------------------------------------------------------------------------------------------------------------------------- End of year $ 20,699 $ 8,901 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements 4 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General 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, 1999. The information furnished is unaudited but reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results expected for the full year. Certain prior period balances have been reclassified to conform with the current period presentation. 2. Multicare Transaction and its Restructuring In October 1997, Genesis, The Cypress Group (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors". In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of The Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. pursuant to which, among other things, Genesis had the option to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis ElderCare Corp. common stock at a price determined pursuant to the Put/Call Agreement. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Genesis also entered into an asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as defined below) and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 (the "Therapy Purchase") and a stock purchase agreement (the "Pharmacy Purchase Agreement") with Multicare and certain subsidiaries pursuant to which Genesis acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Purchase"). The Company completed the Pharmacy Purchase effective January 1, 1998. The Company completed the Therapy Purchase in October 1997. 5 Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement; Issuance of Preferred Stock Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for: o 24,369 shares of Genesis' Series H Senior Convertible Participating Cumulative Preferred Stock (the "Series H Preferred"), which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp., and o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock, (the "Series I Preferred") which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp. In connection with the restructuring transaction, the restrictions in the Put/Call Agreement related to Genesis' right to take certain corporate actions, including its ability to sell all or a portion of its pharmacy business, were terminated. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. Investment in Genesis Cypress and TPG invested in the aggregate, directly or through affiliated investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of Genesis common stock and a ten year warrant to purchase 2,000,000 shares of Genesis common stock at an exercise price of $5.00 per share. Registration Rights Subject to limitations contained in the Restructuring Agreement, the holders of the Genesis common stock, warrants, Series H Preferred Stock and Series I Preferred Stock issued in connection with the restructuring transaction and all securities issued or distributed in respect of these securities have the right to register these securities under the Securities Act. Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; 6 o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. Irrevocable Proxy Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an irrevocable power of attorney directing Genesis to cast for, against or as an abstention in the same proportion as the other Genesis voting securities are cast, the number of shares of securities of Genesis so that Cypress, TPG and Nazem together will not have the right to vote more than 35% of the total voting power of Genesis in connection with any vote other than a vote relating to an amendment to Genesis' articles of incorporation to amend, modify or change the terms of any class or series of preferred stock. This power of attorney will terminate upon the existence of the circumstances that would cause the standstill to terminate as described below. Directors of Genesis Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting jointly, or in the event that only one of Cypress and TPG then owns or has the right to acquire Genesis common stock, Cypress or TPG, as applicable, are entitled to designate a number of directors of Genesis representing at least 23% of the total number of directors constituting the full board of directors of Genesis. However, for so long as the total number of directors constituting the full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only entitled to designate two directors on the Genesis board of directors. Cypress and TPG have this right to designate directors so long as they own any combination of Genesis voting securities or securities convertible into Genesis voting securities constituting more that 10% of Genesis' total voting power. For this purpose, the Series I Preferred Stock and the non-voting common stock issued upon conversion of the Series I Preferred Stock will be considered voting securities. For so long as Cypress and/or TPG have the right to designate directors on the Genesis board of directors, Genesis shall not, without the consent of at least two of the Cypress/TPG designated directors: o enter into any transaction or series of transactions which would constitute a change in control, as defined in the Restructuring Agreement; or o engage in a "going private" transaction. Pre-emptive Rights As a result of the restructuring transaction, Cypress and TPG each have a right, subject to the limitations contained in the Restructuring Agreement, to participate in future offerings of any shares of, or securities exchangeable, convertible or exercisable for any shares of, any class of Genesis' capital stock. Standstill The Sponsors have agreed that, subject to certain termination provisions, neither they nor their affiliates will, without Genesis' prior written consent, either alone or as part of a group, acquire any voting securities of Genesis, except for the voting securities to be issued in the restructuring transaction and pursuant to stock splits, stock dividends or other distributions or offerings made available to holders of Genesis voting securities generally. 7 Accounting Effects Prior to the restructuring transaction, Genesis accounted for its investment in Multicare using the equity method of accounting. Upon consummation of the restructuring transaction, Genesis consolidated the financial results of Multicare since Genesis has managerial, operational and financial control of Multicare under the terms of the Restructuring Agreement. Accordingly, Multicare's assets, liabilities, revenues and expenses are consolidated at their recorded historical amounts and the financial impact of transactions between Genesis and Multicare are eliminated in consolidation. The non-Genesis shareholders' remaining 56.4% interest in Multicare is carried as minority interest based on their proportionate share of Multicare's historical book equity. For so long as there is a minority interest in Multicare, the minority shareholders' proportionate share of Multicare's net income or loss will be recorded through adjustment to minority interest. In connection with the restructuring transaction, Genesis recorded a non-cash charge of approximately $420,000,000 representing the estimated cost to terminate the Put in consideration for the issuance of the Series H Preferred and Series I Preferred. The cost to terminate the Put was estimated based upon the Company's assessment that no incremental value was realized by Genesis as a result of the changes in the equity ownership structure of Multicare brought about by the restructuring of the Multicare joint-venture. The following unaudited pro forma statement of operations information gives effect to the Multicare joint venture restructuring had it occurred on October 1, 1998, after giving effect to certain adjustments, including the elimination of intercompany transactions, the recording of minority interest, the issuance of common stock, the recording of preferred stock dividends, the repayment of debt with proceeds from the issuance of common stock and related income tax effects. The unaudited pro forma financial information has been prepared to reflect the consolidation of the financial results of Multicare. Accordingly, Multicare's revenues and expenses are presented at their recorded historical amounts and the financial impact of all transactions between Genesis and Multicare are eliminated in consolidation. The pro forma financial information does not include the $420,000,000 non cash charge representing the cost estimated to terminate the Multicare put. This charge is a direct result of the Multicare joint venture restructuring. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the transaction occurred at the beginning of the period presented.
(In thousands, except per common share data) Three Months Ended Unaudited Pro Forma Statement of Operations Information: December 31, 1998 ----------------- Total net revenue $ 622,345 Income before extraordinary items 627 Net loss (1,172) Earnings per common share, before extraordinary items, diluted 0.01 Loss per common share, diluted $ (0.02)
3. Long-Term Debt Genesis Credit Facility Genesis entered into a fourth amended and restated credit agreement on August 20, 1999 pursuant to which the lenders amended and restated the credit agreement under which the lenders provided Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the "Genesis Credit Facility") for the purpose of: refinancing and funding interest and principal payments of certain existing indebtedness; funding permitted acquisitions; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of transactions. The fourth amended and restated credit agreement made the financial covenants for certain periods less restrictive, increased the Annual Applicable Margin (defined below) and provided the lenders of the Genesis Credit Facility a collateral interest in certain real and personal property of the Company, required minimum assets sales and generally reallocated the 8 proceeds thereof among the Tranche II Facility (defined below), the Genesis Revolving Facility (defined below) and the Genesis Term Loans (defined below), permitted the restructuring of the Put/Call Agreement, as defined, and increased the interest rates applying to the Term Loans and the Revolving Facility. Additionally, the fourth amended and restated credit agreement provides for $40,000,000 of additional borrowing capacity, (the "Tranche II Facility") available to the Company beginning in December 1999. The asset sales required by the Genesis Credit Facility total $12,000,000 by December 31, 1999, $37,000,000 by June 30, 2000 and $40,000,000 by December 31, 2000. Genesis has satisfied the requirement through December 31, 1999 and has transactions in process to satisfy the majority of the aggregate requirement through December 31, 2000. The Genesis Credit Facility consists of three term loans with original balances of $200,000,000 each (collectively, the "Genesis Term Loans"), and a $650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a $40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly installments through 2005, of which $28,670,000 is payable in Fiscal 2000. The Genesis Term Loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $110,445,000 at December 31, 1999 (the "Genesis Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $152,131,000 at December 31, 1999 (the "Genesis Tranche B Term Facility"); and (iii) an original eight year term loan maturing in June 2005 with an outstanding balance of $151,767,000 at December 31, 1999 (the "Genesis Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding balance of $645,198,000 at December 31, 1999, becomes payable in full on September 30, 2003. As of December 31, 1999, there were no borrowings outstanding under the Tranche II Facility. The Genesis Credit Facility is secured by a first priority security interest in all of the stock, partnership interests and other equity of all of Genesis' present and future subsidiaries (including Genesis ElderCare Corp.) other than the stock of Multicare and its subsidiaries, and also by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Genesis' subsidiaries' real property were also granted. Loans under the Genesis Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. Loans under the Genesis Tranche A Term Facility and Genesis Revolving Facility have an Annual Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans (an effective rate of 9.44% at December 31, 1999). Loans under the Genesis Tranche B Term Facility have an Annual Applicable Margin of 1.75% for Prime Rate loans and 3.50% for LIBO Rate loans (an effective rate of 9.69% at December 31, 1999). Loans under the Genesis Tranche C Term Facility have an Annual Applicable Margin of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans (an effective rate of 9.94% at December 31, 1999). Subject to meeting certain financial ratios, the above referenced interest rates are reduced. The Genesis Credit Facility contains a number of covenants that, among other things, restrict the ability of Genesis and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Genesis and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Genesis and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Genesis to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. Multicare Credit Facility Multicare entered into a fourth amended and restated credit agreement on August 20, 1999 (the "Multicare Credit Facility") which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Multicare Tranche A Term Facility (defined below) and Multicare Revolving Facility (defined below), permitted the restructuring of the Put/Call Agreement, increased the interest rates applying 9 to the Multicare Term Loans (defined below) and the Multicare Revolving Facility, and increased the level of management fee Multicare may defer from two percent to four percent (on an annualized basis) in any fiscal year. The Multicare Credit Facilities consist of three term loans with an aggregate original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The Multicare Term Loans amortize in quarterly installments through 2005, of which $34,000,000 is payable in Fiscal 2000. The loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $140,000,000 at December 31, 1999 (the "Multicare Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $146,625,000 at December 31, 1999 (the "Tranche B Term Facility"); and (iii) and an original eight year term loan maturing in June 2005 with an outstanding balance of $48,750,000 at December 31, 1999 (the "Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an outstanding balance of $123,534,000 at December 31, 1999, becomes payable in full on September 30, 2003. The Multicare Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Multicare Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, an Annual Applicable Margin that is dependent upon a certain financial ratio test. Effective with the Amendment on August 20, 1999, loans under the Multicare Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75% (an effective rate of 9.94% at December 31, 1999); loans under the Multicare Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0% (an effective rate of 10.16% at December 31, 1999); loans under the Multicare Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; (an effective rate of 10.44%) loans under the Multicare Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75% (an effective rate of 9.94%). Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. Multicare continues to actively pursue sales of assets in Ohio, Illinois and Wisconsin. Management is currently engaged in discussions for the asset sales; however, the Company has no firm commitments from potential purchasers for these assets. There can be no assurances that any such sales of assets will be achieved. All net proceeds of the disposition of certain assets located in Ohio not in excess of $55,000,000 shall be applied against the Multicare Revolving Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held be each applicable lender. All net proceeds of the disposition of certain assets located in Illinois and Wisconsin shall be applied first against the Multicare Tranche A Term Loan, on a pro rata basis in accordance with the relative aggregate principal amounts held by each applicable lender. The Multicare Credit Facility contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to: dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Multicare to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. 10 Other Indebtedness Genesis has outstanding an aggregate of $370,000,000 of Senior Subordinated Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%. Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the Multicare Notes is payable semi-annually. Certain of Genesis' and Multicare's other outstanding loans contain covenants which, without the prior consent of the lenders, limit certain of Genesis' and Multicare's activities. Such covenants contain limitations relating to the merger or consolidation of Genesis or Multicare and Genesis' and Multicare's ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, Genesis and Multicare must maintain certain minimum levels of cash flow and debt service coverage, and must maintain certain ratios of liabilities to net worth. Under certain of these loans, Genesis is restricted from paying cash dividends on the Common Stock, unless certain conditions are met. Genesis has not declared or paid any cash dividends on our Common Stock since its inception. 4. Certain Significant Risks and Uncertainties The following information is provided in accordance with the AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties." The Company has substantial indebtedness and, as a result, significant debt service obligations. As of December 31, 1999, the Company had approximately $2,242,754,000 of long-term indebtedness, excluding the current portion of indebtedness of $72,836,000, which represented 74% of our total capitalization. The Company also has significant long-term operating lease obligations with respect to certain of our eldercare centers. The degree to which we are leveraged could have important consequences, including, but not limited to the following: o the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be limited or impaired; o a substantial portion of the Company's cash flow from operations will be dedicated to the payment of principal and interest on the Company's indebtedness, thereby reducing the funds available to us for our operations; o the Company's operating flexibility is limited by restrictions contained in some of the Company's debt agreements which set forth minimum net worth requirements and/or limit the Company's ability to incur additional indebtedness, to enter into other financial transactions, to pay dividends, and set forth minimum net worth requirements; o the Company's degree of leverage may make it more vulnerable to industry downturns and less competitive, may reduce the Company's flexibility in responding to changing business and industry conditions and may limit the Company's ability to pursue other business opportunities, to finance the Company's future operations or capital needs, and to implement its business strategy; and o certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company's to the risk of higher interest rates. The Company expects to satisfy required payments of principal and interest on indebtedness from its cash flow from operations and the sales of certain assets. Management is currently engaged in discussions for the asset sales, however, the Company has no firm commitments from potential purchasers for these assets. The Company's ability to make scheduled payments of the principal or interest on, or to refinance indebtedness, depends on the future performance of the Company's business, which is in turn subject to financial, business, economic and other 11 factors affecting the Company's business and operations, including factors beyond its control, such as prevailing industry conditions. There can be no assurances that cash flow from operations will be sufficient to enable the Company's to service its debt and meet other obligations. If such cash flow is insufficient, the Company may be required to refinance and/or restructure all or a portion of its existing debt, to sell assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such sales of assets or additional financing could be achieved. We also have significant long-term operating lease obligations with respect to certain of our sites of service, including eldercare centers. The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long term care facilities which utilize our specialty medical services. The health care 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, generally have resulted in reduced rates of reimbursement for services to be provided by the Company. In recent years, several significant actions have been taken with respect to Medicare and Medicaid reimbursement, including the following: o the adoption of the Medicare Prospective Payment System pursuant to the Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget Refinement Act, and o the repeal of the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities. While the Company has prepared certain estimates of the impact of the above changes, it is not possible to fully quantify the effect of recent legislation, the interpretation or administration of such legislation or any other governmental initiatives on its business. Accordingly, there can be no assurance that the impact of these changes will not be greater than estimated or that these legislative changes or any future healthcare legislation will not adversely affect the Company's business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company's financial condition and results of operations may be affected by the reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. 5. Other Charges In November 1999, the Company's Board of Directors approved a plan allowing employees and directors to elect to redeem unexercised stock options issued to them prior to January 1, 1999 in exchange for Genesis common stock (the "Redemption Plan"). If an optionee elected to participate in the Redemption Plan, every one vested outstanding stock option held as of November 11, 1999 was exchanged for one share of Genesis common stock, and every two unvested outstanding stock options held as of November 11, 1999 was exchanged for one share of Genesis common stock. Nearly all optionees elected to participate in the Redemption Plan. The Redemption Plan is subject to shareholder approval and will be voted upon at the Company's 2000 Annual Meeting scheduled for March 16, 2000. The Company believes it has secured sufficient votes on this shareholder proposal, and as a result, recorded a pretax charge of approximately $7,720,000 in the first fiscal quarter of 2000 to recognize the non-cash compensation expense of the Redemption Plan. The elections made by optionees will result in the redemption of approximately 4,600,000 stock options in exchange for approximately 4,000,000 shares of Genesis common stock. 12 6. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings (loss) attributed to common shares (amounts are in thousands except per share data):
Three Three Months Months Ended Ended December 31, December 31, 1999 1998 -------------------------- -------------------- Basic Earnings (Loss) Per Share: Income (loss) before extraordinary item and cumulative effect of accounting change $ (439,770) $ 6,476 Extraordinary item - (1,799) Cumulative effect of accounting change (10,412) - -------------------------- -------------------- Net income (loss) attributed to common shareholders $ (450,182) $ 4,677 -------------------------- -------------------- Weighted average shares 42,390 35,217 -------------------------- -------------------- Earnings (loss) per share before extraordinary item and cumulative effect of accounting change $ (10.37) $ 0.18 Extraordinary item - (0.05) Cumulative effect of an accounting change (0.25) - -------------------------- -------------------- Earnings (loss) per share $ (10.62) $ 0.13 -------------------------- -------------------- Diluted Earnings (Loss) Per Share: Income (loss) before extraordinary item and cumulative effect of accounting change $ (439,770) $ 6,476 Extraordinary item - (1,799) Cumulative effect of accounting change (10,412) - -------------------------- -------------------- Net income (loss) attributed to common shareholders $ (450,182) $ 4,677 -------------------------- -------------------- Weighted average shares & common stock equivalents: Common shares 42,390 35,217 Dilutive effect of unexcercised stock options - 164 -------------------------- -------------------- Total 42,390 35,381 -------------------------- -------------------- Earnings (loss) per share before extraordinary item and cumulative effect of accounting change $ (10.37) $ 0.18 Extraordinary item - (0.05) Cumulative effect of accounting change (0.25) - -------------------------- -------------------- Earnings (loss) per share $ (10.62) $ 0.13 -------------------------- --------------------
The operating results of the December 31, 1998 quarter have been restated to increase non-cash preferred stock dividends by $494,000 to adjust the accrual for the increasing rate dividend on the Series G Preferred Stock on a straight line basis over the term of this series. 13 7. Comprehensive Income The following table sets forth the computation of comprehensive income (loss) (amounts in the table are in thousands):
Three Three Months Months Ended Ended December 31, December 31, 1999 1998 -------------------------- ------------------- Net income (loss) attributed to common shareholders $ (450,182) $ 4,677 Unrealized loss on marketable securities (261) (194) -------------------------- ------------------- Total comprehensive income (loss) $ (450,443) $ 4,483 -------------------------- -------------------
Accumulated other comprehensive income (loss), which is composed of net unrealized gains and losses on marketable securities, was $(689,000) and $490,000 at December 31, 1999 and 1998, respectively. 8. Segment Information The Company has two reportable segments: (1) Pharmacy and medical supplies services and (2) Inpatient services. The Company provides pharmacy and medical supply services through its NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply service revenues are institutional pharmacy revenues, which include the provision of infusion therapy, medical supplies and equipment provided to eldercare centers Genesis operates, as well as to independent healthcare providers by contract. The Company provides these services through 69 institutional pharmacies (one is jointly-owned) and 19 medical supply distribution centers located in its various market areas. In addition, the Company operates 34 community-based pharmacies which are located in or near medical centers, hospitals and physician office complexes. The community-based pharmacies provide prescription and over-the-counter medications and certain medical supplies, as well as personal service and consultation by licensed professional pharmacists. Approximately 91% of the sales attributable to all pharmacy operations in Fiscal 1999 were generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by the Company, including the jointly owned Multicare centers. The Company includes in inpatient service revenue all room and board charges and ancillary service revenue for its eldercare customers at 221 eldercare centers owned and leased by Genesis and Multicare. The centers offer three levels of care for their customers: skilled, intermediate and personal. The accounting policies of the segments are the same as those of the Company. All intersegment sales prices are market based. The Company evaluates performance of its operating segments based on income before interest, income taxes, depreciation, amortization, rent and nonrecurring items. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column represents operating information of business units below the prescribed quantitative thresholds. These business units derive revenues from the following services: rehabilitation therapy, management services, capitation fees, consulting services, homecare services, physician services, transportation services, diagnostic services, hospitality services, group purchasing fees and other healthcare related services. In addition, the "Other" column includes the elimination of intersegment transactions. 14
Pharmacy and Medical Supply Services Inpatient (in thousands) Services Other Total - ---------------------------------------------------------------------------------------------------------- Three months ended December 31, 1999 - ---------------------------------------------------------------------------------------------------------- Revenue from external customers $ 223,907 $ 326,327 $ 36,650 $ 586,884 Revenue from intersegment customers 26,321 - 40,299 66,620 Operating income (1) 25,860 39,208 8,402 73,470 Total assets 1,090,280 1,811,692 644,378 3,546,350 - ---------------------------------------------------------------------------------------------------------- Three months ended December 31, 1998 - ---------------------------------------------------------------------------------------------------------- Revenue from external customers 236,217 176,032 66,955 479,204 Revenue from intersegment customers 14,522 - 20,360 34,882 Operating income (1) 33,749 27,655 9,750 71,154 Total assets $1,087,520 $ 850,375 $ 732,783 $ 2,670,678 - ----------------------------------------------------------------------------------------------------------
(1) Operating income is defined as income before interest, income taxes, depreciation, amortization, rent and nonrecurring items. The Company's segment information does not include an allocation of overhead costs, which are between 3% - 4% of consolidated net revenues. 9. Cumulative Effect of Accounting Change Effective October 1, 1999, the Company adopted the provisions of the AICPA's Statement of Position 98-5, "Reporting on the Costs of Start-up Activities", (SOP 98-5) which requires the costs of start-up activities be expensed as incurred, rather than capitalized and subsequently amortized. The adoption of SOP 98-5 resulted in the write-off of $10,412,000, net of tax, of unamortized start-up costs and is reflected as a cumulative effect of accounting change. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania corporation. As used herein, unless the context otherwise requires, "Genesis," the "Company," "we," "our," or "us" refers to Genesis Health Ventures, Inc. and Subsidiaries. Since we began operations in July 1985, we have focused our efforts on providing an expanding array of specialty medical services to elderly customers. We generate revenues primarily from two sources: pharmacy and medical supply services, and inpatient services. However, we also derive revenue from other sources. We provide pharmacy and medical supply services through our NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply service revenues are institutional pharmacy revenues, which include the provision of infusion therapy, medical supplies and equipment provided to eldercare centers operated by Genesis, as well as to independent healthcare providers by contract. We provide these services through 69 institutional pharmacies (one is jointly-owned) and 19 medical supply distribution centers located in our various market areas. In addition, we operate 34 community-based pharmacies which are located in or near medical centers, hospitals and physician office complexes. The community-based pharmacies provide prescription and over-the-counter medications and certain medical supplies, as well as personal service and consultation by licensed professional pharmacists. NeighborCare purchases substantially all of its pharmaceuticals, approximately $540,000,000 annually, through Cardinal Health, Inc. under a five year contract which commenced in May of 1999. NeighborCare has other sources of supply available to it and has not experienced difficulty obtaining pharmaceuticals or other supplies used in the conduct of its business. Approximately 91% of the sales attributable to all pharmacy operations in the twelve months ended September 30, 1999 were generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by us, including the jointly owned and consolidated Multicare centers. We include in inpatient service revenue all room and board charges and ancillary service revenue for our eldercare customers at 221 eldercare centers owned and leased by Genesis and Multicare. We include the following in other revenues: rehabilitation therapy, management fees, capitation fees, consulting services, homecare services, physician services, transportation services, diagnostic services, hospitality services, group purchasing fees and other healthcare related services. Certain Transactions Multicare Transaction and its Restructuring In October 1997, Genesis, The Cypress Group (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors". In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of The Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the 16 "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. pursuant to which, among other things, Genesis had the option to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis ElderCare Corp. common stock at a price determined pursuant to the Put/Call Agreement. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Genesis also entered into an asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as defined below) and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 (the "Therapy Purchase") and a stock purchase agreement (the "Pharmacy Purchase Agreement") with Multicare and certain subsidiaries pursuant to which Genesis acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Purchase"). The Company completed the Pharmacy Purchase effective January 1, 1998. The Company completed the Therapy Purchase in October 1997. Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement; Issuance of Preferred Stock Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for: o 24,369 shares of Genesis' Series H Senior Convertible Participating Cumulative Preferred Stock, (the "Series H Preferred") which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp., and o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock, (the "Series I Preferred") which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp. In connection with the restructuring transaction, the restrictions in the Put/Call Agreement related to Genesis' right to take certain corporate actions, including its ability to sell all or a portion of its pharmacy business, were terminated. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. Investment in Genesis Cypress and TPG invested in the aggregate, directly or through affiliated investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of Genesis common stock and a ten year warrant to purchase 2,000,000 shares of Genesis common stock at an exercise price of $5.00 per share. 17 Registration Rights Subject to limitations contained in the Restructuring Agreement, the holders of the Genesis common stock, warrants, Series H Preferred Stock and Series I Preferred Stock issued in connection with the restructuring transaction and all securities issued or distributed in respect of these securities have the right to register these securities under the Securities Act. Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. Irrevocable Proxy Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an irrevocable power of attorney directing Genesis to cast for, against or as an abstention in the same proportion as the other Genesis voting securities are cast, the number of shares of securities of Genesis so that Cypress, TPG and Nazem together will not have the right to vote more than 35% of the total voting power of Genesis in connection with any vote other than a vote relating to an amendment to Genesis' articles of incorporation to amend, modify or change the terms of any class or series of preferred stock. This power of attorney will terminate upon the existence of the circumstances that would cause the standstill to terminate as described below. Directors of Genesis Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting jointly, or in the event that only one of Cypress and TPG then owns or has the right to acquire Genesis common stock, Cypress or TPG, as applicable, are entitled to designate a number of directors of Genesis representing at least 23% of the total number of directors constituting the full board of directors of Genesis. However, for so long as the total number of directors constituting the full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only entitled to designate two directors on the Genesis board of directors. Cypress and TPG have this right to designate directors so long as they own any combination of Genesis voting securities or securities convertible into Genesis voting securities constituting more that 10% of Genesis' total voting power. For this purpose, the Series I Preferred Stock and the non-voting common stock issued upon conversion of the Series I Preferred Stock will be considered voting securities. For so long as Cypress and/or TPG have the right to designate directors on the Genesis board of directors, Genesis shall not, without the consent of at least two of the Cypress/TPG designated directors: 18 o enter into any transaction or series of transactions which would constitute a change in control, as defined in the Restructuring Agreement; or o engage in a "going private" transaction. Pre-emptive Rights As a result of the restructuring transaction, Cypress and TPG each have a right, subject to the limitations contained in the Restructuring Agreement, to participate in future offerings of any shares of, or securities exchangeable, convertible or exercisable for any shares of, any class of Genesis' capital stock. Standstill The Sponsors have agreed that, subject to certain termination provisions, neither they nor their affiliates will, without Genesis' prior written consent, either alone or as part of a group, acquire any voting securities of Genesis, except for the voting securities to be issued in the restructuring transaction and pursuant to stock splits, stock dividends or other distributions or offerings made available to holders of Genesis voting securities generally. Accounting Effects Prior to the restructuring transaction, Genesis accounted for its investment in Multicare using the equity method of accounting. Upon consummation of the restructuring transaction, Genesis will consolidate the financial results of Multicare since Genesis will have managerial, operational and financial control of Multicare under the terms of the Restructuring Agreement. Accordingly, Multicare's assets, liabilities, revenues and expenses will be consolidated at their recorded historical amounts and the financial impact of transactions between Genesis and Multicare will be eliminated in consolidation. The non-Genesis shareholders' remaining 56.4% interest in Multicare will be carried as minority interest based on their proportionate share of Multicare's historical book equity. For so long as there is a minority interest in Multicare, the minority shareholders' proportionate share of Multicare's net income or loss will be recorded through adjustment to minority interest. In connection with the restructuring transaction, Genesis recorded a non-cash charge of approximately $420,000,000 representing the estimated cost to terminate the Put in consideration for the issuance of the Series H Preferred and Series I Preferred. The cost to terminate the Put was estimated based upon the Company's assessment that no incremental value was realized by Genesis as a result of the changes in the equity ownership structure of Multicare brought about by the restructuring of the Multicare joint-venture. Results of Operations Three months ended December 31, 1999 compared to three months ended December 31, 1998 The Company's total net revenues for the quarter ended December 31, 1999 were $586,884,000 compared to $479,204,000 for the quarter ended December 31, 1998, an increase of $107,680,000 or 22%. Pharmacy and medical supply service revenue from external and intersegment customers was $250,228,000 for the quarter ended December 31, 1999 versus $250,739,000 for the quarter ended December 31, 1998. Inpatient service revenue increased $150,295,000 or 85% to $326,327,000 from $176,032,000. Of this increase, approximately $156,973,000 is attributed to the consolidation of Multicare's inpatient revenues in the quarter ended December 31, 1999. This increase is offset by reduced revenue of approximately $9,100,000 resulting from seven fewer eldercare centers in the December 31, 1999 quarter compared to the December 31, 1998 quarter. The remaining increase of approximately $2,400,000 is due to shifts in payor mix and rates. Total patient days increased 959,512 to 2,210,839 during the quarter ended December 31, 1999 compared to 1,251,327 during the comparable period last year. Of this increase, approximately 1,029,138 patient days are attributed to the consolidation of Multicare's inpatient business in the quarter ended December 31, 1999, offset by a reduction of 76,042 patient days resulting from seven fewer eldercare centers 19 in the December 31, 1999 quarter compared to the December 31, 1998 quarter. The remaining increase of approximately 6,400 patient days is attributed to the fill up of several recently opened assisted living properties. Other revenues decreased approximately $30,305,000 from $66,955,000 to $36,650,000. Approximately $5,300,000 of this decline is attributed to contraction in the Company's rehabilitation services business since the January 1, 1999 implementation of PPS by many of the Company's external rehabilitation customers. Approximately $15,300,000 of the decline is attributed to the consolidation of Multicare's results with those of Genesis and the resulting elimination of management fee and other service related revenues with Multicare in the quarter ended December 31, 1999. Approximately $6,400,000 of this decline is attributed to the termination of a capitation contract in the Company's Chesapeake region. The remaining decline in other revenue of approximately $3,300,000 is attributed to the Company's other heath care services business lines, including the Company's transportation business. The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $513,414,000 for the quarter ended December 31, 1999 compared to $408,050,000 for the quarter ended December 31, 1998, an increase of $105,364,000 or 26%, of which approximately $113,652,000 is attributed to the consolidation of Multicare's results with those of Genesis, approximately $1,300,000 is attributed to the Company's adoption of a new accounting principle that requires start-up costs be expensed when incurred, and approximately $4,900,000 is principally attributed to inflationary increases. These increases are offset by reduced operating expenses of approximately $6,400,000 attributed to a terminated capitation contract in the Company's Chesapeake region and $8,100,000 resulting from seven fewer eldercare centers operating in the December 31, 1999 quarter compared to the December 31, 1998 quarter. The Company recorded a non cash pre tax charge of $7,720,000 in the quarter ended December 31, 1999 for a stock option redemption program (the "Redemption Program") under which current Genesis employees and directors have elected to surrender certain Genesis stock options for unrestricted shares of Genesis Common Stock. The Redemption Plan is subject to shareholder approval and will be voted upon at the Company's 2000 Annual Meeting scheduled for March 16, 2000. The Company believes it has secured sufficient votes on this shareholder proposal, and as a result, recorded a pretax charge of approximately $7,720,000 in the first fiscal quarter of 2000 to recognize the non-cash compensation expense of the Redemption Plan. The elections made by optionees will result in the redemption of approximately 4,600,000 stock options in exchange for approximately 4,000,000 shares of Genesis common stock. In the quarter ended December 31, 1999, approximately $29,100,000 of revenue, and a corresponding amount of expense, was eliminated in consolidation for transactions between Genesis and Multicare. In connection with the Multicare joint venture restructuring, Genesis recorded a non-cash charge of approximately $420,000,000 representing the estimated cost to terminate the Put in consideration for the issuance of the Series H Preferred and Series I Preferred. The cost to terminate the Put was estimated based upon the Company's assessment that no incremental value was realized by Genesis as a result of the changes in the equity ownership structure of Multicare brought about by the restructuring of the Multicare joint-venture. Depreciation and amortization expense increased $11,311,000, of which $9,558,000 is attributed to the consolidation of Multicare's results with those of Genesis. The remaining increase is principally attributed to incremental amortization of deferred financing costs, as well as incremental depreciation expense from capital expenditures made since December 31, 1998. Interest expense increased $25,453,000, of which $18,239,000 is attributed to the consolidation of Multicare's results with those of Genesis. The remaining increase in interest expense is primarily due to additional capital and working capital borrowings and an increase in the Company's weighted average borrowing rate. Minority interest of $6,927,000 recorded during the quarter ended December 31, 1999 principally represents Genesis' Multicare joint venture partners' 56.4% interest in the Multicare net loss for the period. 20 Effective October 1, 1999, Genesis adopted the provisions of the American Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be expensed as incurred. The cumulative effect of expensing all unamortized start-up costs at October 1, 1999 was $16,400,000 pre tax and $10,400,000 after tax. Preferred stock dividends increased $3,395,000 to $8,306,000 during the quarter ended December 31, 1999 compared to $4,911,000 during the quarter ended December 31, 1998. This increase is attributed to the issuance of Series H and Series I Preferred Stock in mid-November, 1999. The December 31, 1998 preferred stock dividends were restated, resulting in an increase of $494,000, to adjust the accrual for the increasing rate dividend on the Series G Preferred Stock on a straight line basis over the term of that series. Liquidity and Capital Resources General We have substantial indebtedness and, as a result, significant debt service obligations. As of December 31, 1999, we had approximately $2,242,754,000 of long-term indebtedness, excluding the current portion of indebtedness of $72,836,000, which represented 74% of our total capitalization. The degree to which we are leveraged could have important consequences, including, but not limited to the following: o our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be limited or impaired; o a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on indebtedness, thereby reducing the funds available to us for our operations; o our operating flexibility is limited by restrictions contained in some of our debt agreements which limit our ability to incur additional indebtedness and enter into other financial transactions, to pay dividends, and set forth minimum net worth requirements; o our degree of leverage may make us more vulnerable to industry downturns and less competitive, may reduce our flexibility in responding to changing business and industry conditions and may limit our ability to pursue other business opportunities, to finance our future operations or capital needs, and to implement our business strategy; and o certain of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of higher interest rates. The Company expects to finance required payments of principal and interest on our indebtedness from its cash flow from operations and the sales of certain assets. Management is currently engaged in discussions for the asset sales, however, the Company has no firm commitments from potential purchasers for these assets. The Company's ability to make scheduled payments of the principal or interest on, or to refinance indebtedness, depends on the future performance of the Company's business, which is in turn subject to financial, business, economic and other factors affecting the Company's business and operations, including factors beyond its control, such as prevailing industry conditions. There can be no assurances that the anticipated sales will be consummated and that cash flow from operations will be sufficient to enable the Company's to service its debt and meet other obligations. If such cash flow is insufficient, the Company may be required to refinance and/or restructure all or a portion of its existing debt, to sell additional assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such additional sales of assets or additional financing could be achieved. Required payments of principal and interest on our indebtedness is expected to be satisfied by our cash flow from operations. Our ability to generate sufficient cash flows from operations depends on a number of internal and external factors affecting our business and operations, including factors beyond our control, such as prevailing industry conditions. There can be no assurances that cash flow from operations will be sufficient to enable us to service our debt and meet our other obligations. If such cash flow is insufficient, we may 21 be required to refinance and/or restructure all or a portion of our existing debt, to sell assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such sales of assets or additional financing could be achieved. Also, the ability of our Multicare affiliate to meet its obligations is dependent upon its ability to consummate certain asset sales. There can be no assurances that such asset sales will be consummated by Multicare. We also have significant long-term operating lease obligations with respect to certain of our sites of service, including eldercare centers. Operating cash flow will depend upon our ability to effect cost reduction initiatives and to reduce our investment in working capital. We believe that operating cash flow, which is expected to be augmented by planned refinancing transactions, will be sufficient to meet our future obligations. However, there can be no assurances that the cash flow from our operations will be sufficient to enable us to service our substantial indebtedness and meet our other obligations. Working capital increased $65,641,000 to $301,345,000 at December 31, 1999 from $235,704,000 at September 30, 1999, of which approximately $27,400,000 is due to a reduction in accounts payable and accrued expenses as a result of the timing of vendor and interest payments, $20,500,000 is due to growth in trade receivables, $11,100,000 is due to the purchase of investments in marketable securities held by the Company's insurance captive and $6,100,000 is due to growth in inventory balances. Genesis' cash flow from operations for the three months ended December 31, 1999 was a use of cash of $38,672,000 compared to a use of cash of $23,862,000 for the three months ended December 31, 1998. At December 31, 1999, included in accounts receivable were approximately $11,600,000 due from HCR Manor Care (see "Legal Proceedings") and approximately $19,800,000 due from Mariner Post-Acute Network, Inc. and Mariner Health Group, Inc. ("Mariner") for the provision of certain ancillary services rendered. At December 31, 1999, $34,200,000 of trade receivables and payables between Genesis and Multicare were eliminated in consolidation. On January 18, 2000, Mariner Post-Acute Network, Inc. and Mariner Health Group, Inc. filed separate voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware. The Company is actively pursuing its claim for the receivables from Mariner, including participating as a member of the official unsecured creditors committee, in order to ensure the interests of the Company are protected. Investing activities for the three months ended December 31, 1999 include approximately $14,300,000 of capital expenditures primarily related to betterments and expansion of eldercare centers and investment in data processing hardware and software. Of the capital expenditures, approximately $4,900,000 relates to the construction, renovation and expansion of assisted living facilities. Cash proceeds from investments in unconsolidated affiliates of approximately $3,800,000 during the three months ended December 31, 1999 represents proceeds raised by joint venture partnerships with outside financing sources to refinance construction costs initially funded by the Company 22 Credit Facilities and Other Debt Genesis Credit Facility Genesis entered into a fourth amended and restated credit agreement on August 20, 1999 pursuant to which the lenders amended and restated the credit agreement under which the lenders provided Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the "Genesis Credit Facility") for the purpose of: refinancing and funding interest and principal payments of certain existing indebtedness; funding permitted acquisitions; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of transactions. The fourth amended and restated credit agreement made the financial covenants for certain periods less restrictive, increases the Annual Applicable Margin (defined below) and provides the lenders of the Genesis Credit Facility a collateral interest in certain real and personal property of the Company, required minimum assets sales and generally reallocated the proceeds thereof among the Tranche II Facility (defined below), the Genesis Revolving Facility (defined below) and the Genesis Term Loans (defined below), permitted the restructuring of the Put/Call Agreement, as defined, and increased the interest rates applying to the Genesis Term Loans and the Genesis Revolving Facility. Additionally, the fourth amended and restated credit agreement provides for $40,000,000 of additional borrowing capacity, (the "Tranche II Facility"). The asset sales required by the Genesis Credit Facility total $12,000,000 by December 31, 1999, $37,000,000 by June 30, 2000 and $40,000,000 by December 31, 2000. Genesis has satisfied the requirement through December 31, 1999 and has transactions in process to satisfy the majority of the aggregate requirement through December 31, 2000. The Genesis Credit Facility consists of three term loans with original balances of $200,000,000 each (collectively, the "Genesis Term Loans"), and a $650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a $40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly installments through 2005, of which $28,670,000 is payable in Fiscal 2000. The Genesis Term Loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $110,445,000 at December 31, 1999 (the "Genesis Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $152,131,000 at December 31, 1999 (the "Genesis Tranche B Term Facility"); and (iii) an original eight year term loan maturing in June 2005 with an outstanding balance of $151,767,000 at December 31, 1999 (the "Genesis Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding balance of $645,198,000 at December 31, 1999, becomes payable in full on September 30, 2003. As of December 31, 1999, there were no borrowings outstanding under the Tranche II Facility. The Genesis Credit Facility is secured by a first priority security interest in all of the stock, partnership interests and other equity of all of Genesis' present and future subsidiaries (including Genesis ElderCare Corp.) other than the stock of Multicare and its subsidiaries, and also by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Genesis' subsidiaries' real property were also granted. Loans under the Genesis Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. Loans under the Genesis Tranche A Term Facility and Genesis Revolving Facility have an Annual Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans (an effective rate of 9.44% at December 31, 1999). Loans under the Genesis Tranche B Term Facility have an Annual Applicable Margin of 1.75% for Prime Rate loans and 3.50% for LIBO Rate loans (an effective rate of 9.69% at December 31, 1999). Loans under the Genesis Tranche C Term Facility have an Annual Applicable Margin of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans (an effective rate of 9.94% at December 31, 1999). Subject to meeting certain financial ratios, the above referenced interest rates are reduced. The Genesis Credit Facility contains a number of covenants that, among other things, restrict the ability of Genesis and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions 23 with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Genesis and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Genesis and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Genesis to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. Multicare Credit Facility Multicare entered into a fourth amended and restated credit agreement on August 20, 1999 which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Multicare Tranche A Term Facility (defined below) and Multicare Revolving Facility (defined below), permitted the restructuring of the Put/Call Agreement, increased the interest rates applying to the Multicare Term Loans (defined below) and the Multicare Revolving Facility, and increased the level of management fee Multicare may defer from two percent to four percent (on an annualized basis) in any fiscal year. The Multicare Credit Facilities consist of three term loans with an aggregate original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The Term Loans amortize in quarterly installments through 2005, of which $34,000,000 is payable in Fiscal 2000. The loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $140,000,000 at December 31, 1999 (the "Multicare Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $146,625,000 at December 31, 1999 (the "Tranche B Term Facility"); and (iii) an original eight year term loan maturing in June 2005 with an outstanding balance of $48,750,000 at December 31, 1999 (the "Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an outstanding balance of $123,534,000 at December 31, 1999, becomes payable in full on September 30, 2003. The Multicare Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Multicare Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, an Annual Applicable Margin that is dependent upon a certain financial ratio test. Effective with the Amendment on August 20, 1999, loans under the Multicare Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75% (an effective rate of 9.94% at December 31, 1999); loans under the Multicare Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0% (an effective rate of 10.16% at December 31, 1999); loans under the Multicare Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; (an effective rate of 10.44%) loans under the Multicare Revolving Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75% (an effective rate of 9.94%). Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. Multicare continues to actively pursue sales of assets in Ohio, Illinois and Wisconsin. Management is currently engaged in discussions for the asset sales; however, the Company has no firm commitments from potential purchasers for these assets. There can be no assurances that any such sales of assets will be achieved. All net proceeds of the disposition of certain assets located in Ohio not in excess of $55,000,000 shall be applied against the Multicare Revolving Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held be each applicable lender. 24 All net proceeds of the disposition of certain assets located in Illinois and Wisconsin shall be applied first against the Multicare Tranche A Term Loan, on a pro rata basis in accordance with the relative aggregate principal amounts held by each applicable lender. The Multicare Credit Facility contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to: dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Multicare to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. Other Indebtedness Genesis has outstanding an aggregate of $370,000,000 of Senior Subordinated Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%. Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the Multicare Notes is payable semi-annually. Certain of Genesis' and Multicare's other outstanding loans contain covenants which, without the prior consent of the lenders, limit certain of Genesis' and Multicare's activities. Such covenants contain limitations relating to the merger or consolidation of Genesis or Multicare and Genesis' and Multicare's ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, Genesis and Multicare must maintain certain minimum levels of cash flow and debt service coverage, and must maintain certain ratios of liabilities to net worth. Under certain of these loans, Genesis is restricted from paying cash dividends on the Common Stock, unless certain conditions are met. Genesis has not declared or paid any cash dividends on our Common Stock since its inception. The Multicare Restructuring In connection with the restructuring of the Multicare transaction, Genesis entered into a Restructuring Agreement with Cypress, TPG and Nazem to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Pursuant to the Restructuring Agreement the Put under the Put/Call Agreement was terminated in exchange for: o 24,369 shares of Genesis' Series H Senior Convertible Participating Cumulative Preferred Stock, which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp., and o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock, which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp. The Series H Preferred are convertible into 27,850,286 shares of Common Stock. The Series I Preferred are convertible into 20,149,410 shares of non-voting Common Stock. The Series H and I Preferred have an initial dividend of 5.00%, which increases 0.05% beginning the sixth anniversary date and an additional 0.05% each anniversary date thereafter through the 12th anniversary date, to a maximum of 8.5%. 25 Cypress and TPG invested in the aggregate, directly or through affiliated investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of Genesis common stock and a ten year warrant to purchase 2,000,000 shares of Genesis common stock at an exercise price of $5.00 per share. Legislative and Regulatory Issues Legislative and regulatory action, including but not limited to the 1997 Balanced Budget Act and the Balanced Budget Refinement Act, has resulted in continuing change in the Medicare and Medicaid reimbursement programs which has adversely impacted us. The changes have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers or other providers. There can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on us. Anticipated Impact of Healthcare Reform The Genesis eldercare centers began implementation of PPS on October 1, 1998 and the majority of the Multicare eldercare centers began implementation of PPS on January 1, 1999. The actual impact of PPS on our earnings in future periods will depend on many variables which can not be quantified at this time, including the effect of the Balanced Budget Refinement Act, regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, ability to reduce costs and growth of ancillary business. PPS and other existing and future legislation and regulation may also adversely affect our pharmacy and medical supply revenue, and other specialty medial services. As a result of the Balanced Budget Refinement Act, the Company transitioned 24 eldercare centers to the full federal rate effective January 1, 2000. The Company believes this transaction will result in incremental annualized revenue of approximately $2,400,000, which will in part be offset by the continued phase in of PPS. Other In August 1998, in connection with the Vitalink Transaction, the Company issued the Series G Preferred. The Series G Preferred has a face value of approximately $295,100,000 and an initial dividend of 5.9375% and generally is not transferable without our consent. The dividend rate increases on the fourth, fifth, ninth, eleventh and thirteenth anniversary date to 6.1875%, 6.6250%, 7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is convertible into Genesis common stock, par value $.02 per share, at $37.20 per share and it may be called for conversion after April 26, 2001, provided the price of common stock reaches certain trading levels and after April 26, 2002, subject to a market-based call premium. At December 31, 1999 there were approximately $20,100,000 of accrued, but unpaid dividends on the Series G Preferred. The Company does not anticipate paying cash dividends on the Series G Preferred in fiscal 2000. The holders of the Series G Preferred are entitled to be paid in additional shares of Series G Preferred to the extent that dividends are not declared and paid or funds continue to not be legally available for the payment of dividends after four consecutive quarterly periods, as defined. As a result of the Vitalink Transaction, Genesis assumed approximately $87,000,000 of indebtedness Vitalink had outstanding. The cash portion of the purchase price was funded through borrowings under the Genesis Credit Facility. Seasonality The Company's 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. 26 Impact of Inflation The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. To date, the Company has offset its increased operating costs by increasing charges for its services and expanding its services. Genesis has also implemented cost control measures to limit increases in operating costs and expenses but cannot predict its ability to control such operating cost increases in the future. Year 2000 Compliance The Company did not experience any material interruptions of business as a result of the Year 2000 computer problem. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company intends to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. 27 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of interest rate changes. In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates. The Company's objective in managing its exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. Notional amounts of interest rate swap agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates. The estimated amount the Company would pay to terminate its interest rate swap agreements outstanding at December 31, 1999 is approximately $27,000,000. 28 PART II: OTHER INFORMATION Item 1. Legal Proceedings Genesis is a party to litigation arising in the ordinary course of business. Genesis does not believe the results of such litigation, even if the outcome is unfavorable to us, would have a material adverse effect on our financial position. See "Cautionary Statement Regarding Forward-Looking Statements." The Genesis and Vitalink Actions Against HCR Manor Care On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services (d/b/a NeighborCare(R), a subsidiary of Genesis, filed multiple lawsuits requesting injunctive relief and compensatory damages against HCR Manor Care, Inc. and two of its subsidiaries and principals. The lawsuits arise from HCR Manor Care's threatened termination of two long term pharmacy services contracts effective June 1, 1999. Vitalink filed a complaint against HCR Manor Care and two of its subsidiaries in Baltimore City, Maryland circuit court. Genesis filed a complaint against HCR Manor Care and two of its subsidiaries and principals in federal district court in Delaware including, among other counts, securities fraud. Vitalink has also instituted an arbitration action in Maryland. Vitalink is seeking a declaration that it has a right to provide pharmacy, infusion therapy and related services to all of HCR Manor Care's facilities and a declaration that HCR Manor Care's threatened terminations were unlawful. Genesis and Vitalink seek over $100,000,000 in compensatory damages and enforcement of a 10-year non-competition clause. Genesis acquired Vitalink from Manor Care in August 1998. In 1991, Vitalink and Manor Care entered into long- term master pharmacy agreements which gave Vitalink the right to provide pharmacy services to all facilities owned or licensed by Manor Care and its affiliates. In 1998, the terms of the pharmacy service agreements were extended to September, 2004. Under the two master service agreements, Genesis and Vitalink receive revenues at the rate of approximately $100,000,000 per year. By agreement dated May 13, 1999, the parties agreed to consolidate the Maryland State Court Claims relating to the master service agreements with the Arbitration matter. Accordingly, on May 25, 1999, the Maryland state court case was dismissed voluntarily. Until such time as a final decision is rendered in said Arbitration, the parties have agreed to maintain the master service agreements in full force and effect. HCR Manor Care and its subsidiaries have pleaded counterclaims in the Arbitration seeking damages for Vitalink's alleged overbilling for products and services provided to HCR Manor Care, a declaration that HCR Manor Care had the right to terminate the master service agreements, and a declaration that Vitalink does not have the right to provide pharmacy, infusion therapy and related services to facilities owned by HCR prior to its merger with Manor Care. Genesis still maintains its Delaware federal court complaint. The Action Against Omnicare and Heartland On July 26, 1999, NeighborCare, through its Maryland counsel, filed an additional complaint against Omnicare Inc. and Heartland Healthcare (a joint venture between Omnicare and HCR Manor Care) seeking injunctive relief and compensatory and punitive damages. The complaint includes counts for tortious interference with Vitalink's contractual rights under its three exclusive long-term service contracts with HCR Manor Care. 29 The HCR Manor Care Action Against Genesis in Delaware On August 27, 1999, Manor Care Inc., a wholly owned subsidiary of HCR Manor Care, Inc., filed a lawsuit against Genesis in federal district court in Delaware based upon Section 11 and Section 12 of the Securities Act. Manor Care Inc. alleges that in connection with the sale of the Genesis Series G Preferred Stock issued as part of the purchase price to acquire Vitalink, Genesis failed to disclose or made misrepresentations related to the effects of the conversion to the prospective payment system, the restructuring of the Multicare joint venture, the impact of the acquisition of Multicare, the status of Genesis labor relations, Genesis' ability to declare dividends on the Series G Preferred Stock and information relating to the ratio of combined fixed charges and preference dividends to earnings. Manor Care Inc. seeks, among other things, compensatory damages and rescission of the purchase of the Series G Preferred Stock. The HCR Manor Care Action Against Genesis in Ohio On December 22, 1999, Manor Care filed a lawsuit against Genesis and others in the United States District Court for the Northern District of Ohio. Manor Care alleges, among other things, that the Series H Senior Convertible Participating Cumulative Preferred Stock (the "Series H Preferred") and Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock (the "Series I Preferred") were issued in violation of the terms of the Series G Preferred and the Rights Agreement dated as of April 26, 1998 between Genesis and Manor Care. Manor Care seeks, among other things, damages and rescission or cancellation of the Series H and Series I Preferred. 30 Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- Number Description ------ ----------- 27 Financial Data Schedule (b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K dated November 15, 1999, reporting the closing of its transaction with The Cypress Group L.L.C and TPG Partners II, L.P. to restructure the Multicare joint-venture. The Current Report on Form 8-K does not include financial statements. 31 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: February 14, 2000 /s/ George V. Hager, Jr. -------------------------------- George V. Hager, Jr. Executive Vice President and Chief Financial Officer 32 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000874265 GENESIS HEALTH VENTURES, INC. USD 3-MOS SEP-30-1999 OCT-01-1999 DEC-31-1999 1 20,699,000 35,609,000 571,387,000 (98,535,000) 69,500,000 663,038,000 1,420,904,000 (204,822,000) 3,546,350,000 361,693,000 0 423,335,000 6,000 748,000 186,691,000 3,546,350,000 586,884,000 586,884,000 0 513,414,000 7,720,000 420,000,000 52,776,000 (445,671,000) (7,280,000) (439,770,000) 0 0 (10,412,000) (450,182,000) (10.62) (10.62)
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