-----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, TE8yoyn62++h9KQTuqyoRjALbpDPFdYV9lURtH2YnVs0QyMKF8z7mgmeOPLia8Q1 QPwi4trfOgSCMyuXDDTs4g== 0000950116-98-001177.txt : 19980518 0000950116-98-001177.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950116-98-001177 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE 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: 98625636 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 March 31, 1998 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 May 8, 1998: 35,154,917 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 .......................................................12 Part II OTHER INFORMATION Item 1. Legal Proceedings................................................................22 Item 2. Changes in Securities............................................................22 Item 3. Defaults Upon Senior Securities..................................................22 Item 4 Submission of Matters to a Vote of Security Holders..............................22 Item 5. Other Information................................................................22 Item 6. Exhibits and Reports on Form 8-K.................................................22 SIGNATURES ........................................................................................24
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Certain oral statements made by management from time to time and certain statements contained herein, including certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" such as statements concerning Medicaid and Medicare programs and the Company's ability to meet its liquidity needs and control costs, certain statements in Notes to Condensed Consolidated Financial Statements, such as certain Pro Forma Financial Information; and other statements contained herein regarding matters which are not historical facts are forward looking statements (as such term is defined in the Securities Act of 1933) and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to those discussed below: 1. The Company's substantial indebtedness and significant debt service obligations. 2. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth through acquisition and development, as well as internal growth. 3. Changes in the United States healthcare system, including changes in reimbursement levels under Medicaid and Medicare, implementation of a Medicare prospective payment system and consolidated billing and other changes in applicable government regulations that might affect the profitability of the Company. 4. The Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities, thereby avoiding a number of potentially adverse consequences, such as the imposition of fines, temporary suspension of admission of patients, restrictions on the ability to acquire new facilities, suspension or decertification from Medicaid or Medicare programs, and, in extreme cases, revocation of a facility's license or the closure of a facility, including as a result of unauthorized activities by employees. 5. The occurrence of changes in the mix of payment sources utilized by the Company's customers to pay for the Company's services. 6. The adoption of cost containment measures by private pay sources such as commercial insurers and managed care organizations, as well as efforts by governmental reimbursement sources to impose cost containment measures. 7. The level of competition in the Company's industry, including without limitation, increased competition from acute care hospitals, providers of assisted and independent living and providers of home health care and changes in the regulatory system, such as changes in certificate of need laws in the states in which the Company operates or anticipates operating in the future that facilitate such competition. 8. The Company's ability to identify suitable acquisition candidates, to consummate or complete development projects, or to profitably operate or successfully integrate enterprises into the Company's other operations, including the proposed acquisition of Vitalink Pharmacy Services, Inc. These and other factors have been discussed in more detail in the Company's periodic reports including its Annual Report on Form 10-K/A for the fiscal year ended September 30, 1997. 1 PART 1: FINANCIAL INFORMATION Item I. Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data)
March 31, September 30, - ---------------------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------- Assets: Current assets: Cash and equivalents $ 15,574 $ 11,651 Investments in marketable securities 18,839 14,729 Accounts receivable, net of allowance for doubtful accounts of $53,085 at March 31, 1998 and $39,418 at September 30, 1997 256,127 205,129 Cost report receivables 63,224 60,865 Inventory 35,778 25,568 Prepaid expenses and other current assets 36,225 26,675 Income taxes receivable -- 7,820 - ---------------------------------------------------------------------------------------------------------- Total current assets 425,767 352,437 - ---------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 572,749 578,397 Notes receivable and other investments 99,612 108,714 Other long-term assets 67,120 31,722 Investments in unconsolidated affiliates 330,773 2,887 Goodwill and other intangibles, net 420,991 359,956 - ---------------------------------------------------------------------------------------------------------- Total assets $ 1,917,012 $ 1,434,113 ========================================================================================================== Liabilities and Shareholders' Equity: Current liabilities: Accounts payable and accrued expenses $ 136,152 $ 117,234 Income taxes payable 1,586 -- Current installments of long-term debt 27,242 8,273 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 164,980 125,507 - ---------------------------------------------------------------------------------------------------------- Long-term debt 1,057,404 651,667 Deferred income taxes 41,487 37,745 Deferred gain and other long-term liabilities 23,573 11,173 Shareholders' equity: Common stock, par $.02, authorized 60,000,000 shares, issued and outstanding 35,153,004 and 35,107,403 at March 31, 1998; 35,117,075 and 35,071,474 at September 30, 1997 721 702 Additional paid-in capital 453,294 457,232 Retained earnings 175,796 150,330 Treasury stock, at cost (243) (243) - ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 629,568 608,021 - ---------------------------------------------------------------------------------------------------------- Total liabilities and shareholders'equity $ 1,917,012 $ 1,434,113 ==========================================================================================================
See accompanying notes to 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 March 31, - ----------------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------------- Net revenues: Basic healthcare services $ 137,033 $ 136,825 Specialty medical services 176,922 124,488 Management services and other, net 30,344 11,950 - ----------------------------------------------------------------------------------------------- Total net revenues 344,299 273,263 - ----------------------------------------------------------------------------------------------- Operating expenses: Salaries, wages and benefits 143,594 130,395 Other operating expenses 125,544 84,886 General corporate expense 14,139 9,907 Depreciation and amortization 12,667 10,620 Lease expense 7,868 7,244 Interest expense, net 18,688 8,960 - ----------------------------------------------------------------------------------------------- Income before income taxes and equity in net income of unconsolidated affiliates 21,799 21,251 Income taxes 7,957 7,757 - ----------------------------------------------------------------------------------------------- Income before equity in net income of unconsolidated affiliates 13,842 13,494 Equity in net income of unconsolidated affiliates 726 -- - ----------------------------------------------------------------------------------------------- Net income $ 14,568 $ 13,494 =============================================================================================== Per common share data: Basic: Net income $ 0.42 $ 0.39 Weighted average shares of common stock 35,093,962 34,873,809 - ----------------------------------------------------------------------------------------------- Diluted: Net income $ 0.41 $ 0.38 Weighted average shares of common stock and equivalents 35,647,451 35,773,885 ===============================================================================================
See accompanying notes to condensed consolidated financial statements 3 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Operations (in thousands, except share and per share data)
Six months ended March 31, - ------------------------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------------------------ Net revenues: Basic healthcare services $ 275,049 $ 270,917 Specialty medical services 319,587 238,667 Management services and other, net 52,228 22,223 - ------------------------------------------------------------------------------------------------------------ Total net revenues 646,864 531,807 - ------------------------------------------------------------------------------------------------------------ Operating expenses: Salaries, wages and benefits 283,948 255,450 Other operating expenses 218,532 165,018 General corporate expense 26,176 19,529 Depreciation and amortization 24,353 20,101 Lease expense 14,511 14,182 Interest expense, net 38,331 18,155 - ------------------------------------------------------------------------------------------------------------ Income before income taxes, equity in net income of unconsolidated affiliates and extraordinary items 41,013 39,372 Income taxes 14,970 14,370 - ------------------------------------------------------------------------------------------------------------ Income before equity in net income of unconsolidated affiliates and extraordinary items 26,043 25,002 Equity in net income of unconsolidated affiliates 1,347 - - ------------------------------------------------------------------------------------------------------------ Income before extraordinary items 27,390 25,002 Extraordinary items, net of tax (1,924) (553) - ------------------------------------------------------------------------------------------------------------ Net income $ 25,466 $ 24,449 ============================================================================================================ Per common share data: Basic: Income before extraordinary items $ 0.78 $ 0.74 Extraordinary items (0.05) (0.02) Net Income $ 0.73 $ 0.72 Weighted average shares of common stock 35,084,965 33,996,555 - ------------------------------------------------------------------------------------------------------------ Diluted: Income before extraordinary items $ 0.77 $ 0.71 Extraordinary items (0.05) (0.02) Net Income $ 0.71 $ 0.70 Weighted average shares of common stock and equivalents 35,658,191 35,589,134 ============================================================================================================
See accompanying notes to condensed consolidated financial statements 4 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands)
Six months ended March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 25,466 $ 24,449 Adjustments to reconcile net income to net cash provided by operating activities: Charges (credits) included in operations not requiring funds: Provision for deferred taxes 3,742 3,592 Depreciation and amortization 24,353 20,101 Amortization of deferred gain and debt premium (592) (230) Equity in net income of unconsolidated affiliates (1,347) - Extraordinary items, net of tax 1,924 553 Changes in assets and liabilities excluding the effects of acquisitions: Accounts receivable (24,613) (27,363) Cost reports receivable (2,436) (5,907) Inventory (2,873) (5,236) Prepaid expenses and other current assets (6,650) (5,069) Accounts payable and accrued expenses (1,283) 6,983 Income taxes receivable and payable 9,396 6,522 - ------------------------------------------------------------------------------------------------------------------------ Total adjustments (379) (6,054) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operations 25,087 18,395 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (24,342) (33,778) Payments for acquisitions, net of cash acquired (100,929) (233,665) Investments in unconsolidated affiliates (326,539) - Net proceeds from the sale of assets 60,555 - Notes receivable and other investment and asset additions, net (26,977) (11,025) - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (418,232) (278,468) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net borrowings (repayments) under working capital revolving credit (181,024) 140,783 Repayment of long term debt (9,583) (1,955) Proceeds from issuance of long-term debt 611,241 125,000 Debt issuance costs (19,648) (3,750) Purchase of common stock call options (4,442) - Common stock options exercised 524 1,067 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 397,068 261,145 - ------------------------------------------------------------------------------------------------------------------------ Net increase in cash and equivalents 3,923 1,072 Cash and equivalents Beginning of period 11,651 12,763 End of period $ 15,574 $ 13,835 ======================================================================================================================== Supplemental disclosure of cash flow information Interest paid $ 38,664 $ 14,533 Income taxes paid $ 1,821 $ 6,873 ========================================================================================================================
See accompanying notes to condensed consolidated financial statements 5 GENESIS HEATLH 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 for the fiscal year ended September 30, 1997. 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. Sale of Assets On January 30, 1998, Genesis successfully completed deleveraging transactions with ElderTrust, a newly formed Maryland healthcare real estate investment trust. Genesis, a co-registrant on the ElderTrust initial public offering, received approximately $78,000,000 in proceeds from the sale of 13 properties to ElderTrust, including four properties it had purchased from Crozer-Keystone Health System in anticipation of resale to ElderTrust. Subsequently, Genesis received an additional $14,000,000 from the sale of a loan and two additional assisted living facilities and the recoupment of amounts advanced and expenses incurred in connection with the formation of ElderTrust. Additionally, ElderTrust has funded approximately $13,200,000 of a commitment to finance the development and expansion of four additional assisted living facilities. Genesis repaid a portion of the revolving credit component of its bank credit facility with the proceeds from these transactions. The sale of properties to ElderTrust resulted in a gain of approximately $12,000,000 which has been deferred and is being amortized over the ten year term of the lease contracts with ElderTrust. 3. Long-Term Debt In October 1997, in connection with the Multicare Transaction (defined below), Genesis entered into a new credit facility with Mellon Bank, N.A., Citicorp Securities, Inc., Citibank N.A., First Union Capital Markets Corp., First Union National Bank and NationsBank, N.A. (the "Lenders") pursuant to which the Lenders provided Genesis and its subsidiaries with loan facilities totaling $850,000,000 (the "Genesis Bank Financing") for the purpose of refinancing certain existing indebtedness of Genesis; funding interest and principal payments on the facilities and certain remaining indebtedness; funding permitted acquisitions; funding Genesis' commitments in connection with the Merger (defined below); and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of the transactions. The Genesis Bank Financing facilities consist of three $200,000,000 term loans (collectively, the "Term Loans"), a $250,000,000 revolving credit loan (the "Revolving Credit Facility"), which includes one or more Swing Loans (collectively, the "Swing Loan Facility") in integral principal multiples of $500,000 up to an aggregate unpaid principal amount of $15,000,000. The Term Loans amortize in quarterly installments beginning in fiscal 1998 through 2005, of which $19,000,000 is payable over the next twelve months. The Term Loans consist of (1) a $200,000,000 six year term loan (the "Tranche A Term Facility"); (2) a $200,000,000 seven year term loan (the "Tranche B Term Facility"); and (3) a $200,000,000 eight year term loan (the "Tranche C Term Facility"). The Revolving Credit Facility becomes payable in full on September 30, 2003. The Genesis Bank Financing facilities are 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 the Genesis Elder Care Corp.) other than stock of Multicare and its subsidiaries. Loans under the Genesis Bank Financing bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBOR. Loans under the Tranche A Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 2.5%, loans under the Tranche B Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 2.75%; loans under the Tranche C Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 3.0%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBOR plus a margin up to 2.5%, and loans under the Swing Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the parties. Subject to meeting certain financial covenants, the above referenced interest rates will be reduced. 6 4. Earnings Per Share In the first quarter of 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (Statement 128). Statement 128, which makes the standards for computing earnings per share more comparable to international standards, replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share. Statement 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement of all entities with complex capital structures. The Company has restated its earnings per share data for the three and six months ended March 31, 1997 to conform to the provisions of Statement 128 (amounts are in thousands except per share data):
Three Three Six Six Months Months Months Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 1998 1997 1998 1997 ------------- ------------ ------------ -------------- Basic Earnings Per Share: Income before extraordinary items $14,568 $13,494 $27,390 $25,002 Extraordinary items - - (1,924) (553) ------------- ------------ ------------ -------------- Net income $14,568 $13,494 $25,466 $24,449 ============= ============ ============ ============== Weighted average shares 35,094 34,874 35,085 33,997 ------------- ------------ ------------ -------------- Earnings per share before extraordinary items $0.42 $0.39 $0.78 $0.74 Earning per share - extraordinary items - - (0.05) (0.02) ------------- ------------ ------------ -------------- Earnings per share $0.42 $0.39 $0.73 $0.72 ------------- ------------ ------------ -------------- Diluted Earnings Per Share: Income before extraordinary items $14,568 $13,494 $27,390 $25,002 Extraordinary items - - (1,924) (553) ------------- ------------ ------------ -------------- Net income $14,568 $13,494 $25,466 $24,449 Adjustments to net income for interest expense, amortization and other costs related to the assumed conversion of convertible debentures - - - 303 ------------- ------------ ------------ -------------- Adjusted net income $14,568 $13,494 $25,466 $24,752 ------------- ------------ ------------ -------------- Weighted Average Shares & Common Stock Equivalents: Common shares 35,094 34,874 35,085 33,997 Dilutive effect of unexcercised stock options 553 900 573 712 Convertible debenture shares - - 880 ------------- ------------ ------------ -------------- Total 35,647 35,774 35,658 35,589 ------------- ------------ ------------ -------------- Earnings per share before extraordinary items $0.41 $0.38 $0.77 $0.71 Earnings per share - extraordinary items - - (0.05) (0.02) ------------- ------------ ------------ -------------- Earnings per share $0.41 $0.38 $0.71 $0.70
7 5. Proforma Financial Information On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation formed by Genesis, The Cypress Group L.L.C. (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the shares of common stock of the Multicare Companies, Inc. ("Multicare"), pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger" or the "Multicare Transaction") of Acquisition Corp. with and into Multicare in accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 16, 1997, by and among Genesis ElderCare Corp., Acquisition Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare became a wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in the business of providing eldercare and specialty medical services in selected geographic regions. Included among the operations acquired by Genesis ElderCare Corp. are operations relating to the provision of ( i ) eldercare services including skilled nursing care, assisted living, Alzheimer's care and related support activities traditionally provided in eldercare facilities, (ii) specialty medical services consisting of (1) sub-acute care such as ventilator care, intravenous therapy and various forms of coma, pain and wound management and (2) rehabilitation therapies such as occupational, physical and speech therapy and stroke and orthopedic rehabilitation and (iii) management services and consulting services to eldercare centers. In connection with the Merger, Multicare and Genesis entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of ( i ) $1,992,000 or (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23,900,000 in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. Genesis also entered into an asset purchase agreement (the "Therapy Purchase Agreement") with Multicare 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 subject to adjustment (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 interest of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 subject to adjustment. The Company completed the pharmacy purchase effective January 1, 1998. Genesis ElderCare Corp. paid approximately $1,492,000,000 to (i) purchase the Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses to be incurred in connection with the completion of the Tender Offer, Merger and the financing transactions in connection therewith, (iii) refinance certain indebtedness of Multicare and (iv) make certain cash payments to employees. Of the funds required to finance the foregoing, approximately $745,000,000 were furnished to Acquisition Corp. as capital contributions by Genesis ElderCare Corp. from the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis ElderCare Corp. Common Stock") to Cypress, TPG, Nazem and Genesis. Cypress, TPG and Nazem purchased shares of Genesis ElderCare Corp. Common Stock for a purchase price of $210,000,000, $199,500,000 and $10,500,000, respectively, and Genesis purchased approximately 44% of the commons stock of Genesis ElderCare Corp. for a purchase price of $325,000,000. The balance of the funds necessary to finance the foregoing came from (i) the proceeds of loans from a syndicate of lenders in the aggregate amount of $525,000,000 and (ii) $246,800,000 of financing upon the completion of the sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997. 8 In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem entered into an agreement (the "Put/Call Agreement") pursuant to which, among other things, Genesis will have the option, on the terms and conditions set forth in the Put/Call Agreement, to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter, at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the terms and conditions set forth in the Put/Call Agreement, to require Genesis to purchase (the "Put") such Genesis ElderCare Corp. Common Stock commencing on October 9, 2002 and for a period of one year thereafter, at a price determined pursuant to the Put/Call Agreement. The prices determined for the Put and Call are based on a formula that calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis ElderCare Corp. Common Stock, plus a portion of the Genesis Pharmacy business (the "Calculated Equity Value"). The Calculated Equity Value will be determined based upon a multiple of Genesis ElderCare Corp.'s earnings before interest, taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR") after deduction of certain liabilities, plus a portion of the EBITDAR related to the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend on whether the Put or the Call is being exercised. Any payment to Cypress, TPG or Nazem under the Call or the Put may be in the form of cash or Genesis common stock at Genesis' option. Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum their original investment plus a 25% compound annual return thereon regardless of the Calculated Equity Value. Any additional Calculated Equity Value attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common Stock will be determined on the basis set forth in the Put/Call Agreement which provides generally for additional Calculated Equity Value of Genesis ElderCare Corp. to be divided based upon the proportionate share of the capital contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress, or TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited to Cypress', TPG's or Nazem's share of the Calculated Equity Value based upon a formula set forth in the terms of the Put/Call Agreement which provides generally for the preferential return of the stockholders' capital contributions (subject to certain priorities), a 25% compound annual return on Cypress', TPG's or Nazem's capital contributions and the remaining Calculated Equity Value to be divided based upon the proportionate share of the capital contributions of the stockholders to Genesis ElderCare Corp. Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon an event of bankruptcy of Genesis, a change of control of Genesis or an extraordinary dividend or distribution or the occurrence of the leverage recapitalization of Genesis. Upon an event of acceleration or the failure by Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and Nazem will have the right to terminate the Stockholders' Agreement and Management Agreement and to control the sale or liquidation of Genesis ElderCare Corp. In the event of such sale, the proceeds from such sale will be distributed among the parties as contemplated by the formula for the Put option exercise price and Cypress, TPG and Nazem will retain a claim against Genesis for the difference, if any, between the proceeds of such sale and the put option exercise price. In the event of a bankruptcy or change of control of Genesis, the option price shall be payable solely in cash provided any such payment will be subordinated to the payment of principal and interest under the Genesis Bank Financing. The following unaudited pro forma statement of operations information gives effect to the Multicare Transaction, which was accounted for using the equity method of accounting and the Therapy Purchase and Pharmacy Purchase, using the purchase method of accounting as though they had occurred on October 1, 1996, after giving effect to certain adjustments, including recognition of management fee income, amortization of goodwill, additional depreciation expense and increased interest expense on debt related to the transactions. The pro forma financial information, which includes preliminary allocations of purchase price to goodwill and property, plant and equipment that are subject to change, does not necessarily reflect the results of operations that would have occurred had the transactions occurred at the beginning of period presented 9
(In thousands, except per share data) Six Months Ended Six Months Ended Pro Forma Statement of Operations Information: March 31, 1998 March 31, 1997 ------------------ -------------- Total net revenue $ 662,885 $ 597,749 Income before extraordinary items 26,990 19,623 Net income 25,066 19,070 Earnings per share, before extraordinary items, diluted 0.76 0.56 Earnings per share, diluted $ 0.70 $ 0.54
6. Summary financial information of unconsolidated affiliate The following unaudited summary financial data for the Multicare Companies is as of and for the three and six months ended March 31, 1998. Multicare is the Company's only material unconsolidated affiliate. (in thousands)
March 31, 1998 ----------------- Total assets $1,708,216 Long-term debt 732,587 Total liabilities $960,491 Three months Six months ended March 31, ended March 31, 1998 1998 --------------------------------------- Revenues $170,164 $355,942 Net income $1,367 $2,725
7. Subsequent Event On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned subsidiary V Acquisition Corporation, a Delaware corporation ("Newco"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"). Pursuant to the Merger Agreement, Vitalink will merge with and into Newco, and Newco shall be the surviving corporation (the "Merger"). Each share of Vitalink Common Stock, par value .01 per share, (the "Vitalink Common Stock") will be converted in the Merger into the right to receive (1) .045 shares of Genesis Series G Cumulative Convertible Preferred Stock, par value .01 per share, ("Genesis Preferred"), (2) $22.50 per share in cash, or (3) a combination of cash and shares of Genesis Preferred (collectively, the "Merger Consideration"), subject to statutory appraisal rights. The Genesis Preferred will have an initial annual dividend of 5.9375%. The total consideration to be paid to stockholders of Vitalink to acquire their shares (including shares which may be issued upon the exercise of outstanding options) is approximately $600,000,000, of which approximately 50% will be paid in cash and 50% in Genesis Preferred. As a result of the Merger, Genesis will assume approximately $90,000,000 of indebtedness Vitalink has outstanding. The transaction has been unanimously approved by the Boards of Directors of both companies. The transaction is subject to regulatory and shareholder approval of both companies as well as receipt of financing and is expected to close in late fiscal year 1998. 10 Manor Care, Inc. ("Manor Care"), the holder of approximately 50% of the shares of Vitalink, has agreed to elect to exchange all of its Vitalink shares for the preferred stock. The form of Manor Care's consideration will be prorated to the extent that other Vitalink shareholders elect to receive preferred stock. The Genesis Preferred will not be transferable without the consent of Genesis until the filing by the Company of the registration statement with the Securities and Exchange Commission covering the sale of shares of Genesis Preferred by the holders. Manor Care has the right to require Genesis to register shares of its Genesis Preferred in certain circumstances beginning one year after the date of the Merger. The Genesis Preferred will be convertible into Genesis common shares at $37.20 per share and it may be called for conversion after three years, provided Genesis' stock price reaches certain trading levels. In addition, after the fourth year, the Genesis Preferred may be called for conversion by Genesis subject to a market-based call premium provision. Manor Care has provided Genesis with an irrevocable proxy to vote its Vitalink shares in favor of the merger. Upon closing of the transaction, it is anticipated that Manor Care will own approximately 18% of Genesis' pro forma diluted shares outstanding assuming the Vitalink shareholders other than Manor Care elect to receive cash for their shares. Manor Care will be subject to certain voting and standstill agreements and will have one representative on the Genesis Board of Directors. On and after April 29, 1998, certain shareholders of Vitalink filed suit in Delaware state court against Vitalink and certain of its officers and directors, Genesis, and Manor Care alleging, among other things, that Vitalink and Manor Care have breached certain fiduciary duties to the Vitalink shareholders in connection with the Merger Agreement and the transactions contemplated thereby, and that Genesis has knowingly aided and abetted the alleged breach. The shareholders mentioned above are seeking to enjoin Manor Care, Vitalink, and Genesis from proceeding with the Merger and the transactions contemplated thereby. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Since the Company began operations in July 1985, it has focused its efforts on providing an expanding array of specialty medical services to geriatric patients. The delivery of these services was originally concentrated in the eldercare centers owned and leased by the Company, but now also includes managed eldercare centers, independent healthcare facilities, outpatient clinics and home health care. The Company generates revenues from three sources: basic healthcare services, specialty medical services and management services and other. The Company includes in basic healthcare services revenues all room and board charges for its eldercare customers at its 111 owned and leased eldercare centers. Specialty medical services include all revenues from providing rehabilitation therapies, institutional pharmacy and medical supply services, professional pharmacy services, subacute care programs, home health care, physician services, and other specialized services to all centers owned, leased or managed by Genesis, as well as to over 800 independent healthcare providers. Management services and other include fees earned for management of eldercare centers, other service related businesses and transactional revenues. Genesis manages 213 eldercare centers, 115 of which are jointly-owned (including the impact of the Multicare Transaction defined in Certain Transactions). Certain Transactions On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned subsidiary V Acquisition Corporation, a Delaware corporation ("Newco"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"). Pursuant to the Merger Agreement, Vitalink will merge with and into Newco, and Newco shall be the surviving corporation (the "Merger"). Each share of Vitalink Common Stock, par value .01 per share, (the "Vitalink Common Stock") will be converted in the Merger into the right to receive (1) .045 shares of Genesis Series G Cumulative Convertible Preferred Stock, par value .01 per share, ("Genesis Preferred"), (2) $22.50 per share in cash, or (3) a combination of cash and shares of Genesis Preferred (collectively, the "Merger Consideration"), subject to statutory appraisal rights. The Genesis Preferred will have an initial annual dividend of 5.9375%. The total consideration to be paid to stockholders of Vitalink to acquire their shares (including shares which may be issued upon the exercise of outstanding options) is approximately $600,000,000, of which approximately 50% will be paid in cash and 50% in Genesis Preferred. As a result of the Merger, Genesis will assume approximately $90,000,000 of indebtedness Vitalink has outstanding. The transaction has been unanimously approved by the Boards of Directors of both companies. The transaction is subject to regulatory and shareholder approval of both companies as well as receipt of financing and is expected to close in late fiscal year 1998. On October 9, 1997, Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation formed by Genesis, The Cypress Group L.L.C. (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates, "Nazem"), acquired 99.65% of the shares of common stock of the Multicare Companies, Inc. ("Multicare"), pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger or the Multicare Transaction") of Acquisition Corp. with and into Multicare in accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare became a wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in the business of providing eldercare and specialty medical services in selected geographic regions. Included among the operations acquired by Genesis ElderCare Corp. are operations relating to the provision of ( i ) eldercare services including skilled nursing care, assisted living, Alzheimer's care and related support activities traditionally provided in eldercare facilities, (ii) specialty medical services consisting of (1) sub-acute care such as ventilator care, intravenous therapy and various forms of coma, pain and wound management and (2) rehabilitation therapies such as occupational, physical and speech therapy and stroke and orthopedic rehabilitation and (iii) management services and consulting services to eldercare centers. 12 In connection with the Merger, Multicare and Genesis entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of ( i ) $1,992,000 or (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23,900,000 in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. Genesis also entered into an asset purchase agreement (the "Therapy Sale Agreement") with Multicare 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 subject to adjustment (the "Therapy Sales") and a stock purchase agreement (the "Pharmacy Sale Agreement") with Multicare and certain subsidiaries pursuant to which Genesis acquired all of the outstanding capital stock and limited partnership intersest of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000, subject to adjustment. The Company completed the pharmacy purchase effective Janauary 1, 1998. Genesis Eldercare Corp. paid approximately $1,492,000,000 to (i) purchase the Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses to be incurred in connection with the completion of the Tender Offer, Merger and the financing transactions in connection therewith, (iii) refinance certain indebtedness of Multicare and (iv) make certain cash payments to employees. Of the funds required to finance the foregoing, approximately $745,000,000 were furnished to Acquisition Corp. as capital contributions by the Genesis ElderCare Corp. from the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis ElderCare Corp. Common Stock") to Cypress, TPG, Nazem and Genesis. Cypress, TPG and Nazem purchased shares of Genesis ElderCare Corp. Common Stock for a purchase price of $210,000,000, $199,500,000 and $10,500,000, respectively, and Genesis purchased approximately 44% of the common stock of Genesis ElderCare Corp. fora purchase price of $325,000,000. The balance of the funds necessary to finance the foregoing came from (i) the proceeds of loans from a syndicate of lenders in the aggregate amount of $525,000,000 and (ii) $246,800,000 of financing upon completion of the sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997. In the fourth quarter of 1997, the Company entered into an agreement with Blue Cross Blue Shield of Maryland (BCBSMD) to insure, through a sub-capitation agreement, the health care benefits of approximately 7,000 members of BCBSMD's Care First Medicare risk product. In the second quarter of 1998, the Company received approximately $7,300,000 of capitation revenue and incurred a like amount of costs associated with this agreement. In the fourth quarter of 1997, the Company recorded a pre-tax special charge of $5,000,000 to accrue for the estimated loss inherent in the agreement. Results of Operations Three months ended March 31, 1998 compared to three months ended March 31, 1997. The Company's total net revenues for the quarter ended March 31, 1998 were $344,299,000 compared to $273,263,000 for the quarter ended March 31, 1997, an increase of $71,036,000 or 26%. Basic healthcare services increased $208,000 principally due to providing care to higher acuity patients and rate increases, offset by the termination of operations by Genesis of three leased eldercare centers in September 1997. 13 Specialty medical services revenue increased $52,434,000 or 42% of which approximately $26,200,000 is attributed to the purchase of the Multicare pharmacy business, approximately $5,100,000 is attributed to the purchase of the Multicare rehabilitation therapy business and the remaining increase of approximately $21,100,000 is primarily due to other volume growth in the institutional pharmacy, medical supply and contract therapy divisions, general rate increases and increased acuity in the health centers division. Specialty medical service revenue per patient day in the health centers division increased 11% to $38.32 in the quarter ended March 31, 1998 compared to $34.58 in the quarter ended March 31, 1997 primarily due to treatment of higher acuity patients. Management services and other income increased $18,394,000 or 154%. This increase is due to approximately $10,200,000 of management fee revenue earned from the management of the operations of the Multicare business, approximately $7,300,000 of capitated revenue earned under a contract with BlueCross / Blue Shield of Maryland with the remaining increase of approximately $900,000 due to growth in revenue from existing management contracts and other service related businesses. The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $283,277,000 for the quarter ended March 31, 1998 compared to $225,188,000 for the quarter ended March 31, 1997, an increase of $58,089,000 or 26%, of which approximately $2,500,000 is due to the operating costs incurred to service the Multicare management contract, approximately $21,600,000 is due to the acquisition of the Multicare pharmacy operations, approximately $4,500,000 is due the acquisition of the Multicare rehabilitation therapy business, approximately $7,300,000 is due to costs incurred in connection with capitation costs incurred under a contract with Blue Cross / Blue Shield of Maryland and the remaining increase of approximately $22,200,000 is attributed to growth in the institutional pharmacy, medical supply and contract therapy divisions, as well as increased costs in information technology systems, community-based programs and marketing campaigns. Interest expense increased $9,728,000 or 109%. This increase in interest expense was primarily due to additional borrowings used to finance the Company's investment in Multicare, the purchase of the Multicare pharmacy and rehabilitation therapy businesses, and the acquisition and development of eldercare centers, assisted living facilities and ancillary businesses. Increased depreciation and amortization expense of $2,047,000 is attributed to the amortization of goodwill and deferred financing costs in connection with the Company's investment in Multicare and the purchase of the Multicare pharmacy and rehabilitation therapy businesses, as well as depreciation of increased investments in information systems. Lease expense increased $624,000 due to additional lease expense incurred by seven properties formerly owned by Genesis and now leased from ElderTrust, offset by decreased lease expense due to the termination of operations of three leased eldercare centers in September 1997. Six months ended March 31, 1998 compared to six months ended March 31, 1997. The Company's total net revenues for the six months ended March 31, 1998 were $646,864,000 compared to $531,807,000 for the six months ended March 31, 1997, an increase of $115,057,000 or 22%. Basic healthcare services increased $4,132,000 or 2% principally due to providing care to higher acuity patients and rate increases, offset by the termination of operations by Genesis of three leased eldercare centers in September 1997. Specialty medical services revenue increased $80,920,000 or 34% of which approximately $26,200,000 is attributed to the purchase of the Multicare pharmacy business, approximately $10,200,000 is attributed to the purchase of the Multicare rehabilitation therapy business, and the remaining increase of approximately $44,500,000 is primarily due to other volume growth in the institutional pharmacy, medical supply and contract therapy divisions, general rate increases and increased acuity in the health centers division. Specialty medical service revenue per patient day in the health centers division increased 16% to $36.41 in the six months ended March 31, 1998 compared to $31.49 in the six months ended March 31, 1997 primarily due to treatment of higher acuity patients. Management services and other income increased approximately $30,000,000 or 135%. This increase is due to approximately $21,800,000 of management fee revenue earned from the management of the operations of the Multicare business, approximately $7,300,000 of capitated revenue earned under a contract with BlueCross / Blue Shield of Maryland with the remaining increase of approximately $900,000 due to growth in revenue from existing management contracts and other service related businesses. 14 The Company's operating expenses before, depreciation, amortization, lease expense and interest expense were $528,656,000 for the six months ended March 31, 1998 compared to $439,997,000 for six months ended March 31, 1997, an increase of $88,659,000 or 20%, of which approximately $6,800,000 is due to the operating costs incurred to service the Multicare management contract, approximately $21,600,000 is due to the acquisition of the Multicare pharmacy operations, approximately $8,800,000 is due to the acquisition of the Multicare rehabilitation therapy business, approximately $7,300,000 is due to costs incurred in connection with capitation costs incurred under a contract with Blue Cross / Blue Shield of Maryland and the remaining increase of approximately $44,200,000 is attributed to growth in the institutional pharmacy, medical supply and contract therapy divisions, as well as increased costs in information technology systems, community-based programs and marketing campaigns. Interest expense increased $20,176,000 or 111%. This increase in interest expense was primarily due to additional borrowings used to finance the Company's investment in Multicare, the purchase of the Multicare pharmacy and rehabilitation therapy businesses, and the acquisition and development of eldercare centers, assisted living facilities and ancillary businesses. Increased depreciation and amortization expense of $4,252,000 is attributed to the amortization of goodwill and deferred financing costs in connection with the Company's investment in Multicare and the purchase of the Multicare pharmacy and rehabilitation therapy businesses, as well as depreciation of increased investments in information systems. Lease expense increased $329,000 due to additional lease expense incurred by seven properties formerly owned by Genesis and now leased from ElderTrust, offset by decreased lease expense due to the termination of operations of three leased eldercare centers in September 1997. In connection with the early repayment of debt in the quarters ended December 31, 1997 and 1996, the Company recorded an extraordinary loss net of tax of approximately $1,924,000 ($3,030,000 before tax) and $553,000 ($871,000 before tax), respectively, to write off unamortized deferred financing fees. Liquidity and Capital Resources Working capital increased $33,857,000 to $260,787,000 at March 31, 1998 from $226,930,000 at September 30, 1997. Accounts receivable increased to $256,127,000 at March 31, 1998 from $205,129,000 at September 30, 1997. Approximately $6,500,000 of this increase relates to balances acquired in the Multicare rehabilitation therapy business, approximately $18,700,000 relates to balances acquired in the Multicare pharmacy business while the remaining approximately $25,800,000 relates primarily to the continuing shift in business mix to specialty medical services, which typically have a longer collection period. Days revenue in accounts receivable decreased 1 day to 67 days during this period from 68 days for the quarter ended December 31, 1997. The Company's cash flow from operations for the six months ended March 31, 1998 was approximately $25,100,000 compared to approximately $18,400,000 for the six months ended March 31, 1997. The improvement in operating cash flow is primarily due to growth in operations. Investing activities for the six months ended March 31, 1998 include approximately $24,342,000 of capital expenditures primarily related to betterments and expansion of eldercare centers and investment in data processing hardware and software. During the six months ended March 31, 1998, other long term assets increased approximately $35,400,000, principally due to approximately $20,000,000 of financing and other transaction costs incurred in connection with the Multicare Transaction and the purchase of the Multicare rehabilitation therapy business, and approximately $9,900,000 of subordinated management fees due from Multicare. 15 On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned subsidiary V Acquisition Corporation, a Delaware corporation ("Newco"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"). Pursuant to the Merger Agreement, Vitalink will merge with and into Newco, and Newco shall be the surviving corporation (the "Merger"). Each share of Vitalink Common Stock, par value .01 per share, (the "Vitalink Common Stock") will be converted in the Merger into the right to receive (1) .045 shares of Genesis Series G Cumulative Convertible Preferred Stock, par value .01 per share, ("Genesis Preferred"), (2) $22.50 per share in cash, or (3) a combination of cash and shares of Genesis Preferred (collectively, the "Merger Consideration"), subject to statutory appraisal rights. The Genesis Preferred will have an initial annual dividend of 5.9375%. The total consideration to be paid to stockholders of Vitalink to acquire their shares (including shares which may be issued upon the exercise of outstanding options) is approximately $600,000,000, of which approximately 50% will be paid in cash and 50% in Genesis Preferred. As a result of the Merger, Genesis will assume approximately $90,000,000 of indebtedness Vitalink has outstanding. The transaction has been unanimously approved by the Boards of Directors of both companies. The transaction is subject to regulatory and shareholder approval of both companies as well as receipt of financing and is expected to close in late fiscal year 1998. Manor Care, Inc. ("Manor Care"), the holder of approximately 50% of the shares of Vitalink, has agreed to elect to exchange all of its Vitalink shares for the preferred stock. The form of Manor Care's consideration will be prorated to the extent that other Vitalink shareholders elect to receive preferred stock. The Genesis Preferred will not be transferable without the consent of Genesis until the filing by the Company of the registration statement with the Securities and Exchange Commission covering the sale of shares of Genesis Preferred by the holders. Manor Care has the right to require Genesis to register shares of its Genesis Preferred in certain circumstances beginning one year after the date of the Merger. The Genesis Preferred will be convertible into Genesis common shares at $37.20 per share and it may be called for conversion after three years, provided Genesis' stock price reaches certain trading levels. In addition, after the fourth year, the Genesis Preferred may be called for conversion by Genesis subject to a market-based call premium provision. Manor Care has provided Genesis with an irrevocable proxy to vote its Vitalink shares in favor of the merger. Upon closing of the transaction, it is anticipated that Manor Care will own approximately 18% of Genesis' pro forma diluted shares outstanding assuming the Vitalink shareholders other than Manor Care elect to receive cash for their shares. Manor Care will be subject to certain voting and standstill agreements and will have one representative on the Genesis Board of Directors. Following the sale, Manor Care will continue to purchase from the Vitalink operations all of its pharmacy services and related pharmacy consulting services. On and after April 29, 1998, certain shareholders of Vitalink filed suit in Delaware state court against Vitalink and certain of its officers and directors, Genesis, and Manor Care alleging, among other things, that Vitalink and Manor Care have breached certain fiduciary duties to the Vitalink shareholders in connection with the Merger Agreement and the transactions contemplated thereby, and that Genesis has knowingly aided and abetted the alleged breach. The shareholders mentioned above are seeking to enjoin Manor Care, Vitalink, and Genesis from proceeding with the Merger and the transactions contemplated thereby. On January 30, 1998, Genesis successfully completed deleveraging transactions with ElderTrust, a newly formed Maryland healthcare real estate investment trust. Genesis, a co-registrant on the ElderTrust initial public offering, received approximately $78,000,000 in proceeds from the sale of 13 properties to ElderTrust, including four properties it had purchased from Crozer-Keystone Health System in anticipation of resale to ElderTrust. Subsequently, Genesis received an additional $14,000,000 from the sale of a loan and two additional assisted living facilities and the recoupment of amounts advanced and expenses incurred in connection with the formation of ElderTrust. Additionally, ElderTrust has funded approximately $13,200,000 of a commitment to finance the development and expansion of four additional assisted living facilities. Genesis repaid a portion of the revolving credit component of its bank credit facility with the proceeds from these transactions. The sale of properties to ElderTrust resulted in a gain of approximately $12,000,000 which has been deferred and is being amortized over the ten year term of the lease contracts with ElderTrust. In October 1997, in connection with the Multicare Transaction, Genesis entered into a new credit facility with Mellon Bank, N.A., Citicorp Securities, Inc., Citibank N.A., First Union Capital Markets Corp., First Union National Bank and NationsBank, N.A. (the "Lenders") pursuant to which the Lenders provided Genesis and its subsidiaries with loan facilities totaling $850,000,000 (the "Genesis Bank Financing") for the purpose of refinancing certain existing indebtedness of Genesis; funding interest and principal payments on the facilities and certain remaining indebtedness; funding permitted acquisitions; funding Genesis' commitments in connection with the Merger; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of the transactions. The Genesis Bank Financing facilities consist of three $200,000,000 term loans (collectively, the "Term Loans"),a $250,000,000 revolving credit loan (the "Revolving Credit Facility") which includes one or more Swing Loans (collectively, the "Swing Loan Facility") in integral principal multiples of $500,000 up to an aggregate unpaid principal amount of $15,000,000. The Term Loans amortize in quarterly installments beginning in fiscal 1998 through 2005, of which $19,000,000 is payable in fiscal 1998. The Term Loans consist of (1) a $200,000,000 six year term loan (the "Tranche A Term Facility"); (2) a $200,000,000 seven year term loan (the "Tranche B Term Facility"); and (3) a $200,000,000 eight year term loan (the "Tranche C Term Facility"). The Revolving Credit Facility becomes payable in full on September 30, 2003. 16 The Genesis Bank Financing facilities are 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 the Genesis Elder Care Corp.) other than stock of Multicare and its subsidiaries. Loans under the Genesis Bank Financing bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBOR. Loans under the Tranche A Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 2.5%, loans under the Tranche B Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 2.75%; loans under the Tranche C Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 3.0%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBOR plus a margin up to 2.5%, and loans under the Swing Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the parties. Subject to meeting certain financial covenants, the above referenced interest rates will be reduced. The Genesis Bank Financing 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; causes Genesis and its affiliates to maintain the Management Agreement, the Put/Call Agreement, as defined below, and corporate separateness; and will cause Genesis to comply with the terms of other material agreements as well as comply with usual and customary covenants for transactions of this nature. In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem entered into an agreement (the "Put/Call Agreement") pursuant to which, among other things, Genesis will have the option, on the terms and conditions set forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter, at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the terms and conditions set forth in the Put/Call Agreement, to require Genesis to purchase (the "Put") such Genesis ElderCare Corp. Common Stock commencing on October 9, 2002 and for a period of one year thereafter, at a price determined pursuant to the Put/Call Agreement. The prices determined for the Put and Call are based on a formula that calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis ElderCare Corp. Common Stock, plus a portion of the Genesis pharmacy business (the "Calculated Equity Value"). The Calculated Equity Value will be determined based upon a multiple of Genesis ElderCare Corp.'s earnings before interest, taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR") after deduction of certain liabilities, plus a portion of the EBITDAR related to the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend on whether the Put or the Call is being exercised. Any payment to Cypress, TPG or Nazem under the Call or the Put maybe in the form of cash or Genesis common stock at Genesis' option. 17 Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum their original investment plus a 25% compound annual return thereon regardless of the Calculated Equity Value. Any additional Calculated Equity Value attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common Stock will be determined on the basis set forth in the Put/Call Agreement which provides generally for additional Calculated Equity Value of Genesis ElderCare Corp. to be divided based upon the proportionate share of the capital contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress, TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited to Cypress' TPG's or Nazem's share of the Calculated Equity Value based upon a formula set forth in the terms of the Put/Call Agreement which provides generally for the preferential return of the stockholders' capital contributions (subject to certain priorities), a 25% compound annual return on Cypress', TPG's and Nazem capital contributions and the remaining Calculated Equity Value to be divided based upon the proportionate share of the capital contributions of the stockholders to Genesis ElderCare Corp. Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon an event of bankruptcy of Genesis, a change of control of Genesis or an extraordinary dividend or distribution or the occurrence of the leverage recapitalization of Genesis. Upon an event of acceleration or the failure by Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and Nazem will have the right to terminate the Stockholders' Agreement and Management Agreement and to control the sale or liquidation of Genesis ElderCare Corp. In the event of such sale, the proceeds from such sale will be distributed among the parties as contemplated by the formula for the Put option exercise price and Cypress, TPG and Nazem will retain a claim against Genesis for the difference, if any, between the proceeds of such sale and the put option exercise price. In the event of a bankruptcy or change of control of Genesis, the option price shall be payable solely in cash provided any such payment will be subordinated to the payment of principal and interest under the Genesis Bank Financing. In December 1997, the Company purchased approximately 1,000,000 long-term call options on the Company's Common Stock. The Company's Board of Directors approved the purchase of up to 1,500,000 call options. The call options are purchased by the Company in privately negotiated transactions designated to take advantage of attractive share price levels, as determined by the Company's management, in compliance with covenants governing existing financing arrangements. The timing and the terms of the transactions, including maturities, will depend on market conditions, the Company's liquidity and covenant requirements under its financing arrangements, and other considerations. The Board of Directors also approved a Senior Executive Stock Ownership Program. Under the terms of the program, certain of the Company's current senior executive employees will be required to own shares of the Company's Common Stock having a market value based upon a multiple of the executive's salary. Each executive is required to own the shares within three years of the date of the adoption of the program. Subject to applicable laws, the Company may lend funds to one or more of the senior executive employees for his or her purchase of the Company's Common Stock. As of March 31, 1998, the Company loaned approximately $1,700,000 to senior executive employees to purchase the Company's Common Stock. In October 1996, the Company completed an offering of $125,000,000 9 1/4% Senior Subordinated Notes due 2006. The Company used the net proceeds of approximately $121,250,000 together with borrowings under the Credit Facility, to pay the cash portion of the purchase price of the Geriatric and Medical Companies (GMC) Transaction, to repay certain debt assumed as a result of the GMC Transaction and to repurchase GMC accounts receivable which were previously financed. Certain of the Company's other outstanding loans contain covenants which, without the prior consent of the lenders, limit certain activities of the Company. Such covenants contain limitations relating to the merger or consolidation of the Company and the Company's ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, the Company must maintain certain minimum levels of cash flow and debt service coverage, and must maintain certain liabilities to net worth. Under these loans, the Company is restricted from paying cash dividends on the Common Stock, unless certain conditions are met. The Company has not declared or paid any cash dividends on its Common Stock since its inception. 18 Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid reimbursement programs which has adversely impacted the Company. The changes have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Implementation of the Company's strategy to expand specialty medical services to independent providers should reduce the impact of changes in the Medicare and Medicaid reimbursement programs on the Company as a whole. 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. Pursuant to the Balanced Budget Act of 1997 (the "Act"), beginning on or after July 1, 1998, Medicare reimbursement for skilled nursing facilities will be on a prospective payment system ("PPS"). Skilled nursing facilities will be paid a per diem rate for all covered Part A skilled nursing facility services as well as many services for which payment may be made under Part B during a period when a beneficiary is provided covered skilled nursing facility care. The per diem rate is adjusted based upon the resource utilization group of a resident. This payment will cover rehabilitation and non-rehabilitation ancillary services; however the per diem rate will not cover physician, nursing, physician assistant and certain related services. For the first three cost reporting periods beginning on or after July 1, 1998, the per diem rate will be based on a blend of a facility specific rate and a federal per diem rate. In subsequent periods, and for facilities first receiving payments for Medicare services on or after October 1, 1995, the federal per diem rate will be used without any facility specific blending. The Act also required consolidated billing for skilled nursing facilities. The skilled nursing facility must submit all Medicare claims for Part A and Part B services received by its residents with the exception of physician, nursing, physician assistant and certain related services. Medicare will pay the skilled nursing facilities directly for all services on the consolidated bill and outside suppliers of services to residents of the skilled nursing facilities must collect payment from the skilled nursing facility. The Act also repealed the Boren Amendment which required Medicaid payments to nursing facilities to be "reasonable and adequate" to cover the costs of efficiently and economically operated facilities. Under the Act, states must now use a public notice and comment process for determining Medicaid rates and give interested parties a reasonable opportunity to comment on proposed rates, rate methodology and justifications. It is unclear what impact the Balanced Budget Act of 1997 will have on the Company. The Company believes that its liquidity needs can be met by expected operating cash flow and availability of borrowings under its credit facilities. At May 11, 1998, approximately $160,000,000 was outstanding under the Revolving Credit Facility, and approximately $71,200,000 was available under the credit facilities after giving effect to approximately $18,800,000 in outstanding letters of credit issued under the credit facilities. 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. 19 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 The Company is aware of issues associated with the programming code in many existing computer systems (the "Year 2000" issue) as the millennium approaches. The Company has conducted a review of its computer systems to identify hardware and software affected by the Year 2000 issue. This issue affects computers systems having date sensitive programs that may not properly recognize the Year 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail resulting in business interruption. With respect to its existing computer systems, the Company is upgrading, generally, in order to meet the demands of its expanding business. In the process, the Company is taking steps to identify, correct, or reprogram and test its existing systems for Year 2000 compliance. It is anticipated that all new system upgrades or reprogramming efforts will be completed by late calendar year 1998, allowing adequate time for testing. The Company presently believes that with modification to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, given the complexity of the Year 2000 issue, there can be no assurances that the Company will be able to address the problem without costs and uncertainties that might affect future financial results or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. The Company has incurred, and expects to incur additional, internal costs as well as other expenses to address the necessary software upgrades, training, data conversion, testing and implementation related to the Year 2000 issue. Such costs are being expensed as incurred. The Company does not expect the amounts required to be expensed to have a material effect on its financial position or results of operations. The Year 2000 issue is expected to affect the systems of various entities with which the Company interacts including payors, suppliers and vendors. There can be no assurance that data produced by systems of other entities on which the Company's systems rely will be converted on a timely basis or that a failure by another entity's system to be Year 2000 compliant will not have a material adverse effect on the Company. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board, (the "FASB") issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement is effective for fiscal years beginning after December 15, 1997, or the Company's fiscal year end September 30, 1999. The Company plans to adopt this accounting standard as required. The adoption of this standard will have no material impact on the Company's earnings, financial condition or liquidity, but will require the Company to classify items other than comprehensive income in the financial statements and display the accumulated balance of other comprehensive income separately in the equity section of the balance sheet. 20 In June 1997, the FASB also issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 supersedes Statement of Financial Accounting Standards No. 14, Financial Reporting of a Business Enterprise, and establishes new standards for reporting information about operation segments in annual financial statements and requires selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Statement 131 is effective for years beginning after December 15, 1997, or the Company's fiscal year end September 30, 1999. This statement affects reporting in financial statements only and will have no impact on the Company's results of operations, financial condition or liquidity. 21 PART II: OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to Vote of Security Holders On February 24, 1998, the Company held its Annual Meeting of Shareholders (the "Annual Meeting"). Proxies were solicited for the Annual Meeting pursuant to Regulation 14 of the Securities Act of 1934. At the Annual Meeting the following matters were voted on: (1) Roger C. Lipitz and Alan B. Miller were elected to serve on the Board of Directors of the Company for three-year terms until after their respective successors are duly elected and qualified, with Roger C. Lipitz receiving 28,456,989 votes for election and zero against election (with 6,511,549 broker non-votes and abstentions); and Alan B. Miller receiving 28,491,740 votes for election and zero against election (with 6,595,129 broker non-votes and abstentions) and (2) an amendment to the Company's Amended and Restated Employee Stock Option Plan (the "Plan") increasing the number of shares which may be issued under the Plan to 6,250,000 shares which was approved by a vote of 26,295,300 for the amendment and 2,132,425 votes against the amendment (with 6,659,144 broker non-votes and abstentions). Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description 2.1(1) Agreement and Plan of Merger by and among Vitalink Pharmacy Services, Inc., Genesis Health Ventures, Inc., and the V Acquisition Corporation dated as of April 26, 1998. 3.1 The Company's Amended and Restated Bylaws 10.1 The Company's Amended and Restated Stock Option Plan 22 10.2 Rights Agreement dated as of April 26, 1998, by and among Genesis Health Ventures, Inc., a Pennsylvania and Manor Care, Inc., a Delaware corporation. 10.3(2) Voting Agreement dated as of April 26, 1998, by and among Genesis Health Ventures, Inc., a Pennsylvania and Manor Care, Inc., a Delaware corporation. 27 Financial Data Schedule (1) - Incorporated by Reference to Schedule 13D filed by the Company with respect to Vitalink Pharmacy Services, Inc. dated April 26, 1998. (2) - Incorporated by reference to the Company's Form 8-K dated May 6, 1998. (b) Reports on Form 8-K The Company filed a current report on Form 8-K/A, dated January 26, 1998 which amended the current report dated October 9, 1997 to include or incorporate by reference the following financial information: Financial Statements of businesses acquired: The Multicare Companies, Inc. (1) Independent Auditors' Report (2) Consolidated Balance Sheets as of December 31, 1995 and 1996 (3) Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996. (4) Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996. (5) Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (6) Notes to Consolidated Financial Statements (7) Unaudited Consolidated Balance Sheet as of September 30, 1997 (8) Unaudited Consolidated Statement of Operations for the three and nine months ended September 30, 1997 (9) Unaudited Consolidated Statement of Cash Flows for the nine months ended September 30, 1997. (10) Unaudited Notes to Consolidated Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Pro Forma Financial Statements (1) Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1997 and Notes Thereto (2) Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Twelve Months Ended September 30, 1997 and Notes Thereto 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereto duly authorized. GENESIS HEALTH VENTURES, INC. Date: May 15, 1998 /S/ George V. Hager, Jr. ------------------------------ Senior Vice President and Chief Financial Officer 24 EX-3.1 2 EXHIBIT 3.1 AMENDED AND RESTATED B Y L A W S of GENESIS HEALTH VENTURES, INC. These Bylaws are adopted by the Corporation and are supplemental to the Pennsylvania Business Corporation Law as the name shall from time to time be in effect. ARTICLE I. SHAREHOLDERS AND DIRECTORS Section 101.1. Place of Shareholders' Meetings. All meetings of the shareholders shall be held at such place or places, inside or outside the Commonwealth of Pennsylvania, as determined by the Board of Directors from time to time. Section 101.2. Annual Shareholders' Meeting. The annual meeting of the shareholders, for the election of directors and the transaction of other business which is properly brought before such meeting, shall be held in each calendar year, at a time and place determined by the Board of Directors. Section 101.3. Special Meetings of Shareholders. Special meetings of the shareholders may be called at any time by the Board of Directors or the Chairman of the Board and Chief Executive Officer. Section 101.4. Conduct of Shareholders' Meetings. The Chairman of the Board shall preside at all Shareholders' meetings. In the absence of the Chairman of the Board, the President shall preside or, in his or her absence, any officer designated by the Board of Directors. The officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as he or she may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. Unless the officer presiding over the shareholders' meeting otherwise requires, shareholders need not vote by ballot on any questions. Section 102.1. Management by Board of Directors. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulation, the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws directed or required to be exercised or done by the shareholders. Section 102.2. Nomination for Directors. Beginning with the annual meeting of the shareholders to be held in 1992, nominations by shareholders for directors to be elected at a meeting of shareholders and which have not been previously approved by the Board of Directors must be submitted to the Secretary of the Corporation in writing, either by personal delivery, nationally recognized express mail or United States mail, postage prepaid, not later than (i) with respect to an election to be held at an annual meeting of shareholders, the latest date upon which shareholder proposals must be submitted to the Corporation for inclusion in the Corporation's proxy statement relating to such meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, or other applicable rules or regulations under the federal securities laws or, if no such rules apply, at least ninety (90) days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at a special meeting of shareholders, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each such nomination shall set forth: (i) the name and address of the shareholder making the nomination and of the person or persons nominated; (ii) a representation that the shareholder is a holder of record of capital stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to vote for the person or persons nominated; (iii) a description of all arrangements and understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations were made by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. All late nominations shall be rejected. Notwithstanding the foregoing, at any time prior to the election of directors at a meeting of shareholders, the Board of Directors may designate a substitute nominee to replace any bona fide nominee who was nominated as set forth above and who, for any reason, becomes unavailable for election as a director. Section 102.3. Number of Directors. The Board of Directors shall consist of at least eight (8) directors and be divided into three classes in accordance with the Corporation's Amended and Restated Articles of Incorporation. Section 102.4. Term of Directors. Each director shall serve until his successor is elected and qualifies, even though his term of office has otherwise expired, except in the event of his earlier resignation, removal or disqualification. Section 102.5. Resignations of Directors. Any director may resign at any time. Such resignation shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 102.6. Vacancies in the Board of Directors. Vacancies in the Board of Directors resulting from an increase in the number of directors shall be filled by the affirmative vote of at least a majority of the members of the Board though less than a quorum and each person so elected shall be a director until his successor is elected by the shareholders. In the event of a vacancy in the Board of Directors resulting for any reason other than an increase in the number of directors, a special meeting of shareholders shall be duly called for the purpose of filling such vacancy. Section 102.7. Compensation of Directors. Unless the Board of Directors otherwise determines, directors shall not be entitled to any compensation for their services as directors; provided that directors who are not also employees of the Corporation shall be reimbursed by the Corporation for all out-of-pocket expenses actually incurred by such directors in attending meetings of the Board of Directors or any committees thereof. Any director may serve the Corporation in other capacities and be entitled to such compensation therefor as is determined by the Board of Directors. Section 102.8. Annual Meeting of Directors. An annual meeting of the Board of Directors shall be held each year immediately following the annual meeting of the shareholders and at such other times as the Board shall from time to time designate or as may be designated in any notice from the Secretary calling the meeting. Section 102.9. Meetings of the Directors. Meetings of the Board of Directors may be called by the Chairman or any three members of the Board of Directors. Any one member of the Board of Directors may request that the Chairman of the Board of Directors call a meeting of the Board of Directors. Upon the request of the Chairman or such three directors, it shall be the duty of the Secretary of the Corporation to fix the date of such meeting to be held at such time, not less than three (3) business days after the receipt of such request as the Secretary may determine and to give due notice thereof for any such meeting to be held at the principal office of the Corporation or at any other place designated in the notice of the meeting; or, in the alternative, not less than twenty-four (24) hours after the receipt of such request as the Secretary may determine and to give due notice thereof for any such meeting where any director may participate by using a conference telephone or similar communications equipment, by means of which all such persons participating in the meeting can hear each other. Section 102.10. Notice of Directors' Meetings. Whenever notice of a meeting of the Board of Directors is required, it shall be in writing and shall be made to each director to his or her address appearing on the books of the Corporation by hand delivery, first class or express mail (postage prepaid), courier service (charges prepaid) or by facsimile transmission. Unless otherwise required by law or these Bylaws, neither the business to be transacted at, nor the purpose of, any regular meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 102.11. Reports and Records. The reports of officers and committees and the records of the proceedings of all committees shall be filed with the Secretary of the Corporation and presented to the Board of Directors, if practicable, at its next regular meeting. The Board of Directors shall keep complete records of its proceedings in a minute book kept for that purpose. When a director shall request it, the vote of each director upon a particular question shall be recorded in the minutes. Section 102.12. Committees. The following committees of the Board of Directors shall be established by the Board of Directors in addition to any other committee the Board of Directors may in its discretion establish: (a) Executive Committee; (b) Audit Committee; and (c) Compensation Committee. Section 102.13. Executive Committee. The Executive Committee shall consist of at least three (3) directors. Meetings of the Committee may be called whenever two or more members of the Committee so request in writing. The Executive Committee shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation between the dates of regular meetings of the Board. Section 102.14. Audit Committee. The Audit Committee shall consist of at least three (3) directors, a majority of which shall be independent. Meetings of the Audit Committee may be called at any time by the Chairman or Secretary of the Audit Committee, and shall be called whenever two or more members of the Committee so request in writing. The Audit Committee shall have the following authority, powers and responsibilities: (a) To recommend each year to the Board the independent accountants to audit the annual financial statements of the Corporation and its consolidated subsidiaries and to review the fees charged for such audits or for special engagements given to such accountants; (b) To meet with the independent accountants, Chief Executive Officer, Chief Financial Officer and any other Corporation executives as the Audit Committee deems appropriate at such times as the Audit Committee shall determine to review: (i) the scope of the audit plan; (ii) the Corporation's financial statements; (iii) the results of external and internal audits; (iv) the effectiveness of the Corporation's system of internal controls; (v) any limitations imposed by Corporation personnel on the independent public accountants; and (vi) such other matters as the Audit Committee shall deem appropriate; (c) To report to the entire Board at such time as the Audit Committee shall determine; (d) To take such other action as the Audit Committee shall deem necessary or appropriate to assure that the interests of the Company are adequately protected. Section 102.15. Compensation Committee. The Compensation Committee shall consist of at least two (2) directors. Meetings of the Committee may be called at any time by the Chairman or Secretary of the Committee, and shall be called whenever two or more members of the Committee so request in writing. The Committee shall review compensation of executive officers and make recommendations to the Board of Directors regarding executive compensation and shall have such other duties as the Board of Directors prescribes. Section 102.16. Appointment of Committee Members. The Board of Directors shall appoint or shall establish a method of appointing the members of the Executive, Audit and Compensation Committees and of any other committees established by the Board of Directors, and the Chairman of each such committee, to serve until the next annual meeting of shareholders. Section 102.17. Organization and Proceedings. Each committee of the Board of Directors shall effect its own organization by the appointment of a Secretary and such other officers, except the Chairman, as it may deem necessary. The Secretary of the Executive Committee shall be the Secretary of the Corporation, but the Secretary of the Audit and Compensation Committees and of any other committee need not be the Secretary of the Corporation. A record of the proceedings of all committees shall be kept by the Secretary of such committee and filed and presented as provided in Section 102.12 of these Bylaws. Section 102.18. Committees. In the absence or disqualification of any member of any committee established by the Board Directors, the members thereof who are present at any meeting such committee and are not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another director to act at such meeting in the place of such absent or disqualified member. Section 103. Absentee Participation in Meetings. A director or shareholder (as the case may be) may participate in a meeting of the Board of Directors, a meeting of a committee established by the Board of Directors, or a meeting of the shareholders, by use of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other. ARTICLE II. OFFICERS Section 201. Officers. The Corporation shall have a Chairman, a President, a Secretary and a Treasurer, and may have one or more Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers and other officers and assistant officers as the Board of Directors may from time to time deem advisable. Section 202. Election and Term of Officers. The Chairman and Chief Executive Officer, President and Chief Operating Officer, Secretary, and Treasurer of the Corporation shall be elected annually by the Board of Directors at the annual meetings of the Board of Directors. All other officers and assistant officers shall be elected by the Board of Directors at the time, in the manner, and for such term as the Board of Directors from time to time determines. Each officer and assistant officer shall serve until his successor is duly elected and qualifies, or until he resigns or is removed from office. Section 203. Compensation. Unless otherwise provided by the Board of Directors, the compensation of officers and assistant officers shall be fixed by the Chairman. Section 204. Chairman and Chief Executive Officer. The Chairman shall be the chief executive officer of the Corporation, and, subject to the direction and control of the Board of Directors, shall in general supervise and control all of the business and affairs of the Corporation. Unless a designation to the contrary is made at a meeting, the Chairman, when present, shall preside at all meetings of the shareholders and of the Board of Directors. As authorized by the Board of Directors, the Chairman may execute and seal, or cause to be sealed, all instruments requiring such execution. Upon request of the Board of Directors, the Chairman shall report to it all matters which the interests of the Corporation may require to be brought to the attention of the Board of Directors. Section 205. President and Chief Operating Officer. The president shall be the chief operating officer of the Corporation. As authorized by the Board of Directors, the President may execute and seal, or cause to be sealed, all instruments requiring such execution, except to the extent that signing and execution thereof is expressly delegated by the Board of Directors to some other officer or agent of the Corporation. In the absence or disability of the Chairman, the President, unless otherwise determined by the Board of Directors, shall perform the duties and exercise the powers of the Chairman. Section 206. Vice President, Secretary, Treasurer, and Assistant Officers. In the absence or disability of the President, the Vice President or Vice Presidents, in the order of their seniority, unless otherwise determined by the Board of Directors or the Chairman shall perform the duties and exercise the powers of the President. The Vice President or Vice Presidents, the Secretary, the Treasurer, the Assistant Secretary or Secretaries, and the Assistant Treasurer or Treasurers, shall act under the direction of the Chairman and shall perform all duties which are prescribed by the Chairman or the Board of Directors. ARTICLE III. PERSONAL LIABILITY AND INDEMNIFICATION Section 301.1.1. Personal Liability of Directors. (a) A director of this Corporation shall not be personally liable for monetary damages as such for any action taken, or any failure to take any action, unless: (1) the director has breached or failed to perform the duties of his office under Section 1721 of the Pennsylvania Business Corporation of 1988 (which, as amended from time to time, is hereafter called the Business Corporation Law); and (2) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (b) This Section 301.1.1 shall not limit a director's liability for monetary damages to the extent prohibited by Section 1721 of the Business Corporation Law. Section 301.1.2. Mandatory Indemnification. The Corporation shall, to the fullest extent permitted by applicable law, indemnify its members, directors and officers who were or are a party or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (whether or not such action, suit or proceeding arises or arose by or in the right of the Corporation or other entity) by reason of the fact that such member, director or officer is or was a member, director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, general partner, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans), against expenses (including, but not limited to, attorneys' fees and costs), judgments, fines (including excise taxes assessed on a person with respect to any employee benefit plan) and amounts paid in settlement actually and reasonably incurred by such director or officer in connection with such action, suit or proceeding, except as otherwise provided in Section 301.1.4 hereof. Persons who were members, directors or officers of the Corporation prior to the date this Section is approved by members of the Corporation, but who do not hold such office on or after such date, shall not be covered by this Section 301.1. A director or officer of the Corporation entitled to indemnification under this Section 301.1.2 is hereafter called a "person covered by Section 301.1.2 hereof". Section 301.1.3. Expenses. Expenses incurred by a person covered by Section 301.1.2 hereof in defending a threatened, pending or completed civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation, except as otherwise provided in Section 301.1.4. Section 301.1.4. Exceptions. No indemnification under Section 301.1.2 or advancement or reimbursement of expenses under Section 301.1.3 shall be provided to a person covered by Section 301.1.2 hereof (a) if a final unappealable judgment or award establishes that such member, director or officer engaged in intentional misconduct or transaction from which the member, director or officer derived an improper personal benefit; (b) for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, and amounts paid in settlement) which have been paid directly to such person by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Corporation or other enterprise; and (c) for amounts paid in settlement of any threatened, pending or completed action, suit or proceeding without the written consent of the Corporation, which written consent shall not be unreasonably withheld. The Board of Directors of the Corporation is hereby authorized, at any time by resolution, to add to the above list of exceptions from the right of indemnification under Section 301.1.2 or advancement or reimbursement of expenses under Section 301.1.3, but any such additional exception shall not apply with respect to any event, act or omission which has occurred prior to the date that the Board of Directors in fact adopts such resolution. Any such additional exception may, at any time after its adoption, be amended, supplemented, waived or terminated by further resolution of the Board of Directors of the Corporation. Section 301.1.5. Continuation of Rights. The indemnification and advancement or reimbursement of expenses provided by, or granted pursuant to, this Section 301.1 shall continue as to a person who has ceased to be a member, director or officer of the Corporation, and shall inure to the benefit of the heirs, executors and administrators of such person. Section 301.1.6. General Provisions. (a) The term "to the fullest extent permitted by applicable law", as used in this Section 301.1, shall mean the maximum extent permitted by public policy, common law or statute. Any person covered by Section 301.1.2 hereof may, to the fullest extent permitted by applicable law, elect to have the right to indemnification or to advancement or reimbursement of expenses, interpreted, at such person's option, (i) on the basis of the applicable law on the date this Section was approved by the members, or (ii) on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the action, suit or proceeding, or (iii) on the basis of the applicable law in effect at the time indemnification is sought. (b) The right of a person covered by Section 301.1.2 hereof to be indemnified or to receive an advancement or reimbursement of expenses pursuant to Section 301.1.3 (i) may also be enforced as a contract right pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the Corporation and such person, (ii) to the fullest extent permitted by applicable law, is intended to be retroactive and shall be available with respect to events occurring prior to the adoption hereof, and (iii) shall continue to exist after the rescission or restrictive modification (as determined by such person) of this Section with respect to events, acts or omissions occurring before such rescission or restrictive modification is adopted. (c) If a request for indemnification or for the advancement or reimbursement of expenses pursuant hereto is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation together with all supporting information reasonably requested by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim (plus interest at the prime rate announced from time to time by the Corporation's primary banker) and, if successful in whole or in part, the claimant shall be entitled also to be paid the expenses (including, but not limited to, attorneys' fees and costs) of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or the advancement or reimbursement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the claimant is not so entitled. (d) The indemnification and advancement or reimbursement of expenses provided by, or granted pursuant to, this Section 301.1 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement or reimbursement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. (e) Nothing contained in this Section 301.1 shall be construed to limit the rights and powers the Corporation possesses under Chapter 17, Subchapter D of the Business Corporation Law, or otherwise, including, but not limited to, the powers to purchase and maintain insurance, create funds to secure or insure its indemnification obligations, and any other rights or powers the Corporation may otherwise have under applicable law. (f) The provisions of this Section 301.1 may, at any time (and whether before or after there is any basis for a claim for indemnification or for the advancement or reimbursement of expenses pursuant hereto), be amended, supplemented, waived, or terminated, in whole or in part, with respect to any person covered by Section 301.1.2 hereof by a written agreement signed by the Corporation and such person. (g) The Corporation shall have the right to appoint the attorney for a person covered by Section 301.1.2 hereof, provided such appointment is not unreasonable under the circumstances. Section 301.1.7. Optional Indemnification. The Corporation may, to the fullest extent permitted by applicable law, indemnify, and advance or reimburse expenses for, persons in all situations other than that covered by this Section 301.1. ARTICLE IV. SHARES OF CAPITAL STOCK Section 401. Authority to Sign Share Certificate. Every share certificate of the Corporation shall be signed by the Chairman and Chief Executive Officer and by the Secretary or one of the Assistant Secretaries. If the certificate is signed by a transfer agent or registrar, the signature of any officer of the Corporation on the certificate may be facsimile, engraved or printed. Section 402. Lost or Destroyed Certificates. Any person claiming a share certificate to be lost, destroyed or wrongfully taken shall receive a replacement certificate if such shareholder: (a) requests such replacement certificate before the Corporation has notice that the shares have been acquired by a bona fide purchaser; (b) files with the Corporation an indemnity bond deemed sufficient by the Board of Directors; and (c) satisfies any other reasonable requirements fixed by the Board of Directors. ARTICLE V. GENERAL Section 501. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 502. Record Date. The Board of Directors may fix any time prior to the date of any meeting of shareholders as a record date for the determination of shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than ninety (90) days prior to the date of the meeting of shareholders. The Board of Directors may fix any time whatsoever (whether or not the same is more than ninety (90) days) prior to the date for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination of the shareholders entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. Section 503. Emergency Bylaws. In the event of any emergency resulting from an attack on the United States, a nuclear disaster or another catastrophe as a result of which a quorum cannot be readily assembled and during the continuance of such emergency, the following Bylaw provisions shall be in effect, notwithstanding any other provisions of these Bylaws. (a) A meeting of the Board of Directors or of any committee thereof may be called by any officer or director upon one hour's notice to all persons entitled to notice whom, in the sole judgment of the notifier, it is feasible to notify; (b) The director or directors in attendance at the meeting of the Board of Directors or of any committee thereof shall constitute a quorum; and (c) These Bylaws may be amended or repealed, in whole or in part, by a majority vote of the directors attending any meeting of the Board of Directors, provided such amendment or repeal shall only be effective for the duration of such emergency. Section 504. Severability. If any provision of these Bylaws is illegal or unenforceable as such, such illegality or unenforceability shall not affect any other provision of these Bylaws and such other provisions shall continue in full force and effect. ARTICLE VI. AMENDMENTS Section 601. Amendment or Repeal by the Board of Directors. Except as provided by applicable law, these Bylaws may be amended or repealed, in whole or in part, by a majority vote of the members of the Board of Directors present and voting at any duly convened regular or special meeting of the Board. Section 602. Amendment or Repeal by Shareholders. These Bylaws may be amended or repealed, in whole or in part, by shareholders as follows: (i) in the case of an amendment or repeal that has previously received the approval of the Board of Directors, by a majority of the votes cast by shareholders at any duly convened annual or special meeting of the shareholders; and (ii) in the case of an amendment or repeal that has not previously received the approval of the Board of Directors, by a vote of shareholders entitled to cast at least 75 percent of the votes which all shareholders are entitled to cast thereon at any annual or special meeting of the shareholders. This Section 602 may be amended or repealed, in whole or in part, only by a vote of shareholders entitled to cast at least 75 percent of the votes which all shareholders are entitled to cast thereon at any duly convened annual or special meeting of shareholders. Section 602. Recording Amendments. The text of all amendments to these Bylaws shall be attached hereto, and a notation of the date of its adoption and a notation of whether it was adopted by the directors or the shareholders shall be made in Section 702 hereof. ARTICLE VII. ADOPTION OF BYLAWS AND RECORD OF AMENDMENTS THERETO Section 701. Adoption and Effective Date. These Bylaws have been adopted as the Bylaws of the Corporation this 26th day of June, 1991, and shall be effective as of said date. Section 702. Amendments to Bylaws. Section Amended Date Amended Adopted By --------------- ------------ ---------- 102.6 October 11, 1993 Board of Directors "RESOLVED, that Section 102.6 of the Bylaws be amended to read as follows: Should a vacancy occur or be created, whether arising through death, resignation, retirement or removal of a Director, such vacancy shall be filled by a majority vote of the remaining Directors. A Director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the class to which he was elected." 102.3 January 17, 1996 Board of Directors Section 102.3 of the Bylaws of the Company is hereby amended and restated in its entirety as follows: "Section 102.3. Number of Directors. The Board of Directors shall consist of at least eight (8) directors and be divided into three classes in accordance with the Corporation's Amended and Restated Articles of Incorporation." 102.3 February 24, 1997 Board of Directors Section 102.3 of the Bylaws of the Company shall be amended and restated in its entirety as follows: "Section 102.3. Number of Directors. The Board of Directors shall consist of no less than five (5) and no more than nine (9) directors and shall be divided into three classes in accordance with the Corporation's Amended and Restated Articles of Incorporation." EX-10.1 3 AMENDED AND RESTATED EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.1 GENESIS HEALTH VENTURES, INC. AMENDED AND RESTATED EMPLOYEE STOCK OPTION PLAN 1. Purpose of Plan The purpose of this Amended and Restated Employee Stock Option Plan (the "Plan") is to provide additional incentive to officers and key employees of Genesis Health Ventures, Inc. (the "Company") and each present or future parent or subsidiary corporation by encouraging them to invest in shares of the Company's common stock, par value $.02 per share ("Common Stock"), and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress, to the mutual benefit of directors, officers, employees and stockholders. 2. Aggregate Number of Shares 6,250,000 shares of the Company's Common Stock shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee, hereinafter referred to, deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Compensation Committee. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. 3. Class of Persons Eligible to Receive Options All officers and key employees of, and consultants and advisors to, the Company and any present or future Company parent or subsidiary corporation are eligible to receive an option or options under this Plan, provided that Incentive Stock Options (as described below) may be issued only to employees. The individuals who shall, in fact, receive an option or options shall be selected by the Compensation Committee, in its sole discretion, except as otherwise specified in Section 4 hereof. The maximum number of options which may be granted to any participant in any one year is options for 750,000 shares of Common Stock subject to appropriate adjustment in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances. 4. Administration of Plan (a) This Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Company's Board of Directors. The Committee shall consist of a minimum of two and a maximum of seven members of the Board of Directors, each of whom shall be a "disinterested person" as defined in Rule 16b-3(d)(3) under the Securities Exchange Act of 1934, as amended, of the Securities and Exchange Commission (the "SEC") or any future corresponding rule. The Committee shall, in addition to its other authority and subject to the provisions of this Plan, determine which individuals are eligible to receive options under this Plan, which individuals shall in fact be granted an option or options, whether the option shall be an incentive stock option or a non-qualified stock option, the number of shares to be subject to each of the options, the time or times at which the options shall be granted, the rate of option exercisability, and, subject to Section 5 hereof, the price at which each of the options is exercisable and the duration of the option. (b) The Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Committee shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Committee on a particular matter shall constitute the act of the Committee on such matter. The Committee shall have the right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Committee or the Board of Directors shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of an authority or discretion granted in connection with the Plan to a Committee or the Board of Directors, or for the acts or omissions of any other members of a Committee or the Board of Directors. Subject to the numerical limitations on Committee membership set forth in Section 4(a) hereof, the Board of Directors may at any time appoint additional members of the Committee and may at any time remove any member of the Committee with or without cause. Vacancies in the Committee, however caused, may be filled by the Board of Directors, if it so desires. 5. Incentive Stock Options and Non-Qualified Stock Options (a) Options issued pursuant to this Plan may be either Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock Options granted pursuant to Section 5(c) hereof, as determined by the Committee. An "Incentive Stock Option" is an option which satisfies all of the requirements of Section 422A of the Code and the regulations thereunder, and a "Non-Qualified Stock Option" is an option which either does not satisfy all of those requirements or the terms of the option provide that it will not be treated as an Incentive Stock Option. The Committee may grant both an Incentive Stock Option and a Non-Qualified Stock Option to the same person, or more than one of each type of option to the same person. The option price for Incentive Stock Options issued under this Plan shall be equal at least to the fair market value (as defined below) of the Company's Common Stock on the date of the grant of the option. The option price for Non-Qualified Stock Options issued under this Plan shall be at least equal to the fair market value of the Common Stock on the date of the grant of the option except that the minimum option price may be equal to or greater than 85% of the fair market value of the Company's Common Stock as of the date of the grant of the option if the discount is expressly granted in lieu of a reasonable amount of salary or cash bonus. If an Incentive -2- Stock Option is granted to an individual who, at the time the option is granted, owns shares of Common Stock equal to more than 10 percent of the total combined voting power of the Common Stock of the Company or any subsidiary corporation of the Company (a "10% Stockholder"), the option price shall not be less than 110 percent of the fair market value, as determined by the Committee in accordance with its interpretation of the requirements of Section 422A of the Code and the regulations thereunder, of the Company's Common Stock on the date of grant of the option, and such option shall not be exercisable after the expiration of five years from the date the option is granted. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the NASDAQ National Market System, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the NASDAQ National Market System, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined by the Committee. (b) Subject to the authority of the Committee set forth in Section 4(a) hereof, Incentive Stock Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Incentive Stock Options shall not be exercisable after the expiration of ten years (five years in the case of 10% Stockholders) from the date such options are granted, unless terminated earlier under the terms of the option. At the time of the grant of an Incentive Stock Option hereunder, the Committee may, in its discretion, modify or amend any of the option terms contained in Appendix I for any particular optionee, provided that the option as modified or amended satisfies the requirements of Section 422A of the Code and the regulations thereunder. Each of the options granted pursuant to this Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that term is defined in Section 422A of the Code and the regulations thereunder. In the event this Plan or any option granted pursuant to this Section 5(b) is in any way inconsistent with the applicable legal requirements of the Code or the regulations thereunder for an Incentive Stock Option, this Plan and such option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. (c) Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix II hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Non-Qualified Stock Options shall expire ten years after the date they are granted, unless terminated earlier under the option terms. At the time of granting a Non-Qualified Stock Option hereunder, the Committee may, in its discretion, modify or amend any of the option terms contained in Appendix II for any particular optionee. (d) Neither the Company nor any of its current or future parent, subsidiaries or affiliates, nor their officers, directors, stockholders, stock option plan committees, employees or agents shall have any liability to any optionee in the event (i) an option granted pursuant to Section 5(b) hereof does not qualify as an "Incentive Stock Option" as that term is used in Section 422A of the Code and the regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option." -3- 6. Modification, Amendment, Suspension and Termination Options shall not be granted pursuant to this Plan after August 1, 2004. The Board of Directors reserves the right at any time, and from time to time, to modify or amend this Plan in any way, or to suspend or terminate it, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors; provided, however, that such action shall not affect options granted under the Plan prior to the actual date on which such action occurred. If a modification or amendment of this Plan is required by the Code or the regulations thereunder to be approved by the stockholders of the Company in order to permit the granting of "Incentive Stock Options" (as that term is defined in Section 422A of the Code and regulations thereunder) pursuant to the modified or amended Plan, such modification or amendment shall also be approved by the stockholders of the Company in such manner as is prescribed by the Code and the regulations thereunder. If the Board of Directors voluntarily submits a proposed modification, amendment, suspension or termination for stockholder approval, such submission shall not require any future modifications, amendments (whether or not relating to the same provision or subject matter), suspensions or terminations to be similarly submitted for stockholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock in the manner as prescribed in the Code and the regulations thereunder. Options may be granted under this Plan prior to obtaining stockholder approval, provided such options shall not be exercisable until stockholder approval is obtained. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any employee the right to continue in the employ of the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation to terminate his employment in any way. (b) Corporate action constituting an offer of stock for sale to any employee under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Committee authorizes the grant of the option to the employee, regardless of when the option is actually delivered to the employee or acknowledged or agreed to by him or her. (c) Except as provided below, the terms "parent corporation" and "subsidiary corporation" as used throughout this Plan, and the options granted pursuant to this Plan, shall (except as otherwise provided in the option form) have the meaning that is ascribed to that term when contained in Section 422A(b) of the Code and the regulations thereunder, and the Company shall be deemed to be the grantor corporation for purposes of applying such meaning. The term "subsidiary corporation" shall also include The Multicare Companies, Inc. (provided that only Non-Qualified Stock Options may be granted to officers and key employees of, and consultant and advisors to The Multicare Companies, Inc.). (d) References in this Plan to the Code shall be deemed to also refer to the corresponding provisions of any future United States revenue law. (e) The use of the masculine pronoun shall include the feminine gender whenever appropriate. -4- APPENDIX I INCENTIVE STOCK OPTION To: ---------------------------------------------------------------------- Name ---------------------------------------------------------------------- Address ---------------------------------------------------------------------- Date of Grant: ----------------------------- You are hereby granted an option, effective as of the date hereof, to purchase shares of common stock, par value $.02 per share ("Common Stock"), of Genesis Health Ventures, Inc. (the "Company") at a price of $ per share pursuant to the Company's Amended and Restated Employee Stock Option Plan (the "Plan"). Your option may first be exercised on and after , but not before that time. [On and after and prior to , your option may be exercised for up to % of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional % of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances).](1) No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after [five/ten] years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check; (b) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the last trading day immediately preceding the delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. - -------- (1) The bracketed portion of this paragraph should be included if the number of shares which may be acquired upon exercise of the option will increase over time. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated other than by reason of (i) disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, in which case your option will terminate one year from the onset of disability, or death (but in no event later than the Scheduled Termination Date), whether such termination be voluntary or not. After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your legatee(s), distributee(s), executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment by the Company or a Company subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares, which you have a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Compensation Committee. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a stockholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. -2- Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the stockholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state or local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale hereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his or her own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he or she will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgments and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of an opinion of counsel acceptable to the Company that said registration is no longer required. -3- The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall, if possible, be an "incentive stock option" as that term is used in Section 422A of the Code and the regulations thereunder. In the event this option is in any way inconsistent with the legal requirements of the Code or the regulations thereunder for an "incentive stock option," this option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, modification or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing or signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. GENESIS HEALTH VENTURES, INC. By: -------------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it hereby signify my understanding of, and my agreement with, its terms and conditions. - ----------------------------------- --------------------------------- (Signature) (Date) -4- APPENDIX II NON-QUALIFIED STOCK OPTION To: ---------------------------------------------------------------------- Name ---------------------------------------------------------------------- Address ---------------------------------------------------------------------- Date of Grant: ---------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase shares of common stock, par value $.02 per share ("Common Stock"), of Genesis Health Ventures, Inc. (the "Company") at a price of $ per share pursuant to the Company's Amended and Restated Employee Stock Option Plan (the "Plan"). Your option may first be exercised on and after , but not before that time. [On and after and prior to , your option may be exercised for up to % of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional % of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances).](1) No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check; (b) certificates representing Common Stock of the Company which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the last trading day immediately preceding the delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. - ---------- (1) The bracketed portion of this paragraph should be included if the number of shares which may be acquired upon exercise of the option will increase over time. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated other than by reason of (i) disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, in which case your option will terminate one year from the onset of disability, or death (but in no event later than the Scheduled Termination Date), whether such termination be voluntary or not. After the date your service or employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director or your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your legatee(s), distributee(s), executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your service with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Compensation Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price for such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Compensation Committee. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, tour legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a stockholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery may not be consummated without violating a federal, state, local or securities exchange rule, regulation or law. -2- Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the stockholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgments and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." -3- The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of an opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "incentive stock option" as that term is used in Section 422A of the Code and the regulations thereunder. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, modification or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. GENESIS HEALTH VENTURES, INC. By: --------------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it hereby signify my understanding of, and my agreement with, its terms and conditions. - -------------------------------------- ----------------------------- (Signature) (Date) -4- EX-10.2 4 EXHIBIT-10.2 EXHIBIT B RIGHTS AGREEMENT RIGHTS AGREEMENT (the "Agreement"), dated as of April 26, 1998, by and between GENESIS HEALTH VENTURES, INC., a Pennsylvania corporation ("Genesis") and Manor Care Inc., a Delaware corporation ("Manor Care"). W I T N E S S E T H : WHEREAS, Genesis, The Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Genesis ("Acquisition Corporation"), and Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"), have entered into an Agreement and Plan of Merger dated April 26, 1998 (the "Merger Agreement"); WHEREAS, as a result of the Merger (capitalized terms used without definition herein having the meanings ascribed thereto in the Merger Agreement), Manor Care will beneficially own shares of preferred stock, par value $.01 per share, of Genesis (the "Preferred Stock"), which Preferred Stock is convertible into shares of common stock, par value $.02 per share, of Genesis (the "Common Stock"); and WHEREAS, Genesis and Manor Care have agreed that this Agreement shall become effective at the Effective Time of the Merger. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, Genesis and Manor Care hereby agree as follows: STANDSTILL Section 1. Manor Care Standstill Obligations. Prior to the earlier of April 26, 2005 or the occurrence of a Director Change (as defined below) and subject to the further provisions hereof: (a) Neither Manor Care nor any Affiliate of Manor Care including, without limitation, New ManorCare Health Services, Inc. (collectively, the "Manor Care Group") will, without the prior written consent of Genesis, directly or indirectly, acquire any shares of any class of capital stock of Genesis which is entitled to vote generally in the election of directors or is convertible or exchangeable for any class of capital stock which is entitled to vote generally in the election of directors (all such classes of capital stock of Genesis being referred to herein as "Voting Securities") (except for the Preferred Stock, the Common Stock or other securities issuable upon conversion of the Preferred Stock and pursuant to stock splits, stock dividends or other distributions or offerings made available to holders of Voting Securities generally); provided, however, that if at any time the Manor Care Voting Power shall be less than the Maximum Percentage of the Total Voting Power, then the Manor Care Group may acquire Voting Securities unless the effect of such acquisition would be to increase the aggregate voting power in the election of directors of all Voting Securities then owned by all members of the Manor Care Group (such aggregate voting power of all Voting Securities owned by all members of the Manor Care Group being referred to herein as the "Manor Care Voting Power") to greater than 15% (the "Maximum Percentage") of the total combined voting power in the election of directors of all the Voting Securities then outstanding (such total combined voting power of all the Voting Securities outstanding being referred to herein as the "Total Voting Power"). If at any time the Manor Care Voting Power shall be increased to more than the Maximum Percentage of the Total Voting Power as a result of a repurchase of Voting Securities by Genesis or any other change in Genesis's capitalization, no member of the Manor Care Group shall be required to dispose of any Voting Securities. As used in this Agreement, the following terms shall have the following meanings: The term "affiliate" shall have the meaning set forth in Rule 12b-2 under the Exchange Act. "Continuing Director" shall mean any member of the Board of Directors of Genesis, while such person is a member of the Board of Directors who either (i) was a member of the Board of Directors on the date hereof, (ii) subsequently becomes a member of the Board of Directors, if such person was recommended or elected to succeed the Continuing Directors by a majority of the Continuing Directors or (iii) was appointed at the direction of Manor Care. "Director Change" shall mean (i) the Chief Executive Officer of Genesis on the date hereof is removed from office by the Board of Directors or the Board of Directors materially alters his authority or responsibilities such that he does not exercise the authority or have the responsibilities formerly associated with his position as the Chief Executive Officer, or (ii) the majority of the Board of Directors does not consist of Continuing Directors. All references to securities "owned" or "acquired" by a person shall include all securities owned of record by such person and all securities over which such person has beneficial ownership within the meaning of Section 13(d) of the Exchange Act. The term "person" shall mean any person or group of persons within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"). (b) No member of the Manor Care Group shall make any "solicitation" of "proxies" to vote or become a "participant" in a "solicitation" (as such terms are defined in Regulation 14A under the Exchange Act) in opposition to the recommendation of the majority of the directors of Genesis with respect to any matter. -2- (c) No member of the Manor Care Group shall join a partnership, limited partnership, syndicate or other group, or otherwise act in concert with any other person, for the purpose of acquiring, holding, voting or disposing of Voting Securities in violation of Section 1(a), or otherwise become a "person" within the meaning of Section 13(d)(3) of the Exchange Act (in each case other than solely with members of the Manor Care Group), nor shall any member of the Manor Care Group deposit any Voting Securities in a voting trust or similar arrangement or subject any Voting Securities to any voting agreement or pooling arrangement other than in accordance with Section 4(b). (d) No member of the Manor Care Group shall seek to call, or request the call of, a special meeting of the shareholders of Genesis or seek to make, or make, a shareholder proposal at any meeting of the shareholders of Genesis. (e) No member of the Manor Care Group shall commence or announce any intention to commence any tender offer for any shares of Stock, or take any action that would require the Manor Care Group to file with or send to the Securities and Exchange Commission (the "SEC") an amendment to Item 4 or Item 6 of its Schedule 13D under the Exchange Act with respect to the Voting Securities. (f) No member of the Manor Care Group shall, directly or indirectly, assist, encourage or induce any person to bid for or acquire outstanding Voting Securities or propose a tender offer, exchange offer or change of control of Genesis; provided, however, that the mere sale of Voting Securities by any member of the Manor Care Group and any action taken by the Manor Care Director or Manor Care Observer in connection with his role as a board member or observer shall not constitute assisting, encouraging or inducing within the meaning of this Section 1(f). (g) No member of the Manor Care Group shall otherwise act alone or in concert with others to seek control or influence the management, Board of Directors or policies of Genesis other than pursuant to this Agreement or any action taken by the Manor Care Director or Manor Care Observer in connection with its role as a board member or observer. (h) No member of the Manor Care Group shall arrange, or in any way participate in, any financing for any transaction referred to in clauses (a) through (g) above inclusive. (i) No member of the Manor Care Group shall make public, or cause or facilitate the public disclosure (including by disclosure to any journalist or other representative of the media) of, any request, or otherwise seek (in any fashion that would require public disclosure by Genesis), to obtain any waiver or amendment of any provision of this Section 1, or to take any action restricted hereby. (j) In the event a tender or exchange offer is made by any person (other than an affiliate of, or any person acting in concert with, any member of the Manor Care Group) any member of the Manor Care Group holding Voting Securities may tender or exchange its Voting Securities according to the terms of the offer. -3- (k) If, at any time prior to April 26, 2003, the Manor Care Group proposes to transfer to a third party Voting Securities having in excess of 15% of the Total Voting Power, then as a condition to such transfer the transferee must agree to be bound by the provisions of this Section 1 with respect to such Voting Securities. Notwithstanding the foregoing, the Manor Care Group shall not transfer Voting Securities to any person who owns any Voting Securities of Genesis, if such transfer will result in such transferee having in excess of 15% of the Total Voting Power. Any purported transfer in violation of this section will be void. Section 2. Genesis Standstill Obligations. (a) Genesis will not, without the prior written consent of Manor Care, take or recommend to its shareholders any action during the term of this Agreement which would impose limitations on the legal rights of the Manor Care Group as Genesis shareholders other than those imposed pursuant to the express terms of this Agreement which disproportionately affect the Manor Care Group compared to holders of Preferred Stock or Common Stock generally. (b) Prior to the Effective Time, Genesis shall have taken appropriate action with respect to its stockholders rights plan so as to exempt (i) the holders of Preferred Stock or (ii) any person that is the direct assignee of any holder of Preferred Stock to the extent that such assignee (A) acquires in a single transaction from a holder of Preferred Stock over 15% of the Voting Securities and (B) owns no other shares of Voting Securities from the restrictions of such stockholders rights plan with respect to such shares of Preferred Stock and shares of Common Stock issuable upon conversion thereof and from and after the Effective Time, Genesis shall take no action which would subject such holders of Preferred Stock to the restrictions of Genesis's stockholders rights plan or any similar plan adopted after the Effective Time. (c) Genesis will not require any Manor Care Director or Manor Care Observer to enter into any confidentiality agreement or other arrangement that would limit the ability of such Manor Care Director or Manor Care Observer to communicate with Manor Care as contemplated by Section 3(c) hereof. BOARD REPRESENTATION AND VOTING Section 3. Covenants Regarding Board Representation. (a) Designation. As promptly as practicable after receipt of written notice from Manor Care, Genesis will cause one person designated by Manor Care to be appointed to Genesis's Board of Directors (the "Manor Care Director") by such Board to serve as a member of Class I. At the end of the term of any Manor Care Director, Manor Care shall have the right to designate the same or a different person to serve as the Manor Care Director for the next term and Genesis's Board of Directors shall appoint such person to its Board of Directors. If at any time the Manor Care -4- Director is not elected or the Manor Care Observer is prohibited from attending Board meetings, Genesis shall appoint another person designated by Manor Care to be a Manor Care Director or Manor Care Observer, as the case may be. Any such designation of a Manor Care Director for appointment to Genesis's Board of Directors or, pursuant to Section 3(c), of a person to attend Board meetings as an observer, shall be made after consultation with Genesis, and any such Manor Care Director or Manor Care Observer shall be reasonably acceptable to Genesis's Board of Directors (which agreement will not be unreasonably withheld). Genesis hereby agrees and acknowledges that Jack Anderson and James H. Rempe are acceptable to Genesis's Board of Directors as a Manor Care Director or Manor Care Observer. Genesis's Board of Directors shall include in the slate of nominees recommended by such Board to Genesis's shareholders for election as a director at each annual meeting of the shareholders of Genesis at which members of Class I directors are elected, the person then designated by Manor Care for election to Genesis's Board of Directors in accordance with the provisions of this Section 3(a). In the event that the Manor Care Director shall cease to serve as a director for any reason, the vacancy resulting therefrom shall be filled by a designee of Manor Care being appointed by the Board of Directors according to the procedures described above. (b) Manor Care Observer. At any time that the Manor Care Group does not have a Manor Care Director serving on Genesis's Board of Directors, Manor Care shall be entitled to designate a non-voting observer for such Board seat and such observer shall be entitled to attend all Board meetings (the "Manor Care Observer"). (c) Confidential Information. The parties acknowledge and agree that the Manor Care Director or Manor Care Observer, as the case may be, will be under an obligation to Manor Care not to disclose to any person outside of Manor Care, or use in any business other than Manor Care's, any confidential information or material relating to the business of Manor Care or its subsidiaries and that the Manor Care Director or Manor Care Observer shall be under no obligation to disclose to Genesis any corporate opportunities that the Manor Care Director or Manor Care Observer becomes aware of because of his or her position as an officer, director or employee of Manor Care or any of its affiliates. The parties acknowledge that there shall be no obligation on the part of such Manor Care Director or Manor Care Observer to disclose any such information or material to Genesis, even if such disclosure would be of interest or value to Genesis. In addition, the parties acknowledge and agree that any Manor Care Director or Manor Care Observer will be under an obligation to Genesis not to disclose to any person outside of Genesis, or use in any business other than Genesis's, any confidential information or material relating to the business of Genesis or its subsidiaries; provided that the Manor Care Director or Manor Care Observer may disclose to the officers and directors of Manor Care information about the financial position or results of operations of Genesis (which information shall not include specific information about the day to day operations of Genesis's business or any proposed acquisition, disposition or other material action to be taken by Genesis) if any such Manor Care officer or director agrees that any confidential information so disclosed to him or her shall not be disclosed by him or her to any other person to whom such information has not been so disclosed by the Manor Care Director or Manor Care Observer, except as may be compelled by law or legal process. -5- (d) Removal of Directors; Vacancies. Manor Care shall have the right to request the removal by Genesis's Board of Directors of the Manor Care Director. Any such removal shall be subject to the applicable provisions of the Amended and Restated Articles of Incorporation and By-Laws of Genesis (including, without limitation, any shareholder vote requirement), as well as applicable statutory provisions; provided that Genesis will use its best efforts to cause the Genesis Board of Directors to vote in favor of such requested removal. In the event that the Manor Care Director for any reason ceases to serve as a member of the Genesis Board of Directors during his or her term of office and at such time Manor Care would have the right to designate a Manor Care Director hereunder (a) the director to fill such vacancy ("Manor Care Director Vacancy") shall be designated by Manor Care and shall be reasonably acceptable to Genesis's Board of Directors, and (b) such Manor Care Director Vacancy shall be filled in accordance with Article Eighth of Genesis's Amended and Restated Articles of Incorporation. Section 4. Voting of Genesis Common Stock and Other Related Matters (a) Each member of the Manor Care Group that is a holder of record of Voting Securities shall be present, and each member of the Manor Care Group that is a beneficial owner of Voting Securities shall cause the holder of record to be present, in person or by proxy, at all meetings of shareholders of Genesis so that all Voting Securities owned of record or beneficially by the Manor Care Group may be counted for the purpose of determining the presence of a quorum at such meetings. (b) At any time prior to April 26, 2001, other than with respect to a proposed Change of Control, the Manor Care Group will take all such action as may be required so that all Voting Securities owned by the Manor Care Group are voted (in person or by proxy) on all matters to be voted on by holders of Voting Securities in accordance with the recommendation of the Board of Directors. Manor Care shall cause the Manor Care Director to take such action as may be necessary and to vote in accordance with the recommendation of Genesis's Board of Directors to fill any vacancies in Genesis's Board of Directors (other than a Manor Care Director Vacancy). (c) Manor Care shall not, with respect to a proposed Change of Control approved by the Board of Directors of Genesis and the shareholders of Genesis, make any demand for payment pursuant to Section 262 of the Delaware General Corporation Law. As used herein, a proposed "Change of Control" occurs (A) when the shareholders of Genesis are asked to approve an agreement or plan (i) to merge or consolidate Genesis with or into another company (other than a merger or consolidation which would result in the Voting Securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of Genesis or such surviving entity outstanding immediately after such merger or consolidation), or (ii) to sell, or otherwise dispose of, all or substantially all of Genesis's property and assets, or (iii) to liquidate, dissolve or wind-up Genesis or (B) when Genesis is the subject of a transaction pursuant to Rule 13e-3 under the Exchange Act. -6- REGISTRATION RIGHTS Section 5. Registration Rights. Genesis covenants and agrees as follows: 5.01. Definitions. For purposes of this Section 5: (a) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Act"). (b) The term "Registrable Securities" means the shares of Preferred Stock and Common Stock underlying such shares of Preferred Stock held, from time to time, by the Manor Care Group. (c) The term "Holder" means any member of the Manor Care Group which owns of record Registrable Securities. 5.02. Request for Registration. (a) If Genesis shall, at any time following the first anniversary of the Effective Time, receive a written request from the Holders of Registrable Securities representing at least 25% of the Voting Securities acquired by the Manor Care Group at the Effective Time that Genesis file a registration statement under the Act covering the registration of Registrable Securities, then Genesis shall, within 10 days after the receipt thereof, give written notice of such request to all Holders and effect within 90 days of the receipt of such request, the registration under the Act on a Form S-1 or other appropriate form covering the sale of all Registrable Securities which the Holders request to be registered. (b) If the Holders initiating the registration request hereunder (the "Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise Genesis as a part of their request made pursuant to this Section 5.02 and Genesis shall include such information in the written notice referred to in Section 5.02(a). In such event, the right of any Holder to include Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute Registrable Securities through such underwriting shall (together with Genesis) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Initiating Holders and reasonably acceptable to Genesis. Genesis at its sole discretion may offer a right to -7- participate in any registration statement filed pursuant to this Section 5.02 to other holders of Common Stock, and may itself participate in any registration statement filed pursuant to this Section 5.02. However, notwithstanding any other provision of this Section 5.02, if the offering is an underwritten offering and the lead managing underwriter advises the Initiating Holders that marketing factors require a limitation of the number of shares of Preferred Stock or Common Stock to be underwritten, then (subject to any contrary provisions in registration rights agreements executed by Genesis prior to the date hereof) the total number of shares of Preferred Stock or Common Stock to be underwritten shall be reduced, with such reduction coming first from selling stockholders who are not Holders, and then from Genesis. (c) Genesis is obligated to effect no more than three such registrations pursuant to this Section 5.02. (d) Notwithstanding the foregoing, if Genesis shall furnish to Holders requesting a registration statement pursuant to this Section 5.02 a certificate signed by the Chief Executive, Chief Operating, or Chief Financial Officer of Genesis stating that, in the good faith judgment of a majority of the disinterested directors, it would be materially detrimental to Genesis for such registration statement to be filed, Genesis shall have the right to defer such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; provided, however, that Genesis may not utilize this right more than once in any 12-month period. 5.03. Piggyback Registration. (a) If (but without any obligation to do so), prior to April 26, 2003, Genesis proposes to register any of its Common Stock under the Act in connection with the public offering of such Common Stock by Genesis (other than a registration relating solely to the sale of securities to participants in a dividend reinvestment plan, stock plan or employee benefit plan; a registration relating solely to the issuance of securities to the security holders of an acquired company in connection with an acquisition; or a registration on any form which does not permit inclusion of selling stockholders), or Genesis proposes to register any of its Common Stock on behalf of a holder of Common Stock exercising demand registration rights similar to those set forth in Section 5.02, (which shall not include a shelf registration) Genesis shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 15 days after mailing of such notice by Genesis, Genesis shall cause to be registered under the Act all of the Common Stock that each such Holder has requested to be registered. However, notwithstanding any other provision of this Section 5.03, if the offering is an underwritten offering and the lead managing underwriter advises the Holders that marketing factors require a limitation of the number of shares of Common Stock to be underwritten, then (subject to any contrary provisions in registration rights agreements executed by Genesis prior to the date hereof) the total number of shares of Common Stock to be underwritten shall be reduced, with such reduction coming first from the Holders. -8- 5.04. Expenses of Registration. All expenses incurred by or on behalf of Genesis in connection with registrations, filings or qualifications pursuant to Sections 5.02 and 5.03, including, without limitation, all registration, filing and qualification fees, printers' and accounting fees, and fees and disbursements of counsel for Genesis and one counsel to the selling Holders, shall be borne by Genesis. In no event shall Genesis be obligated to bear any underwriting discounts or commissions relating to Registrable Securities. 5.05. Obligations of Genesis. Whenever required under this Section 5 to effect the registration of any Registrable Securities, Genesis shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to fifteen business days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such states or other jurisdictions as shall be reasonably requested by the Holders, provided that Genesis shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriters of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and then use its best efforts to promptly correct such statement or omission. Notwithstanding the foregoing and anything to the contrary set forth in this Section 5.05, each Holder acknowledges that there may occasionally be -9- times when Genesis must suspend the use of the prospectus forming a part of the registration statement until such time as an amendment to the registration statement has been filed by Genesis and declared effective by the SEC, or until such time as Genesis has filed an appropriate report with the SEC pursuant to the Exchange Act. Each Holder hereby covenants that it will (a) keep any such notice strictly confidential, and (b) not sell any shares of Preferred Stock or Common Stock pursuant to such prospectus during the period commencing at the time at which Genesis gives the Holder notice of the suspension of the use of such prospectus and ending at the time Genesis gives the Holder notice that it may thereafter effect sales pursuant to such prospectus. Genesis shall only be able to suspend the use of such prospectus for periods aggregating no more than 60 days in respect of any registration. 5.06. Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 5: (a) To the extent permitted by law, Genesis will indemnify and hold harmless each Holder and the affiliates of such Holder, and their respective directors, officers, general and limited partners, agents and representatives (and the directors, officers, affiliates and controlling persons thereof), and each other person, if any, who controls such Holder within the meaning of the Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus (but only if such statement is not corrected in the final prospectus) contained therein or any amendments or supplements thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading (but only if such omission is not corrected in the final prospectus); provided, however, that the indemnity agreement contained in this Section 5.06(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Genesis (which consent shall not be unreasonably withheld), nor shall Genesis be liable in any such case for any such loss, claim, damage, liability or action which arises solely out of or is solely based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in such registration statement by any such Holder or indemnified person. Each indemnified party shall furnish such information regarding itself or the claim in question as an indemnifying party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. -10- (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless Genesis, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls Genesis within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the Exchange Act or other federal or state law, insofar as any such loss, claim, damage, liability or action arises solely out of or is solely based upon (i) any Violation that occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in such registration statement and (ii) the failure of the selling Holder, after actual receipt of any notice from the Company of the happening of any event of the kind described in Section 5.05(f), to discontinue disposition of such Registrable Securities covered by such registration statement until such selling Holder has received copies of a supplemented or amended prospectus, or until it is advised in writing by the Company that the use of the applicable prospectus may be resumed, and has received copies of any amendments or supplements thereto; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this Section 5.06(b) in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 5.06(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this Section 5.06(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 5.06 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 5.06, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to deliver written notice to the indemnifying party within a reasonable time after the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5.06 to the extent of such prejudice, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 5.06. The indemnified party shall have the right, but not the obligation, to participate in the defense of any action referred to above through counsel of its own choosing and shall have the right, but not the obligation, to assert any and all separate defenses, cross claims or counterclaims which it may have, and the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of such counsel has been specifically authorized in advance by the indemnifying party, (ii) counsel advises that there is a conflict of interest that prevents counsel for the indemnifying party from adequately representing the interests of the indemnified party, (iii) the indemnifying party does not employ counsel -11- that is reasonably satisfactory to the indemnified party, or (iv) the indemnifying party fails to assume the defense or does not reasonably contest such action in good faith, in which case, if the indemnified party notifies the indemnifying party that it elects to employ separate counsel, the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party and the reasonable fees and expenses of such separate counsel shall be borne by the indemnifying party; provided, however, that, the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to one firm acting as local counsel) for all indemnified parties. (d) If the indemnification provided for in Section 5.06(a) or 5.06(b) is for any reason unavailable to an indemnified party in respect of any losses, claims, damages or liabilities which are indemnifiable pursuant to such Sections, then each indemnifying party under such paragraphs, in lieu of indemnifying such indemnified party thereunder and in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and the indemnified party or parties on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Genesis on the one hand or such Holder or such other indemnified party, as the case may be, on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. (e) The obligations of Genesis and the Holders under this Section 5.06 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 5.06 and the termination of this Agreement. (f) The underwriting agreement (if any) entered into in connection with any underwritten public offering of the Registrable Securities shall contain provisions on indemnification and contribution that are no less favorable to Holders of Registrable Securities than those provisions contained in this Agreement. To the extent that the provisions on indemnification and contribution contained in such underwriting agreement satisfy the foregoing sentence but are in conflict with the provisions of Section 5.06, the provisions in such underwriting agreement shall control. 5.07. Reports Under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of Genesis to the public without registration or pursuant to a registration on Form S-3, Genesis agrees to: -12- (a) use its commercially reasonable best efforts to make and keep public information available, as those terms are understood and defined in Rule 144; (b) use its commercially reasonable best efforts to file with the SEC in a timely manner all reports and other documents required under the Act and the Exchange Act; and (c) furnish to any Holder forthwith upon request (i) a written statement by Genesis as to its compliance with the reporting requirements of Rule 144, (ii) a copy of the most recent annual or quarterly report of Genesis and such other reports and documents so filed by Genesis, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration. 5.08. Assignment of Registration Rights. The rights to cause Genesis to register Registrable Securities pursuant to Section 5.02 may only be assigned by a Holder to a transferee or assignee of any Registrable Securities if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act and any such transferee or assignee shall be a Holder for purposes of Section 5 entitled to the rights and subject to the obligations of Section 5, including without limitation, the requirement that a request for registration under Section 5.02 must be made by holders of at least 25% of the Voting Securities acquired by the Manor Care Group at the Effective Time. Section 6. Termination. (a) Notwithstanding any other provision of this Agreement, this Agreement may be terminated, upon 60 days prior written notice to the other party (i) by Manor Care, in its sole discretion, if Genesis breaches any of its material obligations pursuant to this Agreement and such breach is continuing on the 61st day following such notice, provided, however that the rights of Manor Care contained in Sections 3 and 5 hereof shall survive such termination; (ii) by Genesis, in its sole discretion, if Manor Care breaches any of its material obligations pursuant to this Agreement and such breach is continuing on the 61st day following such notice or (iii) by either party, in its sole discretion, if the Merger Agreement is terminated. (b) Upon the disposition by the Manor Care Group to persons who are not members of the Manor Care Group of greater than 50% of the Voting Securities acquired by the Manor Care Group at the Effective Time, the provisions of Sections 1, 2, 3 and 4 hereof shall terminate and be of no further force or effect. Section 7. Miscellaneous. (a) Manor Care and Genesis each acknowledges and agrees that irreparable damage would occur in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to -13- prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, in addition to any other remedy to which they may be entitled at law or equity. (b) If any provision of this Agreement is in violation of any statute, rule, regulation, order or decree of any governmental authority, court or agency, or subjects any member of the Manor Care Group to governmental regulation to which it would not be subject except for such provision, then such member of the Manor Care Group shall be relieved of its obligations under such provision to the minimum extent necessary to cure such violation or eliminate the applicability of such regulation. (c) If requested in writing by Genesis, Manor Care shall present or cause to be presented promptly all certificates representing Voting Securities now owned or hereafter acquired by members of the Manor Care Group, for the placement thereon of the following legend, which will remain thereon as long as such Voting Securities are subject to the restrictions contained in this Agreement: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER AND THE OTHER PROVISIONS OF A RIGHTS AGREEMENT DATED AS OF APRIL 26, 1998, BETWEEN GENESIS HEALTH VENTURES, INC. AND MANOR CARE, INC., AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN ACCORDANCE THEREWITH. A COPY OF SAID AGREEMENT IS ON FILE AT THE OFFICE OF THE CORPORATE SECRETARY OF GENESIS HEALTH VENTURES, INC. Genesis agrees that upon any transfer of Voting Securities represented by legended certificates made in compliance with the provisions of this Agreement, it will, upon the presentation to its transfer agent of the certificates containing such legend, remove such legend from the certificates being sold or registered. (d) Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (e) This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby and may be amended only by an agreement in writing executed by the parties hereto. (f) For the convenience of the parties, any number of counterparts of this Agreement may be executed by the parties hereto and each such executed counterpart shall be deemed to be, an original instrument. (g) All notices and other communications hereunder shall be in writing and shall be delivered personally, by next-day courier or mailed by registered or certified mail (return receipt requested), first class postage prepaid, or sent by facsimile, telegram or telex, to the parties at the addresses specified below (or at such other address for a party as shall be specified by like notice; provided that notices of a -14- change of address shall be effective only upon receipt thereof). Any such notice shall be effective upon receipt, if personally delivered or telecommunicated, one day after delivery to a courier for next-day delivery, or three days after mailing, if deposited in the U.S. mail, first class postage prepaid. (i) if to Manor Care, to: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, Maryland 20878 Attention: James H. Rempe, Esq., General Counsel with a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Telecopy: (212) 269-5420 Attention: W. Leslie Duffy, Esq. (ii) if to Genesis, to: Genesis Health Ventures, Inc. 148 West State Street Kennett Square, Pennsylvania 19348 Attention: Ira Gubervick, Esq., General Counsel with a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, Pennsylvania 19103 Attention: Stephen E. Luongo, Esq. (h) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed therein. (i) Each of Manor Care and Genesis has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder -15- and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by each of Manor Care and Genesis and the consummation by each of Manor Care and Genesis of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Manor Care and Genesis, respectively. This Agreement has been duly and validly executed and delivered by each of Manor Care and Genesis and, assuming the due authorization, execution and delivery by the other party, constitutes a legal, valid and binding obligation of each of Manor Care and Genesis, enforceable against each of them in accordance with its terms, except that such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting creditors' rights generally. (j) This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as set forth in Section 5.08 of this Agreement, this Agreement and any of the rights, interests or obligations hereunder shall not be assigned by any of the parties hereto without the prior written consent of the other parties; provided, however, that Manor Care may assign all of its rights and obligations under this Agreement to a direct or indirect subsidiary of Manor Care which is to be spun off as provided in the Form 10 filed with the Securities and Exchange Commission by New ManorCare Health Services, Inc. and Manor Care shall be released from any further obligations under or with respect to this Agreement other than pursuant to Section 1. Genesis hereby consents to the Manor Care Group's transfer of any or all shares of Preferred Stock or Common Stock owned by the Manor Care Group to Manor Care, New Manor Care Heath Services, Inc., or any of their respective wholly owned subsidiaries if such transferee agrees to be bound by the terms of this Agreement. -16- IN WITNESS WHEREOF, Manor Care and Genesis have caused this Agreement to be duly executed by their respective officers, each of whom is duly authorized, all as of the day and year first above written. GENESIS HEALTH VENTURES, INC. By:____________________________ Name: Title: MANOR CARE, INC. By:_____________________________ Name: Title: -17- EX-27 5 FINANCIAL DATA SCHEDULE
5 0000874265 GENSIS HEALTH VENTURES,INC & SUBSIDIARIES 1 U.S. DOLLARS 6-MOS 6-MOS SEP-30-1998 SEP-30-1997 OCT-01-1997 OCT-01-1996 MAR-31-1998 MAR-31-1997 1 1 15,574,000 13,835,000 18,839,000 0 309,212,000 233,518,000 (53,085,000) (36,531,000) 35,778,000 24,866,000 440,290,000 320,140,000 680,366,000 633,540,000 (107,617,000) (77,879,000) 1,917,012,000 1,341,213,000 164,980,000 128,737,000 0 0 0 0 0 0 721,000 699,000 628,847,000 582,267,000 1,917,012,000 1,341,213,000 646,864,000 531,807,000 646,864,000 531,807,000 0 0 528,656,000 439,997,000 38,864,000 34,283,000 0 0 38,331,000 18,155,000 41,013,000 39,372,000 14,970,000 14,370,000 27,390,000 25,002,000 0 0 (1,924,000) (553,000) 0 0 25,466,000 13,494,000 0.73 .72 0.71 .70
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