-----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, GXE6ke+0/N+WuWXny+coLgv0TA+mm/VCMsl5oUcXtHtLq45VFDsp3VfLBfThku2G GgAu1z0XVpHj6JN7OtUeQA== 0000950116-98-001679.txt : 19980814 0000950116-98-001679.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950116-98-001679 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 98686480 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 10-Q 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 June 30, 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 August 7, 1998: 35,224,406 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..................................................................23 Item 2. Changes in Securities..............................................................23 Item 3. Defaults Upon Senior Securities....................................................23 Item 4 Submission of Matters to a Vote of Security Holders................................23 Item 5. Other Information..................................................................23 Item 6. Exhibits and Reports on Form 8-K...................................................23 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 Unaudited 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. PART I: FINANCIAL INFORMATION Item 1. Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data)
June 30, September 30, - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Assets: Current assets: Cash and equivalents $ 30,812 $ 11,651 Investments in marketable securities 19,203 14,729 Accounts receivable, net of allowance for doubtful accounts of $48,793 at June 30, 1998 and $39,418 at September 30, 1997 277,332 205,129 Cost report receivables 69,973 60,865 Inventory 37,968 25,568 Prepaid expenses and other current assets 37,878 26,675 Income taxes receivable - 7,820 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 473,166 352,437 - -------------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 582,892 578,397 Notes receivable and other investments 100,520 108,714 Other long-term assets 73,707 31,722 Investments in unconsolidated affiliates 343,109 2,887 Goodwill and other intangibles, net 418,760 359,956 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,992,154 $ 1,434,113 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Current liabilities: Accounts payable and accrued expenses $ 149,780 $ 117,234 Current installments of long-term debt 32,235 8,273 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 182,015 125,507 - -------------------------------------------------------------------------------------------------------------------------------- Long-term debt 1,089,460 651,667 Deferred income taxes 51,276 37,745 Deferred gain and other long-term liabilities 23,148 11,173 Shareholders' equity: Common stock, par $.02, authorized 60,000,000 shares, issued and outstanding 35,204,005 and 35,158,404, respectively at June 30, 1998; 35,117,075 and 35,071,474, respectively at September 30, 1997 722 702 Additional paid-in capital 453,989 457,232 Retained earnings 191,787 150,330 Treasury stock, at cost (243) (243) - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 646,255 608,021 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,992,154 $ 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 June 30, - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Net revenues: Basic healthcare services $ 139,562 $ 140,127 Specialty medical services 182,253 132,052 Management services and other, net 30,711 12,284 - ------------------------------------------------------------------------------------------------------------------------- Total net revenues 352,526 284,463 - ------------------------------------------------------------------------------------------------------------------------- Operating expenses: Salaries, wages and benefits 149,880 131,356 Other operating expenses 122,179 88,564 General corporate expense 13,627 10,853 Depreciation and amortization 13,632 11,517 Lease expense 8,497 7,324 Interest expense, net 20,679 10,351 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in net income of unconsolidated affiliates 24,032 24,498 Income taxes 8,771 8,942 - ------------------------------------------------------------------------------------------------------------------------- Income before equity in net income of unconsolidated affiliates 15,261 15,556 Equity in net income of unconsolidated affiliates 730 - - ------------------------------------------------------------------------------------------------------------------------- Net income $ 15,991 $ 15,556 - ------------------------------------------------------------------------------------------------------------------------- Per common share data: Basic: Net income $ 0.46 $ 0.44 Weighted average shares of common stock 35,133,022 34,973,202 - ------------------------------------------------------------------------------------------------------------------------- Diluted: Net income $ 0.45 $ 0.43 Weighted average shares of common stock and equivalents 35,719,840 35,917,642 - -------------------------------------------------------------------------------------------------------------------------
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)
Nine months ended June 30, - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Net revenues: Basic healthcare services $ 414,611 $ 411,044 Specialty medical services 501,840 370,719 Management services and other, net 82,939 34,507 - ------------------------------------------------------------------------------------------------------------------------- Total net revenues 999,390 816,270 - ------------------------------------------------------------------------------------------------------------------------- Operating expenses: Salaries, wages and benefits 433,828 386,806 Other operating expenses 340,711 253,582 General corporate expense 39,803 30,382 Depreciation and amortization 37,985 31,618 Lease expense 23,008 21,506 Interest expense, net 59,010 28,506 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes, equity in net income of unconsolidated affiliates and extraordinary items 65,045 63,870 Income taxes 23,741 23,312 - ------------------------------------------------------------------------------------------------------------------------- Income before equity in net income of unconsolidated affiliates and extraordinary items 41,304 40,558 Equity in net income of unconsolidated affiliates 2,077 - - ------------------------------------------------------------------------------------------------------------------------- Income before extraordinary items 43,381 40,558 Extraordinary items, net of tax (1,924) (553) - ------------------------------------------------------------------------------------------------------------------------- Net income $ 41,457 $ 40,005 - ------------------------------------------------------------------------------------------------------------------------- Per common share data: Basic: Income before extraordinary items $ 1.24 $ 1.18 Extraordinary items (0.05) (0.02) Net Income $ 1.18 $ 1.17 Weighted average shares of common stock 35,107,983 34,327,105 - ------------------------------------------------------------------------------------------------------------------------- Diluted: Income before extraordinary items $ 1.22 $ 1.14 Extraordinary items (0.05) (0.02) Net Income $ 1.16 $ 1.13 Weighted average shares of common stock and equivalents 35,701,210 35,799,478 - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements 4 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands)
Nine months ended June 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net cash provided by operations $ 40,127 $ 28,335 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (41,102) (47,138) Payments for acquisitions, net of cash acquired (100,929) (237,665) Investments in unconsolidated affiliates (341,032) - Net proceeds from the sale of assets 63,756 - Notes receivable and other investment and asset additions, net (32,345) (22,893) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (451,652) (307,696) - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net borrowings (repayments) under working capital revolving credit (136,700) 162,449 Repayment of long term debt (20,955) (5,331) Proceeds from issuance of long-term debt 611,241 126,500 Debt issuance costs (19,648) (3,750) Purchase of common stock call options (4,442) - Common stock options exercised 1,190 2,076 - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 430,686 281,944 - ------------------------------------------------------------------------------------------------------------------------------ Net increase in cash and equivalents 19,161 2,583 Cash and equivalents Beginning of period 11,651 12,763 End of period $ 30,812 $ 15,346 - ------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information Interest paid $ 62,205 $ 30,357 Income taxes paid $ 2,390 $ 11,967 - ------------------------------------------------------------------------------------------------------------------------------
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 $15,100,000 commitment to finance the development and expansion of three 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 $26,500,000 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 Multicare Parent) 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 6 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% (currently 7.94%); loans under the Tranche B Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 2.75% (currently 8.44%); loans under the Tranche C Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 3.0% (currently 8.69%) ; loans under the Revolving Credit Facility bear interest at a rate equal to LIBOR plus a margin up to 2.5% (currently 7.94%); 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 are changed periodically. 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 nine months ended June 30, 1997 to conform to the provisions of Statement 128 (amounts are in thousands except per share data):
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1998 1997 1998 1997 --------------------------------------------------- Basic Earnings Per Share: Income before extraordinary items $15,991 $15,556 $43,381 $40,558 Extraordinary items - - (1,924) (553) --------------------------------------------------- Net income $15,991 $15,556 $41,457 $40,005 --------------------------------------------------- --------------------------------------------------- Weighted average shares 35,133 34,973 35,108 34,327 --------------------------------------------------- Earnings per share before extraordinary items $0.46 $0.44 $1.24 $1.18 Earning per share - extraordinary items - - (0.05) (0.02) --------------------------------------------------- Earnings per share $0.46 $0.44 $1.18 $1.17 --------------------------------------------------- Diluted Earnings Per Share: Income before extraordinary items $15,991 $15,556 $43,381 $40,558 Extraordinary items - - (1,924) (553) --------------------------------------------------- Net income $15,991 $15,556 $41,457 $40,005 Adjustments to net income for interest expense, amortization and other costs related to the assumed conversion of convertible debentures - - - 303 --------------------------------------------------- Adjusted net income $15,991 $15,556 $41,457 $40,308 --------------------------------------------------- Weighted Average Shares & Common Stock Equivalents: Common shares 35,133 34,973 35,108 34,327 Dilutive effect of unexcercised stock options 587 945 593 886 Convertible debenture shares - - - 586 --------------------------------------------------- Total 35,720 35,918 35,701 35,799 --------------------------------------------------- Earnings per share before extraordinary items $0.45 $0.43 $1.22 $1.14 Earnings per share - extraordinary items - - (0.05) (0.02) --------------------------------------------------- Earnings per share $0.45 $0.43 $1.16 $1.13 ---------------------------------------------------
7 5. Pro Forma 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 in October 1997 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 interests 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 common 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, 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 9 the results of operations that would have occurred had the transactions occurred at the beginning of period presented.
(In thousands, except per share data) Nine Months Ended Nine Months Ended Pro Forma Statement of Operations Information: June 30, 1998 June 30, 1997 ------------- ------------- Total net revenue $ 1,019,866 $ 918,797 Income before extraordinary items 42,980 32,094 Net income 41,056 31,541 Earnings per share, before extraordinary items, diluted 1.20 0.90 Earnings per share, diluted $ 1.15 $ 0.89
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 nine months ended, June 30, 1998. Multicare is the Company's only material unconsolidated affiliate. (in thousands) June 30, 1998 ----------------- Total assets $1,744,269 Long-term debt 755,681 Total liabilities $995,033 Three months Nine months ended ended June 30, June 30, 1998 1998 ------------------------------------- Revenues $170,703 $526,645 Net income $1,511 $4,236 7. Vitalink Transaction 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 state regulatory and shareholder approval of both companies as well as receipt of 10 financing. The shareholders meeting to vote upon the Vitalink Transaction is scheduled for August 26, 1998. The Company currently expects to close the transaction in late August 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. 8. Subsequent Event On July 21, 1998, Genesis announced an agreement in principle to extend its lease of seven eldercare centers in Maryland and New Jersey. Genesis acquired the leasehold rights of the seven properties with approximately 1,200 beds in its November 1993 acquisition of Meridian Healthcare, Inc. At that time, Genesis also received an option to purchase the seven facilities in 2003 for $59,000,000. The proposed transaction involves the sale of its leasehold rights and option to purchase the facilities to ElderTrust for $44,000,000, consisting of $39,000,000 in cash at closing and a $5,000,000 note. Following the sale of the leasehold rights and option, Genesis will sublease the seven facilities from ElderTrust for ten years with the option to extend its lease until 2018. The lease expense obligation is approximately $10,000,000 per year, which will be offset by the amortization of the gain upon the sale of the option. The transaction is expected to close by August 31, 1998 and is subject to the approval of the Board of Directors of Genesis Health Ventures, the owners of the seven facilities, and lenders. 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 114 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 205 eldercare centers, 119 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 is subject to state regulatory and shareholder approval of both companies as well as receipt of financing. The shareholders meeting to vote upon the Vitalink Transaction is scheduled for August 26, 1998. The Company currently expects to close the transaction in late August 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 12 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 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 in October 1997 $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 interests 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. 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 completion of the sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997. On July 14, 1998, the Company announced that it received notice from NewCourtland, Inc., owner of eight nursing centers in the Philadelphia area, of the termination of its management agreements for these centers effective July 31, 1998. This notice follows the revocation on June 25, 1998 of the operating license at one of the NewCourtland centers. The center had a long-standing history of regulatory compliance difficulties dating back many years prior to Genesis' management. The Company believes that the termination notice was inappropriate and has instituted suit against NewCourtland, Inc. and other related parties to recover unpaid balances due Genesis, the estimated future operating profits of the terminated management agreements, as well as consequential damages. The annualized revenue from the contracts is approximately $3,800,000. The termination of these contracts will result in a reduction in fiscal 1999 earnings of approximately $1,200,000 or $.03 per share. 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. Through the third quarter of 1998, the Company recognized approximately $15,500,000 of capitation revenue and incurred a like 13 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 June 30, 1998 compared to three months ended June 30, 1997. The Company's total net revenues for the quarter ended June 30, 1998 were $352,526,000 compared to $284,463,000 for the quarter ended June 30, 1997, an increase of $68,063,000 or 24%. Basic healthcare services decreased $565,000 principally due to the termination of operations by Genesis of three leased eldercare centers in September 1997, which generated approximately $3,200,000, offset by approximately $2,600,000 due to providing care to higher acuity patients and rate increases. Specialty medical services revenue increased $50,201,000 or 38% of which approximately $27,300,000 is attributed to the purchase of the Multicare pharmacy business, approximately $4,800,000 is attributed to the purchase of the Multicare rehabilitation therapy business, and the remaining increase of approximately $22,700,000 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 eldercare centers. This increase is offset by approximately $2,100,000, $900,000 and $1,600,000 as a result of the deconsolidation of the Company's physician services business beginning in the fourth quarter of 1997, the termination of operations of three leased eldercare centers in September 1997 and the April 1998 government mandated implementation of salary equivalency billing for rehabilitation therapy, respectively. Specialty medical service revenue per patient day in the health centers division increased 3% to $38.74 in the quarter ended June 30, 1998 compared to $37.78 in the quarter ended June 30, 1997 primarily due to treatment of higher acuity patients. Management services and other income increased $18,427,000 or 150%. This increase is due to approximately $10,200,000 of management fee revenue earned from the management of the operations of the Multicare business and approximately $8,200,000 of other revenue, including capitated revenue earned under a contract with Blue Cross / Blue Shield of Maryland. The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $285,686,000 for the quarter ended June 30, 1998 compared to $230,773,000 for the quarter ended June 30, 1997, an increase of $54,913,000 or 24%, of which approximately $2,700,000 is due to the direct operating costs incurred to service the Multicare management contracts, approximately $21,700,000 is due to the acquisition of the Multicare pharmacy operations, approximately $4,000,000 is due the acquisition of the Multicare rehabilitation therapy business, approximately $6,200,000 is due to charges incurred in connection with capitation costs under a contract with Blue Cross / Blue Shield of Maryland and the remaining increase of approximately $26,400,000 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, marketing campaigns and the servicing of the Multicare management contracts. This increase is offset by approximately $2,700,000 and $3,400,000 as a result of the deconsolidation of the Company's physician services business beginning in the fourth quarter of 1997 and the termination of operations of three leased eldercare centers in September 1997, respectively. Interest expense increased $10,328,000 or 100%. 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 $2,115,000 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 $1,173,000 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. 14 Nine months ended June 30, 1998 compared to nine months ended June 30, 1997. The Company's total net revenues for the nine months ended June 30, 1998 were $999,390,000 compared to $816,270,000 for the nine months ended June 30, 1997, an increase of $183,120,000 or 22%. Basic healthcare services increased $3,567,000 or 1%, of which approximately $5,800,000 is 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, which generated approximately $9,400,000. Specialty medical services revenue increased $131,121,000 or 35% of which approximately $53,600,000 is attributed to the purchase of the Multicare pharmacy business, approximately $15,300,000 is attributed to the purchase of the Multicare rehabilitation therapy business, and the remaining increase of approximately $72,800,000 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 eldercare centers. This increase is offset by approximately $6,500,000, $2,500,000 and $1,600,000 as a result of the deconsolidation of the Company's physician services business beginning in the fourth quarter of 1997, the termination of operations of three leased eldercare centers in September 1997 and the April 1998 government mandated implementation of salary equivalency billing for rehabilitation therapy, respectively. Specialty medical service revenue per patient day in the health centers division increased 11% to $37.19 in the nine months ended June 30, 1998 compared to $33.58 in the nine months ended June 30, 1997 primarily due to treatment of higher acuity patients. Management services and other income increased approximately $48,432,000 or 140%. This increase is due to approximately $32,000,000 of management fee revenue earned from the management of the operations of the Multicare business and approximately $16,400,000 of other revenue including capitated revenue earned under a contract with Blue Cross / Blue Shield of Maryland. The Company's operating expenses before, depreciation, amortization, lease expense and interest expense were $814,342,000 for the nine months ended June 30, 1998 compared to $670,770,000 for nine months ended June 30, 1997, an increase of $143,572,000 or 21%, of which approximately $9,500,000 is due to the direct operating costs incurred to service the Multicare management contracts, approximately $43,200,000 is due to the acquisition of the Multicare pharmacy operations, approximately $12,900,000 is due to the acquisition of the Multicare rehabilitation therapy business, approximately $13,500,000 is due to charges incurred in connection with capitation costs under a contract with Blue Cross / Blue Shield of Maryland and the remaining increase of approximately $81,900,000 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 ,marketing campaigns and the servicing of the Multicare management contracts. This increase is offset by approximately $7,800,000 and $9,600,000 as a result of the deconsolidation of the Company's physician services business beginning in the fourth quarter of 1997 and the termination of operations of three leased eldercare centers in September 1997, respectively. Interest expense increased $30,504,000 or 107%. 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 $6,367,000 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 $1,502,000 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. 15 Liquidity and Capital Resources Working capital increased $64,221,000 to $291,151,000 at June 30, 1998 from $226,930,000 at September 30, 1997. Accounts receivable increased approximately $72,200,000 during this period, of this increase approximately $6,500,000 relates to balances acquired in the Multicare rehabilitation therapy business, approximately $18,700,000 relates to balances acquired in the Multicare pharmacy business, approximately $12,100,000 (or three days of revenue) is the result of collection delays experienced in the third quarter of 1998 from the states of Pennsylvania and Connecticut, approximately $1,500,000 relates to collection delays experienced in the third quarter of 1998 as a result of the conversion of several properties to a new billing system, approximately $6,100,000 relates to receivable growth in a home medical equipment joint venture that is consolidated, while the remaining approximately $27,300,000 relates primarily to the continuing shift in business mix to specialty medical services, particularly the home medical equipment and infusion therapy lines of business, which typically have a longer collection period. Days revenue in accounts receivable increased two days to 69 days during the third quarter from 67 days for the quarter ended March 31, 1998. The Company's cash flow from operations for the nine months ended June 30, 1998 was approximately $40,127,000 compared to approximately $28,335,000 for the nine months ended June 30, 1997. Investing activities for the nine months ended June 30, 1998 include approximately $41,102,000 of capital expenditures primarily related to betterments and expansion of eldercare centers and investment in data processing hardware and software. During the nine months ended June 30, 1998, other long term assets increased approximately $41,985,000, 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 $10,700,000 of subordinated management fees due from Multicare. 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 is subject to state regulatory and shareholder approval of both companies as well as receipt of financing. The shareholders meeting to vote upon the Vitalink Transaction is scheduled for August 26, 1998. The Company currently expects to close the transaction in late August 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, 16 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 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 $15,100,000 commitment to finance the development and expansion of three 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. On July 21, 1998, Genesis announced an agreement in principle to extend its lease of seven eldercare centers in Maryland and New Jersey. Genesis acquired the leasehold rights of the seven properties with approximately 1,200 beds in its November 1993 acquisition of Meridian Healthcare, Inc. At that time, Genesis also received an option to purchase the seven facilities in 2003 for $59,000,000. The proposed transaction involves the sale of its leasehold rights and option to purchase the facilities to ElderTrust for $44,000,000, consisting of $39,000,000 in cash at closing and a $5,000,000 note. Following the sale of the leasehold rights and option, Genesis will sublease the seven facilities from ElderTrust for ten years with the option to extend its lease until 2018. The lease expense obligation is approximately $10,000,000 per year, which will be offset by the amortization of the gain upon the sale of the option. The transaction is expected to close by August 31, 1998 and is subject to the approval of the Board of Directors of Genesis Health Ventures, the owners of the seven facilities, and lenders. 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 $26,500,000 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. 17 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% (currently 7.94%); loans under the Tranche B Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 2.75% (currently 8.44%); loans under the Tranche C Term Facility bear interest at an annual rate equal to LIBOR plus a margin up to 3.0% (currently 8.69%); loans under the Revolving Credit Facility bear interest at a rate equal to LIBOR plus a margin up to 2.5% (currently 7.94%); 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 are changed periodically. 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. 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 18 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, 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 June 30, 1998, the Company loaned approximately $2,600,000 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 ratios of 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. 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 19 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. Due to system related problems, the Health Care Financing Administration announced publicly in July 1998 that this requirement of the Act would be postponed indefinitely. 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 August 7, 1998, approximately $166,500,000 was outstanding under the Revolving Credit Facility, and approximately $64,700,000 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. 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. 20 Year 2000 The Company is aware of the 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, and/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. 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. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in 21 other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters beginning after June 15, 1999. The Company intends to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("the Statement"). This statement requires costs of start-up activities, including organizational costs, to be expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. This Statement is effective for fiscal years beginning after December 15, 1998. The Company has not yet quantified the impact the adoption may have on its consolidated financial statements. 22 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 None Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description ------ ----------- 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on May 6, 1998 in connection with the Agreement and Plan of Merger by and between Genesis Health Ventures, Inc. and its wholly owned subsidiary V Acquisition Corporation and Vitalink Pharmacy Services, Inc. The Current Report on Form 8-K does not include financial statements. 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: August 13, 1998 /s/ George V. Hager, Jr. ------------------------------------------ George V. Hager, Jr. Senior Vice President and Chief Financial Officer 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000874265 GENESIS HEALTH VENTURES, INC. 1 US 9-MOS 9-MOS SEP-30-1998 SEP-30-1997 OCT-01-1997 OCT-01-1996 JUN-30-1998 JUN-30-1997 1 1 30,812,000 15,346,000 19,203,000 12,957,000 326,125,000 237,623,000 (48,793,000) (36,431,000) 37,968,000 25,267,000 473,166,000 340,514,000 698,121,000 650,514,000 (115,229,000) (86,269,000) 1,992,154,000 1,375,151,000 182,015,000 119,687,000 0 0 0 0 0 0 722,000 701,000 645,533,000 598,829,000 1,992,154,000 1,375,151,000 999,390,000 816,270,000 999,390,000 816,270,000 0 0 814,342,000 670,770,000 60,993,000 53,124,000 0 0 59,010,000 21,506,000 67,122,000 63,870,000 23,741,000 23,812,000 41,304,000 40,558,000 0 0 (1,924,000) (553,000) 0 0 41,457,000 40,005,000 1.18 1.17 1.16 1.13
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