-----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, INDB51+SR/z2QUSu/c/OaaCRTf6ZIPGwzvtn6xfwglRdyMbnB4w3xtmkwTW3/yOn xGXJ9THOghysE0hSYFPjew== 0000950116-99-001633.txt : 19990824 0000950116-99-001633.hdr.sgml : 19990824 ACCESSION NUMBER: 0000950116-99-001633 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990823 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: 99697395 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 June 30, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 1-11666 GENESIS HEALTH VENTURES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-1132947 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 101 East State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [ x ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of August 11, 1999: 36,145,678 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......................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................24 Part II: OTHER INFORMATION Item 1. Legal Proceedings..........................................25 Item 2. Changes in Securities......................................25 Item 3. Defaults Upon Senior Securities............................25 Item 4. Submission of Matters to a Vote of Security Holders........26 Item 5. Other Information..........................................26 Item 6. Exhibits and Reports on Form 8-K...........................26 SIGNATURES ..................................................................27 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 "Quantitative and Qualitative Disclosures about Market Risk", 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. Changes in the United States healthcare system, including changes in reimbursement levels under Medicaid and Medicare, implementation of the Medicare Prospective Payment System and consolidated billing and other changes in applicable government regulations that might affect the profitability of the Company. 2. The Company's substantial indebtedness and significant debt service obligations. 3. The Company's ability to secure the capital and the related cost of such capital necessary to fund future growth through acquisition and development, as well as internal growth. 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 healthcare 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. 9. The Company's and its payors' and suppliers' ability to implement a Year 2000 readiness program. These and other factors have been discussed in more detail in the Company's periodic reports, including its Annual Report on Form 10-K as amended for the fiscal year ended September 30, 1998. 1 PART I: FINANCIAL INFORMATION Item 1. Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data)
June 30, September 30, - ----------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and equivalents $ 14,698 $ 4,902 Investments in marketable securities 24,175 26,658 Accounts receivable, net 400,405 376,023 Cost report receivables 63,132 62,257 Inventory 65,798 63,760 Prepaid expenses and other current assets 38,480 40,579 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 606,688 574,179 - ----------------------------------------------------------------------------------------------------------------------------- Property, plant, and equipment, net 624,688 596,562 Notes receivable and other investments 52,203 47,623 Other long-term assets 89,638 73,904 Investments in unconsolidated affiliates 360,120 344,567 Goodwill and other intangibles, net 965,089 990,533 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,698,426 $ 2,627,368 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Current installments of long-term debt $ 34,622 $ 49,712 Accounts payable and accrued expenses 196,622 218,749 Income taxes payable 5,428 - - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 236,672 268,461 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt 1,468,840 1,358,595 Deferred income taxes 70,747 72,828 Deferred gain and other long-term liabilities 55,199 52,412 Shareholders' equity: Series G Cumulative Convertible Preferred Stock, par $.01, authorized 5,000,000 shares, 590,253 issued and outstanding at June 30, 1999 and September 30, 1998 6 6 Common stock, par $.02, authorized 60,000,000 shares, issued and outstanding 36,145,678 and 36,133,578 at June 30, 1999; 35,225,731 and 35,180,130 at September 30, 1998 723 704 Additional paid-in capital 753,452 749,491 Retained earnings 113,152 124,430 Accumulated other comprehensive income (loss) (122) 684 Treasury stock, at cost (243) (243) - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 866,968 875,072 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,698,426 $ 2,627,368 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements 2 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Operations ( in thousands, except share and per share data)
Three months ended Nine months ended June 30, June 30, - --------------------------------------------------------------------------------------------- --------------------------- 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------- --------------------------- Net revenues: Pharmacy and medical supply services $ 230,387 $ 102,177 $ 698,505 $ 269,417 Inpatient services 175,887 187,055 527,720 551,089 Other revenue 58,814 63,294 182,686 178,884 - --------------------------------------------------------------------------------------------- --------------------------- Total net revenues 465,088 352,526 1,408,911 999,390 - --------------------------------------------------------------------------------------------- --------------------------- Operating expenses: Operating expenses 390,973 272,059 1,172,685 774,539 General corporate expense 13,685 13,627 42,731 39,803 Facility closure expense - - 9,701 - Depreciation and amortization 18,887 13,632 55,453 37,985 Lease expense 6,655 8,497 19,641 23,008 Interest expense, net 29,515 20,679 85,295 59,010 - --------------------------------------------------------------------------------------------- --------------------------- Earnings before income taxes, equity in net income (loss) of unconsolidated affiliates and extraordinary items 5,373 24,032 23,405 65,045 Income taxes 2,901 8,771 10,851 23,741 - --------------------------------------------------------------------------------------------- --------------------------- Earnings before equity in net income (loss) of unconsolidated affiliates and extraordinary items 2,472 15,261 12,554 41,304 Equity in net income (loss) of unconsolidated affiliates (3,475) 730 (8,626) 2,077 - --------------------------------------------------------------------------------------------- --------------------------- Earnings (loss) before extraordinary items (1,003) 15,991 3,928 43,381 Extraordinary items, net of tax - - (2,100) (1,924) - --------------------------------------------------------------------------------------------- --------------------------- Net income (loss) (1,003) 15,991 1,828 41,457 Preferred stock dividend 4,369 - 13,106 - - --------------------------------------------------------------------------------------------- --------------------------- Net income (loss) attributed to common shareholders $ (5,372) $ 15,991 $ (11,278) $ 41,457 - --------------------------------------------------------------------------------------------- --------------------------- Per common share data: Basic Earnings (loss) before extraordinary items $ (0.15) $ 0.46 $ (0.26) $ 1.24 Net income (loss) $ (0.15) $ 0.46 $ (0.32) $ 1.18 Weighted average shares 35,371,494 35,133,022 35,268,910 35,107,983 - --------------------------------------------------------------------------------------------- --------------------------- Diluted Earnings (loss) before extraordinary items $ (0.15) $ 0.45 $ (0.26) $ 1.22 Net income (loss) $ (0.15) $ 0.45 $ (0.32) $ 1.16 Weighted average shares and equivalents 35,371,494 35,719,840 35,268,910 35,701,210 - --------------------------------------------------------------------------------------------- ---------------------------
See accompanying notes to unaudited condensed consolidated financial statements 3 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands)
Nine months ended June 30, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) attributed to common shareholders $(11,278) $ 41,457 Net charges included in operations not requiring funds 83,586 50,673 Changes in assets and liabilities excluding the effects of acquisitions: Accounts receivable (28,120) (45,818) Accounts payable and accrued expenses (18,586) 9,044 Other, net (1,800) (15,229) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 23,802 40,127 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (57,457) (41,102) Payments for acquisitions and related costs, net of cash acquired (12,003) (100,929) Investments in unconsolidated affiliates (24,180) (341,032) Net proceeds from sale of assets - 63,756 Sale of marketable securities 1,677 - Notes receivable and other investment and other asset additions, net (7,677) (32,345) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (99,640) (451,652) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (repayments) under working capital revolving credit facility 115,200 (136,700) Repayment of long term debt and payment of sinking fund requirements (143,540) (20,955) Proceeds from issuance of long-term debt 123,050 611,241 Debt issuance costs (3,088) (19,648) Preferred stock dividends paid (5,988) - Purchase of common stock call options - (4,442) Stock options exercised - 1,190 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 85,634 430,686 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 9,796 19,161 Cash and equivalents Beginning of period 4,902 11,651 - ----------------------------------------------------------------------------------------------------------------------------------- End of period $ 14,698 $ 30,812 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ 84,509 $ 62,205 Income taxes paid $ 1,089 $ 2,390 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements 4 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 1998. 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. Long-Term Debt Genesis entered into a credit agreement pursuant to which the lenders provided Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the "Credit Facility") for the purpose of: refinancing and funding interest and principal payments of certain existing indebtedness; funding permitted acquisitions; funding Genesis' commitments in connection with the Vitalink Transaction; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of transactions. The Credit Facility consists of three term loans with original balances of $200,000,000 each (collectively, the "Term Loans"), and a $650,000,000 revolving credit loan (the "Revolving Facility") The Term Loans amortize in quarterly installments through 2005, of which $21,419,000 is payable in Fiscal 1999. The Term Loans consist of (i) a six year term loan with an outstanding balance of $121,398,000 at June 30, 1999 (the "Tranche A Term Facility"); (ii) a seven year term loan with an outstanding balance of $152,909,000 at June 30, 1999 (the "Tranche B Term Facility"); and (iii) an eight year term loan with an outstanding balance of $152,545,000 at June 30, 1999 (the "Tranche C Term Facility"). The Revolving Facility becomes payable in full on September 30, 2003. The third amendment to the Credit Facility, dated December 15, 1998, made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of subordinated debt offerings to repay indebtedness under the Revolving Facility and increased the interest rates applying to the Term Loans and the Revolving Facility. The Credit Facility is secured by a first priority security interest in all of the stock, partnership interests and other equity of all of Genesis' present and future subsidiaries (including Genesis ElderCare Corp.) other than the stock of Multicare and its subsidiaries. Loans under the Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. Loans under the Tranche A Term Facility and Revolving Facility have an Annual Applicable Margin of .75% for Prime Rate loans and 2.50% for LIBO Rate loans (an effective rate of 7.82% at June 30, 1999). Loans under the Tranche B Term Facility have an Annual Applicable Margin of 1.25% for Prime Rate loans and 3.00% for LIBO Rate loans (an effective rate of 8.32% at June 30, 1999). Loans under the Tranche C Term Facility have an Annual Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans (an effective rate of 8.57% at June 30, 1999). Subject to meeting certain financial ratios, the above referenced interest rates are reduced. The Credit Facility contains a number of covenants that, among other things, restrict the ability of Genesis and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Genesis and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; causes Genesis and its affiliates to maintain the Management Agreement, the Put/Call Agreement, as defined, 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. See Note 8 regarding an agreement in principle relating to the Put/Call Agreement. 5 On August 20, 1999, the Company entered into an amendment of the Credit Facility. The amendment establishes less restrictive financial covenant requirements through the remaining term of the agreement, increases the Annual Applicable Margin and provides the lenders of the Credit Facility a collateral interest in certain real and personal property of the Company. Additionally, the amendment provides for $40,000,000 of additional borrowing capacity, subject to the satisfaction of certain conditions. The amended Annual Applicable Margin is expected to increase the Company's effective interest rate .75% for Prime Rate and LIBO Rate loans under the Tranche A Term Facility and Revolving Facility and .50% for Prime Rate and LIBO Rate loans under the Tranche B and Tranche C Term Facilities. In December 1998, the Company issued $125,000,000, 9 7/8% Senior Subordinated Notes due 2009 at a price of 96.1598% resulting in net proceeds of $120,200,000. Interest on the notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1999. Approximately $59,900,000 of the net proceeds were used to repay portions of the Tranche A, B and C Term Facilities and approximately $59,900,000 of the net proceeds were used to repay a portion of the Revolving Facility. 3. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share applicable to common shares (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, 1999 1998 1999 1998 --------------------------------------------------------------------- Basic Earnings (Loss) Per Share: Income (loss) before extraordinary items $ (5,372) $ 15,991 $ (9,178) $43,381 Extraordinary items - - (2,100) (1,924) --------------------------------------------------------------------- Net income (loss) attributed to common shareholders $ (5,372) $ 15,991 $(11,278) $41,457 --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average shares 35,371 35,133 35,269 35,108 --------------------------------------------------------------------- Earnings (loss) per share before extraordinary items $ (0.15) $ 0.46 $ (0.26) $ 1.24 Earnings (loss) per share $ (0.15) $ 0.46 $ (0.32) $ 1.18 --------------------------------------------------------------------- Diluted Earnings (Loss) Per Share: Income (loss) before extraordinary items $ (5,372) $ 15,991 $ (9,178) $43,381 Extraordinary items - - (2,100) (1,924) --------------------------------------------------------------------- Net income (loss) attributed to common shareholders $ (5,372) $ 15,991 $(11,278) $41,457 --------------------------------------------------------------------- Weighted average shares & common stock equivalents: Common shares 35,371 35,133 35,269 35,108 Dilutive effect of unexcercised stock options - 587 - 593 --------------------------------------------------------------------- Total 35,371 35,720 35,269 35,701 --------------------------------------------------------------------- Earnings (loss) per share before extraordinary items $ (0.15) $ 0.45 $ (0.26) $ 1.22 Earnings (loss) per share $ (0.15) $ 0.45 $ (0.32) $ 1.16 ---------------------------------------------------------------------
6 4. Pro Forma Financial Information On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"), pursuant to which Vitalink merged with and into Newco (the "Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per share (the "Vitalink Common Stock"), was converted in the merger into the right to receive (i) .045 shares of Genesis Series G Cumulative Convertible Preferred Stock, par value $.01 per share (the "Genesis Preferred"), (ii) $22.50 in cash, or (iii) a combination of cash and shares of Genesis Preferred (collectively, the "Merger Consideration"). The Merger Consideration paid to stockholders of Vitalink to acquire their shares (including shares which may have been issued upon the exercise of outstanding options) was $590,200,000 of which 50% was paid in cash and 50% in Genesis Preferred. The Genesis Preferred has a face value of approximately $295,100,000 and an initial dividend of 5.9375% and generally is not transferable without the consent of the Company. The Genesis Preferred is convertible into Genesis common stock, par value $.02 per share (the "Common Stock"), at $37.20 per share and it may be called for conversion after April 26, 2001, provided the price of Common Stock reaches certain trading levels and after April 26, 2002, subject to a market-based call premium. As a result of the merger, Genesis assumed approximately $87,000,000 of indebtedness Vitalink had outstanding. The cash portion of the purchase price was funded through borrowings under the Credit Facility. The Vitalink Transaction is being accounted for under the purchase method and the related goodwill is being amortized over a forty year period. Effective January 1, 1998, Genesis entered into a stock purchase agreement with Multicare and certain subsidiaries pursuant to which Genesis acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Purchase"), subject to adjustment. The Pharmacy Purchase is being accounted for under the purchase method and the related goodwill is being amortized over forty years. The following unaudited pro forma statement of operations information gives effect to the Vitalink Transaction and the Pharmacy Purchase as though they had occurred on October 1, 1997, after giving effect to certain adjustments, including recognition of goodwill amortization, additional depreciation expense and increased interest expense on debt related to the transaction. 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 the period presented.
(In thousands, except per common share data) Nine Months Ended Pro Forma Statement of Operations Information: June 30, 1998 ------------- Total net revenue $1,400,965 Income before extraordinary items 39,490 Net income 37,566 Earnings per common share, before extraordinary items, diluted 1.11 Earnings per common share, diluted $ 1.05
7 5. 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, 1999. Multicare is the Company's only material unconsolidated affiliate (amounts are in thousands). June 30, 1999 -------------------- Total assets $ 1,698,272 Long-term debt 743,789 Total liabilities $ 986,278 Three Months Ended Nine Months June 30, 1999 Ended June 30, 1999 ----------------------- -------------------- Revenues $ 157,295 $ 480,504 Net loss $ (8,509) $ (21,244) 6. Comprehensive Income In October 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of Statement 130 had no impact on the Company's net income available to common shareholders. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities be included in other comprehensive income. The following table sets forth the computation of comprehensive income (amounts in the table are in thousands):
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ------------------------------------------------------------------- Net income (loss) attributed to common shareholders $ (5,372) $ 15,991 $ (11,278) $ 41,457 Unrealized gain (loss) on marketable securities (259) 53 (806) 158 ------------------------------------------------------------------- Total comprehensive income (loss) $ (5,631) $ 16,044 $ (12,084) $ 41,615 -------------------------------------------------------------------
Accumulated other comprehensive income (loss), which is composed of net unrealized gains and losses on marketable securities, was $(122,282) and $253,800 at June 30, 1999 and 1998, respectively. 7. Facility Closure Expense In March 1999, the Company closed a leased eldercare center located in the state of Florida. In connection with the closure, the Company recorded $9,701,000 of closure costs consisting of the present value of future lease payments through the end of the lease term, a residual lease obligation to be funded at the end of the lease term, severance costs and other related closure expenses. 8 8. Subsequent Event On August 2, 1999, the Company reached an agreement in principle with The Cypress Group ("Cypress") and Texas Pacific Group ("TPG") its co-investor partners in Genesis ElderCare Corp., to simplify the joint-venture structure, accelerate the integration of Genesis and Multicare, and strengthen the financial position of both Genesis and Multicare. Under the agreement in principle, Cypress and TPG will invest $50,000,000 into Genesis in exchange for 12,500,000 newly issued common shares and 2,000,000 warrants to purchase common shares with a $5.00 exercise price. In addition, Cypress and TPG will terminate their right to put their 56% equity interest in Genesis ElderCare Corp. to Genesis in exchange for a newly issued convertible preferred stock in Genesis with a $420,000,000 principal amount, a 5% dividend rate (payable in kind for the first five years) and a conversion price of $8.75 per share. The conversion price represents a 153% premium to the 20 day average trading price of Genesis common stock at the signing of the agreement in principle. Following completion of this transaction, Genesis will consolidate the results of Multicare for financial reporting purposes. After making the $50,000,000 investment, Cypress and TPG will each own approximately 11% of Genesis. On a fully-diluted basis, assuming conversion of the convertible preferred stock, Cypress and TPG will each own approximately 29% of Genesis. The agreement in principle provides that Cypress and TPG will each have the right to vote a maximum of 17.5% of the voting rights of Genesis. Cypress and TPG will each designate one member to the Genesis Board of Directors, increasing the total membership to nine. The transaction is subject to, among other things, regulatory approval, definitive documentation and Genesis shareholder approval. There can be no assurances that the Company will be able to satisfy the conditions to the proposed transaction. 9 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 elderly customers. The Company generates revenues from three sources: pharmacy and medical supply services, inpatient services and other revenue. The Company provides pharmacy and medical supply services through its NeighborCare (SM) pharmacy subsidiaries. Included in pharmacy and medical supply service revenues are institutional pharmacy revenues, which include the provision of infusion therapy, medical supplies and equipment provided to eldercare centers it operates, as well as to independent healthcare providers by contract. The pharmacy services provided in these settings are tailored to meet the needs of the institutional customer. These services include highly specialized packaging and dispensing systems, computerized medical records processing and 24-hour emergency services. The Company's institutional pharmacy and medical supply services were developed to provide the products and support services required in the healthcare market. Institutional pharmacy services are designed to help assure quality of care and to control costs at the facilities served. Medical supply services are designed to assure availability and control through maintenance of a comprehensive inventory, extensive delivery services and special ordering and tracking systems. The Company also provides pharmacy consulting services to assure proper and effective drug therapy. The Company provides these services through 71 institutional pharmacies (of which one is jointly-owned) and 16 medical supply distribution centers located in its various market areas. In addition, the Company operates 34 community-based pharmacies which are located in or near medical centers, hospitals and physician office complexes. The community-based pharmacies provide prescription and over-the-counter medications and certain medical supplies, as well as personal service and consultation by licensed professional pharmacists. Approximately 94% of the sales attributable to all pharmacy operations in the nine months ended June 30, 1999 were generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by the Company. The Company includes in inpatient service revenue all room and board charges and ancillary service revenue for its eldercare customers at its 113 owned and leased eldercare centers. The centers offer three levels of care for their customers: skilled, intermediate and personal. Skilled care provides 24-hour per day professional services of a registered nurse; intermediate care provides less intensive nursing care; and personal care provides for the needs of customers requiring minimal supervision and assistance. Each eldercare center is supervised by a licensed healthcare administrator and employs a Medical Director to supervise the delivery of healthcare services to residents and a Director of Nursing to supervise the nursing staff. The Company maintains a corporate quality assurance program to monitor regulatory compliance and to enhance the standard of care provided in each center. The Company includes the following in other revenues: rehabilitation therapy, management fees, capitation fees, homecare services, physician services, transportation services, diagnostic services, hospitality services, group purchasing fees and other healthcare related services. Certain Transactions Multicare Transaction and Proposed Revision to the Joint Venture In October 1997, Genesis ElderCare Corp., a Delaware Corporation owned 43.6% by Genesis and the remainder by The Cypress Group (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates "Nazem"), acquired The Multicare Companies, Inc. ("Multicare"), pursuant to a tender offer (the "Tender Offer") and the merger (the "Merger" or the "Multicare Transaction"). 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. 10 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) $1,991,666 and (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 will be 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 interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Purchase"), subject to adjustment. The Company completed the Pharmacy Purchase effective January 1, 1998. The Company completed the Therapy Purchase in October 1997. In addition, Genesis, Cypress, TPG and Nazem entered into an agreement (the "Put/Call Agreement") pursuant to which, among other things, Genesis has 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 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. Genesis Eldercare Corp. paid approximately $1,492,000,000 to (i) purchase the Multicare Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses incurred in connection with the completion of the Tender Offer, Merger and the financing transactions in connection with 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 as capital contributions by the Genesis Eldercare Corp. from the sale of its 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 shares of Genesis ElderCare Corp. common stock for a purchase price of $325,000,000 in consideration for 43.6% of the common stock of Genesis ElderCare Corp. 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 bridge financing which was refinanced upon completion of the sale of 9% Senior Subordinated Notes due 2007 sold by a subsidiary of Genesis ElderCare Corp. on August 11, 1997. On August 2, 1999, the Company reached an agreement in principle with Cypress and TPG to simplify the joint-venture structure, accelerate the integration of Genesis and Multicare, and strengthen the financial position of both Genesis and Multicare. Under the agreement in principle, Cypress and TPG will invest 11 $50,000,000 into Genesis in exchange for 12,500,000 newly issued common shares and 2,000,000 warrants to purchase common shares with a $5.00 exercise price. In addition, Cypress and TPG will terminate their right to put their 56% equity interest in Genesis ElderCare Corp. to Genesis in exchange for a newly issued convertible preferred stock in Genesis with a $420,000,000 principal amount, a 5% dividend rate (payable in kind for the first five years) and a conversion price of $8.75 per share. The conversion price represents a 153% premium to the 20 day average trading price of Genesis common stock at the signing of the agreement in principle. Following completion of this transaction, Genesis will consolidate the results of Multicare for financial reporting purposes. After making the $50,000,000 investment, Cypress and TPG will each own approximately 11% of Genesis. On a fully-diluted basis, assuming conversion of the convertible preferred stock, Cypress and TPG will each own approximately 29% of Genesis. The agreement in principle provides that Cypress and TPG will each have the right to vote a maximum of 17.5% of the voting rights of Genesis. Cypress and TPG will each designate one member to the Genesis Board of Directors, increasing the total membership to nine. The transaction is subject to, among other things, regulatory approval, definitive documentation and Genesis shareholder approval. There can be no assurances that the Company will be able to satisfy the conditions of the proposed transaction. Cardinal Contract On May 6, 1999, NeighborCare announced that it selected Cardinal Health, Inc. as its primary pharmaceutical supplier. The five year contract calls for Cardinal to supply NeighborCare's 34 professional retail and 71 long-term care pharmacies. In 1998, NeighborCare purchased approximately $500,000,000 worth of pharmaceuticals. Vitalink Transaction On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"), pursuant to which Vitalink merged with and into Newco (the "Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01 per share (the "Vitalink Common Stock"), was converted in the merger into the right to receive (i) .045 shares of Genesis Series G Cumulative Convertible Preferred Stock, par value $.01 per share (the "Genesis Preferred"), (ii) $22.50 in cash, or (iii) a combination of cash and shares of Genesis Preferred (collectively, the "Merger Consideration"). The Merger Consideration paid to stockholders of Vitalink to acquire their shares (including shares which may have been issued upon the exercise of outstanding options) was $590,200,000, of which 50% was paid in cash and 50% in Genesis Preferred. The Genesis Preferred has a face value of approximately $295,100,000 and an initial dividend of 5.9375% and generally is not transferable without the consent of the Company. The Genesis Preferred is convertible into Genesis common stock, par value $.02 per share (the "Common Stock"), at $37.20 per share and it may be called for conversion after April 26, 2001, provided the price of Common Stock reaches certain trading levels and after April 26, 2002, subject to a market-based call premium. As a result of the merger, Genesis assumed approximately $87,000,000 of indebtedness Vitalink had outstanding. The cash portion of the purchase price was funded through borrowings under the Credit Facility. See "Liquidity and Capital Resources." Pursuant to three master service agreements with HCR-Manor Care, Vitalink provides pharmaceutical products and services, enteral and parenteral therapy supplies and services, urological and ostomy products, intravenous products and services and pharmacy consulting services to facilities operated by HCR-Manor Care. Vitalink is not restricted from providing similar contracts to non-HCR-Manor Care facilities. The current term of each of the Service Contracts extends through September 2004, subject to annual renewals provided therein. On May 7, 1999, the Company filed multiple lawsuits against HCR Manor Care, Inc. and two of its subsidiaries and principals relating to the Vitalink Transaction and the master service agreements. The lawsuits arise from HCR Manor Care's threatened termination of two long term pharmacy services contracts effective June 1, 1999. By agreement dated May 13, 1999, the parties agreed to consolidate the Maryland State Court claims relating to the master service agreements with the arbitration matter. Until such time as a final decision is rendered in said arbitration, the parties have agreed to maintain the master service agreements in full force and effect. Genesis still maintains its Delaware federal court complaint. See Part II: Other Information - Item 1. Legal Proceedings. 12 New Courtland On July 14, 1998, the Company announced that it received notice from NewCourtland, Inc. ("NewCourtland"), 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 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. ElderTrust Transactions 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. 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. 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. Additionally, ElderTrust has funded approximately $14,400,000 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 the Credit Facility with the proceeds from these transactions. In September 1998, the Company sold its leasehold rights and option to purchase seven eldercare facilities acquired in its November 1993 acquisition of Meridian Healthcare, Inc. to ElderTrust for $44,000,000, including $35,500,000 in cash and an $8,500,000 note. As part of the transaction, Genesis will continue to sublease the facilities for ten years with an option to extend the lease until 2018 at an initial annual lease obligation of approximately $10,000,000. The transaction resulted in a gain of approximately $43,700,000 which has been deferred and is being amortized over the ten year lease term of the lease contracts with ElderTrust. The Company also anticipates entering into transactions with ElderTrust in the future. Results of Operations Three months ended June 30, 1999 compared to three months ended June 30, 1998 The Company's total net revenues for the quarter ended June 30, 1999 were $465,088,000 compared to $352,526,000 for the quarter ended June 30, 1998, an increase of $112,562,000 or 32%. Pharmacy and medical supply service revenue increased $128,210,000 to $230,387,000 from $102,177,000, of which approximately $121,729,000 is attributed to the added revenues as a result of the Vitalink Transaction, and the remainder is primarily due to other volume growth in the institutional, medical supply and community-based pharmacies. Inpatient service revenue declined $11,168,000 or 6% to $175,887,000 from $187,055,000. Of this decline, approximately $1,343,000 is attributed to the revenues of an eldercare center located in Florida that was closed in March 1999, $1,742,000 is attributed to the revenues of a Pennsylvania eldercare center for which the lease was terminated in July 1998, approximately $11,726,000 is attributed to dilution in the Company's Medicare rate following the Company's October 1, 1998 implementation of the Medicare Prospective Payment System ("PPS"). These decreases in inpatient service revenue are offset by the positive impact of rate increases of other payor categories and changes in payor mix. Under PPS, the average Medicare rate per day was reduced to approximately $299 per patient day during the quarter ended June 30, 1999 compared to approximately $395 per patient day for the comparable period last year. There were 147,626 Medicare patient days during the quarter ended June 30, 1999 compared to 122,837 days for the comparable period last year. Total patient days declined 22,321 to 1,225,404 during the quarter ended June 30, 1999 compared to 1,247,725 during the comparable period last year. The decline in overall census is principally attributed to 8,520 patient days at the closed Florida eldercare center, 9,913 patient days at the Pennsylvania eldercare center for which the lease was terminated and the remaining decline of 3,888 patient days is attributed to a net drop in overall occupancy. Other revenues decreased approximately $4,480,000 from $63,294,000 to $58,814,000. This decline is principally attributed to contraction in the Company's rehabilitation services business since the January 1, 1999 implementation of PPS by many of the Company's external rehabilitation customers, including the Multicare eldercare centers. 13 The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $404,658,000 for the quarter ended June 30, 1999 compared to $285,686,000 for the quarter ended June 30, 1998, an increase of $118,972,000 or 42%, of which approximately $105,162,000 is attributed to the added operating expenses as a result of the Vitalink Transaction and approximately $16,376,000 is attributed to inflationary increases, growth in the institutional pharmacy and medical supply divisions, capitation contract related expenses, as well as increased costs of community-based programs. These increases are offset by reduced operating expenses of approximately $1,023,000 attributed to the closed Florida eldercare center and $1,543,000 to the Pennsylvania eldercare center for which the lease was terminated. Increased depreciation and amortization expense of $5,255,000 is attributed to the depreciation of fixed assets and amortization of goodwill and deferred financing costs in connection with the Vitalink Transaction, as well as incremental depreciation expense from capital expenditures made since June 30, 1998. Interest expense increased $8,836,000 or 43%. This increase in interest expense was primarily due to additional borrowings used to finance the Vitalink Transaction, as well as an increase in the Company's weighted average borrowing rate. This increase is partially offset by interest savings as a result of the repayment of indebtedness from proceeds received in connection with the ElderTrust Transactions. Equity in net income (loss) of unconsolidated affiliates declined $4,205,000 to a loss of $3,475,000 for the quarter ended June 30, 1999 from income of $730,000 for the quarter ended June 30, 1998 due to declining earnings of the Company's Multicare affiliate. The Multicare earnings have been adversely impacted by its January 1, 1999 implementation of PPS. In the quarter ended June 30, 1999, the Company accrued $4,369,000 of dividends on the Genesis Preferred issued in connection with the Vitalink Transaction. Nine months ended June 30, 1999 compared to nine months ended June 30, 1998 The Company's total net revenues for the nine months ended June 30, 1999 were $1,408,911,000 compared to $999,390,000 for the nine months ended June 30, 1998, an increase of $409,521,000 or 41%. Pharmacy and medical supply service revenue increased $429,088,000 to $698,505,000 from $269,417,000, of which approximately $376,623,000 is attributed to the added revenues as a result of the Vitalink Transaction, approximately $20,720,000 is attributed to the added revenues as a result of the Multicare Pharmacy Purchase, and the remainder is primarily due to other volume growth in the institutional, medical supply and community-based pharmacies. Inpatient service revenue declined $23,369,000 or 4% to $527,720,000 from $551,089,000. Of this decline, approximately $1,343,000 is attributed to the revenues of an eldercare center located in Florida that was closed in March 1999, $5,014,000 is attributed to the revenues of a Pennsylvania eldercare center for which the lease was terminated in July 1998 and approximately $29,443,000 is attributed to dilution in the Company's Medicare rate following the Company's October 1, 1998 implementation of PPS. These decreases in inpatient service revenue are offset by the positive impact of rate increases of other payor categories and changes in payor mix. Under PPS, the average Medicare rate per day was reduced to approximately $305 per patient day during the nine months ended June 30, 1999 compared to approximately $384 per patient day for the comparable period last year. There were 408,034 Medicare patient days during the nine months ended June 30, 1999 compared to 372,912 for the comparable period last year. Total patient days declined 40,189 to 3,698,936 during the nine months ended June 30, 1999 compared to 3,739,125 during the comparable period last year. The decline in overall census is principally attributed to 8,520 patient days at the closed Florida eldercare center, 29,733 patient days at the Pennsylvania eldercare center for which the lease was terminated and the remaining decline of 1,936 patient days is attributed to a net drop in overall occupancy and to survey and other regulatory matters at several of the Company's eldercare centers, which the Company believes have been resolved. 14 The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $1,225,117,000 for the nine months ended June 30, 1999 compared to $814,342,000 for the comparable period in the prior year, an increase of $410,775,000 or 50%, of which approximately $321,360,000 is attributed to the added operating expenses as a result of the Vitalink Transaction, approximately $14,707,000 is attributed to the added operating expenses as a result of the Multicare Pharmacy Purchase, approximately $9,701,000 is attributed to expenses incurred in connection with the closure of an eldercare center located in Florida, approximately $1,369,000 is attributed to severance costs incurred in connection with a reduction in work force in the Company's rehabilitation services business, and the remaining increase of $69,146,000 is attributed to inflationary increases, growth in the institutional pharmacy, medical supply and contract therapy divisions, capitated expenses, as well as increased costs of community-based programs. These increases are offset by reduced operating expenses of approximately $1,023,000 attributed to the closed Florida eldercare center and $4,485,000 to the Pennsylvania eldercare center for which the lease was terminated. Increased depreciation and amortization expense of $17,468,000 is attributed to the depreciation of fixed assets and amortization of goodwill and deferred financing costs in connection with the Multicare Pharmacy Purchase and the Vitalink Transaction, as well as incremental depreciation expense from capital additions made since June 30, 1998. Interest expense increased $26,285,000 or 45%. This increase in interest expense is primarily due to additional borrowings used to finance the Multicare Pharmacy Purchase, the Vitalink Transaction, increased working capital and capital borrowings, and an increase in the Company's weighted average borrowing rate. This increase is partially offset by interest savings as a result of the repayment of indebtedness from proceeds received in connection with the ElderTrust Transactions. In connection with the early repayment and restructuring of debt in the quarters ended December 31, 1998 and 1997, the Company recorded an extraordinary loss, net of tax of approximately $1,799,000 ($2,902,000 before tax) and $1,924,000 ($3,030,000 before tax), respectively, to write-off unamortized deferred financing fees. In connection with the defeasance of certain municipal bonds in the quarter ended March 31, 1999 the Company recorded an extraordinary loss, net of tax of approximately $301,000 ($474,000 before tax). Equity in net income (loss) of unconsolidated affiliates declined $10,703,000 to a loss of $8,626,000 in the nine months ended June 30, 1999 from income of $2,077,000 for the nine months ended June 30, 1998 due to declining earnings of the Company's Multicare affiliate. The Multicare earnings have been adversely impacted by its January 1, 1999 implementation of PPS. In the nine months ended June 30, 1999, the Company accrued $13,106,000 of dividends on the Genesis Preferred issued in connection with the Vitalink Transaction. 15 Liquidity and Capital Resources General Working capital increased $64,298,000 to $370,016,000 at June 30, 1999 from $305,718,000 at September 30, 1998. Accounts receivable increased approximately $24,382,000 during this period, of this increase approximately $4,205,000 relates to the impact of a rehabilitation services agreement entered into during the December 1998 quarter and the remaining increase is principally due to the continuing shift in business mix to ancillary services, particularly the home medical equipment and infusion therapy lines of business, which typically have a longer collection period. Days revenue in accounts receivable decreased approximately one day to 75 days during the quarter ended June 30, 1999 compared to the quarter ended March 31, 1999. Accounts payable and accrued expenses decreased during the nine months ended June 30, 1999, principally due to the timing of routine operating payments, including interest and compensation related costs. As a result of lower earnings and the timing of payments, the Company's cash flow from operations for the nine months ended June 30, 1999 was approximately $23,802,000 compared to approximately $40,127,000 for the nine months ended June 30, 1998. Investing activities for the nine months ended June 30, 1999 include approximately $57,457,000 of capital expenditures primarily related to betterments and expansion of existing eldercare centers and other sites of service, and investment in data processing hardware and software. The cash used to finance investments in unconsolidated affiliates of approximately $24,180,000 during the nine months ended June 30, 1999 represents the Company's limited partnership investment in four assisted living properties with which it has entered into a management contract, and four joint venture assisted living properties under development which it will manage upon completion of construction. To date, the Company has financed approximately $16,100,000 of the construction costs of the four assisted living properties under development. Over the next nine months, the joint venture partnerships are expected to refinance the construction costs with outside financing. During the nine months ended June 30, 1999, other long-term assets increased approximately $15,734,000, principally due to subordinated management fees due from Multicare. The Vitalink and ElderTrust Transactions The total consideration paid to stockholders of Vitalink to acquire their shares (including shares which may have been issued upon the exercise of outstanding options) was $590,200,000, of which 50% was paid in cash and 50% in Genesis Preferred. As a result of the merger, Genesis assumed approximately $87,000,000 of indebtedness Vitalink had outstanding. The Genesis Preferred has a face value of approximately $295,100,000 and an initial dividend of 5.9375% and generally is not transferable without the consent of the Company. The Genesis Preferred is convertible into Common Stock at $37.20 per share and it may be called for conversion after April 26, 2001, provided the price of Common Stock reaches certain levels and after April 26, 2002, subject to a market-based call premium. The cash portion of the purchase price was funded through borrowings under the Credit Facility. 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. 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. 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. Additionally, ElderTrust has funded approximately $14,400,000 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 Credit Facility with the proceeds from these transactions. In September 1998, the Company sold its leasehold rights and option to purchase seven eldercare facilities acquired in its November 1993 acquisition of Meridian Healthcare, Inc. to ElderTrust for $44,000,000, including $35,500,000 in cash and an $8,500,000 note. As part of the transaction, Genesis will continue to sublease the facilities for ten years with an option to extend the lease until 2018 at an initial annual lease obligation of approximately $10,000,000. The transaction resulted in a gain of approximately $43,700,000 which has been deferred and is being amortized over the ten year lease term of the lease contracts with ElderTrust. The Company also anticipates entering into transactions with ElderTrust in the future. 16 Credit Facility and Senior Subordinated Notes Genesis entered into a credit agreement pursuant to which the lenders provided Genesis and its subsidiaries a credit facility totaling $1,250,000,000 (the "Credit Facility") for the purpose of: refinancing and funding interest and principal payments of certain existing indebtedness; funding permitted acquisitions; funding Genesis' commitments in connection with the Vitalink Transaction; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of the transactions. The Credit Facility consists of three term loans with original balances of $200,000,000 each (collectively, the "Term Loans"), and a $650,000,000 revolving credit loan (the "Revolving Facility"). The Term Loans amortize in quarterly installments through 2005, of which $21,419,000 is payable in Fiscal 1999. The Term Loans consist of (i) a six year term loan with an outstanding balance of $121,398,000 at June 30, 1999 (the "Tranche A Term Facility"); (ii) a seven year term loan with an outstanding balance of $152,909,000 at June 30, 1999 (the "Tranche B Term Facility"); and (iii) an eight year term loan with an outstanding balance of $152,545,000 at June 30, 1999 (the "Tranche C Term Facility"). The Revolving Facility becomes payable in full on September 30, 2003. The third amendment to the Credit Facility, dated December 15, 1998, made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of subordinated debt offerings to repay indebtedness under the Revolving Facility and increased the interest rates applying to the Term Loans and the Revolving Facility. The Credit Facility is secured by a first priority security interest in all of the stock, partnership interests and other equity of all of Genesis' present and future subsidiaries (including Genesis ElderCare Corp.) other than the stock of Multicare and its subsidiaries. Loans under the Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. Loans under the Tranche A Term Facility and Revolving Facility have an Annual Applicable Margin of .75% for Prime Rate loans and 2.50% for LIBO Rate loans (an effective rate of 7.82% at June 30, 1999). Loans under the Tranche B Term Facility have an Annual Applicable Margin of 1.25% for Prime Rate loans and 3.00% for LIBO Rate loans (an effective rate of 8.32% at June 30, 1999). Loans under the Tranche C Term Facility have an Annual Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans (an effective rate of 8.57% at June 30, 1999). Subject to meeting certain financial ratios, the above referenced interest rates are reduced. The Credit Facility contains a number of covenants that, among other things, restrict the ability of Genesis and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Genesis and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; causes Genesis and its affiliates to maintain the Management Agreement, the Put/Call Agreement, as defined, 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. 17 On August 20, 1999, the Company entered into an amendment of the Credit Facility. The amendment establishes less restrictive financial covenant requirements through the remaining term of the agreement, increases the Annual Applicable Margin and provides the lenders of the Credit Facility a collateral interest in certain real and personal property of the Company. Additionally, the amendment provides for $40,000,000 of additional borrowing capacity, subject to the satisfaction of certain conditions. The amended Annual Applicable Margin is expected to increase the Company's effective interest rate .75% for Prime Rate and LIBO Rate loans under the Tranche A Term Facility and Revolving Facility and .50% for Prime Rate and LIBO Rate loans under the Tranche B and Tranche C Term Facilities. In December 1998, the Company issued $125,000,000, 9 7/8% Senior Subordinated Notes due 2009, at a price of 96.1598% resulting in net proceeds of $120,200,000. Interest on the notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1999. Approximately $59,900,000 of the net proceeds were used to repay portions of the Tranche A, B and C Term Facilities and approximately $59,900,000 of the net proceeds were used to repay a portion of the Revolving Facility. The Multicare Transaction and Proposed Revision to the Joint Venture 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, TPG or Nazem; and 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. 18 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, dated October 9, 1997, by and among the Company, Genesis ElderCare Corp., Cypress, TPG and Nazem, 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 Credit Facility. On August 2, 1999, the Company reached an agreement in principle with Cypress and TPG its co-investor partners in Genesis ElderCare Corp., to simplify the joint-venture structure, accelerate the integration of Genesis and Multicare, and strengthen the financial position of both Genesis and Multicare. Under the agreement in principle, Cypress and TPG will invest $50,000,000 into Genesis in exchange for 12,500,000 newly issued common shares and 2,000,000 warrants to purchase common shares with a $5.00 exercise price. In addition, Cypress and TPG will terminate their right to put their 56% equity interest in Genesis ElderCare Corp. to Genesis in exchange for a newly issued convertible preferred stock in Genesis with a $420,000,000 principal amount, a 5% dividend rate (payable in kind for the first five years) and a conversion price of $8.75 per share. The conversion price represents a 153% premium to the 20 day average trading price of Genesis common stock at the signing of the agreement in principle. Following completion of this transaction, Genesis will consolidate the results of Multicare for financial reporting purposes. After making the $50,000,000 investment, Cypress and TPG will each own approximately 11% of Genesis. On a fully-diluted basis, assuming conversion of the convertible preferred stock, Cypress and TPG will each own approximately 29% of Genesis. The agreement in principle provides that Cypress and TPG will each have the right to vote a maximum of 17.5% of the voting rights of Genesis. Cypress and TPG will each designate one member to the Genesis Board of Directors, increasing the total membership to nine. The transaction is subject to, among other things, regulatory approval, definitive documentation and Genesis shareholder approval. There can be no assurances that the Company will be able to satisfy the conditions to the proposed transaction. Legislative and Regulatory Issues 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 or other providers. There can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on the Company. 19 Pursuant to the Balanced Budget Act of 1997 (the "Balanced Budget Act") commencing with cost reporting periods beginning on July 1, 1998, PPS began to be phased in for skilled nursing facilities at 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 when a beneficiary who is a resident of a skilled nursing facility receives covered skilled nursing facility care. The consolidated per diem rate is adjusted based upon a resource utilization group. In addition to covering skilled nursing facility services, this consolidated payment will also cover rehabilitation and non-rehabilitation ancillary services. Physician services, certain nurse practitioner and physician assistant services, among others, are not included in the per diem rate. 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 Balanced Budget Act also required consolidated billing for skilled nursing facilities. Under the Balanced Budget Act, 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, even if such services were provided by outside suppliers. 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. Although consolidated billing was scheduled to begin July 1, 1998 for all services, it has been delayed until further notice for beneficiaries in a Medicare Part A stay in a skilled nursing facility not yet using PPS and for the Medicare Part B stay. There can be no assurance that the Company will be able to provide skilled nursing services at a cost below the established Medicare level. Effective April 10, 1998, regulations were adopted by the Health Care Financing Administration ("HCFA"), which revise the methodology for determining the reasonable cost for contract therapy services, including physical therapy, respiratory therapy, occupational therapy and speech language pathology. Under the regulations, the reasonable costs for contract therapy services are limited to geographically-adjusted salary equivalency guidelines. However, the revised salary equivalency guidelines will no longer apply when the PPS system applicable to the particular setting for contract therapy services (e.g. skilled nursing facilities, home health agencies, etc.) goes into effect. The Balanced Budget Act also repealed the Boren Amendment federal payment standard for Medicaid payments to Medicaid nursing facilities effective October 1, 1997. The Boren Amendment required Medicaid payments to certain healthcare providers to be reasonable and adequate in order to cover the costs of efficiently and economically operated healthcare facilities. States must now use a public notice and comment period in order to determine rates and provide interested parties a reasonable opportunity to comment on proposed rates and the justification for and the methodology used in calculating such rates. There can be no assurance that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to nursing facilities and pharmacies or that payments to nursing facilities and pharmacies will be made on timely basis. The law also grants greater flexibility to states to establish Medicaid managed care projects without the need to obtain a federal waiver. Although these waiver projects generally exempt institutional care, including nursing facilities and institutional pharmacy services, no assurances can be given that these projects ultimately will not change the reimbursement system for long-term care, including pharmacy services from fee-for-service to managed care negotiated or capitated rates. The Company anticipates that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies. In July 1998, the Clinton Administration issued a new initiative to promote the quality of care in nursing homes. This initiative includes, but is not limited to (i) increased enforcement of nursing home safety and quality regulations; (ii) increased federal oversight of state inspections of nursing homes; (iii) prosecution of egregious violations of regulations governing nursing homes; (iv) the publication of nursing home survey results on the Internet; and (v) continuation of the development of the Minimum Data Set, a national automated clinical data system. Accordingly, with this new initiative, it may become more difficult for eldercare facilities to maintain licensing and certification. The Company may experience increased costs in connection with maintaining its licenses and certifications as well as increased enforcement actions. In addition, beginning January 1, 1999, outpatient therapy services furnished by a skilled nursing facility to a resident not under a covered Part A stay or to non-residents who receive outpatient rehabilitation services will be paid according to the Medicare Physician Fee Schedule. 20 Under PPS, the reimbursement for certain speech, occupational, physical and respiratory therapy services provided to nursing facility patients is a component of the total reimbursement to the nursing facility allowed per patient. Medicare reimburses the skilled nursing facility directly for all rehabilitation services and the outside suppliers of such services to residents of the skilled nursing facility must collect payment from the skilled nursing facility. Under PPS, a per provider limit of $1,500 applies to all rehabilitation therapy services provided under Medicare Part B ($1,500 for physical and speech-language pathology services, and a separate $1,500 for occupational therapy services). Additionally, Medicare Part B therapy services are no longer being reimbursed on a cost basis; rather, payment for each service provided is based on fee screen schedules published in November 1998. As a result of the implementation of PPS, the Company has to date experienced a substantial reduction in demand for, and reduced operating margins from, therapy services it provides to third parties, because such providers are admitting fewer Medicare patients and are reducing utilization of rehabilitation services. On July 30,1999, HCFA issued the Final Rule and Notice for Prospective Payment Regulations. The final rule was not significantly different from the interim final rule previously published. The final rule provides for an effective inflation adjustment of 1.9%, which, along with a change to the prospective payments rates, results in an estimated increase to the Federal portion of the rate of approximately $5.50 per Medicare patient day effective at the next scheduled update of skilled nursing facility prospective payment rates which generally for Genesis is October 1, 1999. The estimated increase in the Medicare rate assumes no change in Medicare patient acuity. The Company estimates Medicare revenue per patient day in its Genesis Centers will decline as a result of PPS in Fiscal 2000, to $285, due to further blending of the federal rate and the facility specific rate. The Company estimates that its Medicare revenue per patient day in the Multicare centers will decline as a result of PPS in Fiscal 2000 to $290. The Genesis eldercare centers began implementation of PPS on October 1, 1998 and the majority of the Multicare eldercare centers began implementation of PPS on January 1, 1999. The actual impact of PPS on the Company's earnings in future periods will depend on many variables which can not be quantified at this time, including regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, ability to reduce costs and growth of ancillary business. Other 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. Operating cash flow will depend upon the Company's ability to effect cost reduction initiatives and to continue to reduce its investment in working capital. The Company believes that operating cash flow which is expected to be augmented by planned refinancing transactions, will be sufficient to meet its future obligations. 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. 21 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. See "Cautionary Statements Regarding Forward Looking Statements." Year 2000 Compliance The Company has implemented a process to address its Year 2000 compliance issues. The process includes (i) an inventory and assessment of the compliance of the essential systems and equipment of the Company and of Year 2000 mission critical suppliers, customers, and other third parties, (ii) the remediation of non-compliant systems and equipment, and (iii) contingency planning. The Company is in the process of conducting its inventory, assessment and remediation of its information technology ("IT") systems and equipment and non-IT systems and equipment (embedded technology) and has completed approximately 96% of its internal inventory and assessment and approximately 80% of the systems and equipment of critical suppliers, customers and other third parties. With respect to the Year 2000 compliance of critical third parties, the Company derives a substantial portion of its revenues from the Medicare and Medicaid programs. Congress' General Accounting Office ("GAO") concluded in September 1998 that it would be highly unlikely that all Medicare systems will be compliant on time to ensure the delivery of uninterrupted benefits and services into the Year 2000. While the Company does not receive payments directly from Medicare, but from intermediaries, the GAO statement is interpreted to apply as well to these intermediaries. In 1998, the HCFA Administrator asserted that all systems necessary to make payments to fiscal intermediaries would be compliant. The Administrator provided further assurance that intermediary systems would also be compliant well in advance of the deadline. Additionally, most intermediaries have reported to the Company that they are either already compliant or will be prior to the end of 1999. Nonetheless, the Company intends to actively confirm the Year 2000 readiness status for each intermediary and to work cooperatively to ensure appropriate continuing payments for services rendered to all government-insured patients. The Company is remediating its critical IT and non-IT systems and equipment. The Company has also begun contingency planning in the event that essential systems and equipment fail to be Year 2000 compliant. The Company is planning to be Year 2000 complaint for all its essential systems and equipment by October 31, 1999, although there can be no assurance that it will achieve its objective by such date or by January 1, 2000, or that such potential non-compliance will not have a material adverse effect on the Company's business, financial condition or results of operations. In addition there can be no assurance that all of the Company's critical suppliers and other third parties will be Year 2000 complaint by January 1, 2000, or that such potential non-compliance will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company currently estimates that its aggregate costs directly related to Year 2000 compliance efforts will be approximately $1,600,000, of which approximately $1,000,000 has been spent through June 30, 1999. The Company's Year 2000 efforts are ongoing and its overall plan and cost estimations will continue to evolve, as new information becomes available. The Company's analysis of its Year 2000 issues is based in part on information from third party suppliers; there can be no assurance that such information is accurate or complete. 22 The failure of the Company or third parties to be fully Year 2000 compliant for essential systems and equipment by January 1, 2000 could result in interruptions of normal business work operations. The Company's potential risks include (i) the inability to deliver patient care related services in the Company's facilities and / or in non-affiliated facilities, (ii) the delayed receipt of reimbursement from the Federal or State governments, private payors, or intermediaries, (iii) the failure of security systems, elevators, heating systems or other operational systems and equipment of the Company's facilities and (iv) the inability to receive critical equipment and supplies from vendors. Each of these events could have a material adverse affect on the Company's business, results of operations and financial condition. Contingency plans for the Company's Year 2000-related issues continue to be developed and include, but are not limited to, identification of alternate suppliers, alternate technologies and alternate manual systems. The Company is planning to have contingency plans completed for essential systems and equipment by October 31, 1999; however, there can be no assurance that it will meet this objective by such date or by January 1, 2000. The Year 2000 disclosure set forth above is intended to be a "Year 2000 Statement" as such term is defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure relates to Year 2000 processing of the Company or to products or services offered by the Company, is also intended to be "Year 2000 Readiness Disclosure" as such term is defined in the Year 2000 Act. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") 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 April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("Statement 98-5"). Statement 98-5 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 businesses in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. Statement 98-5 is effective for fiscal years beginning after December 15, 1998 or the Company's fiscal year ending September 30, 2000. The Company currently estimates the adoption of Statement 98-5 will result in a charge of approximately $3,500,000, net of tax, which will be recorded as a cumulative effect of a change in accounting principle. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company intends to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of interest rate changes. In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates. The Company's objective in managing its exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. Notional amounts of interest rate swap agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates. The estimated amount the Company would pay to terminate its interest rate swap agreements outstanding at June 30, 1999 is approximately $25,500,000. 24 PART II: OTHER INFORMATION Item 1. Legal Proceedings On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services (d\b\a NeighborCare sm), a subsidiary of Genesis, filed multiple lawsuits requesting injunctive relief and compensatory damages against HCR Manor Care, Inc. and two of its subsidiaries and principals. The lawsuits arise from HCR Manor Care's threatened termination of two long term pharmacy services contracts effective June 1, 1999. Vitalink filed a complaint against HCR Manor Care and two of its subsidiaries in Baltimore City, Maryland circuit court. Genesis filed a complaint against HCR Manor Care and two of its subsidiaries and principals in federal district court in Delaware including, among other counts, securities fraud. Vitalink has also instituted an arbitration action in Maryland. Vitalink is seeking an injunction preventing HCR Manor Care's threatened termination of two of its long term pharmacy service contracts and a declaration that it has a right to provide pharmacy, infusion therapy and related services to all HCR Manor Care's facilities. Genesis and Vitalink seek over $100 million in compensatory damages and enforcement of a 10-year non-competition clause. Genesis acquired Vitalink from Manor Care in August 1998. In 1991, Vitalink and Manor Care entered into long term master pharmacy agreements which gave Vitalink the right to provide pharmacy services to all facilities owned or licensed by Manor Care and its affiliates. In 1998, the terms of the pharmacy service agreements were extended to September, 2004. Under the two master service agreements, Genesis and Vitalink receive revenues at the rate of approximately $100 million per year. By agreement dated May 13, 1999, the parties agreed to consolidate the Maryland State Court Claims relating to the master service agreements with the Arbitration matter. Until such time as a final decision is rendered in said Arbitration, the parties have agreed to maintain the master service agreements in full force and effect. Genesis still maintains its Delaware federal court complaint. On July 26, 1999, NeighborCare, through its Maryland counsel, filed an additional complaint against Omnicare Inc. and Heartland Healthcare (a joint venture between Omnicare and HCR Manor Care) seeking injunctive relief and compensatory and punitive damages. The complaint includes counts for tortious interference with Vitalink's contractual rights under its three exclusive long term service contracts with HCR Manor Care. Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable 25 Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- Number Description ------ ----------- 10.1 Letter of Intent dated August 2, 1999 regarding an understanding among Genesis Health Ventures, Inc. ("Genesis"), The Cypress Group L.L.C., a Delaware limited liability Company ("Cypress") and TPG Partners II, L.P., a Delaware limited partnership ("TPG" and together with Cypress and Nazem, Inc., the "Sponsors") relating to a restructuring of the joint venture investment in Genesis ElderCare Corp., a Delaware corporation ("Parent"), and related transactions. 27 Financial Data Schedule (b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K dated August 2, 1999 reporting that it reached an agreement in principle with The Cypress Group and Texas Pacific Group related to the restructuring of the Multicare joint venture. The Current Report on Form 8-K does not include financial statements. 26 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 20, 1999 /s/ George V. Hager, Jr. ------------------------------------ George V. Hager, Jr. Executive Vice President and Chief Financial Officer 27 EX-10.1 2 EXHIBIT 10.1 Letter of Intent August 2, 1999 Genesis Health Ventures, Inc. 101 East State Street Kennett Square, PA 19348 Gentlemen, This letter of intent, upon your execution, will confirm the understanding among Genesis Health Ventures, Inc., a Pennsylvania corporation ("Genesis"), The Cypress Group L.L.C., a Delaware limited liability company ("Cypress") and TPG Partners II, L.P., a Delaware limited partnership ("TPG", and together with Cypress and Nazem, Inc., the "Sponsors") relating to a restructuring of our joint investment in Genesis ElderCare Corp., a Delaware corporation ("Parent"), and related transactions (the "Transactions"). 1. Amendment of Put/Call Agreement. At the closing of the Transactions (the "Closing"), the put option under the Put/Call Agreement, dated October 9, 1997 (the "Put/Call Agreement"), among the parties hereto and Nazem, Inc. shall be terminated and other modifications to the Put/Call Agreement reasonably satisfactory to the parties shall become effective. In consideration for the cancellation of the put option under the Put/Call Agreement, Genesis will issue to the Sponsors at the Closing, in proportion to their respective investments in Parent, securities as contemplated by Exhibits A and B. 2. Investment in Genesis. At the Closing, Genesis shall sell to each of Cypress and TPG, and each of Cypress and TPG shall purchase from Genesis for a purchase price of $25 million, 6.25 million shares of common stock, par value $.01 per share ("Genesis Common Stock") of Genesis, and warrants to purchase 1 million shares of Genesis Common Stock (or an aggregate of 12.5 million shares of Genesis Common Stock and warrants to purchase 2 million shares of Genesis Common Stock for an aggregate purchase price of $50 million). The warrants shall have a term of 10 years, contain customary dilution protection and be exercisable at any time in whole or in part. The exercise price for the warrants shall be $5.00 per share and shall be paid in cash. 2 3. Registration Rights. Holders of the common stock and warrants referenced in Section 2 and holders of the securities described or referenced in Exhibits A and B will have customary registration rights with respect to such securities, including an unlimited number of piggyback registration rights and 5 demand registration rights. In connection with such registration rights, Genesis will agree to pay all customary registration expenses (which shall not include underwriting discounts and commissions). Demand registration rights shall include the right to have securities registered on a shelf registration statement pursuant to Rule 415 under the Securities Act of 1933. Registration right demands may be made by Cypress or TPG or their affiliated investment funds or by any holder or holders of registrable securities (including the securities issuable upon conversion, exercise or exchange of such registrable securities) representing more than 50% of the shares of common stock of Genesis that are then registrable securities and the shares of common stock of Genesis then issuable upon conversion, exercise or exchange of registrable securities. No registration right demand may be made for registrable securities unless such registrable securities have a market value as of the date of the demand equal to at least $25 million or constitute all of the registrable securities held by the holder or holders making the demand. In addition, no registration right demand may be made for registrable securities other than common stock of Genesis prior to the 270th day following the first issuance of registrable securities. 4. Election of Directors. Beginning immediately prior to Closing and continuing for so long as Cypress and TPG or their affiliated investment funds own any combination of voting securities of the Company and securities convertible into voting securities of the Company where all such voting securities represent more than 10% of the Company's total voting power, Cypress and TPG, acting jointly (or in the event that only one of Cypress and TPG shall then own or have the right to acquire shares of Genesis Common Stock, then such Sponsor), shall be entitled to designate a number of directors representing at least 23% of the total number of directors constituting the full board of directors of Genesis; provided, that for so long as the total number of directors constituting the full board of directors of Genesis is 9 or fewer, Cypress and/or TPG, as the case may be, shall only be entitled to designate two directors on the board of directors of Genesis. For purposes of this Section 4, the Series I Preferred Stock and the securities issuable upon conversion of the Series I Preferred Stock shall be considered voting securities. Each committee of the board of directors of Genesis shall include at least one director designated as provided above; provided, that this requirement shall not apply with respect to the appointment of any particular designee to a committee in the event that the rules or regulations of the primary exchange or quotation system on which Genesis's common stock is then listed or quoted prohibits the appointment of such director to such committee. The foregoing provisions shall be reflected in the certificate of designations relating to the Series H Preferred Stock. 5. Additional Voting Rights. The definitive documentation relating to the Transactions shall provide that for so long as Cypress and/or TPG shall have the right to designate directors on the board of directors of Genesis, Genesis shall not, without the consent of the at least two of such directors: (i) modify the terms of Genesis's Series G Cumulative Convertible Preferred Stock; or (ii) enter into any transaction or series of transactions which would constitute a change in control, as such phrase is defined for purposes of Genesis's senior subordinated indebtedness, or engage in any "going private" transaction pursuant to Rule 13e-3 under the Securities Exchange Act of 1934. 3 6. Pre-emptive Rights. Cypress and TPG shall each have a pro rata right, based on the number of shares of common stock of Genesis held by them and the number of shares of common stock of Genesis issuable upon exercise, conversion or exchange of other securities held by them, to participate in acquiring shares of Genesis capital stock and securities exchangeable, convertible or exercisable for shares of Genesis capital stock issued by Genesis; provided, that Cypress and TPG shall not have such right in connection with (i) sales of securities in underwritten public offerings, (ii) sales of warrants offered in connection with sales of debt securities pursuant to Rule 144A under the Securities Act of 1933, (iii) the issuance of securities in exchange for assets or all of the stock of another company (whether by merger, exchange or otherwise), (iv) issuances and sales of securities to employees and directors pursuant to benefit plans and (v) issuances and sales of securities in connection with joint ventures or other strategic relationships relating to a Healthcare Related Business (as such phrase is defined for purposes of Genesis's senior subordinated indebtedness); provided, that in the case of clause (v) the securities issued in connection with any joint venture or strategic relationship or any series of related joint ventures or strategic relationships do not represent more than 5% of the total voting power of Genesis. 7. Standstill. The definitive documentation relating to the Transactions shall provide that Cypress and TPG shall agree to customary standstill provisions; provided, that such restrictions shall terminate if: (i) the board of directors of Genesis approves a transaction with any "person" (as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) and such transaction would result in such person beneficially owning securities representing more than 35% of the total voting power of Genesis or all or substantially all of its assets, (ii) any person (other than Genesis in the case of an exchange offer) shall have commenced a tender or exchange offer for voting securities of Genesis or securities exchangeable, convertible or exercisable for voting securities of Genesis where all such voting securities represent more than 35% of the total voting power of Genesis or (iii) Cypress and TPG no longer have the right to designate directors on the board of directors of Genesis as contemplated by Section 4. 8. Stockholders Agreement. Effective as of the Closing, the Stockholders Agreement, dated as of October 9, 1997, among Parent, the parties hereto and Nazem, Inc., shall be amended to provide that Genesis may appoint two-thirds of the members of the Board of Directors of Parent, to make appropriate changes to the supermajority provisions and to permit Sponsors to sell their stock of Parent. 4 9. Irrevocable Proxy. The definitive documentation relating to the Transactions shall provide that each Sponsor and its affiliated investment funds owning securities of Genesis described or referenced in Section 2 and Exhibit A and B shall give to Genesis an irrevocable power of attorney directing Genesis to cast for, against or as an abstention, in the same proportion as the other voting securities of Genesis (including the voting securities of Genesis cast by the Sponsors) are cast, such number of shares of common stock and preferred stock of Genesis so that the Sponsors do not have the right to vote more than 35% of the total voting power of Genesis in connection with any vote in which the holders of common stock of Genesis are entitled to vote generally by virtue of their ownership of such securities; provided, that such power of attorney shall terminate upon the existence of circumstances that result in a termination of the standstill. Prior to each vote of securityholders of Genesis in which the holders of common stock of Genesis are entitled to vote generally, each of the Sponsors and their affiliated investment funds having the right to vote voting securities of Genesis shall deliver to Genesis a true and correct certificate setting forth the number and type of securities which it has the right to vote. The votes held by each Sponsor and its affiliated investment funds shall be reduced pro rata. 10. Representation and Warranties. (a) In the definitive documentation regarding the Transactions, Genesis shall make customary representations and warranties, including representations and warranties regarding the following: (i) organization and good standing; (ii) capitalization; (iii) issuance of securities and securities issuable upon conversion, exercise or exchange or in payment of dividends; (iv) authority relative to definitive agreements; (v) no conflicts; required filings, consents and approvals; (vi) SEC reports and financial statements; (vii) listing of Genesis Common Stock; (viii) rights plan amended to allow Transactions; (ix) state takeover statutes and other antitakeover provisions contained in constituent documents not applicable to Transactions; and (x) offering of securities not in violation of the Securities Act of 1933. 5 (b) In the definitive documentation regarding the Transactions, Sponsors shall make customary representations and warranties, including representations and warranties regarding the following: (i) organization, standing and power; (ii) authority relative to definitive agreements; (iii) no conflicts; required filings and consents; and (iv) purchase for investment. 11. Conditions. (a) The definitive documentation regarding the Transactions shall provide for customary conditions of the parties' obligation to close, including the following: (i) no injunctions or restraints; (ii) required filings and consents (including regulatory, shareholder and third party consents and termination of the HSR waiting period), other than as contemplated under Section 11(b)(x); (iii) receipt of waivers from Genesis's senior lenders and amendment to Genesis's senior credit facility, in each case reasonably acceptable to Cypress and TPG; and (iv) receipt of waivers from The Multicare Companies, Inc.'s senior lenders and amendment to The Multicare Companies, Inc.'s senior credit facility, in each case reasonably acceptable to Cypress and TPG. (b) The definitive documentation regarding the Transactions shall provide that the Sponsors' obligation to close shall be further conditioned on customary conditions, including the following: (i) consent of Cypress's limited partners; (ii) listing of Genesis Common Stock; (iii) customary opinions of Genesis's counsel; (iv) representations and warranties of Genesis being true and correct in all material respects when given and at closing; (v) reasonable satisfaction with corporate and other proceedings; 6 (vi) Genesis shall have taken appropriate actions (including filing certificates of designation and amending its articles of incorporation) to issue or prepare for the issuance of the securities described or referenced in Section 2 and Exhibits A and B and to effect the other provisions and agreements contemplated hereby; (vii) no change of control (as defined for purposes of Genesis's senior subordinated indebtedness) of Genesis shall have occurred; (viii) no material breach of covenants by Genesis; (ix) no material adverse change in the business, properties, operations or financial condition of Genesis; and (x) regulatory consents in connection with the disposition by Sponsors of their stock in Parent in one or more transactions satisfactory to Sponsors. (c) The definitive documentation regarding the Transactions shall provide that the Genesis's obligation to close shall be further conditioned on customary conditions, including the following: (i) representations and warranties of Sponsors being true and correct in all material respects when given and at Closing; and (ii) no material breach of covenants by Sponsors. (d) The parties' obligations hereunder shall be subject to the negotiation, execution and delivery of definitive documentation satisfactory in form and substance to the parties, including without limitation, documentation reflecting modifications to the Put/Call Agreement reasonably satisfactory to the parties. 12. Covenants. (a) In the definitive documentation regarding the Transactions, Genesis shall agree to customary covenants, including covenants relating to: (i) reasonable best efforts to consummate the Transactions, including reasonable best efforts to obtain all necessary consents and approvals (including regulatory, shareholder and third party consents and termination of the HSR waiting period); (ii) presentation and recommendation of proposals to shareholders necessary to consummate the Transactions; 7 (iii) prior to Closing and subject to reasonable exceptions (including exceptions related to consummation of the Transactions), (A) Genesis will conduct its business only in the ordinary course consistent with past practice, (B) no transaction described in clause (ii) of Section 5; (C) no issuance, or split, combination or reclassification of, capital stock; (D) no dividends or distributions on Genesis Common Stock; and (E) no amendments to Genesis's charter or by-laws; (iv) no acts or omissions materially impairing Genesis's ability to consummate the Transactions or causing a condition not to be satisfied; (v) advising Sponsors of any change, development or condition that may materially impair Genesis's ability to consummate the Transactions or cause a condition not to be satisfied; (vi) public announcements; (vii) reservation of securities issuable upon conversion, exchange or exercise; (viii) filing of certificates of designation and amendment to Genesis's articles of incorporation; (ix) provision of information, including provision of information sufficient to permit sales of securities under Rule 144 under the Securities Act of 1933; (x) if the Closing occurs, payment of Sponsors' expenses (including fees and expenses of professional advisors) not to exceed $1,000,000; (xi) publicity; and (xii) no amendment to Genesis's articles of incorporation, by-laws, shareholder rights agreement or other constituent document in a manner adverse to Sponsors (other than in a manner that affects the Sponsors the same as other shareholders of Genesis). (b) In the definitive documentation regarding the Transactions, Sponsors shall agree to customary covenants, including covenants relating to: (i) reasonable best efforts to consummate the Transactions; (ii) no affirmative acts materially impairing Sponsors' ability to consummate the Transactions; 8 (iii) public announcements; and (iv) publicity. (c) In the definitive documentation regarding the Transactions, each Sponsor shall also covenant that (i) for so long as the standstill is in effect, it will not sell voting securities of Genesis to: (A) any person in a transaction or a series of transactions where such voting securities, together with any other voting securities known by such Sponsor to have been sold to such person by any other Sponsor, represent more than 15% of Genesis's total voting power or (B) to any "competitor" of Genesis, except, in any case, in an underwritten public offering or in a transaction approved by Genesis's board of directors; and (ii) it will give notice to Genesis of any transfer of securities acquired in connection with the Transactions, including the name of the transferee and whether it believes the transferee and the selling Sponsor are a "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934). For purposes of clause (i)(B), "competitor" shall mean any person which derives more than $500 million in revenues from the operation of long-term care facilities and/or institutional pharmacy sales; provided, that any person which derives more than $200 million in revenues from the operation of long-term care facilities and/or institutional pharmacy sales solely within one of two markets in which Genesis then operates (as most recently reported by Genesis in its filings with the Securities and Exchange Commission) shall be a "competitor". 9 13. Indemnification. The definitive documentation relating to the Transactions shall provide for: (a) the reciprocal indemnification between Genesis and Sponsors for breaches of representations and warranties and breaches of covenants; provided, that Sponsors' ability to recover in respect of any breach of the representation and warranty set forth in Section 10(a)(vi) or the covenants set forth in Sections 12(a)(i), (iv), (v), (vi), (x) and (xi) and Genesis's ability to recover in respect of any breech of the covenants set forth in Sections 12(b)(i), (ii), (iii) and (iv) shall be limited to $50 million; (b) indemnification of Sponsors' designees to Genesis's board of directors to the fullest extent permitted by law (consistent with the indemnification of Genesis's other directors); and (c) indemnification of Sponsors in connection with the Transactions (other than in respect of losses arising out of (i) losses of value of the Sponsors' investments, (ii) claims by the limited partners in Sponsors' affiliated investment funds and (iii) tax consequences of the Transactions). 14. Termination. This letter of intent may be terminated and the Transactions may be abandoned or terminated (a) at any time by mutual agreement of Genesis, Cypress and TPG, (b) at the option of Genesis, on the one hand, and Cypress and TPG, on the other hand, if definitive documentation relating to the Transactions shall not have been executed by August 31, 1999. The provisions of Sections 14, 16 and 19 shall survive any termination of this letter of intent or abandonment or termination of the Transactions. 15. Ordinary Course. Prior to the execution of the definitive documentation relating to the Transactions, Genesis shall operate its business only in the ordinary course consistent with past practice and shall not enter into, or enter into any agreement or make any commitment with respect to, any extraordinary transaction, in any case, without the prior written consent of Cypress and TPG or except as, and upon the terms, disclosed in writing to Cypress and TPG prior to the date hereof. 16. Publicity. Each party shall promptly advise and cooperate with the other before issuing any press release or other information to the public with respect to the Transactions; provided, that nothing shall prohibit any disclosure that may be required by law, regulation or legal or judicial process or the rules of any securities exchange. 10 17. Disclosure. Genesis agrees to promptly furnish the Sponsors with all financial and other information concerning Genesis and related matters, and access to personnel of Genesis, which the Sponsors may reasonably request. Genesis will notify the Sponsors promptly of any material adverse change in the business, properties, operations or financial condition of Genesis. 18. Definitive Documentation; Reasonable Best Efforts. Promptly after the execution of this letter of intent, counsel for the Sponsors and Genesis shall prepare the definitive documentation which shall contain provisions consistent with this letter of intent and such further terms and conditions as are customary in documentation of such type or as may otherwise be mutually agreeable to the parties. The parties shall cooperate and use their reasonable best efforts to negotiate and execute the definitive documentation as soon as practical after the date hereof. 19. Miscellaneous. This letter of intent shall be governed by, and construed in accordance with, the laws of the State of New York. This letter of intent contains the entire agreement among the parties relating to the subject matter hereof. This letter of intent may not be amended or modified except by a written document which shall be executed by each of the parties hereto. This letter of intent is solely for the benefit of the parties hereto, and no other person shall acquire or have any rights under or by virtue of this letter of intent. This letter of intent may not be assigned by any of the parties hereto; provided, that the Sponsors may assign their rights and obligations under this letter of intent, and the definitive documentation relating to the Transactions shall provide that the Sponsors may assign their rights and obligations thereunder, to their respective affiliated investment funds; provided, further, that, in connection with any such assignment, TPG Partners II, L.P., Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P. shall remain liable for such obligations. Each party also agrees that unless and until definitive documentation with respect to the Transactions has been executed and delivered, the parties hereto shall have no legal obligation of any kind whatsoever with respect to the Transactions by virtue of this letter or any other written or oral expression with respect to the Transactions, except for the matters specifically agreed to in Sections 14 through 19, inclusive, hereof. This letter of intent may be executed in counterparts, each of which will be deemed an original, but all of which taken together will constitute one and the same instrument. [Signatures follow.] S-1 Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate copy of this letter of intent. Very truly yours, THE CYPRESS GROUP L.L.C. By:________________________ Name: Title: TPG PARTNERS II, L.P. By: TPG GenPar II, L.P. By: TPG Advisors II, Inc. By:________________________ Name: Title: Accepted and agreed to as of the date first written above: GENESIS HEALTH VENTURES, INC. By:______________________________ Name: Title: EX-27 3 FINANCIAL DATA SCHEDULE
5 0000874265 GENESIS HEALTH VENTURES 1 US 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 1 14,698,000 24,175,000 457,308,000 56,903,000 65,798,000 606,688,000 775,867,000 151,179,000 2,698,426,000 236,672,000 0 0 6,000 723,000 866,238,000 2,698,426,000 1,408,911,000 1,408,911,000 0 1,215,416,000 75,094,000 9,701,000 85,295,000 23,405,000 10,851,000 12,554,000 0 (2,100,000) 0 (11,278,000) (0.32) (0.32)
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