UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of May 8, 1998: 35,154,917 shares of common stock
TABLE OF CONTENTS
Page
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS...........................................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements..............................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................................12
Part II OTHER INFORMATION
Item 1. Legal Proceedings................................................................22
Item 2. Changes in Securities............................................................22
Item 3. Defaults Upon Senior Securities..................................................22
Item 4 Submission of Matters to a Vote of Security Holders..............................22
Item 5. Other Information................................................................22
Item 6. Exhibits and Reports on Form 8-K.................................................22
SIGNATURES ........................................................................................24
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" such
as statements concerning Medicaid and Medicare programs and the Company's
ability to meet its liquidity needs and control costs, certain statements in
Notes to Condensed Consolidated Financial Statements, such as certain Pro Forma
Financial Information; and other statements contained herein regarding matters
which are not historical facts are forward looking statements (as such term is
defined in the Securities Act of 1933) and because such statements involve risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. Factors that could cause actual
results to differ materially include, but are not limited to those discussed
below:
1. The Company's substantial indebtedness and significant debt service
obligations.
2. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
3. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, implementation of a
Medicare prospective payment system and consolidated billing and other
changes in applicable government regulations that might affect the
profitability of the Company.
4. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and, in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
5. The occurrence of changes in the mix of payment sources utilized by the
Company's customers to pay for the Company's services.
6. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
7. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and
changes in the regulatory system, such as changes in certificate of need
laws in the states in which the Company operates or anticipates operating
in the future that facilitate such competition.
8. The Company's ability to identify suitable acquisition candidates, to
consummate or complete development projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations,
including the proposed acquisition of Vitalink Pharmacy Services, Inc.
These and other factors have been discussed in more detail in the Company's
periodic reports including its Annual Report on Form 10-K/A for the fiscal year
ended September 30, 1997.
1
PART 1: FINANCIAL INFORMATION
Item I. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, September 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and equivalents $ 15,574 $ 11,651
Investments in marketable securities 18,839 14,729
Accounts receivable, net of allowance for doubtful accounts of
$53,085 at March 31, 1998 and $39,418 at September 30, 1997 256,127 205,129
Cost report receivables 63,224 60,865
Inventory 35,778 25,568
Prepaid expenses and other current assets 36,225 26,675
Income taxes receivable -- 7,820
- ----------------------------------------------------------------------------------------------------------
Total current assets 425,767 352,437
- ----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 572,749 578,397
Notes receivable and other investments 99,612 108,714
Other long-term assets 67,120 31,722
Investments in unconsolidated affiliates 330,773 2,887
Goodwill and other intangibles, net 420,991 359,956
- ----------------------------------------------------------------------------------------------------------
Total assets $ 1,917,012 $ 1,434,113
==========================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 136,152 $ 117,234
Income taxes payable 1,586 --
Current installments of long-term debt 27,242 8,273
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 164,980 125,507
- ----------------------------------------------------------------------------------------------------------
Long-term debt 1,057,404 651,667
Deferred income taxes 41,487 37,745
Deferred gain and other long-term liabilities 23,573 11,173
Shareholders' equity:
Common stock, par $.02, authorized 60,000,000 shares,
issued and outstanding 35,153,004 and 35,107,403 at
March 31, 1998; 35,117,075 and 35,071,474 at September 30, 1997 721 702
Additional paid-in capital 453,294 457,232
Retained earnings 175,796 150,330
Treasury stock, at cost (243) (243)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 629,568 608,021
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'equity $ 1,917,012 $ 1,434,113
==========================================================================================================
See accompanying notes to condensed consolidated financial statements
2
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except share and per share data)
Three months
ended March 31,
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
Net revenues:
Basic healthcare services $ 137,033 $ 136,825
Specialty medical services 176,922 124,488
Management services and other, net 30,344 11,950
- -----------------------------------------------------------------------------------------------
Total net revenues 344,299 273,263
- -----------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 143,594 130,395
Other operating expenses 125,544 84,886
General corporate expense 14,139 9,907
Depreciation and amortization 12,667 10,620
Lease expense 7,868 7,244
Interest expense, net 18,688 8,960
- -----------------------------------------------------------------------------------------------
Income before income taxes and equity in net income
of unconsolidated affiliates 21,799 21,251
Income taxes 7,957 7,757
- -----------------------------------------------------------------------------------------------
Income before equity in net income of unconsolidated
affiliates 13,842 13,494
Equity in net income of unconsolidated affiliates 726 --
- -----------------------------------------------------------------------------------------------
Net income $ 14,568 $ 13,494
===============================================================================================
Per common share data:
Basic:
Net income $ 0.42 $ 0.39
Weighted average shares of common stock 35,093,962 34,873,809
- -----------------------------------------------------------------------------------------------
Diluted:
Net income $ 0.41 $ 0.38
Weighted average shares of common stock and equivalents 35,647,451 35,773,885
===============================================================================================
See accompanying notes to condensed consolidated financial statements
3
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Six months
ended March 31,
- ------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
Net revenues:
Basic healthcare services $ 275,049 $ 270,917
Specialty medical services 319,587 238,667
Management services and other, net 52,228 22,223
- ------------------------------------------------------------------------------------------------------------
Total net revenues 646,864 531,807
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 283,948 255,450
Other operating expenses 218,532 165,018
General corporate expense 26,176 19,529
Depreciation and amortization 24,353 20,101
Lease expense 14,511 14,182
Interest expense, net 38,331 18,155
- ------------------------------------------------------------------------------------------------------------
Income before income taxes, equity in net income
of unconsolidated affiliates and extraordinary items 41,013 39,372
Income taxes 14,970 14,370
- ------------------------------------------------------------------------------------------------------------
Income before equity in net income of unconsolidated
affiliates and extraordinary items 26,043 25,002
Equity in net income of unconsolidated affiliates 1,347 -
- ------------------------------------------------------------------------------------------------------------
Income before extraordinary items 27,390 25,002
Extraordinary items, net of tax (1,924) (553)
- ------------------------------------------------------------------------------------------------------------
Net income $ 25,466 $ 24,449
============================================================================================================
Per common share data:
Basic:
Income before extraordinary items $ 0.78 $ 0.74
Extraordinary items (0.05) (0.02)
Net Income $ 0.73 $ 0.72
Weighted average shares of common stock 35,084,965 33,996,555
- ------------------------------------------------------------------------------------------------------------
Diluted:
Income before extraordinary items $ 0.77 $ 0.71
Extraordinary items (0.05) (0.02)
Net Income $ 0.71 $ 0.70
Weighted average shares of common stock and equivalents 35,658,191 35,589,134
============================================================================================================
See accompanying notes to condensed consolidated financial statements
4
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six months ended
March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 25,466 $ 24,449
Adjustments to reconcile net income to
net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes 3,742 3,592
Depreciation and amortization 24,353 20,101
Amortization of deferred gain and debt premium (592) (230)
Equity in net income of unconsolidated affiliates (1,347) -
Extraordinary items, net of tax 1,924 553
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (24,613) (27,363)
Cost reports receivable (2,436) (5,907)
Inventory (2,873) (5,236)
Prepaid expenses and other current assets (6,650) (5,069)
Accounts payable and accrued expenses (1,283) 6,983
Income taxes receivable and payable 9,396 6,522
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments (379) (6,054)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 25,087 18,395
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (24,342) (33,778)
Payments for acquisitions, net of cash acquired (100,929) (233,665)
Investments in unconsolidated affiliates (326,539) -
Net proceeds from the sale of assets 60,555 -
Notes receivable and other investment and asset additions, net (26,977) (11,025)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (418,232) (278,468)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under working capital revolving credit (181,024) 140,783
Repayment of long term debt (9,583) (1,955)
Proceeds from issuance of long-term debt 611,241 125,000
Debt issuance costs (19,648) (3,750)
Purchase of common stock call options (4,442) -
Common stock options exercised 524 1,067
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 397,068 261,145
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 3,923 1,072
Cash and equivalents
Beginning of period 11,651 12,763
End of period $ 15,574 $ 13,835
========================================================================================================================
Supplemental disclosure of cash flow information
Interest paid $ 38,664 $ 14,533
Income taxes paid $ 1,821 $ 6,873
========================================================================================================================
See accompanying notes to condensed consolidated financial statements
5
GENESIS HEATLH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report for the fiscal year ended
September 30, 1997. The information furnished is unaudited but reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial information for the periods shown. Such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results expected for the full year. Certain prior
period balances have been reclassified to conform with the current period
presentation.
2. Sale of Assets
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Subsequently, Genesis
received an additional $14,000,000 from the sale of a loan and two additional
assisted living facilities and the recoupment of amounts advanced and expenses
incurred in connection with the formation of ElderTrust. Additionally,
ElderTrust has funded approximately $13,200,000 of a commitment to finance the
development and expansion of four additional assisted living facilities. Genesis
repaid a portion of the revolving credit component of its bank credit facility
with the proceeds from these transactions. The sale of properties to ElderTrust
resulted in a gain of approximately $12,000,000 which has been deferred and is
being amortized over the ten year term of the lease contracts with ElderTrust.
3. Long-Term Debt
In October 1997, in connection with the Multicare Transaction (defined below),
Genesis entered into a new credit facility with Mellon Bank, N.A., Citicorp
Securities, Inc., Citibank N.A., First Union Capital Markets Corp., First Union
National Bank and NationsBank, N.A. (the "Lenders") pursuant to which the
Lenders provided Genesis and its subsidiaries with loan facilities totaling
$850,000,000 (the "Genesis Bank Financing") for the purpose of refinancing
certain existing indebtedness of Genesis; funding interest and principal
payments on the facilities and certain remaining indebtedness; funding permitted
acquisitions; funding Genesis' commitments in connection with the Merger
(defined below); and funding Genesis' and its subsidiaries' working capital for
general corporate purposes, including fees and expenses of the transactions. The
Genesis Bank Financing facilities consist of three $200,000,000 term loans
(collectively, the "Term Loans"), a $250,000,000 revolving credit loan (the
"Revolving Credit Facility"), which includes one or more Swing Loans
(collectively, the "Swing Loan Facility") in integral principal multiples of
$500,000 up to an aggregate unpaid principal amount of $15,000,000. The Term
Loans amortize in quarterly installments beginning in fiscal 1998 through 2005,
of which $19,000,000 is payable over the next twelve months. The Term Loans
consist of (1) a $200,000,000 six year term loan (the "Tranche A Term
Facility"); (2) a $200,000,000 seven year term loan (the "Tranche B Term
Facility"); and (3) a $200,000,000 eight year term loan (the "Tranche C Term
Facility"). The Revolving Credit Facility becomes payable in full on September
30, 2003.
The Genesis Bank Financing facilities are secured by a first priority security
interest in all of the stock, partnership interests and other equity of all of
Genesis' present and future subsidiaries (including the Genesis Elder Care
Corp.) other than stock of Multicare and its subsidiaries. Loans under the
Genesis Bank Financing bear, at Genesis' option, interest at the per annum Prime
Rate as announced by the administrative agent, or the applicable Adjusted LIBOR.
Loans under the Tranche A Term Facility bear interest at an annual rate equal to
LIBOR plus a margin up to 2.5%, loans under the Tranche B Term Facility bear
interest at an annual rate equal to LIBOR plus a margin up to 2.75%; loans under
the Tranche C Term Facility bear interest at an annual rate equal to LIBOR plus
a margin up to 3.0%; loans under the Revolving Credit Facility bear interest at
a rate equal to LIBOR plus a margin up to 2.5%, and loans under the Swing Loan
Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial covenants, the above referenced
interest rates will be reduced.
6
4. Earnings Per Share
In the first quarter of 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (Statement 128).
Statement 128, which makes the standards for computing earnings per share more
comparable to international standards, replaces the presentation of primary and
fully diluted earnings per share with a presentation of basic and diluted
earnings per share. Statement 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement of all entities
with complex capital structures. The Company has restated its earnings per share
data for the three and six months ended March 31, 1997 to conform to the
provisions of Statement 128 (amounts are in thousands except per share data):
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
------------- ------------ ------------ --------------
Basic Earnings Per Share:
Income before extraordinary items $14,568 $13,494 $27,390 $25,002
Extraordinary items - - (1,924) (553)
------------- ------------ ------------ --------------
Net income $14,568 $13,494 $25,466 $24,449
============= ============ ============ ==============
Weighted average shares 35,094 34,874 35,085 33,997
------------- ------------ ------------ --------------
Earnings per share before extraordinary items $0.42 $0.39 $0.78 $0.74
Earning per share - extraordinary items - - (0.05) (0.02)
------------- ------------ ------------ --------------
Earnings per share $0.42 $0.39 $0.73 $0.72
------------- ------------ ------------ --------------
Diluted Earnings Per Share:
Income before extraordinary items $14,568 $13,494 $27,390 $25,002
Extraordinary items - - (1,924) (553)
------------- ------------ ------------ --------------
Net income $14,568 $13,494 $25,466 $24,449
Adjustments to net income for interest expense,
amortization and other costs related to the
assumed conversion of convertible debentures - - - 303
------------- ------------ ------------ --------------
Adjusted net income $14,568 $13,494 $25,466 $24,752
------------- ------------ ------------ --------------
Weighted Average Shares & Common Stock
Equivalents:
Common shares 35,094 34,874 35,085 33,997
Dilutive effect of unexcercised stock options 553 900 573 712
Convertible debenture shares - - 880
------------- ------------ ------------ --------------
Total 35,647 35,774 35,658 35,589
------------- ------------ ------------ --------------
Earnings per share before extraordinary items $0.41 $0.38 $0.77 $0.71
Earnings per share - extraordinary items - - (0.05) (0.02)
------------- ------------ ------------ --------------
Earnings per share $0.41 $0.38 $0.71 $0.70
7
5. Proforma Financial Information
On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a
wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C. (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"), pursuant
to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October
10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger" or the
"Multicare Transaction") of Acquisition Corp. with and into Multicare in
accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated
as of June 16, 1997, by and among Genesis ElderCare Corp., Acquisition Corp.,
Genesis and Multicare. Upon consummation of the Merger, Multicare became a
wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in the business
of providing eldercare and specialty medical services in selected geographic
regions. Included among the operations acquired by Genesis ElderCare Corp. are
operations relating to the provision of ( i ) eldercare services including
skilled nursing care, assisted living, Alzheimer's care and related support
activities traditionally provided in eldercare facilities, (ii) specialty
medical services consisting of (1) sub-acute care such as ventilator care,
intravenous therapy and various forms of coma, pain and wound management and (2)
rehabilitation therapies such as occupational, physical and speech therapy and
stroke and orthopedic rehabilitation and (iii) management services and
consulting services to eldercare centers.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for
its services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of ( i ) $1,992,000 or (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare are paid by Multicare. Genesis also entered into an asset
purchase agreement (the "Therapy Purchase Agreement") with Multicare and certain
of its subsidiaries pursuant to which Genesis acquired all of the assets used in
Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 subject to adjustment (the "Therapy Purchase") and a stock purchase
agreement (the "Pharmacy Purchase Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis acquired all of the outstanding capital
stock and limited partnership interest of certain subsidiaries of Multicare that
are engaged in the business of providing institutional pharmacy services to
third parties for $50,000,000 subject to adjustment. The Company completed the
pharmacy purchase effective January 1, 1998.
Genesis ElderCare Corp. paid approximately $1,492,000,000 to (i) purchase the
Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
to be incurred in connection with the completion of the Tender Offer, Merger and
the financing transactions in connection therewith, (iii) refinance certain
indebtedness of Multicare and (iv) make certain cash payments to employees. Of
the funds required to finance the foregoing, approximately $745,000,000 were
furnished to Acquisition Corp. as capital contributions by Genesis ElderCare
Corp. from the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis
ElderCare Corp. Common Stock") to Cypress, TPG, Nazem and Genesis. Cypress, TPG
and Nazem purchased shares of Genesis ElderCare Corp. Common Stock for a
purchase price of $210,000,000, $199,500,000 and $10,500,000, respectively, and
Genesis purchased approximately 44% of the commons stock of Genesis ElderCare
Corp. for a purchase price of $325,000,000. The balance of the funds necessary
to finance the foregoing came from (i) the proceeds of loans from a syndicate of
lenders in the aggregate amount of $525,000,000 and (ii) $246,800,000 of
financing upon the completion of the sale of 9% Senior Subordinated Notes due
2007 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997.
8
In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement, to purchase (the "Call") Genesis ElderCare
Corp. Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001
and for a period of 270 days thereafter, at a price determined pursuant to the
terms of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on
the terms and conditions set forth in the Put/Call Agreement, to require Genesis
to purchase (the "Put") such Genesis ElderCare Corp. Common Stock commencing on
October 9, 2002 and for a period of one year thereafter, at a price determined
pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis
ElderCare Corp. Common Stock, plus a portion of the Genesis Pharmacy business
(the "Calculated Equity Value"). The Calculated Equity Value will be determined
based upon a multiple of Genesis ElderCare Corp.'s earnings before interest,
taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR")
after deduction of certain liabilities, plus a portion of the EBITDAR related to
the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend
on whether the Put or the Call is being exercised. Any payment to Cypress, TPG
or Nazem under the Call or the Put may be in the form of cash or Genesis common
stock at Genesis' option.
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common Stock
will be determined on the basis set forth in the Put/Call Agreement which
provides generally for additional Calculated Equity Value of Genesis ElderCare
Corp. to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of
the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress, or
TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited to Cypress',
TPG's or Nazem's share of the Calculated Equity Value based upon a formula set
forth in the terms of the Put/Call Agreement which provides generally for the
preferential return of the stockholders' capital contributions (subject to
certain priorities), a 25% compound annual return on Cypress', TPG's or Nazem's
capital contributions and the remaining Calculated Equity Value to be divided
based upon the proportionate share of the capital contributions of the
stockholders to Genesis ElderCare Corp.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis or an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement and
Management Agreement and to control the sale or liquidation of Genesis ElderCare
Corp. In the event of such sale, the proceeds from such sale will be distributed
among the parties as contemplated by the formula for the Put option exercise
price and Cypress, TPG and Nazem will retain a claim against Genesis for the
difference, if any, between the proceeds of such sale and the put option
exercise price. In the event of a bankruptcy or change of control of Genesis,
the option price shall be payable solely in cash provided any such payment will
be subordinated to the payment of principal and interest under the Genesis Bank
Financing.
The following unaudited pro forma statement of operations information gives
effect to the Multicare Transaction, which was accounted for using the equity
method of accounting and the Therapy Purchase and Pharmacy Purchase, using the
purchase method of accounting as though they had occurred on October 1, 1996,
after giving effect to certain adjustments, including recognition of management
fee income, amortization of goodwill, additional depreciation expense and
increased interest expense on debt related to the transactions. The pro forma
financial information, which includes preliminary allocations of purchase price
to goodwill and property, plant and equipment that are subject to change, does
not necessarily reflect the results of operations that would have occurred had
the transactions occurred at the beginning of period presented
9
(In thousands, except per share data)
Six Months Ended Six Months Ended
Pro Forma Statement of Operations Information: March 31, 1998 March 31, 1997
------------------ --------------
Total net revenue $ 662,885 $ 597,749
Income before extraordinary items 26,990 19,623
Net income 25,066 19,070
Earnings per share, before extraordinary items, diluted 0.76 0.56
Earnings per share, diluted $ 0.70 $ 0.54
6. Summary financial information of unconsolidated affiliate
The following unaudited summary financial data for the Multicare Companies is as
of and for the three and six months ended March 31, 1998. Multicare is the
Company's only material unconsolidated affiliate.
(in thousands)
March 31, 1998
-----------------
Total assets $1,708,216
Long-term debt 732,587
Total liabilities $960,491
Three months Six months
ended March 31, ended March 31,
1998 1998
---------------------------------------
Revenues $170,164 $355,942
Net income $1,367 $2,725
7. Subsequent Event
On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned subsidiary
V Acquisition Corporation, a Delaware corporation ("Newco"), entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy
Services, Inc., a Delaware corporation ("Vitalink"). Pursuant to the Merger
Agreement, Vitalink will merge with and into Newco, and Newco shall be the
surviving corporation (the "Merger"). Each share of Vitalink Common Stock, par
value .01 per share, (the "Vitalink Common Stock") will be converted in the
Merger into the right to receive (1) .045 shares of Genesis Series G Cumulative
Convertible Preferred Stock, par value .01 per share, ("Genesis Preferred"), (2)
$22.50 per share in cash, or (3) a combination of cash and shares of Genesis
Preferred (collectively, the "Merger Consideration"), subject to statutory
appraisal rights. The Genesis Preferred will have an initial annual dividend of
5.9375%. The total consideration to be paid to stockholders of Vitalink to
acquire their shares (including shares which may be issued upon the exercise of
outstanding options) is approximately $600,000,000, of which approximately 50%
will be paid in cash and 50% in Genesis Preferred. As a result of the Merger,
Genesis will assume approximately $90,000,000 of indebtedness Vitalink has
outstanding. The transaction has been unanimously approved by the Boards of
Directors of both companies. The transaction is subject to regulatory and
shareholder approval of both companies as well as receipt of financing and is
expected to close in late fiscal year 1998.
10
Manor Care, Inc. ("Manor Care"), the holder of approximately 50% of the shares
of Vitalink, has agreed to elect to exchange all of its Vitalink shares for the
preferred stock. The form of Manor Care's consideration will be prorated to the
extent that other Vitalink shareholders elect to receive preferred stock.
The Genesis Preferred will not be transferable without the consent of Genesis
until the filing by the Company of the registration statement with the
Securities and Exchange Commission covering the sale of shares of Genesis
Preferred by the holders. Manor Care has the right to require Genesis to
register shares of its Genesis Preferred in certain circumstances beginning one
year after the date of the Merger. The Genesis Preferred will be convertible
into Genesis common shares at $37.20 per share and it may be called for
conversion after three years, provided Genesis' stock price reaches certain
trading levels. In addition, after the fourth year, the Genesis Preferred may be
called for conversion by Genesis subject to a market-based call premium
provision.
Manor Care has provided Genesis with an irrevocable proxy to vote its Vitalink
shares in favor of the merger. Upon closing of the transaction, it is
anticipated that Manor Care will own approximately 18% of Genesis' pro forma
diluted shares outstanding assuming the Vitalink shareholders other than Manor
Care elect to receive cash for their shares. Manor Care will be subject to
certain voting and standstill agreements and will have one representative on the
Genesis Board of Directors.
On and after April 29, 1998, certain shareholders of Vitalink filed suit in
Delaware state court against Vitalink and certain of its officers and directors,
Genesis, and Manor Care alleging, among other things, that Vitalink and Manor
Care have breached certain fiduciary duties to the Vitalink shareholders in
connection with the Merger Agreement and the transactions contemplated thereby,
and that Genesis has knowingly aided and abetted the alleged breach. The
shareholders mentioned above are seeking to enjoin Manor Care, Vitalink, and
Genesis from proceeding with the Merger and the transactions contemplated
thereby.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its efforts on
providing an expanding array of specialty medical services to geriatric
patients. The delivery of these services was originally concentrated in the
eldercare centers owned and leased by the Company, but now also includes managed
eldercare centers, independent healthcare facilities, outpatient clinics and
home health care. The Company generates revenues from three sources: basic
healthcare services, specialty medical services and management services and
other. The Company includes in basic healthcare services revenues all room and
board charges for its eldercare customers at its 111 owned and leased eldercare
centers. Specialty medical services include all revenues from providing
rehabilitation therapies, institutional pharmacy and medical supply services,
professional pharmacy services, subacute care programs, home health care,
physician services, and other specialized services to all centers owned, leased
or managed by Genesis, as well as to over 800 independent healthcare providers.
Management services and other include fees earned for management of eldercare
centers, other service related businesses and transactional revenues. Genesis
manages 213 eldercare centers, 115 of which are jointly-owned (including the
impact of the Multicare Transaction defined in Certain Transactions).
Certain Transactions
On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned subsidiary
V Acquisition Corporation, a Delaware corporation ("Newco"), entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy
Services, Inc., a Delaware corporation ("Vitalink"). Pursuant to the Merger
Agreement, Vitalink will merge with and into Newco, and Newco shall be the
surviving corporation (the "Merger"). Each share of Vitalink Common Stock, par
value .01 per share, (the "Vitalink Common Stock") will be converted in the
Merger into the right to receive (1) .045 shares of Genesis Series G Cumulative
Convertible Preferred Stock, par value .01 per share, ("Genesis Preferred"), (2)
$22.50 per share in cash, or (3) a combination of cash and shares of Genesis
Preferred (collectively, the "Merger Consideration"), subject to statutory
appraisal rights. The Genesis Preferred will have an initial annual dividend of
5.9375%. The total consideration to be paid to stockholders of Vitalink to
acquire their shares (including shares which may be issued upon the exercise of
outstanding options) is approximately $600,000,000, of which approximately 50%
will be paid in cash and 50% in Genesis Preferred. As a result of the Merger,
Genesis will assume approximately $90,000,000 of indebtedness Vitalink has
outstanding. The transaction has been unanimously approved by the Boards of
Directors of both companies. The transaction is subject to regulatory and
shareholder approval of both companies as well as receipt of financing and is
expected to close in late fiscal year 1998.
On October 9, 1997, Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a
wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C. (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates, "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"), pursuant
to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October
10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger or the
Multicare Transaction") of Acquisition Corp. with and into Multicare in
accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated
as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition Corp.,
Genesis and Multicare. Upon consummation of the Merger, Multicare became a
wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in the business
of providing eldercare and specialty medical services in selected geographic
regions. Included among the operations acquired by Genesis ElderCare Corp. are
operations relating to the provision of ( i ) eldercare services including
skilled nursing care, assisted living, Alzheimer's care and related support
activities traditionally provided in eldercare facilities, (ii) specialty
medical services consisting of (1) sub-acute care such as ventilator care,
intravenous therapy and various forms of coma, pain and wound management and (2)
rehabilitation therapies such as occupational, physical and speech therapy and
stroke and orthopedic rehabilitation and (iii) management services and
consulting services to eldercare centers.
12
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues for
its services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of ( i ) $1,992,000 or (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare are paid by Multicare. Genesis also entered into an asset
purchase agreement (the "Therapy Sale Agreement") with Multicare and certain of
its subsidiaries pursuant to which Genesis acquired all of the assets used in
Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 subject to adjustment (the "Therapy Sales") and a stock purchase
agreement (the "Pharmacy Sale Agreement") with Multicare and certain
subsidiaries pursuant to which Genesis acquired all of the outstanding capital
stock and limited partnership intersest of certain subsidiaries of Multicare
that are engaged in the business of providing institutional pharmacy services to
third parties for $50,000,000, subject to adjustment. The Company completed the
pharmacy purchase effective Janauary 1, 1998.
Genesis Eldercare Corp. paid approximately $1,492,000,000 to (i) purchase the
Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
to be incurred in connection with the completion of the Tender Offer, Merger and
the financing transactions in connection therewith, (iii) refinance certain
indebtedness of Multicare and (iv) make certain cash payments to employees. Of
the funds required to finance the foregoing, approximately $745,000,000 were
furnished to Acquisition Corp. as capital contributions by the Genesis ElderCare
Corp. from the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis
ElderCare Corp. Common Stock") to Cypress, TPG, Nazem and Genesis. Cypress, TPG
and Nazem purchased shares of Genesis ElderCare Corp. Common Stock for a
purchase price of $210,000,000, $199,500,000 and $10,500,000, respectively, and
Genesis purchased approximately 44% of the common stock of Genesis ElderCare
Corp. fora purchase price of $325,000,000. The balance of the funds necessary to
finance the foregoing came from (i) the proceeds of loans from a syndicate of
lenders in the aggregate amount of $525,000,000 and (ii) $246,800,000 of
financing upon completion of the sale of 9% Senior Subordinated Notes due 2007
(the "9% Notes") sold by Acquisition Corp. on August 11, 1997.
In the fourth quarter of 1997, the Company entered into an agreement with Blue
Cross Blue Shield of Maryland (BCBSMD) to insure, through a sub-capitation
agreement, the health care benefits of approximately 7,000 members of BCBSMD's
Care First Medicare risk product. In the second quarter of 1998, the Company
received approximately $7,300,000 of capitation revenue and incurred a like
amount of costs associated with this agreement. In the fourth quarter of 1997,
the Company recorded a pre-tax special charge of $5,000,000 to accrue for the
estimated loss inherent in the agreement.
Results of Operations
Three months ended March 31, 1998 compared to three months ended March 31, 1997.
The Company's total net revenues for the quarter ended March 31, 1998 were
$344,299,000 compared to $273,263,000 for the quarter ended March 31, 1997, an
increase of $71,036,000 or 26%. Basic healthcare services increased $208,000
principally due to providing care to higher acuity patients and rate increases,
offset by the termination of operations by Genesis of three leased eldercare
centers in September 1997.
13
Specialty medical services revenue increased $52,434,000 or 42% of which
approximately $26,200,000 is attributed to the purchase of the Multicare
pharmacy business, approximately $5,100,000 is attributed to the purchase of the
Multicare rehabilitation therapy business and the remaining increase of
approximately $21,100,000 is primarily due to other volume growth in the
institutional pharmacy, medical supply and contract therapy divisions, general
rate increases and increased acuity in the health centers division. Specialty
medical service revenue per patient day in the health centers division increased
11% to $38.32 in the quarter ended March 31, 1998 compared to $34.58 in the
quarter ended March 31, 1997 primarily due to treatment of higher acuity
patients. Management services and other income increased $18,394,000 or 154%.
This increase is due to approximately $10,200,000 of management fee revenue
earned from the management of the operations of the Multicare business,
approximately $7,300,000 of capitated revenue earned under a contract with
BlueCross / Blue Shield of Maryland with the remaining increase of approximately
$900,000 due to growth in revenue from existing management contracts and other
service related businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $283,277,000 for the quarter ended March 31,
1998 compared to $225,188,000 for the quarter ended March 31, 1997, an increase
of $58,089,000 or 26%, of which approximately $2,500,000 is due to the operating
costs incurred to service the Multicare management contract, approximately
$21,600,000 is due to the acquisition of the Multicare pharmacy operations,
approximately $4,500,000 is due the acquisition of the Multicare rehabilitation
therapy business, approximately $7,300,000 is due to costs incurred in
connection with capitation costs incurred under a contract with Blue Cross /
Blue Shield of Maryland and the remaining increase of approximately $22,200,000
is attributed to growth in the institutional pharmacy, medical supply and
contract therapy divisions, as well as increased costs in information technology
systems, community-based programs and marketing campaigns.
Interest expense increased $9,728,000 or 109%. This increase in interest expense
was primarily due to additional borrowings used to finance the Company's
investment in Multicare, the purchase of the Multicare pharmacy and
rehabilitation therapy businesses, and the acquisition and development of
eldercare centers, assisted living facilities and ancillary businesses.
Increased depreciation and amortization expense of $2,047,000 is attributed to
the amortization of goodwill and deferred financing costs in connection with the
Company's investment in Multicare and the purchase of the Multicare pharmacy and
rehabilitation therapy businesses, as well as depreciation of increased
investments in information systems. Lease expense increased $624,000 due to
additional lease expense incurred by seven properties formerly owned by Genesis
and now leased from ElderTrust, offset by decreased lease expense due to the
termination of operations of three leased eldercare centers in September 1997.
Six months ended March 31, 1998 compared to six months ended March 31, 1997.
The Company's total net revenues for the six months ended March 31, 1998 were
$646,864,000 compared to $531,807,000 for the six months ended March 31, 1997,
an increase of $115,057,000 or 22%. Basic healthcare services increased
$4,132,000 or 2% principally due to providing care to higher acuity patients and
rate increases, offset by the termination of operations by Genesis of three
leased eldercare centers in September 1997. Specialty medical services revenue
increased $80,920,000 or 34% of which approximately $26,200,000 is attributed to
the purchase of the Multicare pharmacy business, approximately $10,200,000 is
attributed to the purchase of the Multicare rehabilitation therapy business, and
the remaining increase of approximately $44,500,000 is primarily due to other
volume growth in the institutional pharmacy, medical supply and contract therapy
divisions, general rate increases and increased acuity in the health centers
division. Specialty medical service revenue per patient day in the health
centers division increased 16% to $36.41 in the six months ended March 31, 1998
compared to $31.49 in the six months ended March 31, 1997 primarily due to
treatment of higher acuity patients. Management services and other income
increased approximately $30,000,000 or 135%. This increase is due to
approximately $21,800,000 of management fee revenue earned from the management
of the operations of the Multicare business, approximately $7,300,000 of
capitated revenue earned under a contract with BlueCross / Blue Shield of
Maryland with the remaining increase of approximately $900,000 due to growth in
revenue from existing management contracts and other service related businesses.
14
The Company's operating expenses before, depreciation, amortization, lease
expense and interest expense were $528,656,000 for the six months ended March
31, 1998 compared to $439,997,000 for six months ended March 31, 1997, an
increase of $88,659,000 or 20%, of which approximately $6,800,000 is due to the
operating costs incurred to service the Multicare management contract,
approximately $21,600,000 is due to the acquisition of the Multicare pharmacy
operations, approximately $8,800,000 is due to the acquisition of the Multicare
rehabilitation therapy business, approximately $7,300,000 is due to costs
incurred in connection with capitation costs incurred under a contract with Blue
Cross / Blue Shield of Maryland and the remaining increase of approximately
$44,200,000 is attributed to growth in the institutional pharmacy, medical
supply and contract therapy divisions, as well as increased costs in information
technology systems, community-based programs and marketing campaigns.
Interest expense increased $20,176,000 or 111%. This increase in interest
expense was primarily due to additional borrowings used to finance the Company's
investment in Multicare, the purchase of the Multicare pharmacy and
rehabilitation therapy businesses, and the acquisition and development of
eldercare centers, assisted living facilities and ancillary businesses.
Increased depreciation and amortization expense of $4,252,000 is attributed to
the amortization of goodwill and deferred financing costs in connection with the
Company's investment in Multicare and the purchase of the Multicare pharmacy and
rehabilitation therapy businesses, as well as depreciation of increased
investments in information systems. Lease expense increased $329,000 due to
additional lease expense incurred by seven properties formerly owned by Genesis
and now leased from ElderTrust, offset by decreased lease expense due to the
termination of operations of three leased eldercare centers in September 1997.
In connection with the early repayment of debt in the quarters ended December
31, 1997 and 1996, the Company recorded an extraordinary loss net of tax of
approximately $1,924,000 ($3,030,000 before tax) and $553,000 ($871,000 before
tax), respectively, to write off unamortized deferred financing fees.
Liquidity and Capital Resources
Working capital increased $33,857,000 to $260,787,000 at March 31, 1998 from
$226,930,000 at September 30, 1997. Accounts receivable increased to
$256,127,000 at March 31, 1998 from $205,129,000 at September 30, 1997.
Approximately $6,500,000 of this increase relates to balances acquired in the
Multicare rehabilitation therapy business, approximately $18,700,000 relates to
balances acquired in the Multicare pharmacy business while the remaining
approximately $25,800,000 relates primarily to the continuing shift in business
mix to specialty medical services, which typically have a longer collection
period. Days revenue in accounts receivable decreased 1 day to 67 days during
this period from 68 days for the quarter ended December 31, 1997. The Company's
cash flow from operations for the six months ended March 31, 1998 was
approximately $25,100,000 compared to approximately $18,400,000 for the six
months ended March 31, 1997. The improvement in operating cash flow is primarily
due to growth in operations.
Investing activities for the six months ended March 31, 1998 include
approximately $24,342,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data processing
hardware and software. During the six months ended March 31, 1998, other long
term assets increased approximately $35,400,000, principally due to
approximately $20,000,000 of financing and other transaction costs incurred in
connection with the Multicare Transaction and the purchase of the Multicare
rehabilitation therapy business, and approximately $9,900,000 of subordinated
management fees due from Multicare.
15
On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned subsidiary
V Acquisition Corporation, a Delaware corporation ("Newco"), entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy
Services, Inc., a Delaware corporation ("Vitalink"). Pursuant to the Merger
Agreement, Vitalink will merge with and into Newco, and Newco shall be the
surviving corporation (the "Merger"). Each share of Vitalink Common Stock, par
value .01 per share, (the "Vitalink Common Stock") will be converted in the
Merger into the right to receive (1) .045 shares of Genesis Series G Cumulative
Convertible Preferred Stock, par value .01 per share, ("Genesis Preferred"), (2)
$22.50 per share in cash, or (3) a combination of cash and shares of Genesis
Preferred (collectively, the "Merger Consideration"), subject to statutory
appraisal rights. The Genesis Preferred will have an initial annual dividend of
5.9375%. The total consideration to be paid to stockholders of Vitalink to
acquire their shares (including shares which may be issued upon the exercise of
outstanding options) is approximately $600,000,000, of which approximately 50%
will be paid in cash and 50% in Genesis Preferred. As a result of the Merger,
Genesis will assume approximately $90,000,000 of indebtedness Vitalink has
outstanding. The transaction has been unanimously approved by the Boards of
Directors of both companies. The transaction is subject to regulatory and
shareholder approval of both companies as well as receipt of financing and is
expected to close in late fiscal year 1998.
Manor Care, Inc. ("Manor Care"), the holder of approximately 50% of the shares
of Vitalink, has agreed to elect to exchange all of its Vitalink shares for the
preferred stock. The form of Manor Care's consideration will be prorated to the
extent that other Vitalink shareholders elect to receive preferred stock.
The Genesis Preferred will not be transferable without the consent of Genesis
until the filing by the Company of the registration statement with the
Securities and Exchange Commission covering the sale of shares of Genesis
Preferred by the holders. Manor Care has the right to require Genesis to
register shares of its Genesis Preferred in certain circumstances beginning one
year after the date of the Merger. The Genesis Preferred will be convertible
into Genesis common shares at $37.20 per share and it may be called for
conversion after three years, provided Genesis' stock price reaches certain
trading levels. In addition, after the fourth year, the Genesis Preferred may be
called for conversion by Genesis subject to a market-based call premium
provision.
Manor Care has provided Genesis with an irrevocable proxy to vote its Vitalink
shares in favor of the merger. Upon closing of the transaction, it is
anticipated that Manor Care will own approximately 18% of Genesis' pro forma
diluted shares outstanding assuming the Vitalink shareholders other than Manor
Care elect to receive cash for their shares. Manor Care will be subject to
certain voting and standstill agreements and will have one representative on the
Genesis Board of Directors.
Following the sale, Manor Care will continue to purchase from the Vitalink
operations all of its pharmacy services and related pharmacy consulting
services.
On and after April 29, 1998, certain shareholders of Vitalink filed suit in
Delaware state court against Vitalink and certain of its officers and directors,
Genesis, and Manor Care alleging, among other things, that Vitalink and Manor
Care have breached certain fiduciary duties to the Vitalink shareholders in
connection with the Merger Agreement and the transactions contemplated thereby,
and that Genesis has knowingly aided and abetted the alleged breach. The
shareholders mentioned above are seeking to enjoin Manor Care, Vitalink, and
Genesis from proceeding with the Merger and the transactions contemplated
thereby.
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Subsequently, Genesis
received an additional $14,000,000 from the sale of a loan and two additional
assisted living facilities and the recoupment of amounts advanced and expenses
incurred in connection with the formation of ElderTrust. Additionally,
ElderTrust has funded approximately $13,200,000 of a commitment to finance the
development and expansion of four additional assisted living facilities. Genesis
repaid a portion of the revolving credit component of its bank credit facility
with the proceeds from these transactions. The sale of properties to ElderTrust
resulted in a gain of approximately $12,000,000 which has been deferred and is
being amortized over the ten year term of the lease contracts with ElderTrust.
In October 1997, in connection with the Multicare Transaction, Genesis entered
into a new credit facility with Mellon Bank, N.A., Citicorp Securities, Inc.,
Citibank N.A., First Union Capital Markets Corp., First Union National Bank and
NationsBank, N.A. (the "Lenders") pursuant to which the Lenders provided Genesis
and its subsidiaries with loan facilities totaling $850,000,000 (the "Genesis
Bank Financing") for the purpose of refinancing certain existing indebtedness of
Genesis; funding interest and principal payments on the facilities and certain
remaining indebtedness; funding permitted acquisitions; funding Genesis'
commitments in connection with the Merger; and funding Genesis' and its
subsidiaries' working capital for general corporate purposes, including fees and
expenses of the transactions. The Genesis Bank Financing facilities consist of
three $200,000,000 term loans (collectively, the "Term Loans"),a $250,000,000
revolving credit loan (the "Revolving Credit Facility") which includes one or
more Swing Loans (collectively, the "Swing Loan Facility") in integral principal
multiples of $500,000 up to an aggregate unpaid principal amount of $15,000,000.
The Term Loans amortize in quarterly installments beginning in fiscal 1998
through 2005, of which $19,000,000 is payable in fiscal 1998. The Term Loans
consist of (1) a $200,000,000 six year term loan (the "Tranche A Term
Facility"); (2) a $200,000,000 seven year term loan (the "Tranche B Term
Facility"); and (3) a $200,000,000 eight year term loan (the "Tranche C Term
Facility"). The Revolving Credit Facility becomes payable in full on September
30, 2003.
16
The Genesis Bank Financing facilities are secured by a first priority security
interest in all of the stock, partnership interests and other equity of all of
Genesis' present and future subsidiaries (including the Genesis Elder Care
Corp.) other than stock of Multicare and its subsidiaries. Loans under the
Genesis Bank Financing bear, at Genesis' option, interest at the per annum Prime
Rate as announced by the administrative agent, or the applicable Adjusted LIBOR.
Loans under the Tranche A Term Facility bear interest at an annual rate equal to
LIBOR plus a margin up to 2.5%, loans under the Tranche B Term Facility bear
interest at an annual rate equal to LIBOR plus a margin up to 2.75%; loans under
the Tranche C Term Facility bear interest at an annual rate equal to LIBOR plus
a margin up to 3.0%; loans under the Revolving Credit Facility bear interest at
a rate equal to LIBOR plus a margin up to 2.5%, and loans under the Swing Loan
Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial covenants, the above referenced
interest rates will be reduced.
The Genesis Bank Financing contains a number of covenants that, among other
things, restrict the ability of Genesis and its subsidiaries to dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Genesis and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; causes Genesis and its affiliates to
maintain the Management Agreement, the Put/Call Agreement, as defined below, and
corporate separateness; and will cause Genesis to comply with the terms of other
material agreements as well as comply with usual and customary covenants for
transactions of this nature.
In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare Corp.
Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and
for a period of 270 days thereafter, at a price determined pursuant to the terms
of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the
terms and conditions set forth in the Put/Call Agreement, to require Genesis to
purchase (the "Put") such Genesis ElderCare Corp. Common Stock commencing on
October 9, 2002 and for a period of one year thereafter, at a price determined
pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis
ElderCare Corp. Common Stock, plus a portion of the Genesis pharmacy business
(the "Calculated Equity Value"). The Calculated Equity Value will be determined
based upon a multiple of Genesis ElderCare Corp.'s earnings before interest,
taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR")
after deduction of certain liabilities, plus a portion of the EBITDAR related to
the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend
on whether the Put or the Call is being exercised. Any payment to Cypress, TPG
or Nazem under the Call or the Put maybe in the form of cash or Genesis common
stock at Genesis' option.
17
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common Stock
will be determined on the basis set forth in the Put/Call Agreement which
provides generally for additional Calculated Equity Value of Genesis ElderCare
Corp. to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of
the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress,
TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited to Cypress'
TPG's or Nazem's share of the Calculated Equity Value based upon a formula set
forth in the terms of the Put/Call Agreement which provides generally for the
preferential return of the stockholders' capital contributions (subject to
certain priorities), a 25% compound annual return on Cypress', TPG's and Nazem
capital contributions and the remaining Calculated Equity Value to be divided
based upon the proportionate share of the capital contributions of the
stockholders to Genesis ElderCare Corp.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis or an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement and
Management Agreement and to control the sale or liquidation of Genesis ElderCare
Corp. In the event of such sale, the proceeds from such sale will be distributed
among the parties as contemplated by the formula for the Put option exercise
price and Cypress, TPG and Nazem will retain a claim against Genesis for the
difference, if any, between the proceeds of such sale and the put option
exercise price. In the event of a bankruptcy or change of control of Genesis,
the option price shall be payable solely in cash provided any such payment will
be subordinated to the payment of principal and interest under the Genesis Bank
Financing.
In December 1997, the Company purchased approximately 1,000,000 long-term call
options on the Company's Common Stock. The Company's Board of Directors approved
the purchase of up to 1,500,000 call options. The call options are purchased
by the Company in privately negotiated transactions designated to take advantage
of attractive share price levels, as determined by the Company's management, in
compliance with covenants governing existing financing arrangements. The timing
and the terms of the transactions, including maturities, will depend on market
conditions, the Company's liquidity and covenant requirements under its
financing arrangements, and other considerations. The Board of Directors also
approved a Senior Executive Stock Ownership Program. Under the terms of the
program, certain of the Company's current senior executive employees will be
required to own shares of the Company's Common Stock having a market value based
upon a multiple of the executive's salary. Each executive is required to own the
shares within three years of the date of the adoption of the program. Subject to
applicable laws, the Company may lend funds to one or more of the senior
executive employees for his or her purchase of the Company's Common Stock. As of
March 31, 1998, the Company loaned approximately $1,700,000 to senior executive
employees to purchase the Company's Common Stock.
In October 1996, the Company completed an offering of $125,000,000 9 1/4% Senior
Subordinated Notes due 2006. The Company used the net proceeds of approximately
$121,250,000 together with borrowings under the Credit Facility, to pay the cash
portion of the purchase price of the Geriatric and Medical Companies (GMC)
Transaction, to repay certain debt assumed as a result of the GMC Transaction
and to repurchase GMC accounts receivable which were previously financed.
Certain of the Company's other outstanding loans contain covenants which,
without the prior consent of the lenders, limit certain activities of the
Company. Such covenants contain limitations relating to the merger or
consolidation of the Company and the Company's ability to secure indebtedness,
make guarantees, grant security interests and declare dividends. In addition,
the Company must maintain certain minimum levels of cash flow and debt service
coverage, and must maintain certain liabilities to net worth. Under these loans,
the Company is restricted from paying cash dividends on the Common Stock, unless
certain conditions are met. The Company has not declared or paid any cash
dividends on its Common Stock since its inception.
18
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which has adversely impacted the
Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Implementation of the Company's
strategy to expand specialty medical services to independent providers should
reduce the impact of changes in the Medicare and Medicaid reimbursement programs
on the Company as a whole. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative rulings
and interpretations which may further affect payments made under those programs.
Further, the federal and state governments may reduce the funds available under
those programs in the future or require more stringent utilization and quality
reviews of eldercare centers.
Pursuant to the Balanced Budget Act of 1997 (the "Act"), beginning on or after
July 1, 1998, Medicare reimbursement for skilled nursing facilities will be on a
prospective payment system ("PPS"). Skilled nursing facilities will be paid a
per diem rate for all covered Part A skilled nursing facility services as well
as many services for which payment may be made under Part B during a period when
a beneficiary is provided covered skilled nursing facility care. The per diem
rate is adjusted based upon the resource utilization group of a resident. This
payment will cover rehabilitation and non-rehabilitation ancillary services;
however the per diem rate will not cover physician, nursing, physician assistant
and certain related services. For the first three cost reporting periods
beginning on or after July 1, 1998, the per diem rate will be based on a blend
of a facility specific rate and a federal per diem rate. In subsequent periods,
and for facilities first receiving payments for Medicare services on or after
October 1, 1995, the federal per diem rate will be used without any facility
specific blending.
The Act also required consolidated billing for skilled nursing facilities. The
skilled nursing facility must submit all Medicare claims for Part A and Part B
services received by its residents with the exception of physician, nursing,
physician assistant and certain related services. Medicare will pay the skilled
nursing facilities directly for all services on the consolidated bill and
outside suppliers of services to residents of the skilled nursing facilities
must collect payment from the skilled nursing facility.
The Act also repealed the Boren Amendment which required Medicaid payments to
nursing facilities to be "reasonable and adequate" to cover the costs of
efficiently and economically operated facilities. Under the Act, states must now
use a public notice and comment process for determining Medicaid rates and give
interested parties a reasonable opportunity to comment on proposed rates, rate
methodology and justifications. It is unclear what impact the Balanced Budget
Act of 1997 will have on the Company.
The Company believes that its liquidity needs can be met by expected operating
cash flow and availability of borrowings under its credit facilities. At May 11,
1998, approximately $160,000,000 was outstanding under the Revolving Credit
Facility, and approximately $71,200,000 was available under the credit
facilities after giving effect to approximately $18,800,000 in outstanding
letters of credit issued under the credit facilities.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles and the number of calendar days
in a given quarter.
19
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. To date, the
Company has offset its increased operating costs by increasing charges for its
services and expanding its services. Genesis has also implemented cost control
measures to limit increases in operating costs and expenses but cannot predict
its ability to control such operating cost increases in the future.
Year 2000
The Company is aware of issues associated with the programming code in many
existing computer systems (the "Year 2000" issue) as the millennium approaches.
The Company has conducted a review of its computer systems to identify hardware
and software affected by the Year 2000 issue. This issue affects computers
systems having date sensitive programs that may not properly recognize the Year
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail resulting in business interruption.
With respect to its existing computer systems, the Company is upgrading,
generally, in order to meet the demands of its expanding business. In the
process, the Company is taking steps to identify, correct, or reprogram and test
its existing systems for Year 2000 compliance. It is anticipated that all new
system upgrades or reprogramming efforts will be completed by late calendar year
1998, allowing adequate time for testing. The Company presently believes that
with modification to existing software and conversions to new software, the Year
2000 issue can be mitigated. However, given the complexity of the Year 2000
issue, there can be no assurances that the Company will be able to address the
problem without costs and uncertainties that might affect future financial
results or cause reported financial information not to be necessarily indicative
of future operating results or future financial condition.
The Company has incurred, and expects to incur additional, internal costs as
well as other expenses to address the necessary software upgrades, training,
data conversion, testing and implementation related to the Year 2000 issue. Such
costs are being expensed as incurred. The Company does not expect the amounts
required to be expensed to have a material effect on its financial position or
results of operations. The Year 2000 issue is expected to affect the systems of
various entities with which the Company interacts including payors, suppliers
and vendors. There can be no assurance that data produced by systems of other
entities on which the Company's systems rely will be converted on a timely basis
or that a failure by another entity's system to be Year 2000 compliant will not
have a material adverse effect on the Company.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board, (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement is effective
for fiscal years beginning after December 15, 1997, or the Company's fiscal year
end September 30, 1999. The Company plans to adopt this accounting standard as
required. The adoption of this standard will have no material impact on the
Company's earnings, financial condition or liquidity, but will require the
Company to classify items other than comprehensive income in the financial
statements and display the accumulated balance of other comprehensive income
separately in the equity section of the balance sheet.
20
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"). Statement 131 supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting of a Business Enterprise, and establishes
new standards for reporting information about operation segments in annual
financial statements and requires selected information about operating segments
in interim financial reports. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Statement 131 is effective for years beginning after December 15,
1997, or the Company's fiscal year end September 30, 1999. This statement
affects reporting in financial statements only and will have no impact on the
Company's results of operations, financial condition or liquidity.
21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
On February 24, 1998, the Company held its Annual Meeting of
Shareholders (the "Annual Meeting"). Proxies were solicited
for the Annual Meeting pursuant to Regulation 14 of the
Securities Act of 1934.
At the Annual Meeting the following matters were voted on: (1)
Roger C. Lipitz and Alan B. Miller were elected to serve on
the Board of Directors of the Company for three-year terms
until after their respective successors are duly elected and
qualified, with Roger C. Lipitz receiving 28,456,989 votes for
election and zero against election (with 6,511,549 broker
non-votes and abstentions); and Alan B. Miller receiving
28,491,740 votes for election and zero against election (with
6,595,129 broker non-votes and abstentions) and (2) an
amendment to the Company's Amended and Restated Employee Stock
Option Plan (the "Plan") increasing the number of shares which
may be issued under the Plan to 6,250,000 shares which was
approved by a vote of 26,295,300 for the amendment and
2,132,425 votes against the amendment (with 6,659,144 broker
non-votes and abstentions).
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
2.1(1) Agreement and Plan of Merger by and among Vitalink
Pharmacy Services, Inc., Genesis Health Ventures,
Inc., and the V Acquisition Corporation dated as of
April 26, 1998.
3.1 The Company's Amended and Restated Bylaws
10.1 The Company's Amended and Restated Stock Option Plan
22
10.2 Rights Agreement dated as of April 26, 1998, by and
among Genesis Health Ventures, Inc., a Pennsylvania
and Manor Care, Inc., a Delaware corporation.
10.3(2) Voting Agreement dated as of April 26, 1998, by and
among Genesis Health Ventures, Inc., a Pennsylvania
and Manor Care, Inc., a Delaware corporation.
27 Financial Data Schedule
(1) - Incorporated by Reference to Schedule 13D filed by the Company
with respect to Vitalink Pharmacy Services, Inc. dated
April 26, 1998.
(2) - Incorporated by reference to the Company's Form 8-K dated May 6,
1998.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K/A, dated
January 26, 1998 which amended the current report dated
October 9, 1997 to include or incorporate by reference the
following financial information:
Financial Statements of businesses acquired:
The Multicare Companies, Inc.
(1) Independent Auditors' Report
(2) Consolidated Balance Sheets as of December 31, 1995 and
1996
(3) Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996.
(4) Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996.
(5) Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996.
(6) Notes to Consolidated Financial Statements
(7) Unaudited Consolidated Balance Sheet as of September 30,
1997
(8) Unaudited Consolidated Statement of Operations for the
three and nine months ended September 30, 1997
(9) Unaudited Consolidated Statement of Cash Flows for the
nine months ended September 30, 1997.
(10) Unaudited Notes to Consolidated Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Pro Forma Financial Statements
(1) Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of September 30, 1997 and Notes Thereto
(2) Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Twelve Months Ended September 30,
1997 and Notes Thereto
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: May 15, 1998 /S/ George V. Hager, Jr.
------------------------------
Senior Vice President and
Chief Financial Officer
24