SCHEDULE 14A INFORMATION
(Rule 14a-101)
Information Required in Proxy Statement
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant /_/
* * * * *
Check the appropriate box:
/_/ Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Geriatric & Medical Companies, Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
/_/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22 (a)(2) of Schedule 14A.
/_/ $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, Par Value $.10 Per Share
2) Aggregate number of securities to which transaction applies:
15,429,746
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
$5.75
4) Proposed maximum aggregate value of transaction:
$92 million
5) Total fee paid:
$31,724.13
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount Previously Paid:
$31,724.13
2) Form, Schedule or Registration No.:
Schedule 14A
3) Filing Party:
Geriatric & Medical Companies, Inc.
4) Date Filed:
August 23, 1996
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC.
5601 CHESTNUT STREET
PHILADELPHIA, PENNSYLVANIA 19139
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 3, 1996
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the 'Special
Meeting') of Geriatric & Medical Companies, Inc. (the 'Company') will be held on
October 3, 1996 at 9:00 a.m., local time, at the offices of Mesirov Gelman Jaffe
Cramer & Jamieson, 38th Floor, 1735 Market Street, Philadelphia, Pennsylvania
19103, for the following purposes:
1. To approve and adopt an Agreement and Plan of Merger (the 'Merger
Agreement'), dated as of July 11, 1996, by and among Genesis Health
Ventures, Inc. ('Genesis'), a Pennsylvania corporation, the
Company, and G Acquisition Corporation, a Delaware corporation,
which is a wholly-owned subsidiary of Genesis ('Newco'); and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
Stockholders who do not wish to accept the Merger Consideration (as defined
in the Merger Agreement) as payment in the Merger and who comply with the
requirements of Section 262 of the General Corporation Law of the State of
Delaware ('Delaware Law') have the right to seek an appraisal by the Delaware
Court of Chancery of the 'fair value' of their shares of common stock of the
Company. For a description of the rights of Stockholders pursuant to such
Section 262 and a summary of the procedures required to be followed to obtain
such appraisal, see 'APPRAISAL RIGHTS' in the accompanying Proxy Statement, and
Exhibit C.
Only Stockholders of record at the close of business on August 30, 1996,
the Record Date of the Special Meeting, are entitled to notice of and to vote at
the Special Meeting or any adjournment or postponement thereof.
I urge you to read the enclosed materials carefully.
To make sure that your interests will be represented, whether or not you
plan to attend the Special Meeting in person, please complete, date and sign the
enclosed Proxy and return it promptly in the return envelope provided with these
materials. This action will not limit your right to vote, regardless of whether
you attend the Special Meeting, and you may revoke your Proxy at any time prior
to the voting of the Proxy. Proxies may be revoked by (i) filing with the
Secretary of the Company, before the polls are closed with respect to the
matters to be considered at the Special Meeting, a written notice of revocation
bearing a date later than that of the Proxy, (ii) duly executing a subsequent
Proxy relating to the same shares of common stock of the Company and delivering
it to the Secretary of the Company before the polls are closed with respect to
the matters to be considered at the Special Meeting, or (iii) attending the
Special Meeting and voting in person (although attendance at the Special Meeting
will not in and of itself constitute a revocation of a Proxy). Any written
notice revoking a Proxy should be sent to Geriatric & Medical Companies, Inc.,
5601 Chestnut Street, Philadelphia, Pennsylvania 19139, Attn: Arthur A. Carr,
Jr., Secretary.
By Order of the Board of Directors,
ARTHUR A. CARR, JR.
Secretary
September 10, 1996
PLEASE DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC.
5601 CHESTNUT STREET
PHILADELPHIA, PENNSYLVANIA 19139
------------------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
------------------------
TO BE HELD OCTOBER 3, 1996
This Proxy Statement is being furnished to stockholders (the
'Stockholders') of Geriatric & Medical Companies, Inc. (the 'Company') in
connection with the solicitation of proxies by the Board of Directors of the
Company (the 'Board') from holders of outstanding shares of the Company's common
stock, par value $.10 per share (collectively, the 'Shares' and each, a
'Share'), for use at the Special Meeting of Stockholders of the Company to be
held on October 3, 1996 at 9:00 a.m. local time at the offices of Mesirov Gelman
Jaffe Cramer & Jamieson, 38th Floor, 1735 Market Street, Philadelphia,
Pennsylvania 19103 and at any adjournment or postponement thereof (the 'Special
Meeting'). This Proxy Statement, the enclosed Notice of Special Meeting, and the
form of Proxy are first being sent to the Stockholders on or about September 10,
1996.
This Proxy Statement relates to the proposed merger of G Acquisition
Corporation ('Newco'), a Delaware corporation, with and into the Company (the
'Merger'), with the Company being the surviving corporation (the 'Surviving
Corporation'), pursuant to an Agreement and Plan of Merger (the 'Merger
Agreement') dated as of July 11, 1996, by and among Genesis Health Ventures,
Inc. ('Genesis'), the Company and Newco. Newco is a wholly-owned subsidiary of
Genesis. The Merger is subject to certain conditions. Upon consummation of the
Merger, the Company will become a wholly-owned subsidiary of Genesis.
In the Merger, (i) each outstanding Share, other than Shares held by the
Company or by Genesis or any of its subsidiaries ('Participant Shares'), and
other than shares ('Dissenting Shares') held by Stockholders ('Dissenting
Stockholders'), if any, who perfect their appraisal rights under the General
Corporation Law of the State of Delaware ('Delaware Law'), will be converted
into the right to receive, upon exchange therefor of the certificate (a
'Certificate') representing such Shares, Five Dollars Seventy-Five Cents ($5.75)
in cash, without interest (the 'Merger Consideration'), (ii) all Participant
Shares will be cancelled and (iii) each Dissenting Share, upon exchange therefor
of the Certificate representing such Dissenting Shares, will be converted into
the right to receive the 'fair value' of such Dissenting Shares in accordance
with Delaware Law. Each share of common stock, no par value, of Newco issued and
outstanding immediately prior to the consummation of the Merger will be
converted into and become one fully paid and nonassessable share of common
stock, no par value, of the Surviving Corporation. Each option, warrant, and
other right to acquire Shares shall be cancelled in exchange for a payment,
payable upon surrender of such option, warrant or right, equal to the number of
Shares subject to such option, warrant or right multiplied by the excess of the
Merger Consideration over the exercise price (if any) per Share for such option,
warrant or other right. See 'THE MERGER -- The Merger Agreement -- Options and
Employee Benefits.'
The Board, after considering the recommendation of the Special Committee of
the Board consisting of Messrs. Gerald E. Bisbee, Jr., Thomas J. Gorman, and
Anthony C. Salvo (the 'Special Committee'), and other relevant factors
identified below under the caption 'THE MERGER -- The Company's Reasons for the
Merger,' has determined that the Merger is fair to, and in the best interests
of, the Stockholders of the Company, has approved the Merger Agreement and
recommends that Stockholders approve and adopt the Merger Agreement.
Any Proxy being solicited in connection with this Proxy Statement may be
revoked at any time prior to the voting of the Proxy. Proxies may be revoked by
(i) filing with the Secretary of the Company, before the polls are closed with
respect to the matters to be considered at the Special Meeting, a written notice
of revocation bearing a date later than that of the Proxy, (ii) duly executing a
subsequent Proxy relating to the same Shares and delivering it to the Secretary
of the Company before the polls are closed with respect to the matters to be
considered at the Special Meeting, or (iii) attending the Special Meeting and
voting in person (although attendance at the Special Meeting will not in and of
itself constitute a revocation of a Proxy). In the event that Shares are
represented by more than one properly executed Proxy, the executed Proxy bearing
the latest date will be voted at the Special Meeting. For more information
concerning proxies, see 'INTRODUCTION -- Proxies.'
The date of this Proxy Statement is September 10, 1996
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC.
PROXY STATEMENT
TABLE OF CONTENTS
SUMMARY................................................................... 1
Date, Time and Place of Special Meeting................................. 1
Record Date; Stockholders Entitled to Vote.............................. 1
Purpose of Special Meeting; Vote Required; Quorum....................... 1
The Merger.............................................................. 1
Payment for Shares...................................................... 2
Recommendation of the Board of Directors................................ 3
Opinion of the Company's Financial Advisor.............................. 3
Background.............................................................. 3
Purpose and Structure of the Merger..................................... 3
Interests of Certain Persons in the Transaction......................... 3
Financing of the Transaction............................................ 3
Federal Income Tax Consequences of the Merger........................... 4
Appraisal Rights........................................................ 4
The Company............................................................. 4
Market Prices........................................................... 4
Certain Information Concerning Genesis and Newco........................ 4
Summary Financial and Operating Data of the Company..................... 5
INTRODUCTION.............................................................. 7
Matters to be Considered at the Special Meeting......................... 7
Record Date; Voting at the Special Meeting; Quorum...................... 7
Proxies................................................................. 8
Appraisal Rights........................................................ 9
THE MERGER................................................................ 10
Description of the Merger............................................... 10
Background of the Merger................................................ 10
The Company's Reasons for the Merger.................................... 13
Opinion of the Company's Financial Advisor.............................. 14
Genesis' Reasons for Undertaking the Merger............................. 17
Financing of the Transaction............................................ 18
Structure and Purpose of the Merger..................................... 18
Certain Effects of the Merger; Operations of the Company
After the Merger....................................................... 18
Interests of Certain Persons in the Merger.............................. 18
The Merger Agreement.................................................... 21
Approval of the Merger............................................... 21
Effective Time....................................................... 21
Payment for Shares................................................... 21
Representations and Warranties....................................... 22
Conditions to the Merger............................................. 22
Certain Covenants.................................................... 22
Options and Employee Benefits........................................ 23
Solicitation......................................................... 24
Termination; Amendment............................................... 24
Expenses............................................................. 24
Indemnification...................................................... 25
APPRAISAL RIGHTS.......................................................... 25
(i)
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 27
CERTAIN INFORMATION REGARDING GENESIS AND NEWCO........................... 27
BUSINESS AND PROPERTIES OF THE COMPANY.................................... 28
Introduction............................................................ 28
Description of the Company.............................................. 28
The Operating Companies................................................. 29
Life Support Ambulance............................................... 29
United Health Care Services.......................................... 29
Innovative Pharmacy Services......................................... 29
Healthcare Hospitality Services...................................... 29
Diagnostic & Rehab Technologies...................................... 29
Healthcare Financial Services and Information Systems................ 29
Geriatric and Medical Services....................................... 30
The Company's Market.................................................... 31
Marketing Strategy...................................................... 31
Third Party Payor Programs.............................................. 32
Government Regulation................................................... 33
Quality Assurance....................................................... 35
Competition............................................................. 36
Liability Insurance..................................................... 36
Employees............................................................... 37
Properties.............................................................. 37
RECENT MARKET PRICES AND DIVIDEND HISTORY................................. 38
SUMMARY FINANCIAL AND OPERATING DATA...................................... 39
Geriatric & Medical Companies, Inc. and Subsidiaries
Consolidated Selected Financial Data................................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 40
Liquidity and Capital Resources......................................... 40
Comparison of Consolidated Results of Operations for
Fiscal 1996 and Fiscal 1995............................................ 42
Comparison of Consolidated Results of Operations for
Fiscal 1995 and Fiscal 1994............................................ 43
MANAGEMENT OF THE COMPANY................................................. 44
Directors and Executive Officers of the Registrant...................... 44
Executive Compensation.................................................. 44
Compensation Committee Interlocks and Insider Participation............. 44
SUMMARY COMPENSATION TABLE................................................ 45
Executive Officer Employment Agreements................................. 46
Compensation Pursuant to Plans.......................................... 46
Certain Relationships and Related Transactions.......................... 47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND CERTAIN TRANSACTIONS IN THE COMPANY'S COMMON STOCK................... 49
INDEPENDENT ACCOUNTANTS................................................... 50
STOCKHOLDER PROPOSALS..................................................... 50
OTHER MATTERS............................................................. 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................ 52
REPORT OF INDEPENDENT ACCOUNTANTS......................................... 53
(ii)
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS......................................... 54
EXHIBITS:
A. AGREEMENT AND PLAN OF MERGER..................................... A-1
B. OPINION OF CS FIRST BOSTON CORPORATION........................... B-1
C. DELAWARE GENERAL CORPORATION LAW,
SECTION 262. APPRAISAL RIGHTS................................... C-1
(iii)
<PAGE>
AVAILABLE INFORMATION
Genesis and the Company are subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the 'Exchange
Act'), and in accordance therewith, each files reports, proxy statements and
other information with the Securities and Exchange Commission (the
'Commission'). Copies of such reports, proxy statements and other information
filed can be inspected and copied at the Public Reference Room of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and may be available at the Commission's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission at its
Washington, D.C. address at prescribed rates. The Commission maintains a web
site that contains reports, proxy statements and other information filed through
the Commission's Electronic Data, Gathering, Analysis, and Retrieval system.
This web site can be accessed at http://www.sec.gov. In addition, material filed
by the Company can be inspected at the offices of the National Association of
Securities Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006, and
materials filed by Genesis can be inspected at the offices of the New York Stock
Exchange, 200 Broad Street, New York, New York 10005. The Shares are listed on
the National Association of Securities Dealers Automated Quotation National
Market System ('NASDAQ'). Upon consummation of the Merger, the listing of such
Shares on NASDAQ will be terminated.
(iv)
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This Summary does not purport to be complete and is
qualified in its entirety by the more detailed information contained elsewhere
in this Proxy Statement and the Exhibits hereto. Unless defined herein,
capitalized terms used in this Summary have the respective meanings given to
them elsewhere in this Proxy Statement. Stockholders are urged to read this
Proxy Statement and the Exhibits hereto in their entirety.
DATE, TIME AND PLACE OF SPECIAL MEETING
A Special Meeting of Stockholders of Geriatric & Medical Companies, Inc.
(the 'Company') will be held on October 3, 1996 at 9:00 a.m. local time, at the
offices of Mesirov Gelman Jaffe Cramer & Jamieson, 1735 Market Street, 38th
Floor, Philadelphia, Pennsylvania 19103 (the 'Special Meeting').
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
Only holders of record of shares of common stock, par value $.10 per share
of the Company (the 'Shares') at the close of business on August 30, 1996 (the
'Record Date'), will be entitled to notice of and to vote at the Special Meeting
or at any adjournment or postponement thereof. The only class of capital stock
of the Company outstanding and entitled to vote at the Special Meeting is the
Shares. As of the Record Date there were outstanding 15,429,746 Shares
('Outstanding Shares') held by approximately 1,155 holders of record.
PURPOSE OF SPECIAL MEETING; VOTE REQUIRED; QUORUM
This Proxy Statement relates to the proposed merger of G Acquisition
Corporation ('Newco') with and into the Company (the 'Merger'), with the Company
being the surviving corporation (the 'Surviving Corporation'), pursuant to an
Agreement and Plan of Merger among Genesis Health Ventures, Inc. ('Genesis'),
the Company and Newco dated as of July 11, 1996 (the 'Merger Agreement'). Upon
consummation of the Merger, the Company will become a wholly-owned subsidiary of
Genesis. Under the General Corporation Law of the State of Delaware ('Delaware
Law'), the affirmative vote of the holders of a majority of Outstanding Shares
as of the Record Date is required to approve and adopt the Merger Agreement. For
additional information concerning the voting requirements for the approval and
adoption of the Merger Agreement, see 'THE MERGER -- The Merger Agreement --
Approval of the Merger.' Each of the executive officers and directors of the
Company has informed the Company that she or he intends to vote all of her or
his Shares for approval and adoption of the Merger Agreement.
For purposes of the Special Meeting, the presence, in person or represented
by proxy, of Stockholders entitled to cast at least a majority of the votes
which all Stockholders are entitled to cast shall constitute a quorum. Each
Share which may be voted at the Special Meeting is entitled to one vote on all
matters to be considered.
Daniel Veloric, Chairman of the Company, and certain other companies
affiliated with him, have appointed Genesis and Newco their proxy to vote
3,748,178 Shares of the Company (24.3% of the Outstanding Shares as of the
Record Date) which Genesis has indicated that it intends to vote in favor of the
proposal to approve and adopt the Merger Agreement. See 'THE MERGER -- Interests
of Certain Persons in the Merger.'
THE MERGER
This Proxy Statement relates to the proposed Merger of Newco with and into
the Company with the Company being the Surviving Corporation pursuant to the
Merger Agreement. Newco is a wholly-owned subsidiary of Genesis. The Merger is
subject to the satisfaction of certain conditions. See 'THE MERGER -- The Merger
Agreement -- Conditions to the Merger.'
<PAGE>
In the Merger, (i) each outstanding Share, other than Shares held by the
Company or by Genesis or any of its subsidiaries ('Participant Shares'), and
other than shares ('Dissenting Shares') held by Stockholders ('Dissenting
Stockholders'), if any, who perfect their appraisal rights under the General
Corporation Law of the State of Delaware ('Delaware Law'), will be converted
into the right to receive, upon exchange therefor of the certificate (a
'Certificate') representing such Shares, Five Dollars Seventy-Five Cents ($5.75)
in cash, without interest (the 'Merger Consideration'), (ii) all Participant
Shares will be cancelled and (iii) each Dissenting Share, upon exchange therefor
of a certificate representing such Dissenting Shares, will be converted into the
right to receive the 'fair value' of such Dissenting Shares in accordance with
Delaware Law. Each share of common stock, no par value, of Newco issued and
outstanding immediately prior to the consummation of the Merger ('Newco Common
Stock') will be converted into and become one fully paid and nonassessable share
of common stock, no par value, of the Surviving Corporation ('Surviving
Corporation Common Stock'). Each option, warrant, and other right to acquire
Shares shall be cancelled in exchange for a payment, payable upon surrender of
such option, warrant or right, equal to the number of Shares subject to such
option, warrant or right multiplied by the excess of the Merger Consideration
over the exercise price (if any) per Share for such option, warrant or other
right. See 'THE MERGER -- The Merger Agreement -- Options and Employee
Benefits.' It is expected that, upon the terms and subject to the conditions
contained in the Merger Agreement, the Merger will be consummated on October 3,
1996, or as promptly as practicable thereafter.
The Board, after considering the recommendation of a Special Committee of
the Board (the 'Special Committee') and other relevant factors, has determined
that the Merger is fair to, and in the best interests of the Stockholders, has
approved the Merger Agreement, and recommends that the Stockholders approve and
adopt the Merger Agreement.
PAYMENT FOR SHARES
The Merger Agreement provides that, prior to the Effective Time, Genesis
shall deposit the Merger Consideration with a paying agent (the 'Paying Agent')
in a separate fund established for the benefit of the Stockholders for payment
in accordance with the Merger Agreement (the 'Payment Fund'). The Paying Agent
shall, pursuant to irrevocable instructions, pay the Merger Consideration out of
the Payment Fund.
As soon as reasonably practicable after the Effective Time, the Paying
Agent will send a notice and transmittal form to each holder of an outstanding
Certificate which immediately prior to the Effective Time evidenced Shares,
advising such Stockholder of the terms of the exchange effected by the Merger
and instructions for use in effecting the surrender of Certificates. Upon
surrender of the Certificates evidencing Shares to the Paying Agent or such
other agent or agents as shall be appointed by Genesis, together with such
letters of transmittal duly executed, and such other documents as may be
reasonably required by the Paying Agent, holders of the Certificates (other than
holders of Participant Shares or Dissenting Shares) shall be entitled to receive
in exchange therefor an amount of cash equal to the Merger Consideration per
Share multiplied by the number of Shares evidenced by such Certificates, as
provided in the Merger Agreement. No interest will be paid or accrue on the cash
payable upon surrender of such Certificate.
Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented Shares (other than Participant Shares and other than
Dissenting Shares), will be deemed for all purposes to evidence a right to
receive the Merger Consideration without interest thereon. After the Effective
Time there shall be no further registration of transfers on the records of the
Company of Shares and, if a Certificate representing such Shares (excluding
Participant Shares and Dissenting Shares) is presented to the Surviving
Corporation, it shall be cancelled and exchanged for the Merger Consideration as
herein provided.
2
<PAGE>
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH
THE ENCLOSED PROXY CARD.
RECOMMENDATION OF THE BOARD OF DIRECTORS
At a meeting held on July 10, 1996, the Special Committee unanimously
determined to recommend that the Board of Directors of the Company (the 'Board')
approve the Merger. At a meeting held immediately thereafter on July 10, 1996,
the full Board determined that the Merger is fair to, and in the best interests
of, the Stockholders, approved the Merger and resolved to recommend that the
Stockholders approve and adopt the Merger Agreement. For a discussion of the
factors the Board considered in reaching its decision, see 'THE MERGER -- The
Company's Reasons for the Merger.'
The Board, after considering the recommendation of the Special Committee,
recommends that Stockholders approve and adopt the Merger Agreement.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
CS First Boston Corporation ('CS First Boston'), financial advisor to the
Company, has rendered a written opinion, dated July 11, 1996, to the Board to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Merger Consideration to be received in the Merger by
the holders of Shares was fair, from a financial point of view, to such holders.
A copy of the opinion of CS First Boston dated July 11, 1996 is attached hereto
as Exhibit B and should be read carefully in its entirety, including with
respect to the assumptions made, matters considered, and limitations on the
review undertaken in connection with such opinion. The opinion of CS First
Boston is directed only to the fairness of the Merger Consideration from a
financial point of view, does not address any other aspect of the proposed
Merger or any related transaction and does not constitute a recommendation to
any Stockholder as to how such Stockholder should vote at the Special Meeting.
See 'THE MERGER -- Opinion of the Company's Financial Advisor.'
BACKGROUND
For a description of the events leading to the approval of the Merger
Agreement by the Board, see 'THE MERGER -- Background of the Merger.'
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger is for Genesis to acquire the entire equity
interest in the Company pursuant to a cash merger in order to provide a prompt
and orderly transfer of ownership of the Company from Stockholders to Genesis
and to provide Stockholders with cash for all of their Shares as promptly as
practicable. The structure of the Merger was determined by mutual agreement of
the parties after negotiation. The Merger has been structured as a reverse
merger of Newco into the Company, with the Company as the Surviving Corporation,
to preserve the Company's corporate identity, certain permits, and existing
contractual arrangements with third parties. Following the Merger, Genesis will
be able to elect all the directors of the Surviving Corporation who, in turn,
will be able to elect all the officers of the Surviving Corporation.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Certain members of the Company's management have certain interests in the
consummation of the Merger, apart from their interests as Stockholders, which
are not identical to those of unaffiliated Stockholders. Prior to the execution
of the Merger Agreement, there was no material relationship between the Company
and Genesis or Newco, or any of the Company's, Genesis' or Newco's respective
affiliates, directors or officers. See 'THE MERGER -- Interests of Certain
Persons in the Merger' and 'THE MERGER -- The Merger Agreement -- Options and
Employee Benefits.'
FINANCING OF THE TRANSACTION
Approximately $92,000,000 will be required in order to pay the
consideration payable to existing Stockholders and holders of options, warrants
and other rights under the terms of the Merger. Genesis has indicated that such
funds shall be provided from existing lines of credit available to Genesis.
3
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
For a description of certain Federal income tax consequences of the Merger,
see 'CERTAIN FEDERAL TAX CONSEQUENCES.'
APPRAISAL RIGHTS
Delaware Law provides that, as a result of the Merger, any Stockholder who
shall have perfected appraisal rights will be entitled to receive payment in
cash of the 'fair value' of his or her Shares. For a summary of the procedures
applicable to the perfection of appraisal rights, see 'APPRAISAL RIGHTS' and
Exhibit C hereto. Because of the complexity of the procedures for exercising
these rights, Stockholders who consider exercising such rights should seek the
advice of counsel. Stockholders electing to exercise their appraisal rights must
not vote for the adoption of the Merger Agreement. If a Stockholder returns a
signed Proxy but does not specify a vote against the adoption of the Merger
Agreement or a direction to abstain, the Proxy will be voted FOR the adoption of
the Merger Agreement, which will have the effect of waiving that Stockholder's
appraisal rights. FAILURE TO TAKE ANY STEP IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
THE COMPANY
The Company is a Mid-Atlantic health care company providing support
services in pharmacy, rehabilitative therapies, ambulance transportation,
contract management, financial, diagnostic services and home care, which
includes infusion, respiratory and equipment rental to hospitals, HMO's,
physician groups and nursing homes. It is also a major long-term care provider
in Pennsylvania and New Jersey. For additional information, see 'BUSINESS AND
PROPERTIES OF THE COMPANY.'
MARKET PRICES
On July 2, 1996, the last full day of trading prior to the announcement by
the Company that it was negotiating a merger with a third party, the reported
closing price of the Shares on the National Association of Securities Dealers
Automated Quotation System was $3.50 per Share. On July 10, 1996, the last full
day of trading prior to the announcement by Genesis and the Company that they
had entered into the Merger Agreement, such reported closing price was $4.00 per
Share. On September 6, 1996, the last full trading day for which quotations were
available at the time of printing this Proxy Statement, such reported closing
price was $5.625 per Share. See 'RECENT MARKET PRICES AND DIVIDEND HISTORY.'
CERTAIN INFORMATION CONCERNING GENESIS AND NEWCO
Genesis is a leading provider of healthcare and support services to the
elderly. Genesis has developed the Genesis ElderCare(sm) delivery model of
integrated healthcare networks to provide cost-effective, outcome-oriented
services to the elderly. Through these integrated healthcare networks, Genesis
provides basic healthcare and specialty medical services to more than 60,000
customers in five regional markets in the Eastern United States in which over
3,000,000 people over the age of 65 reside. The networks include 127 eldercare
centers with approximately 16,800 beds; 10 primary care physician clinics;
approximately 72 physicians, physician assistants and nurse practitioners; 11
institutional pharmacies and five medical supply distribution centers serving
over 44,000 beds; certified rehabilitation agencies providing services through
more than 300 contracts; and seven home healthcare agencies. Genesis has
concentrated its eldercare networks in five geographic regions in order to
achieve operating efficiencies, economies of scale and significant market share.
The five geographic markets that Genesis principally serves are:
Massachusetts/Connecticut/New Hampshire; Eastern Pennsylvania/Delaware Valley;
Southern Delaware/Eastern Shore of Maryland; Baltimore, Maryland/Washington,
D.C.; and Central Florida. Genesis was incorporated in May 1985 as a
Pennsylvania corporation.
Newco is a Delaware corporation that was incorporated in July, 1996 as a
wholly-owned subsidiary of Genesis for the purpose of effecting the Merger.
Newco will not engage in any business prior to the Merger.
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA OF THE COMPANY
The following table sets forth selected statement of income, balance sheet
and operating data of the Company for each of the prior five fiscal years. The
statement of income and balance sheet data for each such fiscal year has been
derived from the consolidated financial statements of the Company:
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Operating Revenues, Net............... $ 164,551,000 $ 164,364,000 $ 177,957,000 $ 192,234,000 $ 195,196,000
Income before Interest and
Taxes (a)........................... $ 10,986,000 $ 14,623,000 $ 9,152,000 $ 16,143,000 $ 15,188,000
Interest Expense, Net................. $ (9,463,000) $ (11,377,000) $ (10,889,000) $ (11,078,000) $ (12,295,000)
Pre-Tax Income (Loss)................. $ 1,523,000 $ 3,246,000 $ (1,737,000) $ 5,065,000 $ 2,893,000
Income Tax Provision (Benefit)........ $ 380,000 $ 812,000 $ (299,000) $ 1,012,000 $ (1,260,000)
Extraordinary Items:
Utilization of Net Operating Loss
Carryforwards..................... $ 66,000 $ -- $ -- $ -- $ --
Extinguishment of Debt -- net of tax
benefit........................... $ (650,000) $ -- $ -- $ -- $ --
Net Income (Loss)..................... $ 559,000 $ 2,434,000 $ (1,438,000) $ 4,053,000 $ 4,153,000
Per Common Share:
Net Income (Loss) before
Extraordinary Item(s)............. $ .08 $ .16 $ (.09) $ .27 $ .27
Extraordinary Item(s)............... $ (.04) $ -- $ -- $ -- $ --
Net Income.......................... $ .04 $ .16 $ (.09) $ .27 $ .27
BALANCE SHEET DATA (AS OF FISCAL YEAR END)
Total Assets.......................... $ 163,479,000 $ 169,619,000 $ 162,724,000 $ 176,717,000 $ 191,684,000
Long-Term Debt and Subordinated
Debentures (b)...................... $ 115,834,000 $ 122,582,000 $ 119,343,000 $ 121,660,000 $ 130,775,000
Shareholders' Equity.................. $ 9,382,000 $ 11,951,000 $ 10,545,000 $ 14,648,000 $ 18,880,000
OPERATING DATA
Patient Days (c)...................... 1,039,403 1,039,204 983,671 992,146 1,004,075
Average Occupancy Based on Beds in
Service (c)......................... 95% 94% 93% 92% 92%
Revenues From Government
Programs (c)........................ 78% 83% 86% 86% 83%
Number of Company Employees........... 4,018 3,887 4,150 5,300 5,100
Number of Beds -- Operated............ 5,530 4,942 3,904 3,989 3,808
</TABLE>
- - ----------
(a) Includes recognition of deferred and current gains on facilities sold:
1992................................................... $ 3,175,000
1993................................................... $ 6,365,000
1994................................................... $ 1,576,000
1995................................................... $ --
1996................................................... $ --
(b) Excludes current portion of long-term debt and subordinated debentures.
(c) Pertains to owned long-term care facilities only.
5
<PAGE>
[This Page Intentionally Left Blank]
6
<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to the holders ('Stockholders') of
common stock, par value $.10 per share ('Shares'), of Geriatric & Medical
Companies, Inc. (the 'Company'), in connection with the solicitation of proxies
by the Board of Directors of the Company (the 'Board') for the Special Meeting
of Stockholders to be held on October 3, 1996 at 9:00 a.m. local time, at the
offices of Mesirov Gelman Jaffe Cramer & Jamieson, 38th Floor, 1735 Market
Street, Philadelphia, Pennsylvania 19103, and any adjournment or postponement
thereof (the 'Special Meeting'). This Proxy Statement, the enclosed Notice of
Special Meeting of Stockholders, and the form of Proxy are first being mailed to
Stockholders on or about September 10, 1996.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
This Proxy Statement relates to the proposed merger of G Acquisition
Corporation ('Newco'), a Delaware corporation, with and into the Company (the
'Merger'), with the Company being the surviving corporation (the 'Surviving
Corporation'), pursuant to an Agreement and Plan of Merger, dated as of July 11,
1996, by and among Genesis Health Ventures, Inc. ('Genesis'), the Company and
Newco (the 'Merger Agreement'). Newco is a wholly-owned subsidiary of Genesis.
The Merger is subject to satisfaction of certain conditions. See 'THE MERGER --
The Merger Agreement -- Conditions to the Merger.'
In the Merger, (i) each outstanding Share, other than Shares held by the
Company or by Genesis or any of its subsidiaries ('Participant Shares'), and
other than shares ('Dissenting Shares') held by Stockholders ('Dissenting
Stockholders'), if any, who perfect their appraisal rights under the General
Corporation Law of the State of Delaware ('Delaware Law'), will be converted
into the right to receive, upon exchange therefor of the certificate (a
'Certificate') representing such Shares, Five Dollars Seventy-Five Cents ($5.75)
in cash, without interest (the 'Merger Consideration'), (ii) all Participant
Shares will be cancelled and (iii) each Dissenting Share, upon exchange therefor
of a Certificate representing such Dissenting Shares, will be converted into the
right to receive the 'fair value' of such Dissenting Shares in accordance with
Delaware Law. Each share of common stock, no par value, of Newco issued and
outstanding immediately prior to the consummation of the Merger ('Newco Common
Stock') will be converted into and become one fully paid and nonassessable share
of common stock, no par value, of the Surviving Corporation ('Surviving
Corporation Common Stock'). Each option, warrant, and other right to acquire
Shares shall be cancelled in exchange for a payment, payable upon surrender of
such option, warrant or other right, equal to the number of Shares subject to
such option, warrant or right multiplied by the excess of the Merger
Consideration over the exercise price (if any) per Share for such option,
warrant or other right. See 'THE MERGER -- The Merger Agreement -- Options and
Employee Benefits.' It is expected that, upon the terms and subject to the
conditions contained in the Merger Agreement, the Merger will be consummated on
October 3, 1996, or as promptly as practicable thereafter. Upon consummation of
the Merger, the Company will become a wholly-owned subsidiary of Genesis.
The Board, after considering the recommendation of the Special Committee of
the Board consisting of Messrs. Gerald E. Bisbee, Jr., Thomas J. Gorman, and
Anthony C. Salvo (the 'Special Committee') and other relevant factors set forth
below under the caption 'THE MERGER -- The Company's Reasons for the Merger,'
has determined that the Merger is fair to, and in the best interests of, the
Stockholders, has approved the Merger Agreement, and recommends that the
Stockholders approve and adopt the Merger Agreement.
RECORD DATE; VOTING AT THE SPECIAL MEETING; QUORUM
The Board has fixed August 30, 1996 as the record date (the 'Record Date')
for determination of Stockholders entitled to notice of and to vote at the
Special Meeting. Accordingly, only holders of record of Shares as of the close
of business on the Record Date will be entitled to notice of and to vote at the
Special Meeting and at any and all adjournments or postponements thereof. The
only class of stock of the Company outstanding and entitled to vote at the
Special Meeting is the Shares. As of the
7
<PAGE>
Record Date, there were outstanding 15,429,746 Shares, held by approximately
1,155 holders of record. Stockholders are entitled to one vote per Share on any
matter which may properly come before the Special Meeting. For purposes of the
Special Meeting, the presence, in person, or by proxy, of Stockholders entitled
to cast at least a majority of the votes which all Stockholders are entitled to
cast, shall constitute a quorum.
Under Delaware Law, approval and adoption of the Merger Agreement requires
the affirmative vote of the holders of at least a majority of the Outstanding
Shares. For additional information concerning the voting requirements for the
approval and adoption of the Merger Agreement, see 'THE MERGER -- Merger
Agreement -- Approval of the Merger.'
As of the Record Date, all executive officers and directors of the Company,
as a group, beneficially owned 5,415,482 Shares. Directors and officers of the
Company who beneficially owned as of the Record Date an aggregate of 5,176,356
Shares (excluding 239,126 Shares issuable upon exercise of stock options or
pursuant to other incentive plans), constituting all of the Shares such persons
are entitled to vote (an aggregate of 33.5% of the Outstanding Shares), have
indicated that they intend to vote all of such Shares in favor of the proposal
to approve and adopt the Merger Agreement. In connection therewith, Daniel
Veloric, Chairman of the Company, and certain other companies affiliated with
him, have appointed Genesis and Newco their proxy to vote 3,748,178 Shares
(24.3% of the Outstanding Shares as of the Record Date) which Genesis has
indicated it intends to vote in favor of the proposal to approve and adopt the
Merger Agreement. See 'THE MERGER -- Interests of Certain Persons in the Merger'
and 'OWNERSHIP OF AND CERTAIN TRANSACTIONS IN THE COMPANY'S COMMON STOCK.'
PROXIES
All Shares which are represented at the Special Meeting by properly
executed Proxies received prior to or at the Special Meeting and not revoked,
will be voted at the Special Meeting in accordance with the instructions
indicated on such Proxies. If no instructions are indicated, such Proxies will
be voted FOR approval and adoption of the Merger Agreement. The Board does not
know of any other matters which are to come before the Special Meeting. If any
other matters are properly presented at the Special Meeting for consideration,
the persons named in the enclosed form of Proxy acting thereunder will have
discretion to vote on such matters in accordance with their best judgment,
including, without limitation, any proposal to adjourn the Special Meeting or
otherwise concerning the conduct of the Special Meeting.
Proxies are being solicited by and on behalf of the Board. All expenses of
this solicitation, including the cost of preparing and mailing this Proxy
Statement, will be borne by the Company. In addition to solicitation by the use
of the mails, proxies may be solicited by directors, officers, and employees of
the Company in person or by telephone, telegram, or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for out-of-pocket expenses in connection with
such solicitation. Arrangements will also be made with custodians, nominees, and
fiduciaries for forwarding the proxy solicitation materials to beneficial owners
of Shares held of record by such custodians, nominees, and fiduciaries, and the
Company may reimburse such custodians, nominees, and fiduciaries for reasonable
expenses incurred in connection therewith.
If for any reason the Company believes that additional time should be
allowed for the solicitation of Proxies, the Company may adjourn the Special
Meeting. The persons named in the enclosed form of Proxy will cast votes in
respect of any Shares for which they have voting authority pursuant to such
Proxies in favor of such adjournment.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, before the polls are closed with respect to
the matters to be considered at the Special Meeting, a written notice of
revocation bearing a date later than that of the Proxy, (ii) duly executing a
subsequent Proxy relating to
8
<PAGE>
the same Shares and delivering it to the Secretary of the Company before the
polls are closed with respect to the matters to be considered at the Special
Meeting, or (iii) attending the Special Meeting and voting in person (although
attendance at the Special Meeting will not in and of itself constitute a
revocation of a Proxy). Any written notice revoking a Proxy should be sent to
Geriatric & Medical Companies, Inc., 5601 Chestnut Street, Philadelphia,
Pennsylvania 19139, Attn: Arthur A. Carr, Jr., Secretary.
Stockholders are urged to read this Proxy Statement and the Exhibits hereto
carefully, in their entirety, before deciding how to vote their Shares.
APPRAISAL RIGHTS
Each Stockholder has the right to dissent from the Merger and obtain
payment of the 'fair value' of his or her Shares by following the procedures
described in Section 262 of Delaware Law. See 'APPRAISAL RIGHTS' and Exhibit C.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
9
<PAGE>
THE MERGER
This section of the Proxy Statement describes certain aspects of the
Merger. To the extent that the following description includes references to the
Merger Agreement, such description does not purport to be complete, and is
qualified in its entirety by reference to the Merger Agreement, which is
attached as Exhibit A to this Proxy Statement, and is incorporated herein by
reference. All Stockholders are urged to read the Merger Agreement in its
entirety. Capitalized words used in the following description which are not
otherwise defined in the Proxy Statement, shall have the respective meanings
given to them in the Merger Agreement.
DESCRIPTION OF THE MERGER
Under the terms of the Merger Agreement, at the Effective Time, Newco will
be merged with and into the Company (the 'Merger'). At the Effective Time, the
separate corporate existence of Newco will cease and the Company shall continue
as the surviving corporation (the 'Surviving Corporation'). The certificate of
incorporation and bylaws of Newco as in effect immediately prior to the
Effective Time will be the certificate of incorporation and by-laws,
respectively, of the Surviving Corporation. As a result of the Merger, the
Company will become a wholly-owned subsidiary of Genesis.
Pursuant to the Merger Agreement, (i) each outstanding Share, other than
Shares held by the Company or by Genesis or any of its subsidiaries
('Participant Shares'), and other than shares ('Dissenting Shares') held by
Stockholders ('Dissenting Stockholders'), if any, who perfect their appraisal
rights under the General Corporation Law of the State of Delaware ('Delaware
Law'), will be converted into the right to receive, upon exchange therefor of
the certificate (a 'Certificate') representing such Shares, Five Dollars
Seventy-Five Cents ($5.75) in cash, without interest (the 'Merger
Consideration'), (ii) all Participant Shares will be cancelled and (iii) each
Dissenting Share, upon exchange therefor of the Certificate representing such
Dissenting Shares, will be converted into the right to receive the 'fair value'
of such Dissenting Shares in accordance with Delaware Law. Each share of common
stock, no par value, of Newco issued and outstanding immediately prior to the
consummation of the Merger will be converted into and become one fully paid and
nonassessable share of common stock, no par value, of the Surviving Corporation
('Surviving Corporation Common Stock'). Each option, warrant, and other right to
acquire Shares shall be cancelled in exchange for a payment, payable upon
surrender of such option, warrant or right, equal to the number of Shares
subject to such option, warrant or other right multiplied by the excess of the
Merger Consideration over the exercise price (if any) per Share for such option,
warrant or other right. See 'THE MERGER -- The Merger Agreement -- Options and
Employee Benefits.'
As of the Effective Time, Shares will no longer be outstanding and will
automatically be canceled and retired and will cease to exist, and each holder
of a certificate representing any Shares will cease to have any rights with
respect thereto, except the right to receive the Merger Consideration, without
interest, and holders of Dissenting Shares will be entitled to the rights
provided by Delaware Law.
At the Effective Time, all the properties, rights, privileges, powers, and
franchises of the Company and Newco will vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Newco will become the
debts, liabilities and duties of the Surviving Corporation.
BACKGROUND OF THE MERGER
The Merger was the final result of a process that began in the summer of
1994 when the Company commenced consideration of the outlook for the health care
industry and the means by which the Company could position itself to meet
anticipated industry challenges. In connection with this process, the Company
engaged CS First Boston in November, 1994 to assist the Company in its
evaluation of potential strategic alternatives, including the possible merger of
the Company with a third party.
The Company believed that it would need to increase the scale and scope of
its operations to compete successfully against larger, better capitalized
companies that likely would be entering or expanding in the Mid-Atlantic market
and competing with the Company. Management believed that
10
<PAGE>
the Company's competitiveness would depend on such factors as its ability to
have a competitive cost structure and to fund significant investments, to
provide a broad range of products and services to the managed care market where
size is important not only to provide a broad range of such products and
services but also to achieve economies of scale to be able to better compete in
the managed care marketplace. However, the Company concluded that its existing
capitalization was such that funding additional investments would be difficult.
As a result, the Company authorized CS First Boston to contact potentially
interested parties to explore a possible merger of the Company.
Pursuant to this authorization, during December, 1994 and January, 1995,
seven potentially interested parties in the health care industry were contacted
to discuss a possible transaction with the Company. Between February and May of
1995, only Genesis and one other industry participant (the 'Other Industry
Participant') expressed sufficient interest to justify a meeting with Company
management and the performance of limited due diligence. Genesis, with the
assistance of its financial advisor, Alex. Brown and Sons Incorporated ('Alex.
Brown') made a preliminary proposal to the Company which was rejected and
negotiations between Genesis and the Company terminated. During the February to
May time period, inquiries were made to two additional industry participants and
three investor groups in an effort to determine whether there was any other
potential interest in the Company. None of these additional contacts lead to an
expression of interest in a transaction with the Company.
During the summer of 1995, general discussions, including price, were held
between the Company and each of Genesis and the Other Industry Participant, but
no consensus was reached regarding a transaction with the Company. Genesis made
another preliminary proposal to the Company which was rejected and negotiations
between Genesis and the Company terminated. During this time period, another
party contacted CS First Boston and expressed an interest in submitting a
proposal for a merger with the Company. However, after conducting limited due
diligence, this party determined not to submit a proposal.
During November, 1995, the Company requested that CS First Boston again
seek expressions of interest in the Company. Six health care industry
participants were contacted, including Genesis, most of which proceeded to
conduct limited due diligence with respect to the Company. After such due
diligence, only Genesis and the Other Industry Participant expressed any
interest in a transaction with the Company. Preliminary discussions were held
with both parties shortly thereafter, but did not result in sufficient interest
in a transaction.
In April, 1996, Genesis indicated to CS First Boston that it had a renewed
interest in a possible transaction with the Company. Shortly thereafter, Genesis
submitted a preliminary proposal to acquire the Company for $4.25 per Share in
cash, subject to extensive due diligence, which preliminary proposal was
rejected by the Company and negotiations terminated.
After a meeting in June, 1996, arranged by CS First Boston, between
representatives of the Company and Genesis, the Company supplied Genesis with
current information and budgets for review by Genesis in order for Genesis to
determine whether it had any further interest in pursuing discussions with the
Company. On June 17, 1996, Genesis and the Company engaged in negotiations
concerning, among other things, the form and structure of a potential
transaction and the per Share price to be paid by Genesis. As a result of these
negotiations, Genesis stated it would be willing to consider paying $6.25 per
Share depending on the outcome of its due diligence investigation, which Genesis
and Alex. Brown commenced shortly thereafter.
On July 2, 1996, prior to the Company's scheduled Board meeting, the
parties met to continue their negotiations. At such time, Genesis informed the
Company that as a result of its due diligence review, the price it would be
willing to pay would have to be reduced from the $6.25 per Share figure
discussed preliminarily. Thereafter, a meeting of the Board was commenced.
Present at the Board meeting, in addition to the Board, were certain executive
officers of the Company, representatives of CS First Boston, and counsel to the
Company. At the meeting, counsel and CS First Boston reported on the status of
the due diligence investigation being conducted by, as well as the ongoing
discussions with, Genesis. The Board also reviewed with CS First Boston certain
information regarding the long-
11
<PAGE>
term health care industry and the operating and financial performance of the
Company relative to other companies in such industry. CS First Boston also
discussed with the Board certain valuation methodologies to be utilized by CS
First Boston in its financial analysis of any proposed transaction. The Board
was also informed by counsel to the Company that certain transactions proposed
by Genesis would involve certain members of the Board. See 'THE MERGER --
Interests of Certain Persons in the Merger.' The Board therefore determined to
refer to its standing Special Committee the duty of reviewing the fairness of
any proposed transaction involving the Company.
Further negotiations between Genesis and the Company occurred immediately
following the Company's Board meeting. As a result of such negotiations, the
parties preliminarily agreed upon a price of $5.75 per Share, subject to, among
other things, continuing due diligence by Genesis, agreement on certain other
material terms of the transaction, negotiation of satisfactory documentation,
and satisfaction of other conditions.
On July 3, 1996, the Company announced that it was in discussions with a
third party regarding a possible merger of the Company.
Between July 3, 1996 and July 11, 1996, documentation was drafted, the
parties met to negotiate the final terms of the Merger and certain other
matters, and the related party transactions were referred to the Special
Committee.
On July 8, 1996, CS First Boston received an unsolicited inquiry from the
Other Industry Participant which indicated that it had an interest in submitting
an acquisition proposal for the Company. The Company requested that CS First
Boston advise the Other Industry Participant that the Company would respond to
such an expression of interest only if such party submitted a detailed written
proposal. On July 9, 1996, the Other Industry Participant informed CS First
Boston that it was not prepared to submit such a proposal.
The Special Committee convened a meeting on July 3, 1996, and retained
independent counsel to advise it in connection with the pending discussions. The
Special Committee met again on July 8, 9, and 10, as the due diligence process
was completed, documentation was drafted and negotiated, and the related party
transactions were negotiated. See, 'THE MERGER -- Interests of Certain Persons
in the Merger.' On July 10, 1996, the Special Committee concluded, after
considering all of the foregoing, that the proposed Merger was fair to the
Stockholders, and recommended to the full Board of Directors that the Board
approve the proposed Merger, and recommend approval and adoption of the Merger
Agreement to the Stockholders.
The entire Board met on the afternoon of July 10, 1996, at which meeting CS
First Boston and counsel participated. Counsel reviewed with the Board the
progress of negotiations, the terms of the proposed Merger Agreement and the
Board's fiduciary obligations in connection with the proposed transaction. CS
First Boston then reviewed with the Board certain financial analyses performed
by CS First Boston in connection with its opinion (see 'THE MERGER -- Opinion of
the Company's Financial Advisor') and advised the Board that it would be in a
position to render an opinion once the final terms of a definitive agreement
with Genesis were reached. After discussion, the Board authorized continued
negotiations and determined to reconvene once such negotiations and any
remaining issues relating to the transaction were resolved.
All of the final conditions to arriving at an agreement between Genesis and
the Company were resolved late in the evening on July 10, 1996. Thereafter, the
Board convened another meeting, at which meeting certain executive officers of
the Company, CS First Boston and counsel participated. At such meeting, counsel
reviewed with the Board the final terms of the proposed Merger Agreement and CS
First Boston rendered to the Board an oral opinion (subsequently confirmed by
delivery of a written opinion dated July 11, 1996) to the effect that, as of
such date and based upon and subject to certain matters stated in such opinion,
the Merger Consideration to be received in the Merger by the Stockholders was
fair to such Stockholders from a financial point of view. After further
discussion, the Board voted to approve the Merger Agreement and to recommend
that the Stockholders approve and adopt the Merger Agreement. The Merger
Agreement was executed early in the morning of July 11,
12
<PAGE>
1996 and public announcement of such execution was made later that morning,
prior to the start of trading for the day.
THE COMPANY'S REASONS FOR THE MERGER
THE COMPANY'S BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, WHICH WERE ESTABLISHED THROUGH ARM'S LENGTH NEGOTIATIONS WITH
GENESIS, AND THE TRANSACTIONS CONTEMPLATED THEREBY, ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT.
In making its determination that the terms of the Merger are fair to, and
in the best interests of, the Stockholders, to approve the Merger Agreement, and
to recommend that the Stockholders approve and adopt the Merger Agreement, the
Board considered a number of factors, including the following:
(i) the business, operations, properties, earnings and prospects of
the Company, as well as the risks involved in achieving those prospects,
including information furnished to the Board by management with respect to
the Company's expected future results of operations and financial
condition;
(ii) a review of possible alternatives available to the Company,
including the prospects of merging the Company with a third party other
than Genesis, or continuing as an independent company;
(iii) recent market prices for the Shares as well as market prices
during the past several years and the relationship of such prices to the
Merger Consideration (see 'RECENT MARKET PRICES AND DIVIDEND HISTORY');
(iv) the continuing efforts of third party payors to contain or reduce
the costs of health care by lowering reimbursement rates, increasing case
management review of services, and negotiating contract pricing;
(v) increasing government regulation of the types of products and
services offered by the Company, which impose additional management,
capital, and operating costs on the Company, and increasing uncertainty
over the nature and direction of such regulation in the future and its
effect on the Company;
(vi) the increasing business pressure to force consolidation in the
health care industry;
(vii) the liquidity pressures on the Company created by the refusal of
certain third party payors to pay all reimbursement claims on a timely
basis;
(viii) the extensive process undertaken by the Company to obtain
indications of interest in the Company from third parties;
(ix) the fact that the terms of the Merger Agreement permit the
Company to terminate the Merger Agreement if the Board determines that such
action is required by its fiduciary duties (subject to a termination fee
and expense reimbursement which would be payable to Genesis in such event);
and
(x) the opinion of CS First Boston to the Company's Board of Directors
to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Merger Consideration to be
received in the Merger by the Stockholders was fair, from a financial point
of view, to such Stockholders.
See generally, 'BUSINESS AND PROPERTIES OF THE COMPANY' and 'MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.'
13
<PAGE>
As a result of a series of meetings held on July 3, 8, 9, and 10, 1996, the
Special Committee unanimously determined (i) that the Merger is fair to, and in
the best interests of, the Stockholders and (ii) to recommend that the Board
approve the Merger Agreement and the transactions contemplated thereby. At a
meeting held July 10, 1996, the Board determined, by unanimous vote in light of
all of the foregoing and subject to the terms and conditions set forth in the
Merger Agreement, that it was in the best interests of the Stockholders for the
Company to enter into the Merger Agreement, and that the proposed Merger was
fair to, and in the best interests of, the Stockholders, and to recommend that
the Stockholders approve and adopt the Merger Agreement.
The Stockholders should be aware that certain officers and directors of the
Company have direct and indirect interests in the consummation of the Merger,
apart from their interests as Stockholders, which are not identical to those of
unaffiliated Stockholders. See 'THE MERGER -- Interests of Certain Persons in
the Merger.'
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
CS First Boston has acted as financial advisor to the Company in connection
with the proposed Merger. CS First Boston was selected by the Company based on
CS First Boston's experience and expertise. CS First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for corporate, estate and other purposes.
In connection with CS First Boston's engagement, the Company requested that
CS First Boston evaluate the fairness, from a financial point of view, to the
holders of Company Common Stock, of the consideration to be received by such
holders in the Merger. On July 10, 1996, at a meeting of the Board of Directors
of the Company held to evaluate the proposed Merger, CS First Boston rendered to
the Board of Directors an oral opinion (subsequently confirmed by delivery of a
written opinion dated July 11, 1996) to the effect that, as of such date and
based upon and subject to certain matters stated in such opinion, the Merger
Consideration to be received in the Merger by the Stockholders was fair to such
Stockholders from a financial point of view. See also, 'THE MERGER -- Background
of the Merger.'
In arriving at its opinion, CS First Boston reviewed the Merger Agreement
and certain publicly available business and financial information relating to
the Company. CS First Boston also reviewed certain other information, including
financial forecasts, provided to CS First Boston by the Company and met with the
respective managements of the Company and Genesis to discuss the business and
prospects of the Company. CS First Boston also considered certain financial and
stock market data of the Company and compared that data with similar data for
other publicly held companies in businesses similar to those of the Company and
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions recently effected. CS First
Boston also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which CS First Boston
deemed relevant.
In connection with its review, CS First Boston did not assume any
responsibility for independent verification of any of the information provided
to or otherwise reviewed by CS First Boston and relied upon such information
being complete and accurate in all material respects. With respect to the
financial forecasts, CS First Boston assumed that such forecasts were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company. In addition, CS First Boston did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company, nor was CS First Boston furnished with any such
evaluations or appraisals. CS First Boston's opinion was necessarily based on
information available to it and financial, stock market and other conditions as
they existed and could be evaluated on the date of its opinion. In connection
with its engagement, CS First Boston was requested to approach third parties to
solicit indications of interest in a possible merger of the Company and held
discussions with certain of these parties prior to the date of its opinion (See
'THE MERGER -- Background of the Merger'). Although CS First Boston
14
<PAGE>
evaluated the Merger Consideration from a financial point of view, CS First
Boston was not requested to, and did not, recommend the specific consideration
payable in the Merger, which consideration was determined through negotiation
between the Company and Genesis. No other limitations were imposed by the
Company on CS First Boston with respect to the investigations made or procedures
followed by CS First Boston in rendering its opinion.
THE FULL TEXT OF CS FIRST BOSTON'S WRITTEN OPINION TO THE BOARD OF
DIRECTORS OF THE COMPANY DATED JULY 11, 1996, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
AS EXHIBIT B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. CS FIRST
BOSTON'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION
FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE
PROPOSED MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF CS FIRST BOSTON SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION.
In preparing its opinion to the Board of Directors of the Company, CS First
Boston performed a variety of financial and comparative analyses, including
those described below. The summary of CS First Boston's analyses set forth below
does not purport to be a complete description of the analyses underlying CS
First Boston's opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. In arriving at its opinion, CS First Boston
made qualitative judgments as to the significance and relevance of each analysis
and factor considered by it. Accordingly, CS First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could create
a misleading or incomplete view of the processes underlying such analyses and
its opinion. In its analyses, CS First Boston made numerous assumptions with
respect to the Company, industry performance, regulatory, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the Company. No company, transaction or business used in
such analyses as a comparison is identical to the Company or the proposed
Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, it involves complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions being analyzed. The estimates contained in
such analyses, and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty. CS
First Boston's opinion and financial analyses were only one of many factors
considered by the Board in its evaluation of the proposed Merger and should not
be viewed as determinative of the views of the Company's Board or management
with respect to the Merger Consideration or the proposed Merger.
The following is a summary of the material analyses performed by CS First
Boston in connection with its opinion and financial presentation made to the
Board of Directors of the Company on July 10, 1996. References to the Company's
latest twelve months ('LTM') financial results relate to management's estimates
for the Company's fiscal year ended May 31, 1996, and such convention is
applicable each year thereafter. CS First Boston compared the projected
financial results of the Company under two different scenarios: (i) a case
prepared by the Company's management which assumed that the Company remained as
a stand-alone entity and which represented the Company's current budget (the
'Base Case') and (ii) a case prepared by management which assumed that the
Company remained as a stand-alone entity and which, among other things, assumed
lower margins and revenue growth as compared to the Company's current budget
(the 'Downside Case').
15
<PAGE>
Historical Trading Analysis. CS First Boston compared the Merger
Consideration of $5.75 per Share to (i) the Company's closing Share price on
July 8, 1996; (ii) the Company's closing Share price on May 13, 1996; and (iii)
the highest closing Share price over the five years prior to public announcement
of the Merger. The Merger Consideration represented premiums of 46%, 179% and
29%, respectively, over the closing price of the Shares on the dates referred to
in the preceding sentence.
Comparison of the Company to Industry Peers. Using publicly available
information, CS First Boston compared certain operating characteristics of the
Company to those of the following selected publicly-traded companies in the
long-term care industry: Arbor Health Care Company; Beverly Enterprises, Inc.;
Genesis; GranCare, Inc.; Health Care and Retirement Corporation; Horizon/CMS
Healthcare Corporation; Integrated Health Services, Inc.; Living Centers of
America, Inc.; Manor Care, Inc.; Mariner Health Group, Inc.; The Multicare
Companies, Inc.; National Healthcare L.P.; Regency Health Services, Inc.; Summit
Care Corporation; Sun Healthcare Group, Inc.; and Vencor, Inc. (the 'Selected
Companies'). CS First Boston observed that, based on the closing price of the
Shares as of May 13, 1996, the equity market value of the Company was lower than
that of any of the Selected Companies. CS First Boston also observed that the
Company's revenues from 'Quality Payors' (defined as Medicare and private
payors) as a percentage of total revenues was lower than that of any of the
Selected Companies. Comparing the Company's LTM earnings before interest, taxes,
depreciation, amortization, and rental expense ('EBITDAR') margin to the LTM
EBITDAR margins of the Selected Companies, CS First Boston observed that the
Company's LTM EBITDAR margin was 13.7%, compared with a median for the Selected
Companies of 17.4%. CS First Boston then compared the financial leverage of the
Company to the financial leverage of the Selected Companies as measured by (i)
book debt divided by total book capitalization (total book debt plus book
equity) and by (ii) total book debt plus capitalized operating leases divided by
total book capitalization plus capitalized operating leases and observed that,
based on both measures, the Company was more highly leveraged than each of the
Selected Companies.
Company Valuation Analysis. CS First Boston arrived at estimated valuation
ranges for the Company using three valuation methodologies: a comparable
acquisitions analysis, a comparable companies analysis, and a discounted cash
flow analysis. These valuation methodologies are discussed below:
Comparable Acquisitions Analysis. Using publicly available information, CS
First Boston analyzed the prices and multiples paid in 18 recent comparable
acquisitions announced between June 14, 1993 and May 6, 1996. The transactions
analyzed were (Acquiror/Target): Genesis/National Health Care Affiliates;
Regency Health Services, Inc./Liberty Healthcare L.P.; The Multicare Companies,
Inc./Glenmark Associates; Genesis/McKerley Health Care Centers; GranCare,
Inc./Evergreen HealthCare, Inc.; Vencor, Inc./The Hillhaven Corporation; Living
Centers of America, Inc./The Brian Center Corporation; The Hillhaven
Corporation/Nationwide Care, Inc.; Mariner Health Group, Inc./CSI; Horizon
Healthcare Corporation/people CARE Heritage Group; The Multicare Companies,
Inc./Providence Health Care, Inc.; Mariner Health Group, Inc./Pinnacle Care
Corporation; Sun Healthcare Group, Inc./The Mediplex Group, Inc.; Regency Health
Services, Inc./Care Enterprises, Inc.; Integrated Health Services, Inc./Central
Park Lodges; Genesis/Meridian Healthcare, Inc.; Horizon Healthcare
Corporation/Greenery Rehabilitation Group, Inc.; and Living Centers of America,
Inc./Vari-Care (the 'Selected Transactions'). CS First Boston analyzed the
Selected Transactions in terms of: (a) the ratios of enterprise value (equity
value plus debt minus cash, 'enterprise value') to revenues and to earnings
before interest, taxes, depreciation and amortization ('EBITDA') and (b) the
ratio of equity value to net income, based on the LTM financial results for the
companies acquired in such transactions. CS First Boston derived a range of
multiples of (a) enterprise value to (i) revenues (0.9x-1.3x) and (ii) EBITDA
(7.0x-9.0x), and (b) equity value to net income (15.0x-20.0x) and applied these
multiples to the Company's LTM revenues, EBITDA and net income (fully-taxed at a
40% tax rate), respectively. The reference ranges of enterprise value and equity
value for the Company derived from this analysis were $200 million to $225
million and $71 million to $96 million, respectively, or $4.38 to $5.94 per
Share.
16
<PAGE>
Comparable Companies Analysis. CS First Boston reviewed certain financial
results of the Selected Companies and the Company. Using publicly available
financial and stock price data for the Selected Companies, CS First Boston
determined the multiples of (a) enterprise value to LTM EBITDA and (b) equity
value to calendarized 1996 estimated net income. CS First Boston then derived a
range of these multiples of LTM EBITDA (6.0x-7.5x) and calendarized 1996
estimated net income (10.0x-12.0x) and applied these multiples to the Company's
LTM EBITDA and calendarized 1996 estimated net income (fully-taxed at a 40% tax
rate), respectively. The reference ranges of enterprise value and equity value
for the Company derived from this analysis were from $175 million to $200
million and $46 million to $71 million, respectively, or $2.83 to $4.38 per
Share.
No transaction used in the Comparable Acquisitions Analysis is identical to
the Merger and no company used in the Comparable Companies Analysis is identical
to the Company. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
Selected Companies and of the Company, and other factors that could affect the
acquisition, public trading, or other values of the business segment, companies
or transactions to which they are being compared.
Discounted Cash Flow Analysis. CS First Boston also performed discounted
cash flow analyses of the Company based on both the Base Case and the Downside
Case. CS First Boston derived the unleveraged 'free cash flow' that the Company
was expected to generate in each fiscal year from 1997 to 2001. CS First Boston
then discounted these cash flows to present values by applying annual discount
rates of 10%, 12%, and 14%. To determine the terminal value of the Company in
2001, CS First Boston applied terminal multiples of 6.0x, 7.0x, and 8.0x EBITDA
in 2001. The reference ranges of enterprise value and equity value for the
Company derived from the Base Case were $210 million to $240 million and $81
million to $111 million, respectively, or $5.01 to $6.87 per Share. The
reference ranges of enterprise value and equity value for the Company derived
from the Downside Case were $180 million to $200 million and $51 million to $71
million, respectively, or $3.14 to $4.38 per Share.
Based on the Comparable Acquisitions Analysis, the Comparable Companies
Analysis, and the Discounted Cash Flow Analysis, CS First Boston derived an
overall reference range of enterprise value and equity value for the Company of
$200 million to $225 million and $71 million to $96 million, respectively, or
$4.38 to $5.94 per Share.
Pursuant to the terms of CS First Boston's engagement, the Company has
agreed to pay CS First Boston for its services an aggregate financial advisory
fee equal to 1% of the total consideration payable (including liabilities
assumed) in connection with the proposed Merger. Under the terms of the
Company's engagement, the Company has agreed to pay CS First Boston an
additional fee, to be mutually agreed upon, at the closing of the Merger. The
Company also has agreed to reimburse CS First Boston for reasonable
out-of-pocket expenses incurred by CS First Boston in performing its services,
including the fees and expenses of legal counsel and any other advisor retained
by CS First Boston, and to indemnify CS First Boston and certain related persons
and entities against certain liabilities, including liabilities under the
Federal securities laws, arising out of CS First Boston's engagement.
In the ordinary course of business, CS First Boston and its affiliates may
actively trade the equity securities of the Company and the equity and debt
securities of Genesis for their own account and for accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
GENESIS' REASONS FOR UNDERTAKING THE MERGER
Genesis believes that the combination of Genesis and the Company will
significantly expand Genesis' network throughout its Delaware Valley market
concentration and strengthen its service capabilities which will enhance its
ability to create alliances and partnerships with other leading health care
providers in the Delaware Valley market. In addition, Genesis believes there may
be significant synergies arising from the Merger.
17
<PAGE>
FINANCING OF THE TRANSACTION
Approximately $92,000,000 will be required in order to pay the
consideration payable to existing Stockholders and holders of options, warrants
or other rights under the terms of the Merger. Genesis has indicated that such
funds shall be provided from existing lines of credit available to Genesis.
STRUCTURE AND PURPOSE OF THE MERGER
The structure of the Merger was determined by mutual agreement of the
parties after prolonged negotiation. The Merger has been structured as a reverse
merger of Newco into the Company, with the Company as the Surviving Corporation,
to preserve the Company's corporate identity, certain permits, and existing
contractual arrangements with third parties.
CERTAIN EFFECTS OF THE MERGER; OPERATIONS OF THE COMPANY AFTER THE MERGER
Upon consummation of the Merger, Stockholders will cease to have any
ownership interest in the Company or rights as Stockholders, and will cease to
participate in the Company's future earnings and growth, if any. In addition,
the receipt of the Merger Consideration pursuant to the Merger will be a taxable
transaction for most Stockholders. See 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.' If the Merger is consummated, Stockholders (other than Dissenting
Stockholders and Stockholders of Participant Shares) will be entitled to receive
the Merger Consideration whether they vote for or against the Merger or abstain
from voting. See 'APPRAISAL RIGHTS' and Exhibit C.
Trading in the Shares on the NASDAQ National Market System will cease on or
about the date on which the Merger is consummated. Following the Merger, the
Shares will cease to be quoted on NASDAQ, the registration of the Shares under
the Securities Exchange Act of 1934, as amended (the 'Exchange Act') will be
terminated, and the Shares will no longer constitute 'margin securities' under
the rules of the Board of Governors of the Federal Reserve System. Moreover, the
Company will be relieved of the obligation to comply with the proxy rules of
Regulation 14A under Section 14 of the Exchange Act and to file periodic reports
under the Exchange Act, and its officers, directors and 10% Stockholders will be
relieved of the reporting requirements and restrictions on 'short-swing' trading
under Section 16 of Exchange Act with respect to the Shares.
For a description of the specific effect on Shares, see 'THE MERGER --
Description of the Merger.'
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors with respect to
the Merger, Stockholders should be aware that certain members of the Company's
management have certain interests, referred to below, in the consummation of the
Merger apart from their interest as Stockholders, which are not identical to
those of unaffiliated Stockholders.
Prior to the execution of the Merger Agreement, there was no material
relationship between the Company and Genesis or Newco or any of the Company's,
Genesis's or Newco's respective affiliates, directors or officers.
In connection with the execution of the Merger Agreement, Daniel Veloric
('Veloric'), the Chairman of the Board, and certain companies of which Veloric
is the beneficial owner, have reached certain understandings with Genesis. The
Special Committee of the Board of Directors of the Company and its independent
legal counsel have reviewed the material business terms of the understandings
reached by Veloric and Genesis.
Tomahawk Holdings, Inc. ('Holdings'), Tomahawk Mt. Laurel, Inc. ('Mt.
Laurel'), and Tomahawk Capital Investments, Inc. ('Investments,' and together
with Holdings and Mt. Laurel, 'Tomahawk') have reached an agreement in principle
with Genesis regarding (i) Genesis' operation of a long-term care facility
located in New Jersey licensed for 280 beds, and a 55-bed licensed residential
healthcare facility located in New Jersey (collectively, the 'Facility') owned
by Investments and (ii) Genesis' option to purchase all of the issued and
outstanding capital stock of Mt. Laurel and Investments from Holdings (the
'Option'). The definitive form of such transactions is
18
<PAGE>
subject to final negotiation by the parties; however, it is currently
anticipated that Genesis will operate the Facility for a period of five years
and that Genesis' aggregate monthly payments therefor will be $40,000 net of all
expenses relating to the operation of the Facility (including, for example,
insurance, taxes and utility costs, and the debt service payments on the
indebtedness secured by a mortgage on the Facility, in the original principal
amount of $10,100,000). If the net working capital deficit of the Facility on
the date Genesis commences operating the Facility exceeds $3,000,000 net of a
deferred gain accounted for as a current liability on the balance sheet of the
Facility, Tomahawk is obligated to contribute an amount necessary to bring such
deficit to $3,000,000. In consideration for the grant of the Option, Genesis
will pay $1,500,000 to Holdings.
The assets of Tomahawk include the Facility, approximately 26.5 acres of
additional land adjacent to the Facility, and three residential rental
properties. The Option is exercisable at any time during the term of Genesis's
operation of the Facility at an aggregate purchase price of $6,000,000. The
purchase price is allocated $4,000,000 to the Facility, and $2,000,000 to the
additional land and rental properties.
In connection with the Merger, Holdings, Tomahawk Capital Holdings, Inc.,
and Veloric (collectively, the 'Owners'), Genesis and Newco entered into a
Stockholder Option and Proxy Agreement dated as of July 11, 1996 (the
'Agreement') pursuant to which the Owners granted to Newco (i) an option (the
'Stock Option') to purchase 3,748,178 Shares owned by the Owners (the 'Owner
Shares') and (ii) an irrevocable proxy (the 'Owner Proxy') with respect to the
Owner Shares. The Stock Option entitles Genesis to purchase the Owner Shares for
a purchase price (the 'Exercise Price') of $5.75 per Share. The Owner Shares
represent approximately 24.3% of the issued and outstanding Shares of the
Company. Under the Agreement, the Owners agree to vote (or cause to be voted)
the Owner Shares in any circumstance in which the vote or approval of the
Stockholders is sought (i) in favor of adoption and approval of the Merger
Agreement and the Merger and the terms thereof and each of the other actions
contemplated by the Merger Agreement and the Agreement; (ii) against any action
or agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company contained in the
Merger Agreement or of any of the Owners under the Agreement; and (iii) against
any action, agreement or transaction that is intended or could reasonably be
expected to facilitate a person other than Newco or its affiliates in acquiring
control of the Company or any other action, agreement or transaction (other than
the Merger Agreement or the transactions contemplated thereby) that is intended,
or could reasonably be expected to impede, interfere or be inconsistent with,
delay, postpone, discourage or materially adversely affect the consummation of
the Merger or the performance by the parties of their respective obligations
under the Agreement. Under the Agreement, the Owners agreed that the Owners
shall not directly or indirectly solicit, initiate or encourage the submission
of any proposal or offer (including, without limitation, any tender offer)
concerning any merger, consolidation or other business combination involving the
Company or any of its subsidiaries or any acquisition of any equity interest in,
or a substantial portion of the assets of, the Company or any of its
subsidiaries or any similar transaction, other than the Merger (a 'Competing
Transaction'). Notwithstanding the foregoing, at any time that Veloric is a
director of the Company, Veloric, in his capacity as a director of the Company,
may take such actions in respect of a Competing Transaction as the Board
determines in its good faith judgment in the exercise of its fiduciary duties to
the Stockholders under Delaware Law based upon the advice of its legal counsel
and after consultation with its financial advisors, is required by such
fiduciary duties. Under the Agreement, the Owners irrevocably granted to Newco
and appointed Newco (with full power of substitution) their proxy to vote the
Owner Shares in the manner described above. This Owner Proxy terminates on the
earlier of the day following the Effective Time and the date which is as long as
one year following the termination of the Merger Agreement. In the event that at
any time prior to the Effective Date of the Merger the highest price paid by
Newco for any share of Company Common Stock exceeds $5.75 (as adjusted) then (a)
the Exercise Price will be adjusted to the highest such price, and (b) as to
Shares as to which the Option has previously been exercised, Newco or Genesis
will promptly pay the amount of the product of (i) the amount of such excess
price per share, multiplied by (ii) the number of Shares as to which the Option
has previously been exercised. If, after Newco has exercised the Option and
prior to the consummation of the Merger, Newco directly or indirectly sells or
otherwise disposes of any Shares purchased pursuant to the Option (other than in
the
19
<PAGE>
Merger or to Genesis) then Newco or Genesis shall pay to the Owners, as promptly
as practicable after such sale or other disposition, the amount on a per share
basis, if any, by which the net proceeds received by Newco upon the sale or
other disposition exceeds the aggregate price paid by Newco to the Owners upon
exercise of the Option for the purchase of such Share.
The Company and Veloric have entered into a Termination Agreement dated as
of July 11, 1996, pursuant to which the Company and Veloric have agreed that, at
the Effective Time, that certain Employment Agreement effective June 1, 1993
(the 'Veloric Employment Agreement') will terminate. The Veloric Employment
Agreement currently expires on May 31, 2001. The Veloric Employment Agreement
provides for annual base compensation of $500,000 per year. The Veloric
Employment Agreement also provides for a bonus equal to five percent (5%) of the
Company's annual increase in profits, the award of phantom stock based on the
annual incremental increase in the average price of the shares of the Company's
common stock, and a death benefit of $1,000,000. In consideration of the
termination of the Veloric Employment Agreement, the Company will pay Veloric
the sum of $1,000,000, payable $200,000 at the Effective Time and $200,000 on
each of the first four anniversaries of the Effective Time.
The Company and Veloric have also entered into a Restrictive Covenants
Agreement dated July 11, 1996 by which Veloric agreed that, among other things,
for a period of ten years after the Effective Time of the Merger, he will not,
directly or indirectly, for his own account, or the benefit of any other person,
without the prior written consent of Genesis, (a) engage in any business
competitive with the businesses of the Company or Genesis in their respective
geographic markets, or (b) hire any employee of the Company or Genesis, or
solicit, induce, or divert any of such employees to work for him or any other
person. In consideration of the foregoing, the Company has agreed to pay Veloric
the sum of $475,000 at the Effective Time.
In addition, Genesis and Veloric have reached an agreement in principle
pursuant to which Veloric will provide consulting services to Genesis after the
Effective Time of the Merger. While the definitive form of the consulting
agreement is still being negotiated, it is expected that the term of such
consulting agreement will be for a period of four years. During the first year
of the consulting agreement, it is expected that Genesis will pay Veloric a
consulting fee of $100,000. After the expiration of the first year of such
consulting agreement any further consulting fees shall be in an amount
determined by Genesis in its sole discretion. It is also expected that Veloric
will be granted an option to purchase 25,000 shares of the common stock of
Genesis at a price equal to the fair market value of Genesis' common stock at
the Effective Time of the Merger. It is further expected that Veloric will also
be provided with an office, car and health insurance for the term of the
consulting agreement and that Genesis will transfer title to such car to Veloric
upon termination of such consulting agreement.
The Company and Esther Ponnocks, Senior Executive Vice President of the
Company ('Ponnocks'), have entered into a Termination Agreement dated as of July
11, 1996, pursuant to which the Company and Ponnocks have agreed that, at the
Effective Time, that certain Employment Agreement dated as of June 1, 1992 (the
'Ponnocks Employment Agreement') will terminate. The Ponnocks Employment
Agreement provides for annual base compensation of $200,000 per year and a term
of three years, with annual extensions through not later than May 31, 2002, plus
severance compensation equal to two times Ponnocks' annual base compensation. In
consideration of the termination of the Ponnocks Employment Agreement, the
Company will pay Ponnocks $200,000 at the Effective Time and up to $600,000 to
fund Ponnocks' secured supplemental pension plan provided in the Ponnocks
Employment Agreement, to provide an annuity for Ponnocks' lifetime, commencing
on the first day of the month following the first anniversary of the Effective
Time, in the amount of $75,000 per annum. In addition, the Company will pay to
Ponnocks up to $250,000, representing income taxes to be incurred by Ponnocks in
connection with such funding.
In addition, Genesis and Ponnocks have reached an agreement in principle
pursuant to which Ponnocks will provide consulting services to Genesis after the
Effective Time of the Merger. While the definitive form of the consulting
agreement is still being negotiated, it is expected that the term of such
consulting agreement will be for a period of two years. During the first year of
the consulting agreement, it is expected that Genesis will pay Ponnocks a
consulting fee of $60,000. After the
20
<PAGE>
expiration of the first year of such consulting agreement any further consulting
fees shall be in an amount determined by Genesis in its sole discretion. It is
further expected that Ponnocks will also be provided with an office, car and
health insurance for the term of the consulting agreement and that Genesis will
transfer title to such car to Ponnocks upon termination of such consulting
agreement.
For a description of the effects of the Merger on certain other employees,
see 'THE MERGER -- The Merger Agreement -- Options and Employee Benefits.'
THE MERGER AGREEMENT
Approval of the Merger. Delaware Law provides that, unless a corporation's
certificate of incorporation requires a greater vote, the vote of a majority of
the outstanding voting stock is required to approve a merger agreement. The
Company's Certificate of Incorporation contains a requirement (the
'Supermajority Provision') that a transaction such as the Merger requires the
affirmative vote of 80% or more of the outstanding voting stock, unless the
transaction has been approved by the Board. The Board has approved the Merger,
and therefore, the Supermajority Provision is not applicable; accordingly the
Merger may be approved by the vote of a majority of the Outstanding Shares.
Under Section 212 of Delaware Law and the Company's Certificate of
Incorporation, the Shares are entitled to one vote per Share.
The Board of Directors and officers of the Surviving Corporation shall be
those persons who constitute the Board of Directors and officers of Newco at the
Effective Time. Each such director or officer shall hold office until such
person's respective successor has been duly elected or appointed pursuant to the
bylaws of the Surviving Corporation and Delaware Law.
Effective Time. The Merger will become effective at the time of the filing
by the Company of a Certificate of Merger or the Merger Agreement with the
Secretary of State of the State of Delaware. It is currently anticipated that
such filing will be made as promptly as practicable after the Special Meeting.
Such filing will be made, however, only upon satisfaction or waiver, where
permissible, of the conditions set forth in the Merger Agreement. See 'THE
MERGER -- The Merger Agreement -- Conditions to the Merger.'
Payment for Shares. The Merger Agreement provides that, prior to the
Effective Time, Genesis shall deposit the Merger Consideration with a bank or
trust company to act as paying agent (the 'Paying Agent') in a separate fund
established for the benefit of the Stockholders for payment in accordance with
the Merger Agreement (the 'Payment Fund'). The Paying Agent shall, pursuant to
irrevocable instructions, pay the Merger Consideration out of the Payment Fund.
The Paying Agent shall invest portions of the Payment Fund as Genesis
directs in obligations of or guaranteed by the United States of America, in
commercial paper obligations receiving the highest investment grade rating from
both Moody's Investors Services, Inc. and Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or banker's acceptances of
commercial banks with capital exceeding $1,000,000,000. All earnings of the
Payment Fund shall be paid to Genesis. If for any reason (including losses) the
Payment Fund is inadequate to pay the amounts to which Stockholders shall be
entitled, Genesis shall nonetheless be liable for payment thereof. The Payment
Fund shall not be used for any purpose except as expressly provided in the
Merger Agreement. On the first business day which is three months after the
Effective Time, all portions of the Payment Fund not theretofore paid to former
Stockholders shall be remitted to the Surviving Corporation and former
Stockholders shall thereafter look solely to the Surviving Corporation for
payment of the Merger Consideration.
As soon as reasonably practicable after the Effective Time, the Paying
Agent will send a notice and transmittal form to each holder of an outstanding
Certificate which immediately prior to the Effective Time evidenced Shares,
advising such Stockholder of the terms of the exchange effected by the Merger
and instructions for use in effecting the surrender of Certificates. Upon
surrender of the Certificates evidencing Shares to the Paying Agent or such
other agent or agents as shall be appointed by Genesis, together with such
letters of transmittal, duly executed, and such other documents as may be
reasonably requested by the paying agent, holders of the Certificates (other
than holders of Participant Shares or Dissenting Shares) shall be entitled to
receive in exchange therefor an amount of
21
<PAGE>
cash equal to the Merger Consideration per Share multiplied by the number of
Shares evidenced by such Certificates, as provided in the Merger Agreement. No
interest will be paid or accrue on the cash payable upon surrender of such
Certificate.
Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented Shares (other than Participant Shares and other than
Dissenting Shares), will be deemed for all purposes to evidence a right to
receive the Merger Consideration without interest thereon. After the Effective
Time there shall be no further registration of transfers on the records of the
Company of Shares and, if a Certificate representing such Shares (excluding
Participant Shares and Dissenting Shares) is presented to the Surviving
Corporation, it shall be cancelled and exchanged for the Merger Consideration as
herein provided.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY
---
CARD.
Representations and Warranties. The Merger Agreement contains
representations and warranties made by each of the parties.
Conditions to the Merger. The Merger Agreement provides that the
obligations of Genesis and Newco to effect the Merger are subject to certain
conditions, including that (i) all consents and permits necessary to permit the
Merger shall have been received, (ii) all obligations of the Company required to
be performed by it at or prior to the time of the Merger ('the Closing'),
including the delivery of all required Closing documents, shall have been duly
performed or complied with in all material respects as of the Closing; (iii) all
representations and warranties of the Company contained in the Merger Agreement
shall be true and correct in all material respects as of the Closing; (iv) all
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act ('HSR Act') shall have expired or terminated; (v) the Merger shall have been
duly approved by the affirmative vote of the holders of a majority of the
Outstanding Shares in accordance with Delaware Law; (vi) no proceeding shall
have been instituted (excluding any such action, suit or proceeding initiated by
or on behalf of Genesis or any of its subsidiaries or affiliates), no judgment
or order shall have been issued, and no new law shall have been enacted, on or
before the Closing Date, in any event which seeks damages which would or would
be reasonably expected to result in a Material Adverse Effect (as defined in the
Merger Agreement) on the Surviving Corporation as a result of, or which seeks to
or does prohibit or restrain, the consummation of the Merger or any of the other
transactions contemplated by this Agreement; (vii) there shall not have been any
Material Adverse Change (as defined in the Merger Agreement) on the Surviving
Corporation, or any event or omission that is reasonably likely to have a
Material Adverse Effect on the Surviving Corporation, between April 30, 1996 and
the Closing Date; and (viii) the Company shall have delivered all Closing
Documents required to be delivered by it at the Closing, including the legal
opinions of its counsel.
The obligations of the Company to effect the Merger are subject to certain
conditions, including that (i) all representations and warranties of Genesis and
Newco contained in the Merger Agreement shall be true and correct in all
material respects as of the Closing; (ii) all applicable waiting periods under
the HSR Act shall have expired or terminated; (iii) the Merger shall have been
duly approved by the affirmative vote of the holders of a majority of the
Outstanding Shares in accordance with Delaware Law; (iv) all of the terms and
conditions of the Merger Agreement required to be satisfied or performed by
Genesis or Newco on or before the Closing Date shall have been satisfied or
performed in all material respects; and (v) Genesis and Newco shall have
delivered all Closing Documents required to be delivered by them at the Closing,
including the legal opinion of their counsel.
Certain Covenants. The Merger Agreement provides that, between the date of
the Merger Agreement and the Closing Date, except with the prior written consent
of Genesis:
(a) The Company shall, and shall cause each of its subsidiaries to,
conduct its businesses in a diligent manner consistent with past practices;
the Company shall not, and shall cause each of its subsidiaries not to,
make any material change in its business practices; and the Company shall,
and shall cause each of its subsidiaries to, in good faith, use
commercially reasonable efforts to (i) preserve its business organizations
intact, (ii) keep available the services of its current officers and key
employees and (iii) maintain the good will of its suppliers, customers and
other persons
22
<PAGE>
having business relations with the Company and any of its subsidiaries.
When requested by Genesis, the Company and each of its subsidiaries shall
consult with Genesis as to the management of the Company's and its
subsidiaries' respective businesses, facilities and affairs.
(b) Except in the ordinary course of its businesses consistent with
past practices, the Company shall not, and shall cause each of its
subsidiaries not to, (i) create or assume any material encumbrance upon any
of its businesses or assets, (ii) incur any obligation, (iii) make any
material loan or advance, (iv) assume, guarantee or otherwise become liable
for any material obligation of any person, (v) commit for any material
capital expenditure, (vi) lease, sell, transfer, abandon or otherwise
dispose of any of its material assets, (vii) waive any material right or
cancel any debt or claim, (viii) assume or enter into any contract other
than the Merger Agreement (and any other contract contemplated therein),
(ix) increase, or authorize an increase in, the compensation or benefits
paid or provided to any of its directors, officers, employees, agents or
representatives, (x) directly or indirectly acquire any Shares or any other
securities of the Company, or (xi) declare, pay or set aside for payment
any dividend or other distribution. Notwithstanding the foregoing
provisions of the Merger Agreement, the Company may extend the term of its
existing line of a certain credit agreement with one of its lender banks
and increase such line to an amount not to exceed $8,500,000.
(c) Even in the ordinary course of its businesses consistent with past
practices, the Company shall not, and shall cause each of its subsidiaries
not to, borrow or lend any funds, purchase any goods or services, lease any
equipment, incur any obligation, or enter into any contract (excluding
customer contracts, working capital advances, sale of accounts receivable
transactions, and related commitments entered into in the ordinary course
of business consistent with past practices) or other transaction, or do any
of the other things described in paragraph (b) above involving individually
an amount exceeding $250,000 for any one transaction or series of related
transactions. Genesis shall not unreasonably withhold its consent to any
request for approval of any such transaction.
(d) The Company shall not, and shall cause each of its subsidiaries
not to, (i) adopt, sponsor or enter into any new employee benefit plan or
employment agreement or modify any employment agreement or, except as
required by applicable Law, any existing employee benefit plan, (ii) except
as otherwise provided in the Merger Agreement, participate in any merger,
consolidation, division, or reorganization (other than the Merger), (iii)
engage in any new type of business, (iv) acquire the business or any bulk
assets of any person, (v) completely or partially liquidate or dissolve,
(vi) terminate any material part of its businesses, (vii) issue, sell,
transfer, pledge, hypothecate or otherwise encumber or dispose of any
Shares or any of the capital stock or other securities of any subsidiary of
the Company, (viii) except in consultation with and with the prior written
consent of Genesis (which shall not be withheld unreasonably), enter into
or renew any union or collective bargaining agreement or modify any
existing union or collective bargaining agreement, or (ix) settle or
compromise any material proceeding.
(e) The Company shall not, and shall not permit any of its
subsidiaries to, amend its charters or bylaws, partnership agreements or
other organizational documents, as applicable.
(f) The Company shall not, and shall cause each of its subsidiaries
not to, redeem, retire or purchase, or create, grant or issue any
contracts, options, warrants or other rights with respect to, any Shares or
any of the capital stock of any of its subsidiaries or any other securities
of the Company or any of its subsidiaries, or create, grant or issue any
stock appreciation rights, phantom shares, cash performance units or other
similar rights. Without limiting the generality of the foregoing, the
Company shall not issue, or permit the further accrual of, any options or
awards under the Company's option plans, the Company's Management Long Term
Incentive Plan or any employment agreement.
(g) Neither the Company nor any of its subsidiaries shall enter into
any contract which commits any of them to take any action or omit to take
any action which would be inconsistent with any of the provisions of the
Merger Agreement.
Options and Employee Benefits. The Merger Agreement provides that the
Board (or any appropriate Committee thereof) contemporaneously with the approval
of the Merger Agreement has
23
<PAGE>
adopted appropriate resolutions and taken all other necessary action so that,
effective immediately prior to the Effective Time, each outstanding stock option
or right previously granted under any Company Option Plans or under the
Management Long Term Incentive Plan under the 1995 Equity Incentive Plan,
whether or not then vested or exercisable, shall be cancelled, and the holders
will be entitled to a cash payment, payable upon surrender of such option or
right, equal to the number of shares subject to such option, multiplied by the
excess of the Merger Consideration over the exercise price (if any) per Share
for such options. See 'SUMMARY COMPENSATION TABLE.'
Solicitation. The parties have agreed that the Company shall not directly
or indirectly solicit, initiate or encourage the submission of any proposal or
offer (including, without limitation, any tender offer) concerning any merger,
consolidation or other business combination involving the Company or any of its
subsidiaries or any acquisition of any equity interest in, or a substantial
portion of the assets of, the Company or any of its subsidiaries, or any similar
transaction (other than the Merger, an 'Acquisition Proposal'). Notwithstanding
the foregoing, the Company may furnish information and access, or cause such
information or access to be furnished, in response to unsolicited requests
therefor, to any person or group (each a 'Potential Acquiror'), including
parties with whom the Company or its representatives have had discussions on any
basis prior to the date of the Merger Agreement, pursuant to appropriate
confidentiality agreements, and may (and may cause its representatives to)
participate in discussion and negotiate with such Potential Acquiror concerning
any Acquisition Proposal only if (i) the Potential Acquiror has, in
circumstances not involving any prior breach by the Company of any of the
foregoing provisions, made a bona fide Acquisition Proposal, and (ii) the Board
of Directors of the Company determines in its good faith judgment in the
exercise of its fiduciary duties to the Stockholders under Delaware Law based
upon the advice of its legal counsel and after consultation with its financial
advisors, that such action is required by such fiduciary duties.
Termination; Amendment. The Merger Agreement may be terminated and the
transactions abandoned at any time prior to the Closing, whether or not the
Merger has been approved by the Stockholders: (i) by mutual agreement of the
parties; (ii) by the Company or by Genesis, as the case may be, (a) if the
Closing shall not have occurred on or prior to February 1, 1997, for any reason
or (b) if it has become reasonably certain that any condition to the Closing
obligations of such party will not be satisfied and such condition has not been
waived by such party, unless, in either case, the failure of the Closing to
occur or such condition to be satisfied is due to the failure of the party
seeking to terminate the Merger Agreement to perform or observe its agreements
and conditions set forth therein to be performed or observed by such party at or
before the Closing; (iii) by either party, if the other shall have materially
breached any of its obligations under the Merger Agreement and shall have failed
to cure such breach within ten (10) days after written notice from the
nonbreaching party specifying the nature of the breach and requesting that such
breach be cured; (iv) by the Company, in order to enter into a definitive
agreement relating to an Acquisition Proposal with a Potential Acquiror with
which the Company is permitted to negotiate pursuant to the terms of the Merger
Agreement, provided that the Company first provides notice to Genesis of its
intent to terminate the Merger Agreement and pays Genesis a termination fee in
the amount of $5,000,000 plus expenses in an amount not to exceed $750,000; or
(v) by Genesis or Newco, if (a) the Board withdraws, modifies or changes its
recommendation of the Merger Agreement or the Merger in a manner adverse to
Genesis or Newco or (b) the Board recommends an Acquisition Proposal to the
Stockholders of the Company. See 'THE MERGER AGREEMENT -- Terms of The Merger --
Expenses.'
The Merger Agreement may be modified or amended at any time prior to the
Effective Time by written agreement of the parties thereto. The Merger Agreement
provides, however, that the per Share Merger Consideration to be received by
holders of Shares in the Merger shall not be amended or modified without the
approval of such holders at any time after such holders have approved the Merger
Agreement.
Expenses. The Merger Agreement provides that, whether or not the Merger is
consummated, Genesis, Newco and the Company shall each pay its own expenses
incident to preparing for, entering into and carrying out the Merger Agreement;
provided, however, that the Company shall pay a termination fee in the amount of
$5,000,000 and promptly reimburse Genesis for all costs and expenses incurred by
Genesis and Newco in connection with the transactions contemplated by the Merger
24
<PAGE>
Agreement up to an aggregate of $750,000, in the event that the Merger Agreement
is terminated under certain circumstances. See 'THE MERGER -- The Merger
Agreement -- Termination; Amendment.'
Indemnification. The Merger Agreement provides that the charter or bylaws
of the Surviving Corporation shall contain provisions no less favorable with
respect to indemnification than those set forth in the charter or bylaws of the
Company, and that such provisions shall be maintained for a period of six years
from the Effective Time. The Merger Agreement further provides that the Company
shall, and after the Effective Time the Surviving Corporation shall, for a
period of six years after the date of the Merger Agreement, indemnify and defend
each present and former director and officer of the Company and each subsidiary
of the Company, against all costs and liabilities in connection with any
proceedings, whether civil, criminal, administrative or investigative, for any
acts or omissions in their capacity as an officer or director, to the fullest
extent permitted by law.
The Merger Agreement also provides that the Company shall, to the fullest
extent permitted under Delaware Law, indemnify and hold harmless, and, after the
Effective Time, the Surviving Corporation shall, to the fullest extent of
Delaware Law, indemnify and hold harmless, each present and former director and
officer of each subsidiary of the Company against all costs and expenses
(including attorneys's fees), judgments, fines, losses, claims, damages,
liabilities and settlement amounts paid in connection with any claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), whether civil, criminal, administrative or investigative, arising out of
or pertaining to any action or omission in their capacity as an officer or
director, whether occurring before or after the Effective Time, for a period of
six years.
APPRAISAL RIGHTS
Under Section 262 of Delaware Law ('Section 262'), Stockholders who do not
wish to accept the Merger Consideration pursuant to the terms of the Merger
Agreement have the right to seek appraisal of the 'fair value' of their Shares
in the Delaware Court of Chancery. Section 262 is set forth in its entirety as
Exhibit C to this Proxy Statement. The following discussion is not a complete
statement of the law relating to appraisal rights and is qualified in its
entirety by reference to Exhibit C. This discussion and Exhibit C should be
reviewed carefully by any holder who wishes to exercise his or her appraisal
rights or wishes to preserve his or her right to do so, as failure to comply
with the procedures set forth herein or therein may result in a loss of such
appraisal rights.
Stockholders who desire to exercise their appraisal rights must satisfy all
the following conditions. A written demand for appraisal of Shares must be
delivered to the Secretary of the Company before the taking of the vote on the
adoption of the Merger Agreement. This written demand for appraisal of Shares
must be in addition to and separate from any proxy or vote abstaining from or
against the adoption of the Merger Agreement. Voting against, abstaining from
voting, or failing to vote on the adoption of the Merger Agreement will not
constitute a demand for appraisal within the meaning of Section 262.
The address of the Secretary of the Company is Geriatric & Medical
Companies, Inc., 5601 Chestnut Street, Philadelphia, Pennsylvania 19139,
Attention: Arthur A. Carr, Jr., Secretary. The telephone number of the Secretary
is (215) 476-2250. Stockholders electing to exercise their appraisal rights
under Section 262 must not vote for the adoption of the Merger Agreement; a
Stockholder who votes in favor of the Merger shall not be entitled to appraisal
rights. If a Stockholder returns a signed Proxy but does not specify a vote
against the adoption of the Merger Agreement or a direction to abstain, the
Proxy will be voted for the adoption of the Merger Agreement, which will have
the effect of waiving that Stockholder's appraisal rights.
A demand for appraisal must be executed by or for the Stockholder of
record, fully and correctly, as such Stockholder's name appears on the
certificate or certificates evidencing such Stockholder's Shares. If the Shares
are owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, such demand must be executed by the fiduciary. If the Shares are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by all record owners. An authorized agent,
including an agent for two or more record owners, may execute the demand for
appraisal for a Stockholder of record; however, the agent must identify the
record
25
<PAGE>
owner and expressly disclose the fact that, in exercising the demand, such
person is acting as agent for the owner.
A record owner, such as a broker, who holds Shares as a nominee for others,
may exercise appraisal rights with respect to the Shares held for all or less
than all beneficial owners of the Shares as to which such person is the record
owner. In such a case, the written demand must set forth the number of Shares
covered by such demand. When the number of Shares is not expressly stated, the
demand will be presumed to cover all Shares outstanding in the name of such
record owner. Beneficial owners who are not record owners and who intend to
exercise appraisal rights should instruct their record owners to comply strictly
with the statutory requirements with respect to the exercise of appraisal rights
before the date of the Special Meeting.
Within ten days of the Effective Time, the Surviving Corporation will
notify each Stockholder who has complied with Section 262 and has not voted for
the adoption of the Merger Agreement of the date the Merger has become
effective.
Within one hundred twenty days after the Effective Time, but not
thereafter, either the Surviving Corporation or any Stockholder entitled to
appraisal rights under Section 262 (a 'Dissenting Stockholder') (who has also
notified the Company as described above before the taking of the vote on the
adoption of the Merger Agreement) may file a petition in the Delaware Court of
Chancery demanding a determination of the value of the Shares of all
Stockholders entitled to appraisal, provided that during the first 60 days after
the Effective Time, any Stockholder has the right to withdraw his demand for
appraisal and accept a cash payment equal to the Merger Consideration per Share
provided for in the Merger Agreement.
Within twenty days after the service upon the Surviving Corporation of a
copy of a petition filed in the Delaware Court of Chancery demanding an
appraisal, the Surviving Corporation is obligated to file in the office of the
Register in Chancery a verified list of all Stockholders who have demanded
appraisal and with whom agreements as to the value of their Shares have not been
reached by the Surviving Corporation. After notice to such Stockholders, the
Court of Chancery is empowered to conduct a hearing upon the petition of any
Stockholder. The court shall then determine those Stockholders entitled to
appraisal and appraise the fair value of the Shares held by them, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be the fair value. In determining fair value, the Court of
Chancery is to take into account all relevant factors.
Stockholders considering seeking appraisal should bear in mind that the
fair value of their Shares determined under Section 262 could be more than, the
same as or less than the consideration they are to receive pursuant to the
Merger Agreement if they do not seek appraisal of their Shares, and that an
opinion of an investment banking firm as to fairness is not an opinion as to
fair value under Section 262. Costs of the appraisal proceeding may be taxed
upon the parties thereto by the court, as the court deems equitable in the
circumstances. Upon application of a Dissenting Stockholder, the Delaware Court
of Chancery may order that all or a portion of the expenses incurred by any
Dissenting Stockholder in connection with the appraisal proceeding, including
(without limitation) reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all Shares entitled to
appraisal.
If no petition for an appraisal shall be filed within one hundred twenty
days after the Effective Time or if such Stockholder shall deliver to the
Surviving Corporation a written withdrawal of his demand of an appraisal and an
acceptance of the Merger, either within sixty days after the Effective Time or
thereafter with the written approval of the Surviving Corporation, then the
right of such Stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Delaware Court of Chancery shall be
dismissed as to any Stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
26
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under present law, the principal Federal income tax consequences to the
Stockholders of the Company expected to result from the Merger are as described
below. The description does not purport to consider all aspects of Federal
income taxation that may be relevant to particular Stockholders, and may not be
applicable to Stockholders who are not citizens or residents of the United
States, Stockholders who acquired their Shares or receive Merger Consideration
pursuant to the exercise of employee stock options or otherwise as compensation,
or Stockholders who constructively own stock owned by Genesis. In addition, the
description does not consider the effect of any applicable foreign, state, local
or other tax laws.
For Federal income tax purposes, the Merger will be a taxable transaction
to holders of the Shares who receive cash pursuant to the Merger. Each holder of
Shares generally will recognize gain or loss equal to the difference between
such Stockholder's tax basis for the Shares owned by him or her immediately
prior to the Effective Time and the amount of cash which the Stockholder is
entitled to receive for such Shares. Generally, the gain or loss will be capital
gain or loss if the Shares are capital assets in the hands of such Stockholder,
and will be long-term capital gain or loss if such Stockholder's holding period
is more than one year.
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL,
STATE, LOCAL AND OTHER TAX CONSEQUENCES TO THEM OF THE MERGER.
CERTAIN INFORMATION REGARDING GENESIS AND NEWCO
Genesis is a leading provider of healthcare and support services to the
elderly. Genesis has developed the Genesis ElderCare(sm) delivery model of
integrated healthcare networks to provide cost-effective, outcome-oriented
services to the elderly. Through these integrated healthcare networks, Genesis
provides basic healthcare and specialty medical services to more than 60,000
customers in five regional geographic markets in the eastern United States in
order to achieve operating effeciencies, economies of scale and significant
market share. The five geographical areas that Genesis principally serves are:
Massachusetts/Connecticut/New Hampshire; Eastern Pennsylvania/Delaware Valley;
Southern Delaware/Eastern Shore of Maryland; Baltimore, Maryland/Washington,
D.C.; and Central Florida. The networks currently include eldercare centers;
primary care physician clinics; physicians, physician assistants and nurse
practicioners; institutional pharmacies and medical supply distribution centers;
and certified rehabilitation agencies and home healthcare.
Through its health care networks, Genesis provides basic and specialty
medical services. The specialty medical services include rehabilitation,
subacute care, pharmacy, home health care and physician services. Genesis'
network facilities offer three levels of care for their patients: skilled,
intermediate and personal. The network currently includes 72 eldercare
facilities, 10 primary care physician clinics, 11 institutional pharmacies and 5
medical supply distribution centers, certified rehabilitation agencies providing
services through more than 300 contracts and, 7 home health care agencies. The
services offered by Genesis are focused on six clinical initiatives which
Genesis believes are the central medical and physical issues facing the more
medically demanding elderly. These initiatives are rehabilitation, nutrition
management, intravenous therapy, bowel/bladder care, respiratory therapy and
wound management.
Genesis was incorporated in May, 1985 as a Pennsylvania corporation.
Newco is a Delaware corporation that was incorporated in July, 1996 as a
wholly-owned subsidiary of Genesis for the purpose of effecting the Merger.
Newco will not engage in any business prior to the Merger.
27
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY
INTRODUCTION
The Company, a Delaware corporation, is a Mid-Atlantic health care company
providing support services in pharmacy, rehabilitative therapies, ambulance
transportation, contract management, financial, diagnostic services and home
care, which includes infusion, respiratory and equipment rental to hospitals,
HMO's, physician groups and nursing homes. It also is a major long-term care
provider in Pennsylvania and New Jersey.
DESCRIPTION OF THE COMPANY
The Company was founded in 1968 as Geriatric & Medical Centers, Inc. The
Company changed its name to Geriatric & Medical Companies, Inc. in 1993 to more
accurately reflect the scope and nature of its business, which had evolved into
a diversified health care provider from a company that primarily owned and
managed long term care and personal care facilities.
The Company serves as a holding company for seven operating companies. Each
operating company is led by a president who reports to a senior officer of the
Company. The operating companies maintain their own management systems,
employees and sales force; however, the sales and marketing function is
integrated through cross-training and cross-selling. Support functions are
centrally administered for the operating companies. These functions include:
finance, accounting, treasury management, public relations, government
relations, legal affairs, human resource management and insurance services.
The Company's operating strategy has been to create service distribution
centers that combine long term care and support services as part of each
center's product mix. The Company believes that this configuration of products
and product mix will strategically position the Company as the managed care
market matures and moves to competitive bidding for services on a capitated rate
basis. In such a system, providers will be asked to quote on as many services as
possible. Accordingly, the Company believes it will have opportunities to bid on
a full range of services, including long term care, sub-acute care and support
services.
The Company's structure and marketing approach is designed to provide for
(1) efficient utilization of top management; (2) economies of scale in
purchasing, marketing and resource utilization; (3) stronger corporate image and
presence in the market; and (4) a broader base to support recruiting. At the
same time, the corporate structure has been designed to permit the individual
operating companies to function autonomously within their respective market
niche.
Since 1993, the Company has steadily moved to maximize productivity and
re-engineer its business consistent with the goal of targeting the managed care
market. In connection therewith, in the summer of 1994, the Company commenced
consideration of the outlook of the health care industry and the means by which
the Company could position itself to meet anticipated challenges. See 'THE
MERGER -- Background of the Merger.' The Company has undertaken a number of
initiatives including (1) the installation of new computer technology designed
to expedite the processing and collection of receivables; (2) the elimination of
duplicate positions and consolidation of management functions; (3) the cross
training of sales teams; (4) the development of an executive sales team; and (5)
the implementation of a sales development program.
The Company believes that the concept of providing a one stop, single
source continuum of health care services provides a competitive advantage to the
Company, particularly in the combination of support services with direct care.
The Company recognizes the significant capital and management investments that
must be made in order for it to provide such a continuum of services. It is this
recognition that resulted in the Company's decision to examine strategic
alternatives. See 'THE MERGER -- Background of the Merger.' Most of the
Company's competitors are companies providing single service or 'smaller
bundles' of services, or they operate primarily in some facet of long-term care.
The degree of market share that the Company has varies with each line of
business.
28
<PAGE>
The Company competes with a number of national, regional and local
companies, non-profit agencies, hospitals, home health agencies, and other
similar organizations, many of which have greater resources than the Company.
The degree of success with which the Company competes is dependent on the
quality of its products and services, reputation, responsiveness, clinical
support, and the physical appearance of its facilities. There is limited
competition in price with respect to Medicaid and Medicare patients, since
revenues for services to such patients are strictly controlled and based on
fixed rates and cost reimbursement principles.
THE OPERATING COMPANIES
Life Support Ambulance. Life Support Ambulance (LSA), provides a full
range of ambulance transportation services to hospitals, nursing homes,
rehabilitation centers, and other health care facilities throughout Pennsylvania
and New Jersey. LSA services include basic life support, advanced life support,
critical care transport and paratransit transportation. LSA has in place a state
of the art vehicle tracking system enabling it to maximize efficiencies. This
satellite driven system allows LSA to provide in excess of 8,000 transports
monthly. LSA, which is headquartered in Philadelphia, PA, serves its patients
through its 15 branches and substations located in Eastern Pennsylvania and New
Jersey. LSA is one of approximately 55 transportation companies in the country
fully accredited by the Commission on Accreditation of Ambulance Services.
United Health Care Services. United Health Care Services (UHCS), provides
a full range of respiratory therapy, infusion therapy and enteral therapy
(delivery of nutrients through feeding tubes) to adult and pediatric patients
primarily in the home care setting and distributes durable medical equipment and
home medical supplies. UHCS serves its patients through its branches located in
Philadelphia, Reading, Easton, and Pittsburgh, Pennsylvania and Clifton and
Pennsauken, New Jersey. UHCS is accredited by the Joint Commission On The
Accreditation of Health Care Organizations ('JCAHO').
Innovative Pharmacy Services. Innovative Pharmacy Services (IPS) provides
customized pharmacy services for a variety of health care settings. The services
include: prescription, clinical, infusion therapy, medical supply, and Medicare
Part B, and are provided from both of its locations in Philadelphia, PA and
Blackwood, NJ. IPS currently services approximately 6,000 patients in 48 health
care settings.
Healthcare Hospitality Services. Healthcare Hospitality Services (HCHS),
provides contract management services including dietary, housekeeping, laundry,
pest control, plant operations and facilities management services to nursing
homes, personal care facilities, and retirement communities. HCHS operates with
full time, on site management which are supported by a regional team of
specialists. HCHS provides such contract services to approximately 7,000 long
term care and residential beds.
Diagnostic & Rehab Technologies. Diagnostic and Rehab Technologies
provides diagnostic and rehabilitative management services including portable
x-ray, Holter monitoring, ultra sound, echocardiograms, and physical, speech and
occupational therapy, primarily to skilled nursing facilities. The Diagnostics
division provides portable x-ray, Holter monitoring, ultra sound and
echocardiograms to approximately 6,000 long term care beds. The Rehab Tech
Division provides comprehensive rehabilitation programs to approximately 4,000
long-term care beds which include physical and occupational therapists, speech
pathologists and administrative personnel. The division also manages five
sub-acute medical specialty units, known as Rehab Tech Units. These units
provide rehabilitation, non-acute cardiac care, wound care, infusion therapy,
neurological, oncology, pulmonary and post surgical care at units located within
long-term care facilities.
Healthcare Financial Services and Information Systems. Healthcare
Financial Services and Information Services (HCIS) provides integrated business
solutions to the long term care industry. HCIS blends financial and clinical
software systems, financial processing services, software and
29
<PAGE>
industry training/consulting services, and insurance services (i.e., risk
management, claims management, employee benefits, worker's compensation) to meet
the operational and management reporting needs of its clients. HCIS currently
serves approximately 5,000 long-term care and residential beds.
Geriatric and Medical Services. Geriatric and Medical Services (GMS),
provides sub-acute, rehab, long term skilled care, residential and independent
living services to approximately 3,800 beds at 28 locations in Pennsylvania and
New Jersey. GMS operates 19 long term care, 8 residential and 1 independent
living facility. Services provided include the prescribed type of nursing care,
room and board, special diets as needed, occupational, physical and recreational
therapy and other services as specified by the patient's physician.
The Company is focused on further developing its capability to deliver
rehabilitative and sub-acute services at its facilities. GMS operates 19
Medicare certified distinct part units with approximately 415 beds.
The residential and independent living facilities operated by GMS are
available for rental without regard to age; however, substantially all residents
are senior citizens. Services at these facilities include meals, recreation and
housekeeping, but generally only limited nursing care. Each of these facilities
is subject to various state and local licensing requirements and building codes.
The following table sets forth pertinent information concerning the
long-term care, residential and independent living facilities operated by the
Company as of the Record Date:
NUMBER OF
FACILITIES LICENSED BEDS
OPERATED OR UNITS (3)
------------------- -----------------
LONG TERM CARE FACILITIES (1)
New Jersey............................... 10 1,783
Pennsylania.............................. 10 1,662
-- -------
TOTAL............................... 20 3,445
-- -------
RESIDENTIAL FACILITIES (1)
New Jersey............................... 5 175
Pennsylvania............................. 3 230
-- -------
TOTAL............................... 8 405
-- -------
INDEPENDENT LIVING FACILITY (2)
Pennsylvania............................. 1 78
-- -------
GRAND TOTAL......................... 29 3,928
== =======
- - ------------------
(1) All facilities are owned by the Company except a long term care facility of
280 beds and a 55 bed licensed residential healthcare facility which are
owned by a company controlled by the Chairman of the Board, President and
Chief Executive Officer of the Company. The Company provides various
services to these facilities. See 'THE MERGER -- Interests of Certain
Persons in the Merger.'
(2) Facility managed by the Company.
(3) The Company has been approved to add 10 beds each to 7 facilities in
Pennsylvania. These beds are excluded from the licensed beds or units set
forth in the table.
30
<PAGE>
THE COMPANY'S MARKET
The Company has defined its target geographic market as the Mid-Atlantic
Region. The Company's present business is principally concentrated in
Pennsylvania and New Jersey, which states contain approximately 20 million
people and have an estimated per capita health care spending of $3,500 which
equates to a $70 billion market for health care services. Currently, this market
is spread over a number of service providers which control varying amounts of
the market. The largest segments include hospitals (44%), physician services
(23%) and nursing homes (10%). The balance is spread among a number of other
providers.
The nation's population is changing. People are living longer than ever
before, with the fastest growing segment of the population being those aged 85
and over. This segment of the U.S. population is expected to continue to
significantly increase. In the Pennsylvania/New Jersey region, the 85 and over
population is expected to increase approximately 16.5% from 1990 through the
year 2000. This segment of the population represents the primary consumers of
long term care services, related support services, rehabilitative services and
skilled nursing care.
The Company perceives that consumers are demanding increasingly higher
levels of clinical quality and assurances that they are receiving the best
possible medical treatment, while these same individuals, their employers,
insurers and governments are demanding that the market provide health care in
the most cost efficient manner. Managed care has evolved as a result of these
competitive pressures.
The Company's experience has been that treatment has shifted to managed
care. The hospital or acute care setting is no longer the focus of service
delivery. What has evolved are cost effective, clinically appropriate
alternatives known as the acute care step down alternatives, including home
care, sub-acute care and skilled nursing. More and more, providers and
physicians are turning to these service areas.
The Company is actively pursuing HMO relationships. The Company's operating
companies presently have contracts or referral arrangements with approximately
50% of the HMO's within their service areas.
MARKETING STRATEGY
The Company's marketing strategy is to capture a greater share of current
markets and to selectively expand into new markets, particularly areas with high
concentrations of the elderly. The Company uses three approaches to further
penetrate existing markets: (1) traditional referral sources, (2) managed care
contracts, and (3) executive sales.
Since its inception, the Company has anticipated the developments in the
health care industry and used the core technology and critical mass of business
in its nursing homes to develop a network of support service companies. The
companies were grown through the expansion of Company-owned beds, non-Company
business and acquisitions. Today these support service companies represent
approximately 30% of overall Company revenue. Nursing homes represent the
largest market for the support services, followed by hospitals, home health care
and other smaller segments.
Nursing care facility marketing is focused at the local level and is
conducted primarily by the facility administrator and its admissions director
who call on referral sources such as doctors, hospitals, hospital discharge
planners, churches and various community organizations. Beside actively
soliciting admissions from these sources, the Company's marketing strategy is to
maintain a public awareness of each care facility and its capabilities. The
Company also markets its subacute program directly to insurance companies,
managed care organizations and other third party payors.
Traditional referral sources include hospital discharge planners, nursing
or social service directors, nursing home administrators, and social workers.
These sources normally do not insure the people they refer, and they are more
concerned with service and clinical quality. In this approach, the Company
highlights its clinical accreditation, expertise, experience, and service
capabilities. The
31
<PAGE>
Company takes advantage of its regional concentrations in its marketing efforts,
where appropriate, through consolidated marketing programs which benefit more
than one facility.
HMO's have a dual perspective as insurers: quality and cost. Because of the
rapid growth of HMO's, market access for providers like the Company is
increasingly dependent on being an approved provider of the HMO. In this
approach, the Company promotes the benefits of 'one stop shopping' and a
'continuum of care' that offers high clinical quality at competitive rates.
THIRD PARTY PAYOR PROGRAMS
The levels of revenues and profitability of the Company, like those of
other health care companies, are affected by the continuing efforts of third
party payors to contain or reduce the costs of health care by lowering
reimbursement rates, increasing case management review of services, and
negotiating contract pricing. The implementation of managed care programs either
mandated by government action or adopted by the industry is expected to continue
to bring additional pressures on pricing. The Company believes that such
programs also favor providers who can efficiently deliver a continuum of
products and services to a large defined population on a capitated basis. Home
health, long term care facilities and other sub-acute care facilities, which are
generally less costly to third party payors than hospital-based care, have
benefited from those cost containment objectives. However, as expenditures in
these segments continue to grow, initiatives aimed at reducing the costs of
health care delivery at non-hospital sites are increasing. Such initiatives have
been implemented in the past and have negatively impacted operating results. A
significant change in coverage or a reduction in payment rates by third party
payors could have a material adverse effect upon the Company's business and
financial condition. (See Note 14 to the Notes to Consolidated Financial
Statements).
The Company derives substantially all its revenues from third party payors,
including Medicare, Medicaid and private insurers. The collection of accounts
receivable from third party payors is critical to the Company's success and
therefore is a high priority for all levels of management. Funds received under
Medicare and Medicaid by all companies in the health care industry are subject
to audit with respect to the proper application of various regulations and
payment formulas. Such audits can result in retroactive adjustments resulting in
amounts due to or from the governmental agency. While the Company believes that
the charges it has submitted are appropriate, no assurance can be given that
such adjustments will not be made, and if made, that they will not be material.
Effective January 1, 1996, Pennsylvania adopted regulations to implement a
new case mix payment system. The revised rates issued by Pennsylvania to the
Company, are lower than the interim rates received under the old system. The
Company is continuing to pursue increases to these rates through various
administrative and legal processes. Similar rate reduction initiatives have
occurred in the New Jersey Medicaid reimbursement program. The Company cannot
predict the outcome of these changes or the ultimate effect on the Company
because the Company continues to explore opportunities to shift business to
other payors, thereby decreasing its reliance on Medicaid programs.
The Medicare program consists of two separate insurance programs: 'Hospital
Insurance,' Part A, provides certain benefits covering inpatient hospital,
nursing facility, home health and hospice services; and 'Supplementary Medical
Insurance,' Part B of the Social Security Act, provides benefits in the areas of
outpatient hospital visits, physician services, respiratory therapy, infusion
therapy, home medical equipment and prosthetic devices. The Company's 7
operating companies, where appropriate, are authorized suppliers eligible to
receive direct reimbursement under Medicare Part B. Health care providers must
meet 'conditions of participation' to receive Medicare payments. The conditions
of participation are Federal requirements intended to insure the quality of the
medical services provided. Part A providers such as hospitals and skilled
nursing facilities are required to sign a provider agreement to participate in
Medicare.
Under Part B, there is an annual deductible of $100 that the beneficiary
must pay before Medicare will make any payments. After the Part B deductible is
satisfied, Medicare will ordinarily pay 80% of the Medicare-approved payment
amount, and the beneficiary or its secondary insurance will be responsible for
paying the remaining 20%.
32
<PAGE>
All of the Company's long-term care facilities are currently certified and
where appropriate all of the Company's other business units are qualified to
receive payments under the Medicare and Medicaid programs. Both initial and
continuing certification or qualification to participate in such programs is
dependent upon many factors including, among others, accommodations, equipment,
services, patient care, safety, personnel, physical environment, and adequate
policies, procedures and controls.
The Company's services and products are principally provided to and
revenues derived from, billings to private pay, private insurance, Medicare and
Medicaid recipients. Revenue derived from these sources for the year ended May
31, 1996 were 28.8% private pay and private insurance, 19.6% Medicare, and 51.6%
Medicaid.
The Company is affected by the continuing efforts of third-party payors to
contain or reduce the cost of healthcare by lowering reimbursement rates,
increasing case management review of services, and negotiating contract pricing.
The Company is dependent upon the continuation of the present reimbursement
system, or something similar thereto, pursuant to which third-party payors
(principally Medicaid and Medicare) pay for the services and products provided
by the Company.
Because of the significance of Medicaid reimbursement on the Company's
operations, significant increases in costs have an adverse impact on the
Company's operating results. This occurs because the Medicaid reimbursement
rates set by each state, which are applicable throughout the ensuing year, are
established periodically and are based on historical data. Additionally, the
Company tends to build up Medicaid receivables due to differences between
interim payments and final cost report audits and settlements. Although
Pennsylvania Medicaid regulations require audits within one year of the filing
of cost reports and the audit of the Medicare home office cost report, it is the
Company's experience that such audits and settlements thereof may take up to
four years after the costs involved are incurred.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
determinations by the Medicare carrier and governmental funding restrictions,
all of which may materially increase or decrease the rate of program payments to
health care providers. Congress is attempting to limit the growth of Federal
spending on health care programs, including limitations on payments under the
Medicare and Medicaid programs. The Company can give no assurance that payments
under such programs will in the future remain at a level comparable to the
present level.
GOVERNMENT REGULATION
The Federal government and both states in which the Company currently
operates regulate various aspects of its businesses. The Company's operations
are subject to federal laws covering the repackaging and dispensing of drugs and
are also subject to federal laws covering the dispensing of oxygen,
environmental regulations and interstate motor-carrier transportation, as well
as state laws governing pharmacies, nursing services and certain types of home
health care activities.
Operation and development of long term care facilities are subject to
various federal, state and local statutes and regulations. The states in which
the Company operates have statutes which require that prior to the addition or
construction of new beds, the addition of new services or certain capital
expenditures in excess of defined levels, the Company must obtain a certificate
of need ('CON') which certifies that the state has made a determination that a
need exists for such new or additional beds, new services or capital
expenditures. These state determinations of need or CON programs are designed to
comply with certain minimum federal standards and to enable states to
participate in certain federal and state health related programs. The Company
believes that CON requirements may be eliminated or relaxed which may result in
increased competition but may also result in increased expansion possibilities.
33
<PAGE>
Since August, 1982, Pennsylvania has refused to reimburse long term care
providers for depreciation and interest on facilities built after that date even
though the Commonwealth issued a CON for the facility. The Company has received
an opinion of counsel that Pennsylvania's position violates various provisions
of federal law. The Company is negotiating to receive reimbursement for the beds
for periods not previously settled and if it is not successful, the Company is
prepared to litigate the issue. Even if the Company is successful, there is no
assurance that the amount of reimbursement will be sufficient to cover all costs
incurred.
The Company's long term care facilities are also subject to licensure
regulations. Each of the long term care facilities is licensed as a nursing
facility. State and local agencies survey all long term care facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participation in
government medical assistance programs. Such surveys include review of patient
utilization of healthcare facilities and standards for patient care.
New survey, certification and enforcement regulations adopted by the Health
Care Financing Administration apply to all surveys of the Company's nursing
facilities effective July 1, 1995. Under these new regulations, state surveyors
utilize a scope and severity rating to determine whether a nursing facility is
in substantial compliance with applicable state and federal regulations. Using a
scope and severity score for each cited deficiency noted during a survey,
surveyors will determine whether there is substandard quality of care and
whether an extended survey process is warranted. The scope and severity score
will also be used to impose remedies, which may include termination of the
provider agreement, denial of payment for new admissions, imposition of
temporary management, and civil monetary penalties of up to $10,000 per day.
Under the new regulations, facilities may appeal a certification of
noncompliance but not the choice of remedy.
The Company endeavors to maintain and operate its facilities in substantial
compliance with all such standards and conditions. However, in the ordinary
course of business the facilities receive notices of deficiencies for failure to
comply with various regulatory requirements. Generally, the facility and the
reviewing agency will agree upon the measures to be taken to bring the facility
into compliance with the regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take adverse actions against a facility,
including the imposition of fines, temporary suspension of admission of new
patients to the facility ('bed holds'), suspension or decertification from
participation in the Medicare or Medicaid programs, and, in extreme
circumstances, revocation of a facility's license. These adverse actions may
adversely affect the ability of a facility to operate or to provide certain
services and may adversely affect eligibility to participate in the Medicare or
Medicaid programs. Certain of the Company's facilities have in the past received
notices from governmental agencies to the effect that if certain alleged
deficiencies are not rectified, such facilities would be decertified from
participation in Medicare and Medicaid programs. In all such cases, the alleged
deficiencies were rectified before any such facilities were decertified.
Enforcement of these regulations is becoming more stringent. As a result the
Company has in recent years experienced bed holds in certain facilities, and
other administrative activities (including fines and penalties), however, the
Company has not had any of its operating licenses revoked.
In addition, all healthcare facilities are subject to various local
building codes and other ordinances. Because of the extensive nature of the
regulatory schemes affecting the healthcare industry, the Company is unable to
predict with confidence the content or impact of future legislation and
regulations affecting the healthcare industry or the effect on the Company's
operations of any such legislation or regulations.
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid fraud and abuse laws. These laws
prohibit any bribe, kickback or rebate in return for the referral of Medicare or
Medicaid patients. Violations of these provisions may result in civil and
criminal penalties and exclusion from participation in the Medicare and Medicaid
programs.
34
<PAGE>
In July, 1991, the Office of the Inspector General of the United States
Department of Health and Human Services promulgated regulations setting forth
certain safe harbors under the fraud and abuse laws (the 'Safe Harbors'). These
laws and regulations were updated under the Omnibus Reconciliation Act ('OBRA')
of 1993 and pursuant to clarifying regulations adopted in July, 1994. In
addition, certain states in which the Company operates have laws that prohibit
certain direct or indirect payments or fee-splitting arrangements between health
care providers, if such arrangements are designed to induce or encourage the
referral of patients to a particular provider. Possible sanctions for violation
of these state-created restrictions include loss of licensure, civil and
criminal penalties and exclusion from participating in the Medicare and Medicaid
programs.
Such laws and regulations vary from state to state, often are vague and
seldom have been interpreted by the courts or regulatory agencies. Some states
enacted laws which, with some exceptions, have the effect of prohibiting a
physician from referring to an ancillary service in which the physician has
either an ownership interest or a contractual arrangement. As a result of the
various statutes and interpretations, the Company has reviewed its joint venture
and management arrangements and has terminated those arrangements as deemed
appropriate. The Company believes that its operations including joint venture
and management arrangements with other health care providers substantially
comply with applicable laws and regulations; however, there can be no assurance
that judicial or administrative interpretation of existing laws, including the
fraud and abuse laws, or legislative enactment of new laws will not have a
material adverse effect on the Company's business. During fiscal 1994, the
Company's subsidiary, United Health Care Services, Inc. ('UHCS') had been
involved in certain joint ventures, most of which were in place when the Company
purchased UHCS, which were subsequently terminated. In connection with a review
of such arrangements in the industry, the Company was requested by the Office of
the United States Attorney for the Eastern District of Pennsylvania and the
Commonwealth of Pennsylvania, Department of Welfare to provide certain
information concerning such joint venture arrangements. As a result of such
inquiry, the Company has reached a settlement with the Office of the United
States Attorney for the Eastern District of Pennsylvania and is discussing a
settlement with the Commonwealth of Pennsylvania Department of Public Welfare
regarding such joint ventures. The Company believes that such settlement will
not have a material adverse effect on the Company's business and financial
condition.
Each year Congress enacts an OBRA which generally affects the operations of
the Company. OBRA 1987 created six categories for durable medical equipment
reimbursement under the Medicare Part B program. OBRA 1987 also defined whether
products would be paid for on a rental or sale basis and established fixed
payment rates for oxygen service as well as a 15-month rental ceiling on certain
medical equipment. OBRA 1990 made new changes to Medicare Part B reimbursement
that were implemented in 1991. The substantive changes included a national
standardization of Medicare rates for certain equipment categories and
reductions in amounts paid for certain durable medical equipment.
The failure to obtain, renew or maintain any of the required regulatory
approvals or licenses could adversely affect the business conducted by the
Company and could prevent the delivery of one or more products and services.
QUALITY ASSURANCE
The Company maintains quality assurance programs in all of its operating
entities. The Corporate Compliance and Quality Review Committee of the Board
reviews and oversees these programs and reports to the Board with respect to
these programs, as appropriate. In addition, the Company has agreed to
participate and fund a joint study with the University of Pennsylvania's
Institute on Aging and embark on what the Company believes is a first of its
kind cooperative effort between government, the academic community, and the
private sector, to describe the role of physicians, dietitians, hospitals and
care staff in those cases where nursing home residents are nutritionally at risk
and need acute medical intervention to prevent and/or treat skin breakdowns. As
part of this cooperative effort, data will be collected from various facilities
owned by the Company pertaining to the Company's existing
35
<PAGE>
policies and procedures for identifying, assessing and evaluating those
residents who may be nutritionally at risk.
COMPETITION
While the Company is unable to determine whether health care reform will be
dominated by third party payors or integrated delivery systems, the Company
believes that its strategy of positioning itself as a provider of a continuum of
care along the lines of long term care and support services will allow the
Company to compete effectively in a changing marketplace, provided that the
Company is able to finance the implementation of its marketing and operations
strategy. In recent years, third party payors have increased their efforts to
contain or reduce health care costs by lowering reimbursement rates, increasing
case management review of services (often resulting in payment delays) and
negotiating contract prices. Moreover, increasing government regulation of the
types of products and services offered by the Company impose additional
management, capital and operating costs on the Company. While the Company has
made steps in developing a single source continuum of health care services, the
Company's progress has been hindered by such third party payors, as well as by
the costs of increasing governmental regulations. A dramatic growth in the
health care market in recent years has attracted a large number of providers,
some of which are national in scope and many of which have greater financial
resources than the Company and a greater number of which, like the Company,
operate only in limited geographic areas. Accordingly, the market for health
care service is highly competitive. Competition is encountered from a variety of
health care organizations including major national chains which are larger than
the Company. Some existing competitors in the home health care business also
manufacture their own products and equipment. Other competitors include health
care organizations, hospital and health maintenance organizations. Some of the
significant competitive factors include reputation, quality and diversity of
services offered, family and physician preferences, referral networks and price.
The Company believes that the changing health care market will afford the
Company opportunities because the Company can provide an array of services to
health care providers which results in increased operating and administrative
efficiencies. In order to take advantage of these opportunities the Company must
have sufficient funds to focus its marketing efforts. The Company's ability to
successfully compete in the delivery of health care services is dependent, among
other things, on its ability to adjust to a changing regulatory environment,
obtain payment from third-party payors, control costs, deliver a consistently
high quality of care, adapt to the changing needs of the population it serves
and position itself to provide a continuum of cost-efficient products and
services to the managed care industry.
The long-term care, residential and independent living facilities operated
by the Company compete with all types of health care facilities, nursing and
convalescent centers, retirement facilities and communities, and similar
institutions. There are a large number of skilled nursing facilities and other
facilities in each of the geographic areas served by the Company's facilities.
The degree of success with which the Company's care facilities compete varies
from location to location and is dependent on a number of factors. The Company
believes that the quality of care provided, reputation and physical appearance
of facilities, and in the case of private patients, charges for services, are
significant competitive factors. There is limited, if any, competition in price
with respect to Medicaid and Medicare patients, since revenues for services to
such patients are strictly controlled and based on fixed rates and cost
reimbursement principles. Provision of quality care by the Company is dependent
in part on its ability to adequately staff its facilities.
LIABILITY INSURANCE
In recent years, participants in the health care market have become subject
to an increasing number of lawsuits alleging malpractice, product liability or
related legal theories, many of which involve large claims and significant
defense costs. The Company is from time to time subject to such suits as a
result of the nature of its business. The Company currently maintains liability
insurance intended to cover such claims. While the Company has been able to
obtain liability insurance in the past, such insurance varies in cost, is
difficult to obtain and may not be available in the future on
36
<PAGE>
acceptable terms or at all. A successful claim against the Company in excess of
the Company's insurance coverage could have a material adverse effect upon the
Company and its financial condition.
The Company currently has in force general liability insurance, including
professional liability, with an aggregate annual limit of $11,000,000 covering
operations at all of its owned long-term care and residential health care
facilities and the other operations of the Company other than the ambulance
services for which the limit of coverage is $3,000,000. In addition, the
ambulance services has in force automobile insurance coverage with an aggregate
annual limit of $1,000,000. The Company also currently has in force two general
liability policies, with aggregate annual limits of $6,000,000 each, covering
the operations of UHCS and IPS, respectively. These insurance policies have no
deductibles, are subject to annual renewal, and provide coverage on a claims
made basis for professional liability. All other policies provide coverage on an
occurrence basis. However, there can be no assurance that the coverage limits of
the Company's insurance policies will be adequate.
The Company makes available health plan coverage to certain of its
employees under a fully insured program. The Company also maintains workers'
compensation insurance with an A+ rated insurance carrier in all states of
operation, subject to a $500,000 deductible per incident and an aggregate loss
of $8,000,000. The Company has implemented and continues to maintain programs to
minimize the number and severity of occurrences and to control the costs of
existing and future claims. The Company's ultimate liability is limited under
the terms of the worker's compensation insurance contracts and by state statute.
EMPLOYEES
As of May 31, 1996, the Company employed approximately 5,100 full and part
time employees. Approximately 1,969 of the employees, primarily the service
worker employees of GMS, are represented by labor unions. The Company believes
that its employee relations are generally satisfactory. However, it cannot
predict the effect of organizational activities on its future operations. In the
present labor market, the prospect of demands for higher wages or strikes is a
possibility.
The health care industry is labor intensive and dependent upon skilled
personnel. On occasion, a shortage of skilled and entry level healthcare
personnel may occur which could adversely affect the operating results of the
Company.
In the conduct of its business, the Company does not discriminate against
any individual on account of his/her race, color, religion, sex, national origin
or physical disability.
PROPERTIES
Reference is made to 'BUSINESS AND PROPERTIES OF THE COMPANY -- The
Operating Companies' for a description of the long-term care, residential and
independent living facilities operated by the Company. All owned facilities
listed therein are subject to mortgages. See Note 2 of the Notes to Consolidated
Financial Statements. In addition, the Company owns and occupies a 175,000
square foot building in Philadelphia, Pennsylvania which houses its management
and administrative activities as well as the operations of its pharmacy and
durable medical equipment businesses. The Company believes that all of the
properties are adequately maintained and are suitable for the purposes intended.
The Company also holds various improved and unimproved properties for
development which, in the aggregate, are not material.
37
<PAGE>
RECENT MARKET PRICES AND DIVIDEND HISTORY
The Shares are traded on the NASDAQ National Market System under the symbol
'GEMC.' The high and low closing prices per Share during the first quarter of
fiscal year 1997 and during fiscal years 1995 and 1996 were as follows:
HIGH LOW
--------- ---------
FISCAL 1997
First Quarter (through the Record Date)................... 5 5/8 2 1/16
FISCAL 1996
Fourth Quarter............................................ 2 3/8 1 3/4
Third Quarter............................................. 2 5/8 2
Second Quarter............................................ 3 2 1/8
First Quarter............................................. 3 1/16 2
FISCAL 1995
Fourth Quarter............................................ 2 13/16 1 13/16
Third Quarter............................................. 3 1/8 2 3/8
Second Quarter............................................ 3 1 5/8
First Quarter............................................. 3 1/16 2
As of August 30, 1996, the Record Date for the Special Meeting, the price
per Share was $5.50, and the number of Shares outstanding was 15,429,746, which
were held of record by approximately 1,155 holders.
The high and low sale prices of the Shares on July 10, 1996, the day
preceding public announcement of the proposed Merger, were $4.0625 and $3.875,
respectively.
The Company has not declared or paid any cash dividends in the time period
covered by the table set forth above.
38
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth selected statement of income, balance sheet
and operating data of the Company for each of the prior five fiscal years. The
statement of income and balance sheet data for each such fiscal year has been
derived from the consolidated financial statements of the Company. The
information set forth below should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements contained
herein.
GERIATRIC & MEDICAL COMPANIES, INC.
AND SUBSIDIARIES CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Operating Revenues, Net........... $ 164,551,000 $ 164,364,000 $ 177,957,000 $ 192,234,000 $ 195,196,000
Income before Interest and
Taxes (a)....................... $ 10,986,000 $ 14,623,000 $ 9,152,000 $ 16,143,000 $ 15,188,000
Interest Expenses, Net............ $ (9,463,000) $ (11,377,000) $ (10,889,000) $ (11,078,000) $ (12,295,000)
Pre-Tax Income (Loss)............. $ 1,523,000 $ 3,246,000 $ (1,737,000) $ 5,065,000 $ 2,893,000
Income Tax Provision (Benefit).... $ 380,000 $ 812,000 $ (299,000) $ 1,012,000 $ (1,260,000)
Extraordinary Items:
Utilization of Net Operating
Loss Carryforwards........... $ 66,000 $ -- $ -- $ -- $ --
Extinguishment of Debt -- net of
tax benefit.................. $ (650,000) $ -- $ -- $ -- $ --
Net Income (Loss)................. $ 559,000 $ 2,434,000 $ (1,438,000) $ 4,053,000 $ 4,153,000
Per Common Share:
Net Income (Loss) before
Extraordinary Item(s)........ $ .08 $ .16 $ (.09) $ .27 $ .27
Extraordinary Item(s)............. $ (.04) $ -- $ -- $ -- $ --
Net Income........................ $ .04 $ .16 $ (.09) $ .27 $ .27
BALANCE SHEET DATA (AS OF FISCAL
YEAR END)
Total Assets...................... $ 163,479,000 $ 169,619,000 $ 162,724,000 $ 176,717,000 $ 191,684,000
Long-Term Debt and Subordinated
Debentures (b).................. $ 115,834,000 $ 122,582,000 $ 119,343,000 $ 121,660,000 $ 130,775,000
Shareholders' Equity.............. $ 9,382,000 $ 11,951,000 $ 10,545,000 $ 14,648,000 $ 18,880,000
OPERATING DATA
Patient Days (c).................. 1,039,403 1,039,204 983,671 992,146 1,004,075
Average Occupancy Based on beds in
Service (c)..................... 95% 94% 93% 92% 92%
Revenues From Government
Programs........................ 78% 83% 86% 86% 83%
Number of Company Employees....... 4,018 3,887 4,150 5,300 5,100
Number of Beds -- Operated........ 5,530 4,942 3,904 3,989 3,808
</TABLE>
- - ------------------
(a) Includes recognition of deferred and current gains on facilities sold:
1992.................................... $ 3,175,000
1993.................................... $ 6,365,000
1994.................................... $ 1,576,000
1995.................................... $ --
1996.................................... $ --
(b) Excludes current portion of long-term debt and subordinated debentures.
(c) Pertains to owned long-term care facilities only.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a Mid-Atlantic health care company providing support
services in pharmacy, rehabilitative therapies, ambulance transportation,
contract management, financial, diagnostic services and home care, which
includes infusion, respiratory and equipment rental to hospitals, HMO's,
physician groups and nursing homes. It also is a major long-term care provider
in Pennsylvania and New Jersey.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $25 million accounts receivable sale agreement, with
recourse, which expires in May, 1997. Under this agreement, program costs are
charged at 9.84% of the outstanding receivables sold. In May, 1994, the Company
entered into an additional agreement to sell certain receivables due from third
party payors. This agreement expires in May, 1997. The program cost charged is
9.75% of outstanding amounts sold. The maximum amount to be sold at any time
under this agreement will be $5,000,000. The amount outstanding at May 31, 1996
under these agreements was $18,572,000. The Company has accounted for these
transactions as a sale of receivables (See Note 4 to the Notes to Consolidated
Financial Statements).
The Company has a $5,000,000 line of credit agreement with a commercial
bank. The line of credit is secured by certain real estate and receivables not
sold under the accounts receivable financing agreement discussed above. Interest
on the line is at prime plus 1%. The line is renewable annually and may, at the
Company's option, be converted to a three (3) year term loan. At May 31, 1996,
the Company had $2,580,000 outstanding under this line and also had $1,574,000
of letters of credit outstanding under this agreement. In August, 1996, the
Company received a commitment to increase the credit line to $7,500,000.
In June, 1996, the Company entered into a $2,500,000 loan agreement with
FINOVA Capital Corporation principally secured by the durable medial equipment
of one of its subsidiaries. The loan is repayable over 60 months with interest
at prime plus 3% (11.25% as of May 31, 1996).
A substantial part of the Company's revenues consists of reimbursements
under the Pennsylvania Medicaid Program. Historically this was a retrospective
cost based program that typically resulted in the generation of large
receivables which were periodically settled. Effective January 1, 1996,
Pennsylvania adopted regulations to implement a new case mix payment system. The
revised rates issued by Pennsylvania to the Company are lower than the interim
rates received under the old system. The Company is continuing to pursue
increases to these rates through various administrative and legal processes. The
Company continues to reduce costs and pursue its aggressive program to reduce
its concentration on Medicaid programs and shift to other payor programs and
opportunities. The Company believes that the results of these activities will be
to mitigate what could otherwise be a substantial adverse effect on the
Company's results from the implementation of the new system.
The Company was named a defendant, together with GMS Management, Inc., and
various current and former officers of the Company, in a class action suit which
was filed in September, 1992, in the United States District Court for the
Eastern District of Pennsylvania in Philadelphia. On July 15, 1996, the Company
entered into an agreement to settle the claims of the plaintiff class. The
agreement received provisional approval by the court on July 23, 1996, and is
subject to a hearing to be held on October 7, 1996. Under the terms of the
agreement, a payment up to a maximum of $1,900,000 will be made to a claims
settlement fund, of which 50% will be paid by the Company's insurance carrier.
The fund will be used to resolve all claims of the members of the plaintiff
class on a claims made basis and to pay the attorneys' fees and costs incurred
by the plaintiff class. The ultimate amount of this settlement cannot be
determined at this time. The Company's maximum share of the claim is $950,000.
The Company reached a settlement in fiscal 1994, with the Office of the
United States Attorney for the Eastern District of Pennsylvania, regarding the
joint venture and management arrangements of
40
<PAGE>
its subsidiary UHCS, whereby the Company is paying $30,000 per month for the
next 16 months (as of May 31, 1996).
On February 21, 1996, a Company subsidiary reached an agreement with the
U.S. Attorney to settle the previously reported matter involving reimbursement
for certain nutritional services provided at a nursing facility (the 'Facility')
previously managed by the subsidiary. The Company entered into this settlement,
without admitting any wrongdoing, in order to avoid the substantial expenses and
management disruption of litigation. The settlement resulted in a charge of
$429,000, before taxes, shown in the accompanying Consolidated Statements of
Operations for the fiscal year ended May 31, 1996. Beginning in February, 1996,
the Company has agreed to pay $10,000 per month through October, 1997 with a
final payment of the remaining balance due in November, 1997. The Company's
management agreement with the Facility provides that the Facility indemnify and
hold the Company harmless with respect to claims such as that alleged by the
U.S. Attorney. However, it is unclear whether the Facility has, or would have,
the funds necessary to provide such indemnification.
LSA received notice of suspension of payments relating to Medicare billing
submitted to its Medicare intermediary, effective April 6, 1995. The
intermediary has alleged that overpayments have occurred to prior LSA billings.
In August, 1995, the intermediary partially lifted the suspension and has since
paid LSA 75% of all subsequent approved billings. As of May 31, 1996, the
intermediary had withheld approximately $4,565,000 in escrow pending resolution
of this matter. LSA has received notices of the results of the intermediary's
audits, including a calculated overpayment of approximately $6,800,000 through
March 31, 1996. LSA is reviewing the intermediary's results and believes there
are errors in, among other things, (i) the sampling techniques used; (ii) the
conclusions reached relative to the appropriateness of payments for claims in
the audit sample; and (iii) the projection technique of the ultimate overpayment
calculation. LSA intends to vigorously defend its position and utilize all
available administrative and legal processes to protect its rights in this
matter. It is not possible at the present time to determine the length of the
suspension or whether such suspension will have a material effect on the
operations or the financial condition of the Company. LSA believes that it has
operated at all times in substantial compliance with all provisions required by
Medicare relating to reimbursement for services. The Company is not able, at
this time, to predict the ultimate outcome of this matter.
The Company's net trade receivables have increased $6,247,000 for the year
ended May 31, 1996 primarily as a result of the suspension and a slowdown of
payments to LSA, discussed above, and a slow down in payment for services
provided to outside long term care facilities. The Company's receivable due from
third party payors, net, increased $7,965,000 in fiscal 1996 as a result of the
continued delay of audits and settlements of cost reports under government
reimbursement programs. All of the foregoing have had an adverse effect on the
Company's liquidity.
In December, 1994, the Company arranged financing under section 232 of the
National Housing Act, of a 60 bed nursing home and 60 bed residential health
care facility in Cape May, New Jersey. The construction of the facility was
completed in January, 1996 at a total construction cost of $7,062,000, of which
$5,636,000 is to be financed. During fiscal 1996, construction costs incurred
totaled $4,857,000, of which $4,577,000 was financed.
On May 31, 1995, the Company completed an agreement to finance a 120 bed
long term care facility in Norristown, PA (Rittenhouse West Nursing &
Rehabilitation Center) with Meditrust Mortgage Investments, Inc. (Meditrust) for
$6,939,000. During fiscal 1996 construction costs incurred totaled $4,557,000,
of which $4,541,000 was financed.
As more fully discussed in Note 14 (a) and (b) to the Notes to Consolidated
Financial Statements, the Company is a party to various legal and other matters
asserted against the Company. The ultimate liability resulting from the
foregoing matters cannot presently be determined. Accordingly, no provision for
any liability in excess of the amount recorded by the Company has been made to
the accompanying consolidated financial statements.
The Company intends to meet its capital commitments and working capital
requirements in fiscal 1997 from operations, existing financing arrangements, or
the sale or refinancing of other assets.
41
<PAGE>
COMPARISON OF CONSOLIDATED RESULTS OF OPERATIONS FOR FISCAL 1996 AND FISCAL 1995
The following table, derived from the Company's consolidated statements of
operations, sets forth for the items listed the respective changes when compared
between the fiscal years ended May 31:
<TABLE>
<CAPTION>
INCREASE %
1996 1995 (DECREASE) CHANGE
(IN 000'S EXCEPT PERCENTAGES) ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues, net................................ $ 195,196 $ 192,234 $ 2,962 1.5%
Other Revenues......................................... -- -- -- --
----------- ----------- -----------
195,196 192,234 2,962 1.5%
----------- ----------- -----------
Operating Expenses..................................... 167,060 163,769 3,291 2.0%
Depreciation and amortization.......................... 8,778 8,734 44 .5%
Interest expense, net.................................. 12,295 11,078 1,217 11.0%
Provision for costs on sale of accounts receivable..... 4,170 3,588 582 16.2%
----------- ----------- -----------
192,303 187,169 5,134 2.7%
----------- ----------- -----------
Income before taxes.................................... 2,893 5,065 (2,172) NM
Tax provision.......................................... (1,260) 1,012 (2,272) NM
----------- ----------- -----------
Net income............................................. $ 4,153 $ 4,053 $ 100 2.5%
=========== =========== ===========
NM = Not Measurable
</TABLE>
Net income was $4,153,000 for the twelve months ended May 31, 1996 compared
to net income of $4,053,000 in 1995. Operating revenues, net were $2,962,000
higher in 1996 when compared to 1995. Of this increase, $4,603,000 relates to
the Company's long term care operations which resulted from revenues generated
from Medicare certified and sub-acute units ($1,078,000), net bed additions
($1,846,000) and rate increases partially offset by a reduction in census
($1,679,000). The increase in the long term care revenues was offset by a net
decrease in ambulance, pharmaceutical and hospitality services revenues related
to a decrease in government reimbursement and a decrease in volume of business
($1,641,000).
Operating expenses increased $3,291,000 in 1996 compared to 1995. This
includes non-recurring charges of $429,000 recorded in the third quarter related
to a settlement of a matter relating to reimbursement for nutritional services
provided at a nursing facility previously managed by a subsidiary and an amount
recorded in the fourth quarter relating to the class action suit (see Note 14 to
the Notes to Consolidated Financial Statements). Excluding the effect of these
non-recurring charges, operating expenses have remained constant as a percentage
of revenues due to continued cost containment and operating efficiencies.
Interest expense, net, for the year ended May 31, 1996 increased approximately
$1,217,000 over 1995. This increase is principally attributable to the
following: additional interest of $621,000 incurred under the Company's credit
facility with Meditrust Mortgage Investments, Inc.; a $500,000 discount on a
note receivable; and debt related to a new long term care facility opened in
January, 1996. The increase in interest expense is offset by an increase in
interest income as the result of interest associated with term notes.
Provision for costs on sale of accounts receivable increased $582,000 over
1995 primarily as the result of an increase in the sale of accounts receivables
during fiscal 1996. The tax provision decreased $2,272,000 primarily due to the
recognition of deferred tax assets. A net deferred tax asset of $1,925,000 was
recorded during fiscal 1996 as the Company believes it is more likely than not
that the results of future operations will generate sufficient taxable income to
realize such net deferred tax assets.
42
<PAGE>
COMPARISON OF CONSOLIDATED RESULTS OF OPERATIONS FOR FISCAL 1995 AND FISCAL 1994
<TABLE>
<CAPTION>
INCREASE %
1995 1994 (DECREASE) CHANGE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
(IN 000'S EXCEPT PERCENTAGES)
Operating revenues, net................................ $ 192,234 $ 177,957 $ 14,277 8.0 %
Other Revenues......................................... -- 1,576 (1,576) (100.0)%
----------- ----------- -----------
192,234 179,533 12,701 7.1 %
----------- ----------- -----------
Operating Expenses..................................... 163,769 157,612 6,157 3.9 %
Depreciation and amortization.......................... 8,734 9,238 (504) (5.5)%
Interest expense, net.................................. 11,078 10,889 189 1.7 %
Provision for costs on sale of accounts receivable..... 3,588 3,531 57 1.6 %
----------- ----------- -----------
187,169 181,270 5,899 3.3 %
----------- ----------- -----------
Income (loss) before taxes............................. 5,065 (1,737) 6,802 NM
Tax provision.......................................... 1,012 (299) 1,311 NM
----------- ----------- -----------
Net income............................................. $ 4,053 $ (1,438) $ 5,491 NM
=========== =========== ===========
NM = Not Measurable
</TABLE>
Net income was $4,053,000 for the twelve months ended May 31, 1995 compared
to a net loss of $1,438,000 in 1994. Income before income taxes was $5,065,000
in 1995 compared to a net loss of $1,737,000 in 1994 which includes $1,576,000
related to a gain on facilities sold and recognition of deferred income.
Operating revenues are $14,277,000 higher in 1995 when compared to 1994. Of
this increase, $8,842,000 relates to the Company's long term care operations
which resulted from growth in its Medicare census ($5,920,000), addition of new
beds in 1995 ($1,480,000), improved rates from government and private payors
($1,719,000) offset principally by a decrease in management fees from external
facilities ($277,000). The remaining increases are related to higher volume in
the ambulance and hospitality businesses.
Operating expenses increased $6,157,000 in 1995 compared to 1994. This
relates to increased costs associated with the acquisition of three ambulance
companies, higher volume including new beds, new customers, salary and other
inflationary factors offset by a reduction in the provision for uncollectible
accounts of approximately $700,000, the elimination of nonrecurring charges in
workers compensation in 1994 of approximately $700,000 and continued operating
efficiencies and cost reductions.
Depreciation and amortization decreased $504,000 in 1995 principally as a
result of the completion in fiscal 1994 of the amortization of certain deferred
financing costs.
Interest expense, net, for the year ended May 31, 1995 increased
approximately $189,000 over 1994. This increase is principally attributable to
the debt related to new beds opened in 1994 and 1995.
43
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the executive officers of
the Company as of May 31, 1996:
NAME AGE POSITION
- - -------------------------- ----------- ---------------------------------------
Daniel Veloric............ 68 Chairman of the Board, President and
Chief Executive Officer
Esther Ponnocks........... 64 Senior Executive Vice President
Arthur A. Carr, Jr........ 46 Executive Vice President and Secretary
Michael Veloric........... 39 Vice President and Assistant Secretary
James J. O Malley......... 44 Vice President and Chief Financial
Officer
James J. Wankmiller....... 42 Vice President - Legal & Human
Resources and Assistant Secretary
Francis J. McCauley....... 51 Vice President
Each executive officer of the Company is elected or appointed by the Board
of the Company and holds office until his or her successor is elected or until
the earlier of his or her death, resignation or removal.
DANIEL VELORIC (the father of Michael Veloric) is a founder of the Company
and has been a Director and Executive Officer for more than twenty-five years.
ESTHER PONNOCKS has been Senior Executive Vice President since October,
1991, Executive Vice President - Long Term Care Operations of the Company
(April, 1990 until October, 1991), Senior Vice President - Operations of the
Company (1985 until April, 1990) and has been a member of the Company's
Management for over twenty-five years. Ms. Ponnocks was elected a Director in
1985.
ARTHUR A. CARR, JR. joined the Company in March, 1989 as Assistant to the
President and was elected Executive Vice President in July, 1989 and Secretary
in August, 1992.
MICHAEL VELORIC (the son of Daniel Veloric) has been a Vice President of
the Company since June, 1987 and has held the position of Assistant Secretary
since October, 1984. Mr. Veloric has been a member of the Company's Management
for over ten years. Mr. Veloric was elected a Director in August, 1992.
JAMES J. O MALLEY joined the Company in April, 1989 as the Chief Financial
Officer of its Life Support Group and has held various positions with the
Company since that time. Mr. O Malley was elected Vice President and Chief
Financial Officer in August, 1992.
JAMES J. WANKMILLER joined the Company in March, 1987 and was elected Vice
President of Human Resources in February, 1989. He was appointed as Legal
Administrator in May, 1991 and elected to Vice President / Legal & Human
Resources and Assistant Secretary in 1992.
FRANCIS J. MCCAULEY joined the Company in January, 1988 as President of
Life Support Ambulance, Inc. and was elected as President of Life Support
Medical, Inc. in December, 1993. Mr. McCauley was elected as a Vice President in
November, 1994 and an Executive Officer of the Company in November, 1995.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No compensation committee interlocks nor insider participation exist on the
Incentive Stock Option and Compensation Committee.
44
<PAGE>
SUMMARY COMPENSATION TABLE
The Summary Compensation Table includes compensation information on the
Chief Executive Officer and the four other most highly paid executive officers
of the Company whose salary and bonus exceeded $100,000, for services rendered
in all capacities during the fiscal years ended May 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------------------------------------
------------------------------- RESTRICTED(*)
NAME AND FISCAL OTHER ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS (IN SHARES) COMPENSATION
- - ------------------------------------- --------- --------- --------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel Veloric ...................... 1996 $ 500,000 $ 103,000(7) $12,472 $ -- -- $ --
Chairman, President and 1995 450,008 107,000 11,179 -- -- 16,005(3)
Chief Executive Officer 1994 450,008 -- 12,359 (115,126)(5) -- 14,495(3)
Esther Ponnocks ..................... 1996 200,000 --(8) 79,317 -- 20,000 24,327(6)
Senior Executive 1995 180,965 -- 138,817 -- -- --
Vice President 1994 166,425 20,000 46,902 (50,437)(5) -- 9,375(4)
Arthur A. Carr, Jr. ................. 1996 184,508 --(8) 14,617 -- 15,000 37,598(6)
Executive Vice President and 1995 170,738 -- 14,062 -- -- 16,999(2)
Secretary 1994 156,600 17,500 14,519 (32,437)(5) -- 8,100(2)
James J. O'Malley ................... 1996 136,338 --(8) 13,237 -- -- 22,197(6)
Vice President and 1995 131,169 -- 12,962 -- 10,000 12,390(2)
Chief Financial Officer 1994 115,050 15,000 12,966 (8,725)(5) -- 6,000(2)
James J. Wankmiller, Esquire ........ 1996 131,881 --(8) 8,177 -- -- 22,446(6)
Vice President -- Legal and 1995 121,554 -- 8,252 -- 10,000 12,040(2)
Assistant Secretary 1994 110,951 15,000 8,925 (12,787)(5) 3,906 5,750(2)
</TABLE>
- - ------------------
(1) Includes all other compensation reported on IRS Form W-2.
(2) Includes Company contribution relating to the Incentive Deferred
Compensation Plan.
(3) Represents the value of 6,500 phantom Shares issued under his Long Term Care
Incentive Plan for the respective years.
(4) Represents the value of 25,000 unregistered Shares issued on December 16,
1993 in recognition of 25 years of service.
(5) Amount represents the forfeiture as of May 31, 1994 of restricted Shares
previously reported.
(6) Includes Company contribution relating to the Incentive Deferred
Compensation Plan and value of unregistered Shares issued on August 17, 1995
in recognition of performance.
(7) Determined in accordance with the Veloric Employment Agreement.
(8) Does not include amounts for 1996 bonuses which may be considered by the
Compensation Committee of the Board, consistent with its past practices and
as permitted under the Merger Agreement, at its next meeting. Does not
include awards under the Management Long Term Incentive Program which will
accelerate as a result of approval of the Merger.
NOTE: During fiscal 1996, no executive officer received personal benefits from
the Company valued at more than 10% of total Annual Compensation or $50,000,
whichever is less.
45
<PAGE>
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
Effective June 1, 1993, the Company entered into an Employment Agreement
with Daniel Veloric, Chairman, President and Chief Executive Officer of the
Company, which provides for an annual base compensation, which increased from
$450,000 per year to $500,000 per year effective June 1, 1995, and an original
term of five years (which, until terminated, extends one additional year each
year). The Agreement also provides for a death benefit of $1,000,000 as well as
benefits under the short term incentive plan and long term incentive plan for
Daniel Veloric.
Effective June 1, 1992, the Company entered into an Employment Agreement
with Esther Ponnocks, Senior Executive Vice President, which provides for an
annual base compensation, which increased from $188,000 per year to $200,000 per
year effective June 1, 1995, and an original term of three years, with annual
extensions through not later than May 31, 2002. If a person acquires more than
20% of the outstanding Shares without the prior approval of the Board, or if the
Company materially breaches the Employment Agreement or under certain other
circumstances, the Company will owe Ms. Ponnocks the remainder of the
compensation due under the agreement through as long as May 31, 2002.
See 'THE MERGER -- Interests of Certain Persons in the Merger' for a
description of the Termination Agreements which have been entered into with
respect to each of the Employment Agreements referred to above.
COMPENSATION PURSUANT TO PLANS
The Company's Profit Sharing Plan was merged into a 401(k) Profit Sharing
Plan effective June 1, 1989. Under the 401(k) Plan, eligible employees may
contribute up to 15% of their total compensation on a tax-deferred basis subject
to maximum annual limitations. Pursuant to the terms of the plan, the Company
may make matching contributions at a percentage or amount determined at the sole
discretion of the Company. During the fiscal year ended May 31, 1996, no
contribution was made by the Company to the Plan.
The Company's 1989 Stock Option and Restricted Stock Plan (the '1989 Plan')
provides that incentive and non-qualified stock options may be granted to key
employees of the Company and its subsidiaries. The 1989 Plan is administered by
the Compensation Committee which has the discretion to determine those key
employees who will receive options and the amount of options to be granted to
said employees; to determine when options can be granted and the exercise price
of each option, which price cannot, however, be less than the fair market value
of the Common Stock on the date of grant; and to determine when each option can
be exercised and the term (up to ten years) of each option granted. All options
will expire within ten years from the date of grant and no options may be
granted after November 9, 1999. If an optionee is terminated other than for
wrongful conduct, the optionee may exercise his/her options within three months
(one year for an optionee who ceases to be employed because of permanent and
total disability) provided that his/her right to exercise said options has
vested at the date of termination and provided that the exercise of the option
is within ten years from the date it was granted (five years for an incentive
stock option granted to a 10% Stockholder). If an optionee dies while in the
employ of the Company or within three months (one year in the case of
disability) after the termination of employment, and provided that his/her
options have vested at the time of his/her death and the exercise of the options
are within ten years form the date of grant (five years, for an incentive stock
option granted to a 10% Stockholder), then the optionee s personal
representative may exercise said options within one year after the optionee's
death.
In 1992, the Company implemented an Incentive Deferred Compensation Plan
for selected key employees. Under this Plan, the Company makes discretionary
awards to such executives, which amount, if any, can vary annually and by
participant, and is generally expressed as a percentage of salary. The amounts
are credited to a book-entry account established in such participant's name.
Such account is also credited with the equivalent of interest and such interest
rate is determined annually by the Company. Participants become vested in the
amounts credited to the deferred compensation account on a graduated basis.
However, full vesting cannot occur prior to attainment of age 65 while
46
<PAGE>
actively employed by the Company, except upon a change of control of the
Company. Upon retirement at age 65 or later, the vested deferred compensation
account is paid out as a 15 year annuity. Participants who terminate employment
prior to age 65 will receive a 10 year annuity at retirement based on the vested
account balance. In the event of the death of a participant while actively
employed, the plan provides to the participant's survivor a continuation of 50%
of the final salary for one year, followed by 25% of final salary until the
participant would have attained age 65, subject to a minimum of 10 years of
total payments. All benefits under the Incentive Deferred Compensation Plan are
unfunded, unsecured general obligations of the Company. The Company has
purchased corporate owned life insurance on the participants estimated to be
sufficient to recover the distribution to be made under this Plan.
The Company's 1995 Equity Incentive Plan (the '1995 Plan') provides that
Shares, stock options, stock appreciation rights, restricted Shares or deferred
Shares (collectively, 'Awards') may be awarded to key employees of the Company
and its subsidiaries. The 1995 Plan is administered by the Compensation
Committee which has the discretion as to who will receive Awards, the time at
which Awards will be made and the size and type or types of Awards. Pursuant to
the 1995 Plan, the Board adopted a three-year Management Long Term Incentive
Program ('LTIP') pursuant to which a maximum of 525,000 Shares may be granted to
certain of the Company's key employees, subject to standard anti-dilution
provisions. Awards under the LTIP may be earned by achieving certain economic
(including minimum net income growth requirements) and Company-wide and
individual management goals (including marketing, planning and management
development). Awards could be earned under the LTIP upon satisfaction of plan
conditions at May 31, 1998; however, such awards will accelerate as a result of
the approval of the Merger.
The following table provides information, with respect to the named
executive officers, concerning the exercise of options during the last fiscal
year and unexercised options held as of the end of the fiscal year, May 31,
1996. There are no outstanding stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END AT FISCAL YEAR-END
ACQUIRED -------------------------- --------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------------------ ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Veloric................ -- -- -- -- -- --
Esther Ponnocks............... -- -- 88,438 10,000 $ 67,232 --
Arthur A. Carr, Jr............ -- -- 30,625 23,125 $ 473 --
James J. O'Malley............. -- -- 18,125 5,000 $ 630 --
James J. Wankmiller........... -- -- 27,906 5,000 $ 9,506 --
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 31, 1993 the Company sold its Mt. Laurel, New Jersey facilities to
Tomahawk for $8.5 million, consisting of cash of $2.5 million and a 9% interest
bearing note for $6 million. This note was payable based on a 25 year
amortization, with a balloon payment due June of 2005. Tomahawk prepaid
approximately $1,500,000 from inception through May 31, 1995. As of May 31,
1996, Tomahawk prepaid $3,000,000 and as an inducement received a discount of
$500,000 which has been recorded in the accompanying financial statements. The
Company also restructured this note requiring that the remaining balance of
principal and interest as of May 31, 1996 (totaling $1,622,000) be paid over 35
quarters, commencing September 1, 1996 with interest on the principal due at
6.75%.
The Company provides certain services which are priced at or above
projected cost, and include staffing services, dietary, environmental,
financial, and other services, to Mount Laurel Convalescent Center and
Laurelview Manor which are owned by Tomahawk. The total services rendered during
fiscal 1996 and 1995 were $8,179,000 and $7,194,000. At May 31, 1996 and 1995
the Company had a receivable of $4,732,000 and $3,235,000 due from Tomahawk for
these services, respectively.
47
<PAGE>
During fiscal 1996 and 1995, the Company received additional revenues of
approximately $1,084,000 and $1,000,000 related to its provision of ancillary
services at the Tomahawk facilities. These services, including provision of
ambulance transportation, diagnostics, rehabilitation, pharmacy and medical
supplies are provided at market rates.
During the fiscal year ended May 31, 1996, the Company leased-back certain
properties previously sold at fair market value to Community Care and
Development Corporation ('CCDC') which is a Pennsylvania non-profit corporation.
The Board of Directors and officers of CCDC include: Daniel Veloric, Esther
Ponnocks, and Michael Veloric, who are also directors and officers of the
Company. No payments were made to Daniel Veloric, Esther Ponnocks or Michael
Veloric in fiscal 1996. The Company paid rent to CCDC of approximately $221,000
for the fiscal year ended May 31, 1996.
Dedicated Staffing Services, Inc. ('DSI'), a Pennsylvania non-profit
corporation, previously provided registered nurses, licensed practical nurses,
nursing assistants and other personnel to the Company on a temporary employment
basis. Certain officers of the Company were members of DSI's Board of Directors.
The Company paid DSI approximately $184,000 and $1,659,000 for these services in
fiscal 1996 and 1995, respectively.
During fiscal 1996, the Company purchased from DSI certain fixed assets as
well as a list of nursing assistants for approximately $137,000. The Company has
agreed to pay such amount over 30 months, with interest at 9%.
The Company believes its transactions with CCDC and DSI have been on terms
at least as favorable to the Company as those which would have been available in
the general market.
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND CERTAIN TRANSACTIONS IN THE COMPANY'S COMMON STOCK
The following table sets forth information as of August 30, 1996, with
respect to the beneficial ownership of Shares by all persons known to the
Company to be the beneficial owner of more than five percent of the Company's
outstanding Shares, by each director of the Company, by each executive officer
of the Company, and by all directors and executive officers as a group. Except
as otherwise indicated, each person's respective address is 5601 Chestnut
Street, Philadelphia, PA 19139. Unless otherwise indicated, each such person has
sole voting and dispositive power with respect to the Shares listed opposite
such person's name.
NUMBER OF SHARES
BENEFICIALLY APPROXIMATE
NAME OF BENEFICIAL OWNER OWNED PERCENTAGE OF CLASS
- - ------------------------ ----------------- ---------------------
Daniel Veloric.......................... 3,753,178(a) 24.0%
Genesis Health Ventures, Inc............ 3,748,178(a) 23.9%
Thomas J. Gorman........................ 1,068,125(b)(c) 6.8%
Robert P. Krauss........................ 1,000,000(c) 6.4%
Esther Ponnocks......................... 152,751(d) *
Gerald E. Bisbee, Jr.................... 22,219(b) *
Anthony C. Salvo........................ 131,464(b) *
Michael Veloric......................... 99,206(e) *
Arthur A. Carr, Jr...................... 75,343(f) *
James J. Wankmiller..................... 45,925(g) *
James J. O'Malley....................... 34,396(h) *
Francis J. McCauley..................... 29,750(i) --
All Directors and Executive
Officers as a Group
(10 Persons).......................... 5,415,482(j)
- - ------------------
(a) 3,748,178 of such Shares are subject to the Option and Proxy
Agreement described above under 'The MERGER -- Interests of Certain
Persons in the Merger.' The address of Genesis is 148 State Street,
Kennett Square, PA 19348.
(b) Includes 16,219 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the 1990 Stock Option Plan for Directors. Also includes
3,000 restricted Shares issued under the 1994 Stock Option and
Restricted Stock Plan for Directors.
(c) Includes 1,000,000 Shares held in Trusts of which Mr. Gorman and Mr.
Krauss are co-Trustees. Mr. Krauss' address is: 1735 Market Street,
Philadelphia, PA 19103.
(d) Includes 88,438 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's 1982 and 1989 Stock Option Plans.
(e) Includes 10,625 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's 1982 and 1989 Stock Option Plans.
(f) Includes 30,625 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's 1982 and 1989 Stock Option Plans. Does not
include 1,000 shares owned by Mr. Carr's wife, beneficial ownership
of which he disclaims.
(Footnotes continued on next page)
49
<PAGE>
(Footnotes continued from previous page)
(g) Includes 27,906 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's 1982 and 1989 Stock Option Plans.
(h) Includes 18,125 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's 1982 and 1989 Stock Option Plans.
(i) Includes 14,750 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's 1982 and 1989 Stock Option Plans.
(j) Includes 239,126 Shares which may be purchased pursuant to options
that are immediately exercisable or will become exercisable within 60
days under the Company's Stock Option Plans. Also includes 1,000,000
Shares held in Trusts as noted in footnote (c) above and includes
Restricted Shares issued under the 1994 Stock Option and Restricted
Stock Plan for Directors. Does not include 9,000 restricted Shares
which may be issued before the Special Meeting pursuant to the 1994
Stock Option and Restricted Stock Plan for Directors.
- - ----------
* Less than One Percent (1%).
None of the executive officers or directors of the Company engaged in any
transactions in the Shares within the 60 days immediately preceding the date of
this Proxy Statement.
INDEPENDENT ACCOUNTANTS
Representatives of BDO Seidman, LLP, the Company's independent public
accountants, are expected to be present at the Special Meeting. They will have
the opportunity to make a statement if they desire to do so, and are expected to
be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If the Merger is not approved and the Company has its next annual meeting,
under the Company's bylaws, any proposal which a Stockholder intends to present
at the Company's 1996 Annual Meeting must have been received by the Company on
or before June 1, 1996, for consideration for inclusion in management's proxy
statement and form of proxy for that Meeting.
OTHER MATTERS
The Company does not know of any other matters (other than procedural
matters) to be presented at the Special Meeting. If any other matters do
properly come before the meeting, the persons named in the accompanying Proxy
will vote on such matters in accordance with their judgment. A form of Proxy is
enclosed for your use. Please complete, date, sign and return the Proxy at your
earliest convenience in the enclosed envelope, which requires no postage if
mailed in the United States. A prompt return of your Proxy will be appreciated.
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants......................... 52
Report of Independent Accountants.......................................... 53
Consolidated Balance Sheets as of
May 31, 1996 and 1995.................................................... 54
Consolidated Statements of Operations
for the three years ended May 31, 1996................................... 55
Consolidated Statements of Cash Flows
for the three years ended May 31, 1996................................... 56
Consolidated Statements of Stockholders'
Equity for the three years ended May 31, 1996............................ 57
Notes to Consolidated Financial Statements................................. 58
51
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
Geriatric & Medical Companies, Inc.
and Subsidiaries
We have audited the consolidated balance sheets of Geriatric & Medical
Companies, Inc. and Subsidiaries as of May 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Geriatric &
Medical Companies, Inc. and Subsidiaries as of May 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the years
ended May 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
August 20, 1996
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
Geriatric & Medical Companies, Inc.
and Subsidiaries
We have audited the consolidated statements of operations, cash flows and
statement of stockholders' equity of Geriatric & Medical Companies, Inc. and
Subsidiaries for the year ended May 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Geriatric & Medical Companies, Inc. and Subsidiaries for the year ended May 31,
1994 in conformity with generally accepted accounting principles.
As more fully discussed in Note 14, a class action shareholder lawsuit has been
brought against the Company. The ultimate outcome of the foregoing cannot
presently be determined. Accordingly, no provision for any liability has been
made to the accompanying consolidated financial statements.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
October 11, 1994
53
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PAR VALUES AND SHARES)
<TABLE>
<CAPTION>
MAY 31,
--------------------
ASSETS 1996 1995
<S> <C> <C>
--------- ---------
Current Assets:
Cash...................................................................................... $ 2,224 $ 3,368
Restricted cash........................................................................... 4,923 715
Patients' funds........................................................................... 1,529 1,388
Accounts receivable, net of allowance of $7,720 and $7,733 at May 31, 1996 and 1995,
respectively............................................................................ 30,392 24,145
Other receivables, net of allowance of $975 at May 31, 1996 and 1995...................... 5,501 5,919
Prepaids and other assets................................................................. 4,403 6,622
Inventories............................................................................... 4,949 5,154
Due from third-party payors, net of allowance of $4,649 and $3,391 at May 31, 1996 and
1995, respectively...................................................................... 21,913 13,948
--------- ---------
Total current assets.................................................................... 75,834 61,259
--------- ---------
Property and equipment:
Land...................................................................................... 4,094 3,702
Building and improvements................................................................. 106,686 99,971
Equipment and fixtures.................................................................... 37,911 38,299
Construction-in-progress.................................................................. 7,256 5,259
--------- ---------
155,947 147,231
Less accumulated depreciation............................................................... 62,905 59,293
--------- ---------
93,042 87,938
--------- ---------
Other noncurrent assets:
Restricted cash........................................................................... 2,980 3,021
Goodwill net of accumulated amortization of $476 and $359 at May 31, 1996 and 1995,
respectively............................................................................ 3,222 2,567
Notes and other receivables............................................................... 6,049 11,132
Deferred charges and other, net of amortization of $3,850 and $2,891 at May 31, 1996 and
1995, respectively...................................................................... 10,557 10,800
--------- ---------
22,808 27,520
--------- ---------
$ 191,684 $ 176,717
========= =========
MAY 31,
--------------------
LIABILITIES 1996 1995
--------- ---------
Current Liabilities:
Current portion of long-term debt and subordinated debenture.............................. $ 4,820 $ 2,906
Accounts payable.......................................................................... 22,132 23,770
Accrued expenses.......................................................................... 10,999 10,151
--------- ---------
Total current liabilities............................................................... 37,951 36,827
--------- ---------
Other long-term liabilities................................................................. 3,586 3,090
--------- ---------
Long-term debt.............................................................................. 130,775 120,660
--------- ---------
Subordinated debenture...................................................................... -- 1,000
--------- ---------
Deferred gain............................................................................... 492 492
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par, authorized 15,000,000 shares; none were issued or outstanding.... -- --
Common Stock, $.10 par, authorized 30,000,000 shares in 1996 and 1995; issued and
outstanding 15,429,746 and 15,244,261 in 1996 and 1995, respectively...................... 1,543 1,524
Capital in excess of par value.............................................................. 14,703 14,643
Accumulated earnings (deficit).............................................................. 2,634 (1,519)
--------- ---------
18,880 14,648
--------- ---------
$ 191,684 $ 176,717
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
54
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER COMMON SHARE)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues, net......................................... $ 195,196 $ 192,234 $ 177,957
Other revenues.................................................. -- -- 1,576
----------- ----------- -----------
195,196 192,234 179,533
----------- ----------- -----------
Costs and Expenses:
Operating expenses.............................................. 167,060 163,769 157,612
Depreciation and amortization................................... 8,778 8,734 9,238
Interest expense, net........................................... 12,295 11,078 10,889
Provision for costs on sale of accounts receivable.............. 4,170 3,588 3,531
----------- ----------- -----------
192,303 187,169 181,270
----------- ----------- -----------
Income (loss) before income taxes............................... 2,893 5,065 (1,737)
Income taxes.................................................... (1,260) 1,012 (299)
----------- ----------- -----------
Net Income (Loss)............................................... $ 4,153 $ 4,053 $ (1,438)
=========== =========== ===========
Earnings (Loss) per common share................................ $ 0.27 $ 0.27 $ (0.09)
=========== =========== ===========
Average common shares outstanding............................... 15,372 15,209 15,314
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
55
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 4,153 $ 4,053 $ (1,438)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for uncollectible accounts.......................................... 4,496 6,388 7,102
Depreciation and amortization................................................. 8,778 8,734 9,238
Gain on sale of facilities and other assets, net and recognition of deferred
income....................................................................... -- -- (115)
Recognition of deferred tax asset............................................. 1,925 -- --
Non-cash change in worker's compensation expense.............................. -- -- (405)
Other items................................................................... 83 332 547
Changes in assets and liabilities, net of effects from acquisitions:
Increase in patients' funds and other, net.................................. (141) (1,077) (40)
Increase in accounts receivable............................................. (10,743) (10,506) (8,587)
(Increase) decrease in other receivables.................................... 418 (364) (814)
(Increase) decrease in prepaids and other assets and inventories............ 499 (3,533) 701
(Increase) decrease in net amounts due from third-party payors.............. (7,965) (4,634) 321
Increase (decrease) in accounts payable and accrued expenses................ (790) 8,297 (1,098)
Increase (decrease) in other long-term liabilities.......................... (10) (348) 815
--------- --------- ---------
Net cash provided by operating activities 703 7,342 6,227
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (2,859) (3,251) (4,092)
Capital expenditures financed by construction and property improvement funds.... (9,118) (2,786) (4,450)
(Increase) decrease in notes and other receivables.............................. 5,083 (700) 1,027
Acquisitions of ambulance companies, net of cash acquired....................... -- (553) --
Other investing activities, net................................................. 90 31 115
--------- --------- ---------
Net cash used in investing activities......................................... (6,804) (7,259) (7,400)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........................................................ 15,747 2,238 6,570
Repayment of debt and subordinated debentures................................... (6,111) (2,933) (11,351)
(Increase) decrease in restricted cash.......................................... (4,167) 4,191 5,625
Expenditures for deferred charges............................................... (522) (1,197) (1,621)
Proceeds from issuance of common stock.......................................... 10 59 32
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 4,957 2,358 (745)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (1,144) 2,441 (1,918)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 3,368 927 2,845
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................................... $ 2,224 $ 3,368 $ 927
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................................... $ 16,659 $ 16,200 $ 16,123
Income taxes.................................................................. $ 471 $ 157 $ 179
SUPPLEMENTAL SCHEDULE OF NONCASH ITEMS:
Assets acquired under capital leases.......................................... $ 1,393 $ 1,938 $ 975
Acquisitions of ambulance companies:
Fair value of assets acquired............................................... $ -- $ 2,809 $ 782
Cash paid and debt issued................................................... -- (2,282) --
--------- --------- ---------
Liabilities assumed......................................................... $ -- $ 527 $ 782
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
56
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN EXCESS ACCUMULATED
---------------------- OF PAR EARNINGS
SHARES AMOUNT VALUE (DEFICIT)
----------- --------- --------- ------------
<S> <C> <C> <C> <C>
Balance, May 31, 1993........................... 15,274 $ 1,527 $ 14,558 $ (4,134)
Net Loss...................................... -- -- -- (1,438)
Restricted shares cancelled net of issued
shares to key employees.................... (153) (15) -- --
Stock options exercised....................... 39 4 43 --
----------- --------- --------- -----------
Balance, May 31, 1994........................... 15,160 1,516 14,601 (5,572)
Net Income.................................... 4,053
Restricted shares issued to Directors......... 9 1 10 --
Stock options exercised....................... 75 7 32 --
----------- --------- --------- -----------
Balance, May 31, 1995........................... 15,244 1,524 14,643 (1,519)
Net Income.................................... 4,153
Restricted shares issued to Directors......... 9 1 22 --
Unregistered shares issued.................... 162 16 65 --
Stock options exercised....................... 15 2 (27) --
----------- --------- --------- -----------
Balance, May 31, 1996........................... 15,430 $ 1,543 $ 14,703 $ 2,634
=========== ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Presentation. The consolidated
financial statements include the accounts of Geriatric & Medical Companies, Inc.
and its Subsidiaries and its investments in majority owned joint ventures
hereafter referred to as the 'Company.' The Company uses the equity method to
account for its ownership interest in other joint ventures. Under the equity
method, the Company recognizes its proportionate share of the net income or loss
of joint ventures currently rather than when realized through dividends or
disposals. All material intercompany transactions and accounts have been
eliminated in consolidation.
(b) Net Patient Service Revenue. The Company's operations and cash flows
are dependent upon the payments for patient services by third-party payors and,
in particular, federal and state administered programs. Reimbursement under
these programs is limited to certain expenditures in accordance with federal and
state regulations and is subject to retroactive adjustment upon audit by federal
and state agencies. Accordingly, net patient service revenue is recorded at the
estimated realizable amounts due from third-party payors and others.
Differences between the amounts accrued and subsequent settlements will be
recorded in operations in the year of settlement. Management maintains an
allowance that it considers adequate to provide for potential disallowances on
its recorded revenues under federal and state administered programs. This
allowance is based on the estimated net realizable value of the Company's
revenues. Management periodically evaluates specific past experience and the
results of the most recent regulatory examinations, as well as other relevant
factors. While management uses the best information available to make such
evaluations, no assurance can be given that future adjustments to the allowance
may not be necessary if regulatory agencies interpret the Company's claims for
reimbursement on a basis different than the Company's historical experience with
regulatory examinations.
Although receivables due from third-party payors may be outstanding in
excess of one year, in accordance with industry practices, such amounts are
classified as current.
(c) Cash and Cash Equivalents. For purposes of the statements of cash
flows, the Company considers cash and cash equivalents to be cash on hand, cash
in banks and overnight investments.
(d) Restricted Cash. Restricted cash represents funds held in trust to be
used to repay debt obligations and funds being held by a Medicare intermediary
(See Note 14).
(e) Patients' Funds. Patients' funds represent cash balances which have
been deposited by the Company into a separate bank account and are restricted
for the use of patients. The related liability is included in accounts payable.
(f) Inventories. Inventories, principally consisting of durable medical
and respiratory therapy equipment, medical supplies and pharmaceuticals, are
stated at the lower of cost or market. Cost is determined principally on the
first-in, first-out basis (FIFO).
(g) Property, Equipment and Related Depreciation. Property and equipment
are stated at cost. Depreciation is provided over the estimated useful lives of
the respective assets using the straight-line method. The annual depreciation
rates range from 2.5% to 10% for buildings and improvements and 5% to 33% for
equipment and fixtures. Normal maintenance and repair costs are charged to
expense as incurred. Major expenditures for renewals and betterments which
extend useful lives are capitalized. Upon sale or retirement the costs and
related accumulated depreciation are eliminated from the respective accounts and
the resulting gain or loss is included in income.
(h) Other Noncurrent Assets. Goodwill represents the excess of the cost of
purchased businesses over the fair value of their net assets. Goodwill arising
after October 31, 1970 is being amortized by the straight-line method over
periods ranging from 15 to 40 years. Goodwill in the amount of $565,000 relating
to acquisitions prior to November 1, 1970 is not being amortized. The Company
assesses the recoverability of the intangibles based on undiscounted estimated
future
58
<PAGE>
operating cash flows. As of May 31, 1996, the carrying value of the intangibles
has been determined not to be impaired.
Notes and other receivables consist primarily of term loans related to
facility sales. The term loans are primarily secured by second mortgages on the
facilities.
Costs incurred in obtaining long-term borrowings are amortized on a
straight-line basis, which approximates the interest method over the term of the
loan. Pre-opening costs incurred in connection with the expansion of existing or
with the construction of new long-term care facilities, are capitalized until
the facility nursing units admit the initial patient or are substantially
completed and then amortized using the straight-line method over a five-year
period which coincides with the amortization period required by government
reimbursement regulations.
(i) Recoverability of Long-Lived Assets. In accordance with Statement of
Financial Accounting Standards No. 121, 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed Of', the Company
evaluates the recoverability of all long-lived assets annually, or more
frequently whenever events and circumstances warrant revised estimates, and
considers whether the long-lived assets should be completely or partially
written off or if the depreciation/amortization period should be accelerated. As
of May 31, 1996, in the opinion of Management, the carrying value of the
long-lived assets has not been impaired.
(j) Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(k) Income Taxes. In fiscal 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which required a change from the deferred method to the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized by applying enacted statutory tax rates,
applicable to future years, to temporary differences between the tax basis and
financial statement carrying values of the Company's assets and liabilities. The
adoption of SFAS No. 109 did not have a material effect on the Company's
consolidated financial statements.
(l) Workers' Compensation Insurance. The Company self-insures for certain
levels of Workers' Compensation Insurance and estimated costs for the workers'
compensation programs are accrued at present values based upon actuarially
projected claims. Related workers' compensation expense for 1996, 1995, and 1994
amount to $4,334,000, $4,757,000, and $4,928,000 respectively. During 1994, the
Company refined its estimate of its workers' compensation expense which resulted
in an additional charge of $700,000. Included in other assets at May 31, 1996
and 1995 is $4,069,000 and $3,563,000, respectively, relating to the future
revenue associated with the difference in accounting for workers' compensation
expense under third party payor programs which is different than the method used
for financial reporting purposes. The accrued workers' compensation expense
amounting to $3,035,000 and $2,529,000 at May 31, 1996 and in 1995,
respectively, is included in other long term liabilities in the accompanying
consolidated financial statements.
(m) Fair Value of Financial Instruments. The fair value of financial
instruments is determined by reference to various market data and other
valuation considerations. The fair value of financial instruments approximates
their recorded values.
(n) Earnings (Loss) Per Common Share. Earnings (loss) per common share is
based on the weighted average number of Shares of common stock outstanding.
Potential dilution from common stock equivalents is not material.
59
<PAGE>
2. LONG-TERM DEBT AND SUBORDINATED DEBENTURE
A summary of long-term debt and subordinated debenture follows:
<TABLE>
<CAPTION>
FISCAL YEAR OF
MATURITY
--------------
FISCAL MAY 31
------------------------
1996 1995
($'S IN THOUSANDS) ----------- -----------
<S> <C> <C> <C>
Credit Line(a)......................................................... 2000 $ 2,580 $ --
Mortgages:
Mortgages(b)......................................................... 2002, 2007 88,228 84,580
Other (HUD Insured)(c)............................................... 2033, 2036 13,295 8,738
Bonds Payable:
County IDA's, NJEDA's(d)............................................. 2000 16,795 17,020
Other NJEDA's(c)..................................................... 2004-2022 8,580 8,705
Notes and Leases(f).................................................. Various 5,117 4,523
----------- -----------
134,595 123,566
Less amounts due within one year....................................... 3,820 2,906
----------- -----------
$ 130,775 $ 120,660
=========== ===========
Subordinated debenture(g).............................................. 1997 $ 1,000 $ 1,000
Less amounts due within one year....................................... 1,000 --
----------- -----------
$ -- $ 1,000
=========== ===========
</TABLE>
- - ------------------
(a) In December 1995, the Company entered into a $5,000,000 secured Line of
Credit Agreement ('Credit Line') with Commerce Bank, NA. The Credit Line is
secured by certain real estate and private receivables not sold under the
accounts receivable financing agreement (see Note 4). Interest on the
Credit Line is at prime plus 1% (9.25% as of May 31, 1996). The line is
renewable annually and may, at the Company's option, be converted to a
three year term loan. The outstanding loan balance under the Credit Line at
May 31, 1996 was $2,580,000.
Three Letters of Credit were issued and outstanding under the Credit Line
totaling $1,574,000. These Letters of Credit were issued in connection with
a Company insurance program and construction project.
At May 31, 1996, the Credit Line availability was $846,000. The maximum
outstanding credit line balance and the average credit line balance during
fiscal 1996 was $2,580,000 and $280,000, respectively. In August 1996, the
Company received a commitment to increase the Credit Line to $7,500,000.
(b) In April, 1992, the Company completed an agreement with Meditrust Mortgage
Investments, Inc. ('Meditrust'), pursuant to which the Company received
$86,003,000 under a credit facility collateralized by mortgages on various
nursing home facilities located in Pennsylvania and New Jersey (the
'Mortgaged Facilities'). The credit facility was used to pay off or
refinance debt, capital improvements and additions to mortgaged facilities,
debt service reserve and working capital.
(Footnotes continued on next page)
60
<PAGE>
(Footnotes continued from previous page)
The credit facility is payable over ten years based upon a twenty-five year
amortization schedule, at an initial interest rate of 11.5% annum ('Based
Rate'), which may increase prospectively (based upon revenues) and is
annually capped at the sum of .25% of the initial mortgage amount and a
prior year interest factor. At the end of five years, the Base Rate will be
reset prospectively at either the higher of 11.5% or the five-year treasury
note interest rate plus 4%, or the rate in effect at the end of the initial
five-year period. At the Company s election, such credit facility may be
prepaid at 103.5% of the outstanding principal at the end of the fifth
year. The loan had a balance of approximately $83,079,000 and bears
interest at an effective rate of 12.23% as of May 31, 1996.
In connection with this agreement, the Company may not pay dividends under
certain circumstances and is required to comply with certain financial
convenants, the most restrictive of which is the debt service coverage
ratio, at May 31, 1996. The Company has complied with the provisions of the
agreement or in instances of noncompliance has received waivers. On May 31,
1995, the Company completed an agreement to finance a 120 bed long term
care facility (Rittenhouse West Nursing & Rehabilitation Center) with
Meditrust for $6,939,000 at a rate of prime plus 2 percent (10.25% as of
May 31, 1996). Construction costs incurred as of May 31, 1996 totaled
$5,262,000. Also, as of May 31, 1996 and 1995, the construction loan had a
balance of approximately $5,149,000 and $608,000, respectively. In
connection with this project, a $74,000 Letter of Credit was issued
which expires in February 1997.
(c) The Company has two mortgage loans insured under Section 232 of the
National Housing Act by the United States Department of Housing and Urban
Development, Federal Housing Administration. The first loan is with
Northwest Total Care Associates, Limited Partnership ('LP'), which is owned
by subsidiaries of the Company. Construction of the facility ('Care Center
of Brakeley Park') was completed during fiscal 1993. The loan had a balance
of approximately $8,089,000 as of May 31, 1996 and bears interest at 10.35%
per annum. The loan is financed by Quaker Capital, L.P. and is payable in
equal monthly payments over forty years. The obligation is collateralized
by the assets of the Limited Partnership without recourse to the partners.
The second HUD loan is with North Cape Convalescent Center Associates,
L.P., which is owned by subsidiaries of the Company. Construction of the
facility was completed in January 1996 at a total construction cost of
$7,062,000, of which $5,636,000 is to be financed by GMAC Commercial
Mortgage Corporation at 9.5% over 40 years. The obligation is
collateralized by the assets of the Limited Partnership without recourse to
the partners. The loan balance at May 31, 1996 was approximately
$5,206,000, with the loans final endorsement occurring in June 1996. In
connection with this loan, a $500,000 letter of credit was issued which
expires in December 1996.
(d) The Company's facilities are owned and subject to mortgages. Mortgage
Revenue Refunding Bonds (Series 1992 and 1993), which are secured by
mortgages on facilities, were issued through Pennsylvania County Industrial
Development Authorities (Bucks, Chester, Montgomery and Lancaster) and the
New Jersey Economic Development Authority. These bonds were issued under a
Master Trust Indenture with First Union National Bank, and bear interest at
fixed rates of 7.5% to 9.0%, payable semi-annually. At May 31, 1996,
outstanding bonds were $16,795,000, which is comprised of $6,035,000 of EDA
and $10,760,000 of PA IDA bonds.
Under the Master Trust Indenture, the Company has agreed not to pay any
dividends or make any distribution which could have the effect of reducing
consolidated tangible net worth and subordinated indebtedness, if
consolidated tangible net worth and subordinated indebtedness is at such
time or would thereby be reduced to less than $9,000,000.
(e) The Company also has two bond series issued through the New Jersey Economic
Development Authority, each secured by a skilled nursing facility mortgage.
(Footnotes continued on next page)
61
<PAGE>
(Footnotes continued from previous page)
Principal on the $2,025,000 and $660,000 Revenue and Revenue Refunding
Bonds is payable quarterly beginning July 15, 2004 and July 15, 1992,
respectively. These bonds bear interest at a fixed rate of 9.625% payable
quarterly. Additionally, at May 31, 1996, the Company had $5,895,000
Economic Development Refunding Bonds outstanding. Interest on these bonds
is at a fixed rate of 10.5% payable semi-annually over a thirty year
period.
(f) Notes and leases consist primarily of capitalized leases and promissory
notes bearing interest at 6% to 13.39%.
(g) In November 1994, the Company issued a $1,000,000 subordinated debenture to
Tomahawk Capital Investments, Inc. ('Tomahawk') which is controlled by an
executive officer of the Company. The interest is payable on a quarterly
basis, at a rate of 12% per annum, and the debenture is due on December 1,
1996.
Amounts due on long-term debt in each of the next five fiscal years are as
follows:
($'s in thousands)
1997 ................................... $ 4,820
1998 ................................... 2,879
1999 ................................... 2,590
2000 ................................... 20,523
2001 ................................... 1,984
Thereafter ............................. 102,799
--------
Total ................................ $135,595
========
Substantially all of the Company's properties related to its long term care
facilities and headquarters location are pledged as collateral on borrowings.
Substantially all other assets of the Company (excluding property under capital
leases and certain accounts receivable) are unencumbered.
3. ACQUISITIONS AND DISPOSALS
Concurrent with the sale of nursing or residential facilities in prior
years, the Company entered into long-term agreements to provide management and
other services in operating these facilities. All of these management agreements
have expired or been terminated as of May 31, 1994.
Under the terms of these sales of nursing and residential facilities, the
Company was required to lend the purchaser amounts to cover certain issuance
costs of bond offerings and to enter into operating deficits agreements under
which the Company lends the purchaser, if needed, funds for working capital
requirements. These working capital advances, plus related interest, were not
payable to the Company until certain conditions were achieved or over a
five-year period upon termination or expiration of the management agreements. In
conjunction with the expiration or termination of these agreements, the Company
has converted the operating deficits advances as well as certain subordinated
management fees, as appropriate, into term loans at an interest rate range of
10% to 13%.
As of May 31, 1996 and 1995, with respect to the aforementioned facility
sales, the Company was owed the following:
MAY 31
--------------------
1996 1995
($'S IN THOUSANDS) --------- ---------
Operating deficits advances ........ $ 390 $ 390
Issuance cost loans ................ 918 925
Term loans and accrued interest .... 5,259 5,728
Management and other fees .......... 5,049 4,503
------- -------
Total ............................ $11,616 $11,546
======= =======
62
<PAGE>
Included in noncurrent notes and other receivables are $3,820,000 and
$5,693,000 of receivables related to the aforementioned transactions at May 31,
1996 and 1995, respectively.
The Company has deferred the recognition of gain on sale of facilities
related to guarantees under an operating deficit agreement. As of May 31, 1996,
the Company may ultimately recognize as additional gain on sale of facilities
$492,000 if certain minimum operating cash flow requirements and other factors
are achieved. In fiscal 1994, the Company recognized $1,576,000 of deferred gain
on facilities sold in prior years.
On May 31, 1993 the Company sold its Mt. Laurel, New Jersey facilities to
Tomahawk for $8.5 million, consisting of cash of $2.5 million and a 9% interest
bearing note for $6 million. This note was payable based on a 25 year
amortization, with a balloon payment due June of 2005. Tomahawk prepaid
approximately $1,500,000 from inception through May 31, 1995. As of May 31,
1996, Tomahawk prepaid $3,000,000 and as an inducement received a discount of
$500,000 which has been recorded in the accompanying financial statements. The
Company also restructured this note requiring that the remaining balance of
principal and interest as of May 31, 1996 (totaling $1,622,000) be paid over 35
quarters, commencing September 1, 1996 with interest on the principal due at
6.75%.
On May 20, 1994, the Company acquired all of the outstanding stock of an
ambulance transportation company in exchange for the assumption of $782,000 in
liabilities. Goodwill of $683,000, was recorded in connection with the
acquisition. The transaction has been accounted for as a purchase for financial
reporting purposes. The operating results of the acquired company are included
in the Company's consolidated results of operations from the date of acquisition
and do not have a material effect on the Company's consolidated financial
statements.
During fiscal 1995, the Company acquired three ambulance transportation
companies for $2,282,000. Two of the acquisitions were asset purchases while the
third was a stock purchase. Goodwill of $365,000 was recorded in connection with
these acquisitions. The transactions have been accounted for as purchases for
financial reporting purposes. The dated results of operations from the
respective dates of acquisition and do not have a material effect on the
Company's consolidated financial statements.
4. ACCOUNTS RECEIVABLE
The Company is a party to a $25 million accounts receivable sale agreement
with recourse with a financial institution, which expires on May 31, 1997. The
Company may sell, on a continuing basis, up to $25,000,000 of certain qualifying
accounts receivable. The Company receives, net of reserves, approximately 80% of
accounts receivable submitted. This transaction has been accounted for as a sale
under Financial Accounting Standards Board Statement No. 77 guidelines but may
be treated as a financing (borrowing) transaction for Medicare/Medicaid
purposes. As permitted by Statement of Accounting Standards No. 125 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities', the Company will adopt the recording of any transfers and
servicing of financial assets and extinguishments of liabilities as of January
1, 1997, which is in accordance with this statement. The subsequent adoption of
this statement will not have a material effect on the Consolidated Financial
Statements.
Under the terms of the agreement, the Company will pay program costs at
9.84% on the outstanding receivables submitted. During fiscal 1996 and 1995, the
Company sold approximately $109,288,000 and $110,297,000 respectively, of
certain qualifying accounts receivables. As of May 31, 1996 and 1995, the
balance of the receivables submitted for sale was approximately $15,656,000 and
$20,774,000 of which approximately $13,074,000 and $16,619,000 were funded,
respectively. The unfunded portion is included in other receivables on the
balance sheet.
The Company entered into an agreement to sell certain receivables due from
third-party payors. The program costs charged are 9.75% of the outstanding
receivables sold. The maximum amount of receivables to be sold is $5,000,000.
The Company receives, net of reserves, approximately 80% of third-party payor
receivables sold. The unfunded portion is included in other receivables on the
balance sheet. As of May 31, 1996 and 1995 the amount of the receivables sold
was $2,916,000 and $150,000, of which approximately $2,435,000 and $150,000 was
funded respectively.
63
<PAGE>
As of May 31, 1996, 1995 and 1994, the Company has recognized a provision
for costs on sale of accounts receivable of $4,170,000, $3,588,000, and
$3,531,000 respectively. The provision for costs on sale of accounts receivable
consists of: (A) program and other costs incurred on receivables sold and (B)
servicing costs relating to the collection of receivables sold. Under the sale
agreement, the Company continues and is required to service the accounts
receivable sold.
5. INVENTORIES
The components of inventories are as follows:
MAY 31
--------------------
1996 1995
($'S IN THOUSANDS) --------- ---------
Durable medical equipment ............ $3,584 $3,595
Institutional pharmacy drugs and
supplies ........................... 564 895
Other ................................ 801 664
------ ------
Total .............................. $4,949 $5,154
====== ======
6. CAPITALIZED INTEREST
The Company capitalized interest expense of approximately $1,027,000,
$879,000, and $1,388,000 in fiscal 1996, 1995 and 1994, respectively, relating
to the cost of additions to existing nursing home facilities and construction of
new facilities.
7. DEFERRED CHARGES AND OTHER
The components of deferred charges and other are as follows:
MAY 31
---------------------
1996 1995
($'S IN THOUSANDS) ------ ------
Deferred financing costs ............................... $ 7,707 $ 6,345
Deferred pre-opening costs ............................. 1,310 951
Accumulated amortization ............................... (3,850) (2,891)
-------- --------
5,167 4,405
Deferred reimbursement -- workers' compensation ........ 4,069 3,563
Deposits ............................................... 316 219
Prepaid bedding and linen and other miscellaneous costs 1,005 2,613
-------- --------
$ 10,557 $ 10,800
======== ========
8. INCENTIVE PLANS AND OPTION ARRANGEMENTS
The Company's 401(k) profit sharing plan covers substantially all full-time
employees not covered by collective bargaining agreements. Contributions under
the plan are at the discretion of the Board. No contributions were made in
fiscal 1996, 1995 and 1994.
Effective November 1989, the Company adopted a 1989 stock option and
restricted stock plan, for certain key employees, whereby eligible employees may
be issued up to an aggregate of 281,250 Shares of the Company's common stock,
subject to certain restrictions, and up to an additional 343,750 Shares upon the
exercise of incentive and/or non-qualified stock options granted pursuant to the
plan. The restricted share portion of this plan expired as of May 31, 1994. As
of May 31, 1996, there were 240,471 Shares under option under this plan, of
which 165,655 Shares were exercisable at an average price of $2.27. During
fiscal 1996, no Shares under option under this plan were granted. During fiscal
1996, 7,875 Shares were exercised at an average price of $1.65 per share and
8,125 options expired. As of May 31,1995, there were 260,221 Shares under
option, under this plan, of which 119,346 Shares
64
<PAGE>
were exercisable at an average price of $2.18. During fiscal 1995, 137,000
Shares under option under this plan were granted at exercise prices ranging from
$2.0625 to $2.6875. During fiscal 1995, 2,000 Shares were exercised at an
average exercise price of $1.41 per share and 10,344 options expired.
The Company has a 1982 incentive stock option plan for key executive and
management personnel. At May 31, 1996, there were 184,376 Shares under option
and exercisable under this plan at exercise prices ranging from $0.80 to $2.50
with an average exercise price of $1.91. During fiscal 1996, 1995, and 1994,
7,813, 79,062, and 46,484 options were exercised, respectively, at an average
price of $1.36, $1.09, and $1.14, respectively. Effective January 28, 1992
additional options cannot be granted under this plan.
In April 1985, a stock option plan was approved under which options to
purchase 23,438 Shares may be granted to non-employees. In fiscal 1995, such
plan expired. Effective November 17, 1994, the Company adopted the 1994 Stock
Option and Restricted Stock Plan for Directors whereby Directors of the Company,
who are not employees of the Company or its subsidiaries, may be issued up to an
aggregate of 250,000 Shares of the Company's common stock. In January 1996 and
January 1995, 9,000 restricted Shares were granted at a price of $2.125 and
$2.875 respectively, and vest over a one year period. During fiscal 1996, 12,000
Shares under option under this plan were granted at an exercise price of $2.375,
and no Shares under option expired.
The Company has a 1990 stock option plan for directors under which options
to purchase up to a total of 120,313 Shares may be granted to outside directors.
Under this plan, a total of 90,283 options have been granted to outside
directors at exercise prices ranging from $.96 to $2.6875 per share. During
fiscal 1996, 10,156 Shares were exercised at an exercise price of $.96. During
fiscal 1995, 10,157 Shares were exercised at an average price of $1.45 and 7,813
Shares under option expired. At May 31, 1996 and 1995, 44,907 and 49,063 Shares
under this plan were exercisable, respectively. Effective December 31, 1994,
additional options cannot be granted under this plan.
In fiscal 1996, the Company adopted the 1995 Equity Incentive Plan in which
a maximum of 525,000 Shares of the Company's common stock could be granted to
the Company's officers and key executives. Awards under the plan may be earned
by achieving certain economic, company wide and individual management goals.
Under all stock option plans maintained by the Company, the exercise price
of options issued is the same as the market price at the date of grant.
As permitted by Statement of Accounting Standards No. 123 'Accounting for
Stock-Based Compensation', the Company has not adopted a fair value based method
of accounting for stock-based compensation as of December 31, 1995. The
subsequent adoption of a fair value based method of Accounting for stock-based
compensation will not have a material effect on the financial statements.
Effective June 1, 1993, the Company entered into an employment agreement
with the Chairman of the Board of Geriatric & Medical Companies, Inc. The term
of the agreement is for an initial five year period with a provision for annual
extensions. The employment agreement provides for a short-term and long-term
incentive plan in addition to a base compensation package. The short-term
incentive plan provides for an incentive bonus contingent upon the Company's
annual operating results.
A short-term incentive bonus of $103,000 and $107,000 was accrued for the
fiscal years ended May 31, 1996 and 1995, respectively. The long-term incentive
plan provides for long-term compensation based upon the increase in market value
of the Company's stock to the shareholders. As of May 31, 1996 and 1995, the
Company has an accrued liability of $14,582 and $13,000, respectively, relating
to this plan. The employment agreement, while in effect, also provides for a
death benefit of $1,000,000 payable in forty equal quarterly installments. See
Note 16 of the Notes to Consolidated Financial Statements.
65
<PAGE>
9. MEDICARE AND MEDICAID REVENUE
The Company's long-term care facilities, which are located in Pennsylvania
and New Jersey, receive reimbursement under the Medicare and Medicaid programs,
which is subject to adjustment upon audit by Federal and State agencies (see
Note 1b). Revenue from these programs related to the Company's long-term care
facilities totaled approximately $112,000,000, $105,900,000, and $98,200,000,
for the years ended May 31, 1996, 1995 and 1994, respectively. At May 31, 1996
and 1995 the Company had a net third-party receivable of approximately
$21,913,000, and $13,948,000, respectively. The total amounts due from
third-party payors generally are not paid in full until audit issues are
resolved. The Company is continually negotiating to resolve the audit findings
and accelerate interim payments due under the reimbursement system.
For the fiscal years 1990 through 1996, the Company has receivables of
approximately $10,824,000 for open issues with the Pennsylvania Department of
Public Welfare (DPW). Management believes that any reduction of the amount
recorded that results from final settlement of these open issues will not have a
material adverse effect on the financial position of the Company.
10. INCOME TAXES
A summary of the components of the tax provision for fiscal years 1996,
1995, and 1994 is as follows:
1996 1995 1994
-------- -------- --------
($'S IN THOUSANDS)
Current Federal ................................. $ 1,132 $ 551 $ --
Current State and Local ......................... 442 296 165
Federal & State Over/Under Accrual Net of Credits (909) 165 (464)
Deferred Tax Benefit ............................ (1,925) -- --
------- ------- -------
$(1,260) $ 1,012 $ (299)
======= ======= =======
The effective net income tax rates before the utilization of the Company's
operating loss carryforwards are different than the statutory federal income tax
rates of 34% in Fiscal years 1996, 1995, and 1994 as indicated below:
1996 1995 1994
-------- -------- --------
($'S IN THOUSANDS)
Statutory Federal Income Tax .................. $ 983 $ 1,722 $ (591)
Permanent Differences ......................... 46 52 25
State and Local Taxes, Net of Federal Benefit . 292 195 109
Investment and Other Tax Credits .............. (75) (293) --
Net Operating Loss Carryforward ............... -- (489) --
Deferred Tax Benefit .......................... (1,925) -- --
Other ......................................... (581) (175) 158
------- ------- -------
$(1,260) $ 1,012 $ (299)
======= ======= =======
66
<PAGE>
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of May 31,1996 and 1995 determined in
accordance with the provisions of SFAS No. 109:
<TABLE>
<CAPTION>
MAY 31,
--------------------
($'S IN THOUSANDS) 1996 1995
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Deferred Gain on Sale of Facilities in Prior Years..................... $ 436 $ 1,779
Net Tax Operating Loss Carryforwards................................... -- 988
Bad Debts.............................................................. 2,905 2,905
Tax Credits............................................................ 3,193 2,461
Inventories (Uniform Capitalization)................................... 93 84
Deferred Vacation...................................................... 484 --
Accrued Legal Costs.................................................... 176 --
--------- ---------
Total Deferred Tax Assets.............................................. $ 7,287 $ 8,217
========= =========
Deferred Tax Liabilities:
Accelerated Depreciation............................................... $ 3,940 $ 4,236
Deferred Income........................................................ 289 1,183
Deferred Costs......................................................... 404 333
--------- ---------
Total Deferred Tax Liabilities......................................... $ 4,633 $ 5,752
========= =========
Deferred Tax Assets in Excess of Deferred Tax Liabilities before
Valuation Allowance.................................................. $ 2,654 $ 2,465
Valuation Allowance.................................................... (729) (2,465)
--------- ---------
Net Deferred Tax Assets................................................ $ 1,925 $ --
========= =========
</TABLE>
The net deferred tax asset of $1,925,000 was recorded, as the Company
believes it is more likely than not, that the results of future operations will
generate sufficient taxable income to realize such deferred tax assets.
For tax purposes, the Company has unused State net operating loss
carryovers of approximately $6,031,000, and Federal tax credit carryovers of
approximately $1,780,000 which will expire in varying amounts through the year
2010 (excluding $1,413,000 of Alternative Minimum Tax Credits).
11. REVENUES
Operating revenues are presented net of contractual allowances of
$48,897,000, $38,555,000 and $36,997,000 for the years ended May 31, 1996, 1995,
and 1994 respectively. Included in other revenue are deferred and current gains
recognized on facilities sold of $1,576,000 for the year ended May 31, 1994.
12. INTEREST EXPENSE
Interest expense is reflected net of approximately $2,130,000, $1,576,000,
and $1,405,000, of interest income for the years ended May 31, 1996, 1995, and
1994, respectively. The interest income is principally related to overnight
investments, restricted cash and notes receivables.
67
<PAGE>
13. QUARTERLY RESULTS (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for the fiscal years ending May 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
1ST 2ND 3RD 4TH(a) TOTAL
($'S IN THOUSANDS EXCEPT PER SHARE DATA) --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues, net.............................. $ 49,409 $ 49,506 $ 49,186 $ 47,095 $ 195,196
========= ========= ========= ========= ===========
Net income........................................... $ 1,157 $ 1,248 $ 1,252 $ 496 $ 4,153
========= ========= ========= ========= ===========
Net income per share of common stock................. $ .08 $ .08 $ .08 $ .03 $ .27
========= ========= ========= ========= ===========
Common stock price range:
High............................................... 3 1/16 3 2 5/8 2 3/8 3 1/16
Low................................................ 2 2 1/8 2 1 3/4 1 3/4
</TABLE>
- - ------------------
(a) Fourth quarter results reflect the recording of an unusual charge pertaining
to the class action suit (see Note 14 (b)), additional interest expense of
$621,000 relating to the Company's credit facility (see Note 2-b); a
$500,000 discount on a note receivable (see Note 3); an additional provision
for bad debt of $1,750,000; and the recognition of a deferred tax asset of
$1,925,000.
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
($'S IN THOUSANDS EXCEPT PER SHARE DATA) --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues, net.............................. $ 45,975 $ 47,782 $ 48,565 $ 49,912 $ 192,234
========= ========= ========= ========= ===========
Net income........................................... $ 740 $ 1,025 $ 1,208 $ 1,080 $ 4,053
========= ========= ========= ========= ===========
Net income per share of common stock................. $ .05 $ .07 $ .08 $ .07 $ .27
========= ========= ========= ========= ===========
Common stock price range:
High............................................... 3 1/16 3 3 1/8 2 13/16 3 1/8
Low................................................ 2 1 5/8 2 3/8 1 13/16 1 5/8
</TABLE>
Primary earnings per share were used to calculate net income per share of
common stock.
Price range of Common Stock: The Company's common stock is listed on the
Automated Quotation System of the National Association of Securities Dealers,
Inc. (NASDAQ symbol: GEMC). On August 27, 1996, the last sale price for the
Company's Common Stock was $5.4375. There were 1,174 stockholders of record of
its Common Stock as of May 31, 1996. The table above sets forth, for the periods
indicated, the range of high and low sale prices of the common stock as reported
by The Wall Street Journal.
14. COMMITMENTS AND CONTINGENCIES
(a) Life Support Ambulance, Inc. (LSA) a subsidiary of the Company,
received notice of suspension of payments relating to Medicare billing submitted
to its Medicare intermediary, effective April 6, 1995. The intermediary has
alleged that overpayments have occurred in connection with LSA billings. In
connection therewith, the Office of the Inspector General has seized certain
records and is conducting an investigation of this matter.
In August, 1995, the intermediary partially lift the suspension and has
since paid LSA 75% of all subsequent approved billings. In connection with this
agreement, the Company has agreed to guarantee the payment by LSA of up to
$5,000,000 of any finally determined overpayments. As of May 31, 1996, the
intermediary had withheld approximately $4,565,000 in escrow pending resolution
of this matter. The amount is included in restricted cash in the accompanying
balance sheets.
LSA has received notices of the results of the intermediary's audits,
including a calculated overpayment of approximately $6,800,000 through March 31,
1996. LSA is reviewing the
68
<PAGE>
intermediary's results and believes there are errors in, among other things, (i)
the sampling techniques used; (ii) the conclusions reached relative to the
appropriateness of payments for claims in the audit sample, and (iii) the
projection technique of the ultimate overpayment calculation. LSA intends to
vigorously defend its position and utilize all available administrative and
legal processes to protect its rights in this matter.
LSA believes that it has operated at all times in substantial compliance
with all provisions required by Medicare relating to reimbursement for services.
The Company is not able, at this time, to predict the ultimate outcome of this
matter.
(b) The Company was named a defendant, together with GMS Management, Inc.,
and various current and former officers of the Company, in a class action suit
which was filed in September, 1992, in the United States District Court for the
Eastern District of Pennsylvania in Philadelphia. On July 15, 1996, the Company
signed an agreement to settle the claims of the plaintiff class. This agreement
received provisional approval by the court on July 23, 1996, and is subject to a
hearing on October 7, 1996. Under the terms of the agreement, a payment up to a
maximum of $1,900,000 will be made to a claims settlement fund, of which 50%
will be paid by the Company's insurance carrier. The fund will be used to
resolve all claims of the members of the plaintiff class on a claims made basis
and to pay the attorneys fees and costs incurred by the plaintiff class. The
ultimate amount of this settlement cannot be determined at this time. The
Company's maximum share of the claim is $950,000. The Company has recorded at
May 31, 1996, its estimate of the ultimate payment to be made in connection with
its settlement. The amount recorded is less than the $950,000 maximum.
(c) On February 21, 1996, a Company subsidiary reached an agreement with
the U.S. Attorney to settle a matter involving reimbursement for certain
nutritional services provided at a nursing facility (the 'Facility') previously
managed by that subsidiary. The Company entered into this settlement, without
admitting any wrongdoing, in order to avoid the substantial expense and
management disruption of litigation. The settlement resulted in a charge of
$429,000, before taxes, shown in the accompanying Consolidated Statements of
Operations for the fiscal year ended May 31, 1996. The Company's management
agreement with the Facility provides that the Facility indemnify and hold the
Company harmless with respect to claims such as that alleged by the U.S.
Attorney. However, it is unclear whether the Facility has, or would have, the
funds necessary to provide such indemnification.
15. OTHER TRANSACTIONS
Dedicated Staffing Services, Inc. ('DSI'), a Pennsylvania non-profit
corporation, previously provided registered nurses, licensed practical nurses,
nursing assistants and other personnel to the Company on a temporary employment
basis. Certain officers of the Company are members of Dedicated Staffing's Board
of Directors. The Company paid Dedicated Staffing Services, Inc. approximately
$184,000 and $1,659,000 for these services in fiscal 1996 and 1995,
respectively. On May 31, 1996, the Company purchased from DSI certain fixed
assets as well as a list of nursing assistants for approximately $137,000. The
Company has agreed to pay such amount over 30 months, with interest at 9%. The
Company provides certain services which are priced at or above projected cost,
and include staffing services, dietary, environmental, financial, and other
services, to Mount Laurel Convalescent Center and Laurelview Manor which are
owned by Tomahawk. The total services rendered during fiscal 1996 and 1995 were
$8,179,000 and $7,194,000. At May 31, 1996 and 1995, the Company had a
receivable of $4,732,000 and $3,235,000 due from Tomahawk for these services,
respectively.
During fiscal 1996 and 1995, the Company received additional revenues of
approximately $1,084,000 and $1,000,000 related to its provision of ancillary
services at the Tomahawk facilities. These services, including provision of
ambulance transportation, diagnostics, rehabilitation, pharmacy and medical
supplies are provided at market rates.
As of May 31, 1996, the Company granted a prepayment discount of $500,000
to Tomahawk with respect to its note payable to the Company. The discount was
granted as an inducement for Tomahawk to prepay $3,000,000 of its note to the
Company.
69
<PAGE>
16. SUBSEQUENT EVENTS
On July 11, 1996, the Company entered into an Agreement and Plan of Merger
(the 'Merger Agreement') with Genesis Health Ventures, Inc. ('Genesis'), and its
wholly owned subsidiary G Acquisition Corporation ('Newco').
Under the terms of the Merger Agreement, Newco will pay $5.75 in cash for
each share of the Company's common stock, and Newco will be merged into the
Company. The consummation of the Merger is subject to various conditions
including, but not limited to, approval by the Company's shareholders and
receipt of applicable regulatory approvals. The Merger Agreement may be
terminated if certain conditions are not satisfied, or if the Merger does not
close prior to February 1, 1997. In connection with the Merger, the Company
engaged CS First Boston as a financial advisor and has agreed to pay CS First
Boston for its services, an aggregate financial advisory fee equal to 1% of the
total consideration payable (including liabilities assumed) in connection with
the proposed Merger. Under the terms of the Company's engagement, the Company
has agreed to pay CS First Boston an additional fee, to be mutually agreed upon,
at the closing of the Merger. Also, in connection with the Merger, the Company
and Daniel Veloric, Chairman ('Veloric') have entered into a Termination
Agreement dated as of July 11, 1996, pursuant to which the Company and Veloric
have agreed that, at the Effective Time, certain Employment Agreement effective
June 1, 1993 (the 'Veloric Employment Agreement') will terminate. The Veloric
Employment Agreement currently expires on May 31, 2001. The Veloric Employment
Agreement provides for annual base compensation of $500,000 per year. The
Veloric Employment Agreement also provides for a bonus equal to five percent
(5%) of the Company's annual increase in profits, the award of phantom stock
based on the annual incremental increase in the average price of Company Common
Stock, and a death benefit of $1,000,000. In consideration of the termination of
the Veloric Employment Agreement, the Company will pay Veloric the sum of
$1,000,000, payable $200,000 at the Effective Time and $200,000 on each of the
first four anniversaries of the Effective Time.
The Company and Veloric have also entered into that certain Restrictive
Covenants Agreement dated July 11, 1996 by which Veloric agreed that, among
other things, for a period of ten years after the Effective Time of the Merger,
he will not, directly or indirectly, for his own account, or the benefit of any
other person, without the prior written consent of Acquiror, (a) engage in any
business competitive with the businesses of the Company or Acquiror in its
respective geographic markets, or (b) hire any employee of the Company or
Acquiror, or solicit, induce, or divert any of them to work for him or any other
person. In consideration of the foregoing, the Company has agreed to pay Veloric
the sum of $475,000 at the Effective Time of the Merger.
In addition, Genesis and Veloric have reached an agreement in principle
pursuant to which Veloric will provide consulting services to Acquiror after the
Effective Time of the Merger. While the definitive form of the consulting
agreement is still being negotiated, it is expected that the term of such
consulting agreement will be for a period of four years. During the first year
of the consulting agreement, it is expected that Genesis will pay Veloric a
consulting fee of $100,000. After the expiration of the first year of such
consulting agreement any further consulting fees shall be in an amount
determined by Genesis in its sole discretion. It is also expected that Veloric
will be granted an option to purchase 25,000 Shares of the common stock of
Genesis at a price equal to the fair market value of Acquiror's common stock at
the Effective Time of the Merger. Veloric will also be provided with an office,
car and health insurance for the entire term of the consulting agreement.
The Company and Esther Ponnocks, Senior Executive Vice President of the
Company ('Ponnocks'), have entered into a Termination Agreement dated as of July
11, 1996, pursuant to which the Company and Ponnocks have agreed that, at the
Effective Time that certain Employment Agreement dated as of June 1, 1992 (the
'Ponnocks Employment Agreement') will terminate. The Ponnocks Employment
Agreement provides for annual base compensation of $200,000 per year and a term
of three years, with annual extensions through not later than May 31, 2002, plus
severance compensation equal to two times her annual base compensation.
70
<PAGE>
In consideration of the termination of the Ponnocks Employment Agreement,
the Company will pay Ponnocks $200,000 at the Effective Time and up to $600,000
to fund Ponnocks' secured supplemental pension plan provided in the Ponnocks
Employment Agreement, to provide an annuity for Ponnocks' lifetime, commencing
on the first day of the month following the first anniversary of the Effective
Time, in the amount of $75,000 per annum. In addition, the Company will pay to
Ponnocks up to $250,000, representing income taxes to be incurred by Ponnocks in
connection with such funding.
In addition, Genesis and Ponnocks have reached an agreement in principle
pursuant to which Ponnocks will provide consulting services to Genesis after the
Effective Time of the Merger. While the definitive form of the consulting
agreement is still being negotiated, it is expected that the term of such
consulting agreement will be for a period of two years. During the first year of
the consulting agreement, it is expected that Genesis will pay Ponnocks a
consulting fee of $60,000. After the expiration of the first year of such
consulting agreement any further consulting fees shall be in an amount
determined by Genesis in its sole discretion. Ponnocks will also be provided
with an office, car and health insurance for the term of the consulting
agreement.
In June, 1996, the Company entered into a $2,500,000 loan agreement with
FINOVA Capital principally secured by the durable medial equipment, of one of
its subsidiaries. The loan is repayable over 60 months with interest at prime
plus 3% (11.25% as of May 31, 1996).
71
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
Parties: GENESIS HEALTH VENTURES, INC.
a Pennsylvania corporation ('Acquiror')
148 West State Street
Kennett Square, PA 19348
GERIATRIC & MEDICAL COMPANIES, INC.
a Delaware corporation ('GMC')
5601 Chestnut Street
Philadelphia, PA 19139
G ACQUISITION CORPORATION
a Delaware corporation ('Newco')
148 West State Street
Kennett Square, PA 19348
Dated as of: July 11, 1996
BACKGROUND:
WHEREAS, the respective Boards of Directors of Acquiror, Newco and GMC have
approved the merger of Newco into GMC, as set forth below (the 'Merger'), upon
the terms and subject to the conditions set forth in this Agreement, whereby
each issued and outstanding share of Common Stock, par value $.10 per share, of
GMC (the 'GMC Common Stock'), other than shares owned directly or indirectly by
Acquiror or GMC and Dissenting Shares (as defined in Section 2.5(d)), will be
converted into the right to receive the Merger Consideration (as defined in
Section 2.5(c)); and
WHEREAS Acquiror, Newco and GMC desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein and subject to the satisfaction of the
terms and conditions set forth herein, the parties, intending to be legally
bound, agree as follows:
SECTION 1: DEFINED TERMS
Certain defined terms used in this Agreement and not specifically defined
in context are defined in this Section 1, as follows:
1.1 'Accounts Receivable' means (a) any right to payment for goods
sold, leased or licensed or for services rendered, whether or not it has
been earned by performance, whether billed or unbilled, and whether or not
it is evidenced by any Contract, (b) any note receivable, or (c) any other
receivable or right to payment of any nature.
1.2 'Asset' means any real, personal, mixed, tangible or intangible
property of any nature, including, but not limited to, (a) Cash Assets, (b)
Accounts Receivable, (c) other current assets of any nature including, but
not limited to, prepayments, deposits and escrows, (d) Tangible Property,
(e) Real Property, (f) Software, (g) Intangibles, (h) Contract Rights, (i)
claims, causes of action and other legal rights and remedies of any nature,
and (j) good will and miscellaneous assets of any nature including, but not
limited to, rights with respect to telephone numbers, rights with respect
to telephone and other directory listings, marketing materials and
advertisements, books and records, correspondence files, data bases,
customer lists, prospect lists, supplier lists,
A-1
<PAGE>
and other files and records of any nature, whether stored in written form
or on any type of computer, electronic or other media.
1.3 'Businesses' means the pharmacy, medical supplies, durable
medical equipment, rehabilitative therapies, ambulance transportation,
paratransit, contract management, financial, diagnostic services, home
care, assisted living, comprehensive personal care, residential health care
and long-term care businesses and other businesses conducted by the GMC
Companies.
1.4 'Cash Asset' means any cash on hand, cash in bank or other
accounts, readily marketable securities, and other cash-equivalent liquid
assets of any nature.
1.5 'Code' means the Internal Revenue Code of 1986, as amended.
1.6 'Consent' means any consent, approval, order or authorization of,
or any declaration, filing or registration with, or any application or
report to, or any waiver by, or any other action (whether similar or
dissimilar to any of the foregoing) of, by or with, any Person which is
necessary in order to take a specified action or actions in a specified
manner and/or to achieve a specified result or to avoid the occurrence of a
default or breach.
1.7 'Contract' means any written or oral contract, agreement,
instrument, order, arrangement, commitment or understanding of any nature,
including, but not limited to, sales orders, purchase orders, leases,
subleases, maintenance agreements, license agreements, sublicense
agreements, loan agreements, promissory notes, security agreements, pledge
agreements, deeds, mortgages, guaranties, indemnities, warranties,
employment agreements, consulting agreements, sales representative
agreements, joint venture agreements, settlement agreements, release
agreements, termination agreements, buy-sell agreements, options or
warrants; but not including Employee Benefit Plans.
1.8 'Contract Right' means, with respect to any Person, any right,
power or remedy of any nature of such Person under any Contract including,
but not limited to, rights to receive property or services or otherwise
derive benefits from the payment, satisfaction or performance of another
party's Obligations, rights to demand that another party accept property or
services or take any other actions, and rights to pursue or exercise
remedies or options.
1.9 'Employee Benefit Plan' means any employee benefit plan as
defined in Section 3(3) of ERISA, or any other plan, trust agreement,
program, policy or arrangement for or regarding bonuses, commissions,
incentive compensation, severance, hospitalization, vacation, deferred
compensation, pensions, profit sharing, retirement, payroll savings, stock
options, stock purchases, stock awards, stock ownership, equity
compensation, phantom stock, stock appreciation rights, medical/dental
expense payment or reimbursement, disability income or protection, sick
pay, group insurance, self insurance, death benefits, employee welfare or
fringe benefits of any nature, including without limitation, those
benefiting retirees or former employees; but not including employment
Contracts with individual employees.
1.10 'Encumbrance' means any lien, security interest, pledge,
mortgage, judgment, easement, leasehold, assessment, covenant, restriction,
reservation, conditional sale, prior assignment, or other encumbrance,
claim, burden or charge of any nature.
1.11 'Environmental Laws' means all Laws relating to pollution,
protection of the environment, health, safety, or the exposure of persons
to Hazardous Substances, including, without limitation, Laws relating to
emissions, discharges, releases or threatened releases into the environment
(including, without limitation, ambient air, surface water, ground water or
land) of any Hazardous Substances identified or regulated under any such
Environmental Laws.
1.12 'ERISA' means the Employee Retirement Income Security Act of
1974, as amended.
1.13 'Exchange Act' means the Securities Exchange Act of 1934, as
amended.
A-2
<PAGE>
1.14 'Facilities' means assisted living residences, comprehensive
personal care facilities, residential health care facilities and long term
care facilities owned, operated or managed by any of the GMC Companies.
1.15 'GAAP' means generally accepted accounting principles under
United States accounting rules and regulations, as in effect from time to
time, consistently applied.
1.16 'GMC Companies' means GMC, the GMC Subsidiaries and the GMC
Partnerships.
1.17 'GMC Partnerships' means each general or limited partnership in
which any GMC Company holds any partnership interest.
1.18 'GMC Subsidiaries' means each of the Subsidiaries of GMC.
1.19 'Hazardous Substances' means any substance, waste, contaminant,
pollutant or material that has been determined by any Law or any United
States federal government authority, or any state or local government
authority having jurisdiction over Real Property owned, leased, used or
occupied by any of the GMC Companies, to be capable of posing a risk of
injury or damage to health, safety, property or the environment, including,
but not limited to, (a) all substances, wastes, contaminants, pollutants
and materials defined or designated as hazardous, dangerous or toxic
pursuant to any Law of the state in which such Real Property is located or
any United States Law, and (b) urea-formaldehyde, polychlorinated
byphenyls, asbestos or asbestos-containing materials, nuclear or
radioactive fuel or waste, radon, explosives, known carcinogens, petroleum,
petroleum products, or any other waste, material, substance, pollutant or
contaminant that might cause any injury to human health or safety or to the
environment or might subject the owner, operator, possessor or occupier of
such Real Property to any claims, causes of action, costs damages,
penalties, expenses, demands or liabilities, however defined, under any
applicable Law.
1.20 'Insurance Policy' means any public liability, product
liability, general liability, comprehensive, property damage, vehicle,
life, hospital, medical, dental, disability, workers' compensation, key
man, fidelity bond, theft, forgery, errors and omissions, directors' and
officers' liability, owner's title, or other insurance policy or binder of
any nature.
1.21 'Intangible' means any name, corporate name, fictitious name,
trademark, trademark application, service mark, service mark application,
trade name, brand name, product name, slogan, trade secret, know-how,
patent, patent application, copyright, copyright application, Software,
design, logo, formula, invention, product right or other intangible asset
of any nature, whether in use, under development or design, or inactive.
1.22 'Inventory' means any raw materials, supplies, work-in-progress,
finished goods, parts or other inventory of any nature whatsoever.
1.23 'Judgment' means any order, writ, injunction, fine, citation,
award, decree or other judgment of any nature of any foreign, federal,
state or local court, governmental body, administrative agency, regulatory
authority or arbitration tribunal.
1.24 'Knowledge' with reference to the phrases 'to the Knowledge of
the GMC Companies' or 'to the best of the GMC Companies' Knowledge' or
similar phrases means that none of the directors of GMC, none of the
executive officers of GMC set forth on Schedule 1.24, and none of the chief
operating officers of each of the Businesses set forth on Schedule 1.24
have any actual knowledge or actual belief after due inquiry that the
statement made is incorrect.
1.25 'Law' means any provision of any foreign, federal, state or
local law, statute, ordinance, order, charter, constitution, treaty, rule
or regulation, guideline, consent order, decree or agreement, including
without limitation, common law.
1.26 'Material Adverse Change' or 'Material Adverse Effect' means any
change or effect which, when taken together with all other adverse changes
and effects which are not individually deemed to be a 'Material Adverse
Change' or have a 'Material Adverse Effect', is or is reasonably likely to
be materially adverse to the Assets, business, financial condition or
A-3
<PAGE>
results of operations of the GMC Companies, taken as a whole, excluding in
all cases: (i) events or conditions generally affecting the industries in
which the GMC Companies operate or arising from changes in general business
or economic conditions; (ii) all reasonable out-of-pocket fees and expenses
(including, without limitation, reasonable legal, accounting, investigatory
and other fees and expenses) incurred by GMC in connection with the
transactions contemplated by this Agreement; (iii) the payment by the GMC
Companies of all amounts due to any officers or employees of the GMC
Companies under employment contracts or other employee benefit plans or
programs in effect as of the date hereof and disclosed to Acquiror prior to
the date hereof and not in breach of any of the terms of this Agreement;
(iv) any effect resulting from any change in Law or GAAP, which affects
generally entities such as the GMC Companies; and (v) any effect resulting
from compliance by the GMC Companies with the terms of this Agreement.
1.27 'Obligation' means any debt, liability or obligation of any
nature, whether secured, unsecured, recourse, nonrecourse, liquidated,
unliquidated, accrued, absolute, fixed, contingent, ascertained,
unascertained, known, unknown or otherwise.
1.28 'Permit' means any license, permit, approval, certificate,
consent, waiver, order, authorization, registration, right or privilege of
any nature, granted, issued, approved or allowed by any foreign, federal,
state or local governmental body, administrative agency or regulatory
authority or any Person acting on behalf of any such body, agency or
authority.
1.29 'Person' means any individual, sole proprietorship, joint
venture, partnership, corporation, limited liability company or
partnership, association, cooperative, trust, estate, governmental body,
administrative agency, regulatory authority or other entity of any nature.
1.30 'Proceeding' means any claim, demand, suit, action, litigation,
investigation, arbitration, audit, hearing or other legal proceeding of any
nature, or any formal demand which might lead to any of the foregoing.
1.31 'Real Property' means any real estate, land, building,
condominium, town house, structure, improvement or other real property of
any nature, all shares of stock or other ownership interests in cooperative
or condominium associations or any other corporation owning real estate,
partnership interests in partnerships, membership interests in limited
liability companies or other forms of ownership interest through which
interests in real estate are held, and all appurtenant and ancillary rights
thereto, including, but not limited to, easements, covenants, water rights,
sewer rights and utility rights.
1.32 'Securities Act' means the Securities Act of 1933, as amended.
1.33 'Software' means any computer program, operating system,
applications system, firmware or software of any nature, whether
operational, under development or inactive, including, but not limited to,
all object code, source code, technical manuals, user manuals and other
documentation therefor, whether in machine-readable form, programming
language or any other language or symbols, and whether stored, encoded,
recorded or written on disk, tape, film, memory device, paper or other
media of any nature.
1.34 'Subsidiary' means any Person in which a majority of any direct
or indirect equity or ownership interest is owned, of record or
beneficially, by another Person or a direct or indirect Subsidiary of such
other Person.
1.35 'Tangible Property' means any furniture, fixtures, buildings,
leasehold improvements, vehicles, office equipment, computer equipment,
other equipment, machinery, tools, forms, supplies or other tangible
personal property of any nature, whether constituting fixed assets,
inventory or otherwise.
1.36 'Tax' means (a) any foreign, federal, state or local income,
earnings, profits, gross receipts, franchise, capital stock, net worth,
sales, use, occupancy, general property, real property, personal property,
intangible property, realty transfer, fuel, excise, payroll, withholding,
unemployment compensation, social security or other tax of any nature, (b)
any foreign, federal,
A-4
<PAGE>
state or local organization fee, qualification fee, annual report fee,
filing fee, occupation fee, assessment, sewer rent or other fee or charge
of any nature, and (c) any deficiency, interest or penalty imposed with
respect to any of the foregoing.
SECTION 2: THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law (the
'DGCL'), Newco shall be merged with and into GMC at the Effective Time (as
hereinafter defined). Following the Merger, the separate corporate existence of
Newco shall cease and GMC shall continue as the surviving corporation (the
'Surviving Corporation') and shall succeed to and assume all the rights and
obligations of GMC and Newco in accordance with the DGCL. At the election of
Acquiror, any direct or indirect wholly owned Subsidiary of Acquiror may be
substituted for Newco as a constituent corporation in the Merger. In such event,
the parties agree to execute an appropriate amendment to this Agreement in order
to reflect the foregoing.
2.2 Closing. The closing of the Merger (the 'Closing') will take place at
10:00 a.m. on a date to be specified by Acquiror or Newco, which may be on, but
shall be no later than the third business day after, the day on which there have
been satisfaction or waiver of the conditions set forth in Section 8 and Section
9 (the 'Closing Date'), at the offices of Blank Rome Comisky & McCauley,
Philadelphia, Pennsylvania, unless another date or place is agreed to in writing
by the parties hereto.
2.3 Effective Time. On the Closing Date, or as soon as practicable
thereafter, the parties shall file a certificate of merger or other appropriate
documents (in any such case, the 'Certificate of Merger') executed in accordance
with the relevant provisions of the DGCL and shall make all other filings or
recordings required under the DGCL. The Merger shall become effective at such
time as the Certificate of Merger is duly filed with the Secretary of State of
the State of Delaware, or at such other time as Newco and GMC shall agree should
be specified in the Certificate of Merger (the time the Merger becomes effective
being the 'Effective Time').
2.4 Effects of the Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL. Without, limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the properties, rights, privileges,
powers and franchises of GMC and Newco shall vest in the Surviving Corporation,
and all debts, liabilities and duties of GMC and Newco shall become the debts,
liabilities and duties of the Surviving Corporation.
2.5 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of GMC
Common Stock or any shares of capital stock of Newco:
(a) Capital Stock of Newco. Each share of the capital stock of Newco
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of common
stock, no par value, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Acquiror Owned Stock. Each
share of GMC Common Stock that is owned by GMC or by any GMC Subsidiary and
each share of GMC Common Stock that is owned by Acquiror, Newco or any
other Subsidiary of Acquiror shall automatically be canceled and retired
and shall cease to exist, and no consideration shall be delivered in
exchange therefor.
(c) Conversion of GMC Common Stock. Subject to Section 2.5(d), each
issued and outstanding share of GMC Common Stock (other than shares to be
canceled in accordance with Section 2.5(b)) shall be converted into the
right to receive from the Surviving Corporation $5.75 in cash, without
interest (the 'Merger Consideration'). As of the Effective Time, all such
shares of GMC Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares of GMC Common Stock
shall cease to have any rights with respect thereto, except the right to
receive the Merger Consideration, without interest.
A-5
<PAGE>
(d) Shares of Dissenting Stockholders. Notwithstanding anything in
this Agreement to the contrary, any issued and outstanding shares of GMC
Common Stock held by a Person (a 'Dissenting Stockholder') who objects to
the Merger and complies with all the provisions of the DGCL concerning the
right of stockholders to dissent from the Merger and require appraisal of
their shares of GMC Common Stock ('Dissenting Shares') shall not be
converted as described in Section 2.5(c) but shall become the right to
receive such consideration as may be determined to be due to such
Dissenting Stockholder pursuant to DGCL. If, after the Effective Time, such
Dissenting Stockholder withdraws his demand for appraisal or fails to
perfect or otherwise loses his right of appraisal, in any case pursuant to
the DGCL, his shares of GMC Common Stock shall be deemed to be converted as
of the Effective Time into the right to receive the Merger Consideration,
without interest. GMC shall give Acquiror (i) prompt notice of any demands
for appraisal of shares of GMC Common Stock received by GMC and (ii) the
opportunity to participate in and direct all negotiations and proceedings
with respect to any such demands. GMC shall not, without the prior written
consent of Acquiror, make any payment with respect to, or settle, offer to
settle or otherwise negotiate, any such demands.
2.6 Exchange of Certificates.
(a) Paying Agent. Prior to the Effective Time, Acquiror shall designate a
bank or trust company to act as paying agent (the 'Paying Agent') for the
payment of the Merger Consideration, and Acquiror shall deposit or shall cause
to be deposited with the Paying Agent in a separate fund established for the
benefit of the stockholders of GMC Common Stock (the 'Stockholders'), for
payment in accordance with this Section 2, through the Paying Agent (the
'Payment Fund'), immediately available funds in amounts necessary to make the
aggregate payments pursuant to Section 2.5(c) to Stockholders (other than GMC,
any GMC Subsidiary, Acquiror, Newco or any other Subsidiary of Acquiror, or
holders of Dissenting Shares). The Paying Agent shall, pursuant to irrevocable
instructions, pay the Merger Consideration out of the Payment Fund.
The Paying Agent shall invest portions of the Payment Fund as Acquiror
directs in obligations of or guaranteed by the United States of America, in
commercial paper obligations receiving the highest investment grade rating from
both Moody's Investors Services, Inc. and Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or banker's acceptances of
commercial banks with capital exceeding $1,000,000,000 (collectively, 'Permitted
Investments'); provided, however, that the maturities of Permitted Investments
shall be such as to permit the Paying Agent to make prompt payment to former
Stockholders entitled thereto as contemplated by this Section. All earnings of
Permitted Investments shall be paid to Acquiror. If for any reason (including
losses) the Payment Fund in inadequate to pay the amounts to which Stockholders
shall be entitled under Section 2.5(c), Acquiror shall nonetheless be liable for
payment thereof. The Payment Fund shall not be used for any purpose except as
expressly provided in this Agreement. On the first business day which is three
months after the Effective Time, all portions of the Payment Fund not
theretofore paid to former Stockholders shall be remitted to the Surviving
Corporation and former Stockholders shall thereafter look solely to the
Surviving Corporation for payment of the Merger Consideration.
(b) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each Stockholder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of GMC Common Stock (the 'Certificates') whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 2.5, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Paying Agent and shall be in
such form and have such other provisions as Acquiror may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Acquiror, together with such letter of transmittal, duly executed
and such other documents as may reasonably be required by the Paying Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor the
amount of cash into which the shares of GMC Common Stock theretofore represented
by such Certificate shall have been converted
A-6
<PAGE>
pursuant to Section 2.5, and the Certificate so surrendered shall forthwith be
canceled. If the Merger Consideration (or any portion thereof) is to be
delivered to a Person other than the Person in whose name the Certificates
surrendered in exchange therefor are registered, it shall be a condition to the
payment of the Merger Consideration to such Person that the Certificates so
surrendered shall be properly endorsed or accompanied by appropriate stock
powers and otherwise in proper form for transfer, that such transfer otherwise
be proper and that the Person requesting such transfer pay to the Paying Agent
any transfer or other Taxes payable by reason of the foregoing or establish to
the satisfaction of Acquiror that such Taxes have been paid or are not required
to be paid. In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such certificate to be lost, stolen or destroyed, the Paying Agent will issue in
exchange for such lost, stolen or destroyed certificate the Merger Consideration
deliverable in respect thereof, provided that the Person to whom the Merger
Consideration is paid shall, as a condition precedent to the payment thereof,
give the Surviving Corporation a bond in such sum as it may direct or to
otherwise indemnify the Surviving Corporation in a manner satisfactory to it
against any claim that may be made against the Surviving Corporation with
respect to the Certificate alleged to have been lost, stolen or destroyed. Until
surrendered as contemplated by this Section 2.6, each Certificate shall after
the Effective Time represent only the right to receive upon such surrender the
amount of cash, without interest, into which the shares of GMC Common Stock
theretofore represented by such Certificate shall have been converted pursuant
to Section 2.5. No interest will be paid or will accrue on the cash payable upon
the surrender of any Certificate.
(c) No Further Ownership Rights in Company Common Stock. All cash paid
upon the surrender of Certificates in accordance with the terms of this Section
2 shall be deemed to have been paid in full satisfaction of all rights
pertaining to the shares of GMC Common Stock theretofore represented by such
Certificates, and there shall be no further registration of transfers, on the
stock transfer books of the Surviving Corporation of the shares of GMC Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
the Paying Agent for any reason, they shall be canceled and exchanged as
provided in this Section 2, except as otherwise provided by Law.
(d) No Liability. None of Acquiror, Newco, GMC or the Paying Agent shall
be liable to any Person in respect of any cash delivered to a public official
pursuant to any applicable abandoned property, escheat or similar Law.
(e) Withholding Rights. Acquiror shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
Stockholder such amounts as Acquiror is required to deduct and withhold with
respect to the making of such payment under the Code or any provision of state,
local or foreign Tax Law. To the extent that amounts are so withheld by
Acquiror, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the Stockholder in respect of which such
deduction and withholding was made by Acquiror.
2.7 Stock Options and Warrants. The Board of Directors of GMC (or, if
appropriate, any Committee thereof) (a) contemporaneously with the approval of
this Agreement has adopted appropriate resolutions and taken all other actions
necessary to provide that, effective immediately prior to the Effective Time,
each outstanding stock option held by employees or directors of GMC or other
Persons to purchase GMC Common Stock (such stock options are hereinafter
referred to collectively as the 'Options') heretofore granted under any GMC
Option Plans or the LTIP (as such terms are defined in Section 3.5)), and (b) as
soon as practicable following the date of this Agreement shall use its
reasonable efforts to provide that outstanding warrants to purchase 100,000
shares of GMC Common Stock under that certain agreement between GMC and Tripp &
Co., Inc. (the 'Tripp Warrant'), in either case whether or not then vested or
exercisable, shall no longer be exercisable for the purchase of shares of GMC
Common Stock but shall entitle each holder thereof, in cancellation and
settlement therefor, to a payment in cash (subject to any applicable withholding
taxes, the 'Cash Payment'), equal to the product of (x) the total number of
shares of GMC Common Stock subject to each such Option or the Tripp Warrant held
by such holder and (y) the excess of the Merger Consideration over the
respective exercise price per share of GMC Common Stock subject to such
A-7
<PAGE>
Option or the Tripp Warrant. The Surviving Corporation shall pay each such Cash
Payment to each holder of an outstanding Option or the Tripp Warrant on the date
or dates occurring on or after the Effective Time on which such holder
surrenders such Option or the Tripp Warrant for payment. Any stock appreciation
rights, phantom stock rights, cash performance units, or similar rights
including, without limitation, long term incentive plans (except for the LTIP
with respect to outstanding awards set forth on Schedule 3.5), shall be
cancelled as of immediately prior to the Effective Time without any payment
therefor. As provided herein, the GMC Option Plans, the LTIP and any other
Contract, plan, program or arrangement providing for the issuance or grant of
any other interest in respect of the capital stock of GMC or any GMC Subsidiary
(collectively with the GMC Option Plans, referred to as the 'GMC Stock Plans')
shall terminate as of the Effective Time. GMC has taken all steps necessary to
ensure that no GMC Company is or will be bound by any Options or the Tripp
Warrant (except as otherwise required by this Section), other options, warrants,
rights or Contracts which would entitle any Person, other than Acquiror or its
affiliates, to own any capital stock of Acquiror, the Surviving Corporation or
any of their respective Subsidiaries or to receive any payment in respect
thereof. GMC shall use its best efforts to obtain all necessary Consents to
ensure that after the Effective Time, the only rights of the holders of Options
or the Tripp Warrant to purchase shares of Common Stock in respect of such
Options or the Tripp Warrant will be to receive the Cash Payment in cancellation
and settlement thereof as described above.
2.8 Certificate of Incorporation and By-Laws.
(a) The certificate of incorporation of Newco as in effect immediately
prior to the Effective Time shall be the certificate of incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable Law.
(b) The Bylaws of Newco as in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation, until thereafter changed or amended as
provided therein or by Law.
2.9 Directors. The directors of Newco immediately prior to the Effective
Time shall be the directors of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
2.10 Officers. The officers of Newco immediately prior to the Effective
Time shall become the officers of the Surviving Corporation, until the earlier
of their resignation or removal or until their successors are duly elected and
qualified, as the case may be.
2.11 Resignations. At the Closing, GMC shall use reasonable efforts to
make available to Acquiror and Newco the written resignations of such officers
and directors of each GMC Company as Acquiror shall request from all
officerships and directorships at the GMC Companies, effective as of the Closing
Date.
2.12 Obligation with Respect to Certain Employee Benefits. Acquiror hereby
agrees that, as soon as reasonably practicable after the Effective Time,
Acquiror shall take such action as may be necessary to cause each of the GMC
Companies to maintain and provide for those employees of the GMC Companies not
covered by union or collective bargaining agreements, the employee welfare plans
and employee pension plans which are generally made available from time to time
to the employees of the Acquiror and its subsidiaries consistent with grade
levels.
SECTION 3: REPRESENTATIONS OF GMC
GMC represents and warrants to Acquiror and Newco as follows:
3.1 Organization and Subsidiaries. GMC and each of the GMC
Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the Laws of the state of its incorporation. Each of the GMC
Partnerships is a partnership duly formed and validly existing under the
Laws of the jurisdiction of its formation. Each of the GMC Companies is
duly qualified or registered to do business as a foreign entity in each
jurisdiction where the transaction of its respective Businesses requires
such qualification or registration except where the failure to so
A-8
<PAGE>
qualify or register would not, or would not reasonably be expected to, have
any Material Adverse Effect. Schedule 3.1 sets forth an accurate and
complete list of each GMC Company, setting forth as to each GMC Company, as
applicable: (a) its exact legal name; (b) its jurisdiction and date of
formation; (c) its federal employer identification number; (d) its
directors and officers or partners, as applicable, indicating all current
title(s) of each individual; (e) its registered agent and/or office in its
jurisdiction of formation (if applicable); (f) all foreign jurisdictions in
which it is qualified or registered to do business and its registered agent
and/or office in each such jurisdiction (if applicable); (g) all
fictitious, assumed or other names of any type that are registered or used
by it or under which it has done business at any time since June 1, 1995;
(h) any name changes, recapitalization, mergers, reorganizations or similar
events since June 1, 1995 and (i) the name of and the percentage and nature
of the interest or percentage of voting securities owned by GMC or any GMC
Company. Each of the GMC Companies has the requisite power and authority to
own its respective Assets and conduct its respective Businesses as such
Businesses are presently conducted. GMC has the requisite corporate power
and authority to enter into and perform this Agreement. Accurate and
complete copies of the charter and bylaws, partnership agreements and other
organizational documents, as applicable, of each of the GMC Companies, each
as amended to date, have been provided to Acquiror. All of the issued and
outstanding capital stock of each of GMC's Subsidiaries is duly authorized,
validly issued, fully paid and non-assessable, and was not issued in
violation of, any preemptive rights. GMC owns, directly or through a
Subsidiary, all of the issued and outstanding capital stock of each of the
GMC Subsidiaries, free and clear of all Encumbrances. Except for the GMC
Subsidiaries listed on Schedule 3.1, none of the GMC Companies owns any
capital stock or other securities of, or any interest in, any Person.
3.2 Authorization of Agreement. The execution, delivery, and
performance of this Agreement by GMC, and the consummation by GMC of the
transactions contemplated hereby, (a) have been authorized by all necessary
corporate actions by GMC's Board of Directors, (b) do not constitute a
violation of or default under (either immediately or upon notice, lapse of
time or both) (i) the charter or bylaws, partnership agreements or other
organizational documents, as applicable, of any of the GMC Companies, (ii)
any material Permits held by any of the GMC Companies or (iii) any material
Contract to which any of the GMC Companies is a party or by which any of
the GMC Companies is bound, (c) do not constitute a violation of any Law or
Judgment which is applicable to any of the GMC Companies or to any of the
GMC Companies' Assets or Businesses, the violation of which would, or would
reasonably be expected to, have a Material Adverse Effect, (d) except as
set forth on Schedule 3.2, do not accelerate or otherwise modify, or give
any Person the right to accelerate or modify, any material Obligation of
any of the GMC Companies, (e) do not result in the creation of any material
Encumbrance upon, or give to any Person any material interest in, any of
the GMC Companies' Assets or Businesses or any shares of capital stock or
other security of GMC or any of GMC's Subsidiaries, and (f) do not require
the Consent of any Person except for (i) the approval of the board of
directors of GMC, which has already been obtained, (ii) the approval of the
stockholders of GMC as described in Section 5 of this Agreement, (iii) the
filing with the Securities and Exchange Commission ('SEC') of (x) a proxy
statement relating to the approval by GMC's stockholders of this Agreement
(as amended or supplemented from time to time, the 'Proxy Statement') and
(y) such reports under Section 13(a) of the Exchange Act as may be required
in connection with this Agreement and the transactions contemplated by this
Agreement, (iv) filings and approvals under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the 'Hart-Scott-Rodino Act'), (v) the filing of
the Certificate of Merger with the Secretary of State of the State of
Delaware, (vi) Consents of government regulatory authorities described on
Schedule 3.2, and (vii) other Consents described on Schedule 3.2. This
Agreement constitutes the valid and legally binding agreement of GMC,
enforceable against GMC in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency and
similar Laws affecting creditors' rights generally and to general
principles of equity (whether considered in a proceeding in equity or at
Law). GMC has received an opinion of CS First Boston Corporation to the
effect that, as of the date of this Agreement, the consideration to be
received by the holders of GMC
A-9
<PAGE>
Common Stock (as defined in Section 3.5 below) pursuant to the Merger are
fair to such holders from a financial point of view. That certain Stock
Option Agreement dated July 11, 1996 among inter alia Tomahawk Capital
Holdings, Inc., Tomahawk Holdings, Inc., Daniel Veloric, Newco and Acquiror
has been approved by the Board of Directors of GMC so that Section 203 of
the DGCL will not apply to the Stock Option Agreement, this Agreement or
the transactions contemplated thereby and hereby.
3.3 Compliance with Law. Each GMC Company's operations and the
conduct of each GMC Company's Businesses (including any discontinued or
inactive business or operations) as such Businesses have been or presently
are conducted, have and continue to comply with all applicable Laws, except
where the failure to do so would not, and would not reasonably be expected
to, have any Material Adverse Effect. Set forth on Schedule 3.3 is a
complete list in all material respects of all inspection reports, surveys,
investigation reports, and audit reports made or initiated by or reported
to federal, state or local governmental agencies, authorities and other
Persons since May 31, 1994 regarding any Laws applicable to any of the GMC
Companies or their respective Businesses or Assets. To the Knowledge of the
GMC Companies, each GMC Company has filed all reports required by all Laws
to be filed including, without limitation, any and all Medicare and
Medicaid cost reports and all such reports complied in all material
respects with the requirements of applicable laws and regulations. Each of
the GMC Companies has duly paid or accrued on its books of account all
applicable duties and charges due or assessed against it pursuant to such
reports, except duties and charges with respect to which it has a bona fide
dispute and which, if resolved adversely to the GMC Companies, would not
have a Material Adverse Effect.
3.4 Permits. Each GMC Company has obtained and currently maintains in
full force and effect all material Permits required by Law or necessary to
conduct its respective Businesses as presently conducted, all of which
Permits are listed on Schedule 3.4(a). Each of the GMC Companies, each of
the Facilities and each of the Businesses set forth on Schedule 3.4(b),
where applicable, are eligible, and are fully certified and have the
requisite Permits to participate as providers under and to receive payment
from Medicare, Medicaid (in each state in which they operate), Civilian
Health and Medical Program of the Uniformed Services ('CHAMPUS'), Civilian
Health and Medical Program of the Veteran's Administration ('CHAMPVA') and
any other Veterans Administration program. Except as set forth on Schedule
3.4(c), no material violations or waivers have been recorded in respect of
any such Permit since May 31, 1994 and no Proceeding is pending or, to the
Knowledge of the GMC Companies, threatened to revoke, terminate, suspend or
limit any such Permit or any GMC Company, Facility or Business, or any
assignee or successor thereof, from applying for such Permits or developing
or expanding any business in any material respect. Except as set forth in
Schedule 3.4(c), no GMC Company has received any notice of any claim of
material default or noncompliance with respect to any such Permit or any
notice of any other material claim or Proceeding (or threatened Proceeding)
relating to any such Permit. No GMC Company is in material default with
respect to any such Permits. To the extent applicable to its respective
Businesses, and except as disclosed on Schedule 3.4(c), each GMC Company
has correctly maintained in all material respects all records required by
applicable Laws or government agencies in connection with any such Permits,
including without limitation, by the FDA, DEA and State Boards and pursuant
to the requirements of Title XVIII and XIX of the Social Security Act.
3.5 GMC's Stock. The authorized capital stock of GMC consists of: (a)
16,000,000 shares of preferred stock, par value $.10 per share ('GMC
Preferred Stock'), of which no shares have been issued; and (b) 30,000,000
shares of common stock, par value $.10 per share ('GMC Common Stock'), of
which (i) 15,429,746 shares are issued and outstanding, (ii) 535,254 shares
are reserved for issuance pursuant to outstanding options granted under
GMC's 1982 Incentive Stock Option Plan, 1985 Stock Option Plan for Medical
Directors, 1989 Stock Option and Restricted Stock Plan, 1990 Stock Option
Plan for Directors and 1994 Stock Option and Restricted Stock Plan for
Directors (collectively, 'GMC Option Plans'), (iii) 100,000 shares are
A-10
<PAGE>
reserved for issuance pursuant to the exercise of the Tripp Warrant, (iv)
493,500 shares are reserved for issuance pursuant to outstanding awards
under the Management Long Term Incentive Plan issued pursuant to the 1995
Equity Incentive Plan (the 'LTIP'), (v) no shares of which are held in
treasury and (vi) any changes to the foregoing caused by shares issued
pursuant to the exercise of outstanding stock options on the date hereof
(GMC Preferred Stock and GMC Common Stock being collectively referred to as
'GMC Stock'). All shares of GMC Stock which are outstanding are duly
authorized and validly issued, and are fully paid and nonassessable, and
were not issued in violation of, any preemptive rights. The number, price
and material terms of the options or awards outstanding under the GMC
Option Plans and the LTIP are set forth on Schedule 3.5. There are no
voting trusts or other arrangements or understandings to which GMC is a
party in favor of any Person with respect to the voting of GMC Stock or any
other interest in GMC. Except as identified on Schedule 3.5, there are no
outstanding options, puts, calls, warrants, subscriptions, stock
appreciation rights, phantom stock, cash performance units, or other
Contracts or Contract rights granted by GMC relating to the GMC Stock or to
the offering, sale, issuance, redemption or disposition of the GMC Stock or
any shares of capital stock or other securities of any of the GMC
Companies.
3.6 GMC Financial Statements. The consolidated balance sheets of GMC
and the GMC Subsidiaries as of May 31, 1995 and the end of the four fiscal
years immediately preceding and the related consolidated statements of
operations, cash flows (or changes in financial position) and changes in
stockholders' equity (deficit) of GMC and the GMC Subsidiaries for each of
the five fiscal years ended May 31, 1995, and the unaudited consolidated
balance sheets of GMC and the GMC Subsidiaries as of August 31, 1995,
November 30, 1995 and February 29, 1996 and the related consolidated
statements of operations and cash flows of GMC and the GMC Subsidiaries for
the respective periods then ended, including the related notes and
schedules, which are contained in the SEC Documents (as defined in Section
3.26), have been prepared in accordance with GAAP, complied in all material
respects as to form with applicable accounting requirements and the rules
and regulations of the SEC with respect thereto, are true and complete in
all material respects and fairly present the consolidated financial
condition and results of operations, cash flows (or changes in financial
position) and changes in stockholders' equity (deficit) of GMC and the GMC
Subsidiaries as of the dates and for the periods indicated subject, in the
case of the unaudited consolidated financial statements, to normal and
recurring year-end adjustments which were not and are not expected,
individually or in the aggregate, to have a Material Adverse Effect. The
consolidated balance sheets of GMC and the GMC Subsidiaries as of April 30,
1996 and the related consolidated statements of operations for the eleven
months ended April 30, 1996 which are attached on Schedule 3.6 have been
prepared by GMC in a manner consistent with GMC's past practices, are true
and complete in all material respects and fairly present the consolidated
financial condition and results of operations for the eleven months ended
April 30, 1996. The financial statements referred to in this section are
collectively referred to as 'GMC's Financial Statements.'
3.7 Assets. The GMC Companies own or lease all of the material Assets
necessary for the operation of the Businesses of the GMC Companies as
presently conducted. Each of the GMC Companies has good and valid title to
all of its Assets, free and clear of any material Encumbrance except for
those subject to security interests granted pursuant to loans or capital
leases identified on Schedule 3.11. To the Knowledge of the GMC Companies,
all Assets owned by, under lease to or otherwise used by any of the GMC
Companies are in good condition, ordinary wear and tear excepted.
3.8 Real Property.
(a) Schedule 3.8 sets forth a true and correct list of (i) the Real
Property owned, operated, managed, leased or otherwise occupied or
possessed by any GMC Company (collectively, the 'GMC Real Property'); (ii)
all material Contracts under which any GMC Company is lessor, lessee,
sublessor or sublessee of any Real Property; (iii) all options held or
given by any GMC Company and all Obligations on the part of any GMC
Company, to sell, purchase or acquire any
A-11
<PAGE>
interest in Real Property; and (iv) all material Contracts securing or
secured by any of the Real Property owned by any GMC Company, including,
without limitation, all mortgages, security agreements, notes or other
obligations.
(b) (i) Except as set forth in Schedule 3.8, each of the GMC Companies
has good and marketable title, insurable as such by a reputable title
insurance company doing business in the applicable jurisdiction at regular
rates, to each parcel of Real Property owned by it, free and clear of all
mortgages, pledges, liens, encumbrances and security interests, except (A)
those reflected or reserved against in GMC's Financial Statements, (B)
taxes and general and special assessments not in default and payable
without penalty or interest, (C) Permitted Liens (as hereinafter defined),
and (D) other liens, mortgages, pledges, encumbrances and security
interests which are not material to any Facility or to any other material
property.
(ii) 'Permitted Liens' shall mean (A) any Encumbrances disclosed on
the GMC's Financial Statements or on Schedule 3.8, (B) liens for Taxes,
assessments or charges of any governmental authority which are not yet due
and payable or which are being contested by any of the GMC Companies in
good faith, (C) mechanics', carriers', workmen's, repairmen's or other like
liens arising or incurred in the ordinary course of business, (D) liens
arising under original purchase price conditional sales contracts and
equipment leases with third parties entered into in the ordinary course of
business, (E) easements (including, without limitation, reciprocal easement
agreements and utility agreements), zoning and subdivision requirements,
rights of way, covenants, consents, agreements, reservations,
encroachments, variances, special exceptions, non-conforming uses and other
similar restrictions, charges or encumbrances (whether or not recorded)
that do not, individually or in the aggregate, materially impair the
continued use and operation of the GMC Real Property to which they relate
in the business of the GMC Companies as presently conducted, (F) liens
created by or existing from any litigation or legal proceeding that are
being contested by any of the GMC Companies in good faith or which are
otherwise disclosed or referred to in Schedule 3.16, and (G) extensions,
renewals or replacements of any lien for money borrowed by the GMC
Companies identified in Schedule 3.8.
(iii) The GMC Companies have no actual knowledge of claims of defects
of title to GMC Real Property that would materially adversely affect the
operations of any individual Facility or other material property.
(c) Except as set forth on Schedule 3.8, there are no material
violations of applicable Law or breaches of the terms of any material
Contract affecting the GMC Real Property.
(d) The GMC Companies have made available to Acquiror all of the files
relating to the GMC Real Property. No condemnation Proceeding is pending
or, to the best Knowledge and belief of the GMC Companies, threatened,
against any GMC Real Property. No material uninsured casualty has occurred
at any GMC Real Property within the last twelve months.
(e) Environmental Matters.
(1) To the Knowledge of the GMC Companies, the GMC Companies have
complied with applicable Environmental Laws except for such failures to
comply which would not have, and would not reasonably be expected to
have, a Material Adverse Effect.
(2) None of the GMC Companies has received any written notice of
any citation, summons, order, complaint, penalty, investigation or
review by any governmental entity or other Person (a) with respect to
any alleged violation by any GMC Company of any Environmental Law, or
(b) with respect to any alleged failure by any GMC Company to have any
environmental Permit or Consent required in connection with its business
or (c) with respect to any generation, treatment, storage, recycling,
transportation or disposal ('Management') of any Hazardous Substance,
except for such violations, failures of management which would not, and
would not reasonably be expected to, have a Material Adverse Effect.
A-12
<PAGE>
(3) To the Knowledge of the GMC Companies, no GMC Company has
received any written request for information, notice of claim, demand or
notification that it is or may be potentially responsible with respect
to any investigation or clean-up of any threatened or actual release of
any Hazardous Substance or any claim for material damages to persons or
property.
(4) To the Knowledge of the GMC Companies, there are no
environmental liens on any properties owned or leased by any GMC Company
and no governmental actions have been taken which would subject any of
such properties to such liens.
(5) To the Knowledge of the GMC Companies, no Hazardous Substance
has been emitted, discharged, disposed of, deposited, or otherwise
released by the GMC Companies and, to the knowledge of the GMC
Companies, there is no threat of release by the GMC Companies, in, on,
under or from any GMC Real Property (as hereafter defined) (including
but not limited to any surface or subsurface waters on or flowing
through any GMC Real Property) except for such emissions, discharges,
disposals, deposits or releases which would not, and would not
reasonably be expected to, have a Material Adverse Effect.
(6) To the Knowledge of the GMC Companies, no underground storage
tank located on or under any GMC Real Property, and the piping
appurtenant thereto, will result in any material Obligation to the GMC
Companies.
(7) To the Knowledge of the GMC Companies, no GMC Real Property is
or has ever been listed in the EPA's National Priorities List or in any
other list, schedule, log, inventory or record, however defined,
maintained by any governmental agency with respect to sites where
Hazardous Substances have or may have been disposed of or where there
is, has been or may be a release or threat of a release of any Hazardous
Substance and no off-site waste storage, treatment or disposal location
to which any of the GMC Companies' wastes have been taken, appears or
has appeared on any such list.
(8) For purposes of this Section 3.8(e), the term 'GMC Real
Property' shall also mean and include all facilities and properties now
or previously owned, operated, managed, leased or otherwise occupied or
possessed by any GMC Company.
3.9 Obligations. None of the GMC Companies has any material Obligations
other than (i) Obligations reflected on the consolidated balance sheet of GMC
and the GMC Subsidiaries as of April 30, 1996 (the 'April 1996 Balance Sheet'),
(ii) Obligations set forth in Schedule 3.9, (iii) Obligations under Contracts of
the type listed or not required to be listed on Schedule 3.8 or Schedule 3.11
provided that no such Obligation consisted of or resulted from a material
default under or violation of any such Contract, and (iv) Obligations incurred
since April 30, 1996 and not in breach in any material respect of any of the
representations and warranties made in Section 3.10 or the covenants of Section
6.1. Except as set forth in Schedule 3.9 and except to the extent specifically
reflected or reserved against in the Financial Statements, no GMC Company is
directly or indirectly liable, by guarantee or otherwise, upon or with respect
to, or obligated to guarantee or assume, any material Obligation of any Person,
except endorsements made in the ordinary course of business in connection with
the deposit of items for collection. Except as described on Schedule 3.9, no
material Obligations of any of the GMC Companies are guaranteed by any Person
other than another GMC Company.
3.10 Operations Since April 30, 1996. Except as disclosed on Schedule
3.10, since April 30, 1996, through the date of this Agreement the GMC Companies
have conducted their Businesses in the ordinary course consistent with past
practices and:
(a) Except in the ordinary course of its business consistent with its
past practices, none of the GMC Companies has (i) created or assumed any
material Encumbrance upon any of its businesses or Assets, (ii) incurred
any material Obligation, (iii) made any material loan or advance, (iv)
assumed, guaranteed or otherwise become liable for any material Obligation
of any Person, (v) committed for any material capital expenditure, (vi)
sold, abandoned or otherwise disposed of
A-13
<PAGE>
any of its material Assets, (vii) waived any material right or canceled any
debt or claim, (viii) assumed or entered into any material Contract other
than this Agreement and any other Contract contemplated herein, (ix)
increased, or authorized an increase in, the compensation or benefits paid
or provided to any of its directors, officers, employees, agents or
representatives, (x) directly or indirectly redeemed or acquired any of
GMC's Stock or any other securities of GMC, or (xi) declared, paid or set
aside for payment any dividend or other distribution.
(b) None of the GMC Companies has borrowed or lent any funds, leased
any equipment or Real Property, involving individually an amount exceeding
$250,000 for any one transaction or series of related transactions.
(c) There has been no Material Adverse Change.
3.11 Contracts.
(a) Set forth on Schedule 3.11 or in the list of material contracts of GMC
set forth in GMC's Annual Report on Form 10-K for the fiscal year ended May 31,
1995 is a true and correct list of all material Contracts to which any GMC
Company or the Assets of any GMC Company is bound or subject. None of the GMC
Companies is a party to or bound by (i) joint venture Contracts relating to the
Assets or Businesses of any GMC Company or by or to which any GMC Company or its
Assets are bound or subject or (ii) Contracts which limit, restrict or prohibit
the right of any GMC Company to conduct any business or to compete with any
other Person.
(b) True and correct copies of all such written Contracts have been made
available to Acquiror. Schedule 3.8 and Schedule 3.11 include a complete and
accurate description in all material respects of all oral Contracts meeting the
criteria set forth in subsection (a) above. All of the Contracts set forth on
Schedule 3.8 and Schedule 3.11 or referred to in this Agreement or in the other
Schedules hereto are in full force and effect and no GMC Company party thereto
is in material default thereunder nor, to the Knowledge of the GMC Companies, is
any other party to any such Contract in material default thereunder.
3.12 Intangibles. Except as described in Schedule 3.12, each GMC Company
has good and valid title to, or license to use, all of its respective material
Intangibles, free and clear of any Encumbrances and maintains or has access to
all source code listings for all material Software owned or licensed by any GMC
Company. To the Knowledge of the GMC Companies, none of the GMC Companies'
Intangibles or its past or current uses, has violated or infringed upon or is
violating or infringing upon any Intangible of any Person, and no Person is
violating or infringing upon any of the GMC Companies' Intangibles, except in
any such case which would not, and would not reasonably be expected to, have a
Material Adverse Effect. Except as described in Schedule 3.12, none of the
material GMC Companies' Intangibles is owned by or registered in the name of any
current or former stockholder, director, officer, employee, salesman, agent,
representative or contractor of any of the GMC Companies, nor does any such
Person have any interest therein or right thereto. Except as described on
Schedule 3.12, no GMC Company has licensed any Person to use any Intangibles of
any GMC Company, nor is any GMC Company obligated to pay any material royalties,
licensing fees or similar payments to any Person.
3.13 Employee Benefit Plans. Except as set forth in Schedule 3.13, no GMC
Company has established, maintained or contributed to any Employee Benefit Plans
and no GMC Company has proposed any Employee Benefit Plans which any GMC Company
will establish or maintain, or to which any GMC Company will contribute, and,
except as provided in this Agreement, no GMC Company has proposed any material
changes to any Employee Benefit Plans now in effect (all of the preceding
referred to collectively hereinafter as 'GMC's Employee Benefit Plans'). True
and correct copies and summaries and/or descriptions thereof of all of GMC's
Employee Benefit Plans have been provided to Acquiror. If permitted and/or
required by applicable Law, the GMC Companies have properly submitted or intend
to submit all of GMC's Employee Benefit Plans in good faith to meet the
applicable requirements of ERISA and/or the Code to the IRS for its approval
within the time prescribed therefor under applicable federal regulations. To the
Knowledge of the GMC Companies,
A-14
<PAGE>
favorable letters of determination of such tax-qualified status of Employee
Benefit Plans have been received from the IRS. GMC has made available a true and
correct copy of the most current Form 5500 and any other form or filing required
to be submitted to any governmental agency with regard to any of GMC's Employee
Benefit Plans. To the Knowledge of the GMC Companies, all of GMC's Employee
Benefit Plans are, and have been, operated in substantial compliance with their
provisions and with all applicable Laws including, without limitation, ERISA and
the Code and the regulations and rulings thereunder. Other than any defined
benefit pension set forth in the employment arrangement of Esther Ponnocks, none
of the GMC Companies has established, maintained, contributed to or has any
Obligations under any defined benefit plan or Multiemployer Plan (as defined in
ERISA or the Code). To the Knowledge of the GMC Companies, there are no pending
or threatened Proceedings which have been asserted or instituted against any of
GMC's Employee Benefit Plans, the Assets of any of the trusts under such plans,
the plan sponsor, the plan administrator or against any fiduciary of any of
GMC's Employee Benefit Plans (other than routine benefit claims) nor does any
GMC Company have Knowledge of facts which could form the basis for any such
Proceeding. There are no investigations or audits of any of GMC's Employee
Benefit Plans, any trusts under such plans, the plan sponsor, the plan
administrator or any fiduciary of any of GMC's Employee Benefit Plans which have
been threatened or instituted nor does any GMC Company have Knowledge of facts
which could form the basis for any such investigation or audit. Except as
disclosed in Schedule 3.13 or as contemplated by this Agreement, no event has
occurred which will result in any material Obligation of any GMC Company in
connection with any Employee Benefit Plan established, maintained, or
contributed to (currently or previously) by any GMC Company or by any other
entity which, together with such GMC Company, constitute elements of either (i)
a controlled group of corporations (within the meaning of Section 414(b) of the
Code), (ii) a group of trades or businesses under common control (within the
meaning of Sections 414(c) of the Code or 4001 of ERISA), (iii) an affiliated
service group (within the meaning of Section 414(m) of the Code), or (iv)
another arrangement covered by Section 414(o) of the Code.
3.14 Labor Matters. Except as set forth in Schedule 3.14, no GMC Company
is a party to any collective bargaining agreement or any other Contract with any
labor unions or any other representatives of any employee of any GMC Company.
Except as set forth in Schedule 3.14, no collective bargaining agreement is
currently being negotiated by or on behalf of any GMC Company. Except as
described on Schedule 3.14, there is no present or, to the Knowledge of the GMC
Companies, threatened walk-out or strike or any pending arbitration, unfair
labor practice, or other similar Proceeding with respect to any GMC Company or
its employees and there has been no such walk-out, strike, similar Proceeding or
litigation for the past eighteen months or which remains unresolved on the date
hereof. Except as set forth on Schedule 3.14, to the Knowledge of the GMC
Companies, during the past five years, or, if shorter, during the period of time
that GMC owned, directly or indirectly, any GMC Company, no union attempts to
organize or represent the employees of any GMC Company have been made, nor has
any GMC Company been notified by any labor organization that it is soliciting or
intends to solicit its employees to select a bargaining agent. Each of the GMC
Companies are in compliance in all material respects with all Laws respecting
employment practices.
3.15 Taxes. Accurate and complete copies of all material federal, state,
local and foreign corporate income, excise, franchise, sales and other material
Tax returns and reports filed by any of the GMC Companies with respect to their
last five fiscal years have been made available to Acquiror. Except as described
on Schedule 3.15, (a) GMC and each of GMC's Subsidiaries have properly and
timely filed all Tax returns and reports required to be filed by them, all of
which were accurately prepared and completed; (b) GMC and each of GMC's
Subsidiaries have properly withheld from payments to its employees, agents,
representatives, contractors and suppliers all amounts required by Law to be
withheld; (c) GMC and each of GMC's Subsidiaries have paid all Taxes required to
be paid by them and have made adequate provision in GMC's Financial Statements
for Taxes not yet due and payable or Taxes which are being contested in good
faith by appropriate Proceedings diligently prosecuted; (d) no audit of any of
the GMC Companies by any governmental taxing authority is currently pending or,
to the Knowledge of the GMC Companies, threatened; (e) no notice of any Tax
A-15
<PAGE>
audit, or of any Tax deficiency or adjustment, has been received by any of the
GMC Companies, and, to the Knowledge of the GMC Companies, there is no basis for
any Tax deficiency or adjustment to be assessed against any of the GMC
Companies; (f) there are no Contracts or waivers in effect that provide for an
extension of time for the assessment of any Tax against any of the GMC
Companies; (g) there are no federal Tax elections under any section (or
predecessor section) of the Code in effect with respect to any of the GMC
Companies; and (h) none of the GMC Companies is a party to, is bound by, or has
any Obligation under any Tax sharing agreement or similar Contract or
arrangement excluding any such Contract or arrangement to which only GMC
Companies are parties or are bound. There is no dispute or claim pending or, to
the Knowledge of the GMC Companies, threatened concerning any material Tax
liability of any of the GMC Companies. None of the GMC Companies has been a
member of an affiliated group filing a consolidated federal income tax return
(other than the group the common parent of which is GMC) or has any liability
for the Taxes of any Person other than the GMC Companies under Treas. Reg.
Section 1.1502-6 or any similar provision of state, local or foreign Law, as a
transferee or successor, by contract or otherwise.
3.16 Proceedings and Judgments. Except as described on Schedule 3.16, (a)
except for workers' compensation claims and Proceedings for which damages of
less than $50,000 are claimed, there is no Proceeding pending or, to the
Knowledge of the GMC Companies, threatened against or relating to any of the GMC
Companies, any of its Businesses or Assets, which, if adversely determined,
would, or would reasonably be expected to, have a Material Adverse Effect, (b)
there are no outstanding Judgments against any of the GMC Companies or any of
its businesses or Assets or against any of its officers, directors or employees,
which would or would reasonably be expected to have a Material Adverse Effect.
As to each item described on Schedule 3.16, accurate and complete copies of all
relevant pleadings, judgments, orders and correspondence have been made
available to Acquiror. Summaries of all open workers' compensation claims have
been delivered to Acquiror.
3.17 Insurance. All Insurance Policies held by or on behalf of each GMC
Company insure against risks of the kind customarily insured against and in
amounts customarily carried by insureds similarly situated. All such Insurance
Policies are enforceable and in full force and effect. No GMC Company is in
default with respect to any provision contained in any such Insurance Policy in
a manner which could impair coverage thereunder in any material respect nor has
any GMC Company failed to give any material notice or present any material claim
under any such Insurance Policy in due and timely fashion. No GMC Company has
received a notice of cancellation, non-renewal or audit of any such Insurance
Policy which has not or will not be cured on or before Closing Date.
3.18 Related Party Transactions. Except as disclosed in the SEC Documents,
there are no real estate leases, personal property leases, loans, guarantees, or
other material Contracts, arrangements or transactions of any nature between any
of the GMC Companies and any of stockholders, officers, directors or affiliates
(as such term is defined for the purpose of the Exchange Act) of any of any of
the GMC Companies (excluding oral Contracts for 'at will' employment with such
persons in their capacities as employees), or between any of the GMC Companies
and any Person which is an affiliate or an immediate family member of any such
stockholder, officer, director or affiliate.
3.19 Questionable Payments. To the Knowledge of the GMC Companies, neither
any GMC Company, nor any of the current or former stockholders, directors,
officers, employees, agents or representatives of any GMC Company, directly or
indirectly, have (a) used any funds of any of the GMC Companies for any illegal
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (b) used any corporate funds of any of the GMC Companies for
any direct or indirect unlawful payments to any foreign or domestic government
officials or employees, (c) violated any provision of the Foreign Corrupt
Practices Act of 1977, (d) established or maintained any unlawful or unrecorded
fund of corporate monies or other assets of the GMC Companies, (e) made any
false or fictitious entries on the books and records of any of the GMC
Companies, (f) made on behalf of any GMC Company or received any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment of any nature
other than third party payments subsequently revised, adjusted or disallowed on
routine Medicare, Medicaid or other third party audits, (g) offered, paid,
submitted for payment, solicited or received any remuneration in violation of
Medicare or Title XIX of the Social Security Act
A-16
<PAGE>
('Medicaid'), including without limitation, the Medicare and Medicaid Patient
and Program Protection Act of 1987, the Medicare and Medicaid Anti-Kickback Act,
the Federal False Claims Act and Federal Laws limiting certain physician
referrals (the 'Stark Laws'), or (h) made any material favor or gift which is
not deductible for federal income tax purposes using funds of any of the GMC
Companies (collectively a 'Questionable Payment').
3.20 Suppliers and Customers. Set forth on Schedule 3.20 is a list of each
single customer or supplier which provides more than five percent (5%) of the
sales or purchases of the GMC Companies (each, a 'material customer or
supplier'). The relationships of the GMC Companies with its material customers
or suppliers are good commercial working relationships. Except as described on
Schedule 3.20, during the last 12 months, no material customer or supplier has
canceled or otherwise terminated, or threatened in writing to cancel or
otherwise terminate, its relationship with any GMC Company or has during the
last 12 months decreased materially, or threatened to decrease or limit
materially, its services, supplies or materials to any GMC Company or its usage
of the services or products of any GMC Company. No GMC Company has any Knowledge
(a) that any material customer or supplier intends to cancel or otherwise modify
its relationship with any GMC Company in any material respect or to decrease
materially or limit its services, supplies or materials to any GMC Company or
its usage of the services or products of any GMC Company or (c) that the
consummation of the transactions contemplated by this Agreement will adversely
affect in any material respect the relationship with any such material customer
or supplier.
3.21 Brokerage Fees. Except as described on Schedule 3.21, no broker,
finder, agent or similar intermediary has acted for or on behalf of any GMC
Company in connection with this Agreement or the transactions contemplated
hereby, and no broker, finder, agent or similar intermediary is entitled to any
broker's fee, finder's fee, or similar fee or commission in connection therewith
based on any agreement, arrangement or understanding with any GMC Company or any
action taken by or on behalf of any GMC Company.
3.22 Potential Conflicts of Interest. To the Knowledge of the GMC
Companies, no physician or 'family member' has a 'financial interest' in any GMC
Company (as such terms are defined in 42 U.S.C. Section 1395 nn and implementing
regulations) other than holdings of GMC Common Stock purchased or received in
the ordinary course.
3.23 Third Party Payment Contracts. In addition to the Permits to provide
services under the Medicare, Pennsylvania and New Jersey Medicaid Programs and
other programs specified in Section 3.4, each GMC Company, each Facility and
each Business conducted by a GMC Company, where appropriate, is an approved
provider of services in the third party payment programs identified in Schedule
3.23(a), including without limitation: (a) Pennsylvania and New Jersey Blue
Cross, Pennsylvania and New Jersey Blue Shield; and (b) other payor plans.
Except as set forth on Schedule 3.23(c), no action is pending, or to the
Knowledge of the GMC Companies threatened, to suspend, limit, terminate, fail to
renew or revoke the status of any such GMC Company, Facility or Business as a
provider in any such program, and no such GMC Company, Facility or Business has
been provided notice by any such third-party payor of its intention to suspend,
limit, terminate, revoke or fail to renew any contractual arrangement with such
GMC Company, Facility or Business as a participating provider of services. No
known and unresolved allegations have been made regarding the conduct of any GMC
Company, Facility or Business, which if true, would likely result in a
suspension, limitation, termination or failure to renew any contractual
arrangement between any such third party payor and any such GMC Company,
Facility or Business. Except as set forth on Schedule 3.23(d), since May 31,
1991, no GMC Company, Business or Facility has ever been denied, disapproved or
prohibited from participating in any payment plan or payor program and no GMC
Company, Business or Facility has ever not applied for participation in a
payment plan or payor program because it believed it would not be accepted for
participation or to receive payment.
3.24 Third Party Payment Filings. To the extent required for the conduct
of its respective Businesses and to receive payment for all services rendered,
each GMC Company has filed within the required time substantially all claims
required to be filed to secure payment under the Medicare,
A-17
<PAGE>
Medical Assistance, Blue Cross and other third-party payment programs. At the
time of filing, all such claims were and continue to be true and accurate.
3.25 No Criminal Proceedings. Except as described in Schedule 3.25, there
are no pending or, to the Knowledge of the GMC Companies, threatened actions,
charges, indictments, information, or investigation of any GMC Company or of any
of their agents, officers or employees which involve allegations of criminal
violations of any Law, including without limitation, Medicare or Medicaid.
3.26 SEC Documents. GMC has filed all registration statements, proxy
statements, reports and other filings, including, without limitation, (i) its
Annual Reports on Form 10-K for the fiscal years ended May 31, 1993, 1994 and
1995, respectively, (ii) its Quarterly Reports on Form 10-Q for the periods
ended August 31, 1995, November 30, 1995 and February 29, 1996, (iii) all proxy
statements relating to meetings of GMC's stockholders (whether annual or
special) held since May 31, 1993, (iv) all other forms, reports and registration
statements and, in each case, all amendments thereto required to be made, which
it was required to file with the SEC (collectively, 'SEC Documents'). True and
correct copies of all SEC Documents filed by or on behalf of GMC since June 1,
1993 have been made available to Acquiror. Except as set forth on Schedule 3.26,
all SEC Documents were prepared in all material respects in accordance with the
requirements of the Securities Act and the Exchange Act and the rules and
regulations thereunder, and, as of its date of filing, none of such documents
contained any untrue statement of material fact, or omitted any material fact
required to be stated therein or necessary to make the statements therein not
misleading. GMC has heretofore furnished to Acquiror complete and correct copies
of all amendments and modifications that have not been filed by GMC with the SEC
to all Contracts, documents and other instruments that previously had been filed
by GMC with the SEC and are currently in effect. No GMC Company (other than GMC)
is required to file any form, report or other document with the SEC.
3.27 Absence of Anti-Takeover Plans. Neither GMC nor any GMC Subsidiary
has in effect any plan, scheme, device or arrangement commonly or colloquially
known as a 'poison pill' or 'anti-takeover' plan or any similar plan, scheme,
device or arrangement other than provisions providing for a staggered Board of
Directors.
3.28 Information Supplied. At the date the Proxy Statement is first mailed
to GMC's stockholders or at the time of the meeting of GMC's stockholders held
to vote on approval and adoption of this Agreement, none of the information
contained or incorporated by reference in the Proxy Statement shall contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, except
that no representation or warranty is made by GMC with respect to statements
made or incorporated by reference therein based on information supplied by
Acquiror or Newco specifically for inclusion or incorporation by reference
therein. The Proxy Statement shall comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by GMC with
respect to statements made or incorporated by reference therein based on
information supplied by Acquiror or Newco specifically for inclusion or
incorporation by reference therein.
SECTION 4: REPRESENTATIONS OF ACQUIROR AND NEWCO
Acquiror and Newco, jointly and severally, represent and warrant to GMC as
follows:
4.1 Organization. Acquiror is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania. Newco is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Each of Acquiror
and Newco has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby upon the
terms and conditions herein provided. Acquiror owns directly or indirectly
all of the outstanding capital stock of Newco.
A-18
<PAGE>
4.2 Authorization of Agreement. The execution, delivery, and
performance of this Agreement by Acquiror and Newco, and the consummation
by Acquiror and Newco of the transactions contemplated hereby, (a) have
been authorized by all necessary corporate actions by Acquiror's and
Newco's respective boards of directors, (b) do not constitute a violation
of or default under (either immediately or upon notice, lapse of time or
both) (i) the charter or bylaws of Acquiror or Newco, (ii) any material
Permits held by Acquiror or Newco or (iii) any material Contract to which
Acquiror or Newco is a party or by which Acquiror or Newco is bound, (c) do
not constitute a violation of any Law or Judgment which is applicable to
Acquiror or Newco, the violation of which would, or would reasonably be
expected to, have a material adverse effect on Acquiror and its
Subsidiaries taken as a whole, (d) do not accelerate or otherwise modify,
or give any Person the right to accelerate or modify, any material
Obligation of Acquiror or Newco, and (e) do not require the Consent of any
Person to be obtained by Acquiror or Newco except for (i) the filing with
the SEC of such reports under Section 13(a) of the Exchange Act as may be
required in connection with this Agreement and the transactions
contemplated by this Agreement, (ii) filings and approvals under the
Hart-Scott-Rodino Act, and (iii) the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware. This Agreement
constitutes the valid and legally binding agreement of Acquiror and Newco,
enforceable against Acquiror and Newco in accordance with its terms except
as such enforceability may be limited by applicable bankruptcy, insolvency
and similar Laws affecting creditors' rights generally and to general
principles of equity (whether considered in a proceeding in equity or at
Law).
4.3 Proceedings. There are no Proceedings existing, and neither
Acquiror nor Newco has any Knowledge of any such Proceedings pending or
threatened, against Acquiror or Newco, which would prevent or impair
Acquiror's or Newco's ability to consummate the transactions contemplated
herein.
4.4 Brokerage Fees. Except for Alex. Brown & Sons Incorporated, no
broker, finder, agent or similar intermediary has acted for or on behalf of
Acquiror or Newco in connection with this Agreement or the transactions
contemplated hereby, and no broker, finder, agent or similar intermediary
is entitled to any broker's fee, finder's fee, or similar fee or commission
in connection therewith based on any agreement, arrangement or
understanding with Acquiror or Newco or any action taken by Acquiror or
Newco.
4.5 Financing. Acquiror has the ability to finance the payment of the
Merger Consideration with cash on hand or available under existing lines of
credit or credit facilities.
4.6 Information Supplied. At the date the Proxy Statement is first
mailed to GMC's stockholders or at the time of the meeting of GMC's
stockholders held to vote an approval and adoption of this Agreement, none
of the information supplied or to be supplied by Acquiror or Newco for
inclusion or incorporation by reference in the Proxy Statement shall
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading.
SECTION 5: APPROVAL OF STOCKHOLDERS
5.1 Stockholders Meeting. As soon as reasonably practicable after the date
of the Agreement, GMC shall duly call, give notice of, convene and hold a
meeting of the holders of the GMC Common Stock (the 'Stockholders Meeting') for
the purpose of approving this Agreement and the transactions contemplated by
this Agreement. Subject to the fiduciary duties of the Board of Directors of GMC
to the Stockholders of GMC under applicable Law, as advised by counsel, the
Board of Directors of GMC shall recommend to its Stockholders that they approve
the Merger and the other transactions contemplated hereby and shall solicit
proxies from its Stockholders in favor of the Merger for use at the Stockholders
Meeting. Acquiror shall vote all shares of GMC Common Stock held by it in favor
of approval of the Merger. Acquiror shall take all actions necessary to obtain
the approval of Acquiror as the sole stockholder of Newco of this Agreement and
the transactions contemplated hereby.
A-19
<PAGE>
5.2 Preparation of the Proxy Statement. As soon as reasonably practicable
after the date of this Agreement, GMC shall reasonably prepare and file a
preliminary Proxy Statement with the SEC and use commercially reasonable efforts
to respond to any comments of the SEC or its staff and to cause the Proxy
Statement to be mailed to GMC's stockholders as promptly as practicable after
responding to all such comments to the satisfaction of the staff. GMC shall give
Acquiror and Newco and their counsel the opportunity to review the Proxy
Statement prior to its being filed with the SEC and shall give Acquiror and
Newco and their counsel the opportunity to review all amendments and supplements
to the Proxy Statement and all responses to requests for additional information
and replies to comments prior to their being filed with, or sent to, the SEC.
Acquiror and Newco shall reasonably cooperate in the preparation of the Proxy
Statement. GMC shall notify Acquiror promptly of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and shall
supply Acquiror with copies of all correspondence between GMC or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement or the Merger. If at any time prior to the
Stockholders Meeting there shall occur any event that should be set forth in an
amendment or supplement to the Proxy Statement, GMC shall promptly prepare and
mail to its stockholders such an amendment or supplement. GMC shall not mail any
Proxy Statement with respect to this Agreement and the transactions contemplated
hereby, or any amendment or supplement thereto, to which Acquiror reasonably
objects unless GMC is advised by its counsel that the mailing of such Proxy
Statement and any amendment or supplement thereto in the form proposed by GMC is
required by applicable Law.
SECTION 6: CERTAIN OBLIGATIONS OF GMC PENDING CLOSING
6.1 Conduct of GMC's Businesses. Between the date of this Agreement and
the Closing Date, except with the prior written consent of Acquiror:
(a) GMC shall, and shall cause each of the GMC Companies to, conduct
its businesses in a diligent manner consistent with past practices; GMC
shall not, and shall cause each of the GMC Companies not to, make any
material change in its business practices; and GMC shall, and shall cause
each of the GMC Companies to, in good faith, use commercially reasonable
efforts to (i) preserve its business organizations intact, (ii) keep
available the services of its current officers and key employees and (iii)
maintain the good will of its suppliers, customers and other Persons having
business relations with any of the GMC Companies. When requested by
Acquiror, GMC and each of the GMC Companies shall consult with Acquiror as
to the management of GMC's and the GMC Companies' respective Businesses,
Facilities and affairs.
(b) Except in the ordinary course of its businesses consistent with
past practices, GMC shall not, and shall cause each of the GMC Companies
not to, (i) create or assume any material Encumbrance upon any of its
businesses or Assets, (ii) incur any Obligation, (iii) make any material
loan or advance, (iv) assume, guarantee or otherwise become liable for any
material Obligation of any Person, (v) commit for any material capital
expenditure, (vi) lease, sell, transfer, abandon or otherwise dispose of
any of its material Assets, (vii) waive any material right or cancel any
debt or claim, (viii) assume or enter into any Contract other than this
Agreement (and any other Contract contemplated herein), (ix) increase, or
authorize an increase in, the compensation or benefits paid or provided to
any of its directors, officers, employees, agents or representatives, (x)
directly or indirectly acquire any GMC Common Stock or any other securities
of GMC, or (xi) declare, pay or set aside for payment any dividend or other
distribution. Notwithstanding the provisions of this Section 6.1, GMC may
extend the term of its existing line of credit agreement with Commerce Bank
and increase such line to an amount not to exceed $8,500,000.
(c) Even in the ordinary course of their businesses consistent with
past practices, GMC shall not, and shall cause each of the GMC Companies
not to, borrow or lend any funds, purchase any goods or services, lease any
equipment, incur any Obligation, or enter into any Contract (excluding
customer Contracts, working capital advances, sale of accounts receivable
transactions, and related commitments entered into in the ordinary course
of business consistent with past practices) or other transaction, or do any
of the other things described in paragraph (b)
A-20
<PAGE>
above involving individually an amount exceeding $250,000 for any one
transaction or series of related transactions. Acquiror shall not
unreasonably withhold its consent to any request for approval of any
transaction subject to this paragraph (c).
(d) GMC shall not, and shall cause each of the GMC Companies not to,
(i) adopt, sponsor or enter into any new Employee Benefit Plan or
employment agreement or modify any employment agreement or, except as
required by applicable Law, any existing Employee Benefit Plan, (ii) except
as provided in Section 6.5, participate in any merger, consolidation,
division, or reorganization (other than the Merger), (iii) engage in any
new type of business, (iv) acquire the business or any bulk Assets of any
Person, (v) completely or partially liquidate or dissolve, (vi) terminate
any material part of its Businesses, (vii) issue, sell, transfer, pledge,
hypothecate or otherwise encumber or dispose of any GMC Stock or any of the
capital stock or other securities of any GMC Subsidiary, (viii) except in
consultation with and with the prior written consent of Acquiror (which
shall not be withheld unreasonably), enter into or renew any union or
collective bargaining agreement or modify any existing union or collective
bargaining agreement, or (ix) settle or compromise any material Proceeding.
(e) GMC shall not, and shall not permit any of the GMC Companies to,
amend its charters or bylaws, partnership agreements or other
organizational documents, as applicable.
(f) GMC shall not, and shall cause each of the GMC Companies not to,
redeem, retire or purchase, or create, grant or issue any Contracts,
options, warrants or other rights with respect to, any GMC Stock or any of
the capital stock of any of the GMC Companies or any other securities of
GMC or any of the GMC Companies, or create, grant or issue any stock
appreciation rights, phantom shares, cash performance units or other
similar rights. Without limiting the generality of the foregoing, GMC shall
not issue, or permit the further accrual of, any options or awards under
the GMC Option Plans, the LTIP or any employment agreement.
(g) Neither GMC nor any of its Subsidiaries shall enter into any
Contract which commits any of them to take any action or omit to take any
action which would be inconsistent with any of the provisions of this
Section 6.1.
6.2 Access to Information. (a) Between the date of this Agreement and the
Closing Date, GMC shall, and shall cause each of the GMC Companies to (i) permit
Acquiror and its authorized representatives to have reasonable access to each of
the GMC Companies' facilities and offices during normal business hours, to
conduct such environmental studies as Acquiror shall reasonably deem necessary
or appropriate, to observe each of the GMC Companies' operations, to meet with
each of the GMC Companies' officers, employees, accountants, counsel, financial
advisors and other representatives, to contact each of the GMC Companies'
customers and suppliers and to audit, examine and copy each of the GMC
Companies' files, books, records and other documents and papers, and (ii)
provide to Acquiror and its authorized representatives all information
concerning each of the GMC Companies and its Businesses, Assets and financial
condition, which Acquiror reasonably requests. Acquiror shall pay its own
out-of-pocket costs and expenses with respect to any such investigation.
(b) GMC shall permit Acquiror and its representatives to make
reasonable investigations and inquiries concerning the status, scope and
nature of all Proceedings pending or threatened against any GMC Company, or
which in any way affect the Businesses of any GMC Company or their Assets.
GMC shall, and shall cause its representatives to, assist Acquiror and its
representatives in conducting such investigations and inquiries, including
without limitation, attending any meetings with government representatives.
Without limiting the generality of the foregoing, GMC expressly authorizes
Acquiror and its representatives to communicate directly with such
government representatives. Acquiror shall not institute any conversations
or meetings with any governmental representative (excluding conversations
or meetings to obtain Permits in the ordinary course) involving any GMC
Company without first providing GMC with an opportunity to initiate and
participate in such conversations and meetings. Acquiror shall not initiate
or communicate directly with any government representatives with respect to
any criminal Proceeding involving any GMC Company without the presence of a
representative of GMC.
A-21
<PAGE>
6.3 Compliance with ISRA. With respect to each GMC Real Property located
in the State of New Jersey, the GMC Companies shall comply with the terms and
conditions of the Industrial Site Recovery Act, N.J.S.A. 13:1K-6, et seq.
('ISRA') and any and all regulations, orders or directives issued pursuant
thereto and, as a condition precedent to Acquiror's obligation to complete
Closing, shall obtain from the NJDEP, a letter of non-applicability or written
acceptance of a Negative Declaration in accordance with Law and deliver such
documents to Acquiror no later than ten (10) days before Closing. Any filing
fees, professional fees and other expenses incurred by any of the GMC Companies
in complying with ISRA shall be the GMC Companies' sole responsibility, which
responsibility shall survive the Closing or termination of this Agreement.
6.4 Material Consents. Between the date of this Agreement and the Closing
Date, GMC and each of its Subsidiaries shall in good faith use commercially
reasonable efforts to (a) obtain all Consents required to be obtained by GMC of
all governmental regulatory authorities, lenders, lessors, vendors, customers,
and other Persons necessary to permit the Merger and other transactions
contemplated by this Agreement to be consummated without violating any Law to
which GMC or any of its Subsidiaries is bound, any Permit held by GMC or any of
its Subsidiaries or any loan agreement, lease or other material Contract to
which GMC or any of its Subsidiaries is a party or by which GMC or any of its
Subsidiaries is bound, (b) give the notices and make the filings described on
Schedule 3.2 and (c) request estoppel certificates from all lenders and lessors
as reasonably requested by Acquiror.
6.5 Acquisition Proposals. Neither GMC nor any GMC Company shall, directly
or indirectly, through any stockholder, officer, director, partner, employee,
agent, representative or otherwise, solicit, initiate or encourage the
submission of any proposal or offer (including, without limitation, any tender
offer) from any Person relating to any acquisition or purchase of all or (other
than in the ordinary course of business) any significant portion of the Assets
of, or any equity interest in, GMC or any GMC Company or any business
combination with GMC or any GMC Company (collectively, an 'Acquisition
Proposal'), or participate in any negotiations regarding, or furnish to any
other Person any information with respect to, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any effort or
attempt by any other Person to do or seek any of the foregoing. GMC immediately
shall cease and cause to be terminated all existing discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing. GMC
shall notify Acquiror promptly if any such proposal or offer, or any inquiry or
contact with any Person with respect thereto, is made and shall, in any such
notice to Acquiror, indicate in reasonable detail the identity of the Person
making such proposal, offer, inquiry or contact and the material terms and
conditions of such proposal, offer, inquiry or contact. Notwithstanding the
foregoing, GMC may furnish information and access, or cause such information or
access to be furnished, in response to unsolicited requests therefor, to any
Person or group (each a 'Potential Acquiror'), including parties with whom GMC
or its representatives have had discussions on any basis prior to the date
hereof, pursuant to appropriate confidentiality agreements, and may (and may
cause its representatives to) participate in discussion and negotiate with such
Potential Acquirors concerning any Acquisition Proposal only if (i) the
Potential Acquiror has, in circumstances not involving any prior breach by GMC
of any of the foregoing provisions, made a bona fide Acquisition Proposal, and
(ii) the Board of Directors of GMC determines in its good faith judgment in the
exercise of its fiduciary duties to the stockholders of GMC under applicable
state Law based upon the advice of its legal counsel and after consultation with
its financial advisors, that such action is required by such fiduciary duties.
In the event GMC shall take any action pursuant to the foregoing sentence, it
shall promptly inform Acquiror as to that fact and shall furnish to Acquiror the
specifics thereof. GMC may not enter into a definitive agreement for an
Acquisition Proposal with a Potential Acquiror with which it is permitted to
negotiate pursuant to this Section except as provided in Section 11.1(e).
Nothing contained in this Agreement shall prohibit GMC and its directors from
(a) issuing a press release or otherwise publicly disclosing the terms of any
Acquisition Proposal, if required by applicable Law, (b) making to its
stockholders any recommendation and related filings with the SEC as required by
Rules 14e-2 and 14d-9 under the Exchange Act with respect to any tender offer or
(c) making any disclosure to GMC's stockholders which the Board of Directors of
GMC determines, after consultation with outside counsel, is required under
applicable Law (including, without limitation, Laws relating to the fiduciary
duties of directors).
A-22
<PAGE>
6.6 Hart-Scott-Rodino Filings. As promptly as practicable after the date
of this Agreement, GMC shall make all filings under the Hart-Scott-Rodino Act
which are required in connection with the transactions contemplated by this
Agreement. GMC shall cooperate with Acquiror in connection with Acquiror's
filings under the Hart-Scott-Rodino Act including, without limitation, providing
all information reasonably requested by Acquiror and taking all reasonable
actions to cause the early termination of all applicable waiting periods.
6.7 Reports. GMC shall provide Acquiror with GMC's Financial Statements
for the year ended May 31, 1996 and any interim period thereafter as and when
such Financial Statements are completed. As of its date, none of such documents
will contain any untrue statement of material fact or omit any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
6.8 Advice of Changes. Between the date of this Agreement and the Closing
Date, GMC shall promptly advise Acquiror of any fact of which it obtains
Knowledge and which, if existing or known as of the date of this Agreement,
would have been required to be set forth or disclosed in or pursuant to this
Agreement (it being understood that such advice shall not be deemed to modify
GMC's representations, warranties or covenants contained in this Agreement).
6.9 Reasonable Efforts. Subject to the fiduciary duties of the Board of
Director's of GMC to GMC's Stockholders under applicable Laws as advised by
counsel, GMC shall use all reasonable efforts, and cause each GMC Company to use
all reasonable efforts, to consummate the Merger and the transactions
contemplated by this Agreement as of the earliest practicable date including,
without limitation, causing the conditions set forth in Section 9 to be
satisfied, and GMC shall not take, cause or, to the best of its reasonable
ability permit to be taken, and shall not permit or cause any GMC Company to
take, cause or permit to be taken, any action that would impair the prospect of
completing the Merger and the transactions contemplated by this Agreement.
SECTION 7: CERTAIN OBLIGATIONS OF ACQUIROR PENDING CLOSING
7.1 Hart-Scott-Rodino Filings. As promptly as practicable after the date
of this Agreement, Acquiror shall make all filings under the Hart-Scott-Rodino
Act which are required in connection with the transactions contemplated by this
Agreement. Acquiror shall cooperate with GMC in connection with GMC's filings
under the Hart-Scott-Rodino Act, including without limitation, providing all
information reasonably requested by GMC and taking all reasonable actions to
cause the early termination of all applicable waiting periods.
7.2 Advice of Changes. Between the date of this Agreement and the Closing
Date, Acquiror shall promptly advise GMC in writing of any fact of which it
obtains Knowledge and which, if existing or known as of the date of this
Agreement, would have been required to be set forth or disclosed in or pursuant
to this Agreement (it being understood that such advice shall not be deemed to
modify Acquiror's representations, warranties or covenants contained in this
Agreement).
7.3 Reasonable Efforts. Acquiror and Newco shall use all reasonable
efforts to consummate the Merger and the transactions contemplated by this
Agreement as of the earliest practicable date including, without limitation,
causing the conditions set forth in Section 8 to be satisfied, and neither
Acquiror nor Newco shall take, or cause or to the best of its reasonable ability
permit to be taken, any action that would impair the prospect of completing the
Merger and the transactions contemplated by this Agreement.
7.4 Material Consent and Permits. Between the date of this Agreement and
the Closing Date, Acquiror and Newco shall in good faith cooperate with GMC in
its efforts to obtain the Consents and Permits referenced in Section 6.4,
provided, however, that neither Acquiror nor Newco shall (i) be required to
assume, guaranty or act as surety for the Obligation of any Person, (ii) breach
or violate any Contract to which Acquiror, Newco or any of their respective
Subsidiaries is a party or by which any of them are bound or (iii) consent to
the amendment of any Contract or Permit which Acquiror determines in its sole
discretion would be adverse to the GMC Companies or the Acquiror.
A-23
<PAGE>
SECTION 8: CONDITIONS PRECEDENT TO GMC'S CLOSING OBLIGATIONS
Each obligation of GMC to be performed on the Closing Date shall be subject
to the satisfaction of each of the conditions stated in this Section 8, except
to the extent that such satisfaction is waived by GMC in writing.
8.1 Stockholder Approval. The Merger shall have been duly approved by the
affirmative vote of the holders of a majority of the outstanding shares of GMC
Common Stock in accordance with Section 251 of the DGCL.
8.2 Acquiror's and Newco's Representations. Each representation and
warranty made by Acquiror and Newco in this Agreement shall be true and correct
(a) in all material respects with respect to representations and warranties
which are not modified by materiality and (b) in all respects with respect to
representations and warranties which are modified by materiality, in either
case, on and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date except for those representations and
warranties made as of a specified date which shall continue to be true and
correct as of such date.
8.3 Acquiror's and Newco's Performance. All of the terms and conditions of
this Agreement to be satisfied or performed by Acquiror or Newco on or before
the Closing Date shall have been satisfied or performed in all material
respects.
8.4 Closing Documents. Acquiror and Newco shall have delivered all of the
documents provided for in Section 10.2.
8.5 Hart-Scott-Rodino Waiting Periods. All applicable waiting periods with
respect to the Merger under the Hart-Scott-Rodino Act shall have expired.
8.6 Legal Opinion. Newco shall have received the favorable opinion of
Blank Rome Comisky & McCauley, counsel to Acquiror, dated the Closing Date,
addressed to GMC and in form and substance materially acceptable to the parties.
SECTION 9: CONDITIONS PRECEDENT TO ACQUIROR'S CLOSING OBLIGATIONS
Each obligation of Acquiror to be performed on the Closing Date shall be
subject to the satisfaction of each of the conditions stated in this Section 9,
except to the extent that such satisfaction is waived by Acquiror in writing.
9.1 Material Consents and Permits. On or before the Closing Date, GMC,
Acquiror and/or Newco shall have received all Consents and Permits necessary to
permit the Merger and the other transactions contemplated by this Agreement to
be consummated. All such Consents and Permits shall be in form and substance
reasonably satisfactory to Acquiror and all applicable notice periods shall have
expired.
9.2 Stockholder Approval. The Merger shall have been duly approved by the
affirmative vote of the holders of a majority of the outstanding shares of GMC
Common Stock in accordance with Section 251 of the DGCL.
9.3 GMC's Representations. Each representation and warranty made by GMC in
this Agreement shall be true and correct (a) in all material respects with
respect to representations and warranties which are not modified by materiality
(excluding the representations and warranties set forth in the first two
sentences of Section 3.5) and (b) in all respects with respect to
representations and warranties which are set forth in the first two sentences of
Section 3.5 or which are modified by materiality, in any case, as of the date of
this Agreement, and as of the Closing Date with the same force and effect as
though made on and as of the Closing Date except for those representations and
warranties made as of a specified date which shall continue to be true and
correct as of such date.
9.4 GMC's Performance. All of the terms and conditions of this Agreement
to be satisfied or performed by GMC on or before the Closing Date shall have
been satisfied or performed in all material respects.
A-24
<PAGE>
9.5 Closing Documents. GMC shall have delivered all of the documents
provided for in Section 10.1.
9.6 Absence of Proceedings. No Proceeding shall have been instituted
(excluding any such action, suit or proceeding initiated by or on behalf of
Acquiror or any of its Subsidiaries or affiliates), no Judgment or order shall
have been issued, and no new Law shall have been enacted, on or before the
Closing Date, in any event which seeks damages which would or would be
reasonably expected to result in a Material Adverse Effect as a result of, or
which seeks to or does prohibit or restrain, the consummation of the Merger or
any of the other transactions contemplated by this Agreement.
9.7 No Material Adverse Changes. There shall not have been any Material
Adverse Change, or any event or omission that is reasonably likely to have a
Material Adverse Effect, between April 30, 1996 and the Closing Date.
9.8 Hart-Scott-Rodino Waiting Periods. All applicable waiting periods with
respect to the Merger under the Hart-Scott-Rodino Act shall have expired.
9.9 Legal Opinion. Acquiror shall have received the favorable opinions of
Mesirov Gelman Jaffe Cramer & Jamieson, counsel to GMC, and Buchanan &
Ingersoll, regulatory counsel to GMC, each dated the Closing Date, addressed to
Acquiror and in form and substance mutually acceptable to the parties.
SECTION 10: CLOSING DELIVERIES
10.1 GMC's Obligations at Closing. GMC shall deliver to Acquiror, at the
Closing, the following:
(a) Resignations of all directors of GMC, releases (in form and
substance reasonably satisfactory to the parties) and, if requested by
Acquiror, resignations of any and all officers or directors, as such, of
the GMC Companies, in form and substance satisfactory to Acquiror, dated
the Closing Date and duly executed by each such director and officer.
(b) A certificate dated the Closing Date, in form and substance
satisfactory to Acquiror, of the Chief Executive Officer and the Chief
Financial Officer of GMC, certifying that to the actual Knowledge of such
officer after reasonable inquiry (i) all representations and warranties
made by GMC in this Agreement are true and correct as required by Section
9.3, (ii) all of the terms and conditions of this Agreement to be satisfied
or performed by GMC on or before the Closing Date have been satisfied or
performed in all material respects, and (iii) there has not been any
Material Adverse Change between April 30, 1996 and the Closing Date.
(c) Good standing certificates for each GMC Company, dated no earlier
than ten days before the Closing Date, from its jurisdiction of formation
and each respective jurisdiction in which any of the GMC Companies
currently or at the Closing Date is qualified or registered to do business
as a foreign corporation or partnership.
(d) All other agreements, certificates, instruments and documents
reasonably requested by Acquiror in order to fully consummate the
transactions contemplated hereby and carry out the purposes and intent of
this Agreement.
10.2 Acquiror's or Newco's Obligations at Closing. Acquiror or Newco shall
deliver to GMC at the Closing the following:
(a) A certificate dated the Closing Date, in form and substance
satisfactory to GMC, of the Chief Executive Officer and the Chief Financial
Officer of each of Acquiror and Newco, certifying that to the actual
Knowledge of such officer after reasonable inquiry (i) all representations
and warranties made by Acquiror or Newco in this Agreement are true and
correct to the extent required by Section 8.2 and (ii) all of the terms and
conditions of this Agreement to be satisfied or performed by Acquiror or
Newco on or before the Closing Date have been satisfied or performed in all
material respects.
A-25
<PAGE>
(b) Good standing certificates for Acquiror and Newco dated no earlier
than ten days before the Closing Date, from its jurisdictions of
incorporation.
(c) All other agreements, certificates, instruments and documents
reasonably requested by GMC in order to fully consummate the transactions
contemplated hereby and carry out the purposes and intent of this
Agreement.
SECTION 11: TERMINATION
11.1 Termination. At any time prior to the Closing, whether or not the
Merger has been approved by the Stockholders, this Agreement may be terminated
and the transactions contemplated hereby may be abandoned, in accordance with
any of the following methods:
(a) by mutual consent of Acquiror, Newco and GMC, authorized by their
respective boards of directors;
(b) by Acquiror or GMC, as the case may be, (i) if the Closing shall
not have occurred on or prior to February 1, 1997 for any reason or (ii) if
it has become reasonably certain that any condition to the closing
obligations of such party will not be satisfied and such condition has not
been waived by such party, unless, in either case, the failure of the
Closing to occur or such condition to be satisfied shall be due to the
failure of the party seeking to terminate this Agreement to perform or
observe its agreements and conditions set forth herein to be performed or
observed by such party at or before the Closing;
(c) by Acquiror, if there shall have been material breach of any
obligation of GMC hereunder and such breach shall have not been remedied
within 10 days after receipt by GMC of notice in writing from Acquiror
specifying the nature of such breach and requesting that it be remedied;
(d) by GMC, if there shall have been any material breach of any
obligation of Acquiror hereunder and such breach shall not have been
remedied within 10 days after receipt by Acquiror of notice in writing from
GMC specifying the nature of such breach and requesting that it be
remedied;
(e) by GMC in order to enter into a definitive agreement for an
Acquisition Proposal with a Potential Acquiror with which it is permitted
to negotiate pursuant to Section 6.5, provided that GMC shall have first
(i) paid the Termination Fee to Acquiror pursuant to Section 12.2 and (ii)
given the Acquiror at least three business days' notice of its intention to
terminate this Agreement, such notice to include all of the material terms
of such definitive agreement; and
(f) by Acquiror or Newco, if (i) the Board of Directors of GMC shall
withdraw, modify or change its recommendation of this Agreement or the
Merger in a manner adverse to Acquiror or Newco or shall have resolved to
do any of the foregoing or (ii) if the Board of Directors of GMC shall have
recommended to the shareholders of GMC an Acquisition Proposal.
11.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 11.1 hereof by Acquiror, on the one hand, or GMC,
on the other hand, written notice thereof shall forthwith be given to the other
party or parties specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall become void and have no effect,
and no party shall have any further Obligation under this Agreement except as
provided in Section 12.1 or 12.2; provided, however, that termination of this
Agreement pursuant to Section 11.1 (b), (c) or (d), shall not relieve any party
to this Agreement of liability for any default or breach of this Agreement.
SECTION 12: OTHER PROVISIONS
12.1 Confidentiality and Publicity. Acquiror and Newco shall hold in
confidence all confidential information concerning the GMC Companies which is
disclosed to it in connection with the transactions contemplated hereby, and GMC
and each of the GMC Subsidiaries shall hold in confidence all confidential
information concerning Acquiror which is disclosed to them in connection
A-26
<PAGE>
with the transactions contemplated hereby. GMC and Acquiror shall consult with
each other as to the form and substance of any press release or other public
disclosure of matters related to this Agreement and the transactions
contemplated hereby and thereby and neither party shall make any such press
release or other public disclosure without the consent of the other party, which
such consent shall not be unreasonably withheld or delayed; provided, however,
that nothing in this Section 12.1 shall be deemed to prohibit any party hereto
from making any disclosure which its counsel deems necessary or advisable in
order to fulfill such party's disclosure obligations imposed by Law. In the
event that the Merger is not consummated, each party shall promptly return to
the other party all confidential information concerning such other party
including copies thereof.
12.2 Fees and Expenses. (a) Except as set forth in this Section 12.2,
Acquiror shall pay all of the fees and expenses incurred by it, and GMC shall
pay all of the fees and expenses incurred by GMC, in negotiating and preparing
this Agreement (and all other Contracts and documents executed in connection
herewith or therewith) and in consummating the transactions contemplated hereby
and thereby.
(b) The parties acknowledge that as a condition to its willingness to enter
into this Agreement, Acquiror has requested GMC to pay a termination fee in the
amount of $5,000,000 plus Expenses (as hereinafter defined) in an amount not to
exceed $750,000 (collectively, the 'Termination Fee') in certain circumstances.
To induce Acquiror to enter into this Agreement, GMC agrees to pay the
Termination Fee to Acquiror, (i) as a precondition to GMC's right to terminate
this Agreement pursuant to Section 11.1(e) hereof, (ii) in the event that
Acquiror or Newco terminate this Agreement pursuant to Section 11.1(f), or (iii)
in the event that a Third Party Acquisition (as defined below) shall have
occurred at any time (A) this Agreement is in effect or (B) during the first 12
months immediately following the termination of this Agreement (other than a
Termination pursuant to Section 11.1(b) or (d) due to a breach of this Agreement
by Acquiror or Newco); provided that in the case of any Third Party Acquisition
under clause (B), such Third Party Acquisition is at a per share value (or
implied per share value) higher than $5.75 per share of GMC Common Stock.
(c) 'Expenses' means the sum of all of Acquiror's and Newco's accountable
out-of-pocket expenses and fees incurred or accrued by either of them or on
their behalf in connection with the transactions contemplated hereby.
(d) 'Third Party Acquisition' means the occurrence of any of the following
events: (i) the acquisition of GMC by merger, consolidation or other business
combination transaction by any Person other than Acquiror, Newco or any
affiliate thereof (a 'Third Party'), or the public announcement of a Contract
providing for such a transaction; (ii) the acquisition by any Third Party of 50%
or more of the total assets of the GMC Companies, taken as a whole, or the
public announcement of a Contract providing for such a transaction; or (iii) the
acquisition by a Third Party of 50% or more of the outstanding GMC Stock whether
by tender offer, exchange offer or otherwise, or the public announcement of a
Contract providing for such a transaction.
(e) In the event that GMC shall fail to pay the Termination Fee when due,
there shall also be payable to the Acquiror the costs and expenses actually
incurred or accrued by Acquiror and Newco (including, without limitation, fees
and expenses of counsel) in connection with the collection under and enforcement
of this Section 12.2, together with interest on such unpaid Termination Fee and
expenses, commencing on the date that the Termination Fee became due, at a rate
equal to the rate of interest publicly announced by Mellon Bank, N.A., from time
to time, as such bank's Base Rate.
(f) The Payment of the Termination Fee shall be due and payable by GMC: (i)
prior to the termination of this Agreement by GMC pursuant to Section 11.1(e) or
(ii) within five business days following (A) the termination of this Agreement
pursuant to 11.1(f) or (B) the occurrence of any Third Party Acquisition
requiring the Termination Fee to be paid pursuant to Section 12.2(b).
(g) In addition to any other rights and remedies it may have at law or in
equity, Acquiror shall have the right to have an injunction, issued by any court
of equity having jurisdiction, enjoining the GMC Companies and any other Person
from entering into a definitive agreement for an Acquisition
A-27
<PAGE>
Proposal or consummating a Third Party Acquisition until the Termination Fee has
been paid to Acquiror in full.
(h) In addition to any other rights and remedies it may have at law or in
equity, Acquiror and Newco shall be entitled to be reimbursed by GMC for their
Expenses in the event of, and payable within five business days after, any
termination of this Agreement by Acquiror pursuant to Section 11.1(b) or Section
11.1(c) due to a material breach of this Agreement by GMC.
12.3 Notices. All notices, consents or other communications required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given when (a) delivered personally, delivery charges
prepaid, or (b) three business days after being sent by registered or certified
mail (return receipt requested), postage prepaid, or (c) one business day after
being sent by a nationally recognized express courier service, postage or
delivery charges prepaid, in any case to the parties at its addresses stated on
the first page of this Agreement. Notices may also be given by prepaid telegram
or facsimile and shall be effective on the date transmitted if confirmed within
24 hours thereafter by a signed original sent in the manner provided in the
preceding sentence. A copy of each notice to GMC shall be simultaneously sent to
Mesirov Gelman Jaffe Cramer & Jamieson, 1735 Market Street, Philadelphia,
Pennsylvania 19103, Attention: Robert P. Krauss, Esquire. A copy of each notice
to Acquiror or Newco shall be sent to Blank Rome Comisky & McCauley, Four Penn
Center Plaza, Philadelphia, Pennsylvania 19103, Attention: Stephen E. Luongo,
Esquire. Any party may change its address for notice and the address to which
copies must be sent by giving notice of the new addresses to the other party in
accordance with this Section 12.3, provided that any such change of address
notice shall not be effective unless and until received.
12.4 Survival of Representations. The respective representations,
warranties, and covenants of the parties in this Agreement shall not survive the
Closing Date and shall terminate on the Closing Date, except for the
representations, warranties and covenants contained in Sections 12.1, 12.2 and
12.13 which shall survive without limitation of time. However, such termination
shall not be deemed to deprive any of the parties hereto or their Subsidiaries,
or any of their directors, officers or controlling Persons, of any defense in
law or equity which otherwise would be available against the claims of any
Person, including, but not limited to, any stockholder or former stockholder of
the parties hereto. Before and on the Closing Date, each party shall be deemed
to have relied upon each of the representations and warranties made to it in
this Agreement or pursuant hereto, regardless of any investigation made by or on
behalf of such party or the right of investigation of such party.
12.5 Entire Understanding. This Agreement, together with the Exhibits and
Schedules hereto, and that certain Confidentiality Agreement dated February 3,
1995 between Acquiror and GMC, state the entire understanding among the parties
with respect to the subject matter hereof and thereof, and supersedes all prior
and contemporaneous oral and written communications and agreements with respect
to the subject matter hereof. No amendment or modification of this Agreement
shall be effective unless in writing and signed by the party against whom
enforcement is sought. Each of the parties may agree to any amendment or
supplement to this Agreement, or a waiver of any provision of this Agreement,
either before or after the approval of such party's stockholders (as provided in
this Agreement) and without seeking further stockholder approval, so long as
such amendment, supplement or waiver does not change the Merger Consideration.
This Agreement shall not be terminated except as provided in Section 11.1.
12.6 Parties in Interest. This Agreement shall bind, benefit, and be
enforceable by and against GMC, Acquiror and Newco and their respective
successors and assigns. No party shall in any manner assign any of its rights or
obligations under this Agreement without the express prior written consent of
the other parties. Nothing in this Agreement is intended to confer, or shall be
deemed to confer, any rights or remedies upon any Persons other than the parties
hereto.
12.7 No Waivers. No waiver with respect to this Agreement shall be
enforceable unless in writing and signed by the party against whom enforcement
is sought. Except as otherwise expressly provided herein, no failure to
exercise, delay in exercising, or single or partial exercise of any right,
A-28
<PAGE>
power or remedy by any party, and no course of dealing between or among any of
the parties, shall constitute a waiver of, or shall preclude any other or
further exercise of, any right, power or remedy.
12.8 Severability. If any provision of this Agreement is construed to be
invalid, illegal or unenforceable as to any party or generally, then that
provision shall be enforceable by the other parties and the remaining provisions
hereof shall not be affected thereby and shall be enforceable without regard
thereto.
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.
12.10 Section Headings. Section and subsection headings in this Agreement
are for convenience of reference only, do not constitute a part of this
Agreement, and shall not affect its interpretation.
12.11 References. All words used in this Agreement shall be construed to
be of such number and gender as the context requires or permits.
12.12 Controlling Law. THIS AGREEMENT IS MADE UNDER, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
12.13 Directors' and Officers' Indemnification and Insurance.
(a) The charter or bylaws of the Surviving Corporation shall contain
provisions no less favorable with respect to indemnification than are set forth
in the charter or bylaws of GMC, which provisions shall not be amended, repealed
or otherwise modified for a period of six years from the Effective Time in any
manner that would affect adversely the rights thereunder of individuals who at
the Effective Time were directors, officers, employees, fiduciaries or agents of
GMC, unless such modification shall be required by Law.
(b) GMC shall, to the fullest extent permitted under applicable Law and
regardless of whether the Merger becomes effective, indemnify and hold harmless,
and, after the Effective Time, the Surviving Corporation shall, to the fullest
extent permitted under applicable Law, indemnify and hold harmless, each present
and former director and officer of each GMC Subsidiary (collectively, the
'Indemnified Parties') against all costs and expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and settlement
amounts paid in connection with any claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), whether
civil, criminal, administrative or investigative, arising out of or pertaining
to any action or omission in their capacity as an officer or director, whether
occurring before or after the Effective Time, for a period of six years after
the date hereof. In the event of any such claim, action, suit, proceeding or
investigation, (i) GMC or the Surviving Corporation, as the case may be, shall
pay the reasonable fees and expenses of counsel selected by the Indemnified
Parties, which counsel shall be reasonably satisfactory to GMC or the Surviving
Corporation, promptly after statements therefor are received and (ii) GMC and
the Surviving Corporation shall cooperate in the defense of any such matter
provided, however, that neither GMC nor the Surviving Corporation shall be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld); and provided, further, that neither GMC nor
the Surviving Corporation shall be obligated pursuant to this Section 12.13(b)
to pay the fees and expenses of more than one counsel for all Indemnified
Parties in any single action except to the extent that two or more of such
Indemnified Parties shall have conflicting interests in the outcome of such
action; and provided, further, that, in the event that any claim for
indemnification is asserted or made within such six-year period, all rights to
indemnification in respect of such claim shall continue until the disposition of
such claim.
A-29
<PAGE>
(c) The Surviving Corporation shall use its commercially reasonable efforts
to maintain in effect for three years from the Effective Time, if available, the
current directors' and officers' liability insurance policies maintained by GMC
(provided that the Surviving Corporation may substitute therefor policies of at
least the same coverage containing terms and conditions which are not materially
less favorable) with respect to matters occurring prior to the Effective Time;
provided, however, that in no event shall the Surviving Corporation be required
to expend pursuant to this Section 12.13(c) more than an amount per year equal
to 150% of current annual premiums paid by GMC for such insurance (which
premiums GMC represents and warrants to be $249,720 in the aggregate).
(d) In the event GMC or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors and assigns of GMC or the
Surviving Corporation, as the case may be, or at Acquiror's option, Acquiror
shall assume the obligations set forth in this Section 12.13.
12.14 Jurisdiction and Process; Specific Performance. (a) In any action
between or among any of the parties, whether arising out of this Agreement or
otherwise, (i) each of the parties irrevocably consents to the exclusive
jurisdiction and venue of the federal and state courts located in the
Commonwealth of Pennsylvania; (ii) if any such action is commenced in a state
court, then, subject to applicable law, no party shall object to the removal of
such action to any federal court located in the Commonwealth of Pennsylvania;
(iii) each of the parties irrevocably waives the right to trial by jury; and
(iv) each of the parties irrevocably consents to service of process by first
class certified mail, return receipt requested, postage prepaid, to the address
at which such party is to receive notice in accordance with Section 12.3.
(b) The parties hereto agree that irreparable damage would occur to
Acquiror and Newco in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that Acquiror and Newco shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of the date first stated
above.
GENESIS HEALTH VENTURES, INC.
By: /s/ Michael R. Walker
-----------------------------------
Michael R. Walker, Chairman of the
Board and Chief Executive Officer
GERIATRIC & MEDICAL COMPANIES, INC.
By: /s/ Daniel Veloric
-----------------------------------
Daniel Veloric, Chairman of the
Board and President
GMC ACQUISITION CORPORATION
By: /s/ Michael R. Walker
-----------------------------------
Michael R. Walker, Chairman of the
Board and Chief Executive Officer
A-30
<PAGE>
EXHIBIT B
CS FIRST BOSTON
CS First Boston Corporation 55 East 52nd Street
New York, NY 10055-0186
Telephone 212-909-2000
July 11, 1996
Board of Directors
Geriatric & Medical Companies, Inc.
5601 Chestnut Street
Philadelphia, Pennsylvania 19139
Members of the Board:
You have asked us to advise you with respect to the fairness to the holders of
the common stock of Geriatric & Medical Companies, Inc. ('Gerimed') from a
financial point of view of the consideration to be received by such holders
pursuant to the terms of the Agreement and Plan of Merger, dated as of July 11,
1996 (the 'Merger Agreement'), by and among Genesis Health Ventures, Inc.
('Genesis'), G Acquisition Corporation, a wholly owned subsidiary of Genesis
('Sub'), and Gerimed. The Merger Agreement provides for, among other things, the
merger of Sub with and into Gerimed (the 'Merger') pursuant to which Gerimed
will become a wholly owned subsidiary of Genesis and each outstanding share of
the common stock, par value $0.10 per share, of Gerimed (the 'Gerimed Common
Stock') will be converted into the right to receive $5.75 in cash (the 'Merger
Consideration').
In arriving at our opinion, we have reviewed the Merger Agreement and certain
publicly available business and financial information relating to Gerimed. We
also have reviewed certain other information, including financial forecasts,
provided to us by Gerimed, and have met with the respective managements of
Gerimed and Genesis to discuss the business and prospects of Gerimed.
We also have considered certain financial and stock market data of Gerimed and
we have compared that data with similar data for other publicly held companies
in businesses similar to those of Gerimed and we have considered, to the extent
publicly available, the financial terms of certain other business combinations
and other transactions which have recently been effected. We also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
upon its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that such forecasts have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of Gerimed as to the future financial
performance of Gerimed. In addition, we have not made an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of Gerimed,
nor have we been furnished with any such evaluations or appraisals. Our opinion
is necessarily based upon information available to us and financial, stock
market and other conditions as they exist and can be evaluated on the date
hereof. In connection with our engagement, we were requested to approach third
parties to solicit indications of interest in a possible acquisition of Gerimed
and held discussions with certain of these parties prior to the date hereof.
B-1
<PAGE>
We have acted as financial advisor to Gerimed in connection with the Merger and
will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We also will receive a fee upon
the delivery of this opinion. In the ordinary course of our business, CS First
Boston and its affiliates may actively trade the equity securities of Gerimed
and the debt and equity securities of Genesis for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Gerimed in connection with its evaluation of the Merger and is not
intended to be and shall not be deemed to constitute a recommendation to any
stockholder as to how such stockholder should vote on the proposed Merger. This
letter is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement or in any other document
used in connection with the offering or sale of securities, nor shall this
letter be used for any other purposes, without CS First Boston's prior written
consent.
Based upon and subject to the forgoing, it is our opinion that as of the date
hereof, the Merger Consideration to be received by the holders of Gerimed Common
Stock in the Merger is fair to such holders from a financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
B-2
<PAGE>
EXHIBIT C
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
'stockholder' means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words 'stock' and 'share' mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
'depository receipt' mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsections (f) or (g) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to
C-1
<PAGE>
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom
C-2
<PAGE>
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Copper, Delaware or such publication as the Court deems advisable. The forms of
the notices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as
C-3
<PAGE>
to any stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
<PAGE>
PROXY
GERIATRIC & MEDICAL COMPANIES, INC.
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 3, 1996
The undersigned stockholder of Geriatric & Medical Companies, Inc. (the
'Company') hereby appoints Daniel Veloric and Arthur A. Carr, Jr., or either of
them, with full power of substitution in each, attorneys and proxies for the
undersigned to vote all the shares of Common Stock of the Company which the
undersigned could vote if personally present at the Special Meeting of
Stockholders thereof to be held at the offices of Mesirov Gelman Jaffe Cramer &
Jamieson, 38th Floor, 1735 Market Street, Philadelphia, Pennsylvania 19103, on
October 3, 1996 at 9:00 a.m., and at any adjournment or adjournments or
postponement or postponements thereof for the following purposes:
1. To approve and adopt an Agreement and Plan of Merger dated as of July
11, 1996, by and among Genesis Health Ventures, Inc. ('Genesis'), a
Pennsylvania corporation, the Company, and G Acquisition Corporation, a
Delaware corporation, which is a wholly-owned subsidiary of Genesis, as
more fully described in the accompanying Proxy Statement; and
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
(Continued, and to be signed on other side)
<PAGE>
(Continued from other side)
PROPOSAL FOR AGAINST ABSTAIN
- - -------- --- ------- -------
Approve and adopt the Agreement and / / / / / /
Plan of Merger dated July 11, 1996
If not otherwise specified, this Proxy will be voted FOR the proposal indicated
above, and with discretionary authority on such other business as may properly
come before the Special Meeting and any adjournment or adjournments or
postponement or postponements thereof.
Dated:
-------------------------------- , 1996
--------------------------------
(SEAL)
--------------------------------
(SEAL)
(Please sign exactly as your
name appears on the records of
the Transfer Agent of the
Company. When signing as
attorney, executor,
administrator, trustee, or
guardian, please give your full
title. If shares are held
jointly, each holder must sign.)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
IMPORTANT: PLEASE SIGN, DATE AND RETURN PROMPTLY
PLEASE DO NOT SEND STOCK CERTIFICATES IN AT THIS TIME
[Letterhead of BDO Seidman, LLP]
Consent of Independent Certified Public Accountants
Geriatric & Medical Companies, Inc.
Philadelphia, Pennsylvania
We hereby consent to the incorporation by reference in this Proxy Statement of
our report dated August 20, 1996 relating to the consolidated financial
statements appearing in Geriatric & Medical Companies, Inc.'s Annual Report on
Form 10-K for the year ended May 31, 1996.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
September 6, 1996
[Letterhead of Coopers & Lybrand, L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this proxy statement of our report dated October
11, 1994, (which includes an explanatory paragraph regarding a class action
shareholder lawsuit brought against the Company) on our audit of the financial
statements of Geriatric and Medical Companies, Inc. which report is included in
the Geriatric and Medical Companies, Inc. Annual Report on Form 10-K for the
year ended May 31, 1996.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
September 5, 1996
