<PAGE>
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-----------------------------------
Date of Report (Date of earliest event reported): July 11, 1996
Genesis Health Ventures, Inc.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 1-11666 06-1132947
- ------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
148 West State Street, Suite 100
Kennett Square, Pennsylvania 19348
- ------------------------------------------------------------------------------
(Address of principal executive offices,
including zip code)
Registrant's telephone number, including area code: (610) 444-6350
-------------
==============================================================================
<PAGE>
Item 5. Other Events.
On July 11, 1996, Genesis Health Ventures, Inc. ("Genesis") and its
wholly-owned subsidiary G Acquisition Corporation ("Newco") entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Geriatric & Medical
Companies, Inc. ("GMC"). Pursuant to the Merger Agreement, Newco will merge into
GMC and GMC will become a wholly-owned subsidiary of Genesis (the "Merger").
Each share of GMC common stock shall be converted into the right to receive
$5.75 in cash, subject to statutory appraisal rights. The total consideration to
be paid to stockholders of GMC to acquire their shares (including shares which
may be issued upon exercise of outstanding warrants, options and long-term
incentive plans) is approximately $91.0 million. GMC currently has outstanding
approximately $132,000,000 of indebtedness.
GMC owns and operates 18 long-term care facilities and six assisted
living facilities with approximately 3,000 licensed beds; 11 of these facilities
are located in the eastern Pennsylvania market and nine are located in New
Jersey. GMC also operates an ambulance transportation business, a medical supply
business, a pharmacy business, a contract management service business, a
diagnostic and rehabilitative management services business and a financial
services and information systems business. In addition, GMC currently is
developing two long-term care facilities with approximately 240 beds.
The conditions precedent to the parties' obligation to consummate the
transaction include the following: (i) all permits and consents required to
consummate the transaction shall have been obtained; (ii) the transaction shall
have been duly approved by the affirmative vote of the majority of the
outstanding shares of GMC; (iii) the agreements, representations and warranties
of the parties contained in the Merger Agreement shall be true and correct in
all material respects on the closing date; (iv) no proceeding shall have been
instituted which could be reasonably expected to result in a material adverse
effect as a result of the Merger or which seeks to or does prohibit or restrain
the consummation of the Merger; (v) there shall not have been any material
adverse change in the business, assets, financial condition or results of
operations of GMC; and (vi) the applicable waiting period under Hart-Scott
Rodino Anti-Trust Improvements Act of 1976, as amended, shall have expired or
been terminated.
The Merger Agreement may be terminated and the transaction abandoned
(i) by the mutual agreement of the parties; (ii) by either party if the
transactions are not consummated by February 1, 1997 or if it becomes reasonably
certain that a condition precedent to any party's obligation to close will not
be satisfied; (iii) by the non-breaching party upon the occurrence of an uncured
material breach; (iv) by GMC in order to enter into an alternative
-2-
<PAGE>
acquisition proposal from a third party if inter alia required by the GMC's
board of directors fiduciary duties; or (v) by Genesis if the board of directors
of GMC shall have withdrawn or modify its recommendation of the Merger or has
recommended to the shareholders of GMC that they accept an alternative
acquisition proposal from a third party. In the event that the Agreement is
terminated as described in clause (iv) or (v) above, or a third-party
acquisition for a higher price per share occurs within 12 months after the
termination of the Merger Agreement, GMC has agreed to pay Genesis $5,000,000,
plus expenses of up to $750,000.
In connection with the Merger Newco, Genesis, Tomahawk Holdings, Inc.
("Shareholder"), Tomahawk Capital Holdings, Inc. and Daniel Veloric
(Shareholder, Tomahawk Capital Holdings, Inc. and Daniel Veloric are referred to
collectively herein as the "Owners") entered into a Stockholder Option and Proxy
Agreement dated as of July 11, 1996 (the "Agreement") pursuant to which Owners
granted to Newco (i) an option (the "Stock Option") to purchase the Shares of
GMC owned by Shareholder (the "Shares") and (ii) an irrevocable proxy (the
"Proxy"). The Shareholder currently owns approximately 24.3% of the outstanding
Common Stock of GMC. The Stock Option entitles Newco to purchase the Shares of
GMC owned by the Shareholder for a purchase price (the "Exercise Price") of
$5.75 per Share. Under the Agreement, the Owners agree to vote (or cause to be
voted) the Shares owned by them in any circumstance in which the vote or
approval of the shareholders of GMC 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 GMC
contained in the Merger Agreement or of any Shareholder in this 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 affiliate
in acquiring control of GMC 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 hereto of their
respective obligations under this Agreement. Under the Agreement, the
Shareholder irrevocably grants to Newco and appoints Newco (with full power of
substitution) its proxy to vote the Shares owned by Shareholder in the manner
described above.
In connection with the proposed transaction, Daniel Veloric and certain
companies which he controls have agreed upon the effective date of the Merger
to enter into an agreement with Genesis for Genesis to manage a long-term care
facility located in New Jersey with 335 licensed beds (the "New Jersey
Facility"). As currently contemplated, the management agreement will provide
that Genesis receive a management fee of 6% per annum and that the owner will
receive payments of $26,667 per month. Mr. Veloric and certain companies which
he controls have also agreed upon the
-3-
<PAGE>
effective date of the Merger to sell to Genesis for $1,000,000 a five year
option to acquire the stock of the companies which own the New Jersey Facility
for $4,000,000 (plus the assumption of outstanding debt) and to sell to Genesis
for $500,000 an option to acquire certain real estate adjacent to the New Jersey
Facility for $2,000,000. During the term of the real estate option Genesis will
pay the owner of the land $13,333 per month, until the option is exercised.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
a. Financial Statements of business to be acquired
Geriatric & Medical Companies, Inc. and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheets as of May 31, 1996
Consolidated Statements of Operations for the years ended May 31, 1995
and 1996
Consolidated Statements of Cash Flows for the years ended May 31, 1995
and 1996
Consolidated Statements of Shareholders' Equity for the years ended May
31, 1995 and 1996
Notes to Consolidated Financial Statements
b. Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended September 30, 1995 and the nine months ended June 30,
1996
Unaudited Pro Forma Condensed Consolidated Balance Sheet at June 30,
1996
c. Exhibits.
---------
The following Exhibits are filed herewith:
Number Title
------ -----
*1. Agreement and Plan of Merger, dated as of
July 11, 1996, by and among Genesis Health
Ventures, Inc., a Pennsylvania corporation,
G Acquisition Corporation, a Delaware
corporation and Geriatric & Medical
Companies, Inc., a Delaware corporation.
*2. Stockholder Option and Proxy Agreement dated
as of July 11, 1996 between G Acquisition
Corporation, Tomahawk Holdings, Inc., Tomahawk
Capital Holdings, Inc., Daniel J. Veloric and
Genesis Health Ventures, Inc.
- --------
* Previously filed.
-4-
<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
fiancial 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
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except par values and shares)
May 31,
ASSETS 1996 1995
---- ----
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
======== ========
<PAGE>
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 $176,717
======== ========
See accompanying notes to consolidated financial statements
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($'s in thousands except per common share)
-----------------------------------------------------------------
Years Ended May 31,
1996 1995
---- ----
Operating revenues, net $ 195,196 $ 192,234
Other revenues -- --
--------- ---------
195,196 192,234
--------- ---------
Cost and Expenses:
Operating expenses 167,060 163,769
Depreciation and amortization 8,778 8,734
Interest expense, net 12,295 11,078
Provision for costs on sale
of accounts receivable 4,170 3,588
--------- ---------
192,303 187,169
--------- ---------
Income (loss) before
income taxes 2,893 5,065
Income taxes (1,260) 1,012
--------- ---------
Net Income (Loss) $ 4,153 $ 4,053
========= =========
Earnings (Loss) per common share $ 0.27 $ 0.27
========= =========
Average common shares outstanding 15,372 15,209
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($'s in thousands)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,153 $ 4,053
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for uncollectible accounts 4,496 6,388
Depreciation and amortization 8,778 8,734
Recognition of deferred tax asset 1,925 --
Other items 83 332
Changes in assets and liabilities, net of effects from acquisitions:
Increase in patients' funds and other, net (141) (1,077)
Increase in accounts receivable (10,743) (10,506)
(Increase) decrease in other receivables 418 (364)
(Increase) decrease in prepaids and other assets and inventories 499 (3,533)
Increase in net amounts due from third-party payors (7,965) (4,634)
Increase (decrease) in accounts payable and accrued expenses (790) 8,297
Decrease in other long-term liabilities (10) (348)
-------- --------
Net cash provided by operating activities 703 7,342
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,859) (3,251)
Capital expenditures financed by construction
and property improvement funds (9,118) (2,786)
(Increase) decrease in notes and other receivables 5,083 (700)
Acquisitions of ambulance companies, net of cash acquired -- (553)
Other investing activities, net 90 31
-------- --------
Net cash used in investing activities (6,804) (7,259)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 15,747 2,238
Repayment of debt and subordinated debentures (6,111) (2,933)
(Increase) decrease in restricted cash (4,167) 4,191
Expenditures for deferred charges (522) (1,197)
Proceeds from issuance of common stock 10 59
-------- --------
Net cash provided by financing activities 4,957 2,358
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,144) 2,441
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,368 927
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,224 $ 3,368
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 16,659 $ 16,200
Income taxes $ 471 $ 157
SUPPLEMENTAL SCHEDULE OF NONCASH ITEMS:
Assets acquired under capital leases $ 1,393 $ 1,938
Acquisitions of ambulance companies:
Fair value of assets acquired $ -- $ 2,809
Cash paid and debt issued -- (2,282)
-------- --------
Liabilities assumed $ -- $ 527
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GERIATRIC & MEDICAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------- Capital in
Excess of Accumulated
Shares Amount Par Value Earnings(Deficit)
------ ------ ---------- -----------------
<S> <C> <C> <C> <C>
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.
<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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 operating cash flows. As of
May 31, 1996, the carrying value of the intangibles has been determined not to
be impaired.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 and 1995 amount to $4,334,000 and $4,757,000,
respectively. 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
$2,529,000 at May 31, 1996 and in 1995, respectively, is included in other long
term liabilities in the accompanying consolidated financial statements.
(m) Fair Value of Financial Instruments:
The fair value of financial instruments is determined by reference to various
market data and other valuation considerations. The fair value of financial
instruments approximates their recorded values.
(n) Earnings (Loss) Per Common Share:
Earnings (loss) per common share is based on the weighted average number of
Shares of common stock outstanding. Potential dilution from common stock
equivalents is not material.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. Long-Term Debt and Subordinated Debenture:
A summary of long-term debt and subordinated debenture follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal
($'s in thousands) of Maturity May 31,
----------- ---------------------------
1996 1995
---- ----
<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:
PA County IDA's, NJ EDA's (d) 2000 16,795 17,020
Other NJ EDA's (e) 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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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.
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 non compliance has
received waivers.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 loan's 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(e) The Company also has two bond series issued through the New Jersey
Economic Development Authority, each secured by a skilled nursing
facility mortgage.
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 $135,595
========
Substantially all of the Company's properties related to its long term care
facilities and headquarters location are pledged as collateral on borrowings.
Substantially all other assets of the Company (excluding property under capital
leases and certain accounts receivable) are unencumbered.
3. Acquisitions and Disposals:
Concurrent with the sale of nursing or residential facilities in prior years,
the Company entered into long-term agreements to provide management and other
services in operating these facilities. All of these management agreements have
expired or been terminated as of May 31, 1994.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under the terms of these sales of nursing and residential facilities, the
Company was required to lend the purchaser amounts to cover certain issuance
costs of bond offerings and to enter into operating deficits agreements under
which the Company lends the purchaser, if needed, funds for working capital
requirements. These working capital advances, plus related interest, were not
payable to the Company until certain conditions were achieved or over a
five-year period upon termination or expiration of the management agreements. In
conjunction with the expiration or termination of these agreements, the Company
has converted the operating deficits advances as well as certain subordinated
management fees, as appropriate, into term loans at an interest rate range of
10% to 13%.
As of May 31, 1996 and 1995, with respect to the aforementioned facility sales,
the Company was owed the following:
May 31,
-----------------------------
($'s in thousands) 1996 1995
------------------ ---- ----
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
======= =======
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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%.
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 Accountant 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
As of May 31, 1996 and 1995 the Company has recognized a provision for costs on
sale of accounts receivable of $4,170,000 and $3,588,000, respectively. The
provision for costs on sale of accounts receivable consists of: (A) program and
other costs incurred on receivables sold and (B) servicing costs relating to the
collection of receivables sold. Under the sale agreement, the Company continues
and is required to service the accounts receivable sold.
5. Inventories:
The components of inventories are as follows:
May 31,
---------------------
($'s in thousands) 1996 1995
------ ------
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 and
$879,000 in fiscal 1996 and 1995 respectively, relating to the cost of additions
to existing nursing home facilities and construction of new facilities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Deferred Charges and Other:
The components of deferred charges and other are as follows:
May 31,
----------------------------
($'s in thousands) 1996 1995
---- ----
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 and 1995.
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 were exercisable at
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 and 1995, 7,813 and
79,062 options were exercised, respectively, at an average price of $1.36 and
$1.09, 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 nonemployees. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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 and $105,900,000, for the years
ended May 31, 1996 and 1995, 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 $10,824,000 for open issues with the Pennsylvania Department of
Public Welfare (DPW). Management believes that any reduction of the amount
recorded that results from final settlement of these open issues will not have a
material adverse effect on the financial position of the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. Income Taxes:
A summary of the components of the tax provision for fiscal years 1996 and 1995,
is as follows:
<TABLE>
<CAPTION>
($'s in thousands) 1996 1995
---- ----
<S> <C> <C>
Current Federal $ 1,132 $ 551
Current State and Local 442 296
Federal & State Over/Under
Accrual Net of Credits (909) 165
Deferred Tax Benefit (1,925) -
------- ------
$(1,260) $1,012
======== ======
</TABLE>
The effective net income tax rates before the utilization of the Company's
operating loss carryforwards are different than the statutory federal income tax
rates of 34% in Fiscal years 1996 and 1995, as indicated below:
<TABLE>
<CAPTION>
($'s in thousands) 1996 1995
---- ----
<S> <C> <C>
Statutory Federal Income Tax $ 983 $1,722
Permanent Differences 46 52
State and Local Taxes, Net of
Federal Benefit 292 195
Investment and Other Tax Credits (75) (293)
Net Operating Loss Carryforward - (489)
Deferred Tax Benefit (1,925) -
Other (581) (175)
------- ------
$(1,260) $1,012
======= ======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of May 31,1996 and 1995 determined in
accordance with the provisions of SFAS No. 109:
<TABLE>
<CAPTION>
($'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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
and $38,555,000 for the years ended May 31, 1996 and 1995, respectively.
12. Interest Expense:
Interest expense is reflected net of approximately $2,130,000 and $1,576,000, of
interest income for the years ended May 31, 1996 and 1995, respectively. The
interest income is principally related to overnight investments, restricted cash
and notes receivables.
13. Quarterly Results (Unaudited):
The following table summarizes the Company's quarterly results of operations for
the fiscal years ending May 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
($'s in thousands except Per Share Data)
<S> <C> <C> <C> <C> <C>
1st 2nd 3rd 4th (a) Total
------- ------- ------- ------- --------
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
1995
<S> <C> <C> <C> <C> <C>
1st 2nd 3rd 4th Total
------- ------- ------- ------- --------
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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. ("Acquiror"), 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Company's shareholders and receipt of applicable regulatory approvals and 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). 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, Acquiror 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 Acquiror 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 Acquiror 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
Acquiror 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
(Continued)
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.
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, Acquiror and Ponnocks have reached an agreement in principle
pursuant to which Ponnocks 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 two years. During the first year of
the consulting agreement, it is expected that Acquiror 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 Acquiror 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).
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
The following unaudited pro forma condensed consolidated statement of
operations gives effect to (i) the acquisition (the "McKerley Transaction") by
the Company of McKerley Health Centers Inc. and certain related entities
("McKerley"); (ii) the acquisition (the "NeighborCare Transaction") by the
Company of the pharmacy healthcare services businesses of NeighborCare
Pharmacies Inc. and certain related entities ("NeighborCare"); (iii) the
acquisition by the Company of the outstanding stock of National HealthCare
Affiliates, Inc. and certain related entities ("National Health") and the lease
from an affiliate of a financial institution of nine eldercare centers which
were purchased from National Health (collectively, the "National Health
Transaction"); (iv) the sale by the Company of 6,500,000 shares of Common Stock
in May 1996 and the application of the net proceeds therefrom (the "1996 Equity
Offering"); and (v) the merger of Geriatric & Medical Companies Inc. ("GMC")
into a wholly-owned subsidiary of the Company (the "GMC Transaction") as if each
had occurred at the beginning of the periods presented.
The pro forma condensed statements of operations are based upon assumptions
and include adjustments as described in the notes below. The pro forma
information should be read in conjunction with the Company's historical
consolidated financial statements, McKerley's historical combined financial
statements, National Health's historical combined financial statements and GMC's
historical combined financial statements. The column entitled "McKerley
Historical Results" represents the historical combined results of McKerley for
the year ended November 30, 1995. The column entitled "McKerley Historical
Results" for the nine months ended June 30, 1996 represents the two months ended
November 30, 1995. As a result of the differing year ends of Genesis and
McKerley, the two months ended November 30, 1995 are included in both periods.
The historical financial statements of NeighborCare for the year ended July 2,
1995 and the seven months ended April 30, 1996 are included in the columns
"NeighborCare" in the tables below. The historical combined financial statements
of National Health for the year ended December 31, 1995 and for the nine months
ended June 30, 1996 are included in the columns "National Health" in the tables
below. As a result of the differing year ends of Genesis and National Health,
the three months ended December 31, 1995 is included in both periods. The column
entitled "GMC Historical Results" for the year ended September 30, 1995
represents the historical results of GMC for the year ended May 31, 1995. The
column entitled "GMC Historical Results" for the nine months ended June 30, 1996
represents the historical results of GMC for the nine months ended May 31, 1996.
For purposes of this presentation, an effective tax rate of 37% has been assumed
for McKerley, NeighborCare, National Health and GMC, for the historical results,
and the resulting pro forma adjustments and offering adjustments. Such data is
not necessarily indicative of the historical financial results that would have
been achieved had the acquisitions occurred at the beginning of the periods
presented or that may be expected to result in the future as a result of such
transactions.
<TABLE>
<CAPTION>
Year ended September 30, 1995
--------------------------------------------------------------------------------------------------------
National National
Genesis McKerley McKerley NeighborCare NeighborCare Health Health
Historical Historical Pro Forma Historical Pro Forma Historical Pro Forma
Results Results Adjustments Results Adjustments Results Adjustments
---------- ---------- -------------- ------------ -------------- ---------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues ......... $486,393 $57,266 $114 (A)(B)(C) $52,751 $ -- $108,785 $(22,949)(L)(P)
Operating expense:
Operating expenses other
than depreciation,
amortization and lease
expense ............ 393,139 52,069 (6,063) (A)(D) 51,986 (1,849) (I)(K) 92,990 (26,435)(L)(O)(P)
Depreciation and
amortization ....... 18,793 1,900 1,079 (F) -- 2,547 (J) 4,055 1,067 (L)(M)
Lease expense ........ 13,798 2,759 (1,244) (G) -- -- 3,176 4,716 (L)(N)
Interest expense, net . 20,367 4,200 1,625 (A)(E) 1,276 1,880 (H) 6,177 (1,498)(L)(N)
---------- ---------- -------------- ------------ -------------- ---------- -----------------
Earnings from operations
before income taxes and
extraordinary items . 40,296 (3,662) 4,717 (511) (2,578) 2,387 (799)
---------- ---------- -------------- ------------ -------------- ---------- -----------------
Earnings from operations
before extraordinary
items .............. $ 25,531 $(2,307) $2,972 $ (322) $ (1,624) $ 1,504 $(503)
---------- ---------- -------------- ------------ -------------- ---------- -----------------
Fully diluted earnings
per share before
extraordinary items . $1.03
Weighted average common
shares and equivalents 28,452 308 (H)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Consolidated Pro Forma
Genesis/McKerley/ Consolidated
NeighborCare/ Genesis/McKerley/
National Health NeighborCare/
1996 Results Adjusted National Health/
Equity for GMC GMC GMC Results
Offering 1996 Equity Historical Pro Forma Adjusted for 1996
Adjustment Offering Results Adjustments Equity Offering
----------- ------------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenues ........... $ -- $682,360 $192,234 $ -- $874,594
Operating expense:
Operating expenses other
than depreciation,
amortization and lease
expense ............... -- 555,837 163,769 (617)(S)(T) 718,989
Depreciation and
amortization .......... -- 29,441 8,734 -- 38,175
Lease expense .......... -- 23,205 -- -- 23,205
Interest expense, net .. (13,720)(Q) 20,307 14,666 4,987 (R)(S)(U) 39,960
----------- ------------------- ---------- ----------- -----------------
Earnings from operations
before income taxes and
extraordinary items ... 13,720 53,570 5,065 (4,370) 54,266
----------- ------------------- ---------- ----------- -----------------
Earnings from operations
before extraordinary
items ................. $ 8,644 $ 33,895 $ 3,191 $(2,753) $ 34,332
----------- ------------------- ---------- ----------- -----------------
Fully diluted earnings per
share before
extraordinary items ... $1.08
Weighted average common
shares and equivalents . 6,500 35,260
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended June 30, 1996
----------------------------------------------------------------------------------------------------------
--
National National
Genesis McKerley McKerley NeighborCare NeighborCare Health Health
Historical Historical Pro Forma Historical Pro Forma Historical Pro Forma
Results Results Adjustments Results Adjustments Results Adjustments
---------- ---------- ------------- ------------ ------------- ---------- -----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues ...... $460,354 $ 9,671 $204(A)(B)(C) $39,916 $ -- $92,092 $(24,764)(L)(P)
Operating expenses:
Operating expenses
other than
depreciation,
amortization and
lease expense .... 373,041 11,537 (3,820)(A)(D) 36,539 (1,078)(I)(K) 79,865 (27,635)(L)(O)(P)
Debenture conversion
expense .......... 1,245 -- -- -- -- -- --
Depreciation and
amortization ..... 17,883 323 180 (F) 510 1,485(J) 3,556 286 (L)(M)
Lease expense ..... 11,948 460 (207)(G) 854 -- 2,617 3,389 (L)(N)
Interest expense, net 19,104 1,158 (201)(A)(E) 1,142 700(H) 4,898 (1,432)(L)(N)
---------- ---------- ------------- ------------ ------------- ---------- -----------------
Earnings from
operations before
taxes and
extraordinary items 37,133 (3,807) 4,252 871 (1,107) 1,156 629
---------- ---------- ------------- ------------ ------------- ---------- -----------------
Earnings from
operations before
extraordinary items $ 23,759 $(2,398) $2,678 $ 549 $(697) $ 728 $396
---------- ---------- ------------- ------------ ------------- ---------- -----------------
Fully diluted
earnings per share
before
extraordinary items
and Debenture
conversion expense . $0.91
Weighted average
common shares and
equivalents ...... 29,359 239(H)
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Consolidated Consolidated
Genesis/McKerley/ Genesis/McKerley/
NeighborCare/ NeighborCare/
1996 National Health National Health/
Equity Results Adjusted GMC GMC GMC Results
Offering for 1996 Historical Pro Forma Adjusted for 1996
Adjustment Equity Offering Results Adjustments Equity Offering
---------- ----------------- ---------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenues ........... $ -- $577,273 $145,787 $ -- $723,260
Operating expenses:
Operating expenses other
than depreciation,
amortization and lease
expense ............... -- 468,449 125,455 (2,353)(R)(S)(T) 591,550
Debenture conversion
expense ............... -- 1,245 -- -- 1,245
Depreciation and
amortization .......... -- 24,223 6,537 -- 30,760
Lease expense .......... -- 19,016 -- -- 19,061
Interest expense, net .. (8,831)(Q) 16,538 12,408 2,210(R)(S)(U) 31,156
---------- ----------------- ---------- ---------------- -----------------
Earnings from operations
before taxes and
extraordinary items ... 8,831 47,958 1,387 143 49,489
---------- ----------------- ---------- ---------------- -----------------
Earnings from operations
before extraordinary
items ................. $ 5,563 $ 30,579 $ 874 $ 90 $ 31,543
---------- ----------------- ---------- ---------------- -----------------
Fully diluted earnings per
share before
extraordinary items and
Debenture conversion
expense ............... $0.98
Weighted average common
shares and equivalents . 5,958 35,556
</TABLE>
<PAGE>
PRO FORMA ADJUSTMENTS ARE AS FOLLOWS:
MCKERLEY TRANSACTION
(A) The historical financial statements of McKerley include unusual,
nonrecurring charges related to a provision to properly state certain
insurance program liabilities, record a loss related to the termination
of an interest rate swap agreement and to write off certain other
long-term assets.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Revenues, net ......................................... $ 204 $ 204
Operating expenses other than depreciation,
amortization and lease expense ....................... (3,248) (3,248)
Interest expense, net ................................. $ (566) $ (566)
</TABLE>
(B) Effective October 1, 1995 the State of New Hampshire issued a reduction
in payment rates under the Medical Assistance program. The annualized
impact of this rate reduction is approximately $1,500,000.
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
Revenues, net ............ $(1,500) $--
(C) The former owners have agreed to pay certain Genesis subsidiaries for
marketing and other services for approximately two years with annual
payments of approximately $900,000. The former owners also agreed to
lease 30,000 square feet of office space from the Company for
approximately two years at an annual rate of $510,000.
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
Revenues, net .......... $1,410 $--
(D) As a result of the McKerley Transaction, corporate overhead functions
related to the prior owners, certain nursing staff and regional
management of the nursing facilities will be merged. The Company has
identified duplicative positions and the costs associated with such
positions, and plans to eliminate these costs according to a transition
plan within one year of the acquisition.
Salary costs and other payments associated with certain McKerley
principals who will not be joining Genesis have been identified and
eliminated, as well as costs associated with other management positions
which have already been vacated and will not be replaced. Support staff
associated with these positions have also been eliminated.
The components of the savings expected upon merging McKerley's operations
into Genesis are as follows:
<TABLE>
<CAPTION>
Annual Cost Nine Months Cost
------------- ----------------
(In thousands)
<S> <C> <C>
Principal salaries, payments and cost of support
personnel .............................................. $(1,693) $(418)
Management to be eliminated due to overlap, and vacated
management positions not to be replaced ................ (622) (104)
Personnel reduction in operating staff to eliminate
duplicative positions .................................. (500) (50)
------------- ----------------
$(2,815) $(572)
============= ================
</TABLE>
<PAGE>
The impact of the savings has reflected in a pro forma adjustment as
follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C> <C>
Operating expenses other than depreciation,
amortization and lease expense ....................... $(2,815) $(572)
</TABLE>
(E) The McKerley Transaction was financed with borrowings under the Company's
bank credit facilities aggregating approximately $68,700,000. The Company
has repaid approximately $27,000,000 of assumed McKerley debt. The
Company has also assumed a mortgage obligation of approximately
$9,000,000 which was not immediately repaid. Interest rate assumptions
are 7.25% for the Company's borrowing under its bank credit facilities.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Interest expense, net:
Interest expense -- bank facilities ............... $ 4,930 $ 822
Elimination of historical McKerley remaining
interest expense ............................... (2,739) (457)
------------------ -----------------
$ 2,191 $ 365
================== =================
</TABLE>
(F) In accordance with generally accepted accounting principles, the net
assets acquired are recorded at the lower of purchase price or fair
value. The estimated fair value adjustments have been determined based on
the most recent information available. The resultant excess of purchase
price over fair value of net assets acquired is required to be amortized.
The pro forma adjustment to reflect the increased depreciation and
amortization is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C> <C>
Depreciation and amortization expense $1,079 $180
</TABLE>
(G) The former owners have agreed to make certain lease payments on behalf of
the Company with respect to certain lease obligations of the McKerley
Entities. The following pro forma adjustment reflects the impact of
recognizing the resulting lease expense on a straight line basis over the
remaining lease term:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C> <C>
Lease expense ........... $(1,244) $(207)
</TABLE>
<PAGE>
NEIGHBORCARE TRANSACTION
(H) A portion of the NeighborCare Transaction will be financed with
borrowings under the Company's bank credit facilities aggregating
approximately $47,250,000. Genesis expects to repay approximately
$18,000,000 of NeighborCare debt assumed in the transaction. Interest
rate assumptions are 6.8% for the Company's borrowings under its credit
facilities.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Interest expense, net:
Interest expense -- bank facilities ............... $ 3,171 $ 1,842
Elimination of historical NeighborCare remaining
interest expense ............................... (1,291) (1,142)
------------------ -----------------
$ 1,880 $ 700
================== =================
</TABLE>
Adjustment to reflect the issuance of $10,000,000 of Genesis Common Stock
as a portion of the consideration. The stock issuance price has been
estimated at $32.50 per share resulting in the issuance of 307,692 shares.
(I) As a result of the NeighborCare Transaction, corporate and administrative
overhead functions related to the prior ownership structure will be
merged. Accordingly, Genesis has identified duplicative physical
locations which will be merged into existing Genesis pharmacy and medical
supply locations.
<TABLE>
<CAPTION>
Annual Cost Nine Months Cost
------------- ----------------
(In thousands)
<S> <C> <C>
Consolidation of institutional pharmacy locations ....... $ (300) $(175)
Consolidation of medical supply division ................ (300) (175)
Personnel reduction in operating staff to eliminate
duplicative positions .................................. (615) (360)
Other operating costs including legal and accounting
fees, advertising and office expense ................... (474) (275)
------------- ----------------
$(1,689) $(985)
============= ================
</TABLE>
The impact of the savings have been reflected in a pro forma adjustment
as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Operating expenses other than depreciation,
amortization and lease expense ....................... $(1,689) $(984)
</TABLE>
(J) In accordance with generally accepted accounting principles, the net
assets acquired are recorded at the lower of purchase price or fair
value. The estimated fair value adjustments have been determined based on
the most recent information available. The resultant excess of purchase
price over fair value of net assets acquired is required to be amortized.
The elimination of historical depreciation expense is the result of
certain assets not being acquired by Genesis. The pro forma adjustment to
reflect the net increased depreciation and amortization is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Impact of step-up and allocation of goodwill . $2,706 $1,578
Elimination of historical depreciation expense (159) (93)
------------------ -----------------
Depreciation and amortization ................ $2,547 $1,485
================== =================
</TABLE>
<PAGE>
(K) In connection with the NeighborCare Transaction, certain corporate office
and furniture and fixture leases will be terminated. The pro forma
adjustment to reflect this is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Operating expenses other than depreciation,
amortization and lease expense ....................... $(160) $(93)
</TABLE>
NATIONAL HEALTH TRANSACTION
(L) In connection with the National Health Transaction certain assets and
liabilities were not acquired by Genesis. Additionally, certain
businesses, including home health care, infusion therapy and assisted
living facilities in New York State were not acquired. The statement of
operations data from these assets is presented in a pro forma footnote
below:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Net Revenues ......................................... $(24,949) $(26,264)
Operating expenses other than depreciation,
amortization and lease expense ...................... (27,375) (28,340)
Depreciation and amortization ........................ (1,290) (1,453)
Lease expense ........................................ (233) (323)
Interest expense, net ................................ (1,124) (1,151)
</TABLE>
(M) In accordance with generally accepted accounting principles, the net
assets acquired are recorded at the lower of the purchase price or fair
value. The estimated fair value adjustments have been determined based on
the most recent information available. The resultant excess of purchase
price over fair value of net assets acquired is required to be amortized.
The pro forma adjustment to reflect the increased depreciation and
amortization is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C> <C>
Depreciation and amortization $2,357 $1,743
</TABLE>
(N) The National Health Transaction was financed by Genesis with borrowings
under its bank credit facilities aggregating approximately $51,800,000.
Genesis repaid approximately $36,200,000 of indebtedness assumed upon
consummation of the transaction. The Company also assumed mortgage
obligations of approximately $7,900,000 which were not repaid. Interest
rate assumptions are 6.8% for the Company's borrowing under its bank
credit facilities.
Prior to the closing of the stock acquisitions, an affiliate of a
financial institution purchased nine of the National Health eldercare
centers and subsequently leased the centers to a subsidiary of Genesis
under operating lease agreements.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Interest expense, net:
Interest expense-bank facility .................. $ 3,619 $ 2,714
Elimination of historical National Health
remaining expense ............................ (3,993) (2,995)
------------------ -----------------
$ (374) $ (281)
================== =================
Lease expense ................................... $ 4,949 $ 3,712
</TABLE>
<PAGE>
(O) Genesis has identified certain cost saving opportunities in connection
with the National Health Transaction. The Company has identified
duplicative positions and the costs associated with such positions, and
plans to eliminate these costs according to a transition plan within one
year of the acquisition.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Reduction in contract labor services .................... $(108) $ (81)
Personnel reduction in operating staff to eliminate
duplicative positions .................................. (252) (189)
------------------ -----------------
$(360) $(270)
================== =================
</TABLE>
(P) Genesis has identified certain revenue synergies relating to its
pharmacy, medical supply and group purchasing businesses. These services
are currently not provided by Genesis to National Health facilities nor
does National Health have the businesses to deliver these services.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Revenues, net ........................................ $2,000 $1,500
Operating expenses other than depreciation,
amortization and lease expense ...................... 1,300 975
------------------ -----------------
Net impact ......................................... $ 700 $ 525
================== =================
</TABLE>
1996 EQUITY OFFERING ADJUSTMENT
(Q) Adjustment to reflect the application of the net proceeds of the 1996
Equity Offering to repay indebtedness under the Company's bank credit
facilities which currently bear interest at a weighted average annual
rate of approximately 6.8%.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1995 June 30, 1996
------------------ -----------------
(In thousands)
<S> <C> <C> <C>
Interest, net.......... $(13,720) $(8,831)
</TABLE>
GMC TRANSACTION
(R) The historical financial statements of GMC include unusual, non-recurring
charges related to a provision to increase allowance for doubtful
accounts, the settlement of a matter relating to reimbursement for
nutritional services provided at a nursing facility previously managed by
a GMC subsidiary and an amount recorded relating to a class action suit.
The historical financial statements also included non-recurring charges
related to additional interest incurred under GMC's credit facility and a
discount on a note receivable.
<TABLE>
<CAPTION>
Year Ended
September 30, Nine Months Ended
1995 June 30, 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Operating expenses other than depreciation,
amortization and lease expense ....................... -- $(2,300)
Interest, net ......................................... -- (1,121)
</TABLE>
F-29
<PAGE>
(S) The historical financial results include a provision for costs on the
sale of accounts receivable, which is included in the interest expense
line item. The following pro forma adjustment represents the
reclassification of the portion of the provision that relates to
operating expenses:
<TABLE>
<CAPTION>
Year Ended
September 30, Nine Months Ended
1995 June 30, 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Operating expenses other than depreciation,
amortization and lease expense ....................... $ 1,383 $ 1,447
Interest expense, net ................................. (1,383) (1,447)
</TABLE>
(T) As a result of the GMC Transaction, certain corporate and administrative
overhead functions related to the prior ownership structure will be
merged. Genesis has identified physical location which will be merged
into existing Genesis Administrative locations.
<TABLE>
<CAPTION>
Nine Months
Annual Cost Cost
------------ ---------------
(In thousands)
<S> <C> <C>
Personnel reduction in operating staff to eliminate
duplicative position ................................... $(1,000) $ (750)
Other operating costs including legal and accounting
fees, advertising and office expense ................... (1,000) (750)
------------ ---------------
$(2,000) $(1,500)
============ ===============
</TABLE>
The impact of the savings have been reflected in a pro forma adjustment
as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30,
1995 June 30, 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Operating expenses other than depreciation,
amortization and lease expense ....................... $(2,000) $(1,500)
</TABLE>
(U) The equity component of the purchase price will be financed with
borrowings under the Company's bank credit facility of approximately
$91,000,000. Interest rate assumptions are 6.8% for the Company's
borrowings:
<TABLE>
<CAPTION>
Year Ended
September 30, Nine Months Ended
1995 June 30, 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Interest expense -- bank
facilities ..................... $6,370 $4,778
</TABLE>
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
The following unaudited pro forma condensed consolidated balance sheet
includes the historical consolidated condensed balance sheet of the Company
at June 30, 1996 and the pro forma adjustments to reflect the National Health
Transaction and GMC Transaction, as if they occurred on June 30, 1996. The
pro forma adjustments should be read in conjunction with the Company's
historical consolidated financial statements, National Health's historical
combined financial statements and GMC's historical combined financial
statements.
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Consolidated
National Pro Forma Genesis/
National Health GMC National
Genesis Health Adjustments GMC Adjustments Health/GMC
-------- ---------- -------------- --- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Current assets ................ $297,009 $23,401 $ (9,108)(A) $75,834 $ -- $387,136
Property and equipment, net .. 313,388 58,608 7,346 (A)(D) 93,042 72,345(E) 544,729
Other assets ................. 267,951 13,795 (7,426)(A)(D) 22,808 44,000(E) 341,128
-------- ------- -------- -------- -------- ----------
Total assets ................. $878,348 $95,804 $ (9,188) $191,684 $116,345 $1,272,993
======== ======= ======== ======== ======== ==========
Current liabilities .......... $ 69,410 $21,777 $ (3,349)(A)(B)(C) $ 37,951 $ (5,820)(F)(G) $ 123,969
Long term debt, excluding
current maturities .......... 295,897 68,826 (1,158)(A)(B) 130,775 100,045(G) 590,385
Other liabilities ............ 12,803 -- 520 (C) 4,078 41,000(E) 58,401
Shareholders' equity ......... 500,238 5,201 (5,201)(A)(D) 18,880 (18,880)(E) 500,238
-------- ------- -------- -------- -------- ----------
Total liabilities and
shareholders' equity ........ $878,348 $95,804 $(9,188) $191,684 $116,345 $1,272,993
======== ======= ======== ======== ======== ==========
</TABLE>
Pro forma adjustments are as follows:
NATIONAL HEALTH TRANSACTION
(A) The assets and liabilities of National Health not acquired or assumed by
Genesis in the National Health Transaction are eliminated in a pro forma
adjustment as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Current assets ............................. $ (9,108)
Property and equipment .................... (9,686)
Other assets .............................. (11,141)
--------
Total assets .............................. $(29,935)
========
Current liabilities ....................... $ (5,249)
Long term debt, excluding current
maturities ............................... (16,758)
Other liabilities ......................... --
Shareholders' equity ...................... (7,928)
--------
Total liabilities and shareholders' equity $(29,935)
========
</TABLE>
(B) The National Health Transaction was financed by Genesis with borrowings
under its bank credit facilities of approximately $51,800,000 which
includes the repayment of approximately $36,200,000. Additionally,
Genesis assumed existing indebtedness of approximately $7,900,000 which
was not repaid immediately. The impact of the borrowings under the bank
credit facilities is reflected in the following pro forma adjustment:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Current liabilities.................................... $(100)
Long term debt, excluding current maturities .......... 15,600
</TABLE>
<PAGE>
(C) Transaction costs which include professional fees, duplicative salary
costs and severance, taxes and title costs and certain other costs
incurred or to be incurred in order to consummate the transaction will be
accrued, net of tax benefits, in the amount of $2,520. The following pro
forma adjustment represents the accrual for these costs:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Current liabilities....................................... $2,000
Other liabilities ........................................ 520
</TABLE>
(D) Purchase accounting adjustments include the following allocations:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Property and equipment, net............................. $16,736
Other assets .......................................... 3,715
Shareholders' equity .................................. 2,727
</TABLE>
GMC TRANSACTION
(E) Purchase accounting adjustments include the following allocations:
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
Property and equipment, net .......................... $72,345
Other assets ........................................ 44,000
Other liabilities ................................... 41,000
Shareholders' equity ................................ 18,880
</TABLE>
(F) Transaction costs which include professional fees, duplicative salary
costs and severance, taxes and title costs and certain other costs
incurred or to be incurred in order to consummate the transaction will be
accrued in the amount of $3,000,000. The following pro forma adjustment
represents the accrual for these costs:
(In thousands)
Current liabilities .................................... $3,000
(G) The GMC Transaction will be financed by the payment of $91,000,000
representing the equity purchase price. The repayment of approximately
$97,900,000 of existing indebtedness and the assumption of approximately
$32,100,000 of other indebtedness. The following pro forma adjustment
represents the incremental debt incurred in the transaction:
(In thousands)
Current liabilities ....................................... $(8,820)
Long-term debt ........................................... 100,045
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GENESIS HEALTH VENTURES, INC.
By: /s/ Richard R. Howard
-----------------------------
Richard R. Howard
President and Chief Operating Officer
Date: September 30, 1996
<PAGE>
Consent of Independent Certified Public Accountants
Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statement of Form S-8 dated
September 12, 1996, for the registration of 750,000 shares of your common
stock, of our report dated August 20, 1996, relating to the consolidated
financial statements of Geriatrics & Medical Companies, Inc. as of May 31,
1996 and for each of the years in the two-year period ended May 31, 1996
included in the Genesis Health Ventures, Inc.'s current report on Form 8-K/A
dated July 11, 1996 filed with the Securities and Exchange Commission.
We also consent to us being named as "Experts" in the Prospectus.
BDO Seidman, LLP
Philadelphia, Pennsylvania
September 30, 1996
<PAGE>
Consent of Independent Certified Public Accountants
Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statement of Form S-3 dated
September 12, 1996, for the registration of 159,499 shares of your common
stock, of our report dated August 20, 1996, relating to the consolidated
financial statements of Geriatrics & Medical Companies, Inc. as of May 31,
1996 and for each of the years in the two-year period ended May 31, 1996
included in the Genesis Health Ventures, Inc.'s current report on Form 8-K/A
dated July 11, 1996 filed with the Securities and Exchange Commission.
We also consent to us being named as "Experts" in the Prospectus.
BDO Seidman, LLP
Philadelphia, Pennsylvania
September 30, 1996
