<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
148 West State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of August 8, 1997: 35,071,512 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.....................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements.........................................2
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................9
Part II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................18
Item 2. Changes in Securities......................................18
Item 3. Defaults Upon Senior Securities............................18
Item 4 Submission of Matters to a Vote of Security Holders........18
Item 5. Other Information..........................................18
Item 6 Exhibits and Reports on Form 8-K...........................18
SIGNATURES ..................................................................19
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and
certain statements contained herein, including certain statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" such as statements concerning Medicaid and Medicare programs and the
Company's ability to meet its liquidity needs and control costs, the proposed
merger between Genesis ElderCare Acquisition Corp. and the Multicare Companies,
Inc., certain statements in Notes to Condensed Consolidated Financial
Statements, such as certain Pro Forma Adjustments; and other statements
contained herein regarding matters which are not historical facts are forward
looking statements (as such term is defined in the Securities Act of 1933) and
because such statements involve risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to those discussed below:
1. The Company's substantial indebtedness and significant debt service
obligations.
2. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
3. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of the
Company.
4. The Company's continued ability to operate in a heavily regulated environment
and to satisfy regulatory authorities, thereby avoiding a number of
potentially adverse consequences, such as the imposition of fines, temporary
suspension of admission of patients, restrictions on the ability to acquire
new facilities, suspension or decertification from Medicaid or Medicare
programs, and, in extreme cases, revocation of a facility's license or the
closure of a facility, including as a result of unauthorized activities by
employees.
5. The occurrence of changes in the mix of payment sources utilized by the
Company's customers to pay for the Company's services.
6. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
7. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and changes
in the regulatory system, such as changes in certificate of need laws in the
states in which the Company operates or anticipates operating in the future
that facilitate such competition.
8. The Company's ability to identify suitable acquisition candidates, to
consummate or complete development projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
9. The consummation of the merger between Genesis ElderCare Acquisition Corp.
and The Multicare Companies, Inc. ("Multicare") and the Company's ability to
successfully manage Multicare's operations.
These and other factors have been discussed in more detail in the Company's
periodic reports including its Annual Report on Form 10K for the fiscal year
ended September 30, 1996.
1
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 15,346 $ 12,763
Investments in marketable securities 12,957 5,517
Accounts receivable, net of allowance for doubtful accounts of
$36,431 at June 30, 1997 and $11,131 at September 30, 1996 201,192 141,716
Cost report receivables 65,289 41,575
Inventory 25,267 17,051
Prepaid expenses and other current assets 20,463 14,099
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 340,514 232,721
- ----------------------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment 650,514 416,766
Accumulated depreciation (86,269) (65,837)
- ----------------------------------------------------------------------------------------------------------------------------------
564,245 350,929
- ----------------------------------------------------------------------------------------------------------------------------------
Notes receivable and other investments 110,343 92,574
Other long-term assets 35,781 24,595
Deferred tax assets 5,690 -
Goodwill and other intangibles, net 318,578 249,850
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,375,151 $ 950,669
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 101,391 $ 73,084
Current installments of long-term debt 6,525 3,720
Income taxes payable 11,771 426
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 119,687 77,230
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 644,725 338,933
Deferred income taxes - 13,812
Deferred gain and other long-term liabilities 11,209 6,086
Shareholders' equity:
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,056,865 and 35,011,264 at June 30, 1997;
31,981,393 and 31,935,792 at September 30, 1996 701 640
Additional paid-in capital 456,328 411,472
Retained earnings 142,744 102,739
Treasury stock, at cost (243) (243)
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 599,530 514,608
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,375,151 $ 950,669
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues:
Basic healthcare services $ 140,127 $ 85,846
Specialty medical services 132,052 78,347
Management services and other, net 12,284 8,643
- -------------------------------------------------------------------------------------------------------------------------
Total net revenues 284,463 172,836
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 131,356 80,919
Other operating expenses 88,564 52,786
General corporate expense 10,853 6,515
Depreciation and amortization 11,517 6,648
Lease expense 7,324 4,086
Interest expense, net 10,351 6,125
Debenture conversion expense - 155
- -------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 24,498 15,602
Income taxes 8,942 5,511
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 15,556 $ 10,091
- -------------------------------------------------------------------------------------------------------------------------
Per common share data:
Primary:
Net income $ 0.43 $ 0.37
Weighted average shares of common stock and equivalents 36,311,392 27,507,276
- -------------------------------------------------------------------------------------------------------------------------
Fully diluted:
Net income $ 0.43 $ 0.35
Weighted average shares of common stock and equivalents 36,387,989 31,108,391
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months
Ended June 30,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues:
Basic healthcare services $ 411,044 $ 241,107
Specialty medical services 370,719 193,347
Management services and other, net 34,507 25,900
- -------------------------------------------------------------------------------------------------------------------------
Total net revenues 816,270 460,354
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 386,806 223,244
Other operating expenses 253,582 132,180
General corporate expense 30,382 17,617
Depreciation and amortization 31,618 17,883
Lease expense 21,506 11,948
Interest expense, net 28,506 19,104
Debenture conversion expense - 1,245
- -------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item 63,870 37,133
Income taxes 23,312 13,374
- -------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 40,558 23,759
Extraordinary item, net of tax (553) -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 40,005 $ 23,759
- -------------------------------------------------------------------------------------------------------------------------
Per common share data:
Primary:
Earnings before extraordinary item $ 1.14 $ 0.96
Extraordinary item (0.02) -
Net income $ 1.12 $ 0.93
Weighted average shares of common stock and equivalents 35,563,491 25,438,335
- -------------------------------------------------------------------------------------------------------------------------
Fully diluted:
Earnings before extraordinary item $ 1.13 $ 0.91
Extraordinary item (0.02) -
Net income $ 1.11 $ 0.88
Weighted average shares of common stock and equivalents 36,274,888 29,358,861
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,005 $ 23,759
Adjustments to reconcile net income to
net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes 5,828 3,343
Depreciation and amortization 31,618 17,883
Amortization of deferred gain (345) (345)
Debenture conversion expense - 1,245
Extraordinary item 553 -
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (31,567) (16,348)
Cost reports receivable (16,836) (6,418)
Inventory (5,637) (2,207)
Prepaid expenses and other current assets (957) (9,012)
Accounts payable and accrued expenses (4,697) 3,144
Income taxes payable 10,370 (816)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments (11,670) (9,531)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 28,335 14,228
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (47,138) (26,151)
Payments for acquisitions, net of cash acquired (237,665) (140,816)
Notes receivable and other investments and asset additions, net (22,893) (8,906)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (307,696) (175,873)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving credit 162,449 20,300
Repayment of long term debt (5,331) (1,673)
Proceeds from issuance of long-term debt 126,500 -
Debt issuance costs (3,750) -
Common stock options exercised 2,076 2,500
Proceeds from issuance of Common Stock - 211,250
Stock issuance costs - (9,248)
Debenture conversion expense - (1,245)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 281,944 221,884
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 2,583 60,239
Cash and equivalents
Beginning of period 12,763 10,387
End of period $ 15,346 $ 70,626
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 30,357 $ 22,755
Income taxes paid $ 11,967 $ 12,451
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
GENESIS HEATLH VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's annual report for the fiscal year ended
September 30, 1996. The information furnished is unaudited but reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial information for the periods shown. Such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results expected for the full year.
2. Earnings Per Share
Primary and fully-diluted earnings per share are based on the weighted
average number of common shares outstanding and the dilutive effect of stock
options, convertible debentures and other common stock equivalents.
3. Long-Term Debt
In March 1997, the Company amended its credit facility to increase the
revolving credit facility from $300,000,000 to $375,000,000 (the "Revolving
Credit Facility"). In October 1996, the Company entered into an agreement with
the lenders to increase the Revolving Credit Facility from $200,000,000 to
$300,000,000 and the lease financing facility from $85,000,000 to $150,000,000
(the "Lease Financing Facility") and to release liens on accounts receivable,
inventory and personal property. The Revolving Credit Facility bears interest at
a floating rate equal, at the Company's option, to prime rate or LIBOR plus a
margin up to 1.5%. The Lease Financing Facility bears interest at a floating
rate equal, at the Company's option, to prime rate or LIBOR plus a margin up to
1.5%.
In October 1996, the Company completed an offering of $125,000,000 9
1/4% Senior Subordinated Notes due 2006 (the "1996 Note Offering"). The Company
used the net proceeds of approximately $121,250,000 together with borrowings
under the Revolving Credit Facility, to pay the cash portion of the purchase
price of the GMC Transaction (defined below), to repay certain debt assumed as a
result of the GMC Transaction and to repurchase GMC (defined below) accounts
receivable which were previously financed.
4. Pro Forma Financial Information
Effective October 1, 1996, Geriatric & Medical Companies, Inc. ("GMC")
merged with a wholly-owned subsidiary of Genesis (the "GMC Transaction"). Under
the terms of the merger agreement, GMC shareholders received $5.75 per share in
cash for each share of GMC stock. The total consideration paid, including
assumed indebtedness of approximately $132,000,000, is approximately
$223,000,000. The merger was financed in part with approximately $121,250,000 in
net proceeds from the 1996 Note Offering. The remaining consideration was
financed through borrowings under the Company's Revolving Credit Facility. The
GMC Transaction added to Genesis 24 owned eldercare centers with approximately
3,300 beds. GMC also operated businesses which provided a number of ancillary
healthcare services including ambulance services; respiratory therapy, infusion
therapy and enteral therapy; distribution of durable medical equipment and home
medical supplies; and information management services. In connection with the
GMC Transaction, the Company has preliminarily recorded approximately
$63,700,000 of goodwill, which is being amortized on a straight-line basis over
lives ranging from 20 to 40 years, and approximately $25,300,000 of deferred tax
assets available to reduce future income taxes,
6
<PAGE>
which are included net in deferred tax assets on the balance sheet. Management
believes it is more likely than not that such deferred tax assets will be
realized.
In July 1996, the Company acquired the outstanding stock of National
Health Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center
Corporation, Eidos, Inc. and Versalink, Inc. (collectively, "National Health").
Prior to the closing of the stock acquisitions, an affiliate of a financial
institution purchased nine of the eldercare centers for $67,700,000 and
subsequently leased the centers to a subsidiary of Genesis under the Lease
Financing Facility. The balance of the total consideration paid to National
Health was funded with available cash of $51,800,000 and assumed indebtedness of
$7,900,000. National Health added 16 eldercare centers in Florida, Virginia and
Connecticut with approximately 2,200 beds to Genesis. National Health also
provided enteral nutrition and rehabilitation therapy services to the eldercare
centers which it owned and leased.
In June 1996, the Company acquired the outstanding stock of
NeighborCare Pharmacies, Inc. and its related entities (collectively,
"NeighborCare"), a privately held institutional pharmacy, infusion therapy and
retail professional pharmacy business based in Baltimore, Maryland. Total
consideration was approximately $57,250,000, comprised of approximately
$47,250,000 in cash and 312,744 shares of Genesis common stock.
On November 30, 1995, the Company acquired McKerley Health Care
Centers, Inc. and its related entities (collectively, "McKerley") for total
consideration of approximately $68,700,000. The transaction (the "McKerley
Transaction") also provided for up to an additional $6,000,000 of contingent
consideration payable upon the achievement of certain financial objectives
through October 1997, of which approximately $4,000,000 was paid in February
1997, and $2,000,000 of which remains contingent consideration. McKerley added
15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds to
Genesis. McKerley also operated a home healthcare company. The acquisition was
financed with borrowings under the Revolving Credit Facility and assumed
indebtedness.
The following unaudited proforma statement of operations information
gives effect to the GMC, National Health, NeighborCare and McKerley transactions
described above as though they had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including amortization of
goodwill, additional depreciation expense, increased interest expense on debt
related to the acquisitions and related income tax effects. The proforma
financial information does not necessarily reflect results of operations that
would have occurred had the acquisitions occurred at the beginning of the period
presented.
(In thousands, except per share data)
Nine Months
Ended
Pro Forma Statement of Operations Information: June 30, 1996
Total net revenues $ 722,249
Net income 34,126
Primary earnings per share $ 1.06
Fully diluted earnings per share $ 1.00
On June 16, 1997, the Company, The Cypress Group, LLC ("Cypress") and
the Texas Pacific Group ("TPG") formed Genesis ElderCare Acquisition Corp.
("GEAC"), which on June 20, 1997 commenced a cash tender offer for the common
stock of The Multicare Companies, Inc. ("Multicare") for $28.00 per share (the
"Multicare Transaction") pursuant to an Agreement and Plan of Merger between
inter alia GEAC and Multicare. Multicare, a New Jersey-based long term care
company with annualized revenues of $696,000,000 and approximately 37,000,000
fully diluted shares outstanding, provides services through 155 facilities with
approximately 16,000 beds. Genesis has committed to invest $325,000,000 in
7
<PAGE>
exchange for approximately 44% of GEAC common stock and Cypress and TPG have
committed to invest $420,000,000 in exchange for approximately 56% of GEAC
common stock. Genesis will enter into a multi-year management services contract
with GEAC to manage Multicare's operations for an annual management fee of 6% of
net revenues, provided that payment of one-third of such fee shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants and that payment of the management fee shall be no less than
approximately $23,900,000 in any one year. Following completion of the
transaction, GEAC will be a consolidated subsidiary of Genesis. Genesis will
enter into a put/call agreement with Cypress and TPG giving Genesis the option
to acquire the equity of Cypress and TPG in GEAC after four years; Cypress and
TPG will have the option to put their equity in GEAC to Genesis after five
years. The offer is subject to, among other things, the tender of a majority of
the outstanding shares on a fully diluted basis and receipt of all regulatory
approvals. Concurrently with the consummation of the Multicare Transaction,
Multicare will sell its contract therapy business (the "Therapy Sale") to
Genesis for approximately $24,000,000. Concurrently with, or as soon as
practicable after, the consummation of the Multicare Transaction, Multicare will
sell its pharmacy business to Genesis for approximately $50,000,000 (the
"Pharmacy Sale").
The following unaudited proforma statement of operations information
gives effect to the Multicare Transaction described above as though it had
occurred at the beginning of the period presented, after giving effect to
certain adjustments including, the effect of the merger and tender offer,
amortization of goodwill, additional depreciation expense, increased interest
expense on debt related to the acquisition and related income tax effects. The
proforma financial information does not necessarily reflect results of
operations that would have occurred had the acquisitions occurred at the
beginning of the period presented.
(In thousands, except per share data)
Nine Months
Ended
Pro Forma Statement of Operations Information: June 30, 1997
Total net revenues $1,339,546
Net income 38,017
Primary earnings per share $ 1.05
Fully diluted earnings per share $ 1.04
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its
efforts on providing an expanding array of specialty medical and community-based
services to the elderly. The delivery of these services was originally
concentrated in the eldercare centers owned and leased by the Company, but now
also includes managed eldercare centers, independent healthcare facilities,
outpatient clinics and home health care.
The Company generates revenues from three sources: basic healthcare
services, specialty medical services and management services and other. The
Company includes in basic healthcare services revenues from all room and board
charges for its eldercare customers at its owned and leased eldercare centers.
Specialty medical services include all revenues from providing rehabilitation
therapies, institutional pharmacy and medical supply services, community-based
pharmacy services, subacute care programs, home health care, physician services,
and other specialized services. Management services and other include fees
earned for management of eldercare centers, development of life care communities
and revenues from the group purchasing, staff replacement, hospitality and
vending businesses, and transactional revenues.
Certain Transactions
Multicare Transaction
On June 16, 1997, the Company, The Cypress Group, LLC ("Cypress") and the Texas
Pacific Group ("TPG") formed Genesis ElderCare Acquisition Corp. ("GEAC"), which
on June 20, 1997 commenced a cash tender offer for the common stock of The
Multicare Companies, Inc. ("Multicare") for $28.00 per share (the "Multicare
Transaction") pursuant to an Agreement and Plan of Merger between inter alia
GEAC and Multicare. Multicare, a New Jersey-based long term care company with
annualized revenues of $696,000,000 and approximately 37,000,000 fully diluted
shares outstanding, provides services through 155 facilities with approximately
16,000 beds. Genesis will enter into a multi-year management services contract
with GEAC to manage Multicare's operations for an annual management fee of 6% of
net revenues, provided that payment of one-third of such fee shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants and that payment of the management fee shall be no less than
approximately $23,900,000 in any one year. Following completion of the
transaction, GEAC will be a consolidated subsidiary of Genesis. The offer is
subject to, among other things, the tender of a majority of the outstanding
shares on a fully diluted basis and receipt of all regulatory approvals.
Concurrently with the consummation of the Multicare Transaction, Multicare will
sell its contract therapy business (the "Therapy Sale") to Genesis for
approximately $24,000,000. Concurrently with, or as soon as practicable after,
the consummation of the Multicare Transaction, Multicare will sell its pharmacy
business to Genesis for approximately $50,000,000 (the "Pharmacy Sale").
9
<PAGE>
GEAC will require approximately $1,483,000,000 to (i) purchase the
Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
to be incurred in connection with the completion of the Tender Offer, Merger and
the financing transactions in connection with therewith, (iii) refinance certain
indebtedness of Multicare and (iv) make certain cash payments to employees in
accordance with the Merger Agreement and Noncompetition Agreements. Of the funds
required to finance the foregoing, approximately $745,000,000 will be furnished
to Acquisition Corp. as capital contributions by Genesis ElderCare Corp. from
the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis ElderCare
Corp. Common Stock") to Cypress, TPG and Genesis. On June 15, 1997, each of
Cypress, TPG and Genesis delivered commitment letters pursuant to which Cypress
and TPG have each agreed to purchase shares of Genesis ElderCare Corp. Common
Stock for a purchase price of $210,000,000 and Genesis has agreed to purchase
shares of Genesis ElderCare Corp. Common Stock for a purchase price of
$325,000,000 subject to satisfaction of certain conditions. The balance of the
funds necessary to finance the foregoing will come from (i) the proceeds of
loans from a syndicate of lenders in the aggregate amount of up to $525,000,000
and (ii) $250,000,000, in the aggregate, from the proceeds of the issuance of 9%
Senior Subordinated Notes due 2007 ("9% Notes") sold by Acquisition Corp. on
August 11, 1997, which net proceeds of approximately $241,000,000 are currently
held in escrow by the trustee.
In connection with the Multicare Transaction, Genesis has accepted an
Amended and Restated Commitment Letter (the "Genesis Commitment Letter") from
Mellon Bank, N.A., Citicorp Securities, Inc., Citibank N.A., First Union Capital
Markets Corp., First Union National Bank and NationsBank, N.A. (the "Lenders")
pursuant to which the Lenders have committed to provide Genesis and its
subsidiaries with loan facilities totaling $880,000,000 (the "Genesis Bank
Financing") for the purpose of refinancing the existing indebtedness of Genesis;
funding interest and principal payments on the facilities and certain remaining
indebtedness; funding permitted acquisitions; funding Genesis' commitments in
connection with the Merger; and funding Genesis' and its subsidiaries' working
capital and general corporate purposes, including fees and expenses of the
transactions. Because the terms, conditions and covenants of the Genesis Bank
Financing are subject to the negotiation, execution and delivery of the
definitive loan documents, certain of the actual terms, conditions and covenants
thereof may differ from those described below.
The Genesis Bank Financing facilities will be secured by a first
priority security interest in all of the (i) stock, partnership interests and
other equity of all of Genesis' present and future direct and indirect
subsidiaries (including, without limitation, Genesis' and its subsidiaries'
ownership interest in Genesis ElderCare Corp.) other than stock of Acquisition
Corp., Multicare and its direct and indirect subsidiaries and (ii) all
intercompany notes among Genesis and any subsidiaries or among any subsidiaries.
The Genesis Bank Financing will contain a number of covenants that,
among other things, will restrict the ability of Genesis and its subsidiaries to
dispose of assets, incur additional indebtedness, make loans and investments,
pay dividends, engage in mergers or consolidations, engage in certain
transactions with affiliates and change control of capital stock, and to make
capital expenditures; will prohibit the ability of Genesis and its subsidiaries
to prepay debt to other persons, make material changes in accounting and
reporting practices, create liens on assets, give a negative pledge on assets,
make acquisitions and amend or modify documents; will cause Genesis and its
affiliates to maintain the Management Agreement, the Put/Call Agreement and
corporate separateness; and will cause Genesis to comply with the terms of other
material agreements as well as comply with usual and customary covenants for
transactions of this nature.
The Multicare Transaction contains a guaranty (the "Guaranty") by
Genesis, as a primary obligor to Multicare, of each obligation of Genesis
ElderCare Corp. and Acquisition Corp. (collectively, the "Obligations" and
singly, "Obligation"). Genesis agreed that if either or both of Genesis
ElderCare Corp. and Acquisition Corp. fails to observe, perform or discharge any
Obligation, Genesis shall promptly itself, observe, perform or discharge such
Obligation, or cause either Genesis ElderCare Corp. or Acquisition Corp. to
observe, perform or discharge such Obligation, in all cases as if and to the
extent that Genesis was
10
<PAGE>
the primary obligor with respect to such Obligation, and shall pay any and all
actual damages that may be incurred or suffered by Multicare in consequence
thereof, and any and all costs and expenses, including, without limitation,
attorneys' fees and expenses, that maybe incurred by Multicare in collecting
such Obligation and/or in preserving or enforcing any rights under the Guaranty
or under the Obligations.
The Merger Agreement further provides that if any scheduled expiration
of the Tender Offer occurring after August 15, 1997 on which each of the
conditions set forth in the Merger Agreement has been satisfied or waived,
Genesis ElderCare Corp. shall not have satisfied or waived the Financing
Condition and the Merger Agreement is thereafter terminated, then Genesis shall
pay to Multicare $30 million. Upon making such payment none of Genesis
ElderCare Corp., Acquisition Corp., Genesis or any of their affiliates shall
have any further liability with respect to the failure to complete the
transactions contemplated by the Merger Agreement unless Genesis ElderCare Corp.
or Acquisition Corp. breaches the Merger Agreement (and the breach remains
unremedied after five days notice to Genesis ElderCare Corp. or Acquisition
Corp.) or if Genesis, Genesis ElderCare Corp. or Acquisition Corp. fail to use
reasonable best efforts to obtain such financing. Genesis has delivered to
Multicare an irrevocable letter of credit (the "Letter of Credit") for $30
million, drawn on Mellon Bank, N.A. to secure its obligation to pay such amount.
The 9% Notes are required to be redeemed at 101% of their face amount
plus accrued interest if the Tender Offer is not consummated by October 31, 1997
(subject to a one-month extension at Acquisition Corp's option). Genesis is
required to deposit the amount of funds necessary to permit all outstanding
Notes to be so redeemed, to the extent the proceeds held by the Trustee are
insufficient to redeem the Note in the event the Tender Offer is not
consummated.
In connection with the funding pursuant to their respective equity
commitments, Genesis, Cypress and TPG also will enter into an agreement (the
"Put/Call Agreement") pursuant to which, among other things, Genesis will have
the option, on the terms and conditions set forth in the Put/Call Agreement to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress and
TPG commencing on the fourth anniversary of the Merger and for a period of 270
days thereafter, at a price determined pursuant to the terms of the Put/Call
Agreement. Cypress and TPG will have the option, on the terms and conditions set
forth in the Put/Call Agreement, to require Genesis to purchase (the "Put") such
Genesis ElderCare Corp. Common Stock commencing on the fifth anniversary of the
Merger and for a period of one year thereafter, at a price determined pursuant
to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress' and TPG's Genesis ElderCare
Corp. Common Stock. The calculated equity value will be determined based upon a
multiple of Genesis ElderCare Corp.'s earnings before interest, taxes,
depreciation, amortization and rental expenses, as adjusted ("EBITDAR") after
deduction of certain liabilities. The multiple to be applied to EBITDAR will
depend on whether the Put or the Call is being exercised. Any payment to Cypress
or TPG under the Call or the Put maybe in the form of cash or Genesis common
stock at Genesis' option.
Upon exercise of the Call, Cypress and TPG will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the calculated equity value. Any additional equity value attributable to
Cypress' or TPG's Genesis ElderCare Corp. Common Stock will be determined on the
basis set forth in the Put/Call Agreement which provides generally for
additional equity value of Genesis ElderCare Corp. to be divided based upon the
proportionate share of the capital contributions of the stockholders to Genesis
ElderCare Corp. Upon exercise of the Put by Cypress or TPG, there will be no
minimum return to Cypress or TPG; any payment to Cypress or TPG will be limited
to Cypress' or TPG's share of the calculated equity value based upon a formula
set forth in the terms of the Put/Call Agreement which provides generally for
the preferential return of the stockholders' capital contributions (subject to
certain priorities), a 25% compound annual return on Cypress' and TPG's capital
contributions and the remaining equity value to be divided based upon the
proportionate share of the capital contributions of the stockholders to Genesis
ElderCare Corp.
Cypress' and TPG's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis or an
extraordinary dividend or the occurrence of the leverage recapitalization of
Genesis, with such terms to be defined in the Put/Call Agreement. Upon an event
of acceleration or the failure by Genesis to satisfy its obligations upon
exercise of the Put, Cypress and TPG will have the right to terminate the
Stockholders' Agreement and Management Agreement and to control the sale or
liquidation of Genesis ElderCare Corp. In the event of such sale, the proceeds
from such sale will be distributed among the parties as contemplated by the
formula for the put option exercise price and Cypress and TPG will retain a
claim against Genesis for the difference, if any, between the proceeds of such
sale and the put option exercise price. In the event of a change of control of
Genesis, the option price shall be payable solely in cash provided any such
payment will be subordinated to the payment of principal and interest under the
Genesis Bank Financing.
11
<PAGE>
Presbyterian Foundation
Effective January 1, 1997, the Company entered into an agreement to
provide management services for NewCourtland, Inc. ("NewCourtland"), a wholly
owned subsidiary of The Presbyterian Foundation of Philadelphia (the
"Presbyterian Foundation"), a non-profit organization. Under the terms of the
agreement, Genesis will provide management services to eight eldercare centers
with 1,844 beds located throughout the Delaware Valley.
Geriatric & Medical Companies, Inc.
Effective October 1, 1996, Geriatric & Medical Companies, Inc. ("GMC")
merged with a wholly-owned subsidiary of Genesis (the "GMC Transaction"). Under
the terms of the merger agreement, GMC shareholders received $5.75 per share in
cash for each share of GMC common stock. The total consideration paid, including
assumed indebtedness of approximately $132,000,000, is approximately
$223,000,000. The merger was financed in part with approximately $121,250,000 in
net proceeds from an offering of 9 1/4% Senior Subordinated Notes issued in
October 1996 (the "1996 Note Offering"). The remaining consideration was
financed through borrowings under the Company's revolving credit facility (the
"Revolving Credit Facility"). The GMC Transaction added to Genesis 24 owned
eldercare centers with approximately 3,300 beds. GMC also operated businesses
which provided a number of ancillary healthcare services including ambulance
services; respiratory therapy, infusion therapy and enteral therapy;
distribution of durable medical equipment and home medical supplies; and
information management services.
National Health Care Affiliates, Inc.
In July 1996, the Company acquired the outstanding stock of National
Health Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center
Corporation, Eidos, Inc. and Versalink, Inc. (collectively, "National Health").
Prior to the closing of the stock acquisitions, an affiliate of a financial
institution purchased nine of the eldercare centers for $67,700,000 and
subsequently leased the centers to a subsidiary of Genesis under a $150,000,000
lease financing facility (the "Lease Financing Facility"). The balance of the
total consideration paid to National Health was funded with available cash of
$51,800,000 and assumed indebtedness of $7,900,000. National Health added 16
eldercare centers in Florida, Virginia and Connecticut with approximately 2,200
beds to Genesis. National Health also provided enteral nutrition and
rehabilitation therapy services to the eldercare centers which it owned and
leased.
NeighborCare Pharmacies, Inc.
In June 1996, the Company acquired the outstanding stock of
NeighborCare Pharmacies, Inc. ("NeighborCare"), a privately held institutional
pharmacy, infusion therapy and retail pharmacy business based in Baltimore,
Maryland. Total consideration was approximately $57,250,000, comprised of
approximately $47,250,000 in cash and 312,744 shares of Genesis common stock.
McKerley Health Care Centers, Inc.
On November 30, 1995, the Company acquired McKerley Health Care
Centers, Inc. and its related entities (collectively, "McKerley") for total
consideration of approximately $68,700,000. The transaction (the "McKerley
Transaction") also provided for up to an additional $6,000,000 of contingent
consideration payable upon the achievement of certain financial objectives
through October 1997, of which approximately $4,000,000 was paid in February
1997, and $2,000,000 of which remains contingent consideration. McKerley added
15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds to
Genesis. McKerley also operated a home healthcare company. The acquisition was
financed with borrowings under the Revolving Credit Facility and assumed
indebtedness.
12
<PAGE>
Results of Operations
Three months ended June 30, 1997 compared to three months ended June 30, 1996.
The Company's total net revenues for the quarter ended June 30, 1997
were $284,463,000 compared to $172,836,000 for the quarter ended June 30, 1996,
an increase of $111,627,000 or 65%. Basic healthcare services increased
$54,281,000 or 63% of which approximately $35,300,000 is attributable to the GMC
Transaction, approximately $16,300,000 is attributable to the National Health
transaction, and the remaining increase of approximately $2,700,000 is primarily
due to providing care to higher acuity patients and to rate increases. Specialty
medical services revenue increased $53,705,000 or 69% of which approximately
$15,000,000 is attributable to the GMC Transaction, approximately $6,000,000 is
due to the National Health transaction, approximately $6,100,000 is due to the
inclusion of the NeighborCare Pharmacies transaction for the full three months
in 1997 versus two months in 1996, and the remaining increase of approximately
$26,600,000 is primarily due to other volume growth in the institutional
pharmacy, medical supply and contract therapy divisions and increased acuity in
the health centers division. Specialty medical services revenue per patient day
in the health centers division increased 22% to $37.78 in the quarter ended June
30, 1997 compared to $30.99 in the quarter ended June 30, 1996 primarily due to
treatment of higher acuity patients. Management services and other income
increased $3,641,000 or 42%. This increase is primarily due to approximately
$4,200,000 of increased other service related business; of which $2,600,000 was
acquired in the GMC Transaction, approximately $1,200,000 of increased
management fees; including approximately $725,000 earned in connection with the
management agreement with the Presbyterian Foundation, offset by approximately
$2,400,000 of other transactional revenues earned in the quarter ended June 30,
1996 which included the sale of an investment.
The Company's operating expenses before depreciation, amortization,
lease expense, interest expense, and debenture conversion expense were
$230,773,000 for the quarter ended June 30, 1997 compared to $140,220,000 for
quarter ended June 30, 1996, an increase of $90,553,000 or 65%, of which
approximately $64,400,000 is due to the impact of acquisitions and the remaining
increase of approximately $26,100,000 is attributed to growth in the
institutional pharmacy, medical supply and contract therapy divisions.
Increased depreciation and amortization, and lease expense are
primarily attributable to the GMC Transaction, the National Health transaction,
and the NeighborCare transaction.
Interest expense increased $4,226,000 or 69%. This increase was
primarily due to additional borrowings used to finance recent acquisitions,
including the 1996 Note Offering used to finance the GMC Transaction, offset by
the repayment of debt associated with proceeds of $202,280,000 from the May 1996
equity offering, and offset by the conversion of the Company's 6% Convertible
Senior Subordinated Debentures (the "Debentures").
In the quarter ended June 30, 1996, the Company converted approximately
$8,800,000 of the then outstanding Debentures. In connection with the early
conversion of the Debentures, the Company paid approximately $155,000
representing the prepayment of interest to converting debenture holders. The
non-recurring cash payment is presented as debenture conversion expense in the
results of operations for the three months ended June 30, 1996.
Nine months ended June 30, 1997 compared to nine months ended June 30, 1996.
The Company's total net revenues for the nine months ended June 30,
1997 were $816,270,000 compared to $460,354,000 for the nine months ended June
30, 1996, an increase of $355,916,000 or 77%. Basic healthcare services
increased $169,937,000 or 70% of which approximately $99,800,000 is attributable
to the GMC Transaction, approximately $45,800,000 is attributable to the
National Health transaction, approximately $9,900,000 is due to the inclusion of
the eldercare centers acquired in
13
<PAGE>
the McKerley Transaction for the full nine months in 1997 versus seven months in
the prior year, and the remaining increase of approximately $14,500,000 is due
to providing care to higher acuity patients and to rate increases. Specialty
medical services revenue increased $177,372,000 or 92% of which approximately
$43,300,000 is attributed to the GMC Transaction, approximately $16,800,000 is
due to the National Health transaction, approximately $42,200,000 is attributed
to the inclusion of the NeighborCare Pharmacies transaction for the full nine
months in 1997 versus two months in 1996, approximately $1,500,000 is due to the
inclusion of the eldercare centers acquired in the McKerley Transaction for the
full nine months in 1997 versus seven months in the prior year, and the
remaining increase of approximately $73,600,000 is primarily due to other volume
growth in the institutional pharmacy, medical supply and contract therapy
divisions and increased acuity in the health centers division. Specialty medical
service revenue per patient day in the health centers division increased 14% to
$33.58 in the nine months ended June 30, 1997 compared to $29.38 in the nine
months ended June 30, 1996 primarily due to treatment of higher acuity patients.
Management services and other income increased $8,607,000 or 33%. This increase
is primarily due to approximately $13,300,000 of increased other service related
business of which $8,700,000 was acquired in the GMC Transaction, offset by
other transactional revenues earned in the nine months ended June 30, 1996 which
included gains recognized in connection with the sale of an investment, the sale
of four eldercare centers and a pharmacy in Indiana and the sale of a majority
interest in one eldercare center in Maryland.
The Company's operating expenses before depreciation, amortization,
lease expense, interest expense and debenture conversion expense were
$670,770,000 for the nine months ended June 30, 1997 compared to $373,041,000
for nine months ended June 30, 1996, an increase of $297,729,000 or 80%, of
which approximately $220,900,000 is due to the impact of acquisitions and the
remaining increase of approximately $76,800,000 is attributed to growth in the
institutional pharmacy, medical supply and contract therapy divisions.
Increased depreciation and amortization, and lease expense are
primarily attributed to the GMC Transaction, the National Health transaction,
the NeighborCare transaction and the McKerley Transaction.
Interest expense increased $9,402,000 or 49%. This increase in interest
expense was primarily due to additional borrowings used to finance recent
acquisitions, including the 1996 Note Offering used to finance the GMC
Transaction, offset by the repayment of debt associated with proceeds of
$202,280,000 from the May 1996 equity offering, and offset by the conversion of
the Company's 6% Convertible Senior Subordinated Debentures.
In the nine months ended June 30, 1996 the Company converted
approximately $42,300,000 of its then outstanding Debentures due 2003. In
connection with the early conversion of the Debentures, the Company paid
approximately $1,245,000 representing the prepayment of interest to converting
debenture holders. The non-recurring cash payment is presented as debenture
conversion expense in the results of operations for the nine months ended June
30, 1996.
In connection with the early repayment of debt and the restructuring
and amendment of the Revolving Credit Facility in the quarter ended December 31,
1996, the Company recorded an extraordinary item (net of tax) of approximately
$553,000 to write off unamortized deferred financing fees.
Liquidity and Capital Resources
Working capital increased to $220,827,000 at June 30, 1997 from
$155,491,000 at September 30, 1996. Accounts receivable increased to
$201,192,000 at June 30, 1997 from $141,716,000 at September 30, 1996.
Approximately $26,000,000 of this increase relates to the GMC Transaction, while
the remaining approximately $33,476,000 relates primarily to the continuing
shift in business mix to specialty medical services including the acquisition of
NeighborCare in fiscal 1996. The allowance for doubtful accounts increased
approximately $25,300,000, primarily as a result of reserves established in
connection with the GMC Transaction. Days of revenue in accounts receivable
remained unchanged at 63 days at
14
<PAGE>
June 30, 1997 versus September 30, 1996. Cost report receivables increased to
$65,289,000 at June 30, 1997 from $41,575,000 at September 30, 1996.
Approximately $6,900,000 of this increase relates to balances acquired in the
GMC Transaction, approximately $3,000,000 relates to amounts due from the
Pennsylvania Medicaid program which were funded in the fourth quarter, and the
remaining increase of approximately $13,600,000 is principally due to an
increase in Medicare revenues which are reimbursed on a retrospective cost
basis. The Company's cash flow from operations for the nine months ended June
30, 1997 provided cash of $28,335,000 compared to $14,228,000 for the nine
months ended June 30, 1996, primarily due to growth in earnings.
Investing activities for the nine months ended June 30, 1997 include
approximately $47,100,000 of capital expenditures primarily related to the
development of assisted living properties, betterments and expansion of
eldercare centers, the purchase of additional corporate office space and
investment in data processing hardware and software.
During the nine months ended June 30, 1997, notes receivable and other
investments increased approximately $17,800,000 principally due to investments
of approximately $7,500,000 in Doctors Health System, Inc., an independent
physician owned and controlled integrated delivery system and practice
management company; approximately $3,900,000 in Health Objects Corporation, a
software development company; approximately $2,000,000 in Senior LifeChoice, a
developer and operator of assisted living facilities, with the remaining
increase due primarily to the GMC Transaction. During the nine months ended June
30, 1997, other long term assets increased approximately $11,200,000,
principally due to the GMC Transaction.
In March 1997, the Company amended its credit facility to increase the
Revolving Credit Facility from $300,000,000 to $375,000,000. In October 1996,
the Company entered into an agreement with the lenders to increase the Revolving
Credit Facility from $200,000,000 to $300,000,000 and the Lease Financing
Facility from $85,000,000 to $150,000,000 and to release liens on accounts
receivable, inventory and personal property. The Revolving Credit Facility bears
interest at a floating rate equal, at the Company's option, to prime rate or
LIBOR plus a margin up to 1.5%. The Lease Financing Facility bears interest at a
floating rate equal, at the Company's option, to prime rate or LIBOR plus a
margin up to 1.5%.
In connection with the GMC Transaction, the Company has preliminarily
recorded approximately $63,700,000 of goodwill, which is being amortized on a
straight-line basis over lives ranging from 20 to 40 years, and approximately
$25,300,000 of deferred tax assets available to reduce future income taxes,
which are included net in deferred tax assets on the balance sheet. Management
believes it is more likely than not that such deferred tax assets will be
realized.
In November 1996, the Company called for redemption the then
outstanding Debentures at a redemption price equal to 104.2% of the principal
amount. The Debenture holders had the option to tender Debentures at the
redemption price or to convert the Debentures at a conversion price of $15.104
per share. All of the approximately $43,800,000 of remaining Debentures
outstanding were converted to Common Stock in the quarter ended December 31,
1996. The conversions improved the Company's leverage and provides the Company
with the ability to borrow under its Revolving Credit Facilities at lower rates.
In October 1996, the Company completed the 1996 Note Offering. The
Company used the net proceeds of approximately $121,250,000 together with
borrowings under the Revolving Credit Facility, to pay the cash portion of the
purchase price of the GMC Transaction, to repay certain debt assumed as a result
of the GMC Transaction and to repurchase GMC accounts receivable which were
previously financed.
Certain of the Company's outstanding loans contain covenants which,
without the prior consent of the lenders, limit certain activities of the
Company. Such covenants contain limitations relating to the merger or
consolidation of the Company and the Company's ability to secure indebtedness,
make
15
<PAGE>
guarantees, grant security interests and declare dividends. In addition, the
Company must maintain certain minimum levels of cash flow and debt service
coverage, and must maintain certain ratios of liabilities to net worth. Under
these loans, the Company is restricted from paying cash dividends on the Common
Stock, unless certain conditions are met. The Company has not declared or paid
any cash dividends on its Common Stock since its inception.
Legislative and regulatory action has resulted in continuing change in
the Medicare and Medicaid reimbursement programs which has adversely impacted
the Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Implementation of the Company's
strategy to expand specialty medical services to independent providers should
reduce the impact of changes in the Medicare and Medicaid reimbursement programs
on the Company as a whole. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative rulings
and interpretations which may further affect payments made under those programs.
Further, the federal and state governments may reduce the funds available under
those programs in the future or require more stringent utilization and quality
reviews of eldercare centers.
The Company believes that its liquidity needs can be met by expected
operating cash flow and availability of borrowings under its credit facilities.
At August 8, 1997, approximately $367,900,000 was outstanding under the
Revolving Credit Facility and Lease Financing Facility, and approximately
$138,300,000 was available under the credit facilities after giving effect to
approximately $18,800,000 in outstanding letters of credit issued under the
credit facilities.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter.
This seasonality is related to a combination of factors which include the timing
of Medicaid rate increases, seasonal census cycles and the number of calendar
days in a given quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs
are especially sensitive to inflation and marketplace labor shortages. To date,
the Company has offset its increased operating costs by increasing charges for
its services and expanding its services. Genesis has also implemented cost
control measures to limit increases in operating costs and expenses but cannot
predict its ability to control such operating cost increases in the future.
16
<PAGE>
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). This
statement simplifies the standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement of all
entities with complex capital structures. SFAS 128 also requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
Had SFAS 128 been adopted in the first quarter of fiscal 1997, basic and diluted
EPS would have been computed for the three and nine-months ended June 30, 1997
as follows (in thousands, except per share amounts):
Per Share
Income Shares Amount
(Three months ended June 30, 1997)
Basic EPS
Net Income $15,556 34,973 $0.44
Incremental shares from
assumed exercise of
dilutive stock options - 1,338 -
------- ------ -----
Diluted EPS
Net Income $15,556 36,311 $0.43
======= ====== =====
(Nine months ended June 30, 1997)
Basic EPS
Income before
extraordinary item $40,558 34,327 $1.18
Extraordinary item (553) (0.02)
------- ------ -----
Net Income $40,005 34,327 $1.16
Diluted EPS
Effect of assumed
conversion of debt 303 586 -
Incremental shares from
assumed exercise of
dilutive stock options - 1,236 -
------- ------ -----
Net Income $40,308 36,149 1.11
Extraordinary item 553 0.02
------- ------ -----
Net Income before
extraordinary item $40,861 36,149 $1.13
======= ====== =====
17
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1* Agreement of Plan of Merger dated June 16, 1997 by and
among Genesis ElderCare Corp., Genesis ElderCare
Acquisition Corp. and The Multicare Companies, Inc.
11 Statement re computation of per share earnings
27 Financial Data Schedule
* Above referenced Exhibits is incorporated by
reference to the Tender Offer Statement on Schedule
14D-1 filed by Genesis ElderCare Corp. and Genesis
ElderCare Acquisition Corp. on June 20, 1997.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated June 16,
1997, reporting the Company's formation of a new company,
Genesis ElderCare Corp. with the Cypress Group L.L.C.
(together with its affiliates, "Cypress") and TPG Partners II,
L.P. (together with its affiliates "TPG") in order to acquire
The Multicare Companies, Inc. ("Multicare"). On June 16, 1997,
Genesis ElderCare Corp., its wholly-owned subsidiary Genesis
ElderCare Acquisition Corp. ("Acquisition Corp") and Multicare
entered into an Agreement and Plan of Merger whereby
Acquisition Corp. agreed to make a tender offer for all of the
issued and outstanding shares of Common Stock, par value $.01
per share of Multicare at a purchase price of $28.00 per
share. The Current Report on Form 8-K does not include
financial statements.
18
<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 thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: August 14, 1997 /s/ George V, Hager, Jr.
-------------------------------------------------
George V. Hager, Jr.
Senior Vice President and Chief Financial Officer
19
<PAGE>
Exhibit 11
GENESIS HEALTH VENTURES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
6/30/97 6/30/96
---------- ----------
<S> <C> <C>
Primary Earnings Per Share:
Reported earnings before debenture conversion expense $ 15,556 $ 10,189
Debenture conversion expense, net of tax ($98)
---------- -----------
Reported net income $15,556 $ 10,091
---------- -----------
Weighted average shares & CSE's: 36,311,392 27,507,276
---------- -----------
Primary EPS- before debenture expense $ 0.43 $ 0.37
Primary EPS - Debenture conversion expense - -
=========== ===========
Primary EPS - Net income $ 0.43 $0.37
=========== ===========
Fully Diluted Earnings Per Share:
Reported earnings before debenture conversion expense $15,556 $10,189
Debenture conversion expense, net of tax - (98)
---------- -----------
Reported net income $15,556 $10,091
---------- -----------
Interest expense, amortization and other costs
related to the assumed conversion of the
Convertible Debentures, net of tax 665
---------- -----------
Adjusted net income $15,556 $10,756
---------- -----------
Weighted average shares & CSE's:
Common shares 36,311,392 27,507,276
Additional option shares 76,597 111,696
Convertible Debenture shares 3,489,419
---------- -----------
Total 36,387,989 31,108,391
---------- -----------
Fully diluted EPS before debenture conversion expense $ 0.43 $ 0.35
Fully diluted EPS - Debenture conversion expense - -
=========== ===========
Fully diluted EPS - Net income $ 0.43 $ 0.35
=========== ===========
</TABLE>
<PAGE>
GENESIS HEALTH VENTURES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
6/30/97 6/30/96
---------------- --------------
<S> <C> <C>
Primary Earnings Per Share:
Reported earnings before debenture conversion expense
and extraordinary item $ 40,558 $ 24,544
Debenture conversion expense, net of tax (785)
Extraordinary item, net of tax (553)
----------- -----------
Reported net income $40,005 $23,759
----------- -----------
Weighted average shares & CSE's: 35,563,491 25,438,335
----------- -----------
Primary EPS before debenture conversion expense
and extraordinary item $1.14 $0.96
Primary EPS - Debenture conversion expense ($0.03)
Primary EPS - Extraordinary item, net of tax ($0.02)
----------- -----------
change in accounting principle
Primary EPS - Net income $1.12 $0.93
Fully Diluted Earnings Per Share:
Reported earnings before debenture conversion expense
and extraordinary item $40,558 $24,544
Debenture conversion expense, net of tax (785)
Extraordinary item, net of tax ($553)
----------- -----------
Reported net income 40,005 23,759
Adjustments to net income:
Interest expense, amortization and other costs
related to the assumed conversion of the
Convertible Debentures, net of tax 303 2,150
----------- -----------
Adjusted net income $40,308 $25,909
----------- -----------
Weighted average shares & CSE's:
Common shares 35,563,491 25,438,335
Additional option shares 125,807 55,000
Convertible Debenture shares 585,590 3,865,526
----------- -----------
Total 36,274,888 29,358,861
----------- -----------
Fully diluted EPS before debenture conversion expense
and extraoordinary item $1.13 $0.91
Fully diluted EPS - Debenture conversion expense (0.03)
Fully diluted EPS - Extraordinary item, net of tax ($0.02)
----------- -----------
Fully diluted EPS - Net income $1.11 $0.88
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000874265
<NAME> GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 15,346,000
<SECURITIES> 12,957,000
<RECEIVABLES> 237,623,000
<ALLOWANCES> (36,431,000)
<INVENTORY> 25,267,000
<CURRENT-ASSETS> 340,514,000
<PP&E> 650,514,000
<DEPRECIATION> (86,269,000)
<TOTAL-ASSETS> 1,375,151,000
<CURRENT-LIABILITIES> 119,687,000
<BONDS> 0
0
0
<COMMON> 701,000
<OTHER-SE> 598,829,000
<TOTAL-LIABILITY-AND-EQUITY> 1,375,151,000
<SALES> 816,270,000
<TOTAL-REVENUES> 816,270,000
<CGS> 640,000,000
<TOTAL-COSTS> 723,894,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,506,000
<INCOME-PRETAX> 63,870,000
<INCOME-TAX> 23,312,000
<INCOME-CONTINUING> 40,558,000
<DISCONTINUED> 0
<EXTRAORDINARY> (553,000)
<CHANGES> 0
<NET-INCOME> 40,005,000
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
</TABLE>
