<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, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of August 7, 1998: 35,224,406 shares of common stock
<PAGE>
TABLE OF CONTENTS
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Page
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.............................................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................................12
Part II: OTHER INFORMATION
Item 1. Legal Proceedings..................................................................23
Item 2. Changes in Securities..............................................................23
Item 3. Defaults Upon Senior Securities....................................................23
Item 4 Submission of Matters to a Vote of Security Holders................................23
Item 5. Other Information..................................................................23
Item 6. Exhibits and Reports on Form 8-K...................................................23
SIGNATURES ..........................................................................................24
</TABLE>
<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, certain statements in
Notes to Unaudited Condensed Consolidated Financial Statements, such as
certain Pro Forma Financial Information; and other statements contained herein
regarding matters which are not historical facts are forward looking
statements (as such term is defined in the Securities Act of 1933) and because
such statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to those discussed below:
1. The Company's substantial indebtedness and significant debt service
obligations.
2. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
3. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, implementation of a
Medicare prospective payment system and consolidated billing and other
changes in applicable government regulations that might affect the
profitability of the Company.
4. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and, in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
5. The occurrence of changes in the mix of payment sources utilized by the
Company's customers to pay for the Company's services.
6. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
7. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and
changes in the regulatory system, such as changes in certificate of need
laws in the states in which the Company operates or anticipates operating
in the future that facilitate such competition.
8. The Company's ability to identify suitable acquisition candidates, to
consummate or complete development projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations,
including the proposed acquisition of Vitalink Pharmacy Services, Inc.
These and other factors have been discussed in more detail in the Company's
periodic reports, including its Annual Report on Form 10-K/A for the fiscal
year ended September 30, 1997.
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997
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<S> <C> <C>
Assets:
Current assets:
Cash and equivalents $ 30,812 $ 11,651
Investments in marketable securities 19,203 14,729
Accounts receivable, net of allowance for doubtful accounts of
$48,793 at June 30, 1998 and $39,418 at September 30, 1997 277,332 205,129
Cost report receivables 69,973 60,865
Inventory 37,968 25,568
Prepaid expenses and other current assets 37,878 26,675
Income taxes receivable - 7,820
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 473,166 352,437
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Property, plant and equipment, net 582,892 578,397
Notes receivable and other investments 100,520 108,714
Other long-term assets 73,707 31,722
Investments in unconsolidated affiliates 343,109 2,887
Goodwill and other intangibles, net 418,760 359,956
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Total assets $ 1,992,154 $ 1,434,113
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Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 149,780 $ 117,234
Current installments of long-term debt 32,235 8,273
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Total current liabilities 182,015 125,507
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Long-term debt 1,089,460 651,667
Deferred income taxes 51,276 37,745
Deferred gain and other long-term liabilities 23,148 11,173
Shareholders' equity:
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,204,005 and 35,158,404, respectively at June 30,
1998; 35,117,075 and 35,071,474, respectively at September 30, 1997 722 702
Additional paid-in capital 453,989 457,232
Retained earnings 191,787 150,330
Treasury stock, at cost (243) (243)
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Total shareholders' equity 646,255 608,021
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Total liabilities and shareholders' equity $ 1,992,154 $ 1,434,113
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</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months
ended June 30,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
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<S> <C> <C>
Net revenues:
Basic healthcare services $ 139,562 $ 140,127
Specialty medical services 182,253 132,052
Management services and other, net 30,711 12,284
- -------------------------------------------------------------------------------------------------------------------------
Total net revenues 352,526 284,463
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Operating expenses:
Salaries, wages and benefits 149,880 131,356
Other operating expenses 122,179 88,564
General corporate expense 13,627 10,853
Depreciation and amortization 13,632 11,517
Lease expense 8,497 7,324
Interest expense, net 20,679 10,351
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in net income
of unconsolidated affiliates 24,032 24,498
Income taxes 8,771 8,942
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in net income of unconsolidated
affiliates 15,261 15,556
Equity in net income of unconsolidated affiliates 730 -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 15,991 $ 15,556
- -------------------------------------------------------------------------------------------------------------------------
Per common share data:
Basic:
Net income $ 0.46 $ 0.44
Weighted average shares of common stock 35,133,022 34,973,202
- -------------------------------------------------------------------------------------------------------------------------
Diluted:
Net income $ 0.45 $ 0.43
Weighted average shares of common stock and equivalents 35,719,840 35,917,642
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</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine months
ended June 30,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
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<S> <C> <C>
Net revenues:
Basic healthcare services $ 414,611 $ 411,044
Specialty medical services 501,840 370,719
Management services and other, net 82,939 34,507
- -------------------------------------------------------------------------------------------------------------------------
Total net revenues 999,390 816,270
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Operating expenses:
Salaries, wages and benefits 433,828 386,806
Other operating expenses 340,711 253,582
General corporate expense 39,803 30,382
Depreciation and amortization 37,985 31,618
Lease expense 23,008 21,506
Interest expense, net 59,010 28,506
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes, equity in net income
of unconsolidated affiliates and extraordinary items 65,045 63,870
Income taxes 23,741 23,312
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in net income of unconsolidated
affiliates and extraordinary items 41,304 40,558
Equity in net income of unconsolidated affiliates 2,077 -
- -------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 43,381 40,558
Extraordinary items, net of tax (1,924) (553)
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 41,457 $ 40,005
- -------------------------------------------------------------------------------------------------------------------------
Per common share data:
Basic:
Income before extraordinary items $ 1.24 $ 1.18
Extraordinary items (0.05) (0.02)
Net Income $ 1.18 $ 1.17
Weighted average shares of common stock 35,107,983 34,327,105
- -------------------------------------------------------------------------------------------------------------------------
Diluted:
Income before extraordinary items $ 1.22 $ 1.14
Extraordinary items (0.05) (0.02)
Net Income $ 1.16 $ 1.13
Weighted average shares of common stock and equivalents 35,701,210 35,799,478
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</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operations $ 40,127 $ 28,335
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (41,102) (47,138)
Payments for acquisitions, net of cash acquired (100,929) (237,665)
Investments in unconsolidated affiliates (341,032) -
Net proceeds from the sale of assets 63,756 -
Notes receivable and other investment and asset additions, net (32,345) (22,893)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (451,652) (307,696)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under working capital revolving credit (136,700) 162,449
Repayment of long term debt (20,955) (5,331)
Proceeds from issuance of long-term debt 611,241 126,500
Debt issuance costs (19,648) (3,750)
Purchase of common stock call options (4,442) -
Common stock options exercised 1,190 2,076
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 430,686 281,944
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 19,161 2,583
Cash and equivalents
Beginning of period 11,651 12,763
End of period $ 30,812 $ 15,346
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Interest paid $ 62,205 $ 30,357
Income taxes paid $ 2,390 $ 11,967
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
GENESIS HEATLH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's annual report for the fiscal year
ended September 30, 1997. The information furnished is unaudited but reflects
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial information for the periods shown. Such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results expected for the full year. Certain prior
period balances have been reclassified to conform with the current period
presentation.
2. Sale of Assets
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties
to ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Subsequently, Genesis
received an additional $14,000,000 from the sale of a loan and two additional
assisted living facilities and the recoupment of amounts advanced and expenses
incurred in connection with the formation of ElderTrust. Additionally,
ElderTrust has funded approximately $13,200,000 of a $15,100,000 commitment to
finance the development and expansion of three additional assisted living
facilities. Genesis repaid a portion of the revolving credit component of its
bank credit facility with the proceeds from these transactions. The sale of
properties to ElderTrust resulted in a gain of approximately $12,000,000 which
has been deferred and is being amortized over the ten year term of the lease
contracts with ElderTrust.
3. Long-Term Debt
In October 1997, in connection with the Multicare Transaction (defined below),
Genesis entered into a new credit facility with Mellon Bank, N.A., Citicorp
Securities, Inc., Citibank N.A., First Union Capital Markets Corp., First
Union National Bank and NationsBank, N.A. (the "Lenders") pursuant to which
the Lenders provided Genesis and its subsidiaries with loan facilities
totaling $850,000,000 (the "Genesis Bank Financing") for the purpose of
refinancing certain existing indebtedness of Genesis; funding interest and
principal payments on the facilities and certain remaining indebtedness;
funding permitted acquisitions; funding Genesis' commitments in connection
with the Merger (defined below); and funding Genesis' and its subsidiaries'
working capital for general corporate purposes, including fees and expenses of
the transactions. The Genesis Bank Financing facilities consist of three
$200,000,000 term loans (collectively, the "Term Loans"), a $250,000,000
revolving credit loan (the "Revolving Credit Facility"), which includes one or
more Swing Loans (collectively, the "Swing Loan Facility") in integral
principal multiples of $500,000 up to an aggregate unpaid principal amount of
$15,000,000. The Term Loans amortize in quarterly installments beginning in
fiscal 1998 through 2005, of which $26,500,000 is payable over the next twelve
months. The Term Loans consist of (1) a $200,000,000 six year term loan (the
"Tranche A Term Facility"); (2) a $200,000,000 seven year term loan (the
"Tranche B Term Facility"); and (3) a $200,000,000 eight year term loan (the
"Tranche C Term Facility"). The Revolving Credit Facility becomes payable in
full on September 30, 2003.
The Genesis Bank Financing facilities are secured by a first priority security
interest in all of the stock, partnership interests and other equity of all of
Genesis' present and future subsidiaries (including the Multicare Parent)
other than stock of Multicare and its subsidiaries. Loans under the Genesis
Bank Financing bear, at Genesis' option, interest at the per annum Prime Rate
as announced by the
6
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administrative agent, or the applicable Adjusted LIBOR. Loans under the
Tranche A Term Facility bear interest at an annual rate equal to LIBOR plus a
margin up to 2.5% (currently 7.94%); loans under the Tranche B Term Facility
bear interest at an annual rate equal to LIBOR plus a margin up to 2.75%
(currently 8.44%); loans under the Tranche C Term Facility bear interest at an
annual rate equal to LIBOR plus a margin up to 3.0% (currently 8.69%) ; loans
under the Revolving Credit Facility bear interest at a rate equal to LIBOR
plus a margin up to 2.5% (currently 7.94%); and loans under the Swing Loan
Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial covenants, the above referenced
interest rates are changed periodically.
4. Earnings Per Share
In the first quarter of 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" (Statement
128). Statement 128, which makes the standards for computing earnings per
share more comparable to international standards, replaces the presentation of
primary and fully diluted earnings per share with a presentation of basic and
diluted earnings per share. Statement 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement of all
entities with complex capital structures. The Company has restated its
earnings per share data for the three and nine months ended June 30, 1997 to
conform to the provisions of Statement 128 (amounts are in thousands except
per share data):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Income before extraordinary items $15,991 $15,556 $43,381 $40,558
Extraordinary items - - (1,924) (553)
---------------------------------------------------
Net income $15,991 $15,556 $41,457 $40,005
---------------------------------------------------
---------------------------------------------------
Weighted average shares 35,133 34,973 35,108 34,327
---------------------------------------------------
Earnings per share before extraordinary items $0.46 $0.44 $1.24 $1.18
Earning per share - extraordinary items - - (0.05) (0.02)
---------------------------------------------------
Earnings per share $0.46 $0.44 $1.18 $1.17
---------------------------------------------------
Diluted Earnings Per Share:
Income before extraordinary items $15,991 $15,556 $43,381 $40,558
Extraordinary items - - (1,924) (553)
---------------------------------------------------
Net income $15,991 $15,556 $41,457 $40,005
Adjustments to net income for interest expense,
amortization and other costs related to the
assumed conversion of convertible debentures - - - 303
---------------------------------------------------
Adjusted net income $15,991 $15,556 $41,457 $40,308
---------------------------------------------------
Weighted Average Shares & Common Stock
Equivalents:
Common shares 35,133 34,973 35,108 34,327
Dilutive effect of unexcercised stock options 587 945 593 886
Convertible debenture shares - - - 586
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Total 35,720 35,918 35,701 35,799
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Earnings per share before extraordinary items $0.45 $0.43 $1.22 $1.14
Earnings per share - extraordinary items - - (0.05) (0.02)
---------------------------------------------------
Earnings per share $0.45 $0.43 $1.16 $1.13
---------------------------------------------------
</TABLE>
7
<PAGE>
5. Pro Forma Financial Information
On October 9, 1997, Genesis ElderCare Acquisition Corp. ("Acquisition Corp."),
a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C. (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"),
pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On
October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger"
or the "Multicare Transaction") of Acquisition Corp. with and into Multicare
in accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997, by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in
the business of providing eldercare and specialty medical services in selected
geographic regions. Included among the operations acquired by Genesis
ElderCare Corp. are operations relating to the provision of (i) eldercare
services including skilled nursing care, assisted living, Alzheimer's care and
related support activities traditionally provided in eldercare facilities,
(ii) specialty medical services consisting of (1) sub-acute care such as
ventilator care, intravenous therapy and various forms of coma, pain and wound
management and (2) rehabilitation therapies such as occupational, physical and
speech therapy and stroke and orthopedic rehabilitation and (iii) management
services and consulting services to eldercare centers.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues
for its services under the Management Agreement provided that payment of such
fee in respect of any month in excess of the greater of (i) $1,992,000 or (ii)
four percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less
than $23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and
administrative expenses (other than certain specified third-party expenses),
and all other expenses of Multicare are paid by Multicare. Genesis also
entered into an asset purchase agreement (the "Therapy Purchase Agreement")
with Multicare and certain of its subsidiaries pursuant to which Genesis
acquired all of the assets used in Multicare's outpatient and inpatient
rehabilitation therapy business in October 1997 for $24,000,000 subject to
adjustment (the "Therapy Purchase") and a stock purchase agreement (the
"Pharmacy Purchase Agreement") with Multicare and certain subsidiaries
pursuant to which Genesis acquired all of the outstanding capital stock and
limited partnership interests of certain subsidiaries of Multicare that are
engaged in the business of providing institutional pharmacy services to third
parties for $50,000,000 subject to adjustment. The Company completed the
pharmacy purchase effective January 1, 1998.
Genesis ElderCare Corp. paid approximately $1,492,000,000 to (i) purchase the
Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
to be incurred in connection with the completion of the Tender Offer, Merger
and the financing transactions in connection therewith, (iii) refinance
certain indebtedness of Multicare and (iv) make certain cash payments to
employees. Of the funds required to finance the foregoing, approximately
$745,000,000 were furnished to Acquisition Corp. as capital contributions by
Genesis ElderCare Corp. from the sale by Genesis ElderCare Corp. of its Common
Stock ("Genesis ElderCare Corp. Common Stock") to Cypress, TPG, Nazem and
Genesis. Cypress, TPG and Nazem purchased shares of Genesis ElderCare Corp.
Common Stock for a purchase price of $210,000,000, $199,500,000 and
$10,500,000, respectively, and Genesis purchased approximately 44% of the
common stock of Genesis ElderCare Corp. for a purchase price of $325,000,000.
The balance of the funds necessary to finance the foregoing came from (i) the
proceeds of loans from a syndicate of lenders in the aggregate amount of
$525,000,000 and (ii) $246,800,000 of financing upon the completion of the
sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by
Acquisition Corp. on August 11, 1997.
8
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In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement, to purchase (the "Call") Genesis ElderCare
Corp. Common Stock held by Cypress, TPG and Nazem commencing on October 9,
2001 and for a period of 270 days thereafter, at a price determined pursuant
to the terms of the Put/Call Agreement. Cypress, TPG and Nazem will have the
option, on the terms and conditions set forth in the Put/Call Agreement, to
require Genesis to purchase (the "Put") such Genesis ElderCare Corp. Common
Stock commencing on October 9, 2002 and for a period of one year thereafter,
at a price determined pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's
Genesis ElderCare Corp. Common Stock, plus a portion of the Genesis Pharmacy
business (the "Calculated Equity Value"). The Calculated Equity Value will be
determined based upon a multiple of Genesis ElderCare Corp.'s earnings before
interest, taxes, depreciation, amortization and rental expenses, as adjusted
("EBITDAR") after deduction of certain liabilities, plus a portion of the
EBITDAR related to the Genesis pharmacy business. The multiple to be applied
to EBITDAR will depend on whether the Put or the Call is being exercised. Any
payment to Cypress, TPG or Nazem under the Call or the Put may be in the form
of cash or Genesis common stock at Genesis' option.
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common
Stock will be determined on the basis set forth in the Put/Call Agreement
which provides generally for additional Calculated Equity Value of Genesis
ElderCare Corp. to be divided based upon the proportionate share of the
capital contributions of the stockholders to Genesis ElderCare Corp. Upon
exercise of the Put by Cypress, TPG or Nazem, there will be no minimum return
to Cypress, or TPG or Nazem; any payment to Cypress, TPG or Nazem will be
limited to Cypress', TPG's or Nazem's share of the Calculated Equity Value
based upon a formula set forth in the terms of the Put/Call Agreement which
provides generally for the preferential return of the stockholders' capital
contributions (subject to certain priorities), a 25% compound annual return on
Cypress', TPG's or Nazem's capital contributions and the remaining Calculated
Equity Value to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated
upon an event of bankruptcy of Genesis, a change of control of Genesis, an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement and
Management Agreement and to control the sale or liquidation of Genesis
ElderCare Corp. In the event of such sale, the proceeds from such sale will be
distributed among the parties as contemplated by the formula for the Put
option exercise price and Cypress, TPG and Nazem will retain a claim against
Genesis for the difference, if any, between the proceeds of such sale and the
put option exercise price. In the event of a bankruptcy or change of control
of Genesis, the option price shall be payable solely in cash provided any such
payment will be subordinated to the payment of principal and interest under
the Genesis Bank Financing.
The following unaudited pro forma statement of operations information gives
effect to the Multicare Transaction, which was accounted for using the equity
method of accounting and the Therapy Purchase and Pharmacy Purchase, using the
purchase method of accounting as though they had occurred on October 1, 1996,
after giving effect to certain adjustments, including recognition of
management fee income, amortization of goodwill, additional depreciation
expense and increased interest expense on debt related to the transactions.
The pro forma financial information, which includes preliminary allocations of
purchase price to goodwill and property, plant and equipment that are subject
to change, does not necessarily reflect
9
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the results of operations that would have occurred had the transactions
occurred at the beginning of period presented.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Nine Months Ended Nine Months Ended
Pro Forma Statement of Operations Information: June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Total net revenue $ 1,019,866 $ 918,797
Income before extraordinary items 42,980 32,094
Net income 41,056 31,541
Earnings per share, before extraordinary items, diluted 1.20 0.90
Earnings per share, diluted $ 1.15 $ 0.89
</TABLE>
6. Summary financial information of unconsolidated affiliate
The following unaudited summary financial data for the Multicare Companies is
as of, and for the three and nine months ended, June 30, 1998. Multicare is
the Company's only material unconsolidated affiliate.
(in thousands)
June 30, 1998
-----------------
Total assets $1,744,269
Long-term debt 755,681
Total liabilities $995,033
Three months Nine months ended
ended June 30, June 30,
1998 1998
-------------------------------------
Revenues $170,703 $526,645
Net income $1,511 $4,236
7. Vitalink Transaction
On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned
subsidiary V Acquisition Corporation, a Delaware corporation ("Newco"),
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink").
Pursuant to the Merger Agreement, Vitalink will merge with and into Newco, and
Newco shall be the surviving corporation (the "Merger"). Each share of
Vitalink Common Stock, par value .01 per share, (the "Vitalink Common Stock")
will be converted in the Merger into the right to receive (1) .045 shares of
Genesis Series G Cumulative Convertible Preferred Stock, par value .01 per
share, ("Genesis Preferred"), (2) $22.50 per share in cash, or (3) a
combination of cash and shares of Genesis Preferred (collectively, the "Merger
Consideration"), subject to statutory appraisal rights. The Genesis Preferred
will have an initial annual dividend of 5.9375%. The total consideration to be
paid to stockholders of Vitalink to acquire their shares (including shares
which may be issued upon the exercise of outstanding options) is approximately
$600,000,000, of which approximately 50% will be paid in cash and 50% in
Genesis Preferred. As a result of the Merger, Genesis will assume
approximately $90,000,000 of indebtedness Vitalink has outstanding. The
transaction has been unanimously approved by the Boards of Directors of both
companies. The transaction is subject to state regulatory and shareholder
approval of both companies as well as receipt of
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financing. The shareholders meeting to vote upon the Vitalink Transaction is
scheduled for August 26, 1998. The Company currently expects to close the
transaction in late August 1998.
Manor Care, Inc. ("Manor Care"), the holder of approximately 50% of the shares
of Vitalink, has agreed to elect to exchange all of its Vitalink shares for
the preferred stock. The form of Manor Care's consideration will be prorated
to the extent that other Vitalink shareholders elect to receive preferred
stock.
The Genesis Preferred will not be transferable without the consent of Genesis
until the filing by the Company of the registration statement with the
Securities and Exchange Commission covering the sale of shares of Genesis
Preferred by the holders. Manor Care has the right to require Genesis to
register shares of its Genesis Preferred in certain circumstances beginning
one year after the date of the Merger. The Genesis Preferred will be
convertible into Genesis common shares at $37.20 per share and it may be
called for conversion after three years, provided Genesis' stock price reaches
certain trading levels. In addition, after the fourth year, the Genesis
Preferred may be called for conversion by Genesis subject to a market-based
call premium provision.
Manor Care has provided Genesis with an irrevocable proxy to vote its Vitalink
shares in favor of the merger. Upon closing of the transaction, it is
anticipated that Manor Care will own approximately 18% of Genesis' pro forma
diluted shares outstanding assuming the Vitalink shareholders other than Manor
Care elect to receive cash for their shares. Manor Care will be subject to
certain voting and standstill agreements and will have one representative on
the Genesis Board of Directors.
8. Subsequent Event
On July 21, 1998, Genesis announced an agreement in principle to extend its
lease of seven eldercare centers in Maryland and New Jersey. Genesis acquired
the leasehold rights of the seven properties with approximately 1,200 beds in
its November 1993 acquisition of Meridian Healthcare, Inc. At that time,
Genesis also received an option to purchase the seven facilities in 2003 for
$59,000,000. The proposed transaction involves the sale of its leasehold
rights and option to purchase the facilities to ElderTrust for $44,000,000,
consisting of $39,000,000 in cash at closing and a $5,000,000 note. Following
the sale of the leasehold rights and option, Genesis will sublease the seven
facilities from ElderTrust for ten years with the option to extend its lease
until 2018. The lease expense obligation is approximately $10,000,000 per
year, which will be offset by the amortization of the gain upon the sale of
the option. The transaction is expected to close by August 31, 1998 and is
subject to the approval of the Board of Directors of Genesis Health Ventures,
the owners of the seven facilities, and lenders.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its efforts on
providing an expanding array of specialty medical services to geriatric
patients. The delivery of these services was originally concentrated in the
eldercare centers owned and leased by the Company, but now also includes
managed eldercare centers, independent healthcare facilities, outpatient
clinics and home health care. The Company generates revenues from three
sources: basic healthcare services, specialty medical services and management
services and other. The Company includes in basic healthcare services revenues
all room and board charges for its eldercare customers at its 114 owned and
leased eldercare centers. Specialty medical services include all revenues from
providing rehabilitation therapies, institutional pharmacy and medical supply
services, professional pharmacy services, subacute care programs, home health
care, physician services, and other specialized services to all centers owned,
leased or managed by Genesis, as well as to over 800 independent healthcare
providers. Management services and other include fees earned for management of
eldercare centers, other service related businesses and transactional
revenues. Genesis manages 205 eldercare centers, 119 of which are
jointly-owned (including the impact of the Multicare Transaction defined in
Certain Transactions).
Certain Transactions
On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned
subsidiary V Acquisition Corporation, a Delaware corporation ("Newco"),
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink").
Pursuant to the Merger Agreement, Vitalink will merge with and into Newco, and
Newco shall be the surviving corporation (the "Merger"). Each share of
Vitalink Common Stock, par value .01 per share, (the "Vitalink Common Stock")
will be converted in the Merger into the right to receive (1) .045 shares of
Genesis Series G Cumulative Convertible Preferred Stock, par value .01 per
share, ("Genesis Preferred"), (2) $22.50 per share in cash, or (3) a
combination of cash and shares of Genesis Preferred (collectively, the "Merger
Consideration"), subject to statutory appraisal rights. The Genesis Preferred
will have an initial annual dividend of 5.9375%. The total consideration to be
paid to stockholders of Vitalink to acquire their shares (including shares
which may be issued upon the exercise of outstanding options) is approximately
$600,000,000, of which approximately 50% will be paid in cash and 50% in
Genesis Preferred. As a result of the Merger, Genesis will assume
approximately $90,000,000 of indebtedness Vitalink has outstanding. The
transaction is subject to state regulatory and shareholder approval of both
companies as well as receipt of financing. The shareholders meeting to vote
upon the Vitalink Transaction is scheduled for August 26, 1998. The Company
currently expects to close the transaction in late August 1998.
On October 9, 1997, Genesis ElderCare Acquisition Corp. ("Acquisition Corp."),
a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation
formed by Genesis, The Cypress Group L.L.C. (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. (together with its affiliates, "Nazem"), acquired 99.65% of the
shares of common stock of the Multicare Companies, Inc. ("Multicare"),
pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On
October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger or
the Multicare Transaction") of Acquisition Corp. with and into Multicare in
accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in
the business of providing eldercare and specialty medical services in selected
geographic regions. Included among the operations acquired by Genesis
ElderCare Corp. are operations relating to the provision of (i) eldercare
services including skilled nursing care, assisted living, Alzheimer's care and
related support activities
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traditionally provided in eldercare facilities, (ii) specialty medical
services consisting of (1) sub-acute care such as ventilator care, intravenous
therapy and various forms of coma, pain and wound management and (2)
rehabilitation therapies such as occupational, physical and speech therapy and
stroke and orthopedic rehabilitation and (iii) management services and
consulting services to eldercare centers.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages
Multicare's operations. The Management Agreement has a term of five years with
automatic renewals for two years unless either party terminates the Management
Agreement. Genesis is paid a fee of six percent of Multicare's net revenues
for its services under the Management Agreement provided that payment of such
fee in respect of any month in excess of the greater of (i) $1,992,000 or (ii)
four percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less
than $23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and
administrative expenses (other than certain specified third-party expenses),
and all other expenses of Multicare are paid by Multicare. Genesis also
entered into an asset purchase agreement (the "Therapy Sale Agreement") with
Multicare and certain of its subsidiaries pursuant to which Genesis acquired
all of the assets used in Multicare's outpatient and inpatient rehabilitation
therapy business for in October 1997 $24,000,000 subject to adjustment (the
"Therapy Sales") and a stock purchase agreement (the "Pharmacy Sale
Agreement") with Multicare and certain subsidiaries pursuant to which Genesis
acquired all of the outstanding capital stock and limited partnership
interests of certain subsidiaries of Multicare that are engaged in the
business of providing institutional pharmacy services to third parties for
$50,000,000, subject to adjustment. The Company completed the pharmacy
purchase effective Janauary 1, 1998.
Genesis Eldercare Corp. paid approximately $1,492,000,000 to (i) purchase the
Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
to be incurred in connection with the completion of the Tender Offer, Merger
and the financing transactions in connection therewith, (iii) refinance
certain indebtedness of Multicare and (iv) make certain cash payments to
employees. Of the funds required to finance the foregoing, approximately
$745,000,000 were furnished to Acquisition Corp. as capital contributions by
the Genesis ElderCare Corp. from the sale by Genesis ElderCare Corp. of its
Common Stock ("Genesis ElderCare Corp. Common Stock") to Cypress, TPG, Nazem
and Genesis. Cypress, TPG and Nazem purchased shares of Genesis ElderCare
Corp. Common Stock for a purchase price of $210,000,000, $199,500,000 and
$10,500,000, respectively, and Genesis purchased approximately 44% of the
common stock of Genesis ElderCare Corp. for a purchase price of $325,000,000.
The balance of the funds necessary to finance the foregoing came from (i) the
proceeds of loans from a syndicate of lenders in the aggregate amount of
$525,000,000 and (ii) $246,800,000 of financing upon completion of the sale of
9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by Acquisition
Corp. on August 11, 1997.
On July 14, 1998, the Company announced that it received notice from
NewCourtland, Inc., owner of eight nursing centers in the Philadelphia area,
of the termination of its management agreements for these centers effective
July 31, 1998. This notice follows the revocation on June 25, 1998 of the
operating license at one of the NewCourtland centers. The center had a
long-standing history of regulatory compliance difficulties dating back many
years prior to Genesis' management. The Company believes that the termination
notice was inappropriate and has instituted suit against NewCourtland, Inc.
and other related parties to recover unpaid balances due Genesis, the
estimated future operating profits of the terminated management agreements, as
well as consequential damages. The annualized revenue from the contracts is
approximately $3,800,000. The termination of these contracts will result in a
reduction in fiscal 1999 earnings of approximately $1,200,000 or $.03 per
share.
In the fourth quarter of 1997, the Company entered into an agreement with Blue
Cross / Blue Shield of Maryland (BCBSMD) to insure, through a sub-capitation
agreement, the health care benefits of approximately 7,000 members of BCBSMD's
Care First Medicare risk product. Through the third quarter of 1998, the
Company recognized approximately $15,500,000 of capitation revenue and
incurred a like
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amount of costs associated with this agreement. In the fourth quarter of 1997,
the Company recorded a pre-tax special charge of $5,000,000 to accrue for the
estimated loss inherent in the agreement.
Results of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997.
The Company's total net revenues for the quarter ended June 30, 1998 were
$352,526,000 compared to $284,463,000 for the quarter ended June 30, 1997, an
increase of $68,063,000 or 24%. Basic healthcare services decreased $565,000
principally due to the termination of operations by Genesis of three leased
eldercare centers in September 1997, which generated approximately $3,200,000,
offset by approximately $2,600,000 due to providing care to higher acuity
patients and rate increases. Specialty medical services revenue increased
$50,201,000 or 38% of which approximately $27,300,000 is attributed to the
purchase of the Multicare pharmacy business, approximately $4,800,000 is
attributed to the purchase of the Multicare rehabilitation therapy business,
and the remaining increase of approximately $22,700,000 is primarily due to
other volume growth in the institutional pharmacy, medical supply and contract
therapy divisions, general rate increases and increased acuity in the
eldercare centers. This increase is offset by approximately $2,100,000,
$900,000 and $1,600,000 as a result of the deconsolidation of the Company's
physician services business beginning in the fourth quarter of 1997, the
termination of operations of three leased eldercare centers in September 1997
and the April 1998 government mandated implementation of salary equivalency
billing for rehabilitation therapy, respectively. Specialty medical service
revenue per patient day in the health centers division increased 3% to $38.74
in the quarter ended June 30, 1998 compared to $37.78 in the quarter ended
June 30, 1997 primarily due to treatment of higher acuity patients. Management
services and other income increased $18,427,000 or 150%. This increase is due
to approximately $10,200,000 of management fee revenue earned from the
management of the operations of the Multicare business and approximately
$8,200,000 of other revenue, including capitated revenue earned under a
contract with Blue Cross / Blue Shield of Maryland.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $285,686,000 for the quarter ended June 30,
1998 compared to $230,773,000 for the quarter ended June 30, 1997, an increase
of $54,913,000 or 24%, of which approximately $2,700,000 is due to the direct
operating costs incurred to service the Multicare management contracts,
approximately $21,700,000 is due to the acquisition of the Multicare pharmacy
operations, approximately $4,000,000 is due the acquisition of the Multicare
rehabilitation therapy business, approximately $6,200,000 is due to charges
incurred in connection with capitation costs under a contract with Blue Cross
/ Blue Shield of Maryland and the remaining increase of approximately
$26,400,000 is attributed to growth in the institutional pharmacy, medical
supply and contract therapy divisions, as well as increased costs in
information technology systems, community-based programs, marketing campaigns
and the servicing of the Multicare management contracts. This increase is
offset by approximately $2,700,000 and $3,400,000 as a result of the
deconsolidation of the Company's physician services business beginning in the
fourth quarter of 1997 and the termination of operations of three leased
eldercare centers in September 1997, respectively.
Interest expense increased $10,328,000 or 100%. This increase in interest
expense was primarily due to additional borrowings used to finance the
Company's investment in Multicare, the purchase of the Multicare pharmacy and
rehabilitation therapy businesses, and the acquisition and development of
eldercare centers, assisted living facilities and ancillary businesses.
Increased depreciation and amortization expense of $2,115,000 is attributed to
the amortization of goodwill and deferred financing costs in connection with
the Company's investment in Multicare and the purchase of the Multicare
pharmacy and rehabilitation therapy businesses, as well as depreciation of
increased investments in information systems. Lease expense increased
$1,173,000 due to additional lease expense incurred by seven properties
formerly owned by Genesis and now leased from ElderTrust, offset by decreased
lease expense due to the termination of operations of three leased eldercare
centers in September 1997.
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Nine months ended June 30, 1998 compared to nine months ended June 30, 1997.
The Company's total net revenues for the nine months ended June 30, 1998 were
$999,390,000 compared to $816,270,000 for the nine months ended June 30, 1997,
an increase of $183,120,000 or 22%. Basic healthcare services increased
$3,567,000 or 1%, of which approximately $5,800,000 is due to providing care
to higher acuity patients and rate increases, offset by the termination of
operations by Genesis of three leased eldercare centers in September 1997,
which generated approximately $9,400,000. Specialty medical services revenue
increased $131,121,000 or 35% of which approximately $53,600,000 is attributed
to the purchase of the Multicare pharmacy business, approximately $15,300,000
is attributed to the purchase of the Multicare rehabilitation therapy
business, and the remaining increase of approximately $72,800,000 is primarily
due to other volume growth in the institutional pharmacy, medical supply and
contract therapy divisions, general rate increases and increased acuity in the
eldercare centers. This increase is offset by approximately $6,500,000,
$2,500,000 and $1,600,000 as a result of the deconsolidation of the Company's
physician services business beginning in the fourth quarter of 1997, the
termination of operations of three leased eldercare centers in September 1997
and the April 1998 government mandated implementation of salary equivalency
billing for rehabilitation therapy, respectively. Specialty medical service
revenue per patient day in the health centers division increased 11% to $37.19
in the nine months ended June 30, 1998 compared to $33.58 in the nine months
ended June 30, 1997 primarily due to treatment of higher acuity patients.
Management services and other income increased approximately $48,432,000 or
140%. This increase is due to approximately $32,000,000 of management fee
revenue earned from the management of the operations of the Multicare business
and approximately $16,400,000 of other revenue including capitated revenue
earned under a contract with Blue Cross / Blue Shield of Maryland.
The Company's operating expenses before, depreciation, amortization, lease
expense and interest expense were $814,342,000 for the nine months ended June
30, 1998 compared to $670,770,000 for nine months ended June 30, 1997, an
increase of $143,572,000 or 21%, of which approximately $9,500,000 is due to
the direct operating costs incurred to service the Multicare management
contracts, approximately $43,200,000 is due to the acquisition of the
Multicare pharmacy operations, approximately $12,900,000 is due to the
acquisition of the Multicare rehabilitation therapy business, approximately
$13,500,000 is due to charges incurred in connection with capitation costs
under a contract with Blue Cross / Blue Shield of Maryland and the remaining
increase of approximately $81,900,000 is attributed to growth in the
institutional pharmacy, medical supply and contract therapy divisions, as well
as increased costs in information technology systems, community-based programs
,marketing campaigns and the servicing of the Multicare management contracts.
This increase is offset by approximately $7,800,000 and $9,600,000 as a result
of the deconsolidation of the Company's physician services business beginning
in the fourth quarter of 1997 and the termination of operations of three
leased eldercare centers in September 1997, respectively.
Interest expense increased $30,504,000 or 107%. This increase in interest
expense was primarily due to additional borrowings used to finance the
Company's investment in Multicare, the purchase of the Multicare pharmacy and
rehabilitation therapy businesses, and the acquisition and development of
eldercare centers, assisted living facilities and ancillary businesses.
Increased depreciation and amortization expense of $6,367,000 is attributed to
the amortization of goodwill and deferred financing costs in connection with
the Company's investment in Multicare and the purchase of the Multicare
pharmacy and rehabilitation therapy businesses, as well as depreciation of
increased investments in information systems. Lease expense increased
$1,502,000 due to additional lease expense incurred by seven properties
formerly owned by Genesis and now leased from ElderTrust, offset by decreased
lease expense due to the termination of operations of three leased eldercare
centers in September 1997.
In connection with the early repayment of debt in the quarters ended December
31, 1997 and 1996, the Company recorded an extraordinary loss net of tax of
approximately $1,924,000 ($3,030,000 before tax) and $553,000 ($871,000 before
tax), respectively, to write off unamortized deferred financing fees.
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Liquidity and Capital Resources
Working capital increased $64,221,000 to $291,151,000 at June 30, 1998 from
$226,930,000 at September 30, 1997. Accounts receivable increased
approximately $72,200,000 during this period, of this increase approximately
$6,500,000 relates to balances acquired in the Multicare rehabilitation
therapy business, approximately $18,700,000 relates to balances acquired in
the Multicare pharmacy business, approximately $12,100,000 (or three days of
revenue) is the result of collection delays experienced in the third quarter
of 1998 from the states of Pennsylvania and Connecticut, approximately
$1,500,000 relates to collection delays experienced in the third quarter of
1998 as a result of the conversion of several properties to a new billing
system, approximately $6,100,000 relates to receivable growth in a home
medical equipment joint venture that is consolidated, while the remaining
approximately $27,300,000 relates primarily to the continuing shift in
business mix to specialty medical services, particularly the home medical
equipment and infusion therapy lines of business, which typically have a
longer collection period. Days revenue in accounts receivable increased two
days to 69 days during the third quarter from 67 days for the quarter ended
March 31, 1998. The Company's cash flow from operations for the nine months
ended June 30, 1998 was approximately $40,127,000 compared to approximately
$28,335,000 for the nine months ended June 30, 1997.
Investing activities for the nine months ended June 30, 1998 include
approximately $41,102,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data
processing hardware and software. During the nine months ended June 30, 1998,
other long term assets increased approximately $41,985,000, principally due to
approximately $20,000,000 of financing and other transaction costs incurred in
connection with the Multicare Transaction and the purchase of the Multicare
rehabilitation therapy business, and approximately $10,700,000 of subordinated
management fees due from Multicare.
On April 26, 1998, Genesis Health Ventures, Inc. and its wholly owned
subsidiary V Acquisition Corporation, a Delaware corporation ("Newco"),
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink").
Pursuant to the Merger Agreement, Vitalink will merge with and into Newco, and
Newco shall be the surviving corporation (the "Merger"). Each share of
Vitalink Common Stock, par value .01 per share, (the "Vitalink Common Stock")
will be converted in the Merger into the right to receive (1) .045 shares of
Genesis Series G Cumulative Convertible Preferred Stock, par value .01 per
share, ("Genesis Preferred"), (2) $22.50 per share in cash, or (3) a
combination of cash and shares of Genesis Preferred (collectively, the "Merger
Consideration"), subject to statutory appraisal rights. The Genesis Preferred
will have an initial annual dividend of 5.9375%. The total consideration to be
paid to stockholders of Vitalink to acquire their shares (including shares
which may be issued upon the exercise of outstanding options) is approximately
$600,000,000, of which approximately 50% will be paid in cash and 50% in
Genesis Preferred. As a result of the Merger, Genesis will assume
approximately $90,000,000 of indebtedness Vitalink has outstanding. The
transaction is subject to state regulatory and shareholder approval of both
companies as well as receipt of financing. The shareholders meeting to vote
upon the Vitalink Transaction is scheduled for August 26, 1998. The Company
currently expects to close the transaction in late August 1998.
Manor Care, Inc. ("Manor Care"), the holder of approximately 50% of the shares
of Vitalink, has agreed to elect to exchange all of its Vitalink shares for
the preferred stock. The form of Manor Care's consideration will be prorated
to the extent that other Vitalink shareholders elect to receive preferred
stock.
The Genesis Preferred will not be transferable without the consent of Genesis
until the filing by the Company of the registration statement with the
Securities and Exchange Commission covering the sale of shares of Genesis
Preferred by the holders. Manor Care has the right to require Genesis to
register shares of its Genesis Preferred in certain circumstances beginning
one year after the date of the Merger. The Genesis Preferred will be
convertible into Genesis common shares at $37.20 per share and it may be
called for conversion after three years, provided Genesis' stock price reaches
certain trading levels. In addition,
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after the fourth year, the Genesis Preferred may be called for conversion by
Genesis subject to a market-based call premium provision.
Manor Care has provided Genesis with an irrevocable proxy to vote its Vitalink
shares in favor of the merger. Upon closing of the transaction, it is
anticipated that Manor Care will own approximately 18% of Genesis' pro forma
diluted shares outstanding assuming the Vitalink shareholders other than Manor
Care elect to receive cash for their shares. Manor Care will be subject to
certain voting and standstill agreements and will have one representative on
the Genesis Board of Directors.
Following the sale, Manor Care will continue to purchase from the Vitalink
operations all of its pharmacy services and related pharmacy consulting
services.
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties
to ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. Subsequently, Genesis
received an additional $14,000,000 from the sale of a loan and two additional
assisted living facilities and the recoupment of amounts advanced and expenses
incurred in connection with the formation of ElderTrust. Additionally,
ElderTrust has funded approximately $13,200,000 of a $15,100,000 commitment to
finance the development and expansion of three additional assisted living
facilities. Genesis repaid a portion of the revolving credit component of its
bank credit facility with the proceeds from these transactions. The sale of
properties to ElderTrust resulted in a gain of approximately $12,000,000 which
has been deferred and is being amortized over the ten year term of the lease
contracts with ElderTrust.
On July 21, 1998, Genesis announced an agreement in principle to extend its
lease of seven eldercare centers in Maryland and New Jersey. Genesis acquired
the leasehold rights of the seven properties with approximately 1,200 beds in
its November 1993 acquisition of Meridian Healthcare, Inc. At that time,
Genesis also received an option to purchase the seven facilities in 2003 for
$59,000,000. The proposed transaction involves the sale of its leasehold
rights and option to purchase the facilities to ElderTrust for $44,000,000,
consisting of $39,000,000 in cash at closing and a $5,000,000 note. Following
the sale of the leasehold rights and option, Genesis will sublease the seven
facilities from ElderTrust for ten years with the option to extend its lease
until 2018. The lease expense obligation is approximately $10,000,000 per
year, which will be offset by the amortization of the gain upon the sale of
the option. The transaction is expected to close by August 31, 1998 and is
subject to the approval of the Board of Directors of Genesis Health Ventures,
the owners of the seven facilities, and lenders.
In October 1997, in connection with the Multicare Transaction, Genesis entered
into a new credit facility with Mellon Bank, N.A., Citicorp Securities, Inc.,
Citibank N.A., First Union Capital Markets Corp., First Union National Bank
and NationsBank, N.A. (the "Lenders") pursuant to which the Lenders provided
Genesis and its subsidiaries with loan facilities totaling $850,000,000 (the
"Genesis Bank Financing") for the purpose of refinancing certain existing
indebtedness of Genesis; funding interest and principal payments on the
facilities and certain remaining indebtedness; funding permitted acquisitions;
funding Genesis' commitments in connection with the Merger; and funding
Genesis' and its subsidiaries' working capital for general corporate purposes,
including fees and expenses of the transactions. The Genesis Bank Financing
facilities consist of three $200,000,000 term loans (collectively, the "Term
Loans"),a $250,000,000 revolving credit loan (the "Revolving Credit Facility")
which includes one or more Swing Loans (collectively, the "Swing Loan
Facility") in integral principal multiples of $500,000 up to an aggregate
unpaid principal amount of $15,000,000. The Term Loans amortize in quarterly
installments beginning in fiscal 1998 through 2005, of which $26,500,000 is
payable in fiscal 1998. The Term Loans consist of (1) a $200,000,000 six year
term loan (the "Tranche A Term Facility"); (2) a $200,000,000 seven year term
loan (the "Tranche B Term Facility"); and (3) a $200,000,000 eight year term
loan (the "Tranche C Term Facility"). The Revolving Credit Facility becomes
payable in full on September 30, 2003.
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The Genesis Bank Financing facilities are secured by a first priority security
interest in all of the stock, partnership interests and other equity of all of
Genesis' present and future subsidiaries (including the Genesis Elder Care
Corp.) other than stock of Multicare and its subsidiaries. Loans under the
Genesis Bank Financing bear, at Genesis' option, interest at the per annum
Prime Rate as announced by the administrative agent, or the applicable
Adjusted LIBOR. Loans under the Tranche A Term Facility bear interest at an
annual rate equal to LIBOR plus a margin up to 2.5% (currently 7.94%); loans
under the Tranche B Term Facility bear interest at an annual rate equal to
LIBOR plus a margin up to 2.75% (currently 8.44%); loans under the Tranche C
Term Facility bear interest at an annual rate equal to LIBOR plus a margin up
to 3.0% (currently 8.69%); loans under the Revolving Credit Facility bear
interest at a rate equal to LIBOR plus a margin up to 2.5% (currently 7.94%);
and loans under the Swing Loan Facility bear interest at the Prime Rate unless
otherwise agreed to by the parties. Subject to meeting certain financial
covenants, the above referenced interest rates are changed periodically.
The Genesis Bank Financing contains a number of covenants that, among other
things, restrict the ability of Genesis and its subsidiaries to dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Genesis and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; causes Genesis and its affiliates
to maintain the Management Agreement, the Put/Call Agreement, as defined
below, and corporate separateness; and will cause Genesis to comply with the
terms of other material agreements, as well as comply with usual and customary
covenants for transactions of this nature.
In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare
Corp. Common Stock held by Cypress, TPG and Nazem commencing on October 9,
2001 and for a period of 270 days thereafter, at a price determined pursuant
to the terms of the Put/Call Agreement. Cypress, TPG and Nazem will have the
option, on the terms and conditions set forth in the Put/Call Agreement, to
require Genesis to purchase (the "Put") such Genesis ElderCare Corp. Common
Stock commencing on October 9, 2002 and for a period of one year thereafter,
at a price determined pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's
Genesis ElderCare Corp. Common Stock, plus a portion of the Genesis pharmacy
business (the "Calculated Equity Value"). The Calculated Equity Value will be
determined based upon a multiple of Genesis ElderCare Corp.'s earnings before
interest, taxes, depreciation, amortization and rental expenses, as adjusted
("EBITDAR") after deduction of certain liabilities, plus a portion of the
EBITDAR related to the Genesis pharmacy business. The multiple to be applied
to EBITDAR will depend on whether the Put or the Call is being exercised. Any
payment to Cypress, TPG or Nazem under the Call or the Put maybe in the form
of cash or Genesis common stock at Genesis' option.
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common
Stock will be determined on the basis set forth in the Put/Call Agreement
which provides generally for additional Calculated Equity Value of Genesis
ElderCare Corp. to be divided based upon the proportionate share of the
capital contributions of the stockholders to Genesis ElderCare Corp. Upon
exercise of the Put by Cypress, TPG or Nazem, there will be no minimum return
to Cypress, TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited
to Cypress' TPG's or Nazem's share of the Calculated Equity Value based upon a
formula set forth in the terms of the Put/Call Agreement which provides
generally for
18
<PAGE>
the preferential return of the stockholders' capital contributions (subject to
certain priorities), a 25% compound annual return on Cypress', TPG's and Nazem
capital contributions and the remaining Calculated Equity Value to be divided
based upon the proportionate share of the capital contributions of the
stockholders to Genesis ElderCare Corp.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated
upon an event of bankruptcy of Genesis, a change of control of Genesis, an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement and
Management Agreement and to control the sale or liquidation of Genesis
ElderCare Corp. In the event of such sale, the proceeds from such sale will be
distributed among the parties as contemplated by the formula for the Put
option exercise price and Cypress, TPG and Nazem will retain a claim against
Genesis for the difference, if any, between the proceeds of such sale and the
put option exercise price. In the event of a bankruptcy or change of control
of Genesis, the option price shall be payable solely in cash provided any such
payment will be subordinated to the payment of principal and interest under
the Genesis Bank Financing.
In December 1997, the Company purchased approximately 1,000,000 long-term call
options on the Company's Common Stock. The Company's Board of Directors
approved the purchase of up to 1,500,000 call options. The call options are
purchased by the Company in privately negotiated transactions designated to
take advantage of attractive share price levels, as determined by the
Company's management, in compliance with covenants governing existing
financing arrangements. The timing and the terms of the transactions,
including maturities, will depend on market conditions, the Company's
liquidity and covenant requirements under its financing arrangements, and
other considerations. The Board of Directors also approved a Senior Executive
Stock Ownership Program. Under the terms of the program, certain of the
Company's current senior executive employees will be required to own shares of
the Company's Common Stock having a market value based upon a multiple of the
executive's salary. Each executive is required to own the shares within three
years of the date of the adoption of the program. Subject to applicable laws,
the Company may lend funds to one or more of the senior executive employees
for his or her purchase of the Company's Common Stock. As of June 30, 1998,
the Company loaned approximately $2,600,000 to senior executive employees to
purchase the Company's Common Stock.
In October 1996, the Company completed an offering of $125,000,000 9 1/4%
Senior Subordinated Notes due 2006. The Company used the net proceeds of
approximately $121,250,000 together with borrowings under the Credit Facility,
to pay the cash portion of the purchase price of the Geriatric and Medical
Companies (GMC) Transaction, to repay certain debt assumed as a result of the
GMC Transaction and to repurchase GMC accounts receivable which were
previously financed.
Certain of the Company's other outstanding loans contain covenants which,
without the prior consent of the lenders, limit certain activities of the
Company. Such covenants contain limitations relating to the merger or
consolidation of the Company and the Company's ability to secure indebtedness,
make guarantees, grant security interests and declare dividends. In addition,
the Company must maintain certain minimum levels of cash flow and debt service
coverage, and must maintain certain 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
19
<PAGE>
Company as a whole. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative
rulings and interpretations which may further affect payments made under those
programs. Further, the federal and state governments may reduce the funds
available under those programs in the future or require more stringent
utilization and quality reviews of eldercare centers.
Pursuant to the Balanced Budget Act of 1997 (the "Act"), beginning on or after
July 1, 1998, Medicare reimbursement for skilled nursing facilities will be on
a prospective payment system ("PPS"). Skilled nursing facilities will be paid
a per diem rate for all covered Part A skilled nursing facility services as
well as many services for which payment may be made under Part B during a
period when a beneficiary is provided covered skilled nursing facility care.
The per diem rate is adjusted based upon the resource utilization group of a
resident. This payment will cover rehabilitation and non-rehabilitation
ancillary services; however, the per diem rate will not cover physician,
nursing, physician assistant and certain related services. For the first three
cost reporting periods beginning on or after July 1, 1998, the per diem rate
will be based on a blend of a facility specific rate and a federal per diem
rate. In subsequent periods, and for facilities first receiving payments for
Medicare services on or after October 1, 1995, the federal per diem rate will
be used without any facility specific blending.
The Act also required consolidated billing for skilled nursing facilities. The
skilled nursing facility must submit all Medicare claims for Part A and Part B
services received by its residents with the exception of physician, nursing,
physician assistant and certain related services. Medicare will pay the
skilled nursing facilities directly for all services on the consolidated bill
and outside suppliers of services to residents of the skilled nursing
facilities must collect payment from the skilled nursing facility. Due to
system related problems, the Health Care Financing Administration announced
publicly in July 1998 that this requirement of the Act would be postponed
indefinitely.
The Act also repealed the Boren Amendment which required Medicaid payments to
nursing facilities to be "reasonable and adequate" to cover the costs of
efficiently and economically operated facilities. Under the Act, states must
now use a public notice and comment process for determining Medicaid rates and
give interested parties a reasonable opportunity to comment on proposed rates,
rate methodology and justifications. It is unclear what impact the Balanced
Budget Act of 1997 will have on the Company.
The Company believes that its liquidity needs can be met by expected operating
cash flow and availability of borrowings under its credit facilities. At
August 7, 1998, approximately $166,500,000 was outstanding under the Revolving
Credit Facility, and approximately $64,700,000 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.
20
<PAGE>
Year 2000
The Company is aware of the issues associated with the programming code in
many existing computer systems (the "Year 2000" issue) as the millennium
approaches. The Company has conducted a review of its computer systems to
identify hardware and software affected by the Year 2000 issue. This issue
affects computers systems having date sensitive programs that may not properly
recognize the Year 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail resulting
in business interruption.
With respect to its existing computer systems, the Company is upgrading,
generally, in order to meet the demands of its expanding business. In the
process, the Company is taking steps to identify, correct, and/or reprogram
and test its existing systems for Year 2000 compliance. It is anticipated that
all new system upgrades or reprogramming efforts will be completed by late
calendar year 1998, allowing adequate time for testing. The Company presently
believes that with modification to existing software and conversions to new
software, the Year 2000 issue can be mitigated. However, given the complexity
of the Year 2000 issue, there can be no assurances that the Company will be
able to address the problem without costs and uncertainties that might affect
future financial results or cause reported financial information not to be
necessarily indicative of future operating results or future financial
condition.
The Company has incurred, and expects to incur additional, internal costs as
well as other expenses to address the necessary software upgrades, training,
data conversion, testing and implementation related to the Year 2000 issue.
Such costs are being expensed as incurred. The Company does not expect the
amounts required to be expensed to have a material effect on its financial
position or results of operations. The Year 2000 issue is expected to affect
the systems of various entities with which the Company interacts including
payors, suppliers and vendors. There can be no assurance that data produced by
systems of other entities on which the Company's systems rely will be
converted on a timely basis or that a failure by another entity's system to be
Year 2000 compliant will not have a material adverse effect on the Company.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board, (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997, or the Company's
fiscal year end September 30, 1999. The Company plans to adopt this accounting
standard as required. The adoption of this standard will have no material
impact on the Company's earnings, financial condition or liquidity, but will
require the Company to classify items other than comprehensive income in the
financial statements and display the accumulated balance of other
comprehensive income separately in the equity section of the balance sheet.
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"). Statement 131 supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting of a Business Enterprise, and
establishes new standards for reporting information about operation segments
in annual financial statements and requires selected information about
operating segments in interim financial reports. Statement 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for years
beginning after December 15, 1997, or the Company's fiscal year end September
30, 1999. This statement affects reporting in financial statements only and
will have no impact on the Company's results of operations, financial
condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
21
<PAGE>
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. This Statement is
effective for all fiscal quarters beginning after June 15, 1999. The Company
intends to adopt this accounting standard as required. The adoption of this
standard is not expected to have a material impact on the Company's earnings
or financial position.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("the Statement").
This statement requires costs of start-up activities, including organizational
costs, to be expensed as incurred. Start-up activities are defined as those
one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, conducting business
with a new process in an existing facility, or commencing a new operation. This
Statement is effective for fiscal years beginning after December 15, 1998. The
Company has not yet quantified the impact the adoption may have on its
consolidated financial statements.
22
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on
May 6, 1998 in connection with the Agreement and
Plan of Merger by and between Genesis Health
Ventures, Inc. and its wholly owned subsidiary V
Acquisition Corporation and Vitalink Pharmacy
Services, Inc. The Current Report on Form 8-K does
not include financial statements.
23
<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 13, 1998 /s/ George V. Hager, Jr.
------------------------------------------
George V. Hager, Jr.
Senior Vice President and Chief Financial Officer
24
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<ARTICLE> 5
<CIK> 0000874265
<NAME> GENESIS HEALTH VENTURES, INC.
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> JUN-30-1998 JUN-30-1997
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<CASH> 30,812,000 15,346,000
<SECURITIES> 19,203,000 12,957,000
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<ALLOWANCES> (48,793,000) (36,431,000)
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<CURRENT-ASSETS> 473,166,000 340,514,000
<PP&E> 698,121,000 650,514,000
<DEPRECIATION> (115,229,000) (86,269,000)
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<TOTAL-REVENUES> 999,390,000 816,270,000
<CGS> 0 0
<TOTAL-COSTS> 814,342,000 670,770,000
<OTHER-EXPENSES> 60,993,000 53,124,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 59,010,000 21,506,000
<INCOME-PRETAX> 67,122,000 63,870,000
<INCOME-TAX> 23,741,000 23,812,000
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