<PAGE>
[GRAPHIC OMITTED]
Offer to Exchange
all existing 97/8% Senior
Subordinated Notes due 2009
($125,000,000 aggregate principal
amount outstanding)
for
9 7/8% Senior Subordinated
Notes due 2009 of
Genesis Health Ventures, Inc.
TERMS OF EXCHANGE OFFER
o Expires 5:00 p.m., New York City time, May 17, 1999, unless extended.
o Not subject to any condition other than that the exchange offer not violate
applicable law or any applicable interpretation of the staff of the
Securities and Exchange Commission.
o All existing notes that are validly tendered and not validly withdrawn will
be exchanged.
o Tenders of existing notes may be withdrawn any time prior to 5:00 p.m., New
York City time, on the expiration date.
o The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes.
o We will not receive any proceeds from the exchange offer.
o The terms of the notes to be issued are substantially identical to the
existing notes, except for certain transfer restrictions and registration
rights relating to the existing notes.
See "Risk Factors" beginning on page 11 for a discussion of certain
matters that should be considered by prospective investors.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in the
Exchange Offer, nor have any of these organizations determined that this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is April 9, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary .............................................................................. 1
Risk Factors ......................................................................... 11
Forward-Looking Statements ........................................................... 17
Where You Can Find More Information .................................................. 18
Incorporation of Certain Documents by Reference ...................................... 18
Use of Proceeds ...................................................................... 20
Capitalization ....................................................................... 21
The Exchange Offer ................................................................... 22
Selected Historical Consolidated Financial Data ...................................... 31
Management's Discussion and Analysis of Financial Condition and Results of Operations 32
Business ............................................................................. 48
Management ........................................................................... 59
Description of the Exchange Notes .................................................... 62
Certain United States Federal Income Tax Consequences ................................ 93
Plan of Distribution ................................................................. 97
Legal Matters ........................................................................ 97
Experts .............................................................................. 97
Index to Financial Information ....................................................... F-1
</TABLE>
---------------------
Genesis ElderCare(R) and NeighborCare(R) are service marks of
Genesis Health Ventures, Inc.
i
<PAGE>
SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes specific terms of the notes we are offering, as well as
information regarding our business and detailed financial data. We encourage you
to read this prospectus in its entirety. The terms "Genesis" or the "Company"
refer to Genesis Health Ventures, Inc. and its subsidiaries. The information
contained in this prospectus reflects a 43.6% equity investment by Genesis in
The Multicare Companies, Inc., which is accounted for using the equity method.
Certain operating statistics of the Company included herein reflect operations
that Genesis manages for Multicare.
THE EXCHANGE OFFER
We completed on December 23, 1998 the private offering of $125,000,000 of
97/8% Senior Subordinated Notes due 2009. We entered into a registration rights
agreement with the initial purchasers in the private offering in which we
agreed, among other things, to deliver to you this prospectus by February 6,
1999 and to complete this exchange offer by May 22, 1999. You are entitled to
exchange in this exchange offer your existing notes for registered notes with
substantially identical terms. If the exchange offer is not completed by May 22,
1999, then interest rates on the notes will be increased. You should read the
discussion under the heading "Summary Description of the Exchange Notes" and
"Description of the Exchange Notes" for further information regarding the
registered notes.
We believe that the notes issued in this exchange offer may be resold by
you without compliance with the registration and prospectus delivery provisions
of the Securities Act, subject to certain conditions. You should read the
discussion under the heading "Summary of the Terms of The Exchange Offer" and
"The Exchange Offer" for further information regarding this exchange offer and
resale of the notes.
THE COMPANY
Who We Are
Our company is a leading provider of healthcare and support services to the
elderly. We have developed the Genesis ElderCare delivery model of integrated
healthcare networks to provide cost-effective, outcome-oriented services to the
elderly. Through our networks, we provide basic healthcare and specialty medical
services to more than 175,000 customers, including approximately 40,000
customers who are residents in eldercare facilities.
Our Networks
Our networks include:
o 326 eldercare centers with approximately 42,200 beds;
o nine primary care physician clinics;
o approximately 85 physicians, physician assistants and nurse
practitioners;
o 11 medical supply distribution centers serving over 1,000 eldercare
centers with over 80,000 beds;
o an integrated pharmacy operation with over $900,000,000 in annualized
net revenues, including 79 long-term care pharmacies serving
approximately 263,000 institutional beds; 34 community-based
pharmacies; and infusion therapy services; and
o certified rehabilitation agencies providing services through over 600
contracts.
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We also provide diagnostic and hospitality services in selected markets
and operate a group purchasing organization.
Where We Operate
We operate primarily in five regional markets in which over 11,100,000
people over the age of 65 reside. We have concentrated our networks in five
geographic regions in order to achieve operating efficiencies, economies of
scale and significant market share. The five geographic markets that we
principally serve are:
o New England Region (Massachusetts/Connecticut/New
Hampshire/Vermont/Rhode Island);
o MidAtlantic Region (Greater Philadelphia/Delaware Valley);
o Chesapeake Region (Southern Delaware/Eastern Shore of
Maryland/Baltimore, Maryland/Washington D.C./Virginia);
o Southern Region (Central Florida); and
o Allegheny Region (West Virginia/Western Pennsylvania/Eastern
Ohio/Illinois/Wisconsin).
We believe that we are the largest operator of eldercare center beds in the
states of New Hampshire, Massachusetts, New Jersey, Pennsylvania, Maryland and
West Virginia.
Competitive Strengths
Our eldercare services focus on the central medical and physical issues
facing the more medically demanding elderly. By integrating the talents of
physicians with case management, comprehensive discharge planning and, where
necessary, home support services, we believe we provide cost-effective care
management to achieve superior outcomes and return customers to the community.
We believe this focus has resulted in:
o increased use of specialty medical services,
o high occupancy of available beds,
o enhanced quality payor mix and
o a broader base of repeat customers.
Our Strategy
Our long-term growth strategy is to:
o enhance our existing eldercare networks,
o establish new eldercare networks in contiguous markets and
o broaden our array of high margin specialty medical services.
We will pursue this strategy through internal development and selected
acquisitions of, and investments in, eldercare centers and rehabilitation and
pharmacy companies, such as the Vitalink transaction we completed on August 28,
1998 which is discussed in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Certain Transactions."
CORPORATE HISTORY AND PRINCIPAL EXECUTIVE OFFICES
Our company was incorporated in Pennsylvania in May 1985 as a Pennsylvania
corporation. Our principal executive offices are located at 101 East State
Street, Kennett Square, Pennsylvania 19348 and our telephone number is (610)
444-6350.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $125,000,000 aggregate
principal amount of existing notes for an equal aggregate principal amount of
exchange notes. The exchange notes will be our obligations entitled to the
benefits of the indenture governing the existing notes. The form and terms of
the exchange notes are identical in all material respects to the form and terms
of the existing notes except that the exchange notes have been registered under
the Securities Act, and therefore are not entitled to the benefits of the
registration rights granted under the Registration Rights Agreement, executed
as part of the offering of the existing notes, dated December 23, 1998 among
the Company and the initial purchasers in the private offering, including
NationsBanc Montgomery Securities LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and First Union Capital Markets, a division of Wheat First
Securities, Inc., relating to certain contingent increases in the interest
rates provided for pursuant thereto.
Registration Rights
Agreement................ You are entitled to exchange your notes for
registered notes with substantially identical terms.
The exchange offer is intended to satisfy these
rights. After the exchange offer is complete, you
will no longer be entitled to any exchange or
registration rights with respect to your notes.
The Exchange Offer....... We are offering to exchange $1,000 principal
amount of 97/8% Senior Subordinated Notes due 2009
which have been registered under the Securities Act
for each $1,000 principal amount of our existing
97/8% Senior Subordinated Notes due 2009 which were
issued in December 1998 in a private offering. In
order to be exchanged, an existing note must be
properly tendered and accepted. All existing notes
that are validly tendered and not validly withdrawn
will be exchanged.
As of this date there are $125,000,000 principal
amount of existing notes outstanding. We will issue
registered notes on or promptly after the
expiration of this exchange offer.
Resale of the
Exchange Notes........... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, we believe that the notes issued in
this exchange offer will in general be freely
tradeable without compliance with the registration
and prospectus delivery provisions of the Securities
Act provided that:
o you are not an "affiliate" of ours;
o you are not a broker-dealer who purchased such
existing notes directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act;
o the notes issued in this exchange offer are being
acquired in the ordinary course of business; and
o you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the notes issued to you in
this exchange offer.
However, if you are an "affiliate" of ours or if
you intend to participate in this exchange offer
for the purpose of distributing the exchange notes:
o you will not be able to rely on such
interpretations of the staff of the Commission,
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o you will not be able to tender your existing
notes in this exchange offer and
o you must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any sale or
transfer of the existing notes, unless such sale
or transfer is made pursuant to an exemption from
such requirements.
If you transfer any note issued to you in this
exchange offer without delivering a prospectus
meeting the requirement of the Securities Act or
without an exemption from registration of your
notes for such requirements, you may incur
liability under the Securities Act. We do not
assume to indemnify you against such liability.
Each broker-dealer that is issued notes in this
exchange offer for its own account in exchange for
notes which were acquired by such broker-dealer as
a result of market-making or other trading
activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act, in connection with any resale of
the notes issued in this exchange offer. The letter
of transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer will
not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. A
broker-dealer may use this prospectus for an offer
to resell, resale or other retransfer of the notes
issued to it in this exchange offer. We have agreed
that we will make this prospectus and any amendment
or supplement to this prospectus available to any
such broker-dealer for use in connection with any
such resales.
Expiration Date.......... The exchange offer will expire at 5:00 p.m., New
York City time, May 17, 1999, unless we decide to
extend the expiration date.
Accrued Interest on the
Exchange Notes and the
Existing Notes.......... The exchange notes will bear interest from December
23, 1998. Holders of existing notes whose notes are
accepted for exchange will be deemed to have waived
the right to receive any payment of interest on such
outstanding notes accrued from December 23, 1998 to
the date of the issuance of the exchange notes.
Consequently, holders who exchange their existing
notes for exchange notes will receive the same
interest payment on July 15, 1999 (the first
interest payment date with respect to the existing
notes and the exchange notes to be issued in this
exchange offer) that they would have received had
they not accepted this exchange offer.
Procedures for Tendering
Existing Notes.......... If you are a holder of a note and you wish to
tender your note for exchange pursuant to this
exchange offer, you must transmit to The Bank of New
York, as exchange agent, on or prior to this
expiration date:
either
o a properly completed and duly executed letter of
transmittal, which accompanies this prospectus,
or a facsimile of the letter
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of transmittal, including all other documents
required by the letter of transmittal, to the
exchange agent at the address set forth on the
cover page of the letter of transmittal; or
o a computer-generated message transmitted by means
of DTC's Automated Tender Offer Program system
and received by the exchange agent and forming a
part of a confirmation of book entry transfer in
which you acknowledge and agree to be bound by
the terms of the letter of transmittal;
and, either
o a timely confirmation of book-entry transfer of
your outstanding notes into the exchange agent's
account at DTC pursuant to the procedure for
book-entry transfers described in this prospectus
under the heading "The Exchange Offer --
Procedure for Tendering," must be received by the
exchange agent on or prior to the expiration
date; or
o the documents necessary for compliance with the
guaranteed delivery procedures described below.
By executing the letter of transmittal, each holder
will represent to us that, among other things,
o the notes to be issued in the exchange offer are
being obtained in the ordinary course of business
of the person receiving such new notes whether or
not such person is the holder,
o neither the holder nor any such other person has
an arrangement or understanding with any person
to participate in the distribution of such
exchange notes and
o neither the holder nor any such other person is
an "affiliate," as defined in Rule 405 under the
Securities Act, of us.
Special Procedures for
Beneficial Owners....... If you are the beneficial owner of notes and your
name does not appear on a security position listing
of DTC as the holder of such notes or if you are a
beneficial owner of registered notes that are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
you wish to tender such notes or registered notes in
this exchange offer, you should contact such person
in whose name your notes or registered notes are
registered promptly and instruct such person to
tender on your behalf. If you are a beneficial
holder and wish to tender on your own behalf, you
must, prior to completing and executing the letter
of transmittal and delivering your outstanding
notes, either make appropriate arrangements to
register ownership of the existing notes in your
name or obtain a properly completed bond power from
the registered holder. The transfer of record
ownership may take considerable time.
Guaranteed Delivery
Procedures.............. If you wish to tender your notes and time will not
permit your required documents to reach the exchange
agent by the expiration date, or the procedure for
book-entry transfer cannot be completed
5
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on time or certificates for registered notes cannot
be delivered on time, you may tender your notes
pursuant to the procedures described in this
prospectus under the heading "The Exchange Offer --
Guaranteed Delivery Procedure."
Withdrawal Rights........ You may withdraw the tender of your notes at any
time prior to 5:00 p.m., New York City time, on the
expiration date.
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes.......... We will accept for exchange any and all existing
notes which are properly tendered in this exchange
offer prior to 5:00 p.m., New York City time, on the
expiration date. The notes issued pursuant to this
exchange offer will be delivered promptly following
the expiration date.
Certain U.S. Federal
Income Tax
Consequences............ The exchange of the notes will generally not be a
taxable exchange for United States federal income
tax purposes. We believe you will not recognize any
taxable gain or loss or any interest income as a
result of such exchange.
Use of Proceeds.......... We will not receive any proceeds from the issuance
of notes pursuant to this exchange offer. We will
pay all expenses incident to the exchange offer.
Exchange Agent........... The Bank of New York is serving as exchange agent
in connection with the exchange offer. The exchange
agent can be reached at its Reorganization Section,
101 Barclay Street, Floor 7E, New York, NY 10286.
For more information with respect to this exchange
offer, the telephone number for the exchange agent
is (212) 815-3738 and the facsimile number for the
exchange agent is (212) 815-6339.
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SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
Notes Offered............ $125,000,000 aggregate principal amount of 97/8%
Senior Subordinated Notes due 2009.
Maturity Date............ January 15, 2009.
Interest Payments Dates... January 15 and July 15 of each year, commencing
July 15, 1999.
Ranking.................. The notes:
o will be unsecured senior subordinated obligations
and will be subordinated to all our existing and
future senior indebtedness, including our credit
facility and currently outstanding 91/4% mortgage
bonds due 2007,
o will rank equally with all our other existing and
future senior subordinated indebtedness,
including our currently outstanding 93/4% senior
subordinated notes due 2005 and 91/4% senior
subordinated notes due 2006,
o will rank senior to all our subordinated
indebtedness, and
o effectively will rank junior to all liabilities
of our subsidiaries. On December 31, 1998, we had
o $1,114,576,000 of indebtedness that is effectively
or structurally senior to the notes,
o $120,000,000 of indebtedness that is effectively
or structurally equal to the notes, and
o $125,000,000 of indebtedness that is effectively
or structurally subordinate to the notes.
Optional Redemption...... We may redeem the notes, in whole or in part, in
cash, at any time on or after January 15, 2004, at
the redemption prices set forth in this prospectus.
Public Equity Offering
Optional Redemption..... Before January 15, 2002, we may redeem up to 35%
of the aggregate principal amount of the notes with
the net proceeds of a public equity offering at
109.875% of the principal amount thereof, plus
accrued interest, if at least 65% of the aggregate
principal amount of the notes originally issued
remains outstanding after such redemption. See
"Description of the Exchange Notes -- Optional
Redemption."
Change of Control........ Upon certain change of control events, each holder
of notes may require us to repurchase all or a
portion of its notes at a purchase price equal to
101% of the principal amount thereof, plus accrued
interest. See "Description of the Exchange Notes --
Change in Control" for the definition of a Change
in Control.
Certain Covenants........ The indenture governing the notes will contain
covenants that, among other things, will limit our
ability and the ability of our subsidiaries to:
o incur additional indebtedness,
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o pay dividends on, redeem or repurchase our
capital stock,
o make investments,
o issue or sell capital stock of our subsidiaries,
o engage in transactions with affiliates,
o sell assets,
o create certain liens,
o incur additional senior subordinated
indebtedness,
o guarantee indebtedness,
o restrict dividend or other payments to us, and
o consolidate, merge or transfer all or
substantially all our assets and the assets of
our subsidiaries on a consolidated basis.
These covenants are subject to important exceptions
and qualifications, which are described under the
heading "Description of the Exchange Notes" in this
prospectus.
Lack of a Public Market... There currently is no public trading market for
the notes. Although the initial purchasers have
informed us that they currently intend to make a
market in the exchange notes, they are not obligated
to do so and may discontinue making a market at any
time without notice. Accordingly, there can be no
assurance that an active or liquid trading market
will develop for the exchange notes. We do not
intend to apply for listing of the exchange notes on
any securities exchange or for quotation through the
National Association of Securities Dealers Automated
Quotation System.
Exchange Offer, Registration
Rights.................. Under a registration rights agreement executed as
part of the offering of the existing notes, we have
agreed to use our best efforts to:
o file a registration statement by February 6, 1999
enabling note holders to exchange the privately
placed notes for publicly registered notes with
identical terms,
o cause the registration statement to become
effective by April 22, 1999,
o consummate the exchange offer by May 22, 1999,
and
o file a shelf registration statement for the
resale of the notes if we cannot effect an
exchange offer within the time periods listed
above and in certain other circumstances.
The interest rate on the notes will increase if we
do not comply with our obligations under the
registration rights agreement. See "The Exchange
Offer."
RISK FACTORS
See "Risk Factors" immediately following this summary for a discussion of
certain factors which you should consider in evaluating your investment in the
notes to be issued in the exchange offer.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements of Genesis, including
the notes thereto, appearing elsewhere in this prospectus.
EBITDAR represents earnings before interest expense, income taxes,
depreciation and amortization, extraordinary items, rental expense, debenture
conversion expense and a $15,000,000 non-cash impairment charge occurring in
1997 and a $115,505,000 non-cash impairment charge occurring in 1998. EBITDAR
should not be considered an alternative measure of our net income, operating
performances, cash flow or liquidity. It is included herein to provide
additional information related to our ability to service debt.
EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, extraordinary items, debenture conversion
expense a $15,000,000 non-cash impairment charge occurring in 1997 and a
$115,505,000 non-cash impairment charge occurring in 1998. EBITDA should not be
considered an alternative measure of our net income, operating performance,
cash flow or liquidity. It is included herein to provide additional information
related to our ability to service debt. The indenture contains certain
covenants that utilize a consolidated fixed charge coverage ratio calculation
that is based upon EBITDA. See "Description of the Exchange Notes" for a
description of such covenants.
For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of the sum of earnings before income taxes and extraordinary
items plus fixed charges. Fixed charges consist of interest on all
indebtedness, debenture conversion expense, preferred stock dividends,
amortization of debt discount and expenses, and that portion of rental expense
that we believe to be representative of the interest factor. Fixed charges
related to approximately $14,200,000 of debt guaranteed by us has not been
included in the computation of the ratio. The definition of fixed charges used
in this calculation differs from that used in the fixed charge coverage ratio
covenants contained in the indenture.
The pro forma statement of operations data for the year ended September
30, 1998 gives effect to the Vitalink transaction, the Multicare transaction,
the purchase of the therapy business from Multicare and the purchase of the
pharmacy business from Multicare as if they had occurred at the beginning of
the period presented.
The pro forma, as adjusted statement of operations data for the year ended
September 30, 1998 gives effect to the Vitalink transaction, the Multicare
transaction, the purchase of the therapy business from Multicare and the
purchase of the offering of the existing notes and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds" as if
they had occurred at the beginning of the period presented.
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<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1994 1995 1996 1997
------------- ------------- ------------- ----------------
(In thousands, except ratio and operating data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ............................ $ 388,616 $ 486,393 $ 671,469 $ 1,099,823
Operating expenses ..................... 319,243 393,140 543,200 914,955
Depreciation and amortization .......... 14,982 18,793 25,374 41,946
Lease expense .......................... 11,376 13,798 18,638 28,587
Interest expense, net .................. 15,305 20,366 24,926 39,103
Earnings (loss) before extraordinary
items, equity in income of
unconsolidated affiliates, and
cumulative effect of change in
accounting principle .................. 17,691 25,531 37,169 48,144
Net income (loss) available to
common shareholders ................... $ 17,673 $ 23,608 $ 37,169 $ 47,591
Other Financial Data:
EBITDAR ................................ $ 69,373 $ 93,253 $ 128,269 $ 199,868
EBITDA ................................. 57,997 79,455 109,631 171,281
Capital expenditures ................... 18,784 24,719 38,645 61,102
Ratio of EBITDAR to interest
expense plus lease expense ............ 2.6x 2.7x 2.9x 3.0x
Ratio of EBITDA to interest
expense ............................... 3.8x 3.9x 4.4x 4.3x
Ratio of earnings to fixed charges ..... 2.0x 2.2x 2.3x 2.1x
Operating Data:
Payor mix (as a percent of patient
service revenue):
Private pay and other .................. 41% 38% 39% 39%
Medicare ............................... 16% 21% 25% 24%
Medicaid ............................... 43% 41% 36% 37%
Average owned/leased health center
beds .................................. 7,530 8,268 9,429 15,132
Occupancy percentage ................... 91.9% 91.9% 92.6% 91.0%
Average managed health center
beds .................................. 9,992 10,374 5,030 6,101
Balance Sheet Data (at period
end):
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended
Year Ended September 30, December 31,
-------------------------------------------- --------------------------
1998 1997 1998
-------------------------------------------- ------------- -------------
Pro Forma, (Unaudited)
Actual Pro Forma As Adjusted
------------- ------------- --------------
(In thousands, except ratio and operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ............................ $1,405,305 $1,878,622 $1,878,622 $ 302,565 $ 479,204
Operating expenses ..................... 1,270,615 1,671,848 1,671,848 245,379 408,050
Depreciation and amortization .......... 52,385 72,259 72,259 11,686 17,807
Lease expense .......................... 31,182 30,908 30,908 6,643 6,367
Interest expense, net .................. 82,088 113,779 116,531 19,643 27,323
Earnings (loss) before extraordinary
items, equity in income of
unconsolidated affiliates, and
cumulative effect of change in
accounting principle .................. (22,807) (10,172) (12,924) 12,201 12,279
Net income (loss) available to
common shareholders ................... $ (25,900) $ (31,068) $ (32,802) 10,898 5,171
Other Financial Data:
EBITDAR ................................ $ 250,195 $ 322,279 $ 322,279 57,186 71,154
EBITDA ................................. 219,013 291,371 291,371 50,543 64,787
Capital expenditures ................... 56,663 67,498 67,498 10,925 17,551
Ratio of EBITDAR to interest
expense plus lease expense ............ 2.2x 2.2x 2.2x 2.2x 2.1x
Ratio of EBITDA to interest
expense ............................... 2.7x 2.6x 2.5x 2.6x 2.4x
Ratio of earnings to fixed charges ..... 1.7x 1.6x 1.6x 1.7x 1.4x
Operating Data:
Payor mix (as a percent of patient
service revenue):
Private pay and other .................. 45% 49% 49% 43% 45%
Medicare ............................... 20% 16% 16% 21% 17%
Medicaid ............................... 35% 35% 35% 36% 38%
Average owned/leased health center
beds .................................. 15,137 15,137 15,137 15,011 15,282
Occupancy percentage ................... 91.5% 91.5% 91.5% 91.2% 91.2%
Average managed health center
beds .................................. 24,234 24,234 24,234 22,926 23,326
Balance Sheet Data (at period
end):
</TABLE>
December 31,
1998
--------------
(Unaudited,
in thousands)
Working capital .............. $ 372,864
Total assets ................. 2,670,678
Long-term debt ............... 1,439,457
Shareholders' equity ......... 880,058
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RISK FACTORS
An investment in the registered exchange notes to be issued pursuant to
this prospectus in exchange for the existing notes is subject to a number of
risks. You should carefully consider the following factors, as well as the more
detailed descriptions cross-referenced to the body of the prospectus and the
other matters described in this prospectus, in evaluating this investment. The
term "note" or "notes" includes the existing notes and the exchange notes.
The notes are unsecured subordinated obligations so that in the event of
bankruptcy, liquidation or dissolution we are required to pay senior and
secured indebtedness prior to paying the notes. There is no assurance that
sufficient assets will remain after repayment of the senior and secured
indebtedness to make payments on the notes.
The notes:
o will be unsecured senior subordinated obligations and will be
subordinated to all our existing and future senior indebtedness,
o will rank equally with all our other existing and future senior
subordinated indebtedness, and
o effectively will rank junior to all liabilities of our subsidiaries.
In addition to being subordinate to all of our senior indebtedness, the
notes will not be secured by any of our assets. Our credit facility is secured
by the stock and partnership interests in substantially all our subsidiaries,
and substantially all of our subsidiaries are co-obligors of the credit
facility. In the event of our bankruptcy, liquidation or dissolution, our
assets would be available to pay obligations on the notes only after all
payments had been made on our senior and secured indebtedness. We cannot assure
you that sufficient assets will remain to make any payments on the notes. In
addition, certain events of default under our senior indebtedness would
prohibit us from making any payments on the notes.
Under the indenture, certain events may cause the repayment of the notes to
be accelerated. If this were to occur, it would cause a default under our credit
facility and we would be required to either repay these obligations or obtain a
waiver from our lenders, before we can repay the notes. Currently, we do not
have enough funds to cover these obligations, and we may not have enough funds
in the near future.
Upon certain change in control events, each holder of the notes may
require us to repurchase all or a portion of its notes at a purchase price in
cash equal to 101% of the principal amount thereof, together with accrued and
unpaid interest. Certain change in control events would constitute a default
under our credit facility and would require us to offer to redeem
o the $21,939,000 principal amount of the 91/4% Mortgage Bonds which rank
senior in right of payment to the notes,
o the $120,000,000 principal amount of the 93/4% Notes which rank equally
in right of payment to the notes and
o the $125,000,000 principal amount of the 91/4% Notes which rank equally
in right of payment to the notes.
Future indebtedness we incur may also limit our ability to repurchase the notes
upon a change in control or require us to offer to redeem such indebtedness
upon a change in control. Moreover, the exercise by the holders of the notes of
this repurchase right could cause a default under such indebtedness, even if
the change in control does not cause a default, due to the financial effect of
such purchase on us. Finally, there can be no guarantee we will have enough
funds to repurchase all the notes. Currently, we believe we would not have
enough funds to repurchase the notes. Even if enough sufficient funds were
available, the terms of our credit facility generally prohibit our prepayment
of the notes prior to their scheduled maturity. Consequently, if we are not
able to prepay amounts outstanding under our credit facility and other senior
indebtedness or obtain requisite consents, we will be unable to fulfill our
repurchase obligations and therefore cause a default under the Indenture.
Furthermore, the change in control provisions may in certain circumstances make
more difficult or discourage a takeover of our company and the removal of
incumbent management.
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<PAGE>
Fraudulent conveyance laws that have been enacted for the protection of
creditors may be applied by a court to subordinate or prevent repayment of the
notes.
Various fraudulent conveyance laws have been enacted for the protection of
creditors. These laws may be applied by a court to subordinate or avoid the
notes in favor of our other existing or future creditors. If a court were to
find that, at the time we issued the notes any of the following were true, such
court could void our obligations under the notes, recover payments made to the
note holders and/or subordinate the claims of the note holders to claims of our
other creditors if we:
o intended to hinder, delay or defraud any existing or future creditor or
considered insolvency with the intent to favor one or more creditors over
others,
o did not receive fair consideration or reasonably equivalent value for
issuing the notes and were insolvent at the time we issued the notes, or
o were made insolvent by issuing the notes, were engaged or about to engage
in a business or transaction for which our remaining assets would be
unreasonably small to carry on our business or intended to take on, or
believed that we would take on, more debts than we could pay.
Generally, a company would be considered insolvent if the sum of the
company's debts is greater than all of the company's property at a fair
valuation, or if the present fair saleable value of the company's assets is
less than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and mature. There can be no assurance as
to what standards a court would apply to determine whether our company was
solvent at the relevant time, or whether, whatever standard was applied, the
notes would not be voided on another of the grounds set forth above.
The notes are subject to original issue discount for federal income tax
purposes. Accordingly, the holders will be required to include amounts in gross
income for federal income tax purpose in advance of receipt of cash payments to
which the income is attributable. In a bankruptcy case the claims of a holder
may be limited.
The existing notes were issued at an original issue discount for federal
income tax purposes. The exchange notes will be a continuation of the existing
notes for federal income tax purposes. Consequently, holders of the notes
generally will be required to include amounts in gross income for federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. See "Certain United States Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the holders of the notes of the purchase, ownership and
disposition of the notes.
If a bankruptcy case is commenced by or against us under federal
bankruptcy law after the issuance of the notes, the claim of a holder of the
notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of the initial public offering price of the notes and that
portion of the original issue discount which is not deemed to constitute
"unmatured interest" for purposes of federal bankruptcy law. Any original issue
discount that was not authorized as of any such bankruptcy filing would
constitute "unmatured interest."
We do not intend to list the exchange notes on any securities exchange.
Accordingly, it may be difficult for you to sell any of the notes you receive in
this exchange offer.
The existing notes currently are owned by a relatively small number of
owners. The existing notes have not been registered under the Securities Act
and will be subject to restrictions on transferability to the extent that they
are not exchanged for the exchange notes. The exchange notes will constitute a
new issue of securities with no established trading market. Although the
exchange notes generally will be permitted to be resold or otherwise
transferred by the holders (who are not our affiliates) without compliance with
the registration requirements under the Securities Act, we do not intend to
list the exchange notes on any national securities exchange or to apply for
quotation on National Association of Securities Dealers Automated Quotation
System. The exchange notes may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities, our performance and certain other factors. Although the initial
purchasers have informed us that they currently intend to make a market in the
exchange notes, they are not obligated to do so and may discontinue making a
market at any time without notice. In
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<PAGE>
addition, any market-making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the exchange
offer. Accordingly, there can be no assurance that an active or liquid market
will develop for the exchange notes.
This exchange offer will expire on May 17, 1999. Your notes will not be
accepted for exchange if you do not follow the procedures of this exchange
offer. Any existing notes that are not exchanged in this offer will continue to
be restricted securities, and your transfer or sale of these notes will be
limited by federal and any applicable state securities laws.
Issuance of exchange notes in exchange for existing notes pursuant to the
exchange offer will be made only after we timely receive the existing notes, a
properly completed and duly executed letter of transmittal and all other
required documents. Therefore, if you want to tender your existing notes in
exchange for exchange notes, you should allow sufficient time to ensure timely
delivery. We are under no duty to notify you of defects or irregularities with
respect to your tender.
After the exchange offer, existing notes that are not tendered or are
tendered but not accepted will continue to be subject to existing transfer
restrictions, and the registration rights under the Registration Rights
Agreement will terminate. In addition, if you participate in the exchange offer
for the purpose of distributing the exchange notes, you may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
exchange notes for its own account in exchange for existing notes which were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. See "Plan of Distribution."
To the extent that existing notes are tendered and accepted in the exchange
offer, the trading market for untendered and tendered but unaccepted existing
notes could be adversely affected.
We intend for this exchange offer to satisfy our registration obligations
under the Registration Rights Agreement. If the exchange offer is consummated,
we do not intend to file further registration statements for the sale or other
disposition of existing notes. Consequently, following completion of this
exchange offer, holders of existing notes seeking liquidity in their investment
would have to rely on an exemption to the registration requirements under
applicable securities laws, including the Securities Act, with respect to any
sale or other disposition of the existing notes.
The indenture and terms of our other indebtedness contain significant
restrictions on our ability to enter into a number of transactions. If we
breach the covenants in the indenture or our other indebtedness, a significant
portion of our indebtedness would become immediately due and payable.
The indenture and our credit facility contain many financial and operating
covenants that significantly limit our ability to,
o incur additional debt,
o grant or create liens upon assets,
o pay dividends,
o redeem capital stock or prepay certain subordinated indebtedness,
o enter into sale leaseback transactions or other loans, investments or
guarantees or
o take other actions.
See "Description of the Exchange Notes" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Our credit facility
also requires us to meet certain financial ratios and other tests. A breach of
any of these restrictions or covenants could cause a default of our credit
facility or the indenture which could cause a default under other indebtedness.
A significant portion of our indebtedness then may become immediately due and
payable and the subordination provisions in the indenture would likely restrict
payments to the holders of the notes.
13
<PAGE>
Our high level of indebtedness may have significant impact on our
operations such as our ability to incur additional debt or to refinance our
existing debt. We cannot assure you that we will have sufficient cash flow to
make required payments under the notes and meet our other obligations.
We are highly leveraged. In addition, we may incur additional debt in the
future, although we will be limited in the amount we could incur by our
existing and future debt agreements. Our high level of indebtedness could have
important consequences to note holders, such as:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be
limited or impaired;
o a substantial portion of our cash flow from operations will be used to
pay principal and interest on our indebtedness and will not be available
for our operations;
o our operating flexibility is limited by covenants contained in the
indenture and our credit facility which limit our ability to incur
additional indebtedness and enter into sale and leaseback transactions or
other loans, investments or guarantees, the creation of liens, the payment
of dividends and sales of assets, and which set forth minimum net worth
requirements;
o our leveraged position may increase our vulnerability to economic
downturns and adverse business and economic conditions and may limit our
ability to pursue other business opportunities, to finance our future
operations or capital needs, and to implement our business strategy; and
o we borrow under our credit facility at variable rates of interest which
exposes us to the risk of greater interest rates. See "Business,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Description of the Exchange Notes."
We expect to pay principal and interest on our indebtedness from cash flow
from operations. Our ability to make scheduled payments of principal and
interest on or to refinance our indebtedness (including the notes) depends on
the future performance of our business which will be subject to many factors.
Certain of these factors are beyond our control, such as prevailing economic
conditions. We cannot assure you that cash flow from operations will be
sufficient to enable us to service our debt and meet our other obligations. If
such cash flow is insufficient, we may be required to refinance all or a
portion of our existing debt, including the notes, to sell assets or to obtain
additional financing. We cannot assure you that any such refinancing would be
possible or that any such sales of assets or additional financing could be
achieved. We also have significant long-term operating lease obligations with
respect to certain of our eldercare centers.
Our business is heavily regulated by federal and state governments.
Failure to comply with federal and state regulations could adversely affect our
business.
The federal government and all states in which we operate and regulate
various aspects of our business. Our failure to obtain or renew any required
regulatory approvals or licenses could result in actions such as,
o the denial of reimbursement,
o the imposition of fines,
o temporary suspension of admission of new patients to facilities,
o suspension or decertification from the Medicaid or Medicare program,
o restrictions on the ability to acquire new providers or expand existing
providers, and
o revocation of the facility's license or closure of a facility.
There can be no assurance that our facilities or the provision of services
and supplies by us, will meet or continue to meet the requirements for
participation in the Medicaid or Medicare programs or that state licensing
authorities will not adopt changes or new interpretations of existing laws that
would adversely affect us.
To the extent that certificates of need or other similar approvals are
required for expansion of our operations, either through center or provider
acquisitions or expansion or provision of new services or other
14
<PAGE>
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays and expenses associated with obtaining such
approvals. In addition, in most states the reduction of beds or the closure of
a facility requires the approval of the appropriate state regulatory agency and
if we were to reduce beds or close a facility, we could be adversely impacted
by a failure to obtain or a delay in obtaining such approval.
We are also subject to federal and state laws which govern financial and
other arrangements between healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to encourage the referral of patients to
a particular provider for medical products and services. We are also subject to
laws applicable to federal government contracts generally, such as the False
Claims Act, which establishes liability for anyone making false statements to
get a claim paid by the federal government. The federal government, private
insurers and various state enforcement agencies have increased their scrutiny
of providers, business practices and claims in an effort to identify and
prosecute fraudulent and abusive practices. In addition, the federal government
has issued recent fraud alerts concerning nursing services, double billing,
home health services and the provision of medical supplies to nursing
facilities; accordingly, these areas may come under closer scrutiny by the
government. Furthermore, some states restrict certain business relationships
between physicians and other providers of healthcare services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. These
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies. From time to time, we have sought
guidance as to the interpretation of these laws; however, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with our practices.
There can be no assurance that future actions by state regulators will not
result in penalties or sanctions which could have a material adverse effect on
us.
Recent changes in the health care system, including the establishment of a
prospective payment system, adversely affect the amount of payment we receive
for providing services.
In recent years, a number of laws have been enacted that have effected
major changes in the health care system, both nationally and at the state
level. The Balanced Budget Act of 1997 seeks to reduce federal spending on the
Medicare and Medicaid programs. With respect to Medicare, the law mandated
establishment of a prospective payment system for Medicare skilled nursing
facilities under which facilities will be paid a federal per diem rate for most
covered nursing facility services (including pharmaceuticals).
Pursuant to the Balanced Budget Act, commencing with cost reporting
periods beginning on July 1, 1998, the prospective payment system began to be
phased in for skilled nursing facilities at 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 when a beneficiary who is a resident of a
skilled nursing facility receives covered skilled nursing facility care.
Congress continues to focus on efforts to curb the growth of federal
spending on health care programs such as Medicare and Medicaid through changes
in the payment methodology. Congress' efforts have not been limited to skilled
nursing facilities, but have and will most likely include other industry
services. For example, the Balanced Budget Act also required that a prospective
payment system for home health services be implemented.
While we have prepared certain estimates of the impact of the prospective
payment system, it is not possible to fully quantify the effect of the recent
legislation, the interpretation or administration of such legislation or any
other governmental initiatives on the Company's business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Accordingly, there can be no assurance that the impact of prospective payment
system will not be greater than estimated or that these legislative changes or
any future healthcare legislation will not adversely affect our business.
We are dependent upon reimbursement by third party payors for our
services. These payors employ cost containment measures to limit their payments
to us.
15
<PAGE>
Both governmental and private third party payors have employed cost
containment measures designed to limit payments made to healthcare providers
such as us. Furthermore, government payment programs are subject to statutory
and regulatory changes, retroactive rate adjustments, administrative rulings
and government funding restrictions, all of which may materially increase or
decrease the rate of program payments to us for our services. There can be no
assurance that payments under governmental and private third party payor
programs will remain at levels comparable to present levels or will, in the
future, be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. Our financial condition and results of
operations may be affected by the revenue reimbursement process, which in the
healthcare industry is complex and can involve lengthy delays between the time
that revenue is recognized and the time that reimbursement amounts are settled.
Our financial condition and results of operations may also be affected by the
timing of reimbursement payments and rate adjustments from third party payors.
In addition, there can be no assurance that our centers or the provision of
services and supplies by us, will meet the requirements for participation in
such programs. We could be adversely affected by the continuing efforts of
governmental and private third party payors to contain the amount of
reimbursement for healthcare services. We cannot at this time predict the
extent to which these proposals will be adopted or, if adopted and implemented,
what effect, if any, such proposals will have on us. Efforts to impose reduced
allowances, greater discounts and more stringent cost controls by government
and other payors are expected to continue. See "Business -- Revenue Sources."
Managed care organizations and other third party payors have continued to
consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage
of the United States population are increasingly served by a small number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the
extent such organizations terminate us as a preferred provider and/or engage
our competitors as a preferred or exclusive provider, our business could be
materially adversely affected. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures or the
assumption by healthcare providers of all or a portion of the financial risk
through prepaid capitation arrangements.
We are subject to periodic audits by the Medicare and Medicaid programs,
and the paying agencies for these programs have various rights and remedies
against us if they assert that we have overcharged the programs or failed to
comply with program requirements. Such payment agencies could seek to require
us to repay any overcharges or amounts billed in violations of program
requirements, or could make deductions from future amounts due to us. Such
agencies could also impose fines, criminal penalties or program exclusions.
Private pay sources also reserve rights to conduct audits and make monetary
adjustments.
Our business is highly competitive. Our competitors may have greater
resources and may offer different centers or services to attract our customers
away from us. One of our competitors owns a significant portion of our stock.
The healthcare industry is highly competitive. We compete with a variety
of other companies in providing eldercare services. Certain competing companies
have greater financial and other resources than we do and may be more
established in their respective communities than we are. Competing companies
may offer newer or different centers or services than we do and may thereby
attract our customers away from us.
As a result of the Vitalink transaction, HCR-Manor Care, a publicly traded
owner of eldercare centers that competes with us in certain markets, owns
586,240 shares of our preferred stock which are convertible at the option of
the holder into approximately 7,880,000 shares of our common stock. Pursuant to
the Vitalink service contracts, our NeighborCare pharmacy operations provides
services to HCR-Manor Care constituting approximately ten percent of the net
revenues of NeighborCare. See "Business -- Competition."
We have recently acquired several businesses. If we are unable to
successfully manage these new businesses we may not realize the expected
benefits from these acquisitions. If we are unable to make additional
acquisitions our future growth could be limited.
We have recently acquired several eldercare businesses. There can be no
assurance that we will be able to achieve expected operating and economic
efficiencies from these or future acquisitions or that such
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<PAGE>
acquisitions will not adversely affect our results of operations or financial
condition. In addition, there can be no assurance that we will be able to find
suitable businesses to buy in the future, buy them on favorable terms or
successfully integrate them with our operations. If we acquire additional
businesses, we will probably have to incur or assume additional debt.
Our computer systems and those of the government agencies and companies
with which we do business may not be Year 2000 Compliant. This could limit our
ability to provide care and to receive reimbursement and could adversely affect
our operations and our ability to receive supplies from vendors.
Our failure or the failure of third parties to be fully Year 2000
compliant for essential systems and equipment by January 1, 2000 could
interrupt our normal business operations. Our potential risks include
o the inability to deliver patient care related services in our
facilities and/or in non-affiliated facilities,
o the delayed receipt of reimbursement from the federal or state
governments, private payors or intermediaries,
o the failure of security systems, elevators, heating systems or other
operational systems and equipment at our facilities, and
o the inability to receive critical equipment and supplies from vendors.
Each of these events could have a material adverse effect on our
business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements, including:
o certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," such as statements
concerning Medicare and Medicaid programs including Medicare's
prospective payment system, our ability to meet our liquidity and
capital needs and to controls costs, our arrangements with ElderTrust,
Inc., the expected effects of the Vitalink transaction and Year 2000
compliance,
o certain statements contained in "Business," such as statements
concerning strategy, government regulation and Medicare and Medicaid
programs,
o certain statements in the pro forma condensed consolidated financial
information, such as certain of the pro forma adjustments, and
o other statements contained in this prospectus regarding matters that
are not historical facts.
We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to risks, uncertainties, and assumptions about us, including, among
other things:
o Our substantial indebtedness and debt service obligations,
o Our future capital needs to fund growth,
o Changes in the U.S. healthcare system and applicable governmental
regulations,
o Our ability to operate in a heavily regulated environment and to
satisfy regulatory authorities,
o Changes in the mix of payment sources used by our customers to pay for
our services,
o The adoption of cost containment measures,
o Our ability to compete,
o Our ability to integrate acquired businesses,
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<PAGE>
o Our ability, and our payors, and suppliers' ability, to implement a
Year 2000 readiness program, and
o Changes in general economic conditions.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus might not occur.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As a result, we file
periodic reports, proxy statements and other information with the Securities
and Exchange Commission ("Commission"). You may read and copy reports, proxy
statements and other information we file at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Seven World
Trade Center, 13th Floor, New York, New York 10008 and at 500 West Madison
Street, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-0330
for further information on the public reference facilities. Copies of documents
we file can also be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington D.C. 20549. You
may also access this information electronically through the Commission's web
page on the Internet at http://www.sec.gov. This web site contains reports,
proxy statements and other information regarding registrants such as ourselves
that have filed electronically with the Commission. In addition, our common
stock and 93/4% Senior Subordinated Notes due 2005 are listed on the New York
Stock Exchange.
This prospectus constitutes a part of a registration statement (the
"Registration Statement") filed by us with the Commission under the Securities
Act of 1933, as amended (the "Securities Act"). As permitted by the rules and
regulations of the Commission, this prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules to the Registration Statement. Therefore, we make reference in this
prospectus to the Registration Statement and to the exhibits and schedules to
the Registration Statement. For further information about us and about the
securities we hereby offer, you should consult the Registration Statement and
the exhibits and schedules to the Registration Statement. You should be aware
that statements contained in this prospectus concerning the provisions of any
documents filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance
reference is made to the copy of such document so filed. Each such statement is
qualified in its entirety by such reference.
You should rely only on the information provided in this prospectus. No
person has been authorized to provide you with different information. We are
not making an offer to exchange notes in any jurisdiction where the offer is
not permitted. The information in this prospectus is accurate as of the date on
the front cover. You should not assume that the information contained in this
prospectus is accurate as of any other date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to incorporate by reference the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We hereby incorporate by reference into this prospectus the following documents
previously filed with the Commission:
1. Our Quarterly Report on Form 10-Q for the three months ended December
31, 1998;
2. Our Annual Report on Form 10-K for the fiscal year ended September 30,
1998;
3. The consolidated financial statements and schedules of The Multicare
Companies, Inc. contained in its Annual Report on Form 10-K for the fiscal year
ended December 31, 1996; and
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<PAGE>
4. The consolidated financial statements and schedules of Vitalink Pharmacy
Services, Inc. contained in its Annual Report on Form 10-K for the fiscal year
ended May 31, 1998.
As noted above, any statement contained in this prospectus, or in any
documents incorporated or deemed to be incorporated by reference in this
prospectus, shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a subsequent statement contained in this
prospectus or in any subsequently filed document which also is or is deemed to
be incorporated by reference in this prospectus modifies or supersedes such
previous statement. Any such statement so modified shall not be deemed to
constitute a part of this prospectus except as so modified or superseded.
This prospectus incorporates documents by reference which are not
presented herein or delivered herewith. These documents are available without
charge upon written or oral request from the Corporate Secretary of the Company
at the Company's principal executive offices located at 101 East State Street,
Kennett Square, PA 19348, telephone number (610) 444-6350.
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USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer.
The Company used approximately $59,990,000 of the net proceeds of the Offering
to repay portions of the Tranche A, Tranche B and Tranche C term loan
components of the Third Amended and Restated Credit Agreement, dated October 9,
1997, as first amended on March 5, 1998, as second amended on August 28, 1998,
and as third amended on December 15, 1998 (the "Credit Facility"), with Mellon
Bank, N.A., Citibank USA, Inc., First Union National Bank and NationsBank,
N.A., as agents, which had outstanding principal balances of $130,525,000,
$153,687,000 and $173,450,000, respectively, at December 31, 1998. The Company
also used approximately $59,990,000 of the net proceeds of the Offering to
repay a portion of the revolving credit component of the Credit Facility, which
had an outstanding principal balance of $553,000,000 at December 31, 1998. The
term loan and revolving credit components of the Credit Facility bear interest
at variable rates, currently equalling approximately 7.75% and 7.25%,
respectively. The Tranche A, Tranche B and Tranche C term loans mature in
September 2003, September 2004 and January 2005, respectively. The revolving
credit component of the Credit Facility matures in September 2003. The cash
portion of the consideration paid by the Company in the Vitalink Transaction
was funded through the Credit Facility. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998 on an actual basis. This table should be read in conjunction
with "Use of Proceeds" and "Selected Historical Consolidated Financial Data,"
including the related notes thereto, and the Company's Pro Forma Condensed
Consolidated Financial Statements, including the related notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1998
------------------
(in thousands)
<S> <C>
Cash and cash equivalents .......................................................... $ 8,901
==========
Current installment of long-term debt .............................................. $ 34,160
==========
Long-term debt, less current maturities:
Senior long-term debt ............................................................. 1,053,568
9 1/4% Mortgage Bonds ............................................................. 20,689
9 1/4% Senior Subordinated Notes due 2006 ......................................... 120,000
9 3/4% Senior Subordinated Notes due 2005 ......................................... 125,000
9 7/8% Senior Subordinated Notes due 2009 (Net of remaining original issue discount
of $4,800,000.).................................................................. 120,200
----------
Total long-term debt ............................................................ 1,439,457
Shareholders' equity:
Series G Preferred Stock .......................................................... 6
Common Stock, $.02 par value, 60,000,000 shares authorized;
35,227,449 shares issued and 35,181,848 shares outstanding ...................... 704
Additional paid-in capital ........................................................ 749,500
Retained earnings ................................................................. 129,601
Accumulated -- other comprehensive income ......................................... 490
Treasury stock, at cost ........................................................... (243)
----------
Total shareholders' equity ........................................................ 880,058
----------
Total capitalization ............................................................ $2,319,515
==========
</TABLE>
As described under "Use of Proceeds," the Company used the net proceeds of
the Offering to repay a portion of the term loan components and the revolving
credit component of the Credit Facility.
As of December 31, 1998, the Company had $990,500,000 outstanding under
its Credit Facility with the ability to borrow approximately an additional
$85,200,000 under the revolving credit portion of the Credit Facility. Upon
consummation of the Offering and the use of proceeds therefrom, the Company had
approximately $203,626,900 available under the revolving credit portion of the
Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Transactions" for a discussion of the terms of
the Company's Series G Preferred Stock.
21
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Existing Notes were originally sold by the Company on December 23,
1998 to the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Existing Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. As a condition to the
closing under the Purchase Agreement, the Company entered into the Registration
Rights Agreement with the Initial Purchasers, pursuant to which the Company
agreed, for the benefit of the holders of the Existing Notes, at the Company's
cost, among other things, to use its best efforts to:
1. file within 45 days, and cause to become effective within 120 days, of
the date of the original issuance of the Existing Notes, a registration
statement on Form S-4 (the "Exchange Offer Registration Statement") which term
shall encompass all amendments, exhibits, annexes and schedules thereto and of
which this Prospectus is a part and
2. cause the Exchange Offer to be consummated within 150 days of the
original issuance of the Existing Notes.
Promptly after the Exchange Offer Registration Statement has been declared
effective, the Company will offer the Exchange Notes in exchange for the
Existing Notes.
The Company will keep the Exchange Offer open until the Expiration Date.
For each Existing Note validly tendered to the Company pursuant to the Exchange
Offer and not withdrawn by the holder thereof, the holder of such Existing Note
will receive an Exchange Note having a principal amount equal to that of the
tendered Existing Note. Interest on each Exchange Note will accrue from the
last interest payment date on which interest was paid on the tendered Existing
Note in exchange therefor or, if no interest has been paid on such Existing
Note, from the date of the original issuance of the Existing Note.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties and subject to the immediately
following sentence, the Company believes that the Exchange Notes would in
general be freely tradeable after the Exchange Offer without further compliance
with the registration and prospectus delivery requirements of the Securities
Act. However, any purchaser of Existing Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes:
1. will not be able to rely on the interpretation of the staff of the
Commission,
2. will not be able to tender its Existing Notes in the Exchange Offer
and
3. must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Existing
Notes unless such sale or transfer is made pursuant to an exemption from such
requirements.
Each holder of the Existing Notes (other than certain specified holders)
who wishes to exchange Existing Notes for Exchange Notes in the Exchange Offer
will be required to represent that:
1. it is not an "affiliate" of the Company,
2. it is not a broker-dealer tendering Existing Notes acquired directly
from the Company or if it is such a broker-dealer, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable,
3. any Exchange Notes to be received by it were acquired in the ordinary
course of its business and
4. at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes.
In addition, in connection with any resales of Exchange Notes, any
broker-dealer who acquired the Existing Notes for its own account as a result
of market-making or other trading activities (a "Participating Broker-Dealer")
must deliver a prospectus meeting the requirements of the Securities Act. The
Commission
22
<PAGE>
has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Existing Notes),
with the prospectus contained in the Exchange Offer Registration Statement.
Under the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons subject to similar prospectus
delivery requirements, if any, to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such Exchange
Notes; provided, however, that the Company is only required to use its best
efforts to maintain the effectiveness of the Exchange Offer Registration
Statement for a period of 150 days following the closing of the Exchange Offer.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer is not consummated within 150
days following the date of original issue of the Existing Notes, or if any
holder of the Existing Notes (other than the Initial Purchasers) is not
eligible to participate in the Exchange Offer, or upon the request of any
Initial Purchaser under certain circumstances, the Company will, at its cost,
use its best efforts to:
1. as promptly as practicable, file the Shelf Registration Statement
covering resales of the Existing Notes,
2. cause the Shelf Registration Statement to be declared effective under
the Securities Act by the 150th day after the original issue of the Existing
Notes and
3. keep continuously effective the Shelf Registration Statement until two
years after the date of original issue of the Existing Notes (or until one year
after the effective date of the Shelf Registration Statement if such Shelf
Registration Statement is filed at the request of any Initial Purchaser under
certain circumstances) or until such shorter period when all the Existing Notes
covered by the Shelf Registration Statement have been sold pursuant to the
Shelf Registration Statement or are eligible for resale pursuant to Rule 144
under the Securities Act without volume limitations.
The Company will, in the event of the filing of a Shelf Registration Statement,
provide to each holder of the Existing Notes copies of the prospectus which is
a part of the Shelf Registration Statement, notify each such holder when the
Shelf Registration Statement for the Existing Notes has become effective and
take certain other actions as are required to permit unrestricted resales of
the Existing Notes. A holder of Existing Notes that sells such Existing Notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations). In
addition, each holder of the Existing Notes will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Existing
Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding liquidated damages set forth in the following paragraph.
In the event that either:
1. the Exchange Offer Registration Statement is not filed with the
Commission on or prior to the 45th day following the date of original issue of
the Existing Notes,
2. the Exchange Offer Registration Statement is not declared effective on
or prior to the 120th day following the date of original issue of the Existing
Notes or
3. the Exchange Offer is not consummated or a Shelf Registration
Statement with respect to the Existing Notes is not declared effective on or
prior to the 150th day following the date of original issue of the Existing
Notes,
the interest rate borne by the Existing Notes shall be increased by one-quarter
of one percent per annum following such 45-day period in the case of paragraph
1 above, following such 120-day period in the case of paragraph 2 above or
following such 150-day period in the case of paragraph 3 above, which rate will
be
23
<PAGE>
increased by an additional one-quarter of one percent per annum for each 90-day
period that any additional interest continues to accrue. The aggregate amount
of such increase from the original interest rate pursuant to those provisions
will in no event exceed one percent. Upon (x) the filing of the Exchange Offer
Registration Statement after the 45-day period described in paragraph 1 above,
(y) the effectiveness of the Exchange Offer Registration Statement after the
120-day period described in paragraph 2 above or (z) the consummation of the
Exchange Offer or the effectiveness of a Shelf Registration Statement, as the
case may be, after the 150-day period described in paragraph 3 above, the
interest rate borne by the Existing Notes from the date of such filing, the
date of such effectiveness or the day before the date of consummation, as the
case may be, will be reduced to the original interest rate.
The summary of certain provisions of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by, all the provisions of the Registration Rights Agreement, a copy of
which is available upon request of the Company.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Existing
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Existing Notes accepted in the Exchange Offer. Holders may tender some or all
of their Existing Notes pursuant to the Exchange Offer. However, Existing Notes
may be tendered only in integral multiples of $1,000. The Company has fixed the
close of business on April 6, 1999 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
The form and terms of the Exchange Notes are the same as the form and
terms of the Existing Notes (which they replace), except that as of the date
hereof the Exchange Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not
contain certain provisions included in the terms of the Existing Notes relating
to an increase in the interest rate in certain circumstances relating to the
timing of the Exchange Offer. The holders of the Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement, which
rights will terminate when the Exchange Offer is consummated. The Exchange
Notes will evidence the same debt as the Existing Notes and will be entitled to
the benefits to the Indenture.
Holders of the Existing Notes do not have any appraisal or dissenters'
rights under the Business Corporation Law of Pennsylvania or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and
the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Existing
Notes when, as and if the Company has given written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Existing Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Existing Notes will be
returned to the tendering holder thereof, at the Company's expense, as promptly
as practicable after the Expiration Date.
Holders who tender Existing Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Existing Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extension; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
May 17, 1999, unless the Company in its sole discretion extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
24
<PAGE>
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
The Company reserves the right, in its sole discretion:
1. to delay accepting any Existing Notes, to extend the Exchange Offer or
to terminate the Exchange Offer if any of the conditions set forth below under
"Conditions" shall not have been satisfied, by giving written notice of such
delay, extension or termination to the Exchange Agent, or
2. to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as promptly
as practicable by written notice thereof to the registered holders.
Interest on the Exchange Notes
Interest on each Exchange Note will accrue from the last date on which
interest was paid on the Existing Note surrendered in exchange therefor or, if
no interest has been paid on the Existing Note, from the date of original
issuance of such Existing Note. No interest will be paid on the Existing Notes
accepted for exchange, and holders of Existing Notes whose Existing Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Existing Notes accrued up to the date of
the issuance of the Exchange Notes. Holders of Existing Notes whose Existing
Notes are not exchanged will receive the accrued interest payable thereon on
July 15, 1999, in accordance with the Indenture.
Interest on the Exchange Notes is payable semi-annually on each July 15
and January 15, commencing on July 15, 1999.
Procedures for Tendering
Only a holder of Existing Notes may tender such Existing Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile thereof (or,
with respect to DTC and its participants, electronic instructions in which the
tendering holder acknowledges its receipt of and agreement to be bound by the
Letter of Transmittal) together with the Existing Notes and any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. To be tendered effectively, the Existing Notes, the Letter of
Transmittal (or, with respect to DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal) and other required
documents must be completed and received by the Exchange Agent at the address
set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Existing Notes may be made by
book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange Agent
prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the fourth paragraph under
"Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
25
<PAGE>
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO
THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Owner" included with the Letter of Transmittal.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or any other "eligible guarantor institution" within the meaning
of Rule 17Ad-15 under the Exchange Act that is a participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange, Inc. Medallion
Program or the Stock Exchange Medallion Program (an "Eligible Institution"),
unless the Existing Notes tendered pursuant thereto are tendered:
1. by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or
2. for the account of an Eligible Institution. In the event that
signatures on the Letter of Transmittal or the notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Existing Notes listed therein, such Existing Notes
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such
Existing Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and (except when
Exchange Notes are being issued to replace Existing Notes registered in the
same name) evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect
to the Existing Notes at the book-entry transfer facility, DTC, for the purpose
of facilitating the Exchange Offer, and subject to the establishment thereof,
any financial institution that is a participant in the DTC system may make
book-entry delivery of Existing Notes by causing DTC to transfer such Existing
Notes into the Exchange Agent's account with respect to the Existing Notes in
accordance with the DTC's procedures for such transfer. Although delivery of the
Existing Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, an appropriate Letter of Transmittal properly completed
and duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are compiled
with, within the time period provided under such procedures. Delivery of
documents to the DTC does not constitute delivery to the Exchange Agent.
DTC's Automated Tender Offer Program is the only method of processing
exchange offers through DTC. To accept the Exchange Offer through DTC's
Automated Tender Offer Program, participants in DTC must send electronic
instructions to DTC through DTC's communication system in lieu of sending a
signed, hard copy Letter of Transmittal. DTC is obligated to communicate those
electronic instructions to the Exchange Agent. To tender Existing Notes through
DTC's Automated Tender Offer Program, the electronic instructions sent to DTC
and transmitted by DTC to the Exchange Agent must contain the character by
which the participant acknowledges its receipt and agrees to be bound by the
Letter of Transmittal.
26
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Existing Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Existing Notes not properly tendered or any Existing Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Existing
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Existing Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Existing Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived. Any Existing Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
Guaranteed Delivery Procedures
Holders who wish to tender their Existing Notes and
1. whose Existing Notes are not immediately available,
2. who cannot deliver their Existing Notes, the Letter of Transmittal or
any other required documents to the Exchange Agent or
3. who cannot complete the procedures for book-entry transfer, prior to
the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number(s) of such Existing Notes and principal amount of Existing
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Existing
Notes (or a confirmation of book-entry transfer of such Existing Notes
into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal or
facsimile thereof, as well as the certificate(s) representing all
tendered Existing Notes in proper form for transfer (or a confirmation
of book-entry transfer of such Existing Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility), and all other
documents required by the Letter of Transmittal are received by the
Exchange Agent upon three New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to holders who wish to tender their Existing Notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
27
<PAGE>
To withdraw a tender of Existing Notes in the Exchange Offer, a facsimile
transmission or letter must be received by the Exchange Agent at its address
set forth herein prior to 5:00 p.m., New York City time, on the Expiration
Date. Any such notice of withdrawal must:
1. specify the name of the person having deposited the Existing Notes to
be withdrawn (the "Depositor"),
2. identify the Existing Notes to be withdrawn (including the certificate
number(s) and principal amount of such delivered Existing Notes, or, in the
case of Existing Notes transferred by book-entry transfer, the name and number
of the account at the Book-Entry Transfer Facility to be credited and the
transaction code number),
3. state that such Depositor is withdrawing its election to have the
Existing Notes exchanged and specify the name in which any such Existing Notes
are to be registered, if different from that of the Depositor and
4. be signed by the holder in the same manner as the original signature
on the Letter of Transmittal by which such Existing Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Existing Notes
register the transfer of such Existing Notes into the name of the person
withdrawing the tender.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Existing Notes so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Existing
Notes so withdrawn are validly retendered. Any Existing Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Existing Notes may be retendered by following one of the procedures described
above under "Procedures for Tendering" at any time prior to the Expiration
Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange Exchange Notes for, any
Existing Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Existing Notes, if:
(a) the Exchange Offer or the making of any exchange by a holder of
Existing Notes violates applicable law or any applicable interpretation by the
staff of the Commission;
(b) the tendering of the Existing Notes is not in accordance with the
Exchange Offer;
(c) each holder of Existing Notes to be exchanged in the Exchange Offer
shall not have represented that all Exchange Notes to be received by it shall
be acquired in the ordinary course of business and that at the time of the
consummation of the Exchange Offer it shall have no arrangement of
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and shall have made such
other representations as may be reasonably necessary under applicable
Commission rules, regulations or interpretations to render the use of the
Exchange Offer Registration Statement or other appropriate form under the
Securities Act available; or
(d) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer which,
in the judgment of the Company, would reasonably be expected to impair the
ability of the Company to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may:
1. refuse to accept any Existing Notes and return all tendered Existing
Notes to the tendering holders,
2. extend the Exchange Offer and retain all Existing Notes theretofore
tendered in the Exchange Offer, subject, however, to the rights of holders to
withdraw such Existing Notes (see "Withdrawal of Tenders") or
28
<PAGE>
3. waive such unsatisfied conditions with respect to the Exchange Offer
and accept all properly tendered Existing Notes which have not been withdrawn.
Exchange Agent
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for The Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail:
The Bank of New York
101 Barclay Street
Floor 7 East
New York, NY 10286
Attention: Reorganization Section
By Hand or Overnight Delivery:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
New York, NY 10286
Attention: Reorganization Section
By Facsimile: (212) 815-6339
Confirm: (212) 815-3738
Attention: Reorganization Section
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF
INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the
Existing Notes, which is face value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
will be expensed over the term of the Exchange Notes.
Consequences of Failure to Exchange
The Existing Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain outstanding and continue to accrue interest and
will also remain restricted securities. Accordingly, such Existing Notes may be
resold only:
29
<PAGE>
1. to the Company,
2. pursuant to a registration statement which has been declared effective
under the Securities Act,
3. for so long as the Existing Notes are eligible for resale pursuant to
Rule 144A under the Securities Act, to a person the seller reasonably believes
is a "qualified institutional buyer" within the meaning of Rule 144A that
purchases for its own account or for the account of a qualified institutional
buyer and to whom notice is given that the transfer is being made in reliance
on Rule 144A,
4. pursuant to offers and sales to non-U.S. persons that occur outside the
United States within the meaning of Regulation S under the Securities Act, or
5. pursuant to any other available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States and in accordance
with the Indenture.
Holders of Existing Notes not tendered in the Exchange Offer will not retain
any rights under the Registration Rights Agreement, except in limited
circumstances.
Resale of the Exchange Notes
With respect to resales of Exchange Notes, based on an interpretation by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) in exchange for Existing Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with a person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
30
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)
The selected historical consolidated financial data presented below for,
and as of, each of the years in the five-year period ended September 30, 1997,
have been derived from the Consolidated Financial Statements of Genesis,
including the notes thereto, which have been audited by KPMG LLP, independent
certified public accountants. The selected historical consolidated financial
data for, and as of, each of the three months ended December 31, 1997 and 1998
have been derived from unaudited consolidated financial statements of Genesis
which, in the opinion of management, include all adjustments (consisting only
of normal recurring items) necessary for a fair and consistent presentation of
such data. The results for the three months ended December 31, 1998 are not
necessarily indicative of results to be expected for the full fiscal year. The
information set forth below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Summary Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Genesis, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------------- ----------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues .......................... $388,616 $486,393 $671,469 $1,099,823 $1,405,305
Operating expenses (1) ................ 319,243 393,140 543,200 914,955 1,270,615
Depreciation and amortization ......... 14,982 18,793 25,374 41,946 52,385
Lease expense ......................... 11,376 13,798 18,638 28,587 31,182
Interest expense, net ................. 15,305 20,366 24,926 39,103 82,088
Debenture conversion expense .......... -- -- 1,245 -- --
Earnings (loss) before extraordinary
items equity in net income of
unconsolidated affiliates, and
cumulative effect of change in
accounting principle ................. 17,691 25,531 37,169 48,144 (22,807)
Net income (loss) ..................... $ 17,673 $ 23,608 $ 37,169 $ 47,591 $ (24,245)
-------- -------- -------- ---------- ----------
Preferred stock dividend .............. -- -- -- -- 1,655
Net income (loss) available to
common shareholders .................. $ 17,673 $ 23,608 $ 37,169 $ 47,591 $ (25,900)
-------- -------- -------- ---------- ----------
Per common share data
(diluted) (2):
Earnings (loss) before
extraordinary items, cumulative
effect of change in accounting
principle ........................... $0.84(3) $1.03(3) $1.29 $1.34 $(0.68)
Net income (loss) .................... $0.84(3) $0.97(3) $1.29 $1.33 $(0.74)
Weighted average share of
common stock and equivalents 24,747,000 28,307,000 31,058,000 36,120,000 35,159,000
Ratio of earnings to fixed
charges(4) .......................... 2.0x 2.2x 2.3x 2.1x 1.7x
Year Ended September 30,
-------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------- ------------- ------------ ------------ -----------
Balance Sheet Data:
Working capital ...................... $ 66,854 $132,274 $155,491 $ 226,930 $ 305,718
Total assets ......................... 511,698 600,389 950,669 1,434,113 2,627,368
Long-term debt ....................... 250,807 308,052 338,933 651,667 1,358,595
Shareholders' equity ................. 195,466 221,548 514,608 608,021 875,072
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1997 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Net revenues .......................... $302,565 $479,204
Operating expenses (1) ................ 245,379 408,050
Depreciation and amortization ......... 11,686 17,807
Lease expense ......................... 6,643 6,367
Interest expense, net ................. 19,643 27,323
Debenture conversion expense ..........
Earnings (loss) before extraordinary
items equity in net income of
unconsolidated affiliates, and
cumulative effect of change in
accounting principle ................. 19,214 19,657
Net income (loss) ..................... $ 10,898 $ 9,588
-------- --------
Preferred stock dividend .............. -- 4,417
Net income (loss) available to
common shareholders .................. $ 10,898 $ 5,171
-------- --------
Per common share data
(diluted) (2):
Earnings (loss) before
extraordinary items, cumulative
effect of change in accounting
principle ........................... $0.36 $0.20
Net income (loss) .................... $0.31 $0.15
Weighted average share of
common stock and equivalents 35,595,000 35,381,000
Ratio of earnings to fixed
charges(4) .......................... 1.7x 1.4x
December 31,
1998
-------------
Balance Sheet Data: (Unaudited)
Working capital ...................... $ 372,864
Total assets ......................... 2,670,678
Long-term debt ....................... 1,439,457
Shareholders' equity ................. 850,058
</TABLE>
- ------------
(1) Includes a $15,000 non-cash impairment charge in 1997 and a $115,505
non-cash impairment change in 1998.
(2) Reflects a three for two stock dividend on the Common Stock effective March
29, 1996.
(3) Includes the assumed conversion of the Convertible Debentures which were
issued November 30, 1993.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of the sum of earnings before income taxes and
extraordinary items plus fixed charges. Fixed charges consist of interest
on all indebtedness, debenture conversion expense, preferred stock
dividends, amortization of debt discount and expenses, and that portion of
rental expense that the Company believes to be representative of the
interest factor. Fixed charges related to approximately $14,200 of debt
guaranteed by the Company have not been included in the computation of the
ratio. The definition of fixed charges used in this calculation differs
from that used in the Fixed Charge Coverage Ratio covenants contained in
the Indenture.
31
<PAGE>
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
elderly customers. Through the fiscal year ended September 30, 1998 ("Fiscal
1998"), the Company presented revenues from three sources: basic healthcare
services, specialty medical services and management services and other. The
Company included in basic healthcare services revenues all room and board
charges for its eldercare customers at its 113 owned and leased eldercare
centers. Specialty medical services included all revenues from providing
rehabilitation therapies, institutional pharmacy and medical supply services.
Management services and other included fees earned for management of eldercare
centers, other service related businesses and transactional revenues.
As a result of Medicare's establishment of a prospective payment
system ("PPS"), beginning in the three month period ended December 31, 1998,
the Company now presents revenues from three sources: pharmacy and medical
supply services, inpatient services and other revenue. The Company provides
pharmacy and medical supply services through its NeighborCare(SM) pharmacy
subsidiaries. Included in pharmacy and medical supply service revenues are
institutional pharmacy revenues, which include the provision of infusion
therapy, medical supplies and equipment provided to eldercare centers it
operates, as well as to independent healthcare providers by contract.
Approximately 89% of the sales attributable to all pharmacy operations in
Fiscal 1998 were generated through external contracts with independent
healthcare providers with the balance attributable to centers owned or leased
by the Company. The Company includes in inpatient service revenue all room and
board charges and ancillary service revenue for its eldercare customers at its
113 owned and leased eldercare centers. The Company includes the following in
other revenues: rehabilitation therapy, management fees, capitation fees,
homecare services, physicians services, transportation services, diagnostic
services, hospitality services, group purchasing fees and other healthcare
related services.
Certain Transactions
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink common stock, par value $.01
per share (the "Vitalink Common Stock"), was converted in the merger into the
right to receive (i) .045 shares of Genesis Series G Cumulative Convertible
Preferred Stock, par value $.01 per share ("Genesis Preferred"), (ii) $22.50 in
cash, or (iii) a combination of cash and shares of Genesis Preferred
(collectively, the "Merger Consideration"). The total consideration paid to
stockholders of Vitalink to acquire their shares (including shares which may
have been issued upon the exercise of outstanding options) was $590,200,000, of
which 50% was paid in cash and 50% in Genesis Preferred. As a result of the
merger, Genesis assumed approximately $87,000,000 of indebtedness Vitalink had
outstanding. The Genesis Preferred has a face value of approximately
$295,000,000 and an initial annual dividend of 5.9375% and generally is not
transferable without the consent of the Company. The Genesis Preferred is
convertible into Genesis common stock, par value $.02 per share (the "Common
Stock"), at $37.20 per share and it may be called for conversion after April
26, 2001, provided the price of Common Stock reaches certain trading levels,
and after April 26, 2002, subject to a market-based call premium. Vitalink's
total net revenues for the fiscal years ended May 31, 1997 and 1998, were
$274,000,000 and $494,000,000, respectively. The cash portion of the purchase
price was funded through borrowings under the Credit Facility. See "-- Liquidity
and Capital Resources."
Prior to the merger, Manor Care, Inc., a Delaware corporation which merged
with Health Care and Retirement Corporation, a publicly-traded Delaware
corporation, in September 1998 ("HCR-Manor Care"), owned approximately 50% of
the outstanding Vitalink Common Stock. Upon consummation of the merger,
HCR-Manor Care acquired 586,240 shares of Genesis Preferred which are
convertible into approximately 7,880,000 shares of the Company's Common Stock.
Pursuant to four agreements with HCR-Manor Care,
32
<PAGE>
Vitalink provides pharmaceutical products and services, enteral and parenteral
therapy supplies and services, urological and ostomy products, intravenous
products and services and pharmacy consulting services to facilities operated
by HCR-Manor Care (the "Service Contracts") constituting approximately ten
percent of the net revenues of NeighborCare. The current term of each of the
Service Contracts extends through September 30, 2004, subject to annual
renewals provided for therein.
On July 14, 1998, the Company announced that it received notice from
NewCourtland, Inc. ("NewCourtland"), 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 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.
On January 30, 1998, Genesis successfully completed deleveraging
transactions with ElderTrust, Inc. ("ElderTrust"), a newly formed Maryland
healthcare real estate investment trust (the "ElderTrust Transactions").
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. Genesis received an
additional $14,000,000 from the sale of a loan, two additional assisted living
facilities and the recoupment of amounts advanced and expenses incurred in
connection with the formation of ElderTrust. The sale of assets to ElderTrust
resulted in a gain of approximately $12,000,000 which has been deferred and is
being amortized over the ten year lease term of the lease contracts with
ElderTrust. Additionally, ElderTrust has funded approximately $15,000,000 of a
commitment to finance the development and expansion of four additional assisted
living facilities. In September 1998, the Company sold its leasehold rights and
option to purchase seven eldercare facilities acquired in its November 1993
acquisition of Meridian Healthcare, Inc. to ElderTrust for $44,000,000,
including $35,500,000 in cash and an $8,500,000 note. As a part of the
transaction, Genesis will continue to sublease the facilities for ten years
with an option to extend the lease until 2018 at an initial annual lease
obligation of approximately $10,000,000. The transaction resulted in a gain of
approximately $43,700,000 which has been deferred and is being amortized over
the ten year term of the lease contracts with ElderTrust. Genesis repaid a
portion of the revolving credit component of the Credit Facility with the
proceeds from these transactions. The Company also anticipates entering into
similar transactions with ElderTrust in the future.
In October 1997, Genesis ElderCare Corp., a Delaware corporation owned
43.6% by Genesis and the remainder by 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 The Multicare Companies, Inc. ("Multicare") pursuant to a tender offer
(the "Tender Offer") and merger (the "Multicare Transaction"). 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 Multicare Transaction, 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) $1,991,666 and (ii) four percent of Multicare's consolidated net
revenues for such
33
<PAGE>
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 will be paid by Multicare.
Genesis also entered into an asset purchase agreement (the "Therapy Purchase
Agreement") with Multicare and certain of its subsidiaries pursuant to which
Genesis acquired all of the assets used in Multicare's outpatient and inpatient
rehabilitation therapy business for $24,000,000, subject to adjustment (the
"Therapy Purchase"), and a stock purchase agreement (the "Pharmacy Purchase
Agreement") with Multicare and certain subsidiaries pursuant to which Genesis
acquired all of the outstanding capital stock and limited partnership interests
of certain subsidiaries of Multicare that are engaged in the business of
providing institutional pharmacy services to third parties for $50,000,000 (the
"Pharmacy Purchase"), subject to adjustment. The Company completed the Pharmacy
Purchase effective January 1, 1998. The Company completed the Therapy Purchase
in October 1997.
In addition, Genesis, Cypress, TPG and Nazem entered into an agreement
(the "Put/Call Agreement") pursuant to which, among other things, Genesis has
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 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.
Genesis ElderCare Corp. paid approximately $1,492,000,000 to (i) purchase
the shares of Multicare common stock 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 as capital
contributions by Genesis ElderCare Corp. from the sale of its 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 shares of
Genesis ElderCare Corp. common stock for a purchase price of $325,000,000 in
consideration for 43.6% of the common stock of Genesis ElderCare Corp. 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 from the sale of 9% Senior Subordinated Notes
due 2007 sold by a subsidiary of Genesis ElderCare Corp. on August 11, 1997.
In the fourth quarter of 1997, the Company entered into an agreement with
Blue Cross Blue Shield of Maryland ("BCBSMD") to insure, through a
sub-capitation agreement, the health care benefits of approximately 7,000
members of BCBSMD's Care First Medicare risk product. In the second quarter of
1998, the Company received approximately $7,300,000 of capitation revenue and
incurred a like amount of costs associated with the 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.
At September 30, 1997, the Company held $10,000,000 of convertible
preferred stock of Doctors Health, Inc. ("Doctors Health"), an independent
physician owned and controlled integrated delivery system and practice
management company based in Maryland. The convertible preferred stock, which is
accounted for under the cost method, carries an eight percent cumulative
dividend and is convertible into common stock, and if converted would represent
an approximate ten percent ownership interest in Doctors Health. Also, the
Company has loaned $5,500,000 to Doctors Health. On November 16, 1998, a
voluntary petition for Chapter 11 bankruptcy was filed by Doctors Health. In
the fourth quarter of 1998, the Company wrote off its investment in Doctors
Health.
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
34
<PAGE>
assumed indebtedness of approximately $132,000,000, was approximately
$223,000,000. The merger was financed in part with approximately $121,250,000
in net proceeds from the offering of the 91/4% Notes. The remaining
consideration was financed through borrowings under the Company's then existing
bank credit facility. The GMC Transaction added to Genesis 24 owned eldercare
centers with approximately 3,300 beds. GMC also operates businesses which
provide 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 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 operating
lease agreements and a then existing $85,000,000 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 provides enteral
nutrition and rehabilitation therapy services to the eldercare centers which it
owns and leases.
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 Common Stock.
In March 1996, the Company sold four eldercare centers and a pharmacy in
Indiana for approximately $22,250,000 (the "Indiana Transaction").
In March 1996, the Company acquired for total consideration of
approximately $31,900,000 including the payment of assumed debt, the remaining
approximately 71% joint venture interests of four eldercare centers in Maryland
and the remaining 50% joint venture interest of an eldercare center in Florida
(the "Partnership Interest Purchase").
On November 30, 1995, the Company acquired McKerley Health Care Centers
("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 $4,000,000 was paid in
February 1997. McKerley added to Genesis 15 geriatric care facilities in New
Hampshire and Vermont with a total of 1,535 beds. McKerley also operates a home
healthcare company. The acquisition was financed with borrowings under the then
existing bank credit facilities and assumed indebtedness.
Results of Operations
Three Months ended December 31, 1998 Compared to Three Months ended
December 31, 1997
The Company's total net revenues for the quarter ended December 31, 1998
were $479,204,000 compared to $302,565,000 for the quarter ended December 31,
1997, an increase of $176,639,000 or 58%. Pharmacy and medical supply service
revenue increased $167,521,000 to $236,217,000 from $68,696,000, of which
approximately $128,700,000 is attributed to the Vitalink Transaction,
approximately $20,700,000 is attributed to the Multicare Pharmacy Purchase, and
the remaining increase of $18,121,000 is primarily due to other volume growth
in the institutional, medical supply and community based pharmacies. Inpatient
service revenue declined $4,773,000 or 3% to $176,032,000 from $180,805,000,
attributed principally to the Company's October 1, 1998 implementation of PPS
and an overall decline in census. Under PPS, the average Medicare rate per day
was reduced to approximately $305 per patient day during the quarter ended
December 31, 1998 compared to approximately $364 per patient day for the
comparable period last year. There were 121,466 Medicare patient days during the
quarter ended December 31, 1998 compared to 123,161 days for the comparable
period last year. Total patient days declined approximately 9,000 patient days
to 1,251,000 during the quarter ended December 31, 1998 compared to 1,260,000
patient days during the comparable period last year. The decline in overall
census is principally
35
<PAGE>
attributed to survey and other regulatory matters at several of the Company's
eldercare centers which the Company believes have been resolved. Other revenues
increased approximately $13,900,000 from $53,064,000 to $66,955,000. This
increase is attributed to growth in capitation fees earned, rehabilitation
revenues and other service related businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $408,050,000 for the quarter ended December
31, 1998 compared to $245,379,000 for the quarter ended December 31, 1997, an
increase of $162,671,000 or 66%, of which approximately $106,000,000 is
attributed to the Vitalink Transaction, approximately $14,700,000 is attributed
to the Multicare Pharmacy Purchase, and the remaining increase of $41,971,000
is attributed to growth in the institutional pharmacy, medical supply and
contract therapy divisions, capitated expenses, as well as increased costs of
community-based programs.
Increased depreciation and amortization expense of $6,121,000 is
attributed to the depreciation of fixed assets and amortization of goodwill and
deferred financing costs in connection with the Multicare Pharmacy Purchase and
the Vitalink Transaction.
Interest expense increased $7,680,000 or 39%. This increase in interest
expense was primarily due to additional borrowings used to finance the
Multicare Pharmacy Purchase, the Vitalink Transaction, and an increase in the
Company's weighted average borrowing rate on the Credit Facility. This increase
is offset by interest savings as a result of the repayment of indebtedness from
proceeds received in connection with the ElderTrust Transactions.
In connection with the early repayment and restructuring of debt in the
quarters ended December 31, 1998 and 1997, the Company recorded an
extraordinary loss, net of tax of approximately $1,799,000 ($2,902,000 before
tax) and $1,924,000 ($3,030,000 before tax), respectively, to write-off
unamortized deferred financing fees.
In the quarter ended December 31, 1998, the Company accrued $4,417,000 of
dividends on the Genesis Preferred issued in connection with the Vitalink
Transaction.
Fiscal 1998 Compared to Fiscal 1997
The Company's total net revenues for Fiscal 1998 were $1,405,305,000
compared to $1,099,823,000 for the fiscal year ended September 30, 1997 ("Fiscal
1997"), an increase of $305,482,000 or 28%. Basic healthcare services increased
$4,892,000 or 1%, of which approximately $17,292,000 is due to providing care to
higher acuity patients and rate increases, offset by $12,400,000 from the
termination of operations by Genesis of three leased eldercare centers in
September 1997. Specialty medical services revenue increased $234,159,000 or 47%
of which approximately $46,600,000 is attributed to the August 1998 Vitalink
Transaction, approximately $80,598,000 is attributed to the Multicare pharmacy
business acquired effective January 1998, approximately $21,548,000 is
attributed to the purchase of the Multicare rehabilitation therapy business
acquired in October 1997, and the remaining increase of approximately
$98,413,000 is primarily due to other volume growth in the institutional
pharmacy, medical supply and contract therapy divisions and increased acuity in
the eldercare centers. This increase was offset by approximately $6,500,000,
$3,300,000 and $3,200,000 as a result of the 4th quarter of Fiscal 1997
deconsolidation of the Company's physician services business, the termination of
the 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 Company's eldercare centers increased 11% to $37.57 in the
twelve months ended September 30, 1998 compared to $33.84 in the twelve months
ended September 30, 1997 primarily due to treatment of higher acuity patients.
Management services and other income increased $66,431,000 or 140%. This
increase is primarily due to approximately $42,200,000 of management fee revenue
earned from the management of the operations of the Multicare business and
approximately $24,200,000 of other revenue growth, including capitated revenue
earned under a contract with Blue Cross / Blue Shield of Maryland (BCBSMD).
The Company's operating expenses before depreciation, amortization, lease
expense and interest expense were $1,270,615,000 for the twelve months ended
September 30, 1998 compared to $914,955,000 for twelve months ended September
30, 1997, an increase of $355,660,000 or 39%, of which approximately
$14,100,000
36
<PAGE>
is due to the direct operating costs incurred to service the Multicare
management contracts, approximately $39,200,000 is due to the August 1998
acquisition of Vitalink Pharmacies, approximately $63,900,000 is due to the
January 1998 acquisition of the Multicare pharmacy operations, approximately
$18,600,000 is due to the October 1997 acquisition of the Multicare
rehabilitation therapy business, approximately $19,800,000 is due to charges
incurred in connection with capitation costs under a contract with BCBSMD,
approximately $20,700,000 is attributed principally to write-offs included in
other operating expenses for uncollectible receivables and other assets of
eldercare centers previously owned or managed by the Company, approximately
$80,700,000 is attributed to an increase in the Company's loss on impairment of
assets in the current fiscal year versus the prior fiscal year and the
remaining increase of approximately $118,500,000 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 overhead costs of servicing the Multicare
management contracts. This increase is offset by approximately $7,800,000 and
$12,000,000 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.
Due to specific events occurring in the fourth quarter of Fiscal 1998 and
a focus on core business operations in response to PPS, the Company recorded
non-cash charges before income taxes of approximately $116,000,000, of which
approximately $24,000,000 relates to the impairment of one eldercare center and
certain non-core businesses, including the Company's ambulance business and
certain non-core Medicare home health operations; approximately $43,000,000
relates to investments in owned eldercare centers and other assets the Company
believes are impaired as a result of PPS; approximately $23,000,000 relates to
impaired investments in eldercare centers previously owned or managed by the
Company; and approximately $26,000,000 relates to the Company's investment in
Doctors Health, a medical care management company in the Company's Chesapeake
region.
In the fourth quarter of Fiscal 1997, the Company completed an evaluation
of its physician service business and announced its intentions to restructure
this business. In connection with the plan and selected asset impairments, the
Company recorded a fourth quarter pretax charge of approximately $5,700,000. In
addition, the Company reached an agreement with BCBSMD to insure, through a
sub-capitation agreement, the health care benefits of approximately 7,000
members of BCBSMD's Care First Medicare product. The Company recorded a
liability and pretax impairment loss of approximately $5,000,000 to accrue for
the estimated loss inherent in the agreement. The asset impairment charge also
included a pretax charge of approximately $4,300,000 related to the write-off
of selected assets deemed unrecoverable.
Increased depreciation and amortization expense of $10,439,000 is
attributed to the amortization of goodwill, fixed assets and deferred financing
costs in connection with the Company's investment in Multicare, the Pharmacy
Purchase and the Therapy Purchase, the Vitalink Transaction, as well as
depreciation of increased investments in information systems, offset by
decreased depreciation expense of seven properties formerly owned by Genesis
and now leased from ElderTrust.
Lease expense increased $2,595,000 due to additional lease expense of
seven properties formerly owned by Genesis and now leased from ElderTrust,
offset by the termination of operations of three leased eldercare centers in
September 1997.
Interest expense increased $42,985,000 or 110%. This increase in interest
expense was primarily due to additional borrowings used to finance the
Company's investment in Multicare, the Pharmacy Purchase and the Therapy
Purchase, the Vitalink Transaction and an increase in the Company's weighted
average borrowing rate on the Credit Facility. This increase is offset by
interest savings as a result of the repayment of indebtedness from proceeds
received in connection with the ElderTrust Transaction.
In connection with the early repayment of debt in the quarters ended
December 31, 1998 and 1997, 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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Fiscal 1997 Compared to Fiscal 1996
The Company's total net revenues for Fiscal 1997 were $1,099,823,000
compared to $671,469,000 for the fiscal year ended September 30, 1996 ("Fiscal
1996"), an increase of $428,354,000 or 64%. Basic healthcare services increased
$201,947,000 or 58%, of which approximately $132,800,000 was attributable to
the GMC Transaction, approximately $45,800,000 was attributable to the
inclusion of the eldercare centers acquired in the National Health transaction
for the full twelve months in 1997 versus three months in the prior year,
approximately $9,900,000 was due to the inclusion of the eldercare centers
acquired in the McKerley Transaction for the full twelve months in 1997 versus
ten months in the prior year, and the remaining increase of approximately
$14,600,000 was due to providing care to higher acuity patients and to rate
increases. This increase was offset by approximately $1,200,000 due to the
termination of operations of three leased eldercare centers in September 1997
and a decline in overall census. Specialty medical services revenue increased
$211,954,000 or 73% of which approximately $47,300,000 was attributed to the
GMC Transaction, approximately $16,800,000 was due to the inclusion of the
eldercare centers acquired in the National Health transaction for the full
twelve months in 1997 versus three months in the prior year, approximately
$42,200,000 was attributed to the inclusion of the NeighborCare transaction for
the full twelve months in 1997 versus five months in 1996, approximately
$1,500,000 was due to the inclusion of the eldercare centers acquired in the
McKerley Transaction for the full twelve months in 1997 versus ten months in
the prior year, and the remaining increase of approximately $106,900,000 was
primarily due to other volume growth in the institutional pharmacy, medical
supply and contract therapy divisions and increased acuity in the health
centers division. This increase was offset by approximately $2,400,000 and
$300,000 as a result of the fourth quarter of Fiscal 1997 deconsolidation of
the Company's physician services business and the termination of the operations
of three leased eldercare centers in September 1997, respectively. Specialty
medical service revenue per patient day in the health centers division
increased 13% to $33.84 in Fiscal 1997 compared to $29.94 in Fiscal 1996
primarily due to treatment of higher acuity patients. Management services and
other income increased $14,453,000 or 44%. This increase was primarily due to
other service business acquired in the GMC Transaction, offset by other
transactional revenues earned in Fiscal 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 $914,955,000
for Fiscal 1997 compared to $543,200,000 for Fiscal 1996, an increase of
$371,755,000 or 68%, which was primarily due to the impact of acquisitions,
growth in the institutional pharmacy, medical supply and contract therapy
divisions and due to a $15,000,000 special charge recorded in the fourth
quarter of Fiscal 1997. In the fourth quarter of Fiscal 1997, the Company
completed an evaluation of its physician service business and announced its
intentions to restructure this business, including the closure and possible
sale of free standing service sites, the restructuring of physician
compensation arrangements and the termination of certain staff. In connection
with the plan and selected asset impairments, the Company recorded a fourth
quarter pretax charge of approximately $5,700,000. In addition, the Company
reached an agreement with BCBSMD to insure, through a sub-capitation agreement,
the health care benefits of approximately 7,000 members of BCBSMD's Care First
Medicare product. The capitation risk contract is currently generating
operating losses, which the Company has agreed to assume retroactive to July 1,
1997. As a result, the Company has recorded a liability and a pretax special
charge of approximately $5,000,000 in Fiscal 1997 to accrue for the estimated
loss inherent in the agreement. The special charge also included a pretax
charge of approximately $4,300,000 related to the write-off of selected assets
deemed impaired.
Increased depreciation and amortization, and lease expense are primarily
attributed to the assets acquired in the GMC Transaction, the National Health
transaction, the NeighborCare transaction and the McKerley Transaction.
Interest expense increased $14,177,000 or 57%. This increase in interest
expense was primarily due to additional borrowings used to finance recent
acquisitions, including the offering of the 91/4% Notes 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
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Subordinated Debentures due 2003 (the "Debentures"). In connection with the
early repayment of debt and the restructuring and amendment of the Company's
then existing bank 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.
Fiscal 1996 Compared to Fiscal 1995
The Company's total net revenues for Fiscal 1996 were $671,469,000
compared to $486,393,000 for the fiscal year ended September 30, 1995 ("Fiscal
1995"), an increase of $185,076,000 or 38%. Basic healthcare services increased
$69,895,000 or 25%, approximately $41,652,000 of which was due to the McKerley
Transaction, National Health transaction and the Partnership Interest Purchase
in March 1996 (which was partially offset by the sale of five eldercare centers
in September 1995 and the Indiana Transaction in March 1996), with the
remainder due to a shift in payor mix from Medicaid to Medicare and rate
increases. Specialty medical services revenue increased $110,101,000 or 61%, of
which approximately $57,000,000 was due to acquisitions, with the remainder 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 19% to $29.94 in Fiscal 1996 compared to $25.06 in Fiscal
1995 primarily due to treatment of higher acuity patients. Management services
and other income increased $5,080,000 or 18%. This increase was primarily due
to an increase in service related business revenues (group purchasing and staff
replacement services) of approximately $3,500,000 and an increase in
transactional gains of approximately $2,600,000. Transactional and other
activity in Fiscal 1996 included net gains recognized in connection with the
sale of an investment, the Indiana Transaction and the sale of a majority
interest in one eldercare center in Maryland.
The Company's operating expenses before debenture conversion expense,
depreciation, amortization, lease expense and interest expense were
$543,200,000 for Fiscal 1996 compared to $393,140,000 for Fiscal 1995, an
increase of $150,060,000 or 38%, of which approximately $84,335,000 was due to
the McKerley Transaction, Neighbor Care transaction and National Health
transaction, and the remaining $65,726,000 is attributed to growth in
institutional pharmacy, medical supply and contract therapy business and
inflationary wage and benefit increases.
During Fiscal 1996, the Company converted approximately $42,500,000 of the
Debentures. In connection with the early conversion of a portion of the
Debentures, the Company paid approximately $1,245,000 representing the
prepayment of interest to converting debenture holders. The non-recurring cash
payment was presented as debenture conversion expense in the results of
operations.
Depreciation and amortization expense increased to $25,374,000 in Fiscal
1996 from $18,793,000 in Fiscal 1995 as a result of Fiscal 1996 acquisitions
and capital expenditures.
Lease expense increased to $18,638,000 in Fiscal 1996 from $13,798,000 in
Fiscal 1995 of which approximately $2,000,000 was related to the McKerley
Transaction and $1,600,000 is related to the National Health transaction.
Interest expense increased $4,560,000 or 22%. This increase reflected
increased debt levels used to fund acquisitions and a higher average prevailing
interest rate due to the June 1995 issuance of the 9 3/4% Notes.
Liquidity and Capital Resources
General
Working capital increased $67,146,000 to $372,864,000 at December 31, 1998
from $305,718,000 at September 30, 1998. Accounts receivable increased
approximately $29,459,000 during this period, of this increase approximately
$6,000,000 relates to the impact of a rehabilitation services agreement entered
into during the current quarter and the remaining increase is principally due
to the continuing shift in business mix to ancillary services, particularly the
home medical equipment and infusion therapy lines of business, which typically
have a longer collection period. As a result, days revenue in accounts
receivable increased approximately seven days to 77 days for the quarter ended
December 31, 1998 compared to the quarter ended September 30, 1998. Accounts
payable and accrued expenses declined during the quarter ending December 31,
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1998, principally due to the timing of routine operating payments, including
interest and compensation related costs. As a result of the growth in accounts
receivable and the timing of payments, the Company's use of cash flow from
operations for the three months ended December 31, 1998 was approximately
$23,900,000 compared to a source of cash of approximately $4,100,000 for the
three months ended December 31, 1997.
Investing activities for the three months ended December 31, 1998 include
approximately $17,600,000 of capital expenditures primarily related to the
development of assisted living facilities, betterments and expansion of
existing eldercare centers and investment in data processing hardware and
software. The additional investment in unconsolidated affiliates of
approximately $12,500,000 during the December 1998 quarter represents the
Company's limited partnership investment in four assisted living properties
with which it has entered into a management contract, and four assisted living
properties under development which it will manage upon completion of
construction. During the three months ended December 31, 1998, other long term
assets increased approximately $3,802,000, principally due to subordinated
management fees due from Multicare.
The Vitalink and ElderTrust Transactions
The total consideration paid to stockholders of Vitalink to acquire their
shares (including shares which may have been issued upon the exercise of
outstanding options) was $590,200,000, of which 50% was paid in cash and 50% in
Genesis Preferred. As a result of the merger, Genesis assumed approximately
$87,000,000 of indebtedness Vitalink had outstanding. The Genesis Preferred has
a face value of approximately $295,100,000 and an initial annual dividend of
5.9375% and generally is not transferable without the consent of the Company.
The Genesis Preferred is convertible into Common Stock at $37.20 per share and
it may be called for conversion after April 26, 2001, provided the price of
Common Stock reaches certain trading levels and after April 26, 2002, subject
to a market-based call premium. Vitalink's total net revenues for the fiscal
years ended May 31, 1997 and 1998, were $274,000,000 and $494,000,000,
respectively. The cash portion of the purchase price was funded through
borrowings under the Credit Facility.
On January 30, 1998, Genesis successfully completed deleveraging
transactions with ElderTrust. 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. 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.
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. Additionally, ElderTrust has
funded approximately $14,200,000 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 the Credit
Facility with the proceeds from these transactions. In September 1998, the
Company sold its leasehold rights and option to purchase seven eldercare
facilities acquired in its November 1993 acquisition of Meridian Healthcare,
Inc. to ElderTrust for $44,000,000, including $35,500,000 in cash and an
$8,500,000 note. As a part of the transaction, Genesis will continue to
sublease the facilities for ten years with an option to extend the lease until
2018 at an initial annual lease obligation of approximately $10,000,000. The
transaction resulted in a gain of approximately $43,700,000 which has been
deferred and is being amortized over the ten year lease term of the lease
contracts with ElderTrust. The Company also anticipates entering into
transactions with ElderTrust in the future.
Credit Facility
Genesis entered into the Credit Facility pursuant to which the Lenders
provided Genesis and its subsidiaries with a credit facility totaling
$1,250,000,000 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 Vitalink Transaction; and funding Genesis'
and its subsidiaries' working capital for general corporate purposes, including
fees and expenses of the transactions. The Credit Facility consists of three
term loans with original balances of $200,000,000 each (collectively, the "Term
Loans") and a $650,000,000 revolving credit loan (the
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"Revolving 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 $20,000,000. The Term Loans amortize in
quarterly installments beginning in Fiscal 1998 through Fiscal 2005, of which
$21,419,000 is payable in Fiscal 1999. The Term Loans consist of (i) a six year
term loan with an outstanding balance at December 31, 1998 of $130,525,000 (the
"Tranche A Term Facility"), (ii) a seven year term loan with an outstanding
balance at December 31, 1998 of $153,687,000 (the "Tranche B Term Facility"),
and (iii) a eight year term loan with an outstanding balance at December 31,
1998 of $173,450,000 (the "Tranche C Term Facility"). The Revolving Facility
becomes payable in full on September 30, 2003. The third amendment to the Credit
Facility, dated December 15, 1998, made the financial covenants, for certain
periods, less restrictive, permitted portion of the proceeds of subordinated
debt offerings to repay indebtedness under the Revolving Facility and increased
the interest rates applying to the Term Loans and the Revolving Facility. The
revised financial covenants accommodate the projected impact of PPS beginning in
fiscal 1999 and the non-cash charges in the fourth quarter of 1998.
The Credit Facility is 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 Genesis ElderCare Corp.) other than
the stock of Multicare and its subsidiaries. Loans under the Credit Facility
bear, at Genesis' option, interest at the per annum Prime Rate as announced by
the administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin (the "Annual Applicable Margin") that is dependent upon a
certain financial ratio test. Loans under the Tranche A Term Facility and
Revolving Facility have an Annual Applicable Margin of .75% for Prime Rate
loans and 2.5% (an effective rate of 7.90% at December 31, 1998) for LIBO Rate
loans. Loans under the Tranche B Term Facility have an Annual Applicable Margin
of 1.25% for Prime Rate loans and 3.0% (an effective rate of 8.40% at December
31, 1998) for LIBO Rate loans. Loans under the Tranche C Term Facility have an
Annual Applicable Margin of 1.5% for Prime Rate loans and 3.25% (an effective
rate of 8.65% at December 31, 1998) for LIBO Rate loans. Loans under the Swing
Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial ratios, the above referenced
interest rates are reduced.
The Credit Facility 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), 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 December 1998, the Company issued the Notes. Interest on the Notes is
payable semi-annually on January 15 and July 15 of each year, commencing July
15, 1999. Approximately $59,990,000 of the net proceeds were used to repay
portions of the Tranche A, B and C Term Facilities and approximately
$59,990,000 of the net proceeds were used to repay a portion of the Revolving
Facility.
The Multicare Transaction
In connection with the Multicare Transaction, Genesis, Cypress, TPG and
Nazem entered into the Put/Call Agreement pursuant to which, among other
things, Genesis will have the option 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 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
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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 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; and 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.
Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated
upon an event of bankruptcy of Genesis, a change of control of Genesis or an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement, dated
October 9, 1997, by and among the Company, Genesis ElderCare Corp., Cypress,
TPG and Nazem, and the 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 Credit Facility.
Legislative and Regulatory Issues
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 or other
providers. There can be no assurances that adjustments from Medicare or
Medicaid audits will not have a material adverse effect on the Company.
Pursuant to the Balanced Budget Act, commencing with cost reporting
periods beginning on July 1, 1998, PPS began to be phased in for skilled
nursing facilities at 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 when a beneficiary who is a resident of a skilled nursing facility
receives covered skilled nursing facility care. The consolidated per diem rate
is adjusted based upon the RUG. In addition to covering skilled nursing
facility services, this consolidated payment will also cover rehabilitation and
non-rehabilitation ancillary services. Physician services, certain nurse
practitioner and physician assistant services, among others, are not included
in the per diem rate. 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.
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The Balanced Budget Act also required consolidated billing for skilled
nursing facilities. Under the Balanced Budget Act, 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, even if such services were provided by outside
suppliers. 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. Although consolidated billing was scheduled to begin
July 1, 1998 for all services, it has been delayed until further notice for
beneficiaries in a Medicare Part A stay in a skilled nursing facility not yet
using PPS and for the Medicare Part B stay. There can be no assurance that the
Company will be able to provide skilled nursing services at a cost below the
established Medicare level.
Effective April 10, 1998, regulations were adopted by the Health Care
Financing Administration, which revise the methodology for determining the
reasonable cost for contract therapy services, including physical therapy,
respiratory therapy, occupational therapy and speech language pathology. Under
the regulations, the reasonable costs for contract therapy services are limited
to geographically-adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g.,
skilled nursing facilities, home health agencies, etc.) goes into effect.
The Balanced Budget Act also repealed the "Boren Amendment" federal
payment standard for Medicaid payments to Medicaid nursing facilities effective
October 1, 1997. The Boren Amendment required Medicaid payments to certain
health care providers to be reasonable and adequate in order to cover the costs
of efficiently and economically operated health care facilities. States must
now use a public notice and comment period in order to determine rates and
provide interested parties a reasonable opportunity to comment on proposed
rates and the justification for and the methodology used in calculating such
rates. There can be no assurance that budget constraints or other factors will
not cause states to reduce Medicaid reimbursement to nursing facilities and
pharmacies or that payments to nursing facilities and pharmacies will be made
on a timely basis. The law also grants greater flexibility to states to
establish Medicaid managed care projects without the need to obtain a federal
waiver. Although these waiver projects generally exempt institutional care,
including nursing facilities and institutional pharmacy services, no assurances
can be given that these projects ultimately will not change the reimbursement
system for long-term care, including pharmacy services, from fee-for-service to
managed care negotiated or capitated rates. The Company anticipates that
federal and state governments will continue to review and assess alternative
health care delivery systems and payment methodologies.
In July 1998, the Clinton Administration issued a new initiative to
promote the quality of care in nursing homes. This initiative includes, but is
not limited to:
1. increased enforcement of nursing home safety and quality regulations;
2. increased federal oversight of state inspections of nursing homes;
3. prosecution of egregious violations of regulations governing nursing
homes;
4. the publication of nursing home survey results on the Internet; and
5. continuation of the development of the Minimum Data Set ("MDS"), a
national automated clinical data system.
Accordingly, with this new initiative, it may become more difficult for
eldercare facilities to maintain licensing and certification. The Company may
experience increased costs in connection with maintaining its licenses and
certifications as well as increased enforcement actions. In addition, beginning
January 1, 1999, outpatient therapy services furnished by a skilled nursing
facility to a resident not under a covered Part A stay or to non-residents who
receive outpatient rehabilitation services will be paid according to the
Medicare Physician Fee Schedule.
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Anticipated Impact of Healthcare Reform
Based upon assumptions, the Company estimates that the adverse revenue
impact of PPS in Fiscal 1999 will be approximately $28,000,000 on the Genesis
centers and approximately $18,000,000 on the Multicare centers. In each of
Fiscal 2000-2002, the Company estimates the adverse revenue impact of PPS on
its Genesis centers will approximate an additional $8,000,000. The Company
estimates that the adverse revenue impact of PPS on the Multicare eldercare
centers will be approximately an additional $13,000,000 in Fiscal 2000 and an
additional $5,000,000 in each of Fiscal 2001 and 2002. The Genesis eldercare
centers began implementation of PPS on October 1, 1998 and the majority of the
Multicare eldercare centers began implementation of PPS on January 1, 1999. The
actual impact of PPS on the Company's earnings in Fiscal 1999 will depend on
many variables which can not be quantified at this time, including regulatory
changes, patient acuity, patient length of stay, Medicare census, referral
patterns, ability to reduce costs, and growth of ancillary businesses.
To adapt to the significant challenges posed by PPS and recent changes in
the health care marketplace, the Company has taken the following actions:
identified non-core businesses for disposition; reduced its corporate overhead
by approximately $15,000,000; reorganized its businesses into a Core Business
Division, including the Company's eldercare centers, pharmacy, therapy and
other ancillary companies, and a Strategic Business Division, including the
Company's clinical program development, care management, business development,
managed care division and community based programs; restructured the
compensation structure for contract therapists; spent significant time training
and educating its personnel to prepare for the administration of PPS; and
established targets to increase Medicare census and overall occupancy levels at
its centers.
Other
In October 1996, the Company completed the offering of $125,000,000 91/4%
Notes due 2006. The Company used the net proceeds of approximately $121,250,000
together with borrowings under its then existing bank credit facilities, 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.
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 are 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 December 31, 1998, the Company
loaned approximately $3,000,000 to senior executive employees to purchase the
Company's Common Stock.
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
Company's Common Stock, unless certain conditions are met. The Company has not
declared or paid any cash dividends on the Company's Common Stock since its
inception.
44
<PAGE>
The Company believes that its liquidity needs can be met by expected
operating cash flow and availability of borrowings under its Revolving
Facility. At January 31, 1999, approximately $576,200,000 was outstanding under
the Revolving Facility, and approximately $62,000,000 was available under the
Revolving Facility after giving effect to approximately $11,800,000 in
outstanding letters of credit issued under the Revolving Facility.
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. See
"Forward -- Looking Statements."
Year 2000 Compliance
The Company has implemented a process to address its Year 2000 compliance
issues. The process includes (i) an inventory and assessment of the compliance
of the essential systems and equipment of the Company and of critical year 2000
mission suppliers, customers, and other third parties, (ii) the remediation of
non-compliant systems and equipment, and (iii) contingency planning. The
Company is in the process of conducting its inventory, assessment and
remediation of its information technology ("IT") systems, equipment and non-IT
systems and equipment (embedded technology) and has completed approximately 70%
of its internal inventory and assessment and approximately 30% of the systems
and equipment of critical suppliers, customers, and other third parties.
With respect to the Year 2000 compliance of critical third parties, the
Company derives a substantial portion of its revenues from the Medicare and
Medicaid programs. Congress' General Accounting Office ("GAO") concluded in
September 1998 that it would be highly unlikely that all Medicare systems will
be compliant on time to ensure the delivery of uninterrupted benefits and
services into the Year 2000. While the Company does not receive payments
directly from Medicare but from intermediaries, the GAO statement is
interpreted to apply as well to these intermediaries. Recently, the HCFA
Administrator asserted that all systems necessary to make payments to fiscal
intermediaries would be compliant. The Administrator provided further assurance
that intermediary systems would also be compliant well in advance of the
deadline. Nonetheless, the Company intends to actively confirm the Year 2000
readiness status for each intermediary and to work cooperatively to ensure
appropriate continuing payments for services rendered to all government-insured
patients.
The Company is remediating its critical IT and non-IT systems and
equipment. The Company has also begun contingency planning in the event that
essential systems and equipment fail to be Year 2000 compliant. The Company is
planning to be Year 2000 compliant for all its essential systems and equipment
by September 30, 1999, although there can be no assurance that it will achieve
its objective by such date or by January 1, 2000 or that such potential
non-compliance will not have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that all of the Company's critical suppliers and other third
parties will be Year 2000 compliant by January 1, 2000, or that such potential
non-compliance will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company currently estimates that its aggregate costs directly related
to Year 2000 compliance efforts will be approximately $1,100,000, of which
approximately $550,000 has been spent through December 31,
45
<PAGE>
1998. The Company's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve, as new information becomes available. The
Company's analysis of its Year 2000 issues is based in part on information from
third party suppliers; there can be no assurance that such information is
accurate or complete.
The failure of the Company or third parties to be fully Year 2000
compliant for essential systems and equipment by January 1, 2000 could result
in interruptions of normal business work operations. The Company's potential
risks include:
1. the inability to deliver patient care related services in the
Company's facilities and/or in non-affiliated facilities,
2. the delayed receipt of reimbursement from the federal or state
governments, private payors or intermediaries,
3. the failure of security systems, elevators, heating systems or other
operational systems and equipment at the Company's facilities and
4. the inability to receive critical equipment and supplies from vendors.
Each of these events could have a material adverse effect on the Company's
business, results of operations and financial condition.
Contingency plans for the Company's Year 2000-related issues continue to
be developed and include, but are not limited to, identification of alternate
suppliers, alternate technologies and alternate manual systems. The Company is
planning to have contingency plans completed for essential systems and
equipment by June 30, 1999; however, there can be no assurance that it will
meet this objective by such date or by January 1, 2000.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Company or to products or services
offered by the Company, is also intended to be "Year 2000 Readiness Disclosure"
as such term is defined in the Year 2000 Act.
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
ending 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 ending 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 March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("Statement 98-1").
46
<PAGE>
Once the capitalization criteria of Statement 98-1 have been met, external
directs costs of materials and services consumed in developing or obtaining
internal-use computer software; payroll and payroll-related costs for employees
who are directly associated with and who devote time to the internal-use
computer software project (to the extent of the time spent directly on the
project); and interest costs incurred when developing computer software for
internal use should be capitalized. Training costs and data conversion costs,
should be expensed as incurred. Statement 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998, with earlier
application encouraged. The Company adopted the provisions of Statement 98-1 in
its fiscal year ended September 30, 1998.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (the
"Statement"). The 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. The Statement is effective for fiscal years beginning after
December 15, 1998 or the Company's fiscal year ending September 30, 2000. The
Company has not yet quantified the impact the adoption may have on its
consolidated financial statements.
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 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.
47
<PAGE>
BUSINESS
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a
Pennsylvania corporation. As used herein, unless the context otherwise
requires, "Genesis" or the "Company" refers to Genesis Health Ventures, Inc.
and subsidiaries. Information included herein which describes the Company's
operations after October 10, 1997 (e.g., markets served, facilities information,
personnel) includes the Multicare operations; information included herein
describing the Company's historical results prior to October 10, 1997 (e.g.,
occupancy rates and revenue sources) does not include the Multicare operations.
Genesis is a leading provider of healthcare and support services to the
elderly. The Company has developed the Genesis ElderCare delivery model of
integrated healthcare networks to provide cost-effective, outcome-oriented
services to the elderly. Through these integrated healthcare networks, Genesis
provides basic healthcare and specialty medical services to more than 175,000
customers, including approximately 40,000 customers who are residents in
eldercare facilities. Genesis operates primarily in five regional markets in
which over 11,100,000 people over the age of 65 reside. The networks include:
o 326 eldercare centers with approximately 42,200 beds;
o nine primary care physician clinics;
o approximately 85 physicians, physician assistants and nurse
practitioners;
o 11 medical supply distribution centers serving over 1,000 eldercare
centers with over 80,000 beds;
o an integrated NeighborCare pharmacy operation with over $900,000,000 in
annualized net revenues, including 79 long-term care pharmacies serving
approximately 263,000 institutional beds; 34 community-based pharmacies; and
infusion therapy services; and
o certified rehabilitation agencies providing services through over 600
contracts.
The Company also provides diagnostic and hospitality services in selected
markets and operates a group purchasing organization. Genesis has concentrated
its eldercare networks in five geographic regions in order to achieve operating
efficiencies, economies of scale and significant market share. The five
geographic markets that Genesis principally serves are:
o New England Region (Massachusetts/Connecticut/New
Hampshire/Vermont/Rhode Island);
o Midatlantic Region (Greater Philadelphia/Delaware Valley);
o Chesapeake Region (Southern Delaware/Eastern Shore of
Maryland/Baltimore, Maryland/Washington D.C./Virginia);
o Southern Region (Central Florida); and
o Allegheny Region (West Virginia/Western Pennsylvania/Eastern
Ohio/Illinois/Wisconsin). The Company believes that it is the largest operator
of eldercare center beds in the states of New Hampshire, Massachusetts, New
Jersey, Pennsylvania, Maryland and West Virginia.
The Company's eldercare services focus on the central medical and physical
issues facing the more medically demanding elderly. By integrating the talents
of physicians with case management, comprehensive discharge planning and, where
necessary, home support services, the Company believes it provides
cost-effective care management to achieve superior outcomes and return
customers to the community. The Company believes that its orientation toward
achieving improved customer outcomes through its eldercare networks has
resulted in:
o increased utilization of specialty medical services,
o high occupancy of available beds,
o enhanced quality payor mix and
o a broader base of repeat customers.
48
<PAGE>
Specialty medical services revenues have increased at a compound annual rate of
56% from the fiscal year ended September 30, 1994 to Fiscal 1998 and comprised
52% of the Company's net revenues for Fiscal 1998. Specialty medical services
typically generate higher profit margins than basic healthcare services and are
less capital intensive.
The Company's long-term growth strategy is to enhance its existing
eldercare networks, establish new eldercare networks in markets it deems
attractive and broaden its array of high margin specialty medical services
through internal development and selected acquisitions. Consistent with its
strategy, the Company has made selected acquisitions of, and investments in,
eldercare centers and rehabilitation and pharmacy companies, including the
August 28, 1998 Vitalink Transaction. The Company has undertaken several
initiatives to position itself to compete in the current healthcare
environment. These initiatives include:
o establishing a strategic division to develop clinical care protocols and
monitor the delivery and utilization of medical care;
o developing a clinical administration and healthcare management
information system;
o establishing and marketing the Genesis ElderCare brand name, and
establishing Genesis ElderCare toll-free telephone lines along with other
trademarks, to increase awareness of the Company's eldercare services in the
healthcare market;
o seeking strategic alliances with other healthcare providers to broaden
the Company's continuum of care; and
o creating an independent eldercare advisory board to formulate new and
innovative approaches in the delivery of care.
Basic Healthcare Services
Genesis operates 302 eldercare centers located in 16 states. The centers
offer three levels of care for their customers: skilled, intermediate and
personal. Skilled care provides 24-hour per day professional services of a
registered nurse; intermediate care provides less intensive nursing care; and
personal care provides for the needs of customers requiring minimal supervision
and assistance. Each eldercare center is supervised by a licensed healthcare
administrator and employs a Medical Director to supervise the delivery of
healthcare services to residents and a Director of Nursing to supervise the
nursing staff. The Company maintains a corporate quality assurance program to
monitor regulatory compliance and to enhance the standard of care provided in
each center.
In addition to programs to meet the healthcare needs of its customers, all
Genesis eldercare centers offer a variety of quality of life programs. These
include the Intergenerational Learning Program that enables residents to
function both as students and as instructors in programs with community
schools, as well as The Magic Mix Program that provides a supervised setting in
which children of working parents can interact with residents of the centers
after school. These programs have received recognition at both local and
national levels.
In eight of its eldercare centers, the Company operates Genesis ElderCare
Focus programs which are dedicated to meeting the special medical, emotional
and psychological needs of Alzheimer's patients. The Focus programs were
developed in conjunction with the Dementia Research Clinic at the Johns Hopkins
University School of Medicine. These units provide an environment that is
designed or modified to assist those with cognitive loss. Clinical experts have
experienced significant success and produced benefits to customers served in
both Alzheimer's day services and dedicated residential units.
49
<PAGE>
The following table sets forth, for the periods indicated, information
regarding the Company's average number of beds in service and the average
occupancy levels at its eldercare centers during the respective fiscal years.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Average Beds in Service: (1)
Owned and Leased Facilities .................. 9,429 15,132 15,137
Managed and Jointly-Owned Facilities ......... 5,030 6,101 24,234
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities .................. 93% 91% 91%
Managed and Jointly-Owned Facilities ......... 93% 92% 92%
</TABLE>
- ------------
(1) Excludes beds in facilities which were unavailable for occupancy due to
renovations.
Specialty Medical Services
The Company emphasizes the delivery of specialty medical services which
typically require smaller capital investment and generate higher profit margins
than providing basic healthcare services. The Company provides the specialty
medical services described below.
Institutional Pharmacy and Medical Supply Services. The Company, through
its NeighborCare pharmacy subsidiaries which have over $900,000,000 in
annualized net revenues, provides pharmacy and other services including
infusion therapy and medical supplies and equipment to eldercare centers it
operates, as well as to independent healthcare providers by contract. The
pharmacy services provided in these settings are tailored to meet the needs of
the institutional customer. These services include highly specialized packaging
and dispensing systems, computerized medical records processing and 24-hour
emergency services. The Company's institutional pharmacy and medical supply
services were developed to provide the products and support services required
in the healthcare market. Institutional pharmacy services are designed to help
assure quality of care and to control costs at the facilities served. Medical
supply services are designed to assure availability and control through
maintenance of a comprehensive inventory, extensive delivery services and
special ordering and tracking systems. The Company also provides pharmacy
consulting services to assure proper and effective drug therapy. The Company
provides these services through 79 institutional pharmacies (of which one is
jointly-owned) and 11 distribution centers located in its various market areas.
In addition, the Company operates 34 community-based pharmacies which are
located in or near medical centers, hospitals and physician office complexes.
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies, as well as personal service and
consultation by licensed professional pharmacists. Approximately 89% of the
sales attributable to all pharmacy operations in Fiscal 1998 were generated
through external contracts with independent healthcare providers with the
balance attributable to centers owned or leased by the Company.
Rehabilitation Therapy. The Company provides an extensive range of
rehabilitation therapy services, including speech pathology, physical therapy
and occupational therapy, through seven certified rehabilitation agencies in
all five of its regional market concentrations. These services are provided by
over approximately 1,800 licensed rehabilitation therapists and assistants
employed by Genesis to substantially all of the eldercare centers the Company
operates, as well as by contract to healthcare facilities operated by others.
Subacute Care Programs. The Company has established and actively markets
programs for elderly and other customers who require subacute levels of medical
care. These programs include ventilator care, intravenous therapy,
post-surgical recovery, respiratory management, orthopedic or neurological
rehabilitation, terminal care and various forms of coma, pain and wound
management. Private insurance companies and other third party payors, including
certain state Medicaid programs, have recognized that treating customers
requiring subacute medical care in centers such as those operated by Genesis is
a cost-effective alternative to treatment in an acute care hospital. The
Company provides such care at rates that the Company believes are substantially
below the rates typically charged by acute care hospitals for comparable
services.
50
<PAGE>
Other Services. The Company employs or has consulting arrangements with
approximately 85 physicians, physician assistants and nurse practitioners who
are primarily involved in designing and administering clinical programs and
directing patient care. The Company also provides an array of other specialty
medical services in certain parts of its eldercare networks, including portable
x-ray and other diagnostic services; home healthcare services; and hospitality
services such as dietary, housekeeping, laundry, plant operations and
facilities management services.
Management Services and Other
Management Services. The Company provides management services to 189
eldercare centers pursuant to management agreements that provide generally for
the Company's day-to-day responsibility for the operation and management of the
centers. In turn, Genesis receives management fees, depending on the agreement,
computed as either:
1. an overall fixed fee,
2. a fixed fee per customer,
3. a percentage of net revenues of the center plus an incentive fee, or
4. a percentage of gross revenues of the center with some incentive
clauses.
The various management agreements, including option periods, terminate between
1999 and 2017. The Company has extended various mortgage and other loans to
certain facilities under management contract. See "Notes to Consolidated
Financial Statements -- Footnote 9 Notes Receivable and Other Investments."
Genesis provides development services for a fee in an amount equal to five
percent of the total cost of developing and completing facilities developed by
Adult Community Total Services, Inc. The contract extends through December 2002
and Genesis is guaranteed a minimum annual development fee of $1,500,000.
Group Purchasing. The Company's subsidiary, The Tidewater Healthcare
Shared Services Group, Inc. ("Tidewater"), is one of the largest group
purchasing companies in the Midatlantic region. Tidewater provides purchasing
and shared service programs specially designed to meet the needs of eldercare
centers and other long-term care facilities. Tidewater's services are
contracted to approximately 2,200 members with over 236,000 beds in 44 states
and the District of Columbia.
Strategic Clinical Initiatives
The Company has undertaken several initiatives to position itself to
compete effectively in the current healthcare environment. The Company has
established a strategic division which is responsible for developing clinical
care protocol and monitoring the delivery and utilization of medical care. The
Company has also developed a clinical administration and healthcare management
information system to monitor and measure clinical and patient outcome data for
use by healthcare providers and the Company. The Company is also seeking
strategic alliances with selected providers in order to:
1. further the continuum of care,
2. increase market share and customer acceptance and
3. create strategic affiliations for negotiating with payors in a managed
care environment.
In addition to these initiatives, the Company has established toll-free
telephone lines and has consolidated its core business under the Genesis
ElderCare brand name in an effort to increase the Company's visibility among
current and potential customers, payors and other healthcare providers. The
Company has also created an independent eldercare advisory board composed of
individuals with distinguished credentials in geriatric care to formulate new
and innovative approaches in the delivery of care. See "Risk Factors."
Revenue Sources
The Company derives its basic healthcare and specialty medical revenue
from private pay sources, state Medicaid programs and Medicare. The Company
classifies payments from persons or entities other than the
51
<PAGE>
government as private pay and other revenue. The private pay and other
classification also includes revenues from commercial insurers, health
maintenance organizations and other charge-based payment sources. Blue Cross
and Veterans Administration payments are included in private pay and other
revenues and are made pursuant to renewable contracts negotiated with these
payors. The private pay rates charged by the Company are influenced primarily
by the rates charged by other providers in the local market and by Medicaid and
Medicare reimbursement rates. Specialty medical revenues are usually reimbursed
under casualty and health insurance coverages. The acuity levels for these
insurance patients are generally higher and require additional staff and
increased utilization of facility resources, resulting in higher payment rates.
Individual cases are either negotiated on a case by case basis with the insurer
or the rates are prescribed through managed care contract provisions.
Medicare is a federally funded and administered health insurance program
that consists of Parts A and B. Participation in Part B is voluntary and is
funded in part through the payment of premiums. Subject to certain limitations,
benefits under Part A include inpatient hospital services, skilled nursing in
an eldercare center and medical services such as physical, speech and
occupational therapy, certain pharmaceuticals and medical supplies. Part B
provides coverage for physician services. Part B also reimburses for medical
services with the exception of pharmaceutical services. Medicare benefits are
not available for intermediate and custodial levels of care; however, medical
and physician services furnished to such patients may be reimbursable under
Part B.
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 or other
providers. There can be no assurances that adjustments from Medicare or
Medicaid audits will not have a material adverse effect on the Company. See
"Risk Factors."
Pursuant to the Balanced Budget Act, commencing with cost reporting
periods beginning on July 1, 1998, PPS began to be phased in for skilled
nursing facilities at 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 when a beneficiary who is a resident of a skilled nursing facility
receives covered skilled nursing facility care. The consolidated per diem rate
is adjusted based upon the RUG. In addition to covering skilled nursing
facility services, this consolidated payment will also cover rehabilitation and
non-rehabilitation ancillary services. Physician services, certain nurse
practitioner and physician assistant services, among others, are not included
in the per diem rate. 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 Balanced Budget Act also required consolidated billing for skilled
nursing facilities. Under the Balanced Budget Act, 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, even if such services were provided by outside
suppliers. 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. Although consolidated billing was scheduled to begin
July 1, 1998 for all services, it has been delayed until further notice for
beneficiaries in a Medicare Part A stay in a skilled nursing facility not yet
using PPS for the Medicare Part B stay.
52
<PAGE>
Under the Part A reimbursement methodology applicable to periods prior to
the implementation of PPS, each eldercare center receives an interim payment
during the year which is adjusted to reflect actual allowable direct and
indirect costs of services based on the submission of a cost report at the end
of each year. For services not billed through each eldercare center, the
Company's specialty medical operations bill Medicare directly for nutritional
support services, infusion therapy, certain medical supplies and equipment,
physician services and certain therapy services as provided. Medicare payments
for these services may be based on reasonable cost charges or a fixed-fee
schedule determined by Medicare. As the Company is reimbursed for its direct
costs plus an allocation of indirect costs up to a regional limit for periods
prior to the implementation of PPS, to the extent that the Company expands its
specialty medical services, the costs of care for these patients are expected
to exceed the regional reimbursement limits. As a result, the Company has
submitted and will be required to submit further exception requests to recover
such excess costs under pending or future requests from Medicare. There can be
no assurances that the Company will be able to recover such excess costs under
pending or future requests. The failure to recover these excess costs in the
future would adversely affect the Company's financial position and results of
operations. Medicare payments for these services may be based on reasonable
cost charges or a fixed-fee schedule determined by Medicare.
Medicaid is the state administered reimbursement program that covers both
skilled and intermediate long-term care. Although Medicaid programs vary from
state to state, typically they provide for payment for services including
nursing facility services, physician's services, therapy services and
prescription drugs, up to established ceilings, at rates based upon cost
reimbursement principles. Reimbursement rates are typically determined by the
state from cost reports filed annually by each center, on a prospective or
retrospective basis. In a prospective system, a rate is calculated from
historical data and updated using an inflation index. The resulting prospective
rate is final, but in some cases may be adjusted pursuant to an audit. In this
type of payment system, center cost increases during the rate year do not
affect payment levels in that year. In a retrospective system, final rates are
based on reimbursable costs for that year. An interim rate is calculated from
previously filed cost reports, and may include an inflation factor to account
for the time lag between the final cost report settlement and the rate period.
Consequently, center cost increases during any year may affect revenues in that
year. Certain states are scheduled to convert, or have recently converted, from
a retrospective system, which generally recognizes only two or three levels of
care, to a case mix prospective pricing system, pursuant to which payment to a
center for patient services directly considers the individual patient's
condition and need for services. Moreover, the Balanced Budget 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 Balanced Budget Act, states
must now use a public notice and comment process for determining Medicaid
rates, rate methodology and justifications. It is unclear what the impact of
the Balanced Budget Act will have on the Company. The Company employs
specialists in reimbursement at the corporate level to monitor both Medicaid
and Medicare regulatory developments to comply with all reporting requirements
and to insure appropriate payments.
<PAGE>
The following table reflects the allocation of customer service revenues
among these sources of revenue.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Private pay and other ......... 41% 38% 39% 39% 45%
Medicaid ...................... 43 41 36 37 35
Medicare ...................... 16 21 25 24 20
-- -- -- -- --
Total ..................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
See "Forward-Looking Statements."
Marketing
Marketing for eldercare centers is focused at the local level and is
conducted primarily by the center administrator and its admissions director who
call on referral sources such as doctors, hospitals, hospital discharge
planners, churches and various community organizations. In addition to those
efforts, the Company's
53
<PAGE>
marketing objective is to maintain public awareness of the eldercare center and
its capabilities. The Company takes advantage of its regional concentrations in
its marketing efforts, where appropriate, through consolidated marketing
programs which benefit more than one center.
Genesis markets specialty medical services to its managed eldercare
centers, as well as to independent healthcare providers, in addition to
providing such services to its owned, leased and affiliated eldercare centers.
The Company markets its rehabilitation therapy and institutional pharmacy and
medical supply services through a direct sales force which primarily calls on
eldercare centers, hospitals, clinics and home health agencies. The corporate
business development department, through regional managers, markets the
Company's subacute program directly to insurance companies, managed care
organizations and other third party payors. In addition, the marketing
department supports the eldercare centers in developing promotional materials
and literature focusing on the Company's philosophy of care, services provided
and quality clinical standards. See "-- Governmental Regulation" for a
discussion of the federal and state laws which limit financial and other
arrangements between healthcare providers.
In Fiscal 1996, the Company announced a consolidation of its core business
under the name Genesis ElderCare. The Genesis ElderCare logo and service mark
have been featured in a series of print advertisements in publications serving
the regional markets in which the Company operates. The Company's marketing of
Genesis ElderCare is aimed at increasing awareness among decision makers in key
professional and business audiences. The Company is using advertising,
including the Company's toll-free ElderCare Lines, to promote its brand name in
trade, professional and business publications and to promote services directly
to consumers.
The consumer advertising effort was significantly increased beginning in
January 1998 to build awareness of the Genesis ElderCare brand among family
caregivers and elders living in the community. The advertising effort, which is
concentrated in the Company's key geographic markets, uses television, consumer
magazines, and direct mail to motivate consumers who need any of the Company's
services to call one of the Company's regional toll-free ElderCare Lines where
they are directed to the appropriate resource.
Personnel
At November 30, 1998, Genesis and its subsidiaries (including Multicare)
employed over 45,000 people, including approximately 34,500 full-time and
10,000 part-time employees. Approximately 20% of these employees are physicians
and nursing and professional staff. Approximately 15,000 of these employees are
employed by Multicare.
The Company currently has collective bargaining agreements which relate to
61 facilities, including 27 facilities operated by Multicare. The agreements
expire at various dates from 1999 through 2001 and cover approximately 5,000
employees. In addition, certain of the Company's facilities have been subject
to an aggressive union organizing campaign. The Company believes that its
relationship with its employees is generally good.
Employee Training and Development
Genesis believes that nursing and professional staff retention and
development has been and continues to be a critical factor in the successful
operation of the Company. In response to this challenge, a compensation program
which provides for annual merit reviews as well as financial and quality of
care incentives has been implemented to promote center staff motivation and
productivity and to reduce turnover rates. Management believes that the
Company's wage rates for professional nursing staff are commensurate with
market rates. The Company also provides employee benefit programs which
management believes, as a package, exceed industry standards. The Company has
not experienced any significant difficulty in attracting or retaining qualified
personnel.
In addition, Genesis has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized
by the Company through a variety of in-house programs as well as a tuition
reimbursement program. The Company has established, company-wide, the Genesis
Nursing Assistant Specialist Program. This program is offered on a joint basis
with community
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colleges. Classes are held on the employees' time, last for approximately six
months and provide advanced instruction in nursing care. The Company pays the
tuition. When all of the requirements for class participation have been met
through attendance, discussion and examinations, the nurses aide graduates and
is awarded the title of Nursing Assistant Specialist and receives a salary
adjustment. The Company has maintained a retention rate of 77% since 1990 of
the nurses aide graduates. Approximately 1,450 nurses aides have graduated from
the Genesis Nursing Assistant Specialist Program and received an increase in
salary. As the nurse aide continues through the career ladder, the Company
continues to provide incentives. At the next level, Senior Nursing Assistant
Specialist, the employee receives another increase in salary and additional
tuition reimbursement of up to $2,250 toward becoming a Licensed Practical
Nurse ("LPN") or Registered Nurse ("RN") and at the Senior Nursing Assistant
Specialist Coordinator level, tuition reimbursement increases to a maximum of
$3,000 per year towards a nursing degree.
The Company began a junior level management and leadership training
program in 1990 referred to as the Pilot Light Program. The target audience for
this training is RN's and LPN's occupying charge nurse positions within the
Company's nursing centers as well as junior level managers throughout the
Genesis networks. Over 800 participants have graduated from this program.
Governmental Regulation
The federal government and all states in which the Company operates
regulate various aspects of the Company's business. The Company's eldercare
centers are subject to certain federal statutes and regulations and to
statutory and regulatory licensing requirements by state and local authorities.
All Genesis eldercare centers are currently so licensed. In addition, eldercare
centers are subject to various local building codes and other ordinances.
All of the Company's eldercare centers and healthcare services, to the
extent required, are licensed under applicable law. All eldercare centers and
healthcare services, or practitioners providing the services therein, are
certified or approved as providers under one or more of the Medicaid, Medicare
or Veterans Administration programs. Licensing, certification and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. State and local agencies survey all eldercare centers on a
regular basis to determine whether such centers are in compliance with
governmental operating and health standards and conditions for participation in
government sponsored third party payor programs. The Company believes that its
centers are in substantial compliance with the various Medicare and Medicaid
regulatory requirements applicable to them. However, in the ordinary course of
its business, the Company receives notices of deficiencies for failure to
comply with various regulatory requirements. Genesis reviews such notices and
takes appropriate corrective action. In most cases, Genesis and the reviewing
agency will agree upon the measures to be taken to bring the center into
compliance with regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take various adverse actions against a
provider, including the imposition of fines, temporary suspension of admission
of new patients to the center, suspension or decertification from participation
in the Medicare or Medicaid programs and, in extreme circumstances, revocation
of a center's license. These actions may adversely affect the eldercare
centers' ability to continue to operate, the ability of the Company to provide
certain services, and eligibility to participate in the Medicare, Medicaid or
Veterans Administration programs or to receive payments from other payors.
Additionally, actions taken against one center may subject other centers under
common control or ownership to adverse measures, including loss of licensure or
eligibility to participate in Medicare and Medicaid programs. Certain of the
Company's centers have received notices in the past from state agencies that,
as a result of certain alleged deficiencies, the agency was taking steps to
decertify the providers from participation in Medicare and Medicaid programs.
Except as described below, in all cases, such deficiencies were remedied before
any providers were decertified. On July 14, 1998, the Company announced that it
received notice from NewCourtland, 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.
All but 30 of the Genesis eldercare owned and leased centers provide
skilled nursing services and are currently certified to receive benefits
provided under Medicare for these services. Additionally, all Genesis and
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Multicare eldercare centers are currently certified to receive benefits under
Medicaid. Both initial and continuing qualifications of an eldercare center to
participate in such programs depend upon many factors including accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls.
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to "medically
indigent" persons. The programs are administered by the applicable state
welfare or social service agencies. Although Medicaid programs vary from state
to state, traditionally they have provided for the payment of certain expenses,
up to established limits, at rates based generally on cost reimbursement
principles.
Most states in which Genesis operates have adopted Certificate of Need or
similar laws which generally require that a state agency approve certain
acquisitions and determine that the need for certain bed additions, new
services, and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other
changes, or the expenditure of capital. State approvals are generally issued
for a specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
centers, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the center's license
and adverse reimbursement action.
The Company is also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. These laws include the "anti-kickback"
provisions of the federal Medicare and Medicaid programs, which prohibit, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration (including any kickback, bribe or rebate) directly or
indirectly in return for or to induce the referral of an individual to a person
for the furnishing or arranging for the furnishing of any item or service for
which payment may be made in whole or in part under Medicare or Medicaid. These
laws also include the "Stark legislations" which prohibit, with limited
exceptions, the referral of patients by physicians for certain services,
including home health services, physical therapy and occupational therapy, to
an entity in which the physician has a financial interest. In addition, some
states restrict certain business relationships between physicians and other
providers of healthcare services. Many states prohibit business corporations
from providing, or holding themselves out as a provider of medical care.
Possible sanctions for violation of any of these restrictions or prohibitions
include loss of licensure or eligibility to participate in reimbursement
programs and civil and criminal penalties. These laws vary from state to state,
are often vague and have seldom been interpreted by the courts or regulatory
agencies. From time to time, the Company has sought guidance as to the
interpretation of these laws; however, there can be no assurance that such laws
will ultimately be interpreted in a manner consistent with the practices of the
Company. Although the Company has contractual arrangements with some healthcare
providers to which the Company pays fees for services rendered or products
provided, the Company believes that its practices are not in violation of these
laws. The Company cannot accurately predict whether enforcement activities will
increase or the effect of any such increase on its business. There have also
been a number of recent federal and state legislative and regulatory
initiatives concerning reimbursement under the Medicare and Medicaid programs.
In particular, the federal government has issued recent fraud alerts concerning
double billing, home health services and the provision of medical supplies to
nursing facilities. Accordingly, it is anticipated that these areas may come
under closer scrutiny by the government. The Company cannot accurately predict
the impact of any such initiatives. See "Risk Factors."
Competition
The Company competes with a variety of other companies in providing
healthcare services. Certain competing companies have greater financial and
other resources and may be more established in their respective communities
than the Company. Competing companies may offer newer or different centers or
services than the Company and may thereby attract the Company's customers who
are either presently residents of its eldercare centers or are otherwise
receiving its healthcare services. As a result of the Vitalink
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Transaction, HCR-Manor Care, a publicly traded owner of eldercare centers that
competes with the Company in certain markets, owns 586,240 shares of Genesis
Preferred which are convertible at the option of the holder into approximately
7,880,000 shares of the Company's Common Stock. Pursuant to the Vitalink
Service Contracts, the Company's NeighborCare pharmacy operations provide
services to HCR-Manor Care constituting approximately ten percent of the net
revenues of NeighborCare. See "Risk Factors -- Competition."
The Company operates eldercare centers in 16 states. In each market, the
Company's eldercare centers may compete for customers with rehabilitation
hospitals, subacute units of hospitals, skilled or intermediate nursing centers
and personal care or residential centers which offer comparable services to
those offered by the Company's centers. Certain of these providers are operated
by not-for-profit organizations and similar businesses which can finance
capital expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company. In competing for customers, a center's local
reputation is of paramount importance. Referrals typically come from acute care
hospitals, physicians, religious groups, other community organizations, health
maintenance organizations and the customer's families and friends. Members of a
customer's family generally actively participate in selecting an eldercare
center. Competition for subacute patients is intense among hospitals with
long-term care capability, rehabilitation hospitals and other specialty
providers and is expected to remain so in the future. Important competitive
factors include the reputation in the community, services offered, the
appearance of a center and the cost of services. See "Risk Factors."
Genesis competes in providing specialty medical services with a variety of
different companies. Generally, this competition is national, regional and
local in nature. The primary competitive factors in the specialty medical
services business are similar to those in the eldercare center business and
include reputation, the quality of clinical services, responsiveness to patient
needs, and the ability to provide support in other areas such as third party
reimbursement, information management and patient record-keeping. See "Risk
Factors."
Insurance
Genesis carries property and general liability insurance, professional
liability insurance, and medical malpractice insurance coverage in amounts
deemed adequate by management. However, there can be no assurance that any
current or future claims will not exceed applicable insurance coverage. Genesis
also requires that physicians practicing at its eldercare centers carry medical
malpractice insurance to cover their individual practices.
Facilities
The following table provides information by state regarding the eldercare
centers owned, leased and managed by Genesis as of November 1998. Included in
Managed Centers are 116 jointly-owned facilities with 13,271 beds. Member
centers consist of independently owned facilities that, for a fee, have access
to many of the resources and capabilities of the Genesis Eldercare Networks,
including participation in Genesis' managed care contracts, preferred provider
arrangements and group purchasing arrangements. These centers typically
purchase an array of ancillary services from Genesis.
57
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<TABLE>
<CAPTION>
Wholly-Owned
Centers Member Centers Leased Centers Managed Centers Total
------------------- ------------------- ------------------- ------------------- -------------------
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania ....... 16 2,228 5 645 4 503 30 4,100 55 7,476
Massachusetts ...... 8 1,092 1 123 1 100 39 5,138 49 6,453
Maryland ........... 13 2,089 11 2,041 7 990 6 907 37 6,027
New Jersey ......... 12 1,571 1 178 4 616 26 3,630 43 5,995
Florida ............ 4 598 -- -- 12 1,409 12 1,308 28 3,315
Connecticut ........ 4 615 1 190 1 120 13 1,866 19 2,791
West Virginia ...... -- -- -- -- 2 180 23 1,983 25 2,163
Virginia ........... 2 421 1 200 4 670 2 175 9 1,466
New Hampshire ...... 8 808 -- -- 5 440 -- -- 13 1,248
Delaware ........... 4 522 4 539 -- -- 1 158 9 1,219
Ohio ............... -- -- -- -- -- -- 14 1,128 14 1,128
Illinois ........... -- -- -- -- -- -- 10 968 10 968
Wisconsin .......... -- -- -- -- -- -- 7 941 7 941
Rhode Island ....... -- -- -- -- -- -- 3 373 3 373
North Carolina ..... -- -- -- -- -- -- 2 340 2 340
Vermont ............ 2 256 -- -- -- -- 1 58 3 314
-- ----- -- ----- -- ----- -- ----- -- -----
Total ............ 73 10,200 24 3,916 40 5,028 189 23,073 326 42,217
== ====== == ===== == ===== === ====== === ======
</TABLE>
The Company believes that all of its centers are well maintained and are in a
suitable condition for the conduct of its business.
Legal Proceedings
Genesis is a party to litigation arising in the ordinary course of
business. Genesis does not believe the results of such litigation, even if the
outcome is unfavorable to the Company, would have a material adverse effect on
its financial position.
On and after April 29, 1998, certain shareholders of Vitalink (the
"Plaintiffs") filed four separate actions in Delaware state court against
Vitalink, certain of its officers and directors (the "Individual Defendants"),
Genesis and HCR-Manor Care (collectively, the "Defendants") alleging, among
other things, that Vitalink, the individual Defendants and HCR-Manor Care
breached certain duties owed to the Plaintiffs in connection with the Merger
Agreement and certain of the transactions contemplated thereby, and that
Genesis has knowingly aided and abetted that alleged breach (the "Stockholders
Litigation"). In their complaints, the Plaintiffs sought damages and
preliminary and permanent relief to enjoin the Defendants from consummating the
Merger and the transactions contemplated thereby. On July 27, 1998, the
Plaintiffs and the Defendants entered into a Memorandum of Understanding
pursuant to which they agreed in principle, subject to the execution of a
written Stipulation of Settlement and approval by the court, to settle the
Stockholders Litigation by (a) allowing the Genesis Preferred received by the
Vitalink minority stockholders in connection with the Merger to become freely
transferable beginning on August 28, 1999 and (b) including certain additional
disclosures in the proxy statement/prospectus related to the Vitalink
Transaction.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Michael R. Walker (1) ............... 50 Chairman and Chief Executive Officer
Richard R. Howard (1) ............... 49 Vice Chairman and Director
David C. Barr ....................... 48 Vice Chairman and Chief Operating Officer
Michael G. Bronfein ................. 43 President, NeighborCare
George V. Hager, Jr. ................ 43 Senior Vice President and Chief Financial Officer
Maryann Timon ....................... 45 Senior Vice President for Managed Care
Marc D. Rubinger .................... 49 Senior Vice President and Chief Information Officer
Barbara J. Hauswald ................. 39 Vice President and Treasurer
James V. McKeon ..................... 34 Vice President and Corporate Controller
Jack R. Anderson (2) ................ 73 Director
Samuel H. Howard (2)(3)(4) .......... 59 Director
Roger C. Lipitz (2)(3)(4) ........... 56 Director
Stephen E. Luongo (3) ............... 51 Director
Alan B. Miller (1) .................. 61 Director
</TABLE>
- ------------
(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
(4) Member of the Stock Option Committee of the Board of Directors.
Michael R. Walker is the founder of the Company and has served as Chairman
and Chief Executive Officer of the Company since its inception. In 1981, Mr.
Walker co-founded Health Group Care Centers ("HGCC"). At HGCC, he served as
Chief Financial Officer and, later, as President and Chief Operating Officer.
Prior to its sale in 1985, HGCC operated nursing homes with 4,500 nursing beds
in 12 states. From 1978 to 1981, Mr. Walker was the Vice President and
Treasurer of AID Healthcare Centers, Inc. ("AID"). AID, which owned and
operated 20 nursing centers, was co-founded in 1977 by Mr. Walker as the
nursing home division of Hospital Affiliates International. Mr. Walker holds a
Master of Business Administration degree from Temple University and a Bachelor
of Arts in Business Administration from Franklin and Marshall College. Mr.
Walker has served as Chairman of the Board of Trustees of ElderTrust since its
inception in January 1998 and has served as Chairman of the Board of Directors
of Multicare since October 1997.
Richard R. Howard has served as a director of the Company since its
inception, as Vice President of Development from September 1985 to June 1986,
as President and Chief Operating Officer from June 1986 to April 1997, as
President from April 1997 to November 1998 and as Vice Chairman since November
1998. Mr. Howard's background in healthcare includes two years as the Chief
Financial Officer of HGCC. Mr. Howard's experience also includes over ten years
with Fidelity Bank, Philadelphia, Pennsylvania and one year with Equibank,
Pittsburgh, Pennsylvania. Mr. Howard is a graduate of the Wharton School,
University of Pennsylvania, where he received a Bachelor of Science degree in
Economics in 1971. Mr. Howard is a member of the Board of Directors of
Multicare.
David C. Barr has served as Executive Vice President of the Company since
October 1988, as Chief Operating Officer since April 1997 and as Vice Chairman
since November 1998. Prior to joining Genesis, Mr. Barr was a principal of a
private consulting firm, Kane Maiwurm Barr, Inc., which provided management
consulting for small and medium-sized firms. Prior to forming this firm, he
served as Executive Vice President
59
<PAGE>
of Allegheny Beverage Corporation, a service conglomerate. During 1984 and
1985, Mr. Barr served with Equibank, Pittsburgh, Pennsylvania, where he held
several positions including Executive Vice President of Corporate Banking. Mr.
Barr graduated in 1972 from the University of Miami with a Bachelor of Science
degree in Accounting.
Michael G. Bronfein joined the Company in June 1996 as the President of
NeighborCare, which was acquired by Genesis in June 1996. Prior to joining
NeighborCare in 1991, Mr. Bronfein held the position of Senior Vice President
and Head of Commercial Finance Lending for Signet Banking Corporation in
Maryland, Virginia and Washington, D.C. In addition to his position with the
Company, Mr. Bronfein serves as the Chairman of the Board of Health Objects
Corporation and on the National Board of Advisors -- University of Maryland
School of Pharmacy. Mr. Bronfein received a Bachelors of Science Degree in
Accounting from the University of Baltimore. He is a Certified Public
Accountant and is a member of the AICPA and MACPA.
George V. Hager, Jr. has served the Company as Senior Vice President and
Chief Financial Officer since February 1994. Mr. Hager joined the Company in
July 1992 as Vice President and Chief Financial Officer. Mr. Hager was
previously partner in charge of the healthcare practice for KPMG LLP in the
Philadelphia office. Mr. Hager began his career at KPMG LLP in 1979 and has
over 15 years of experience in the healthcare industry. Mr. Hager received a
Bachelor of Arts degree in Economics from Dickinson College in 1978 and a
Master of Business Administration degree from Rutgers Graduate School of
Management. He is a certified public accountant and a member of the AICPA and
PICPA. Mr. Hager is a member of the Board of Directors of Multicare.
Maryann Timon has served as Senior Vice President for Managed Care since
May 1996. From January 1995 through May 1996 Ms. Timon served as Corporate Vice
President of the Managed Care Division. Ms. Timon joined the Company in
December 1990 to form and serve as President of a wholly-owned subsidiary,
Healthcare Services Network. Ms. Timon was previously President of Mercy
Ventures, Inc., a five-company healthcare specialty group owned by Mercy
Medical Center in Baltimore, Maryland. Ms. Timon has 25 years of experience
providing eldercare healthcare services. Ms. Timon received an Associate Degree
in Applied Science in Nursing in 1973 from the State University of New York at
Canton, a Bachelor of Science Degree in Nursing in 1976 from the State
University of New York at Utica/Rome and a Master of Gerontological Nursing
Degree in 1978 from the University of Rochester.
Marc D. Rubinger has served as Senior Vice President and Chief Information
Officer since April 1997. From November 1995 to April 1997 Mr. Rubinger served
as Vice President and Chief Information Officer. Prior to joining the Company,
Mr. Rubinger served as General Manager-Decision Support Systems of Shared
Medical Systems. From 1975 through 1986, Mr. Rubinger was a partner with Ernst
& Young LLP in their national healthcare consulting practice. Mr. Rubinger
received a Bachelor of Arts degree in Bioscience from Binghamton University in
1971 and a Masters of Health Administration and Planning from The George
Washington University in 1973.
Barbara J. Hauswald has served as Vice President and Treasurer since April
1998. Prior to joining the Company, Ms. Hauswald served as First Vice President
in the Health Care Banking Department of Mellon Bank, N.A. Ms. Hauswald has
over 16 years of commercial banking experience. She received a Bachelor of
Science degree in Commerce in 1981 from the University of Virginia.
James V. McKeon has served as Vice President and Corporate Controller
since April 1997. Mr. McKeon joined the Company in June 1994 as Director of
Financial Reporting and Investor Relations and served as Vice President of
Finance and Investor Relations from November 1995 to April 1997. From September
1986 until June 1994, Mr. McKeon was employed by KPMG LLP, most recently as
Senior Manager. He received a Bachelor of Science degree in Accountancy from
Villanova University in 1986. Mr McKeon is a certified public accountant and a
member of the AICPA and PICPA.
Jack R. Anderson has served as a director of the Company since November
1998. Since 1982, Mr. Anderson has been President of Calver Corporation, a
Dallas based health care consulting and investing firm. From September 1981
until May 1982, Mr. Anderson served as President of Manor Care, Inc. From 1970
until 1981, Mr. Anderson served as President and later as Chairman of Hospital
Affiliates International, Inc., a hospital management company in Nashville. Mr.
Anderson is a member of the Board of Directors of Horizon Health Corporation
and PacifiCare Health Systems, Inc.
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<PAGE>
Samuel H. Howard has served as a director of the Company since March 1988.
He is the founder and chairman of Xantus Corporation ("Xantus") and the founder
and President of Phoenix Communications Group, Inc. ("Phoenix Group") and
Phoenix Holdings, Inc. all of which are based in Nashville, Tennessee. Formed
in 1993, Xantus provides management services for managed care organizations,
including health maintenance organizations serving Tennessee's Medicaid
population through the innovative TennCare program which offers a managed care
approach to meeting the healthcare needs of Tennessee's Medicaid and uninsured
populations. Mr. Howard's past corporate and operations experience in the
healthcare industry include having served as the Senior Vice President of
Public Affairs for Hospital Corporation of America from August 1981 to January
1990, Vice President and Treasurer for Hospital Affiliates International Inc.,
and Vice President of Finance and Business for Meharry Medical College. In
addition, Mr. Howard was a financial analyst for General Electric and a White
House Fellow with U.S. Ambassador Arthur Goldberg. Mr. Howard is a member of
the Board of Directors of O'Charley's Inc.
Roger Lipitz has served as a director of the Company since March 1994.
From January 1994 until January 1996, Mr. Lipitz served on a consulting basis
as Director of Government Relations of the Company. From 1969 until its
acquisition by the Company in 1993, Mr. Lipitz served as Chairman of the Board
of Meridian Healthcare, Inc., a Maryland based long-term care company which
operated over 5,000 beds and related businesses. Mr. Lipitz is a past president
of the American Health Care Association, Health Facilities Association of
Maryland and the National Council of Health Care Services. Since 1994, he has
been Chairman of the Board of Allegis Health Management, Inc. (formerly known
as Global Health Management, Inc.), a privately held Maryland based long-term
care company. Mr. Lipitz is a member of the Board of Directors of Blue Cross
and Blue Shield of Maryland.
Stephen E. Luongo has served as a director of the Company since June 1985.
He currently is a partner in the law firm of Blank Rome Comisky & McCauley LLP.
Blank Rome Comisky & McCauley LLP serves as outside legal counsel for the
Company.
Alan B. Miller has served as a director of the Company since October 1993.
Since 1978, he has been Chairman of the Board, President and Chief Executive
Officer of Universal Health Services, Inc., a Pennsylvania based health
services company. Prior thereto, Mr. Miller was Chairman of the Board,
President and Chief Executive Officer of American Medicorp, Inc. Mr. Miller is
Chairman of the Board of Trustees of Universal Health Realty Income Trust and a
member of the Board of Directors of CDI Corp. and Penn Mutual Life Insurance
Company.
Richard R. Howard and Samuel H. Howard are not related.
61
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under an Indenture dated as of December
23, 1998 (the "Indenture") between the Company and The Bank of New York, as
trustee (the "Trustee"). Upon the effectiveness of the registration statement
with respect to the Exchange Offer (the "Exchange Offer Registration
Statement"), the Indenture will be subject to, and governed by, the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). Certain
capitalized terms used below are defined under "Certain Definitions." The
following summary of the material provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Indenture, including the
definitions of certain terms provided therein that are used herein but not
otherwise defined, and to terms made a part of the Indenture by the Trust
Indenture Act. A copy of the Indenture will be made available to holders of the
Notes upon request and is filed as an exhibit to this Exchange Offer
Registration Statement. See "Where You Can Find More Information."
General
The Exchange Notes and any Existing Notes that remain outstanding after
consummation of the Exchange Offer will be treated as a single class of
securities under the Indenture. The Exchange Notes offered hereby will mature
on January 15, 2009, will be limited to $125,000,000 aggregate principal amount
and will be unsecured obligations of the Company. The Exchange Notes will bear
interest at 97/8% per annum. Each Note will bear interest from December 23,
1998 or from the most recent interest payment date to which interest has been
paid, payable semiannually on January 15 and July 15 of each year, commencing
July 15, 1999 to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the January 1 or July 1 next preceding
such interest payment date. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company in the City of New York maintained for such purposes; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of Notes,
except in certain circumstances for any documentary, stamp or similar issue or
transfer taxes or other tax or other governmental charge that may be imposed in
connection therewith.
As discussed under "The Exchange Offer," pursuant to the Registration
Rights Agreement, the Company has agreed for the benefit of the holders of the
Notes, at the Company's cost, either
1. to effect a registered Exchange Offer under the Securities Act to
exchange the Notes for Exchange Notes, which will have terms identical in all
material respects to the Notes (except that the Exchange Notes will not contain
terms with respect to transfer restrictions or interest rate increases) or
2. to register the Notes for resale under the Securities Act through a
shelf registration statement (the "Shelf Registration Statement") in the event
that
(a) any changes in law or applicable interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer, or
(b) if for any other reason the Exchange Offer is not consummated within
150 days following the date of the original issue of the Notes, or
(c) if any holder of the Notes (other than the Initial Purchasers) is not
eligible to participate in the Exchange Offer, or
(d) upon the request of any Initial Purchaser, in certain circumstances.
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In the event that either
1. the Exchange Offer Registration Statement is not filed with the
Commission on or prior to the 45th calendar day following the date of original
issue of the Notes,
2. the Exchange Offer Registration Statement has not been declared
effective on or prior to the 120th calendar day following the date of original
issue of the Notes or
3. the Exchange Offer is not consummated or a Shelf Registration
Statement is not declared effective on or prior to the 150th calendar day
following the date of original issue of the Notes,
the interest rate borne by the Notes shall be increased by one-quarter of one
percent per annum following such 45-day period in the case of paragraph 1 above,
following such 120-day period in the case of paragraph 2 above or following such
150-day period in the case of paragraph 3 above, which rate will be increased by
an additional one-quarter of one percent per annum for each 90-day period that
any additional interest continues to accrue. The aggregate amount of such
increase from the original interest rate pursuant to these provisions will in no
event exceed one percent. Upon
(a) the filing of the Exchange Offer Registration Statement after the
45-day period described in paragraph 1 above,
(b) the effectiveness of the Exchange Offer Registration Statement after
the 120-day period described in paragraph 2 above or
(c) the consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, after the 150-day period
described in paragraph 3 above,
the interest rate borne by the Notes from the date of such filing, the date of
such effectiveness or the day before the date of consummation, as the case may
be, will be reduced to the original interest rate if the Company is otherwise
in compliance with this paragraph. See "The Exchange Offer -- Purpose and Effect
of the Exchange Offer."
Existing Notes that remain outstanding after the consummation of the
Exchange Offer and Exchange Notes issued in connection with the Exchange Offer
will be treated as a single class of securities under the Indenture.
Optional Redemption
The Notes will be subject to redemption at any time on or after January
15, 2004 at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or an integral
multiple of $1,000 at the following redemption prices (expressed as a
percentage of the principal amount), if redeemed during the 12-month period
beginning on January 15 of each of the years indicated below:
Year Redemption Price
- -------- -----------------
2004 104.937%
2005 102.468%
2006 101.234%
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest to the redemption date (subject to the right of
holders of record on relevant record dates to receive interest due on an
interest payment date).
In addition, at any time prior to January 15, 2002, the Company, at its
option, may use the net proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price equal to 109.875%
of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least 65% of the
initial aggregate principal amount of Notes remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 30 days
after the closing of the related Public Equity Offering and must consummate
such redemption within 60 days of the closing of the Public Equity Offering.
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If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable.
Sinking Fund
The Notes are not subject to the benefit of any sinking fund.
Change in Control
Upon the occurrence of any of the following events, each holder of the
Notes shall have the right to require that the Company repurchase such holder's
Notes in whole or in part in integral multiples of $1,000, at a purchase price
in cash in an amount equal to 101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of purchase, pursuant to
an offer (the "Change in Control Offer") made in accordance with the procedures
described below and the other provisions in the Indenture.
A "Change in Control" shall occur at any time that
1. any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), in a single transaction or through a series of related
transactions, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of more than 50% of the total
Voting Stock of the Company;
2. the Company consolidates or merges with or into another corporation or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates or merges with or into the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is changed into or exchanged for cash, securities or other
property, other than any such transaction where
(a) the outstanding Voting Stock of the Company is changed into or
exchanged for
(1) Voting Stock of the surviving corporation which is not Redeemable
Capital Stock or
(2) cash, securities or other property in an amount which could be
paid by the Company as a Restricted Payment as described under
"-- Certain Covenants--Limitation on Restricted Payments" (and
such amount shall be treated as a Restricted Payment subject to
the provisions in the Indenture described under "-- Certain
Covenants--Limitation on Restricted Payments"), and
(b) the holders of the Voting Stock of the Company immediately prior to
such transaction own, directly or indirectly, not less than 50% of the
Voting Stock of the surviving corporation immediately after such
transaction;
3. during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the stockholders of the Company was approved
by a vote of at least 662/3% of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
or
4. the Company is liquidated or dissolved or adopts a plan of
liquidation.
Within 30 days following a Change in Control and prior to the mailing of
the notice to the holders of Notes provided for in the next paragraph, the
Company covenants to
1. notify the lenders under the Credit Facility that a "Change in
Control" under the Indenture has occurred and
2. either
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(a) repay in full all Indebtedness under the Credit Facility and
permanently reduce the commitments of the lenders thereunder or offer
to repay in full all such Indebtedness and permanently reduce such
commitments and repay the Indebtedness and permanently reduce the
commitment of each lender who has accepted such offer or
(b) obtain the requisite consent under the Credit Facility to permit the
repurchase of the Notes as provided for in this covenant. The Company
shall first comply with the provisions of this paragraph before it
shall be required to repurchase the Notes in accordance with this
covenant, but any failure to comply with the covenant to offer to
purchase the Notes upon a Change in Control shall constitute an Event
of Default under the Indenture.
Within 30 days following any Change in Control, the Company shall send by
first-class mail, postage prepaid, to the Trustee and to each holder of Notes,
at his address appearing in the security register, a notice stating, among
other things, that a Change in Control has occurred, the purchase price, the
purchase date, which shall be a business day no earlier than 30 days nor later
than 60 days from the date such notice is mailed, and certain other procedures
that a holder of the Notes must follow to accept a Change in Control Offer or
to withdraw such acceptance.
The Company will comply, to the extent applicable, with the requirements
of Rule 14e-1 under the Exchange Act and other securities laws or regulations
in connection with the repurchase of the Notes as described above.
The use of the term "all or substantially all" in Indenture provisions
such as paragraph 2 of the definition of "Change in Control" and under "Merger
and Sale of Assets, etc." has no clearly established meaning under New York law
(which governs the Indenture) and has been the subject of limited judicial
interpretation in few jurisdictions. Accordingly, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person, which
uncertainty should be considered by prospective purchasers of the Notes.
The occurrence of certain of the events which would constitute a Change in
Control would constitute a default under the Credit Facility (which had
$1,084,800,000 in principal amount outstanding at December 9, 1998) which ranks
senior in right of payment to the Notes, and would require the Company to offer
to redeem
1. the $21,939,000 principal amount of the Company's 91/4% Mortgage
Bonds, which rank senior in right of payment to the Notes,
2. the $120,000,000 principal amount of the Company's 93/4% Notes, which
rank pari passu in right of payment to the Notes and
3. the $125,000,000 principal amount of the Company's 91/4% Notes, which
rank pari passu in right of payment to the Notes.
Future Indebtedness of the Company may also limit the ability of the Company to
repurchase the Notes upon the occurrence of a Change in Control or require the
Company to offer to redeem such Indebtedness upon a Change in Control.
Moreover, the exercise by the holders of the Notes of their right to require
the Company to purchase the Notes could cause a default under such
Indebtedness, even if the Change in Control itself does not, due to the
financial effect of such purchase on the Company. Finally, the Company's
ability to pay cash to the holders of the Notes upon a purchase may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
purchases. Under its current financial condition, the Company believes that
sufficient funds would not be available to make such required purchases. Even
if sufficient funds were otherwise available, the terms of the Credit Facility
will prohibit, subject to certain exceptions, the Company's prepayment of the
Notes prior to their scheduled maturity. Consequently, if the Company is not
able to prepay indebtedness outstanding under the Credit Facility and any other
Senior Indebtedness containing similar restrictions or obtain requisite
consents, the Company will be unable to fulfill its repurchase obligations if
holders of the Notes exercise their purchase rights following a Change in
Control, thereby resulting in a default under the Indenture. Furthermore, the
Change in Control provisions may in certain circumstances make more difficult
or discourage a takeover of the Company and the removal of incumbent
management.
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Subordination
The payment of the principal of, premium, if any, and interest on, the
Notes will be subordinated, as described below, in right of payment to the
prior payment in full in cash or Cash Equivalents of all Senior Indebtedness.
The Notes will be senior subordinated indebtedness of the Company ranking pari
passu with all other existing and future senior subordinated indebtedness of
the Company and senior to all existing and future Subordinated Indebtedness of
the Company.
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness no payment (other than any payments made pursuant to the
provisions described under "-- Satisfaction and Discharge of Indenture;
Covenant Defeasance" which have been deposited with the Trustee for at least
124 days) or distribution of any assets of the Company or any Subsidiary of any
kind or character (excluding certain permitted equity or subordinated
securities) shall be made by the Company or any Subsidiary or on behalf of, or
out of the property of, the Company, or received by the Trustee or any
Noteholder on account of the principal of, premium, if any, or interest on, the
Notes or on account of the purchase, redemption, defeasance or other
acquisition of or in respect of the Notes unless and until such default has
been cured, waived or has ceased to exist or such Designated Senior
Indebtedness shall have been paid in full in cash or Cash Equivalents.
Upon the occurrence of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated (a "Non-payment Default") and after the receipt by the Trustee and
the Company from a representative or the holder of any Designated Senior
Indebtedness of written notice of such Non-payment Default, no payment (other
than any payments made pursuant to the provisions described under "--
Satisfaction and Discharge of Indenture; Covenant Defeasance" which have been
deposited with the Trustee for at least 124 days) or distribution of any assets
of the Company or any Subsidiary of any kind or character (excluding certain
permitted equity or subordinated securities) may be made by the Company or any
Subsidiary or on behalf of, or out of the property of, the Company or received
by the Trustee or any Noteholder on account of any principal of, premium, if
any, or interest on, the Notes or on account of the purchase, redemption,
defeasance or other acquisition of or in respect of the Notes for the period
specified below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of
the Non-payment Default by the Trustee and the Company from a representative or
the holder of any Designated Senior Indebtedness and shall end on the earliest
of (subject to any blockage of payments that may then or thereafter be in
effect pursuant to the second preceding paragraph):
1. 179 days after receipt of such notice by the Trustee (provided any
Designated Senior Indebtedness as to which notice was given shall not
theretofore have been accelerated),
2. the date such Non-payment Default and all other Non-payment Defaults
as to which notice is also given after such period is initiated shall have been
cured or waived or shall have ceased to exist or the Senior Indebtedness
related thereto shall have been paid in full or
3. the date such Payment Blockage Period and any Payment Blockage Periods
initiated during such period shall have been terminated by written notice to
the Company or the Trustee from the senior representative and the holders of
the Designated Senior Indebtedness that have given notice of a Non-payment
Default at or after the initiation of such Payment Blockage Period,
after which, in the case of paragraphs 1, 2 or 3, the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments. In no event will a Payment Blockage Period extend beyond 179
days from the date of the receipt by the Trustee of the notice initiating the
first such Payment Blockage Period (such 179-day period referred to as the
"Initial Period"). Any number of notices of events of default may be given
during the Initial Period; provided that during any 365-day consecutive period
only one such period during which payment of principal of, or interest on, the
Notes may not be made may commence and the duration of such period may not
exceed 179 days. No Nonpayment Default with respect to Designated Senior
Indebtedness which existed or was continuing on the date of the
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commencement of any Payment Blockage Period will be, or can be, made the basis
for the commencement of a second Payment Blockage Period whether or not within
a period of 365 consecutive days, unless such default has been cured or waived
for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "Events of Default."
The Indenture will provide that in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relative to the
Company or its assets, or any liquidation, dissolution or other winding up of
the Company, whether voluntary or involuntary, or any assignment for the
benefit of creditors or other marshaling of assets or liabilities of the
Company, all Senior Indebtedness must be paid in full in cash or Cash
Equivalents before any payment or distribution (excluding certain permitted
equity or subordinated securities) is made on account of the principal of,
premium, if any, or interest on the Notes.
By reason of such subordination, in the event of liquidation or
insolvency, creditors of the Company who are holders of Senior Indebtedness may
recover more, ratably, than the holders of the Notes and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness
in full in cash or Cash Equivalents, and the Company may be unable to meet its
obligations fully with respect to the Notes.
"Senior Indebtedness" means all obligations of the Company or any
Subsidiary or Affiliate of the Company, now or hereafter existing, under or in
respect of the Credit Facility, whether for principal, interest (including
interest accruing after the filing of a petition by or against the Company
under any state or federal Bankruptcy Laws, whether or not such interest is
allowed as a claim after such filing in any proceeding under such law) or
otherwise (including obligations in respect of the lease financing facility of
the Credit Facility) and the principal of, premium, if any, and interest on all
other Indebtedness of the Company (other than the Notes), whether outstanding
on the date of the Indenture or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include
<PAGE>
1. Indebtedness evidenced by the Notes,
2. Indebtedness evidenced by the 93/4% Notes or the 91/4% Notes,
3. Indebtedness that is by its terms subordinate or junior in right of
payment to any Indebtedness of the Company,
4. Indebtedness which when incurred and without respect to any election
under Section 1111(b) of the Bankruptcy Law is without recourse to the Company,
5. Indebtedness which is represented by Redeemable Capital Stock,
6. Indebtedness for goods, materials or services purchased in the
ordinary course of business or Indebtedness consisting of trade payables or
other current liabilities (other than any current liabilities owing under, or
in respect of, the Credit Facility),
7. Indebtedness of or amounts owed by the Company for compensation to
employees or for services,
8. any liability for federal, state, local or other taxes owed or owing
by the Company,
9. Indebtedness of the Company to a Subsidiary of the Company or any
other Affiliate of the Company or any of such Affiliate's subsidiaries,
10. that portion of any Indebtedness which at the time of issuance is
issued in violation of the Indenture and
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11. amounts owing under leases (other than Capital Lease Obligations,
which for purposes of this section includes, without limitation, obligations in
respect of the lease financing facility of the Credit Facility).
The Notes shall rank pari passu in right of payment with the Indebtedness
evidenced by the 93/4% Notes and the 91/4% Notes.
"Designated Senior Indebtedness" is defined as (1) all Senior Indebtedness
under, or in respect of, the Credit Facility and (2) any other Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount outstanding, together with any commitments to lend additional amounts,
of at least $30,000,000 and is specifically designated in the instrument
evidencing such Senior Indebtedness as "Designated Senior Indebtedness."
As of December 31, 1998, the aggregate amount of Senior Indebtedness was
approximately $1,114,576,000 (which included approximately $1,053,568,000 of
indebtedness, approximately $26,432,000 of lease obligations of subsidiaries,
approximately $22,776,000 of indebtedness of other persons, all of which are
guaranteed by the Company, and approximately $11,800,000 of letters of credit
issued under the Company's Credit Facility primarily related to the Company's
self-insurance programs) and as of such date the aggregate amount of
liabilities of the subsidiaries of the Company, which consist primarily of
trade payables and accrued compensation, that will effectively rank senior to
the Notes was approximately $196,687,000. See "Capitalization." As of December
31, 1998, there were also outstanding $21,939,000 principal amount of the
Company's 91/4% Mortgage Bonds which will rank senior in right of payment to
the Notes and $120,000,000 principal amount of the 93/4% Notes and $125,000,000
principal amount of the 91/4% Notes which will rank pari passu in right of
payment to the Notes. The Notes will rank senior to all other subordinated
indebtedness of the Company. The Credit Facility is, secured by the stock and
partnership interests of the Company's subsidiaries and first priority liens on
the Company's accounts receivable, inventory and all other personal property
and substantially all of the Company's subsidiaries are co-obligors of the
Credit Facility. See "Risk Factors" and "Capitalization."
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any
of its Subsidiaries to, create, incur, assume, or directly or indirectly
guarantee or in any other manner become directly or indirectly liable for the
payment of, any Indebtedness (including any Acquired Indebtedness but excluding
Permitted Indebtedness) unless at the time of such event and after giving
effect thereto on a pro forma basis the Company's Fixed Charge Coverage Ratio
for the four full fiscal quarters immediately preceding such event, taken as
one period, calculated on the assumption that (1) such Indebtedness had been
incurred on the first day of such four-quarter period and (2) any acquisition
or disposition by the Company and its Subsidiaries of any assets out of the
ordinary course of business, or any company or business facility, in each case
since the first day of its last four completed fiscal quarters, had been
consummated on such first day of such four-quarter period, would have been at
least 2.00 to 1.00.
For purposes of determining compliance with this covenant, in the event
that an item of proposed Indebtedness meets the criteria of more than one of
the categories described in clauses (a) through (l) of Permitted Indebtedness
as of the date of incurrence thereof or is entitled to be incurred pursuant to
the first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant and the payment of dividends on
Redeemable Capital Stock in the form of additional shares of the same class of
Redeemable Capital Stock will not be deemed an issuance of Redeemable Capital
Stock.
Limitation on Restricted Payments. The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
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1. declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of the Company (other than dividends or distributions
payable solely in shares of Qualified Capital Stock of the Company or in
options, warrants or other rights to acquire Qualified Capital Stock of the
Company);
2. purchase, redeem, defease or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any Wholly
Owned Subsidiary of the Company) or any option, warrant or other right to
acquire such Capital Stock of the Company or any Affiliate thereof;
3. make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value in each case, prior to any scheduled
repayment, or maturity, any Subordinated Indebtedness; or
4. make any Investment in any Person (other than any Permitted
Investment) unless the Person thereby becomes a Wholly Owned Subsidiary; (such
payments described in (1) through (4) collectively, "Restricted Payments"),
unless at the time of and after giving effect to the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution),
(a) no Default or Event of Default shall have occurred and be continuing
and such Restricted Payment shall not be an event which is, or after
notice or lapse of time or both, would be, an "event of default" under
the terms of any Indebtedness of the Company or any Subsidiary;
(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of "-- Limitation on
Indebtedness" (other than Permitted Indebtedness); and
(c) the aggregate amount of all Restricted Payments (plus, without
duplication, dividends and distributions paid to any Person other than
the Company, a Wholly Owned Subsidiary or a Permitted Joint Venture as
permitted by paragraph (b) under "-- Restrictions on Preferred Stock
of Subsidiaries and Subsidiary Distributions" herein and any
Restricted Payments made pursuant to clauses 1, 4, 5 and 6 of the
succeeding paragraph) declared or made after the date of the Indenture
shall not exceed the sum of:
(1) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on October 7, 1996
and ending on the last day of the Company's last fiscal quarter
ending prior to the date of such proposed Restricted Payment (or,
if such aggregate cumulative Consolidated Net Income shall be a
loss, minus 100% of such loss);
(2) the aggregate Net Cash Proceeds received after October 7, 1996 by
the Company as capital contributions to the Company;
(3) the aggregate Net Cash Proceeds received after October 7, 1996 by
the Company from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock (other than Redeemable
Capital Stock) of the Company or any options or warrants to
purchase such shares (other than issuances in respect of clause
(ii) of the subsequent paragraph) of Capital Stock (other than
Redeemable Capital Stock) of the Company;
(4) the aggregate Net Cash Proceeds received after October 7, 1996 by
the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Capital
Stock of the Company;
(5) the aggregate Net Cash Proceeds received after October 7, 1996 by
the Company for debt securities that have been converted into or
exchanged for Qualified Capital Stock of the Company to the
extent such debt securities are originally sold for cash plus the
aggregate cash received by the Company at the time of such
conversion or exchange; and
(6) other Restricted Payments in an aggregate amount not to exceed
$10,000,000.
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None of the foregoing provisions shall be deemed to prohibit the following
Restricted Payments so long as in the case of clauses 2, 3, 5 and 6 there is no
Default or Event of Default continuing:
1. dividends paid within 60 days after the date of declaration if at the
date of declaration, such payment would be permitted by the provisions of the
preceding paragraph and such payment shall be deemed to have been paid on such
date of declaration for purposes of the calculation required by the provisions
of the foregoing paragraph;
2. the redemption, repurchase or other acquisition or retirement of any
shares of any class of Capital Stock of the Company or Subordinated
Indebtedness in exchange for, or out of the net proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary) of shares of Qualified
Capital Stock of the Company; provided that any net proceeds from the issue and
sale of such Qualified Capital Stock are excluded from clause (c)(3) of the
foregoing paragraph;
3. the redemption, repurchase, or other acquisition or retirement of
Subordinated Indebtedness of the Company (other than Redeemable Capital Stock)
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, new Indebtedness of the Company so long as
(a) the principal amount of such new Indebtedness does not exceed the
principal amount of the Indebtedness being so redeemed, repurchased,
acquired or retired for value (plus the amount of any premium required
to be paid under the terms of the instrument governing the
Indebtedness being so redeemed, repurchased, acquired or retired),
(b) such Indebtedness is subordinated to Senior Indebtedness and the Notes
at least to the same extent as such Subordinated Indebtedness so
purchased, exchanged, redeemed, repurchased, acquired or retired for
value,
(c) such Indebtedness has a Stated Maturity for its final scheduled
principal payment later than the Stated Maturity for the final
scheduled principal payment of the Notes and
(d) such Indebtedness has an Average Life to Stated Maturity equal to or
greater than the remaining Average Life to Stated Maturity of the
Notes;
4. any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture from a physician or other healthcare provider which is
required to be purchased, redeemed or otherwise acquired by applicable law;
5. in addition to the transactions covered by clause (4) of this
paragraph, any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture; or
6. the making of any payment pursuant to any guarantee of Indebtedness of
a Permitted Joint Venture.
Restrictions on Preferred Stock of Subsidiaries and Subsidiary
Distributions. (a) The Company will not permit any Subsidiary to issue any
Preferred Stock (other than Preferred Stock issued prior to the date of the
Indenture or to the Company or a Wholly Owned Subsidiary (collectively,
"Permitted Preferred Stock")) or permit any Person (other than the Company or a
Wholly Owned Subsidiary) to own or hold any interest in any Preferred Stock of
any Subsidiary, other than with respect to any Preferred Stock issued prior to
the date of the Indenture, unless a Subsidiary would be entitled to create,
incur or assume Indebtedness pursuant to the covenant described under "--
Limitation on Indebtedness" in the aggregate principal amount equal to the
aggregate liquidation value of the Preferred Stock to be issued.
(b) The Company will not, and will not permit any Subsidiary to, declare
or pay dividends or distributions on any Capital Stock of such
Subsidiary to any Person (other than to the Company or any Wholly
Owned Subsidiary or any lender in its capacity as a pledgee of Capital
Stock of any Subsidiary under the Credit Facility); provided, that the
foregoing shall not prohibit
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(1) the Company or any Subsidiary from making any payment of
dividends or distributions on the Capital Stock of any Subsidiary
in the aggregate up to the amount of Restricted Payments that the
Company could make at any time pursuant to the covenant described
under "-- Limitation on Restricted Payments;"
(2) the purchase, redemption, or other acquisition of the Capital
Stock of a Permitted Joint Venture from a physician or other
healthcare provider which is required to be purchased, redeemed
or otherwise acquired by applicable law; or
(3) the payment of pro rata dividends or distributions to holders of
minority interests in the Capital Stock of a Subsidiary made in
accordance with the terms of the Agreement pursuant to which such
payment is made or
2. in addition to the transactions covered by clause 1(a) of this
paragraph, in the event no Default or Event of Default has occurred and is
continuing, the purchase, redemption, or other acquisition of the Capital Stock
of a Permitted Joint Venture.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property
or services) with any Affiliate of the Company (other than a Wholly Owned
Subsidiary or a Permitted Joint Venture) unless
1. such transaction or series of related transactions is on terms that
are no less favorable to the Company or such Subsidiary, as the case may be,
than would be available in a comparable transaction in arm's-length dealings
with an unrelated third party and
2. with respect to a transaction or series of related transactions
involving payments in excess of $5,000,000 in the aggregate, the Company
delivers an Officers' Certificate to the Trustee certifying that
(a) such transaction complies with paragraph 1 above and
(b) such transaction or series of related transactions shall have been
approved by a majority of the independent directors of the Board of
Directors of the Company; provided, however, that the foregoing
restriction shall not apply to
(1) any transaction or series of related transactions entered into
prior to the date of the Indenture,
(2) the payment of reasonable and customary regular fees to directors
of the Company or any of its Subsidiaries who are not employees
of the Company or any Affiliate or
(3) the Company's employee compensation and other benefit
arrangements.
Disposition of Proceeds of Asset Sales. (a) The Company will not, and will
not permit any Subsidiary to, make any Asset Sale unless
1. the Company or such Subsidiary receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the shares or assets
subject to such Asset Sale (as determined by the Board of Directors of the
Company and evidenced in a board resolution whose determination shall be
conclusive) and
2. at least 75% of the proceeds from such Asset Sale when received
consists of cash or Cash Equivalents;
provided, however, any Asset Sale which constitutes a Permitted Investment under
paragraphs 7 or 8 of the definition of Permitted Investment shall not be
subject to the condition set forth in paragraph 2 of this sentence.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any outstanding Senior
Indebtedness as required by the terms thereof, or, if not so required
to be applied, the Company determines not to apply such Net Cash
Proceeds to the prepayment of such Senior Indebtedness or if no such
Senior Indebtedness is outstanding,
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then the Company may within one year of the Asset Sale, invest (or
enter into a legally binding agreement to invest) the Net Cash
Proceeds in properties and assets that (as determined by the Board of
Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) replace the properties and assets that were the
subject of the Asset Sale or in properties and assets that will be
used in the businesses of the Company, its Wholly Owned Subsidiaries
or its Permitted Joint Ventures existing on the date of the Indenture
or in any Healthcare Related Business. If any such legally binding
agreement to invest any Net Cash Proceeds is terminated, then the
Company may invest such Net Cash Proceeds, prior to the end of such
one-year period or six months from such termination, whichever is
later, in the business of the Company, its Wholly Owned Subsidiaries
or Permitted Joint Ventures or in any Healthcare Related Business as
provided above. The amount of such Net Cash Proceeds neither used to
repay or prepay Senior Indebtedness nor used or invested as set forth
in this paragraph (after the periods specified in this paragraph)
constitutes "Excess Proceeds."
(c) Subject to paragraph (f) below, when the aggregate amount of Excess
Proceeds equals $10,000,000 or more, the Company shall apply the
Excess Proceeds to the repayment of the Notes and other Indebtedness
that is pari passu with the Notes containing provisions similar to
those set forth in the Indenture as follows: the Company shall make an
offer to purchase (an "Offer") from all holders of the Notes and other
pari passu Indebtedness in accordance with the procedures set forth in
the Indenture and such other pari passu Indebtedness in the maximum
principal amount (expressed as a multiple of $1,000 in the case of the
Notes) of Notes and such other pari passu Indebtedness that may be
purchased out of an amount (the "Asset Sale Offer Amount") equal to
the product of such Excess Proceeds multiplied by a fraction, the
numerator of which is the outstanding principal amount of the Notes
and such other pari passu Indebtedness, and the denominator of which
is the sum of the outstanding principal amount of the Notes and such
other pari passu Indebtedness (subject to proration in the event such
amount is less than the aggregate Offered Price (as defined herein) of
all Notes and such other pari passu Indebtedness tendered). The offer
price shall be payable in cash in an amount equal to 100% of the
principal amount of the Notes and such other pari passu Indebtedness
plus accrued and unpaid interest, if any, to the date such Offer is
consummated (the "Offered Price"), in accordance with the procedures
set forth in the Indenture and such other pari passu Indebtedness. To
the extent that the aggregate Offered Price of the Notes and such
other pari passu Indebtedness tendered pursuant to an Offer is less
than the Asset Sale Offer Amount relating thereto (such shortfall
constituting a "Deficiency"), the Company may use such Deficiency, or
a portion thereof, in the business of the Company, its Wholly Owned
Subsidiaries or its Permitted Joint Ventures or any Healthcare Related
Business. Upon completion of the purchase of all the Notes and such
other pari passu Indebtedness tendered pursuant to an Offer, the
amount of Excess Proceeds shall be reset at zero.
(d) Whenever the Excess Proceeds received by the Company exceed
$10,000,000, in the case of the Notes, such Excess Proceeds shall be
set aside by the Company in a separate account pending:
1. deposit with the Trustee or a paying agent of the amount required to
purchase the Notes tendered in an Offer,
2. delivery by the Company of the Offered Price to the holders of the
Notes tendered in an Offer and
3. application, as set forth above, of Excess Proceeds for general
corporate purposes.
Such Excess Proceeds may be invested in Temporary Cash Investments, provided
that the maturity date of any investment made after the amount of Excess
Proceeds exceeds $10,000,000 shall not be later than the Offer Date. The
Company shall be entitled to any interest or dividends accrued, earned or paid
on such Temporary Cash Investments. The Company shall apply the Excess Proceeds
to the repayment of other pari passu Indebtedness pursuant to an Offer in
accordance with the provisions of such other pari passu Indebtedness.
(e) If the Company becomes obligated to make an Offer pursuant to clause
(c) above, the Notes shall be purchased by the Company, at the option
of the holder thereof, in whole or in part in integral
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multiples of $1,000, on a date that is not earlier than 30 days and
not later than 60 days from the date the notice is given to holders,
or such later date as may be necessary for the Company to comply with
the requirements under the Exchange Act, subject to proration in the
event the amount of Excess Proceeds is less than the aggregate Offered
Price of all Notes tendered and to satisfaction by or on behalf of the
holder of the requirements set forth in clause (f) below.
(f) In the event that the Company shall be unable to purchase Notes
from holders thereof in an Offer because of the provisions:
1. of applicable law,
2. of the Company's loan agreements, indentures or other contracts in
existence on the date of the Indenture,
3. permitted to exist or become effective by subparagraph (h)(2) below or
4. of the Credit Facility, the Company need not make an Offer.
The Company shall then be obligated to:
1. invest the Excess Proceeds in properties and assets to replace the
properties and assets that were the subject of the Asset Sale or in properties
and assets that (as determined by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) will be used in the
businesses of the Company, its Wholly Owned Subsidiaries or its Permitted Joint
Ventures existing on the date of the Indenture or in any Healthcare Related
Business or
2. apply the Excess Proceeds to repay Senior Indebtedness.
(g) The Company shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, in connection with an
Offer.
(h) The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than
restrictions existing under:
1. Indebtedness as in effect on the date of the Indenture or
2. any Senior Indebtedness existing on the date of the Indenture or
thereafter) that would materially impair the ability of the Company to make an
Offer to purchase the Notes upon an Asset Sale or, if such Offer is made, to
pay for the Notes tendered for purchase.
Limitation on Liens Securing Subordinated Indebtedness. The Company will
not, and will not permit any Subsidiary to, create, incur, assume or suffer to
exist any Liens of any kind upon any of their respective assets or properties
now owned or acquired after the date of the Indenture or any income or profits
therefrom securing:
1. any Indebtedness of the Company which is expressly by its terms
subordinate or junior in right of payment to any other Indebtedness of the
Company, unless the Notes are equally and ratably secured; provided that, if
such Indebtedness which is expressly by its terms subordinate or junior in
right of payment to any other Indebtedness of the Company is expressly
subordinate to the Notes, the Lien securing such subordinated or junior
Indebtedness shall be subordinate and junior to the Lien securing the Notes
with the same relative priority as such subordinated or junior Indebtedness
shall have with respect to the Notes; provided, further, that this paragraph 1
shall not be applicable to any Liens securing any such Indebtedness which
became Indebtedness of the Company pursuant to a transaction permitted under
"-- Merger and Sale of Assets, etc." or Liens securing Acquired Indebtedness
and, in each case, which Liens were in existence at the time of such
transaction or incurrence of such Acquired Indebtedness (unless such
Indebtedness was incurred in connection with, or in contemplation of, such
transaction or incurrence of such Acquired Indebtedness), so long as such Liens
do not extend to or cover any property or assets of the Company or any
Subsidiary other than property or assets acquired in such transaction or
securing such Acquired Indebtedness, or
2. any assumption, guarantee or other liability of any Subsidiary in
respect of any Indebtedness of the Company which is expressly by its terms
subordinate or junior in right of payment to any other Indebtedness
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of the Company, unless the substantially similar assumption, guarantee or other
liability of such Subsidiary in respect of the Notes is equally and ratably
secured; provided that, if such subordinated Indebtedness is expressly by its
terms subordinate or junior to the Notes, then the Lien securing the
assumption, guarantee or other liability of such Subsidiary in respect of such
subordinated or junior Indebtedness shall be subordinate and junior to the Lien
securing the assumption, guarantee or other liability of such Subsidiary in
respect of the Notes with the same relative priority as such subordinated or
junior Indebtedness shall have with respect to the Notes; provided, further,
that this paragraph 2 shall not be applicable to Liens securing any such
assumption, guarantee or other liability which existed at the time such
Subsidiary became a Subsidiary and which Liens were in existence at the time of
such transaction (unless such assumption, guarantee or other liability was
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary), so long as such Liens do not extend to or cover any property or
assets of the Company or any Subsidiary other than the property or assets of
such Person.
Limitation on Other Senior Subordinated Indebtedness. The Company will not
create, incur, assume, guarantee or in any other manner become liable with
respect to any Indebtedness, other than the Notes, that is subordinate in right
of payment to any Senior Indebtedness, unless such Indebtedness is also pari
passu with, or subordinate in right of payment to, the Notes pursuant to
subordination provisions substantially similar to those contained in the
Indenture.
Limitation on Issuance of Guarantees of Subordinated Indebtedness. (a) The
Company will not permit any Subsidiary, directly or indirectly, to assume,
guarantee or in any other manner become liable with respect to any Indebtedness
of the Company which is expressly by its terms subordinate or junior in right
of payment to any other Indebtedness of the Company unless
1. such Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a guarantee of payment of the Notes by
such Subsidiary and
(a) if any such assumption, guarantee or other liability is subordinated,
the guarantee under the supplemental indenture shall be subordinated
to the same extent as the Notes are subordinated to Senior
Indebtedness of the Company under the Indenture and
(b) if such subordinated or junior Indebtedness is by its terms expressly
subordinated to the Notes, any such assumption, guarantee or other
liability of such Subsidiary with respect to such subordinated or
junior Indebtedness shall be subordinated to such Subsidiary's
assumption, guarantee or other liability with respect to the Notes to
the same extent as such subordinated or junior Indebtedness is
subordinated or junior to the Notes under the Indenture; and
2. such Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Subsidiary as
a result of any payment by such Subsidiary under its Guarantee.
(b) Each guarantee created pursuant to the provisions described in the
foregoing paragraph is referred to as a "Guarantee" and the issuer of
each such Guarantee is referred to as a "Guarantor." Notwithstanding
the foregoing, any Guarantee by a Subsidiary of the Notes shall
provide by its terms that it (together with any Liens arising from
such Guarantee) shall be automatically and unconditionally released
and discharged upon (i) any sale, exchange or transfer, to any Person
not an affiliate of the Company, of all of the Company's Capital Stock
in, or all or substantially all the assets of, such Subsidiary, which
is in compliance with the Indenture or (ii) the release or discharge
of the assumption, guarantee or other liability which resulted in the
creation of such Guarantee.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
restriction of any kind, on the ability of any Subsidiary to:
1. pay dividends or make any other distribution on its Capital Stock to the
Company or any other Subsidiary,
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2. pay any Indebtedness owed to the Company or any other Subsidiary,
3. make any Investment in the Company or any other Subsidiary or
4. transfer any of its property or assets to the Company or any other
Subsidiary, except:
(a) any encumbrance or restriction existing under or by reason of
applicable law;
(b) any encumbrance or restriction existing under or by reason of
customary non-assignment provisions of any lease governing a leasehold
interest of the Company, or any Subsidiary;
(c) any restriction pursuant to an agreement in effect at or entered into
on the date of the Indenture as set forth in a schedule to the
Indenture;
(d) any restriction existing under the Credit Facility as in effect on the
date of the Indenture;
(e) any restriction, with respect to a Subsidiary that is not a Subsidiary
on the date of the Indenture, in existence at the time such Person
becomes a Subsidiary or created on the date it becomes a Subsidiary
and not incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary; and
(f) any restriction existing under any agreement that extends, renews,
refinances or replaces the agreements containing the restrictions in
the foregoing clauses (c) through (e), provided that the terms and
conditions of any such restrictions are not materially less favorable
to the holders of the Notes than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced
or replaced (in the opinion of the Board of Directors of the Company
whose determination shall be conclusive).
Reporting Requirements. The Indenture will require that the Company file
with the Commission the annual reports, quarterly reports and other documents
required to be filed with the Commission pursuant to Sections 13 and 15 of the
Exchange Act, whether or not the Company has a class of securities registered
under the Exchange Act. The Company will be required to file copies of such
reports and documents with the Trustee within 15 days after it files them with
the Commission.
Additional Covenants. The Indenture also contains covenants with respect to
the following matters:
1. payment of principal, premium and interest;
2. maintenance of an office or agency in the City of New York;
3. arrangements regarding the handling of money held in trust;
4. maintenance of corporate existence;
5. payment of taxes and other claims;
6. maintenance of properties; and
7. maintenance of insurance.
Merger and Sale of Assets, etc. The Company shall not, in a single
transaction or through a series of related transactions, consolidate with or
merge with or into any other Person or sell, assign, convey, transfer or lease
or otherwise dispose of all or substantially all of its properties and assets
as an entirety to any Person or group of affiliated Persons, or permit any of
its Subsidiaries to enter into any such transaction or transactions if such
transaction or transactions, in the aggregate, would result in a sale,
assignment, transfer, lease or disposal of all or substantially all of the
properties and assets of the Company and its Subsidiaries on a consolidated
basis to any other Person or group of affiliated Persons, unless at the time
and after giving effect thereto:
1. either
(a) the Company shall be the continuing corporation, or
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(b) the Person (if other than the Company) formed by such consolidation or
into which the Company is merged or the Person which acquires by
conveyance, transfer, lease or disposition the properties and assets
of the Company, substantially as an entirety (the "Surviving Entity")
shall be a corporation duly organized and validly existing under the
laws of the United States of America, any state thereof or the
District of Columbia and shall, in either case, expressly assume, by
an indenture supplemental to the Indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations
of the Company under the Notes and the Indenture, and the Indenture
shall remain in full force and effect;
2. immediately before and immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or a Subsidiary which becomes the obligation of
the Company or any of its Subsidiaries in connection with or as a result of
such transaction as having been incurred at the time of such transaction), no
Default or Event of Default shall have occurred and be continuing;
3. immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or the Surviving Entity if
the Company is not the continuing obligor under the Indenture) is at least
equal to the Consolidated Net Worth of the Company immediately before such
transaction;
4. immediately before and immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or a Subsidiary which becomes the obligation of
the Company or any of its Subsidiaries in connection with or as a result of
such transaction as having been incurred at the time of such transaction), the
Company (or the Surviving Entity if the Company is not the continuing obligor
under the Indenture) could incur $1.00 of additional Indebtedness under the
provisions of "-- Certain Covenants -- Limitation on Indebtedness" (other than
Permitted Indebtedness);
5. each Guarantor, if any, unless it is the other party to the
transactions described above, shall have by supplemental indenture confirmed
that its Guarantee of the Notes shall apply to such person's obligations under
the Indenture and the Notes; and
6. the Company or the Surviving Entity shall have delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger, transfer, lease or disposition and such
supplemental indenture comply with the terms of the Indenture.
Each Guarantor, if any (other than any Subsidiary whose Guarantee is being
released pursuant to the provisions under "-- Certain Covenants -- Limitation
on Issuance of Guarantees of Subordinated Indebtedness" as a result of such
transaction), shall not, and the Company will not permit a Guarantor to, in a
single transaction or through a series of related transactions, merge or
consolidate with or into any other corporation or other entity (other than the
Company or any Guarantor), or sell, assign, convey, transfer, lease or
otherwise dispose of its properties and assets on a consolidated basis
substantially as an entirety to any entity unless:
1. either
(a) such Guarantor shall be the continuing corporation or partnership or
(b) the entity (if other than such Guarantor) formed by such consolidation
or into which such Guarantor is merged or the entity which acquires by
sale, assignment, conveyance, transfer, lease or disposition the
properties and assets of such Guarantor substantially as an entirety
shall be a corporation or partnership organized and validly existing
under the laws of the United States, any state thereof or the District
of Columbia and shall expressly assume by an indenture supplemental to
the Indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of such Guarantor
under the Notes and the Indenture;
2. immediately before and immediately thereafter (and treating any
Indebtedness not previously an obligation of the Company or a Subsidiary which
becomes the obligation of the Company or any of its Subsidiaries in connection
with or as a result of such transaction as having been incurred at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; and
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3. such Guarantor shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger, sale, assignment, conveyance, transfer, lease or disposition and such
supplemental indenture comply with the Indenture, and thereafter all
obligations of the predecessor shall terminate.
Notwithstanding the foregoing, any Wholly Owned Subsidiary may:
1. merge or consolidate with or into any other Wholly Owned Subsidiary or
the Company or
2. sell, assign, convey, transfer, lease, or otherwise dispose of all or
substantially all of its properties and assets to any other Wholly Owned
Subsidiary or the Company;
provided, that
(a) any Person surviving any such merger or consolidation with a Guarantor
or which acquires substantially all of the assets of any Guarantor
(the "Acquisition Survivor") shall expressly assume by a supplemental
indenture or guarantee executed and delivered to the Trustee, in form
satisfactory to the Trustee, any obligations of such Subsidiary to
guarantee the obligations owing under the Indenture; and
(b) the Acquisition Survivor shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that the
transaction and the supplemental guarantee or indenture executed in
connection therewith comply with this provision and that all
conditions precedent provided for in the Indenture relating to such
transaction have been complied with.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of the Company or any Guarantor in accordance with the immediately
preceding paragraphs, the successor Person formed by such consolidation or into
which the Company or such Guarantor, as the case may be, is merged or the
successor Person to which such sale, assignment, conveyance, transfer, lease or
disposition is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company or such Guarantor, as the case may be,
under the Indenture and/or the Guarantees, as the case may be, with the same
effect as if such successor had been named as the Company or such Guarantor, as
the case may be, herein and/or in the Guarantees, as the case may be. When a
successor assumes all the obligations of its predecessor under the Indenture,
the Notes or a Guarantee, as the case may be, the predecessor shall be released
from those obligations; provided that in the case of a transfer by lease, the
predecessor shall not be released from the payment of principal and interest on
the Notes or a Guarantee, as the case may be.
Events of Default
An Event of Default will occur under the Indenture if:
1. there shall be a default in the payment of any interest on any Note when
it becomes due and payable, and such default shall continue for a period of 30
days;
2. there shall be a default in the payment of the principal of (or premium,
if any, on) any Note at its Stated Maturity;
3. (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or of any Guarantor under the Indenture
(other than a default in the performance or breach of a covenant or agreement
which is specifically dealt with elsewhere in the Indenture) and such default or
breach shall continue for a period of 30 days after written notice has been
given, by certified mail:
(1) to the Company by the Trustee or
(2) to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Notes;
(b) there shall be a default in the performance or breach of the
provisions of "-- Merger and Sale of Assets, etc.;"
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(c) the Company shall have failed to make or consummate an Offer in
accordance with the provisions of "-- Certain Covenants --
Dispositions of Proceeds of Asset Sales;" or
(d) the Company shall have failed to make or consummate a Change in
Control Offer in accordance with the provisions of "Change in
Control;"
4. one or more defaults shall have occurred under any agreements,
indentures or instruments under which the Company or any Subsidiary then has
outstanding Indebtedness in excess of $5,000,000 in the aggregate and, if not
already matured at its final maturity in accordance with its terms, such
Indebtedness shall have been accelerated;
5. one or more judgments, orders or decrees for the payment of money in
excess of $5,000,000, either individually or in the aggregate, shall be entered
against the Company or any Subsidiary or any of their respective properties
which is not fully covered by insurance, bond, surety or similar instrument and
shall not be discharged and there shall have been a period of 60 days during
which a stay of enforcement of such judgment or order, by reason of an appeal or
otherwise, shall not be in effect; or
6. certain events of bankruptcy, insolvency or reorganization with respect
to the Company or any Subsidiary shall have occurred.
If an Event of Default (other than as specified in paragraph 6) occurs and
is continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee upon the
request of the holders of not less than 25% in aggregate principal amount of the
Notes then outstanding shall, declare the principal of all the Notes due and
payable immediately in an amount equal to the principal amount of the Notes,
together with accrued and unpaid interest to the date the Notes become due and
payable, by a notice in writing to the Company (and to the Trustee, if given by
the holders of the Notes and, if the Credit Facility is in effect, to the
representative of the Credit Facility) and, upon any such declaration such
principal shall become immediately due and payable and the Trustee may, at its
discretion, proceed to protect and enforce the rights of the holders of Notes by
appropriate judicial proceedings. If an Event of Default specified in paragraph
6 above occurs and is continuing, then the principal of all the Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holder of the Notes.
At any time after a declaration of acceleration has been made and before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of the Notes
then outstanding, by written notice to the Company and the Trustee, may rescind
and annul such declaration and its consequences if:
1. the Company has paid or deposited with the Trustee a sum sufficient to
pay
(a) all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel,
(b) all overdue interest on all Notes,
(c) the principal of and premium, if any, on any Notes which have become
due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes and
(d) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes; and
2. all Events of Default, other than the non-payment of principal of the
Notes which have become due solely by such declaration of acceleration, have
been cured or waived.
The holders of not less than a majority in aggregate principal amount of
the Notes then outstanding may on behalf of the holders of all the Notes waive
any past Defaults under the Indenture, except a Default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note then outstanding.
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The Company is also required to notify the Trustee within five days of the
occurrence of any Default.
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions, provided that if it acquires any conflicting
interest it must eliminate such conflict upon the occurrence of an Event of
Default or else resign.
Satisfaction and Discharge of the Indenture; Covenant Defeasance
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to:
1. rights of registration of transfer and exchange and the Company's right
of optional redemption;
2. substitution of apparently mutilated, defaced, destroyed, lost or stolen
Notes;
3. rights of holders of the Notes to receive payments of principal and
interest on the Notes;
4. rights, obligations and immunities of the Trustee under the Indenture;
and
5. rights of the holders of the Notes as beneficiaries of the Indenture
with respect to the property so deposited with the Trustee payable to all or any
of them), if:
(a) the Company will have paid or caused to be paid the principal of and
interest on the Notes as and when the same will have become due and
payable or
(b) all outstanding Notes (except lost, stolen or destroyed Notes which
have been replaced or paid) have been delivered to the Trustee for
cancellation or
(c) (1) the Notes not previously delivered to the Trustee for
cancellation will have become due and payable or are by their
terms to become due and payable within one year or are to be
called for redemption under arrangements satisfactory to the
Trustee upon delivery of notice and
(2) the Company will have irrevocably deposited with the Trustee, as
trust funds, cash, in an amount sufficient to pay principal of
and interest on the outstanding Notes, to maturity or redemption,
as the case may be. Such trust may only be established if such
deposit will not result in a breach or violation of, or
constitute a default under, any agreement or instrument pursuant
to which the Company is a party or by which it is bound and the
Company has delivered to the Trustee an Officers' Certificate and
an opinion of counsel, each stating that all conditions related
to such defeasance have been complied with.
The Indenture will also cease to be in effect (except as described in 1
through 5 in the immediately preceding paragraph) and the Indebtedness on all
outstanding Notes will be discharged on the 123rd day after the irrevocable
deposit by the Company with the Trustee, in trust, specifically pledged as
security for, and dedicated solely to, the benefit of the holders of the Notes,
of cash, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in an amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay the principal of and
interest on the Notes then outstanding in accordance with the terms of the
Indenture and the Notes. Such a trust may only be established if:
1. such deposit will not result in a breach or violation of, or constitute
a default under, any agreement or instrument to which the Company is a party or
by which it is bound;
2. the Company has delivered to the Trustee an opinion of counsel stating
that:
(a) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or
(b) since the date of this Indenture there has been a change in the
applicable federal income tax law, in either case to the effect that,
based thereon such opinion shall confirm that, the holders of the
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Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and
will be subject to federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred;
3. the Company has delivered to the Trustee an opinion of counsel to the
effect that after the 123rd day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and
4. the Company has delivered to the Trustee an Officer's Certificate and
an opinion of counsel, each stating that all conditions related to the
defeasance have been complied with.
The Company and any Guarantor may also be released from its obligations
under certain covenants that are described in the Indenture and shall cease to
be subject to paragraph 3 of the first paragraph under "Events of Default,"
with respect to the Notes outstanding on the 123rd day after the irrevocable
deposit by the Company with the Trustee, in trust, specifically pledged as
security for, and dedicated solely to, the benefit of the holders of the Notes,
cash, U.S. Government Obligations, or a combination thereof, in an amount
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to
the Trustee, to pay the principal of and interest on the Notes then outstanding
in accordance with the terms of the Indenture and the Notes ("covenant
defeasance"). Such covenant defeasance may only be effected if:
1. such deposit will not result in a breach or violation of, or
constitute a default under, any agreement or instrument to which the Company or
any Guarantor is party or by which it is bound;
2. the Company delivers to the Trustee an Officers' Certificate and an
opinion of counsel to the effect that the holders of the Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and covenant defeasance and will be subject to federal income tax
on the same amount, in the same manner and at the same times as would have been
the case if such deposit and covenant defeasance had not occurred;
3. the Company has delivered to the Trustee an opinion of counsel to the
effect that after the 123rd day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and
4. the Company has delivered to the Trustee an Officer's Certificate and
an opinion of counsel, each stating that all conditions related to the covenant
defeasance have been complied with. Following such covenant defeasance, the
Company may omit to comply with and will have no liability in respect of any
term, condition or limitation set forth in such sections of the Indenture,
whether directly or indirectly by reason of any reference elsewhere in the
Indenture of such sections or by reason of any reference in such sections to
any other provision in the Indenture or in any other document, and such
omission will not constitute an Event of Default.
Modifications and Amendments
Modifications and amendments of the Indenture may be made by the Company,
the Guarantors, if any, and the Trustee with the consent of the holders of not
less than a majority in aggregate principal amount of the outstanding Notes;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby:
1. change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which the principal of any Note or any premium or the
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or, in the
case of redemption, on or after the redemption date);
2. amend, change or modify the obligation of the Company to make and
consummate a Change in Control Offer in the event of a Change in Control or
make and consummate the Offer with respect to any Asset Sales or modify any of
the provisions or definitions with respect thereto;
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3. reduce the percentage in principal amount of outstanding Notes, the
consent of whose holders is required for any such supplemental indenture or the
consent of whose holders is required for any waiver of compliance with certain
provisions of the Indenture or certain Defaults thereunder and their
consequences provided for in the Indenture or with respect to any Guarantee;
4. modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past defaults or
relating to the waiver of certain covenants, except to increase the percentage
of outstanding Notes required for such actions or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the holder of each Note affected thereby;
5. except as otherwise permitted under "-- Merger and Sale of Assets,
etc.," consent to the assignment or transfer by the Company or any Guarantor of
any of their rights and obligations under the Indenture; or
6. modify any of the provisions of the Indenture relating to the
subordination of the Notes or any Guarantee in a manner adverse to the holders
of the Notes. Any amendment to the subordination provisions of the Notes will
also require the consent of the holders of Designated Senior Indebtedness.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Governing Law
The Indenture, the Notes and any Guarantees will be governed by, and
construed in accordance with, the laws of the State of New York.
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person (1) existing at the
time such Person becomes a Subsidiary or (2) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or
the date the acquired Person becomes a Subsidiary.
"Affiliate" means with respect to any specified Person,
1. any other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified Person,
2. any other Person that owns, directly or indirectly, 5% or more of such
specified Person's Capital Stock,
3. any officer or director of (a) any such specified Person, (b) any
Subsidiary of such specified Person or (c) any Person described in paragraph 1
or 2 above or
4. any other Person having a relationship with any natural Person
described in paragraphs 1, 2 or 3 above by blood, marriage or adoption not more
remote than first cousin or any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with such other Person
described in this paragraph 4. For the purposes of this definition, "control"
when used with respect to any specified Person means the power to direct the
management and policies of such Person directly or indirectly, whether through
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of:
1. any Capital Stock of any Subsidiary;
2. all or substantially all of the properties and assets of any division
or line of business of the Company or its Subsidiaries; or
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3. any other properties or assets of the Company or any Subsidiary, other
than in the ordinary course of business.
For the purposes of this definition, the term "Asset Sale" shall not include:
1. any transfer of properties and assets that is governed by the
provisions described under "-- Merger, Sale of Assets, etc.,"
2. any transfer of properties or assets of the Company to any Wholly
Owned Subsidiary, or of any Subsidiary to the Company or any Wholly Owned
Subsidiary in accordance with the terms of the Indenture or
3. transfers of properties or assets in any twelve month period (a) the
Fair Market Value of which does not, in the aggregate, exceed 2.5% of the
Company's Consolidated Total Assets and (b) the Consolidated EBITDA related to
such properties or assets does not, in the aggregate, exceed 2.5% of the
Company's Consolidated EBITDA.
"Attributable Debt" in respect of a sale-leaseback transaction or an
operating lease in respect of a healthcare facility means, at the time of
determination, the present value (discounted at the interest rate implicit in
the lease, compounded semiannually) of the obligation of the lessee of the
property subject to such sale-leaseback transaction or operating lease in
respect of a healthcare facility for rental payments during the remaining term
of the lease included in such transaction including any period for which such
lease has been extended or may, at the option of the lessor, be extended or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of penalty (in which case the rental payments shall
include such penalty), after excluding all amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (1) the sum
of the products of (a) the number of years from the date of determination to
the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (2)
the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Code, as amended, or any
similar United States Federal or State law relating to bankruptcy, insolvency,
receivership, winding-up, liquidation, reorganization or relief of debtors or
any amendment to, succession to or change in any such law.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded on
the balance sheet of such Person as a capitalized lease obligation.
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"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or equity interests.
"Cash Equivalent" means:
1. any security, maturing not more than six months after the date of
acquisition, issued by the United States of America, or an instrumentality or
agency thereof and guaranteed fully as to principal, premium, if any, and
interest by the United States of America,
2. any certificate of deposit, time deposit, money market account or
bankers' acceptance, maturing not more than six months after the date of
acquisition, issued by any commercial banking institution that is a member of
the Federal Reserve System and that has combined capital and surplus and
undivided profits of not less than $500,000,000, whose debt has a rating, at
the time as of which any investment therein is made, of "P-1" (or higher)
according to Moody's Investors Service, Inc. or any successor rating agency, or
"A-1" (or higher) according to Standard & Poor's Corporation or any successor
rating agency and
3. commercial paper, maturing not more than three months after the date
of acquisition, issued by any corporation (other than an Affiliate or
Subsidiary of the Company) organized and existing under the laws of
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the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's Investors
Service, Inc. or any successor rating agency, or "A-1" (or higher) according to
Standard & Poor's Corporation or any successor rating agency.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
date of the Indenture such Commission is not existing and performing the duties
now assigned to it under the Trust Indenture Act, then the body performing such
duties at such time.
"Company" means Genesis Health Ventures, Inc., a corporation incorporated
under the laws of Pennsylvania, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person. To the extent necessary to comply
with the requirements of the provisions of Trust Indenture Act Sections 310
through 317 as they are applicable to the Company, the term "Company" shall
include any other obligor with respect to the Notes for purposes of complying
with such provisions.
"Consolidated EBITDA" of any Person means with respect to any
determination date, Consolidated Net Income before extraordinary items and
gains or losses realized in connection with Asset Sales, plus:
1. Consolidated Income Tax Expense, plus
2. consolidated depreciation expense, plus
3. consolidated amortization expense, plus
4. Consolidated Interest Expense, plus
5. all other non-cash items reducing Consolidated Net Income of such
Person and its Subsidiaries, determined on a consolidated basis in accordance
with GAAP, and less all non-cash items increasing Consolidated Net Income of
such Person and its Subsidiaries, determined on a consolidated basis in
accordance with GAAP, in each case, for such Person's prior four full fiscal
quarters for which financial results have been reported immediately preceding
the determination date.
"Consolidated Income Tax Expense" means for any period, as applied to any
Person, the provision for federal, state, local and foreign income taxes of
such Person and its Consolidated Subsidiaries for such period as determined in
accordance with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, as applied to any Person, the sum of:
1. the interest expense of such Person and its Consolidated Subsidiaries
for such period, on a consolidated basis, including, without limitation,
(a) amortization of debt discount,
(b) the net cost under interest rate contracts (including amortization
of discounts),
(c) the interest portion of any deferred payment obligation and
(d) accrued interest, plus
2. the interest component of the Capital Lease Obligations paid, accrued
and/or scheduled to be paid, or accrued by such Person during such period, in
each case as determined in accordance with GAAP, plus
3. Preferred Stock dividends in respect of Preferred Stock of the Company
or any Subsidiary held by Persons other than the Company or a Wholly Owned
Subsidiary.
For purposes of paragraph 3 of the preceding sentence, dividends shall be
deemed to be an amount equal to the actual dividends paid divided by one minus
the applicable actual combined Federal, state, local and foreign income tax
rate of the Company and its Consolidated Subsidiaries (expressed as a decimal).
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"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of the Company and its Consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (loss), by excluding:
1. all extraordinary gains or losses (less all fees and expenses relating
thereto),
2. the portion of net income of the Company and its Consolidated
Subsidiaries allocable to investments in unconsolidated Persons to the extent
that cash dividends or distributions have not actually been received by the
Company or one of its Consolidated Subsidiaries,
3. net income (or loss) of any Person combined with the Company or any of
its Subsidiaries in a "pooling of interests" basis attributable to any period
prior to the date of combination,
4. any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan,
5. any gains or losses (less all fees and expenses relating thereto) in
respect of dispositions of assets other than in the ordinary course of
business, or
6. the net income of any Subsidiary to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that income is not at
the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Subsidiary or its shareholders.
"Consolidated Net Worth" of any Person means the Consolidated
stockholders' equity (excluding Redeemable Capital Stock) of such Person and
its Consolidated Subsidiaries, as set forth on the most recent consolidated
balance sheet of such Person and its Consolidated Subsidiaries determined in
accordance with GAAP.
"Consolidated Rental Payments" of any Person means, for any period, the
aggregate rental obligations of such Person and its Consolidated Subsidiaries
(not including taxes, insurance, maintenance and similar expenses that the
lessee is obligated to pay under the terms of the relevant leases), determined
on a consolidated basis in conformity with GAAP, payable in respect of such
period under Attributable Debt or leases of real or personal property not
constituting Attributable Debt (net of income from subleases thereof, not
including taxes, insurance, maintenance and similar expenses that the sublessee
is obligated to pay under the terms of such sublease), whether or not such
obligations are reflected as liabilities or commitments on a consolidated
balance sheet of such Person and its Subsidiaries or in the notes thereto,
excluding, however, in any event,
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1. that portion of Consolidated Interest Expense of such Person
representing payments by such Person or any of its Consolidated Subsidiaries in
respect of Capital Lease Obligations (net of payments to such Person or any of
its Consolidated Subsidiaries under subleases qualifying as capitalized lease
subleases to the extent that such payments would be deducted in determining
Consolidated Interest Expense) and
2. the aggregate amount of amortization of obligations of such Person and
its Consolidated Subsidiaries in respect of such Capital Lease Obligations for
such period (net of payments to such Person or any of its Consolidated
Subsidiaries and subleases qualifying as capitalized lease subleases to the
extent that such payments would be deducted in determining such amortization
amount).
"Consolidated Total Assets" of any Person means the Consolidated total
assets of such Person and its Consolidated Subsidiaries, as set forth on the
most recent consolidated balance sheet of such Person and its Consolidated
Subsidiaries determined in accordance with GAAP.
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of such Person and each of its subsidiaries if and to the extent
the accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Credit Facility" means:
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1. the Third Amended and Restated Credit Agreement, dated October 9,
1997, as first amended on March 5, 1998, as second amended on August 28, 1998,
and as third amended on December 15, 1998 (the "Credit Facility"), with Mellon
Bank, N.A., Citibank USA, Inc., First Union National Bank and NationsBank,
N.A., as agents, as the same may be amended, restated, renewed, extended,
restructured, supplemented or otherwise modified from time to time,
2. any Loan Documents (as defined in the Third Amended and Restated
Credit Agreement as in effect from time to time) and any other documents or
instruments executed by the Company pursuant to or in connection with the Third
Amended and Restated Credit Agreement and
3. any credit agreement, loan agreement, note purchase agreement,
indenture or other agreement, document or instrument refinancing, refunding or
otherwise replacing the Third Amended and Restated Credit Agreement or any
other agreement deemed a Credit Facility under paragraphs 1, 2 or 3 hereof,
whether or not with the same agent, trustee, representative, lenders or
holders, regardless of whether the Third Amended and Restated Credit Agreement
or Credit Facility or any portion thereof was outstanding or in effect at the
time of such restatement, renewal, extension, restructuring, supplement or
modification. Without limiting the generality of the foregoing, the term
"Credit Facility" shall include any amendment, restatement, renewal, extension,
restructuring, supplement or modification to any Credit Facility and all
refundings, refinancings and replacements of any Credit Facility, including any
agreement:
(a) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
(b) adding or deleting borrowers or guarantors thereunder, so long as such
borrowers and guarantors include one or more of the Company and its
Subsidiaries and their respective successors and assigns, provided
that on the date thereof the addition of such borrower or guarantor
would not be prohibited by the definition of "Permitted Indebtedness"
and the provisions described under "-- Certain Covenants--Limitation
on Liens Securing Subordinated Indebtedness" and "-- Certain
Covenants--Limitation on Issuance of Guarantees of Subordinated
Indebtedness,"
(c) increasing the amount of Indebtedness incurred thereunder or available
to be borrowed thereunder provided such increase is permitted to be
incurred under the definition of "Permitted Indebtedness" or is or
will be permitted to be incurred under the provisions described under
"-- Certain Covenants--Limitation on Indebtedness" or
(d) otherwise altering the terms and conditions thereof in a manner not
prohibited by the definition of "Permitted Indebtedness" and the
provisions described under "-- Certain Covenants--Limitation on Liens
Securing Subordinated Indebtedness", "-- Certain Covenants--Limitation
on Issuance of Guarantees of Subordinated Indebtedness" and "--
Certain Covenants--Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries" and as such agreement may be
amended, renewed, extended, substituted, refinanced, replaced or
otherwise modified from time to time, and includes any agreement
extending the maturity of all or any portion of the Indebtedness
thereunder.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Eligible Accounts Receivables" as of any date means the book value of all
accounts receivables of the Company and its Subsidiaries that would be shown on
a Consolidated balance sheet of the Company and its Subsidiaries prepared on
such date in accordance with GAAP, which are not more than 180 days past their
due date and were entered into on normal payment terms.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"Fiscal Year" with respect to the Company shall mean the fiscal year of
the Company.
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"Fixed Charge Coverage Ratio" of any Person means, for any period, the
ratio of:
1. the sum of Consolidated Net Income, Consolidated Interest Expense,
Consolidated Income Tax Expense, and one-third of Consolidated Rental Payments
plus, without duplication, all depreciation, amortization and all other
non-cash charges (excluding any such non-cash charge constituting an
extraordinary item or loss or any non-cash charge which requires an accrual of
or a reserve for cash charges for any future period), in each case, for such
period, of the Company and its Subsidiaries on a Consolidated basis, as
determined in accordance with GAAP to
2. the sum of (a) Consolidated Interest Expense for such period and (b)
one-third of Consolidated Rental Payments for such period;
provided that in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma basis and
bearing a floating interest rate shall be computed as if the rate in effect on
the date of computation had been the applicable rate for the entire period.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, as
in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor which guarantees the
Indenture Obligations pursuant to a guarantee given in accordance with the
Indenture.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
Person through an agreement:
1. to pay or purchase such Indebtedness or to advance or supply funds for
the payment or purchase of such Indebtedness,
2. to purchase, sell or lease (as lessee or lessor) property, or to
purchase or sell services, primarily for the purpose of enabling the debtor to
make payment of such Indebtedness or to assure the holder of such Indebtedness
against loss,
3. to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring that
such property be received or such services be rendered),
4. to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial condition of
the debtor or
5. otherwise to assure a creditor against loss; provided that the term
"Guaranteed Debt" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"Guarantor" means any Person which guarantees the Indenture Obligations
pursuant to the Indenture.
"Healthcare Related Business" means a business, the majority of whose
revenues result from healthcare, long-term care, or managed care related
businesses or facilities, including businesses which provide insurance relating
to the costs of healthcare, long-term care or managed care services.
"Indebtedness" means, with respect to any Person, without duplication,
1. all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit or acceptances issued
under letter of credit facilities, acceptance facilities or other similar
facilities and in connection with any agreement to purchase, redeem, exchange,
convert or otherwise acquire for value any Capital Stock of such Person, or any
warrants, rights or options to acquire such Capital Stock, now or hereafter
outstanding,
2. all obligations of such Person evidenced by bonds, notes, debentures
or other similar instruments,
3. every obligation of such Person issued or contracted for as payment in
consideration of the purchase by such Person or an Affiliate of such Person of
the Capital Stock or substantially all of the assets of another
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Person or in consideration for the merger or consolidation with respect to
which such Person or an Affiliate of such Person was a party (other than any
obligation of such Person to pay an amount to another Person based on income in
respect of Capital Stock or assets which were purchased or in respect of such
merger to which such Person or an Affiliate was a party except for such
obligations which are required in accordance with GAAP to be classified as a
liability on the balance sheet of such Person),
4. all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade payables and other accrued current liabilities
arising in the ordinary course of business,
5. all obligations under Interest Rate Contracts of such Person,
6. all Capital Lease Obligations of such Person,
7. all indebtedness referred to in paragraphs 1 through 6, 9 and 10 of
other Persons and all dividends of other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon any property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness,
8. all Guaranteed Debt of such Person,
9. all Redeemable Capital Stock valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends
and
10. all Attributable Debt of such Person. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to
be determined in good faith by the Board of Directors of the issuer of such
Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes, including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all other
amounts due or to become due under or in connection with the Indenture, the
Notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the Notes, according to the terms thereof.
"Interest Rate Contracts" means interest rate swap agreements, interest
rate cap agreements, interest rate collar agreements, interest rate insurance,
and other agreements or arrangements designed to provide protection against
fluctuations in interest rates.
"Investments" means, with respect to any Person, directly or indirectly,
any advance, loan or other extension of credit (including any guarantee) or
capital contribution to (by means of any transfer of cash or other property
(tangible or intangible) to others, or any payment for property or services for
the account or use of others or otherwise), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or
other securities (including, without limitation, any interests in any
partnership or joint venture) issued or owned by any other Person.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired.
"Maturity" when used with respect to any Note means the date on which the
principal of such Note becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, or any redemption date
and whether by declaration of acceleration, Offer in respect of Excess
Proceeds, Change in Control Offer in respect of a Change in Control, call for
redemption or otherwise.
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"Net Cash Proceeds" means, with respect to any Asset Sale by any Person,
the proceeds thereof in the form of cash or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of, or
stock or other assets when disposed for, cash or Cash Equivalents (except to
the extent that such obligations are financed or sold with recourse to the
Company or any Subsidiary) net of:
1. brokerage commissions and other reasonable fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale,
2. provisions for all taxes payable as a result of such Asset Sale,
3. payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of such Asset
Sale,
4. amounts required to be paid to any Person (other than the Company or
any Subsidiary) owning a beneficial interest in the assets subject to the Asset
Sale and
5. appropriate amounts to be provided by the Company or any Subsidiary,
as the case may be, as a reserve, in accordance with GAAP, against any
liabilities associated with such Asset Sale and retained by the Company or any
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an Officers'
Certificate delivered to the Trustee.
"Permitted Indebtedness" means:
(a) Indebtedness of up to $300,000,000 outstanding principal amount under
the Credit Facility;
(b) any guarantee by the Company or any Subsidiary under the Credit
Facility;
(c) Indebtedness in existence on the date of the Indenture;
(d) Indebtedness of the Company pursuant to the Notes;
(e) Indebtedness evidenced by letters of credit issued in the ordinary
course of business consistent with past practice to support the
Company's or any Subsidiary's insurance or self-insurance obligations
(including to secure workers' compensation and other similar insurance
coverages);
(f) Interest Rate Contracts, to the extent that the notional principal
amount of such obligations does not exceed the amount of Indebtedness
outstanding or committed to be incurred on the date such Interest Rate
Contracts are entered into;
(g) Indebtedness of the Company to a Wholly Owned Subsidiary and
Indebtedness of a Subsidiary to the Company or another Subsidiary;
provided, however, that any subsequent issuance or transfer of any
Capital Stock or any other event which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any other
subsequent transfer of any such Indebtedness (except to the Issuer or
a Wholly Owned Subsidiary) shall be deemed, in each case to be
incurred and shall be treated as an incurrence for purposes of the
covenant described under "-- Limitation on Indebtedness" at the time
the Wholly Owned Subsidiary in question ceased to be a Wholly Owned
Subsidiary;
(h) any guarantees of Indebtedness by a Subsidiary entered into in
accordance with "-- Certain Covenants--Limitation on Issuance of
Guarantees of Subordinated Indebtedness";
(i) Indebtedness incurred by the Company or any Subsidiary consisting of
Purchase Money Obligations in an amount not to exceed $15,000,000 at
any one time outstanding;
(j) Indebtedness incurred by the Company or any Wholly Owned Subsidiary
consisting of Capital Lease Obligations in an amount not to exceed
$15,000,000 at any time outstanding;
(k) Indebtedness of the Company or any Wholly Owned Subsidiary, in
addition to that described in clauses (a) through (k) of this
definition of "Permitted Indebtedness," in an aggregate principal
amount outstanding at any given time not to exceed $40,000,000; and
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(l) any renewals, extensions, substitutions, refundings, refinancings or
replacements of any Indebtedness described in clauses (a) through (e)
of this definition of "Permitted Indebtedness," including any
successive renewals, extensions, substitutions, refundings,
refinancings or replacements, so long as:
1. any such new Indebtedness shall be in a principal amount that does not
exceed the principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the amount of any premium required to be paid
under the terms of the instrument governing such Indebtedness being refinanced
or the amount of any premium reasonably determined by the Company as necessary
to accomplish such refinancing through means of a tender offer or privately
negotiated transactions and, in each case, actually paid, plus the amount of
expenses of the Company incurred in connection with such refinancing;
2. in the case of any refinancing of Subordinated Indebtedness, such new
Indebtedness is made subordinate to the Notes at least to the same extent as the
Indebtedness being refinanced; and
3. any such new Subordinated Indebtedness has an Average Life to Stated
Maturity longer than the Average Life to Stated Maturity of the refinanced
Subordinated Indebtedness and a final Stated Maturity later than the final
Stated Maturity of the Notes.
"Permitted Investment" means
1. the Notes or any Guarantees;
2. Temporary Cash Investments;
3. Indebtedness of the Company to a Subsidiary and Indebtedness of a
Subsidiary to the Company or another Subsidiary;
4. Investments in existence on the date of the Indenture;
5. Investments in any Wholly Owned Subsidiary by the Company or any Wholly
Owned Subsidiary or any Investment in the Company by any Wholly Owned
Subsidiary;
6. receivables owing to the Company and its Subsidiaries if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms;
7. Investments in any Permitted Joint Ventures;
8. Investments in any Healthcare Related Businesses, provided that the
Company is able, at the time of such Investment and immediately after giving pro
forma effect thereto, to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the "Limitation on Indebtedness"
covenant;
9. Investments acquired or retained from another Person in connection with
any sale, conveyance, transfer, lease or other disposition of any properties or
assets to such Person in accordance with the covenant described under "--
Disposition of Asset Sales"; and
10. in addition to Permitted Investments described in the foregoing
paragraphs 1 through 9, Investments in the aggregate amount of $20,000,000 at
any one time outstanding.
"Permitted Joint Venture" means any Subsidiary which owns, operates or
services Healthcare Related Businesses.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
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"Preferred Stock," as applied to any Person, means Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Property" means, with respect to any Person, all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person.
"Public Equity Offering" means an underwritten public offering of common
stock (other than Redeemable Capital Stock) of the Company pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form
S-4, Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"Purchase Money Obligations" means any Indebtedness of the Company or any
Subsidiary incurred to finance the acquisition or construction of any Property
or business (including Indebtedness incurred within 90 days following such
acquisition or construction), including Indebtedness of a Person existing at
the time such Person becomes a Subsidiary or assumed by the Company or a
Subsidiary in connection with the acquisition of assets from such Person;
provided, however, that any Lien on such Indebtedness shall not extend to any
Property other than the Property so acquired or constructed.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms, by the terms of any security into which it is convertible or
exchangeable or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed prior to any Stated Maturity of the
principal of the Notes or is redeemable at the option of the holder thereof at
any time prior to any such Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to any such Stated Maturity
at the option of the holder thereof.
"Redemption Date" when used with respect to any Note to be redeemed
pursuant to any provision in the Indenture means the date fixed for such
redemption by or pursuant to the Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company subordinated
in right of payment to the Notes.
"Subsidiary" means:
1. a corporation
(a) at least 50% of the Voting Stock of which is at the time owned,
directly or indirectly, by the Company and
(b) of which the Company, directly or indirectly, has the right to elect a
majority of the members of the Board of Directors either as a result
of the ownership of a majority of the Voting Stock of such corporation
or pursuant to a shareholders or other voting agreement or
2. any partnership, joint venture, limited liability company or similar
entity at least 50% of the total equity and voting interests of which
(a) is at the time owned, directly or indirectly, by the Company whether
in the form of membership, general, special or limited partnership, or
otherwise and
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(b) the Company or any Wholly Owned Subsidiary is a controlling general
partner or otherwise controls such entity.
"Temporary Cash Investments" means:
1. any evidence of Indebtedness, maturing not more than one year after
the date of acquisition, issued by the United States of America, or an
instrumentality or agency thereof and guaranteed fully as to principal,
premium, if any, and interest by the United States of America,
2. any certificate of deposit, maturing not more than one year after the
date of acquisition, issued by, or time deposit of, a commercial banking
institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than
$500,000,000, whose debt has a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's Investors Service,
Inc. or any successor rating agency, or "A-1" (or higher) according to Standard
& Poor's Corporation or any successor rating agency and
3. commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-1" (or higher) according to Moody's Investors Service, Inc. or any
successor rating agency, or "A-1" (or higher) according to Standard & Poor's
Corporation or any successor rating agency.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which is owned by the Company or another Wholly Owned Subsidiary.
Book-Entry Delivery and Form
The certificates representing the Notes will be issued in fully registered
form. Except as described in the next paragraph, the Notes initially will be
represented by a Global Note in fully registered form without interest coupons
(the "Global Note") and will be deposited with, or on behalf of, The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC.
Existing Notes:
1. originally purchased by or transferred to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) ("Institutional Accredited Investors") who are not "qualified
institutional buyers" (as defined in Rule 144A) ("Qualified Institutional
Buyers"),
2. except as described below, purchased by or transferred to Persons
outside the United States pursuant to sales in accordance with Regulation S
under the Securities Act or
3. held by Qualified Institutional Buyers who elect to take physical
delivery of their certificates instead of holding their interest through the
Global Note (and which are then unable to trade through DTC) (collectively
referred to herein as the "Non-Global Purchasers"), will be in registered form
without interest coupons ("Certificated Notes"). Upon the transfer of
Certificated Notes initially issued to a Non-Global Purchaser or to a Qualified
Institutional Buyer, such Certificated Notes will, unless the transferee
requests otherwise or the Global Note has previously been exchanged in whole
for Certificated Notes, be exchanged for an interest in the Global Note.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the
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Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a participant, either directly or indirectly ("indirect participants").
Upon the issuance of the Global Note, DTC or is custodian will credit, on
its internal system, the respective principal amount of the individual
beneficial interests represented by such Global Note to the accounts of persons
who have accounts with such depository. Ownership of beneficial interests in
the Global Note will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer
of that ownership will be effected only through, records maintained by DTC or
its nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Notes represented by such Global Note for
all purposes under the Indenture and the Notes. No beneficial owners of an
interest in the Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture. Payments of the principal of, premium, if any, and
interest on the Global Note will be made to DTC or its nominee, as the case may
be, as the registered owner thereof. Neither the Company, the Trustee, nor any
paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment
of principal, premium, if any, or interest in respect of the Global Note will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such
Global Note, as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsiblity of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a Holder requires physical delivery of
Certificated Notes for any reason, including to sell Notes to persons in states
which require such delivery of such Notes or to pledge such Notes, such holder
must transfer its interest in the Global Note, in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture. Neither the
Company nor the Trustee will have any responsiblity for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations. Subject to certain
conditions, any person having a beneficial interest in the Global Note may,
upon request to the Trustee, exchange such beneficial interest for Notes in the
form of Certificated Notes. Upon any such issuance, the Trustee is required to
register such Certificated Notes in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). In
addition, if DTC is at any time unwilling or unable to continue as a depository
for the Global Note and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Note.
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CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax consequences as of the date hereof of the exchange of the Existing Notes
for the Exchange Notes and ownership of Notes by United States Holders as
described below. Except where noted, it deals only with Notes held as capital
assets by initial purchasers that purchased the Existing Notes at their issue
price and does not deal with special situations, such as those of dealers in
securities or currencies, financial institutions, tax-exempt entities, life
insurance companies, persons holding Notes as a part of a hedging, conversion
or constructive sale transaction or a straddle or holders of Notes whose
"functional currency" is not the U.S. dollar.
Furthermore, the discussion below is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "Service") will not
take a contrary view, and no ruling from the Service has been or will be
sought. Legislative, judicial or administrative changes or interpretations may
be forthcoming that could alter or modify the statements and conditions set
forth herein. Any such changes or interpretations may or may not be retroactive
and could affect the tax consequences to holders. Persons considering the
purchase, ownership or disposition of Notes should consult their own tax
advisors concerning the United States federal income tax consequences in light
of their particular situations as well as any consequences arising under the
laws of any other taxing jurisdiction.
Exchange Offer
The exchange of the Existing Notes for Exchange Notes pursuant to the
Exchange Offer should not be treated as an "exchange" for federal income tax
purposes because the Exchange Notes should not be considered to differ
materially in kind or extent from the Existing Notes. Rather, the Exchange
Notes received by a holder should be treated as a continuation of the Existing
Notes in the hands of such holder. As a result, there should be no federal
income tax consequences to holders exchanging Existing Notes for Exchange Notes
pursuant to the Exchange Offer.
Payments of Interest
Except as set forth below, interest on a Note will generally be taxable to
a United States Holder as ordinary income from domestic sources at the time it
is paid or accrued in accordance with the United States Holder's method of
accounting for tax purposes. As used herein, a "United States Holder" of a Note
means a holder that is:
1. a citizen or resident of the United States,
2. a corporation or partnership created or organized in or under the laws
of the United States or any political subdivision thereof,
3. an estate the income of which is subject to United States federal
income taxation regardless of its source or
4. a trust which is subject to the supervision of a court within the
United States and the control of one or more United States person as described
in section 7701(a)(30) of the Code.
A "Non-United States Holder" is a holder that is not a United States Holder.
Original Issue Discount
The Existing Notes were issued with OID in an amount equal to the
difference between their stated redemption price at maturity (the sum of all
payments to be made on the Existing Note other than "qualified stated
interest") and their "issue price." Since the Exchange Notes will constitute a
continuation of the Existing Notes for federal income tax purposes, the OID
rules applicable to the Existing Notes will continue to apply to the Exchange
Notes: United States Holders should be aware that they generally must include
OID
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in gross income in advance of the receipt of cash attributable to that income.
However, United States Holders of such Notes generally will not be required to
include separately in income cash payments received on the Notes, even if
denominated as interest, to the extent such payments do not constitute
qualified stated interest (as defined below).
This summary is based upon final Treasury regulations addressing debt
instruments issued with OID (the "OID Regulations").
The "issue price" of each Note was the first price at which a substantial
amount of that particular offering was sold (other than to an underwriter,
placement agent or wholesaler). The term "qualified stated interest" means
stated interest that is unconditionally payable in cash or in property (other
than debt instruments of the issuer) at least annually at a single fixed rate
or, subject to certain conditions, based on one or more interest indices.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. The stated interest
payments on the Notes are qualified stated interest.
The amount of OID includible in income by the initial United States Holder
of an Original Issue Discount Note is the sum of the "daily portions" of OID
with respect to the Note for each day during the taxable year or portion of the
taxable year in which such United States Holder held such Note ("accrued OID").
The daily portion is determined by allocating to each day in any "accrual
period" a pro rata portion of the OID allocable to that accrual period. The
"accrual period" for an Original Issue Discount Note may be of any length and
may vary in length over the term of the Note, provided that each accrual period
is no longer than one year and each scheduled payment of principal or interest
occurs on the first day or the final day of an accrual period. The amount of
OID allocable to any accrual period is an amount equal to the excess, if any,
of:
1. the product of the Note's adjusted issue price at the beginning of
such accrual period and its yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the accrual period) over
2. the sum of any qualified stated interest allocable to the accrual
period. OID allocable to a final accrual period is the difference between the
amount payable at maturity (other than a payment of qualified stated interest)
and the adjusted issue price at the beginning of the final accrual period.
The "adjusted issue price" of a Note at the beginning of any accrual period is
equal to its issue price increased by the accrued OID for each prior accrual
period and reduced by any payments made on such Note (other than qualified
stated interest) on or before the first day of the accrual period. Under these
rules, a United States Holder will have to include in income increasingly
greater amounts of OID in successive accrual periods. The Company is required
to provide information returns stating the amount of OID accrued on Notes held
of record by persons other than corporations and other exempt holders.
United States Holders may elect to treat all interest on any Note as OID
and calculate the amount includible in gross income under the constant yield
method described above. For the purposes of this election, interest includes
stated interest, acquisition discount, OID, de minimis OID and unstated
interest. The election is to be made for the taxable year in which the United
States Holder acquired the Note, and may not be revoked without the consent of
the IRS. United States Holders should consult with their own tax advisors about
this election.
Sale, Exchange and Retirement of Notes
A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost therefor, increased by OID and reduced by any cash
payments on the Note other than qualified stated interest. Upon the sale,
exchange, retirement or other disposition of a Note, a United States Holder
will recognize gain or loss equal to the difference between the amount realized
upon the sale, exchange, retirement or other disposition (less any accrued
qualified stated interest, which will be taxable as such) and the adjusted tax
basis of the Note. Such gain or loss will be capital gain or loss. Capital
gains of individuals derived in respect of capital assets held for more than
one year are eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations.
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Non-United States Holders
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of
principal or interest (which for purposes of this discussion includes
OID) on a Note owned by a Non-United States Holder, provided:
1. that the beneficial owner does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote within the meaning of section 871(h)(3) of the Code
and the regulations thereunder,
2. the beneficial owner is not a controlled foreign corporation that is
related to the Company through stock ownership,
3. the beneficial owner is not a bank whose receipt of interest on a Note
is described in section 881(c)(3)(A) of the Code and
4. the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code and
the regulations thereunder;
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-United States
Holder upon the sale, exchange, retirement or other disposition of a
Note; and
(c) a Note beneficially owned by an individual who at the time of death is
a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's death, provided
that such individual does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote within the meaning of section 871(h)(3) of
the Code and provided that the interest payments with respect to such
Note would not have been, if received at the time of such individual's
death, effectively connected with the conduct of a United States trade
or business by such individual.
To satisfy the requirement referred to in (a)(4) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner
is not a United States person. Currently, these requirements will be met if:
1. the beneficial owner provides his name and address, and certifies,
under penalties of perjury, that he is not a United States person (which
certification may be made on an Internal Revenue Service Form ("IRS") W-8 (or
successor form)) or
2. a financial institution holding the Note on behalf of the beneficial
owner certifies, under penalties of perjury, that such statement has been
received by it and furnishes a paying agent with a copy thereof. Under recently
finalized Treasury regulations (the "Final Regulations"), the statement
requirement referred to in (a)(4) above may also be satisfied with other
documentary evidence for interests paid after December 31, 1999 with respect to
an offshore account or through certain foreign intermediaries.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of interest
(including OID) made to such non-United States Holder will be subject to a 30%
withholding tax unless the beneficial owner of the Note provides the Company or
its paying agent, as the case may be, with a properly executed (a) IRS Form
1001 (or successor form) claiming an exemption from withholding under the
benefit of a tax treaty or (b) IRS Form 4224 (or successor form) stating that
interest paid on the Note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or
business in the United States. Under the Final Regulations, Non- United States
Holders will generally be required to provide IRS Form W-8 in lieu of IRS Form
1001 and IRS Form 4224, although alternative documentation may be applicable in
certain situations.
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If a Non-United States Holder is engaged in a trade or business in the
United States and interest (including OID) on the Note is effectively connected
with the conduct of such trade or business, the non-United States Holder,
although exempt from the withholding tax discussed above, will be subject to
United States federal income tax on such interest and OID on a net income basis
in the same manner as if it were a United States Holder. In addition, if such
holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% of its effectively connected earnings and profits for the taxable
year, subject to adjustments. For this purpose, interest (including OID) on a
Note will be included in such foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless:
1. such gain or income is effectively connected with a trade or business
in the United States of the Non-United States Holder, or
2. in the case of a Non-United States Holder who is an individual, such
individual is present in the United States for 183 days or more in the taxable
year of such sale, exchange, retirement or other disposition, and certain other
conditions are met.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal, interest and OID paid on Notes and to the proceeds of
sale of a Note made to United States Holders other than certain exempt
recipients (such as corporations). A 31 percent backup withholding tax will
apply to such payments if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-United
States Holders if a statement described in (a)(4) under "Non-United States
Holders" has been received and the payor does not have actual knowledge that
the beneficial owner is a United States person.
In addition, backup withholding and information reporting will not apply
if payments of the principal, interest and OID on a Note are paid or collected
by a foreign office of a custodian, nominee or other foreign agent on behalf of
the beneficial owner of such Note, or if a foreign office of a broker (as
defined in applicable Treasury regulations) pays the proceeds of the sale of a
Note to the owner thereof. If, however, such nominee, custodian, agent or
broker is, for United States federal income tax purposes, a United States
person, a controlled foreign corporation or a foreign person that derives 50%
or more of its gross income for certain periods from the conduct of a trade or
business in the United States, or, for taxable years beginning after December
31, 1999, a foreign partnership in which one or more United States persons, in
the aggregate, own more than 50% of the income or capital interests in the
partnership or a foreign partnership which is engaged in a trade or business in
the United States, such payments will not be subject to backup withholding but
will be subject to information reporting, unless (a) such custodian, nominee,
agent or broker has documentary evidence in its records that the beneficial
owner is not a United States person and certain other conditions are met or (b)
the beneficial owner otherwise establishes an exemption.
Payments of principal, interest and OID on a Note paid to the beneficial
owner of a Note by a United States office of a custodian, nominee or agent, or
the payment by the United States office of a broker of the proceeds of sale of
a Note, will be subject to both backup withholding and information reporting
unless the beneficial owner provides the statement referred to in (a)(4) above
and the payor does not have actual knowledge that the beneficial owner is a
United States person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
96
<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Existing Notes where such Existing Notes were acquired
as a result of market-making activities or other trading activities. The
Company has agreed that it will furnish to each Participating Broker-Dealer as
many copies of this Prospectus, as amended or supplemented, as such
Participating Broker-Dealer may reasonably request. In addition, each
Participating Broker-Dealer shall be authorized to deliver this Prospectus in
connection with the sale or transfer of the Exchange Notes. In addition, until
May 4, 1999 (25 days after the date of this Prospectus), all dealers effecting
transactions in the Exchange Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market,
in negotiated transactions, through the writing of options on the Exchange
Notes or a combination of such methods of resale, at market prices prevailing
at the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such Participating Broker-Dealer and/or the
purchasers of any such Exchange Notes. Any Participating Broker-Dealer that
resells the Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any omissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and
any amendment or supplement to this Prospectus to any Participating
Broker-Dealer that requests such documents in the Letter of Transmittal. See
"The Exchange Offer -- Purpose and Effect of the Exchange Offer."
LEGAL MATTERS
Certain legal matters with respect to the validity of the Exchange Notes
offered hereby will be passed upon for the Company by Blank Rome Comisky &
McCauley LLP, Philadelphia, Pennsylvania. As to matters of New York law, Blank
Rome Comisky & McCauley LLP will rely upon the opinion of Simpson Thacher &
Bartlett, New York, New York. Stephen Luongo, a partner in Blank Rome Comisky &
McCauley LLP, is the beneficial owner of 52,018 shares of Common Stock and is a
director of the Company.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1998 and 1997, and for each of the years in the three-year period ended
September 30, 1998 have been included herein and the related schedule
incorporated herein by reference in reliance upon the reports of KPMG LLP,
independent certified public accountants, and upon the authority of said firm
as experts in accounting and auditing.
The consolidated financial statements and schedules of Multicare and its
subsidiaries for the years ended December 31, 1996 and 1995, and for each of
the years in the three-year period ended December 31, 1996 included in
Multicare's 1996 Annual Report on Form 10-K, have been incorporated by
reference herein in reliance upon the reports of KPMG LLP, independent
certified public accountants, also incorporated by reference herein, and upon
authority of said firm as experts in accounting and auditing.
The consolidated financial statements and schedules of Vitalink as of May
31, 1998 and 1997 and for each of the three years in the period ended May 31,
1998 appearing in Vitalink's Annual Report on Form 10-K for the year ended May
31, 1998 incorporated by reference in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
97
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997 ............................ F-3
Consolidated Statements of Operations for the years ended September 30, 1998, 1997 and
1996 ................................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998,
1997 and 1996 .......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and
1996 ................................................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
Unaudited Condensed Consolidated Balance Sheet as of December 31, 1998 ................... F-29
Unaudited Condensed Consolidated Statements of Operations for the three months ended
December 31, 1998 and 1997 ............................................................. F-30
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 1998 and 1997 ............................................................. F-31
Notes to Unaudited Condensed Consolidated Financial Statements ........................... F-32
Pro Forma Condensed Consolidated Financial Statements .................................... F-35
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended
September 30, 1998 ..................................................................... F-36
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations .............. F-37
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Genesis Health Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Genesis
Health Ventures, Inc. and Subsidiaries as of September 30, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended September 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genesis
Health Ventures, Inc. and subsidiaries as of September 30, 1998 and 1997, and
the results of their operations, and their cash flows for each of the years in
the three-year period ended September 30, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
December 15, 1998
F-2
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
--------------- --------------
(in thousands except share and
per share data)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents ............................................. $ 4,902 $ 11,651
Investments in marketable securities ............................. 26,658 14,729
Accounts receivable, net of allowance for doubtful accounts of
$73,719 in 1998 and $39,418 in 1997 ............................ 376,023 205,129
Cost report receivables .......................................... 62,257 60,865
Inventory ........................................................ 63,760 25,568
Prepaid expenses and other current assets ........................ 40,579 34,495
---------- ----------
Total current assets ........................................ 574,179 352,437
---------- ----------
Property, plant, and equipment, net .............................. 596,562 578,397
Notes receivable and other investments ........................... 47,623 108,714
Other long-term assets ........................................... 73,904 31,722
Investments in unconsolidated affiliates ......................... 344,567 2,887
Goodwill and other intangibles, net .............................. 990,533 359,956
---------- ----------
Total assets ................................................ $2,627,368 $1,434,113
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt ........................... $ 49,712 $ 8,273
Accounts payable ................................................. 80,980 47,547
Accrued expenses ................................................. 59,474 33,835
Accrued compensation ............................................. 59,371 23,116
Accrued interest ................................................. 18,924 12,736
---------- ----------
Total current liabilities ................................... 268,461 125,507
---------- ----------
Long-term debt .................................................... 1,358,595 651,667
Deferred income taxes ............................................. 72,828 37,745
Deferred gains and other long-term liabilities .................... 52,412 11,173
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01,
authorized 5,000,000 shares, 590,253 issued and outstanding at
September 30, 1998 ............................................. 6 --
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 35,225,731 and 35,180,130 at September 30, 1998;
35,117,075 and 35,071,474 at September 30, 1997 ................ 704 702
Additional paid-in capital ....................................... 749,491 457,232
Retained earnings ................................................ 124,430 150,330
Net unrealized gain on marketable securities ..................... 684 --
Treasury stock, at cost .......................................... (243) (243)
---------- ----------
Total shareholders' equity .................................. 875,072 608,021
---------- ----------
Total liabilities and shareholders' equity .................. $2,627,368 $1,434,113
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(In thousands, except share and per share data)
<S> <C> <C> <C>
Net revenues:
Basic healthcare services .................. $ 554,855 $ 549,963 $ 348,016
Specialty medical services ................. 736,541 502,382 290,428
Management services and other, net ......... 113,909 47,478 33,025
----------- ----------- -----------
Total net revenues .................... 1,405,305 1,099,823 671,469
----------- ----------- -----------
Operating expenses:
Salaries, wages and benefits ............... 597,513 512,317 315,494
Other operating expenses ................... 525,106 346,599 201,866
General corporate expense .................. 53,179 41,039 25,840
Loss on impairment of assets ............... 94,817 15,000 --
Depreciation and amortization ............... 52,385 41,946 25,374
Lease expense ............................... 31,182 28,587 18,638
Interest expense, net ....................... 82,088 39,103 24,926
Debenture conversion expense ................ -- -- 1,245
----------- ----------- -----------
Earnings (loss) before income taxes,
equity in net income of unconsolidated
affiliates and extraordinary items ......... (30,965) 75,232 58,086
Income taxes ................................ (8,158) 27,088 20,917
----------- ----------- -----------
Earnings (loss) before equity in net
income of unconsolidated affiliates and
extraordinary items ........................ (22,807) 48,144 37,169
Equity in net income of unconsolidated
affiliates ................................. 486 -- --
----------- ----------- -----------
Earnings (loss) before extraordinary
items ...................................... (22,321) 48,144 37,169
Extraordinary items, net of tax ............. (1,924) (553) --
----------- ----------- -----------
Net income (loss) ........................... (24,245) 47,591 37,169
Preferred stock dividend .................... 1,655 -- --
----------- ----------- -----------
Net income (loss) available to common
shareholders ............................... (25,900) 47,591 37,169
=========== =========== ===========
Per common share data:
Basic
Earnings (loss) before extraordinary
items ................................... $ (0.68) $ 1.39 $ 1.40
Net income (loss) ....................... $ (0.74) $ 1.38 $ 1.40
Weighted average shares of common
stock and equivalents ................... 35,159,195 34,557,874 26,541,980
----------- ----------- -----------
Diluted
Earnings (loss) before extraordinary
items ................................... $ (0.68) $ 1.34 $ 1.29
Net income (loss) ........................ $ (0.74) $ 1.33 $ 1.29
Weighted average shares of common
stock and equivalents ................... 35,159,195 36,119,820 31,058,214
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Series G
cumulative Net unrealized
convertible Additional gain on
Common preferred paid-in Retained marketable Treasury
stock stock capital earnings securities stock Total
-------- ------------- ------------ ------------ --------------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995 ......................... $294 $ -- $155,927 $ 65,570 $ -- $ (243) $ 221,548
---- ---- -------- --------- ---- ------ ---------
Issuance of additional
common stock, net of issu-
ance costs ................... 136 -- 211,529 -- -- -- 211,665
Conversion of Debentures ...... 42 -- 41,676 -- -- -- 41,718
Exercise of common stock
options ...................... 5 -- 2,503 -- -- -- 2,508
Effect of stock split ......... 163 -- (163) -- -- -- --
1996 net earnings ........... -- -- -- 37,169 -- -- 37,169
---- ---- -------- --------- ---- ------ ---------
Balance at September 30,
1996 ........................ $640 $ -- $411,472 $ 102,739 $ -- $ (243) $ 514,608
==== ==== ======== ========= ==== ====== =========
Exercise of common stock
options ...................... 4 -- 2,815 -- -- -- 2,819
Conversion of Debentures ...... 58 -- 42,945 -- -- -- 43,003
1997 net earnings ........... -- -- -- 47,591 -- -- 47,591
---- ---- -------- --------- ---- ------ ---------
Balance at September 30,
1997 ......................... $702 $ -- $457,232 $ 150,330 $ -- $ (243) $ 608,021
==== ==== ======== ========= ==== ====== =========
Exercise of common stock
options ...................... 2 -- 1,587 -- -- -- 1,589
Purchase of common stock
call options ................. -- -- (4,442) -- -- -- (4,442)
Issuance of Series G
Cumulative Convertible
Preferred Stock .............. -- 6 295,114 -- -- -- 295,120
Net unrealized gain on
marketable securities ........ -- -- -- -- 684 -- 684
1998 net loss ................. -- -- -- (25,900) -- -- (25,900)
---- ---- -------- --------- ---- ------ ---------
Balance at September 30,
1998 ......................... $704 $ 6 $749,491 $ 124,430 $684 $ (243) $ 875,072
==== ==== ======== ========= ==== ====== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................ $ (25,900) $ 47,591 $ 37,169
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Charges (credits) included in operations not requiring funds:
Provision for deferred taxes ........................................... (8,158) 21,023 5,114
Depreciation and amortization .......................................... 52,385 41,946 25,374
Amortization of deferred gains and debt premiums ....................... (1,700) (858) (460)
Loss on impairment of assets ........................................... 94,817 15,000 --
Equity in net income of unconsolidated affiliates ...................... (486) -- --
Debenture conversion expense ........................................... -- -- 1,245
Extraordinary items, net of tax ........................................ 1,924 553 --
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable .................................................... (57,882) (41,801) (6,256)
Cost reports receivable ................................................ (1,469) (17,447) (15,647)
Inventory .............................................................. (4,942) (5,938) (2,061)
Prepaid expenses and other current assets .............................. (4,989) (4,529) 1,955
Accounts payable and accrued expenses .................................. 7,192 1,618 (8,707)
Income taxes payable ................................................... 27,163 (3,804) (1,494)
---------- ---------- ----------
Total adjustments ....................................................... 103,855 5,763 (937)
---------- ---------- ----------
Net cash provided by operations ......................................... 77,955 53,354 36,232
---------- ---------- ----------
Cash flows from investing activities:
Purchase of marketable securities ........................................ (22,764) (27,022) (3,909)
Proceeds on maturity or sale of marketable securities .................... 10,835 17,809 1,847
Capital expenditures ..................................................... (56,663) (61,102) (38,645)
Payments for acquisitions, net of cash acquired .......................... (400,576) (257,837) (215,874)
Investments in unconsolidated affiliates ................................. (344,081) -- --
Proceeds from assets sold, net ........................................... 91,495 -- 21,521
Reductions in notes receivable and other investments ..................... 52,410 1,943 6,913
Additions to notes receivable and other investments ...................... (15,947) (14,747) (49,026)
Other long term asset additions, net ..................................... (15,446) (7,816) (7,871)
---------- ---------- ----------
Net cash used in investing activities ................................... (700,737) (348,772) (285,044)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings under working capital revolving credit facility ........... 100,500 176,683 50,798
Repayment of long term debt and payment of sinking fund requirments ...... (69,540) (7,946) (2,539)
Proceeds from issuance of long-term debt ................................. 611,243 126,500 --
Debt issuance costs ...................................................... (23,317) (3,750) --
Purchase of common stock call options .................................... (4,442) -- --
Proceeds from issuance of common stock ................................... -- -- 211,250
Stock issuance costs ..................................................... -- -- (9,585)
Debenture conversion expense ............................................. -- -- (1,245)
Stock options exercised .................................................. 1,589 2,819 2,508
---------- ---------- ----------
Net cash provided by financing activities ............................... 616,033 294,306 251,187
---------- ---------- ----------
Net (decrease) increase in cash and equivalents ........................... (6,749) (1,112) 2,375
Cash and equivalents
Beginning of year ........................................................ 11,651 12,763 10,388
---------- ---------- ----------
End of year .............................................................. $ 4,902 $ 11,651 $ 12,763
========== ========== ==========
Supplemental disclosure of cash flow information:
Interest paid ............................................................ $ 85,557 $ 40,869 $ 24,926
========== ========== ==========
Income taxes paid (recovered) ............................................ (31,370) 12,357 22,374
========== ========== ==========
Non-cash financing activity -- issuance of Genesis Series G Cumulative
Convertible Preferred Stock ............................................. $ 295,120 $ -- $ --
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Genesis
Health Ventures, Inc. and its wholly-owned subsidiaries (the "Company" or
"Genesis"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Investments in unconsolidated affiliated companies, owned 20% to 50%
inclusive, are stated at cost of acquisition plus the Company's equity in
undistributed net income (loss) since acquisition. The change in the equity in
net income (loss) of these companies is reflected as a component of net income
or loss on the Consolidated Statement of Operations.
All dollars, except per share amounts, and shares are expressed in
thousands. All other amounts are expressed in whole numbers. Certain prior year
balances have been reclassified to conform with the current year presentation.
Business
The Company provides a broad range of healthcare services to the geriatric
population, principally within five geographic markets in the eastern United
States. These services include basic healthcare services traditionally provided
in eldercare centers; specialty medical services, such as rehabilitation
therapy, institutional pharmacy and medical supply services, community-based
pharmacies and subacute care; and management services to independent geriatric
care providers.
Contractual Adjustments
Patient revenues are recorded based on standard charges applicable to all
patients. Under Medicare, Medicaid, and other cost-based reimbursement
programs, each facility is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. The differences between
established billing rates and the amounts reimbursable by the programs and
customer payments are recorded as contractual adjustments and deducted from
revenues. Retroactively calculated third-party contractual adjustments are
accrued on an estimated basis in the period the related services are rendered.
Revisions to estimated contractual adjustments are recorded based upon audits
by third-party payors, as well as other communications with third-party payors
such as desk reviews, regulation changes and policy statements. These revisions
are made in the year such amounts are determined.
Cash Equivalents
Short-term investments which have a maturity of ninety days or less at
acquisition are considered cash equivalents.
Investments in Marketable Securities
Marketable securities, which comprises fixed interest securities and money
market funds are considered to be available for sale and accordingly are
reported at fair value with unrealized gains and losses reported as a separate
component of shareholders' equity, net of related tax effects. Fair values for
fixed interest securities are based on quoted market prices.
A decline in the market value of any security below cost that is deemed
other than temporary is charged to earnings, resulting in the establishment of
a new cost basis for the security.
F-7
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(1) Summary of Significant Accounting Policies -- (Continued)
Premiums and discounts on fixed interest securities are amortized or
accreted over the life of the related security as an adjustment to yield using
the straight-line method. Realized gains and losses for securities classified
as available for sale are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
Inventories
Inventories, consisting of drugs and supplies, are stated at the lower of
cost or market. Cost is determined primarily on the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Land, land improvements, buildings, and equipment are stated at cost.
Depreciation is calculated on the straight-line method over estimated useful
lives of 20-35 years for land improvements and buildings, and three to fifteen
years for equipment, furniture, fixtures and information systems. Expenditures
for maintenance and repairs necessary to maintain property and equipment in
efficient operating condition are charged to operations. Costs of additions and
betterments are capitalized. Interest costs associated with construction or
renovation are capitalized in the period in which they are incurred.
The Company records impairment losses on long-lived assets including
property, plant and equipment used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets.
Deferred Financing Costs
Financing costs have been deferred and are being amortized on a
straight-line basis, which approximates the effective interest method, over the
term of the related debt. Deferred financing costs, net of accumulated
amortization of $8,705 and $4,972 were $29,566 and $12,939 at September 30,
1998 and 1997, respectively, and are included in other long term assets.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair market
value of net assets acquired and is amortized on a straight-line basis from ten
to forty years. Goodwill, before accumulated amortization of $29,900 and
$20,900, was $1,000,100 and $371,900 at September 30, 1998 and 1997,
respectively. Goodwill and other intangibles increased in 1998 principally as a
result of the purchase of Vitalink Pharmacy Services, Inc. (approximately
$606,000, subject to finalization), the purchase of the Multicare
rehabilitation services business (approximately $20,000, subject to
finalization), the purchase of the Multicare pharmacy business (approximately
$35,000, subject to finalization), offset by non-cash asset impairment
write-offs (approximately $34,000). Goodwill is reviewed for impairment
whenever events or circumstances provide evidence that suggest that the
carrying amount of goodwill may not be recoverable. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
goodwill balance can be recovered through projected undiscounted future cash
flows.
The Company records impairment losses on long-lived assets including
goodwill and other intangibles used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets.
With respect to the carrying value of the excess of cost over net asset
value of purchased facilities and other intangible assets, the Company
determines on a quarterly basis whether an impairment event has
F-8
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(1) Summary of Significant Accounting Policies -- (Continued)
occurred by considering factors such as the market value of the asset; a
significant adverse change in legal factors or in the business climate; adverse
regulatory action; a history of operating or cash flow losses; or a projection
of continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has
been impaired. If this evaluation indicates that the value of the asset will
not be recoverable, as determined based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, an impairment loss is
calculated based on excess of the carrying amount of the asset over the asset's
fair value.
Income Taxes
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. Provision is made for deferred income taxes
applicable to temporary differences between financial statement and taxable
income.
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 twelve months ended September
30, 1997 and 1996 to conform to the provisions of Statement 128. The following
table sets forth the computation of basic and diluted earnings per share
applicable to common shares:
F-9
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(1) Summary of Significant Accounting Policies -- (Continued)
<TABLE>
<CAPTION>
(amounts are in thousands except per share data): Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Income (loss) before extraordinary items .............. $ (23,976) $48,144 $ 37,169
Extraordinary items ................................... (1,924) (553) --
--------- ------- --------
Net income (loss) ..................................... $ (25,900) $47,591 $ 37,169
--------- ------- --------
Weighted Average Shares ............................... 35,159 34,558 26,542
--------- ------- --------
Earnings (loss) per share before extraordinary items . $ (0.68) $ 1.39 $ 1.40
Loss per share -- extraordinary items ................. (0.05) (0.02) --
--------- ------- --------
Earnings (loss) per share ............................. $ (0.74) $ 1.38 $ 1.40
--------- ------- --------
Diluted Earnings (Loss) Per Share:
Income (loss) before extraordinary items .............. $ (23,976) $48,144 $ 37,169
Extraordinary items ................................... (1,924) (553) --
--------- ------- --------
Net income (loss) ..................................... $ (25,900) $47,591 $ 37,169
Adjustments to net income (loss) for interest
expense, amortization and other costs related to the
assumed conversion of convertible debentures ......... -- 303 2,812
--------- ------- --------
Adjusted net income (loss) ............................ $ (25,900) $47,894 $ 39,981
--------- ------- --------
Weighted Average Shares & Common Stock
Equivalents:
Weighted average shares ............................... 35,159 34,558 26,542
Dilutive effect of unexercised stock options .......... -- 1,125 884
Convertible debenture shares .......................... -- 437 3,632
--------- ------- --------
Total ................................................. 35,159 36,120 31,058
--------- ------- --------
Earnings (loss) per share before extraordinary items . $ (0.68) $ 1.34 $ 1.29
Loss per share -- extraordinary items ................. (0.05) (0.02) --
--------- ------- --------
Earnings (loss) per share ............................. $ (0.74) $ 1.33 $ 1.29
--------- ------- --------
</TABLE>
Use of Estimates
Management of the Company has made a number of estimates relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
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 ended 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 of comprehensive income in the
financial statements and display the accumulated balance of other comprehensive
income separately in the equity section of the balance sheet.
F-10
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(1) Summary of Significant Accounting Policies -- (Continued)
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 March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("Statement 98-1"). Once the
capitalization criteria of Statement 98-1 have been met, external directs costs
of materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal use
should be capitalized. Training costs and data conversion costs, should be
expensed as incurred. Statement 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998, with earlier application
encouraged. The Company adopted the provisions of Statement 98-1 in its fiscal
year ended September 30, 1998.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (the
"Statement"). The 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 businesses in a new territory,
conducting business with a new process in an existing facility, or commencing a
new operation. The Statement is effective for fiscal years beginning after
December 15, 1998 or the Company's fiscal year ending September 30, 2000. The
Company currently estimates the adoption of the Statement will result in a
charge of approximately $1,500, net of tax, which will be recorded as a
cumulative effect of a change in accounting principle.
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 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.
(2) Acquisitions/Dispositions
Vitalink Transaction
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01
per share (the "Vitalink Common Stock"), was converted in the merger into the
right to receive (i) .045 shares of Genesis Series G Cumulative Convertible
Preferred Stock, par value $.01 per share (the "Genesis Preferred"), (ii)
$22.50 in
F-11
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Acquisitions/Dispositions -- (Continued)
cash, or (iii) a combination of cash and shares of Genesis Preferred
(collectively, the "Merger Consideration"). The Merger Consideration paid to
stockholders of Vitalink to acquire their shares (including shares which may
have been issued upon the exercise of outstanding options) was $590,200, of
which 50% was paid in cash and 50% in Genesis Preferred. The Genesis Preferred
has a face value of approximately $295,100 and an initial dividend of 5.9375%
and generally is not transferable without the consent of the Company. The
Genesis Preferred is convertible into Genesis common stock, par value $.02 per
share (the "Common Stock"), at $37.20 per share and it may be called for
conversion after April 26, 2001, provided the price of Common Stock reaches
certain trading levels and after April 26, 2002, subject to a market-based call
premium. Vitalink's total net revenues for the fiscal years ended May 31, 1997
and 1998, were $274,000 and $494,000, respectively. As a result of the merger,
Genesis assumed approximately $87,000 of indebtedness Vitalink had outstanding.
The cash portion of the purchase price was funded through borrowings under the
Credit Facility, as defined. The Vitalink Transaction is being accounted for
under the purchase method and the related goodwill is being amortized over a
forty year period.
Pursuant to four agreements with HCR-Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and services
and pharmacy consulting services to facilities operated by HCR-Manor Care (the
"Services Contracts"). Vitalink is not restricted from providing similar
contracts to non-HCR-Manor Care facilities. The current term of each of the
Service Contracts extends through September 2004, subject to annual renewals
provided therein.
Multicare Transaction
In October 1997, Genesis ElderCare Corp., a Delaware Corporation owned
43.6% by Genesis and the remainder by The Cypress Group (together with its
affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates,
"TPG") and Nazem, Inc. (together with its affiliates "Nazem"), acquired The
Multicare Companies, Inc. ("Multicare"), pursuant to a tender offer (the
"Tender Offer") and the merger (the "Merger" or the "Multicare Transaction").
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 and
(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 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 will be paid by Multicare. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the
assets used in Multicare's outpatient and inpatient rehabilitation therapy
business for $24,000 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
F-12
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Acquisitions/Dispositions -- (Continued)
certain subsidiaries of Multicare that are engaged in the business of providing
institutional pharmacy services to third parties for $50,000 (the "Pharmacy
Purchase"), subject to adjustment. The Company completed the Pharmacy Purchase
effective January 1, 1998, which was accounted for under the purchase method
and the related goodwill is being amortized over forty years. The Therapy
Purchase was completed in October 1997 and is accounted for under the purchase
method with the related goodwill amortized over twenty years.
In addition, Genesis, Cypress, TPG and Nazem entered into an agreement
(the "Put/Call Agreement") pursuant to which, among other things, Genesis has
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 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.
Genesis Eldercare Corp. paid approximately $1,492,000 to (i) purchase the
shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses
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 were
furnished as capital contributions by the Genesis Eldercare Corp. from the sale
of its 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, $199,500 and $10,500, respectively, and Genesis purchased shares
of Genesis ElderCare Corp. common stock for a purchase price of $325,000 in
consideration for 43.6% of the common stock of Genesis ElderCare Corp. 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 and (ii) $246,800 of bridge financing which was refinanced upon
completion of the sale of 9% Senior Subordinated Notes due 2007 sold by a
subsidiary of Genesis ElderCare Corp. on August 11, 1997.
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,
TPG or Nazem; and 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.
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
F-13
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Acquisitions/Dispositions -- (Continued)
obligations upon exercise of the Put, Cypress, TPG and Nazem will have the
right to terminate the Stockholders' Agreement, dated October 9, 1997, by and
among the Company, Genesis ElderCare Corp., Cyrpess, TPG and Nazem, and the
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
Credit Facility.
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 stock. The total consideration paid, including
assumed indebtedness of approximately $132,000, was approximately $223,000. The
merger was financed in part with approximately $121,250 in net proceeds from an
offering of 9 1/4% Senior Subordinated Notes issued in October of 1996. The
remaining consideration was financed through borrowings under the Company's
bank credit facility. The GMC Transaction, added to Genesis 24 owned eldercare
centers with approximately 3,300 beds. GMC also operates businesses which
provide 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. The acquisition was accounted for as a purchase with the related
goodwill being amortized over a period of forty years.
National Health Care Affiliates
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 and
subsequently leased the centers to a subsidiary of Genesis under operating
lease agreements and a then existing $85,000 lease financing facility. The
balance of the total consideration paid to National Health was funded with
available cash of $51,800 and assumed indebtedness of $7,900. National Health
added 16 eldercare centers in Florida, Virginia and Connecticut with
approximately 2,200 beds to Genesis. National Health also provides enteral
nutrition and rehabilitation therapy services to the eldercare centers which it
owns and leases. The acquisition was accounted for as a purchase, with the
related goodwill being amortized over 40 years.
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, comprised of approximately
$47,250 in cash and 312,744 shares of Genesis Common Stock. The acquisition was
accounted for as a purchase, with the related goodwill being amortized over 40
years.
McKerley Health Care
On November 30, 1995, the Company acquired McKerley Health Care Centers
("McKerley") for total consideration of approximately $68,700. The transaction
(the "McKerley Transaction") also provided for up to an additional $6,000 of
contingent consideration payable upon the achievement of certain financial
objectives
F-14
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Acquisitions/Dispositions -- (Continued)
through October 1997, of which $4,000 was paid in February 1997. McKerley added
to Genesis 15 geriatric care facilities in New Hampshire and Vermont with a
total of 1,535 beds. McKerley also operates a home healthcare company. The
acquisition was financed with borrowings under the Credit Facility and assumed
indebtedness. The acquisition was accounted for as a purchase, with the related
goodwill being amortized over 40 years.
Other Transactions
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 September 30, 1998,
the Company loaned approximately $3,000,000 to senior executive employees to
purchase the Company's Common Stock.
In March 1996, the Company sold four eldercare centers and a pharmacy in
Indiana for approximately $22,250. The net sale proceeds were used to repay
indebtedness under the Company's credit facility.
In March 1996, the Company acquired for total consideration of
approximately $31,900, including the payment of assumed debt, the remaining
approximately 71% joint venture interests of four eldercare centers in Maryland
and the remaining 50% joint venture interest of an eldercare center in Florida.
The acquisition was accounted for as a purchase.
The following unaudited pro forma statement of operations information
gives effect to the Multicare Transaction, the Therapy Purchase, the Pharmacy
Purchase and the Vitalink Transaction described above as though they had
occurred on October 1, 1996, after giving effect to certain adjustments,
including amortization of goodwill, additional depreciation expense, increased
interest expense on debt related to the acquisition and related income tax
effects. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the acquisitions occurred at
the beginning of the respective fiscal years.
<TABLE>
<CAPTION>
(Unaudited) 1998 1997
- ------------------------------------------------------------------------ ------------- ---------------
<S> <C> <C>
Pro Forma Statement of Operations Information:
Total net revenues ..................................................... $1,878,622 $ 1,718,010
Earnings (loss) before extraordinary item .............................. (31,068) 34,793
Net income (loss) available to common shareholders ..................... (32,992) 34,240
Diluted earnings (loss) per common share before extraordinary item ..... (0.88) 0.96
Diluted earnings (loss) per common share ............................... $ (0.94) $ 0.95
---------- -----------
</TABLE>
F-15
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(3) Investments in Marketable Securities
Marketable securities at September 30, 1998 consist of the following:
<TABLE>
<CAPTION>
Amortized Unrealized Fair
cost gains Value
----------- ------------ ---------
<S> <C> <C> <C>
U.S Treasury Notes ................. $ 3,102 $ 36 $ 3,138
Mortgage backed securities ......... 12,016 809 12,825
Corporate bonds .................... 6,651 197 6,848
Money market funds ................. 3,837 10 3,847
------- ------ -------
$25,606 $1,052 $26,658
------- ------ -------
</TABLE>
Marketable securities at September 30, 1997 consist of the following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
cost gains losses Value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
U.S Treasury Bills ................. $ 942 $ -- $ -- $ 942
U.S. Treasury Notes ................ 2,094 -- (17) 2,077
Mortgage backed securities ......... 11,496 169 (5) 11,660
Money market funds ................. 50 -- -- 50
------- ---- ------ -------
$14,582 $169 $(22) $14,729
------- ---- ------ -------
</TABLE>
Fixed interest securities held at September 30, 1998 and 1997 mature as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Amortized Fair Amortized Fair
cost value cost value
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Due in one year or less .................... $ 3,001 $ 3,015 $ 1,439 $ 1,440
Due after 1 year through 5 years ........... 8,187 8,427 6,904 7,045
Due after 5 years through 10 years ......... 8,999 9,712 6,189 6,194
Due after 10 years ......................... 1,582 1,657 -- --
------- ------- ------- -------
$21,769 $22,811 $14,532 $14,679
------- ------- ------- -------
</TABLE>
Actual maturities may differ from stated maturities because borrowers have
the right to call or prepay certain obligations with or without prepayment
penalties. There were no significant realized gains or losses in 1998, 1997 or
1996.
(4) Property, Plant and Equipment
Property, plant and equipment at September 30, 1998 and 1997 consist of
the following:
September 30,
1998 1997
------------- ------------
Land ...................................... $ 39,244 $ 38,163
Land improvements ......................... 5,656 5,064
Buildings ................................. 451,440 471,520
Equipment, furniture and fixtures ......... 180,632 120,734
Construction in progress .................. 40,778 36,456
---------- ---------
717,750 671,937
Less accumulated depreciation ............. (121,188) (93,540)
---------- ---------
Net property, plant and equipment ......... $ 596,562 $ 578,397
---------- ---------
F-16
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(5) Long-term Debt
Long-term debt at September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------- -----------
<S> <C> <C>
Secured - due 1999 to 2034;
7.38% to 11.60% (weighted average interest rate 1998 -- 8.47%;
1997 -- 7.76%) ............................................. $1,151,292 $401,484
Unsecured - due 1999 to 2008
6.64% to 11.00% (weighted average interest rate 1998 -- 9.44%;
1997 -- 9.43%) ............................................. 251,915 252,670
---------- --------
1,403,207 654,154
Plus:
Debt premium, net of amortization ............................ 5,482 6,032
Less:
Debt discount, net of amortization ........................... (382) (246)
Current installments and short-term borrowings ............... (49,712) (8,273)
---------- --------
1,358,595 $651,667
---------- --------
</TABLE>
At September 30, 1998 and 1997, the Company's long-term debt included
approximately $1,032,889 and $300,000 of floating rate debt based on Prime or
LIBO Rate with weighted average interest rates of 8.36% and 7.10%,
respectively. At September 30, 1998 and 1997, the Company's long-term debt
consisted of approximately $370,318 and $354,154 of fixed rate debt with
weighted average interest rates of 9.40% and 9.42%, respectively.
Genesis entered into a credit agreement pursuant to which the lenders
provided Genesis and its subsidiaries a credit facility totaling $1,250,000
(the "Credit Facility") 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 Vitalink Transaction; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of the transactions. The Credit Facility
consists of three $200,000 term loans (collectively, the "Term Loans"), a
$650,000 revolving credit loan (the "Revolving Facility") which includes one or
more Swing Loans (collectively, the "Swing Loan Facility") in integral
principal multiples of $500 up to an aggregate unpaid principal amount of
$15,000. The Term Loans amortize in quarterly installments beginning in Fiscal
1998 through 2005, of which $24,419 is payable in Fiscal 1999. The Term Loans
consist of (i) a $200,000 six year term loan (the "Tranche A Term Facility");
(ii) a $200,000 seven year term loan (the "Tranche B Term Facility"); and (iii)
a $200,000 eight year term loan (the "Tranche C Term Facility"). The Revolving
Facility becomes payable in full on September 30, 2003. The third amendment to
the Credit Facility, dated December 15, 1998, made the financial covenants for
certain periods less restrictive, permitted the proceeds of subordinated debt
offerings to repay indebtedness under the Revolving Facility and increased the
interest rates applying to the Term Loans and the Revolving Facility. The
revised financial covenants reflect the impact of PPS and the non-cash charges
in the fourth quarter of 1998.
The Credit Facility is 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 Genesis Elder Care Corp.) other than
the stock of Multicare and its subsidiaries. Loans under the Credit Facility
bear, at Genesis' option, interest at the per annum Prime Rate as announced by
the administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin that is dependent upon a certain financial covenant test. The
following interest rates reflect the impact of the third amended credit
facility entered into subsequent to fiscal year end. Loans under the Tranche A
Term Facility and Revolving Facility bear interest at an annual rate of .75%
for Prime Rate loans and 2.5% for LIBO Rate loans (8.14% at September 30,
1998). Loans under the Tranche B Term Facility bear interest at an annual rate
of 1.25% for Prime Rate loans and 3.0% for LIBO
F-17
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(5) Long-term Debt -- (Continued)
Rate loans (8.64% at September 30, 1998). Loans under the Tranche C Term
Facility bear interest at an annual rate of 1.5% for Prime Rate loans and 3.25%
for LIBO Rate loans (8.89% at September 30, 1998). 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 reduced.
The Credit Facility 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, 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 December 1998, subsequent to the fiscal year end, the Company issued
$125,000, 9 7/8% Senior Subordinated Notes due 2009. Interest on the notes are
payable semi-annually on January 15 and July 15 of each year, commencing July
15, 1999. The Company expects that approximately $59,950 of the net proceeds
will be used to repay portions of the Tranche A, B and C Term Facilities and
approximately $59,950 of the net proceeds will be used to repay a portion of
the Revolving Facility.
In October 1996, the Company completed an offering of $125,000 9 1/4%
Senior Subordinated Notes due 2006. Interest is payable on April 1 and October
1 of each year. The Company used the net proceeds of approximately $121,250,
together with borrowings under the 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.
In November 1996, the Company called for redemption of the then
outstanding 6% Convertible Senior Subordinated Debentures (the 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 into Common Stock at a conversion price of $15.104 per share. In
connection with the early conversion of a portion of the Debentures converted
during fiscal 1996, the Company paid approximately $1,245 representing the
prepayment of interest to converting debenture holders. The non-recurring cash
payment is presented as debenture conversion expense in the 1996 statement of
operations.
In June 1995, the Company completed an offering of $120,000 of 9 3/4%
Senior Subordinated Notes due 2005. Interest is payable on the notes on June 15
and December 15 of each year. The notes are redeemable at the option of the
Company in whole or in part, at any time, on or after June 15, 2000 at a
redemption price initially equal to 104.05% of the principal amount and
decreasing annually thereafter. The Company used the net proceeds from the
notes offering to repay a portion of the Credit Facility.
At September 30, 1998, sinking fund requirements and installments of
long-term debt are as follows:
Principal
Year ending September 30, Amount
- -------------------------------- ----------
1999 ......................... $ 49,712
2000 ......................... 48,883
2001 ......................... 38,874
2002 ......................... 44,376
2003 ......................... 574,117
Thereafter ................... $652,345
--------
The Company enters into interest rate swap agreements to manage interest
costs and risks associated with changing interest rates. These agreements
generally convert underlying variable-rate debt based on LIBO
F-18
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(5) Long-term Debt -- (Continued)
Rates into fixed-rate debt. At September 30, 1998, the notional principal
amount of these agreements totaled $1,100,000 with a net fixed notional amount
of $370,000 whereby the Company made quarterly payments at a weighted average
fixed rate of 5.00% and received quarterly payments at floating rates based on
three month LIBO Rate (approximately 5.64% at September 30, 1998). At September
30, 1997, the notional principal amount of these agreements totaled $400,000
whereby the Company made quarterly payments at a weighted average fixed rate of
5.45% and received payments at a floating rate based on three month LIBO Rate
(approximately 5.78% at September 30, 1997).
Interest of $3,526 in 1998, $2,156 in 1997 and $1,191 in 1996, was
capitalized in connection with facility construction, systems development and
renovations.
During fiscal 1998 and 1997, the Company recorded extraordinary losses,
net of tax, of $1,924 and $553, respectively related to the early retirement of
debt. The Company is restricted from declaring any dividends on its Common
Stock or authorizing any other distribution on account of ownership of its
capital stock unless certain conditions are met.
(6) Leases and Lease Commitments
The Company leases certain facilities and equipment under operating
leases. Future minimum payments for the next five years under operating leases
at September 30, 1998 were as follows:
Minimum
Year ending September 30, Payment
- --------------------------- ----------
1999 .................... $40,545
2000 .................... 35,712
2001 .................... 32,550
2002 .................... 25,674
2003 .................... $24,002
-------
Excluded from the future minimum lease payments above in the year 2001 is
approximately $78,600 related to a residual value guarantee due under a lease
financing facility.
On January 30, 1998, Genesis 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 in proceeds from the sale and leaseback of 13 properties
to ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. The sale of properties
to ElderTrust resulted in a gain of approximately $12,000 which has been
deferred and is being amortized over the ten year term of the lease contracts
with ElderTrust. In September 1998, the Company sold its leasehold rights and
option to purchase seven eldercare facilities acquired in its November 1993
acquisition of Meridian Healthcare, Inc. to ElderTrust for $44,000, including
$35,500 in cash and an $8,500 note. As part of the transaction, Genesis will
continue to sublease the facilities for ten years with an option to extend the
lease until 2018 at an initial annual lease obligation of approximately
$10,000. The transaction resulted in a gain of approximately $43,700 which has
been deferred and is being amortized over the ten year lease term of the lease
contracts with ElderTrust.
F-19
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(7) Patient Service Revenue
The distribution of net patient service revenue by class of payor for the
years ended September 30, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Year ended September 30,
Class of payor 1998 1997 1996
- ------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
Private pay and other ......... $ 581,128 $ 414,187 $251,244
Medicaid ...................... 451,989 385,313 229,838
Medicare ...................... 258,279 252,845 157,362
---------- ---------- --------
$1,291,396 $1,052,345 $638,444
---------- ---------- --------
</TABLE>
The above revenue amounts are net of third-party contractual allowances of
$278,804, $213,250 and $122,136, in 1998, 1997 and 1996, respectively. The
Company has recorded cost report receivables from third-party payors (i.e.,
Medicare and Medicaid) of $62,257 and $60,865 at September 30, 1998 and 1997,
respectively. These amounts at September 30, 1998 are due primarily from
Massachusetts ($17,700), Pennsylvania ($5,700), Florida ($2,400) and Medicare
($35,600) for the 1994 through 1998 cost reporting periods. The Company
recorded bad debt expense of $18,016, $12,615 and $4,382 in 1998, 1997 and
1996, respectively.
(8) Income Taxes
Total income tax expense (benefit) for the years ended September 30, 1998,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Income (loss) before extraordinary item ......... $ (8,158) $27,088 $20,917
Extraordinary item .............................. (1,106) (318) --
-------- ------- -------
Total ........................................... $ (9,264) $26,770 $20,917
-------- ------- -------
</TABLE>
The components of the provision (benefit) for income taxes for the years
ended September 30, 1998, 1996 and 1995 were as follows:
Year ended September 30,
1998 1997 1996
------------ --------- ----------
Current:
Federal ......... $ -- $ 5,370 $14,508
State ........... -- 695 1,295
-------- ------- -------
$ -- $ 6,065 $15,803
-------- ------- -------
Deferred:
Federal ......... $ (7,163) $20,781 $ 4,595
State ........... (995) 242 519
-------- ------- -------
$ (8,158) $21,023 $ 5,114
-------- ------- -------
Total ........... $ (8,158) $27,088 $20,917
-------- ------- -------
F-20
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(8) Income Taxes -- (Continued)
Total income tax expense differed from the amounts computed by applying
the U.S. federal income tax rate of 35% to net income before income taxes and
extraordinary items as a result of the following:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
------------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) .......... $ (10,838) $26,331 $20,330
Increase (reduction) in income taxes resulting from:
State and local income taxes (benefit), net of
federal tax benefits ............................ (463) 364 1,179
Amortization of goodwill .......................... 3,840 693 235
Targeted jobs tax credits ......................... (1,073) (300) --
Tax exempt interest ............................... -- -- (770)
Other, net ........................................ 376 -- (57)
--------- ------- -------
Total income tax expense (benefit) ................. $ (8,158) $27,088 $20,917
--------- ------- -------
</TABLE>
The sources of the differences between consolidated earnings for financial
statement purposes and tax purposes and the tax effects are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Excess tax depreciation expense versus book depreciation ......... $ 973 $ 2,525 $1,157
Excess tax gains versus book gains ............................... (7,275) (200) (895)
Amortization of deferred gain on sale and leaseback .............. -- -- 49
Utilization of net operating loss carryforward ................... -- 200 (600)
Accrued liabilities and reserves ................................. 820 15,000 676
Goodwill ......................................................... 3,689 3,575 3,661
Prepaid rent ..................................................... -- -- 1,146
Net operating loss ............................................... (6,128) -- --
Other ............................................................ (237) (77) (80)
-------- ------- ------
Net deferred tax provision ....................................... $ (8,158) $21,023 $5,114
-------- ------- ------
</TABLE>
F-21
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(8) Income Taxes -- (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1998 and 1997 are presented below:
September 30,
1998 1997
------------- -------------
Deferred Tax Assets
Accounts receivable ...................... $ -- $ 5,480
Accrued compensation ..................... 444 601
Amortization of deferred gain ............ -- 47
Debt premium ............................. 2,144 2,144
Accrued liabilities and reserves ......... 11,225 7,966
Net operating loss carryforwards ......... 10,128 4,000
Other, net ............................... 1,017 --
--------- ---------
Deferred tax assets ...................... 24,958 20,238
--------- ---------
Valuation allowance ...................... (3,400) (3,400)
--------- ---------
Net deferred tax assets .................. 21,558 $ 16,838
--------- ---------
Deferred Tax Liabilities
Accounts receivable ...................... (3,464) --
Goodwill and other intangibles ........... (39,861) (10,695)
Depreciation ............................. (50,242) (43,888)
Accrued liabilities and reserves ......... (819) --
--------- ---------
Total deferred tax liability ............. (94,386) (54,583)
--------- ---------
Net deferred tax liability ............... $ (72,828) $ (37,745)
--------- ---------
The deferred tax assets related to state net operating loss carryforwards
are available to reduce future state income taxes payable, subject to
applicable carryforward rules and limitations. Due to these limitations, the
Company has established a valuation allowance of $3,400. The net operating loss
carryforwards expire in years 1999 through 2002.
(9) Notes Receivable and Other Investments
Notes receivable and other investments at September 30, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
---------- ----------
<S> <C> <C>
Mortgage notes and other notes receivable ......... $41,011 $ 92,164
Investments in non marketable securities .......... 6,612 16,550
------- --------
$47,623 $108,714
------- --------
</TABLE>
Mortgage notes and other notes receivable at September 30, 1998 bear
interest at rates ranging from 7 1/2% to 10% and mature at various times
ranging from 1999 to 2006. Approximately $30,869 of the mortgage notes and
other notes are secured by first or second mortgage liens on underlying
facilities and personal property, accounts receivable, inventory and / or gross
facility receipts, as defined.
At September 30, 1997 and 1998, the Company held $10,000 of convertible
preferred stock of Doctors Health, Inc. ("Doctors Health"), an independent
physician owned and controlled integrated delivery system and practice
management company based in Maryland. The convertible preferred stock, which is
accounted for under the cost method, carries an 8% cumulative dividend and is
convertible into common stock, and if converted would represent an approximate
10% ownership interest in Doctors Health. Also, the Company loaned to Doctors
Health $5,000 at an annual interest rate of 11%. On November 16, 1998, a
voluntary petition for Chapter 11 bankruptcy was filed by Doctors Health. In
the fourth quarter of 1998, the Company wrote-off its investment in and loan to
Doctors Health.
F-22
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(9) Notes Receivable and Other Investments -- (Continued)
During the twelve months ended September 30, 1998, notes receivable and
other investments declined approximately $61,100 principally due to the
restructuring and repayment of a $45,000 mortgage loan and a $10,000 working
capital loan with 11 managed eldercare centers in Florida, the impairment
write-off of the Company's convertible preferred stock investment and note
receivable with Doctors Health, offset by an $8,500 note extended to ElderTrust
in connection with the sale of leasehold rights and an option to purchase seven
eldercare centers.
The Company has agreed to provide third parties, including facilities
under management contract, with $21,944 of working capital lines of credit. The
unused portion of working capital lines of credit was $8,322 at September 30,
1998.
(10) Other Long-Term Assets
Other long-term assets at September 30, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
September 30,
1998 1997
---------- ----------
<S> <C> <C>
Deferred financing fees, net ................................... $29,567 $12,939
Subordinated management fees receivable from Multicare ......... 14,048 --
Property deposits and funds held in escrow ..................... 10,764 7,056
Funds held by trustee .......................................... 1,415 1,661
Other, net ..................................................... 18,110 10,066
------- -------
$73,904 $31,722
------- -------
</TABLE>
(11) Management Services and Other Income, Net
Included in management services and other income, net were the following:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Fees earned in connection with management
agreements ....................................... $ 64,178 $18,959 $18,227
Service related businesses ........................ 27,809 28,043 9,023
Capitation revenue and transactions with acute care
providers ........................................ 21,922 -- --
Transactional items, net .......................... -- 476 5,775
-------- ------- -------
$113,909 $47,478 $33,025
-------- ------- -------
</TABLE>
In 1998, approximately $42,200 of management fees were earned in
connection with the management of the Multicare operations.
(12) Stock Option Plans
The Company has two stock option plans (the "Employee Plan" and the
"Directors Plan"). Under the Employee Plan, 6,250,000 shares of common stock
were reserved for issuance to employees including officers and directors.
Options granted in the Employee Plan prior to fiscal 1997 generally become
excercisable over a five year period, while options granted subsequent to
fiscal 1996 vest 25% in the year of the grant and 25% over each of the next
three years. The options granted in the Employee Plan expire 10 years from the
date of grant. All options granted under the Employee Plan have been at the
fair market value of the common stock on the date of grant. Presented below is
a summary of the Employee Plan for the three years ended September 30, 1998.
F-23
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(12) Stock Option Plans -- (Continued)
<TABLE>
<CAPTION>
Option Price Available
per Share Outstanding Exercisable for Grant
------------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 ......... $2.22 -- $20.25 2,094,168 926,712 437,817
------------------ --------- ------- -------
Authorized ............................ -- -- -- 750,000
Granted ............................... 19.50 -- 31.87 1,010,998 -- (1,010,998)
Became Exercisable .................... -- -- 509,070 --
Exercised ............................. 5.33 -- 20.25 (275,455) (275,455) --
Canceled .............................. -- (136,269) -- 136,269
------------------ --------- --------- ----------
Balance at September 30, 1996 ......... $2.22 -- $31.87 2,693,442 1,160,327 313,088
------------------ --------- --------- ----------
Authorized ............................ -- -- -- 750,000
Granted ............................... $25.00 -- $35.25 933,672 -- (933,672)
Became Exercisable .................... -- -- 695,087 --
Exercised ............................. $5.33 -- $32.88 (191,774) (191,774) --
Canceled .............................. -- (13,515) -- 13,515
------------------ --------- --------- ----------
Balance at September 30, 1997 ......... $2.22 -- $35.25 3,421,825 1,663,640 142,931
------------------ --------- --------- ----------
Authorized ............................ -- -- -- 1,750,000
Granted ............................... $27.12 -- $28.75 1,056,905 -- (1,056,905)
Became Exercisable .................... -- -- 757,849 --
Exercised ............................. $5.33 -- $32.88 (75,052) (75,052) --
Canceled .............................. -- (249,190) -- 249,190
------------------ --------- --------- ----------
Balance at September 30, 1998 ......... $2.22 -- $35.25 4,154,488 2,346,437 1,085,216
------------------ --------- --------- ----------
</TABLE>
In March 1992, the Company adopted, and in February 1993, the shareholders
approved, the Directors Plan. Pursuant to the Directors Plan, options may be
granted for an aggregate of 225,000 shares of common stock. The Directors Plan
terminates ten years after its approval by the shareholders. At September 30,
1998, there were 106,500 options outstanding and excercisable at grant prices
ranging from $7.33 to $35.25.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", and applies APB Opinion No. 25 in accounting for its plans and,
accordingly, has not recognized compensation cost for stock option plans in its
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date consistent with the provisions of Statement 123,
the Company's net income (loss) would have been changed to the proforma amounts
indicated below:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------- ------------
<S> <C> <C>
Net income (loss) -- as reported ............................. $ (25,900) $ 47,591
Net income (loss) -- pro forma ............................... (31,469) 38,955
Net income (loss) per share -- as reported (diluted) ......... (0.74) 1.32
Net income (loss) per share -- pro forma (diluted) ........... $ (0.90) $ 1.08
</TABLE>
The fair value of stock options granted in 1998 and 1997 is estimated at
the grant date using the Black-Scholes option-pricing model with the following
assumptions for 1998 and 1997: dividend yield of 0% (1997 and 1998); expected
volatility of 56.17% (1998) and 37.3% (1997); a risk-free return of 5.9% (1997
and 1998); and expected lives of approximately 7 years (1998) and 8 years
(1997).
F-24
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(12) Stock Option Plans -- (Continued)
The following table summarizes information for stock options of the
Employee Plan and the Director Plan outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.00 -- $10.00 412,419 3.10 $ 6.54 412,419 $ 6.54
$10.01 -- $15.00 91,325 4.40 10.63 91,325 10.63
$15.01 -- $20.00 604,925 5.70 16.89 537,425 16.81
$20.01 -- $25.00 1,015,775 6.80 23.08 568,588 23.01
$25.01 -- $30.00 1,741,594 8.50 28.94 644,985 29.08
$30.01 -- $35.00 75,000 7.70 31.88 50,000 31.88
$35.01 -- $40.00 319,950 8.00 35.25 148,195 35.25
--------- ---- ------- ------- -------
4,260,988 7.00 $ 23.80 2,452,937 $ 20.94
--------- ---- ------- --------- -------
</TABLE>
(13) Retirement Plan
The Company's retirement plan (the "Retirement Plan") is a cash deferred
profit-sharing plan covering all of the employees of the Company (other than
certain employees covered by a collective bargaining agreement) who have
completed at least 1,000 hours of service and twelve months of employment.
Under the 401(k) component, each employee may elect to contribute a portion of
his or her current compensation up to the maximum permitted by the Internal
Revenue Code or 15% (or for more highly compensated employees 2%) of such
employee's annual compensation. The Company may make a matching contribution
each year as determined by the Board of Directors. The Board of Directors may
establish this contribution at any level each year, or may omit such
contribution entirely.
The Company match since January 1995 has been based on years of service.
For an employee who has completed six years of service prior to the beginning
of the calendar year, he/she receives a match of $0.75 per $1.00 of
contribution up to 4% of his/her salary. Therefore, if this employee
contributes 4% or more of his/her salary, the Company contributes 3% of his/her
salary. If the employee contributes less than 4%, the Company contributes $0.75
per $1.00 of contribution.
If an employee has not completed six years of service, he/she is matched
$0.50 per $1.00 of contribution up to 2% of his/her salary. Therefore, if this
employee contributes 2% or more of his/her salary, the Company contributes 1%
of his/her salary. If the employee contributes less than 2%, the Company
contributes $0.50 per $1.00 of contribution.
Under the profit sharing provisions of the Retirement Plan, the Company
may make an additional employer contribution as determined by the Board of
Directors each year. The Board of Directors may establish this contribution at
any level each year, or may omit such contribution entirely. It is the
Company's intent that employer contributions under the profit sharing
provisions of the Retirement Plan are to be made 50% in the form of Common
Stock and 50% in cash, and are to be made only if there are sufficient profits
to do so. Profit sharing contributions are allocated among the accounts of
participants in the proportion that their annual compensation bears to the
aggregate annual compensation of all participants. All employee contributions
to the Retirement Plan are 100% vested. Company contributions are vested in
accordance with a schedule that generally provides for vesting after five years
of service with the Company (any non-vested amounts that are forfeited by
participants are used to reduce the following year's contribution by the
Company).
The Company recorded retirement plan expense for the 401(k) match and the
discretionary contribution of approximately $7,484, $3,516 and $1,877 for the
years ended September 30, 1998, 1997 and 1996, respectively.
F-25
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(14) Commitments and Contingencies
The Company is self insured for the majority of its workers' compensation
and health insurance claims. The Company's maximum exposure is $500 per
occurrence for workers' compensation and $75 per year, per participant for
health insurance. The Company has elected to reinsure the first $500 per
occurrence for workers' compensation claims, through its wholly-owned captive
insurance company, Liberty Health Corp., LTD. The Company carries excess
insurance with commercial carriers for losses above $500 per workers'
compensation claim, and $75 per participant for health insurance. The provision
for estimated workers' compensation and health insurance claims includes
estimates of the ultimate costs for both reported claims and claims incurred
but not reported.
The Company has guaranteed $14,195 of indebtedness of facilities under
management contract. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for guarantees,
loan commitments and letters of credit is represented by the dollar amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
financial instruments. The Company does not anticipate any material losses as a
result of these commitments.
Genesis is a party to litigation arising in the ordinary course of
business. Genesis does not believe the results of such litigation, even if the
outcome is unfavorable to the Company, would have a material adverse effect on
its consolidated financial position or results of operations.
(15) Loss on Impairment of Assets
Due to specific events occurring in the fourth quarter of Fiscal 1998 and
a focus on core business operations in response to the Medicare Prospective
Payment System ("PPS"), the Company recorded non-cash charges before income
taxes of approximately $116,000, of which approximately $24,000 relates to the
impairment of one eldercare center and certain non-core businesses, including
the Company's ambulance business and certain non-core Medicare home health
operations; approximately $43,000 relates to investments in owned eldercare
centers and other assets the Company believes are impaired as a result of PPS;
approximately $23,000 relates to impaired investments in eldercare centers
previously owned or managed by the Company; and approximately $26,000 relates
to the Company's investment in Doctors Health, a medical care management
company in the Company's Chesapeake region. Approximately $95,000 of the
non-cash impairment charges are reflected in the Statement of Operations as
loss on impairment of assets and approximately $21,000 are included in other
operating expenses.
In the fourth quarter of Fiscal 1997, the Company completed an evaluation
of its physician service business and announced its intentions to restructure
this business, including the closure and possible sale of free standing service
sites, the restructuring of physician compensation arrangements and the
termination of certain staff. In connection with the plan and selected asset
impairments, the Company recorded a fourth quarter pretax charge of
approximately $5,700. In addition, the Company reached an agreement with BCBSMD
to insure, through a sub-capitation agreement, the health care benefits of
approximately 7,000 members of BCBSMD's Care First Medicare product. As a
result, the Company has recorded a liability and pretax impairment charge of
approximately $5,000 to accrue for the estimated loss inherent in the
agreement. The impairment charge also included a pretax charge of approximately
$4,300 related to the write-off of selected assets deemed unrecoverable.
(16) Fair Value of Financial Instruments
The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), cost report receivables,
prepaid expenses and other current assets, accounts payable, accrued expenses,
accrued compensation and accrued interest approximates fair value because of
the short-term maturity of these instruments.
F-26
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(16) Fair Value of Financial Instruments -- (Continued)
The Company also believes the carrying value of mortgage notes and other
notes receivable, and non marketable debt securities approximate fair value
based upon the discounted value of expected future cash flows using interest
rates at which similar investments would be made to borrowers with similar
credit quality and for the same remaining maturities.
The fair value of interest rate swap agreements is the estimated amount
the Company would receive or pay to terminate the swap agreement at the
reporting date, taking into account current interest rates. The estimated
amount the Company would pay to terminate its interest rate swap agreements
outstanding at September 30, 1998 and 1997 is approximately $29,685 and $2,052,
respectively.
The fair value of the Company's commitments to provide working capital
lines of credit and certain financial guarantees is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. Since the Company has not charged fees for currently
outstanding commitments there is no fair value of such financial instruments.
The fair value of the Company's fixed rate long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
At September 30, 1998 and 1997, the carrying value of fixed rate debt of
$370,318 and $354,154, respectively, approximates market value.
The fair value of the Company's floating rate debt approximates its fair
value.
(17) Summary Financial Information of Unconsolidated Affiliates
The following unaudited summary financial data for the Multicare Companies
is as of and for the twelve months ended September 30, 1998. Multicare is the
Company's only significant unconsolidated affiliate.
Total assets ........................ $1,698,955
Long-term debt ...................... 725,194
Total liabilities ................... 965,718
Revenues ............................ 695,633
Net income .......................... $ 238
In 1998, the Company earned approximately $42,200 of management fees in
connection with the management of the Multicare operations and approximately
$30,900 of ancillary revenue in connection with services provided to Multicare
eldercare centers.
(18) Certain Significant Risks and Uncertainties
The following information is provided in accordance with the AICPA
Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties."
In recent years, a number of laws have been enacted that have effected
major changes in the health care system, both nationally and at the state
level. The Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into
law on August 5, 1997, seeks to achieve a balanced federal budget, by, among
other things, reducing federal spending on the Medicare and Medicaid programs.
With respect to Medicare, the law mandated establishment of PPS for Medicare
skilled nursing facilities under which facilities will be paid a federal per
diem rate for most covered nursing facility services (including
pharmaceuticals).
While the Company has prepared certain estimates of the impact of PPS, it
is not possible to fully quantify the effect of the recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Company's business. Accordingly, there can be no assurance
that the impact of PPS will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect the business of the Company.
F-27
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(19) Quarterly Financial Data (Unaudited)
The Company's unaudited quarterly financial information is as follows:
<TABLE>
<CAPTION>
Diluted
Earnings
Earnings (Loss) Per Diluted
(Loss) Before Share Before Earnings
Total Net Extraordinary Net Income Extraordinary (Loss)
Revenues Item (Loss) Item Per Share
------------- --------------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
Quarter ended:
December 31, 1997 .......... $ 302,565 $ 12,822 $ 10,898 $ 0.36 $ 0.31
March 31, 1998 ............. 344,299 14,568 14,568 0.41 0.41
June 30, 1998 .............. 352,526 15,991 15,991 0.45 0.45
September 30, 1998 ......... 405,915 (67,357) (67,357) (1.92) (1.92)
---------- --------- --------- ------ ------
$1,405,305 $ (23,976) $ (25,900) $(0.68) $(0.74)
Quarter ended:
December 31, 1996 .......... $ 258,544 $ 11,508 $ 10,955 $ 0.33 $ 0.32
March 31, 1997 ............. 273,263 13,494 13,494 0.37 0.37
June 30, 1997 .............. 284,463 15,556 15,556 0.43 0.43
September 30, 1997 ......... 283,553 7,586 7,586 0.21 0.21
---------- --------- --------- ------ ------
$1,099,823 $ 48,144 $ 47,591 $ 1.34 $ 1.33
---------- --------- --------- ------ ------
</TABLE>
Earnings (loss) per share was calculated for each three month and the
twelve month period on a stand alone basis. As a result, the sum of the
earnings per share for the four quarters does not equal the earnings per share
for the twelve months. The fourth quarter of 1998 includes non-cash charges of
approximately $116,000 (see Note 15).
F-28
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
-------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents ................................................ $ 8,901 $ 4,902
Investments in marketable securities ................................ 24,186 26,658
Accounts receivable, net ............................................ 405,482 376,023
Cost report receivables ............................................. 63,861 62,257
Inventory ........................................................... 66,703 63,760
Prepaid expenses and other current assets ........................... 34,578 40,579
----------- -----------
Total current assets ............................................. 603,711 574,179
----------- -----------
Property, plant, and equipment, net .................................... 608,692 596,562
Notes receivable and other investments ................................. 49,785 47,623
Other long-term assets ................................................. 77,706 73,904
Investments in unconsolidated affiliates ............................... 356,149 344,567
Goodwill and other intangibles, net .................................... 974,635 990,533
----------- -----------
Total assets ..................................................... $ 2,670,678 $ 2,627,368
----------- -----------
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt .............................. $ 34,160 $ 49,712
Accounts payable and accrued expenses ............................... 192,260 218,749
Income taxes payable ................................................ 4,427 --
----------- -----------
Total current liabilities ........................................ 230,847 268,461
----------- -----------
Long-term debt ......................................................... 1,439,457 1,358,595
Deferred income taxes .................................................. 69,357 72,828
Deferred gain and other long-term liabilities .......................... 50,959 52,412
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 590,253 issued and outstanding at December 31,
1998 and September 30, 1998 ........................................ 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and out-
standing 35,227,449 and 35,181,848 at December 31, 1998;
35,225,731 and 35,180,130 at September 30, 1997 .................... 704 704
Additional paid-in capital .......................................... 749,500 749,491
Retained earnings ................................................... 129,601 124,430
Accumulated other comprehensive income .............................. 490 684
Treasury stock, at cost ............................................. (243) (243)
----------- -----------
Total shareholders' equity ....................................... 880,058 875,072
----------- -----------
Total liabilities and shareholders' equity ....................... $ 2,670,678 $ 2,627,368
----------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
F-29
<PAGE>
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
December 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net revenues:
Pharmacy and medical supply services ..................................... $ 236,217 $ 68,696
Inpatient services ....................................................... 176,032 180,805
Other revenue ............................................................ 66,955 53,064
----------- -----------
Total net revenues .................................................... 479,204 302,565
----------- -----------
Operating expenses:
Operating expenses ....................................................... 393,082 233,342
General corporate expense ................................................ 14,968 12,037
Depreciation and amortization ............................................... 17,807 11,686
Lease expense ............................................................... 6,367 6,643
Interest expense, net ....................................................... 27,323 19,643
----------- -----------
Earnings before income taxes, equity in net income (loss) of unconsolidated
affiliates and extraordinary items ......................................... 19,657 19,214
Income taxes ................................................................ 7,378 7,013
----------- -----------
Earnings before equity in net income (loss) of unconsolidated affiliates and
extraordinary items ........................................................ 12,279 12,201
Equity in net income (loss) of unconsolidated affiliates .................... (892) 621
----------- -----------
Earnings before extraordinary items ......................................... 11,387 12,822
Extraordinary items, net of tax ............................................. (1,799) (1,924)
----------- -----------
Net income .................................................................. 9,588 10,898
Preferred stock dividend .................................................... 4,417 --
----------- -----------
Net income available to common shareholders ................................. $ 5,171 $ 10,898
----------- -----------
Per common share data:
Basic
Earnings before extraordinary items ................................... $ 0.20 $ 0.37
Net income ............................................................ $ 0.15 $ 0.31
Weighted average shares of common stock and equivalents ............... 35,217,418 35,079,426
----------- -----------
Diluted
Earnings before extraordinary items ................................... $ 0.20 $ 0.36
Net income ............................................................ $ 0.15 $ 0.31
Weighted average shares of common stock and equivalents ............... 35,380,732 35,594,481
----------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
F-30
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 5,170 $ 10,898
Net charges included in operations not requiring funds ..................... 21,880 14,644
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable ..................................................... (29,459) (12,312)
Accounts payable and accrued expenses ................................... (22,364) (8,622)
Other, net .............................................................. 911 (527)
---------- ----------
Net cash provided by (used in) operations .................................. $ (23,862) $ 4,081
---------- ----------
Cash flows from investing activities:
Capital expenditures ....................................................... (17,551) (10,925)
Payments for acquisitions and related costs, net of cash acquired .......... (4,125) (41,174)
Investments in unconsolidated affiliates ................................... (12,474) (326,641)
Cash paid for assets held for sale ......................................... -- (20,109)
Sale of marketable securities .............................................. 2,472 --
Notes receivable and other investment and other asset additions, net ....... (2,692) (12,805)
---------- ----------
Net cash used in investing activities ...................................... (34,370) (411,654)
---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under working capital revolving credit
facility .................................................................. 65,539 (164,800)
Repayment of long term debt and payment of sinking fund requirements (120,429) (1,973)
Proceeds from issuance of long-term debt ................................... 120,200 600,000
Debt issuance costs ........................................................ (3,088) (19,648)
Purchase of common stock call options ...................................... -- (4,442)
Stock options exercised .................................................... 9 313
---------- ----------
Net cash provided by financing activities .................................. 62,231 409,450
---------- ----------
Net increase in cash and equivalents: ......................................... 3,999 1,877
Cash and equivalents
Beginning of period ........................................................ 4,902 11,651
---------- ----------
End of period .............................................................. $ 8,901 $ 13,528
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid .............................................................. $ 35,660 $ 22,550
Income taxes paid .......................................................... $ 186 $ --
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
F-31
<PAGE>
Genesis Health 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 on Form 10-K for the
fiscal year ended September 30, 1998. 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. Long-Term Debt
Genesis entered into a credit agreement pursuant to which the lenders
provided Genesis and its subsidiaries a credit facility totaling $1,250,000,000
(the "Credit Facility") 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 Vitalink Transaction; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of the transactions. The Credit Facility
consists of three term loans with original balances of $200,000,000 each
(collectively, the "Term Loans"), a $650,000,000 revolving credit loan (the
"Revolving 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 $20,000,000. The Term Loans amortize in
quarterly installments beginning in Fiscal 1998 through 2005, of which
$21,419,000 is payable in Fiscal 1999. The Term Loans consist of (i) a six year
term loan with an outstanding balance of $130,525,000 at December 31, 1998 (the
"Tranche A Term Facility"); (ii) a seven year term loan with an outstanding
balance of $153,687,000 (the "Tranche B Term Facility"); and (iii) an eight
year term loan with an outstanding balance of $173,450,000 (the "Tranche C Term
Facility"). The Revolving Facility becomes payable in full on September 30,
2003. The third amendment to the Credit Facility, dated December 15, 1998, made
the financial covenants for certain periods less restrictive, permitted a
portion of the proceeds of subordinated debt offerings to repay indebtedness
under the Revolving Facility and increased the interest rates applying to the
Term Loans and the Revolving Facility. The revised financial covenants
accommodate the projected impact of PPS beginning in fiscal 1999 and the
non-cash charges in the fourth quarter of fiscal 1998.
The Credit Facility is 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 Genesis ElderCare Corp.) other than
the stock of Multicare and its subsidiaries. Loans under the Credit Facility
bear, at Genesis' option, interest at the per annum Prime Rate as announced by
the administrative agent, or the applicable Adjusted LIBO Rate plus, in either
event, a margin (the "Annual Applicable Margin") that is dependent upon a
certain financial ratio test. Loans under the Tranche A Term Facility and
Revolving Facility have an Annual Applicable Margin of .75 for Prime Rate loans
and 2.5 (an effective rate of 7.90 at December 31, 1998) for LIBO Rate loans.
Loans under the Tranche B Term Facility have an Annual Applicable Margin of
1.25 for Prime Rate loans and 3.0 (an effective rate of 8.40 at December 31,
1998) for LIBO Rate loans. Loans under the Tranche C Term Facility have an
Annual Applicable Margin of 1.5 for Prime Rate loans and 3.25 (an effective
rate of 8.65 at December 31, 1998) for LIBO Rate loans. Loans under the Swing
Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the
parties. Subject to meeting certain financial ratios, the above referenced
interest rates are reduced.
The Credit Facility 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
F-32
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements -- (Continued)
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, 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 December 1998, the Company issued $125,000,000, 97/8% Senior
Subordinated Notes due 2009 at a price of 96.1598% resulting in net proceeds of
$120,200,000. Interest on the notes is payable semi-annually on January 15 and
July 15 of each year, commencing July 15, 1999. Approximately $59,900,000 of
the net proceeds were used to repay portions of the Tranche A, B and C Term
Facilities and approximately $59,900,000 of the net proceeds were used to repay
a portion of the Revolving Facility.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share applicable to common shares: (amounts are in thousands
except per share data):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
-------------------- -------------------
<S> <C> <C>
Basic Earnings Per Share:
Income before extraordinary items ..................... $ 6,970 $ 12,822
Extraordinary items ................................... (1,799) (1,924)
-------- --------
Net income available to common shareholders ........... $ 5,171 $ 10,898
-------- --------
Weighted average shares ............................... 35,217 35,079
-------- --------
Earnings per share before extraordinary items ......... $ 0.20 $ 0.37
-------- --------
Earnings per share .................................... $ 0.15 $ 0.31
-------- --------
Diluted Earnings Per Share:
Income before extraordinary items ..................... $ 6,970 $ 12,822
Extraordinary items ................................... (1,799) (1,924)
-------- --------
Net income available to common shareholders ........... $ 5,171 $ 10,898
-------- --------
Weighted Average Shares & Common Stock Equivalents:
Common shares ......................................... 35,217 35,079
Dilutive effect of unexcercised stock options ......... 164 515
-------- --------
Total ................................................. 35,381 35,594
-------- --------
Earnings per share before extraordinary items ......... $ 0.20 $ 0.36
-------- --------
Earnings per share .................................... $ 0.15 $ 0.31
-------- --------
</TABLE>
<PAGE>
4. Pro Forma Financial Information
On August 28, 1998, Genesis and its wholly-owned subsidiary V Acquisition
Corporation ("Newco") consummated an Agreement and Plan of Merger (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink"), pursuant to which Vitalink merged with and into Newco (the
"Vitalink Transaction"). Each share of Vitalink Common Stock, par value $.01
per share (the "Vitalink Common Stock"), was converted in the merger into the
right to receive (i) .045 shares of Genesis Series G Cumulative Convertible
Preferred Stock, par value $.01 per share (the "Genesis Preferred"), (ii)
$22.50 in cash, or (iii) a combination of cash and shares of Genesis Preferred
(collectively, the "Merger Consideration"). The Merger Consideration paid to
stockholders of Vitalink to acquire their shares (including shares which may
have been issued upon the exercise of outstanding options) was $590,200,000 of
which 50% was paid in cash and 50% in Genesis Preferred. The Genesis Preferred
has a face value of approximately $295,100,000 and an initial dividend of
5.9375% and generally is not transferable without the consent of the Company.
The Genesis Preferred is convertible into Genesis common stock, par value $.02
per share (the "Common Stock"), at $37.20 per share and it may be called for
conversion after April 26, 2001, provided the price of Common Stock reaches
certain trading levels and after April 26, 2002, subject to a market-based call
premium. As a result of the merger, Genesis assumed approximately $87,000,000
of indebtedness Vitalink had outstanding.
F-33
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements -- (Continued)
The cash portion of the purchase price was funded through borrowings under the
Credit Facility. The Vitalink Transaction is being accounted for under the
purchase method and the related goodwill is being amortized over a forty year
period.
Genesis entered into a stock 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 (the "Pharmacy Purchase"), subject to
adjustment. The Company completed the Pharmacy Purchase effective January 1,
1998, which was accounted for under the purchase method and the related
goodwill is being amortized over forty years.
The following unaudited pro forma statement of operations information
gives effect to the Vitalink Transaction and the Pharmacy Purchase as though
they had occurred on October 1, 1997, after giving effect to certain
adjustments, including recognition of goodwill amortization, additional
depreciation expense and increased interest expense on debt related to the
transaction. The pro forma financial information, which includes preliminary
allocations of purchase price to goodwill and property, plant and equipment
that are subject to change, does not necessarily reflect the results of
operations that would have occurred had the transactions occurred at the
beginning of period presented.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended
Pro Forma Statement of Operations Information: December 31, 1997
- ---------------------------------------------------------------------- --------------------------------------
<S> <C>
Total net revenue ............................................... $ 446,298
Income before extraordinary items ............................... 11,092
Net income ...................................................... 9,168
Earnings per share, before extraordinary items, diluted ......... 0.31
Earnings per share, diluted ..................................... $ 0.26
</TABLE>
5. Summary Financial Information of Unconsolidated Affiliate
The following unaudited summary financial data for the Multicare Companies
is as of, and for the three months ended, December 31, 1998. Multicare is the
Company's only material unconsolidated affiliate.
(in thousands)
December 31, 1998
------------------
Total assets .............. $ 1,711,274
Long-term debt ............ 735,522
Total liabilities ......... $ 980,614
Three Months Ended
December 31, 1998
-------------------
Revenues .............. $ 168,484
Net loss .............. $ (2,578)
<PAGE>
6. Comprehensive Income
In October 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of Statement 130 had no impact on the
Company's net income available to common shareholders. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities be
included in other comprehensive income. The following table sets forth the
computation of comprehensive income (amounts are in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
-------------------- -------------------
<S> <C> <C>
Net income available to common shareholders ............. $ 5,171 $10,898
Unrealized gain (loss) on marketable securities ......... (194) 89
------- -------
Total comprehensive income .............................. $ 4,977 $10,987
------- -------
</TABLE>
Accumulated other comprehensive income, which is composed of net unrealized
gains and losses on marketable securities, was $490,000 and $185,000 at
December 31, 1998 and 1997, respectively.
F-34
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The following unaudited pro forma financial information for the combined
company and other acquisitions gives effect to (i) the Vitalink Transaction (or
"the Merger"), which was accounted for using the purchase method of accounting
and (ii) Genesis's purchase of the outstanding capital stock and limited
partnership interests of certain subsidiaries of the Multicare Companies, Inc.
("Multicare") engaged in the business of providing institutional pharmacy
services to third parties (the "Pharmacy Purchase") effective January 1, 1998,
which was accounted for using the purchase method of accounting as if each had
occurred on October 1, 1997.
The pro forma adjustments are based on available information and certain
assumptions that management believes are reasonable and are described in the
accompanying notes. No changes in operating revenues and expenses have been
made to reflect the results of any modification to operations that might have
been made had the Merger been consummated on the aforesaid assumed effective
dates for purposes of the pro forma results. The unaudited pro forma financial
information for the combined company and other acquisitions is provided for
informational purposes only and does not purport to represent what Genesis's
results of operations would actually have been had the transactions described
above actually occurred at such dates or to project Genesis's results of
operations or financial position at or for any future date or period. The
unaudited pro forma financial information for the combined company has been
prepared using the purchase method of accounting for the Merger, whereby merger
consideration is allocated to the tangible and intangible assets acquired and
liabilities assumed based on their respective fair values at the effective date
of the transaction. Such allocations are based on studies and valuations which
have not yet been completed. Accordingly, the allocations and estimated lives
for the Merger in the unaudited pro forma financial information for the
combined company are preliminary and subject to change.
The following unaudited pro forma financial information for the combined
company should be read in conjunction with the historical fiancial statements
of Genesis for its fiscal year ended September 30, 1998 and Vitalink for its
fiscal year ended May 31, 1998, including the respective notes thereto.
F-35
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Genesis
Genesis Pro Forma
Historical Adjustments
-------------- ---------------------
<S> <C> <C>
Net revenues ............................................. $ 1,405,305 $ 20,476 (10)
Expenses:
Operating expenses ..................................... 1,122,619 17,932 (10)
Corporate, general and
administrative ........................................ 53,179 --
Loss on impairment of assets ........................... 94,817 --
Lease expense .......................................... 31,182 179 (10)
Depreciation and amortization .......................... 52,385 321 (9)
Interest expense, net .................................. 82,088 2,100 (8)
----------- -----------
Total expenses ...................................... 1,436,270 20,532
----------- -----------
Income (loss) before income taxes, equity in
loss of unconsolidated subsidiaries and
extraordinary item ................................. (30,965) (56)
Income tax expense (benefit) (7) ......................... (8,158) (20)
----------- -----------
Income (loss) before equity in loss of
unconsolidated subsidiaries and
extraordinary item ................................. (22,807) (36)
Equity in net income of unconsolidated affiliates ........ 486 --
----------- -----------
Income (loss) before extraordinary item .................. (22,321) (36)
Less: preferred stock dividends .......................... 1,655 --
----------- -----------
Income (loss) available to common shareholders before
extraordinary item ...................................... $ (23,976) (36)
=========== ===========
Per common share data: (4)
Basic:
Loss before extraordinary item (11) .................... $ (0.68)
Weighted average shares of common stock and
equivalents ........................................... 35,159,195
Diluted:
Loss before extraordinary item (11) .................... $ (0.68)
Weighted average shares of common of common
stock and equivalents ................................. 35,159,195
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Vitalink
Vitalink Transaction Pro Forma
Historical * Adjustments Combined
-------------- -------------------- --------------
<S> <C> <C> <C>
Net revenues ............................................. 452,841 -- 1,878,622
Expenses:
Operating expenses ..................................... 352,502 (3,059) (5) 1,489,994
Corporate, general and
administrative ........................................ 38,936 (5,078) (6) 87,037
Loss on impairment of assets ........................... -- -- 94,817
Lease expense .......................................... -- (453) (6) 30,908
Depreciation and amortization .......................... 17,015 2,538 (1) 72,259
Interest expense, net .................................. 5,116 24,475 (2) 113,779
------- ----------- ---------
Total expenses ...................................... 413,569 18,423 1,888,794
------- ----------- ---------
Income (loss) before income taxes, equity in
loss of unconsolidated subsidiaries and
extraordinary item ................................. 39,272 (18,423) (10,172)
Income tax expense (benefit) (7) ......................... 17,808 (5,795) 3,835
------- ----------- ---------
Income (loss) before equity in loss of
unconsolidated subsidiaries and
extraordinary item ................................. 21,464 (12,628) (14,007)
Equity in net income of unconsolidated affiliates ........ -- -- 486
------- ----------- ---------
Income (loss) before extraordinary item .................. 21,464 (12,628) (13,521)
Less: preferred stock dividends .......................... -- 15,892 (3) 17,547
------- ----------- ---------
Income (loss) available to common shareholders before
extraordinary item ...................................... 21,464 (28,520) (31,068)
======= =========== =========
Per common share data: (4)
Basic:
Loss before extraordinary item (11) .................... $ (0.88)
Weighted average shares of common stock and
equivalents ........................................... 35,159,195
Diluted:
Loss before extraordinary item (11) .................... $ (0.88)
Weighted average shares of common of common
stock and equivalents ................................. 35,159,195
</TABLE>
- ------------
* Eleven months ended May 31, 1998.
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations
F-36
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
(1) Represents additional amortization relating to the goodwill and the
estimated fair value of pharmacy services agreements with Manor Care
recorded as a result of the merger, less amortization of pre-acquisition
goodwill recorded by Vitalink:
Amortization of goodwill over 40 years ................... $12,584
Amortization of the fair value of pharmacy services agree-
ments with Manor Care over 20 years .................... 987
-------
13,571
Less: amortization of $342,560 of pre-acquisition goodwill
recorded by Vitalink over a remaining useful life of 40
years and amortization and depreciation of assets which
have no future benefit ................................. 11,032
-------
Pro forma adjustment ..................................... $ 2,538
=======
(2) The Closing Consideration and the repayment of certain amounts under the
Vitalink credit facility were financed, in part, through borrowings under
Genesis' revolving credit facility, resulting in additional net interest
expense, and the amortization of related direct financing costs, as
follows:
<TABLE>
<CAPTION>
<S> <C>
Interest expense -- $383,811 borrowing under revolving
credit facility, 8.00% ..................................... $27,888
Amortization of direct financing costs over 10 years ......... 333
-------
28,221
Less: interest expense -- $68,274 repayment of Vitalink
credit facility, 6.05% ..................................... 3,746
-------
Pro forma adjustment ......................................... $24,475
=======
</TABLE>
(3) Represents the 5.9375% dividend on the $295,155 of Genesis Preferred Stock
issued as part of the Closing Consideration.
F-37
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (Continued)
(in thousands, except share and per share data)
(4) Pro forma per share basic and diluted income before extraordinary item
include the effect of the 5.9375% dividend on the Genesis Preferred Stock.
The pro forma per share diluted income before extraordinary item does not
assume the conversion of the Genesis Preferred Stock as the effect would
be antidilutive.
(5) Genesis has identified certain operations of Vitalink for which it has a
discrete and identifiable plan to implement. Additionally, under current
pharmaceutical supply contracts, purchasing discounts on volume increases
will be achieved.
Elimination of losses related to operations for which Gen-
esis has a discrete and identifiable plan .............. $1,154
Purchasing discounts on volume increases ................. 1,904
------
Pro forma adjustment ..................................... $3,059
======
Additionally, Genesis has identified duplicative positions and operations
and the related costs which approximate $10,900 for the twelve months ended
September 30, 1998 and plans to eliminate these costs according to a
transition plan within one year from the Merger date.
(6) As a result of the Merger, certain duplicative corporate and administrative
overhead functions related to the prior ownership structure will be merged
and duplicative positions will be eliminated. Genesis has identified
duplicative physical locations which will be merged into existing Genesis
administrative locations.
Personnel reductions in corporate and administrative staff
to eliminate duplicative positions ..................... $2,811
Other administrative costs including legal and accounting
fees and office expense ................................ 2,267
------
$5,078
======
Lease expense ............................................ $ 453
======
(7) Represents income tax expense (benefit), excluding non-deductible
amortization, at 36%.
(8) Interest expense has been adjusted to reflect the indebtedness incurred in
connection with the investment in the Pharmacy Purchase. The estimated
average interest rate for the indebtedness incurred is approximately 8.3%.
Interest expense, net ......... $2,100
======
F-38
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (Continued)
(in thousands, except share and per share data)
(9) In connection with the Pharmacy Purchase, depreciation and amortization
have been increased by the amortization of goodwill and depreciation
resulting from the allocation of purchase price. The Pharmacy Purchase
have preliminarily resulted in additional goodwill of approximately
$47,000 which is amortized over 40 years.
Depreciation and amortization ......... $321
====
(10) Represents the consolidation of the operating results relating to the
Pharmacy Purchase.
Revenues, net ......................... $20,476
Operating expenses .................... 17,932
Depreciation and amortization ......... --
Lease expense ......................... 179
=======
(11) Before the effect of extraordinary losses, net of tax, of $1,924 related
to the early retirement of debt for the twelve months ended September 30,
1998.
F-39
<PAGE>
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
================================================================================
$125,000,000
[GRAPHIC OMITTED]
Offer to Exchange its
97/8% Senior Subordinated Notes due 2009,
which have been registered under the
Securities Act of 1933, as amended, for any
and all of its existing 97/8% Senior
Subordinated Notes due 2009
---------------------
PROSPECTUS
---------------------
April 9, 1999
================================================================================
