<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of August 11, 1999: 36,145,678 shares of common stock
<PAGE>
TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.....................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements......................................2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..............................................24
Part II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................25
Item 2. Changes in Securities......................................25
Item 3. Defaults Upon Senior Securities............................25
Item 4. Submission of Matters to a Vote of Security Holders........26
Item 5. Other Information..........................................26
Item 6. Exhibits and Reports on Form 8-K...........................26
SIGNATURES ..................................................................27
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" such
as statements concerning Medicaid and Medicare programs and the Company's
ability to meet its liquidity needs and control costs, certain statements in
"Quantitative and Qualitative Disclosures about Market Risk", certain statements
in Notes to Unaudited Condensed Consolidated Financial Statements, such as
certain Pro Forma Financial Information; and other statements contained herein
regarding matters which are not historical facts are forward looking statements
(as such term is defined in the Securities Act of 1933) and because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward looking statements. Factors that
could cause actual results to differ materially include, but are not limited to
those discussed below:
1. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, implementation of the
Medicare Prospective Payment System and consolidated billing and other
changes in applicable government regulations that might affect the
profitability of the Company.
2. The Company's substantial indebtedness and significant debt service
obligations.
3. The Company's ability to secure the capital and the related cost of such
capital necessary to fund future growth through acquisition and
development, as well as internal growth.
4. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and, in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
5. The occurrence of changes in the mix of payment sources utilized by the
Company's customers to pay for the Company's services.
6. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
7. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home healthcare and
changes in the regulatory system, such as changes in certificate of need
laws in the states in which the Company operates or anticipates operating
in the future that facilitate such competition.
8. The Company's ability to identify suitable acquisition candidates, to
consummate or complete development projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
9. The Company's and its payors' and suppliers' ability to implement a Year
2000 readiness program.
These and other factors have been discussed in more detail in the Company's
periodic reports, including its Annual Report on Form 10-K as amended for the
fiscal year ended September 30, 1998.
1
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 14,698 $ 4,902
Investments in marketable securities 24,175 26,658
Accounts receivable, net 400,405 376,023
Cost report receivables 63,132 62,257
Inventory 65,798 63,760
Prepaid expenses and other current assets 38,480 40,579
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 606,688 574,179
- -----------------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net 624,688 596,562
Notes receivable and other investments 52,203 47,623
Other long-term assets 89,638 73,904
Investments in unconsolidated affiliates 360,120 344,567
Goodwill and other intangibles, net 965,089 990,533
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,698,426 $ 2,627,368
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 34,622 $ 49,712
Accounts payable and accrued expenses 196,622 218,749
Income taxes payable 5,428 -
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 236,672 268,461
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,468,840 1,358,595
Deferred income taxes 70,747 72,828
Deferred gain and other long-term liabilities 55,199 52,412
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 590,253 issued and outstanding at June 30, 1999
and September 30, 1998 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 36,145,678 and 36,133,578 at June 30, 1999;
35,225,731 and 35,180,130 at September 30, 1998 723 704
Additional paid-in capital 753,452 749,491
Retained earnings 113,152 124,430
Accumulated other comprehensive income (loss) (122) 684
Treasury stock, at cost (243) (243)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 866,968 875,072
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,698,426 $ 2,627,368
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
2
<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 Nine months ended
June 30, June 30,
- --------------------------------------------------------------------------------------------- ---------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net revenues:
Pharmacy and medical supply services $ 230,387 $ 102,177 $ 698,505 $ 269,417
Inpatient services 175,887 187,055 527,720 551,089
Other revenue 58,814 63,294 182,686 178,884
- --------------------------------------------------------------------------------------------- ---------------------------
Total net revenues 465,088 352,526 1,408,911 999,390
- --------------------------------------------------------------------------------------------- ---------------------------
Operating expenses:
Operating expenses 390,973 272,059 1,172,685 774,539
General corporate expense 13,685 13,627 42,731 39,803
Facility closure expense - - 9,701 -
Depreciation and amortization 18,887 13,632 55,453 37,985
Lease expense 6,655 8,497 19,641 23,008
Interest expense, net 29,515 20,679 85,295 59,010
- --------------------------------------------------------------------------------------------- ---------------------------
Earnings before income taxes, equity in net income (loss)
of unconsolidated affiliates and extraordinary items 5,373 24,032 23,405 65,045
Income taxes 2,901 8,771 10,851 23,741
- --------------------------------------------------------------------------------------------- ---------------------------
Earnings before equity in net income (loss) of unconsolidated
affiliates and extraordinary items 2,472 15,261 12,554 41,304
Equity in net income (loss) of unconsolidated affiliates (3,475) 730 (8,626) 2,077
- --------------------------------------------------------------------------------------------- ---------------------------
Earnings (loss) before extraordinary items (1,003) 15,991 3,928 43,381
Extraordinary items, net of tax - - (2,100) (1,924)
- --------------------------------------------------------------------------------------------- ---------------------------
Net income (loss) (1,003) 15,991 1,828 41,457
Preferred stock dividend 4,369 - 13,106 -
- --------------------------------------------------------------------------------------------- ---------------------------
Net income (loss) attributed to common shareholders $ (5,372) $ 15,991 $ (11,278) $ 41,457
- --------------------------------------------------------------------------------------------- ---------------------------
Per common share data:
Basic
Earnings (loss) before extraordinary items $ (0.15) $ 0.46 $ (0.26) $ 1.24
Net income (loss) $ (0.15) $ 0.46 $ (0.32) $ 1.18
Weighted average shares 35,371,494 35,133,022 35,268,910 35,107,983
- --------------------------------------------------------------------------------------------- ---------------------------
Diluted
Earnings (loss) before extraordinary items $ (0.15) $ 0.45 $ (0.26) $ 1.22
Net income (loss) $ (0.15) $ 0.45 $ (0.32) $ 1.16
Weighted average shares and equivalents 35,371,494 35,719,840 35,268,910 35,701,210
- --------------------------------------------------------------------------------------------- ---------------------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) attributed to common shareholders $(11,278) $ 41,457
Net charges included in operations not requiring funds 83,586 50,673
Changes in assets and liabilities excluding the effects of acquisitions:
Accounts receivable (28,120) (45,818)
Accounts payable and accrued expenses (18,586) 9,044
Other, net (1,800) (15,229)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 23,802 40,127
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (57,457) (41,102)
Payments for acquisitions and related costs, net of cash acquired (12,003) (100,929)
Investments in unconsolidated affiliates (24,180) (341,032)
Net proceeds from sale of assets - 63,756
Sale of marketable securities 1,677 -
Notes receivable and other investment and other asset additions, net (7,677) (32,345)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (99,640) (451,652)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under working capital revolving credit facility 115,200 (136,700)
Repayment of long term debt and payment of sinking fund requirements (143,540) (20,955)
Proceeds from issuance of long-term debt 123,050 611,241
Debt issuance costs (3,088) (19,648)
Preferred stock dividends paid (5,988) -
Purchase of common stock call options - (4,442)
Stock options exercised - 1,190
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 85,634 430,686
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 9,796 19,161
Cash and equivalents
Beginning of period 4,902 11,651
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ 14,698 $ 30,812
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 84,509 $ 62,205
Income taxes paid $ 1,089 $ 2,390
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
<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 and funding interest and
principal payments of certain existing 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 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 "Revolving Facility") The Term Loans amortize in quarterly
installments 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
$121,398,000 at June 30, 1999 (the "Tranche A Term Facility"); (ii) a seven year
term loan with an outstanding balance of $152,909,000 at June 30, 1999 (the
"Tranche B Term Facility"); and (iii) an eight year term loan with an
outstanding balance of $152,545,000 at June 30, 1999 (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 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 2.50% for LIBO Rate loans (an effective rate of 7.82% at June 30, 1999).
Loans under the Tranche B Term Facility have an Annual Applicable Margin of
1.25% for Prime Rate loans and 3.00% for LIBO Rate loans (an effective rate of
8.32% at June 30, 1999). Loans under the Tranche C Term Facility have an
Annual Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate
loans (an effective rate of 8.57% at June 30, 1999). 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. See Note 8 regarding an agreement in principle relating to the
Put/Call Agreement.
5
<PAGE>
On August 20, 1999, the Company entered into an amendment of the Credit
Facility. The amendment establishes less restrictive financial covenant
requirements through the remaining term of the agreement, increases the Annual
Applicable Margin and provides the lenders of the Credit Facility a collateral
interest in certain real and personal property of the Company. Additionally, the
amendment provides for $40,000,000 of additional borrowing capacity, subject to
the satisfaction of certain conditions. The amended Annual Applicable Margin is
expected to increase the Company's effective interest rate .75% for Prime Rate
and LIBO Rate loans under the Tranche A Term Facility and Revolving Facility and
.50% for Prime Rate and LIBO Rate loans under the Tranche B and Tranche C Term
Facilities.
In December 1998, the Company issued $125,000,000, 9 7/8% 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 (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share applicable to common shares (amounts are in thousands except
per share data):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Income (loss) before extraordinary items $ (5,372) $ 15,991 $ (9,178) $43,381
Extraordinary items - - (2,100) (1,924)
---------------------------------------------------------------------
Net income (loss) attributed to common
shareholders $ (5,372) $ 15,991 $(11,278) $41,457
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average shares 35,371 35,133 35,269 35,108
---------------------------------------------------------------------
Earnings (loss) per share before
extraordinary items $ (0.15) $ 0.46 $ (0.26) $ 1.24
Earnings (loss) per share $ (0.15) $ 0.46 $ (0.32) $ 1.18
---------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
Income (loss) before extraordinary items $ (5,372) $ 15,991 $ (9,178) $43,381
Extraordinary items - - (2,100) (1,924)
---------------------------------------------------------------------
Net income (loss) attributed to common
shareholders $ (5,372) $ 15,991 $(11,278) $41,457
---------------------------------------------------------------------
Weighted average shares & common stock equivalents:
Common shares 35,371 35,133 35,269 35,108
Dilutive effect of unexcercised stock
options - 587 - 593
---------------------------------------------------------------------
Total 35,371 35,720 35,269 35,701
---------------------------------------------------------------------
Earnings (loss) per share before
extraordinary items $ (0.15) $ 0.45 $ (0.26) $ 1.22
Earnings (loss) per share $ (0.15) $ 0.45 $ (0.32) $ 1.16
---------------------------------------------------------------------
</TABLE>
6
<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. 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.
Effective January 1, 1998, 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 Pharmacy Purchase is being 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 the period presented.
<TABLE>
<CAPTION>
(In thousands, except per
common share data)
Nine Months Ended
Pro Forma Statement of Operations Information: June 30, 1998
-------------
<S> <C>
Total net revenue $1,400,965
Income before extraordinary items 39,490
Net income 37,566
Earnings per common share, before extraordinary items, diluted 1.11
Earnings per common share, diluted $ 1.05
</TABLE>
7
<PAGE>
5. Summary Financial Information of Unconsolidated Affiliate
The following unaudited summary financial data for the Multicare Companies is as
of, and for the three and nine months ended, June 30, 1999. Multicare is the
Company's only material unconsolidated affiliate (amounts are in thousands).
June 30, 1999
--------------------
Total assets $ 1,698,272
Long-term debt 743,789
Total liabilities $ 986,278
Three Months Ended Nine Months
June 30, 1999 Ended
June 30, 1999
----------------------- --------------------
Revenues $ 157,295 $ 480,504
Net loss $ (8,509) $ (21,244)
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 in the table are in thousands):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) attributed
to common shareholders $ (5,372) $ 15,991 $ (11,278) $ 41,457
Unrealized gain (loss) on
marketable securities (259) 53 (806) 158
-------------------------------------------------------------------
Total comprehensive
income (loss) $ (5,631) $ 16,044 $ (12,084) $ 41,615
-------------------------------------------------------------------
</TABLE>
Accumulated other comprehensive income (loss), which is composed of net
unrealized gains and losses on marketable securities, was $(122,282) and
$253,800 at June 30, 1999 and 1998, respectively.
7. Facility Closure Expense
In March 1999, the Company closed a leased eldercare center located in the state
of Florida. In connection with the closure, the Company recorded $9,701,000 of
closure costs consisting of the present value of future lease payments through
the end of the lease term, a residual lease obligation to be funded at the end
of the lease term, severance costs and other related closure expenses.
8
<PAGE>
8. Subsequent Event
On August 2, 1999, the Company reached an agreement in principle with The
Cypress Group ("Cypress") and Texas Pacific Group ("TPG") its co-investor
partners in Genesis ElderCare Corp., to simplify the joint-venture structure,
accelerate the integration of Genesis and Multicare, and strengthen the
financial position of both Genesis and Multicare. Under the agreement in
principle, Cypress and TPG will invest $50,000,000 into Genesis in exchange for
12,500,000 newly issued common shares and 2,000,000 warrants to purchase common
shares with a $5.00 exercise price. In addition, Cypress and TPG will terminate
their right to put their 56% equity interest in Genesis ElderCare Corp. to
Genesis in exchange for a newly issued convertible preferred stock in Genesis
with a $420,000,000 principal amount, a 5% dividend rate (payable in kind for
the first five years) and a conversion price of $8.75 per share. The conversion
price represents a 153% premium to the 20 day average trading price of Genesis
common stock at the signing of the agreement in principle. Following completion
of this transaction, Genesis will consolidate the results of Multicare for
financial reporting purposes. After making the $50,000,000 investment, Cypress
and TPG will each own approximately 11% of Genesis. On a fully-diluted basis,
assuming conversion of the convertible preferred stock, Cypress and TPG will
each own approximately 29% of Genesis. The agreement in principle provides that
Cypress and TPG will each have the right to vote a maximum of 17.5% of the
voting rights of Genesis. Cypress and TPG will each designate one member to the
Genesis Board of Directors, increasing the total membership to nine. The
transaction is subject to, among other things, regulatory approval, definitive
documentation and Genesis shareholder approval. There can be no assurances that
the Company will be able to satisfy the conditions to the proposed transaction.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Since the Company began operations in July 1985, it has focused its efforts on
providing an expanding array of specialty medical services to elderly customers.
The Company generates 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. 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 71 institutional pharmacies (of which one is
jointly-owned) and 16 medical supply 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 94%
of the sales attributable to all pharmacy operations in the nine months ended
June 30, 1999 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 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.
The Company includes the following in other revenues: rehabilitation therapy,
management fees, capitation fees, homecare services, physician services,
transportation services, diagnostic services, hospitality services, group
purchasing fees and other healthcare related services.
Certain Transactions
Multicare Transaction and Proposed Revision to the Joint Venture
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.
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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) $1,991,666 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
$23,900,000 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
Multicare 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 with 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 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 $210,000,000, $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 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.
On August 2, 1999, the Company reached an agreement in principle with Cypress
and TPG to simplify the joint-venture structure, accelerate the integration of
Genesis and Multicare, and strengthen the financial position of both Genesis and
Multicare. Under the agreement in principle, Cypress and TPG will invest
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$50,000,000 into Genesis in exchange for 12,500,000 newly issued common shares
and 2,000,000 warrants to purchase common shares with a $5.00 exercise price. In
addition, Cypress and TPG will terminate their right to put their 56% equity
interest in Genesis ElderCare Corp. to Genesis in exchange for a newly issued
convertible preferred stock in Genesis with a $420,000,000 principal amount, a
5% dividend rate (payable in kind for the first five years) and a conversion
price of $8.75 per share. The conversion price represents a 153% premium to the
20 day average trading price of Genesis common stock at the signing of the
agreement in principle. Following completion of this transaction, Genesis will
consolidate the results of Multicare for financial reporting purposes. After
making the $50,000,000 investment, Cypress and TPG will each own approximately
11% of Genesis. On a fully-diluted basis, assuming conversion of the convertible
preferred stock, Cypress and TPG will each own approximately 29% of Genesis. The
agreement in principle provides that Cypress and TPG will each have the right to
vote a maximum of 17.5% of the voting rights of Genesis. Cypress and TPG will
each designate one member to the Genesis Board of Directors, increasing the
total membership to nine. The transaction is subject to, among other things,
regulatory approval, definitive documentation and Genesis shareholder approval.
There can be no assurances that the Company will be able to satisfy the
conditions of the proposed transaction.
Cardinal Contract
On May 6, 1999, NeighborCare announced that it selected Cardinal Health, Inc. as
its primary pharmaceutical supplier. The five year contract calls for Cardinal
to supply NeighborCare's 34 professional retail and 71 long-term care
pharmacies. In 1998, NeighborCare purchased approximately $500,000,000 worth of
pharmaceuticals.
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 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. The cash portion of the purchase price was funded
through borrowings under the Credit Facility. See "Liquidity and Capital
Resources."
Pursuant to three master service 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. 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.
On May 7, 1999, the Company filed multiple lawsuits against HCR Manor Care, Inc.
and two of its subsidiaries and principals relating to the Vitalink Transaction
and the master service agreements. The lawsuits arise from HCR Manor Care's
threatened termination of two long term pharmacy services contracts effective
June 1, 1999. By agreement dated May 13, 1999, the parties agreed to consolidate
the Maryland State Court claims relating to the master service agreements with
the arbitration matter. Until such time as a final decision is rendered in said
arbitration, the parties have agreed to maintain the master service agreements
in full force and effect. Genesis still maintains its Delaware federal court
complaint. See Part II: Other Information - Item 1. Legal Proceedings.
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New Courtland
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.
ElderTrust Transactions
On January 30, 1998, Genesis successfully completed deleveraging transactions
with ElderTrust, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. 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 $14,400,000
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 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.
Results of Operations
Three months ended June 30, 1999 compared to three months ended June 30, 1998
The Company's total net revenues for the quarter ended June 30, 1999 were
$465,088,000 compared to $352,526,000 for the quarter ended June 30, 1998, an
increase of $112,562,000 or 32%. Pharmacy and medical supply service revenue
increased $128,210,000 to $230,387,000 from $102,177,000, of which approximately
$121,729,000 is attributed to the added revenues as a result of the Vitalink
Transaction, and the remainder is primarily due to other volume growth in the
institutional, medical supply and community-based pharmacies. Inpatient service
revenue declined $11,168,000 or 6% to $175,887,000 from $187,055,000. Of this
decline, approximately $1,343,000 is attributed to the revenues of an eldercare
center located in Florida that was closed in March 1999, $1,742,000 is
attributed to the revenues of a Pennsylvania eldercare center for which the
lease was terminated in July 1998, approximately $11,726,000 is attributed to
dilution in the Company's Medicare rate following the Company's October 1, 1998
implementation of the Medicare Prospective Payment System ("PPS"). These
decreases in inpatient service revenue are offset by the positive impact of rate
increases of other payor categories and changes in payor mix. Under PPS, the
average Medicare rate per day was reduced to approximately $299 per patient day
during the quarter ended June 30, 1999 compared to approximately $395 per
patient day for the comparable period last year. There were 147,626 Medicare
patient days during the quarter ended June 30, 1999 compared to 122,837 days for
the comparable period last year. Total patient days declined 22,321 to 1,225,404
during the quarter ended June 30, 1999 compared to 1,247,725 during the
comparable period last year. The decline in overall census is principally
attributed to 8,520 patient days at the closed Florida eldercare center, 9,913
patient days at the Pennsylvania eldercare center for which the lease was
terminated and the remaining decline of 3,888 patient days is attributed to a
net drop in overall occupancy. Other revenues decreased approximately $4,480,000
from $63,294,000 to $58,814,000. This decline is principally attributed to
contraction in the Company's rehabilitation services business since the January
1, 1999 implementation of PPS by many of the Company's external rehabilitation
customers, including the Multicare eldercare centers.
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The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $404,658,000 for the quarter ended June 30,
1999 compared to $285,686,000 for the quarter ended June 30, 1998, an increase
of $118,972,000 or 42%, of which approximately $105,162,000 is attributed to the
added operating expenses as a result of the Vitalink Transaction and
approximately $16,376,000 is attributed to inflationary increases, growth in the
institutional pharmacy and medical supply divisions, capitation contract related
expenses, as well as increased costs of community-based programs. These
increases are offset by reduced operating expenses of approximately $1,023,000
attributed to the closed Florida eldercare center and $1,543,000 to the
Pennsylvania eldercare center for which the lease was terminated.
Increased depreciation and amortization expense of $5,255,000 is attributed to
the depreciation of fixed assets and amortization of goodwill and deferred
financing costs in connection with the Vitalink Transaction, as well as
incremental depreciation expense from capital expenditures made since June 30,
1998.
Interest expense increased $8,836,000 or 43%. This increase in interest expense
was primarily due to additional borrowings used to finance the Vitalink
Transaction, as well as an increase in the Company's weighted average borrowing
rate. This increase is partially offset by interest savings as a result of the
repayment of indebtedness from proceeds received in connection with the
ElderTrust Transactions.
Equity in net income (loss) of unconsolidated affiliates declined $4,205,000 to
a loss of $3,475,000 for the quarter ended June 30, 1999 from income of $730,000
for the quarter ended June 30, 1998 due to declining earnings of the Company's
Multicare affiliate. The Multicare earnings have been adversely impacted by its
January 1, 1999 implementation of PPS.
In the quarter ended June 30, 1999, the Company accrued $4,369,000 of dividends
on the Genesis Preferred issued in connection with the Vitalink Transaction.
Nine months ended June 30, 1999 compared to nine months ended June 30, 1998
The Company's total net revenues for the nine months ended June 30, 1999 were
$1,408,911,000 compared to $999,390,000 for the nine months ended June 30, 1998,
an increase of $409,521,000 or 41%. Pharmacy and medical supply service revenue
increased $429,088,000 to $698,505,000 from $269,417,000, of which approximately
$376,623,000 is attributed to the added revenues as a result of the Vitalink
Transaction, approximately $20,720,000 is attributed to the added revenues as a
result of the Multicare Pharmacy Purchase, and the remainder is primarily due to
other volume growth in the institutional, medical supply and community-based
pharmacies. Inpatient service revenue declined $23,369,000 or 4% to $527,720,000
from $551,089,000. Of this decline, approximately $1,343,000 is attributed to
the revenues of an eldercare center located in Florida that was closed in March
1999, $5,014,000 is attributed to the revenues of a Pennsylvania eldercare
center for which the lease was terminated in July 1998 and approximately
$29,443,000 is attributed to dilution in the Company's Medicare rate following
the Company's October 1, 1998 implementation of PPS. These decreases in
inpatient service revenue are offset by the positive impact of rate increases of
other payor categories and changes in payor mix. Under PPS, the average Medicare
rate per day was reduced to approximately $305 per patient day during the nine
months ended June 30, 1999 compared to approximately $384 per patient day for
the comparable period last year. There were 408,034 Medicare patient days during
the nine months ended June 30, 1999 compared to 372,912 for the comparable
period last year. Total patient days declined 40,189 to 3,698,936 during the
nine months ended June 30, 1999 compared to 3,739,125 during the comparable
period last year. The decline in overall census is principally attributed to
8,520 patient days at the closed Florida eldercare center, 29,733 patient days
at the Pennsylvania eldercare center for which the lease was terminated and the
remaining decline of 1,936 patient days is attributed to a net drop in overall
occupancy and to survey and other regulatory matters at several of the Company's
eldercare centers, which the Company believes have been resolved.
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The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $1,225,117,000 for the nine months ended June
30, 1999 compared to $814,342,000 for the comparable period in the prior year,
an increase of $410,775,000 or 50%, of which approximately $321,360,000 is
attributed to the added operating expenses as a result of the Vitalink
Transaction, approximately $14,707,000 is attributed to the added operating
expenses as a result of the Multicare Pharmacy Purchase, approximately
$9,701,000 is attributed to expenses incurred in connection with the closure of
an eldercare center located in Florida, approximately $1,369,000 is attributed
to severance costs incurred in connection with a reduction in work force in the
Company's rehabilitation services business, and the remaining increase of
$69,146,000 is attributed to inflationary increases, growth in the institutional
pharmacy, medical supply and contract therapy divisions, capitated expenses, as
well as increased costs of community-based programs. These increases are offset
by reduced operating expenses of approximately $1,023,000 attributed to the
closed Florida eldercare center and $4,485,000 to the Pennsylvania eldercare
center for which the lease was terminated.
Increased depreciation and amortization expense of $17,468,000 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, as well as incremental depreciation expense from capital
additions made since June 30, 1998.
Interest expense increased $26,285,000 or 45%. This increase in interest expense
is primarily due to additional borrowings used to finance the Multicare Pharmacy
Purchase, the Vitalink Transaction, increased working capital and capital
borrowings, and an increase in the Company's weighted average borrowing rate.
This increase is partially 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 connection with the defeasance of certain municipal bonds in
the quarter ended March 31, 1999 the Company recorded an extraordinary loss, net
of tax of approximately $301,000 ($474,000 before tax).
Equity in net income (loss) of unconsolidated affiliates declined $10,703,000 to
a loss of $8,626,000 in the nine months ended June 30, 1999 from income of
$2,077,000 for the nine months ended June 30, 1998 due to declining earnings of
the Company's Multicare affiliate. The Multicare earnings have been adversely
impacted by its January 1, 1999 implementation of PPS.
In the nine months ended June 30, 1999, the Company accrued $13,106,000 of
dividends on the Genesis Preferred issued in connection with the Vitalink
Transaction.
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Liquidity and Capital Resources
General
Working capital increased $64,298,000 to $370,016,000 at June 30, 1999 from
$305,718,000 at September 30, 1998. Accounts receivable increased approximately
$24,382,000 during this period, of this increase approximately $4,205,000
relates to the impact of a rehabilitation services agreement entered into during
the December 1998 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. Days revenue in accounts receivable decreased
approximately one day to 75 days during the quarter ended June 30, 1999 compared
to the quarter ended March 31, 1999. Accounts payable and accrued expenses
decreased during the nine months ended June 30, 1999, principally due to the
timing of routine operating payments, including interest and compensation
related costs. As a result of lower earnings and the timing of payments, the
Company's cash flow from operations for the nine months ended June 30, 1999 was
approximately $23,802,000 compared to approximately $40,127,000 for the nine
months ended June 30, 1998.
Investing activities for the nine months ended June 30, 1999 include
approximately $57,457,000 of capital expenditures primarily related to
betterments and expansion of existing eldercare centers and other sites of
service, and investment in data processing hardware and software. The cash used
to finance investments in unconsolidated affiliates of approximately $24,180,000
during the nine months ended June 30, 1999 represents the Company's limited
partnership investment in four assisted living properties with which it has
entered into a management contract, and four joint venture assisted living
properties under development which it will manage upon completion of
construction. To date, the Company has financed approximately $16,100,000 of the
construction costs of the four assisted living properties under development.
Over the next nine months, the joint venture partnerships are expected to
refinance the construction costs with outside financing. During the nine months
ended June 30, 1999, other long-term assets increased approximately $15,734,000,
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 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 levels and after April 26, 2002, subject to a market-based call premium.
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, a newly formed Maryland healthcare real estate investment
trust. Genesis, a co-registrant on the ElderTrust initial public offering,
received approximately $78,000,000 in proceeds from the sale of 13 properties to
ElderTrust, including four properties it had purchased from Crozer-Keystone
Health System in anticipation of resale to ElderTrust. 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 $14,400,000
of a $15,100,000 commitment to finance the development and expansion of three
additional assisted living facilities. Genesis repaid a portion of the revolving
credit component of its 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 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.
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Credit Facility and Senior Subordinated Notes
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 and funding interest and
principal payments of certain existing 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 "Revolving Facility"). The Term Loans amortize in quarterly
installments 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
$121,398,000 at June 30, 1999 (the "Tranche A Term Facility"); (ii) a seven year
term loan with an outstanding balance of $152,909,000 at June 30, 1999 (the
"Tranche B Term Facility"); and (iii) an eight year term loan with an
outstanding balance of $152,545,000 at June 30, 1999 (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 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 2.50% for LIBO Rate loans (an effective rate of 7.82% at June 30, 1999).
Loans under the Tranche B Term Facility have an Annual Applicable Margin of
1.25% for Prime Rate loans and 3.00% for LIBO Rate loans (an effective rate of
8.32% at June 30, 1999). Loans under the Tranche C Term Facility have an
Annual Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate
loans (an effective rate of 8.57% at June 30, 1999). 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.
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On August 20, 1999, the Company entered into an amendment of the Credit
Facility. The amendment establishes less restrictive financial covenant
requirements through the remaining term of the agreement, increases the Annual
Applicable Margin and provides the lenders of the Credit Facility a collateral
interest in certain real and personal property of the Company. Additionally, the
amendment provides for $40,000,000 of additional borrowing capacity, subject to
the satisfaction of certain conditions. The amended Annual Applicable Margin is
expected to increase the Company's effective interest rate .75% for Prime Rate
and LIBO Rate loans under the Tranche A Term Facility and Revolving Facility and
.50% for Prime Rate and LIBO Rate loans under the Tranche B and Tranche C Term
Facilities.
In December 1998, the Company issued $125,000,000, 9 7/8% 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.
The Multicare Transaction and Proposed Revision to the Joint Venture
In connection with the Multicare Transaction, Genesis, Cypress, TPG and Nazem
entered into an agreement (the "Put/Call Agreement") pursuant to which, among
other things, Genesis will have the option, on the terms and conditions set
forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare Corp.
Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and
for a period of 270 days thereafter, at a price determined pursuant to the terms
of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the
terms and conditions set forth in the Put/Call Agreement, to require Genesis to
purchase (the "Put") such Genesis ElderCare Corp. common stock commencing on
October 9, 2002 and for a period of one year thereafter, at a price determined
pursuant to the Put/Call Agreement.
The prices determined for the Put and Call are based on a formula that
calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis
ElderCare Corp. common stock, plus a portion of the Genesis pharmacy business
(the "Calculated Equity Value"). The Calculated Equity Value will be determined
based upon a multiple of Genesis ElderCare Corp.'s earnings before interest,
taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR")
after deduction of certain liabilities, plus a portion of the EBITDAR related to
the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend
on whether the Put or the Call is being exercised. Any payment to Cypress, TPG
or Nazem under the Call or the Put may be in the form of cash or Genesis common
stock at Genesis' option.
Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum
their original investment plus a 25% compound annual return thereon regardless
of the Calculated Equity Value. Any additional Calculated Equity Value
attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. common stock
will be determined on the basis set forth in the Put/Call Agreement which
provides generally for additional Calculated Equity Value of Genesis ElderCare
Corp. to be divided based upon the proportionate share of the capital
contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of
the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress,
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.
18
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Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon
an event of bankruptcy of Genesis, a change of control of Genesis, an
extraordinary dividend or distribution or the occurrence of the leverage
recapitalization of Genesis. Upon an event of acceleration or the failure by
Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and
Nazem will have the right to terminate the Stockholders' Agreement, dated
October 9, 1997, by and among the Company, Genesis ElderCare Corp., Cypress, TPG
and Nazem, and Management Agreement and to control the sale or liquidation of
Genesis ElderCare Corp. In the event of such sale, the proceeds from such sale
will be distributed among the parties as contemplated by the formula for the Put
option exercise price and Cypress, TPG and Nazem will retain a claim against
Genesis for the difference, if any, between the proceeds of such sale and the
put option exercise price. In the event of a bankruptcy or change of control of
Genesis, the option price shall be payable solely in cash provided any such
payment will be subordinated to the payment of principal and interest under the
Credit Facility.
On August 2, 1999, the Company reached an agreement in principle with Cypress
and TPG its co-investor partners in Genesis ElderCare Corp., to simplify the
joint-venture structure, accelerate the integration of Genesis and Multicare,
and strengthen the financial position of both Genesis and Multicare. Under the
agreement in principle, Cypress and TPG will invest $50,000,000 into Genesis in
exchange for 12,500,000 newly issued common shares and 2,000,000 warrants to
purchase common shares with a $5.00 exercise price. In addition, Cypress and TPG
will terminate their right to put their 56% equity interest in Genesis ElderCare
Corp. to Genesis in exchange for a newly issued convertible preferred stock in
Genesis with a $420,000,000 principal amount, a 5% dividend rate (payable in
kind for the first five years) and a conversion price of $8.75 per share. The
conversion price represents a 153% premium to the 20 day average trading price
of Genesis common stock at the signing of the agreement in principle. Following
completion of this transaction, Genesis will consolidate the results of
Multicare for financial reporting purposes. After making the $50,000,000
investment, Cypress and TPG will each own approximately 11% of Genesis. On a
fully-diluted basis, assuming conversion of the convertible preferred stock,
Cypress and TPG will each own approximately 29% of Genesis. The agreement in
principle provides that Cypress and TPG will each have the right to vote a
maximum of 17.5% of the voting rights of Genesis. Cypress and TPG will each
designate one member to the Genesis Board of Directors, increasing the total
membership to nine. The transaction is subject to, among other things,
regulatory approval, definitive documentation and Genesis shareholder approval.
There can be no assurances that the Company will be able to satisfy the
conditions to the proposed transaction.
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.
19
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Pursuant to the Balanced Budget Act of 1997 (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 a resource utilization group.
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 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 ("HCFA"), 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 healthcare
providers to be reasonable and adequate in order to cover the costs of
efficiently and economically operated healthcare 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 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 healthcare 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 (i) increased enforcement of nursing home safety and quality regulations;
(ii) increased federal oversight of state inspections of nursing homes; (iii)
prosecution of egregious violations of regulations governing nursing homes; (iv)
the publication of nursing home survey results on the Internet; and (v)
continuation of the development of the Minimum Data Set, 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.
20
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Under PPS, the reimbursement for certain speech, occupational, physical and
respiratory therapy services provided to nursing facility patients is a
component of the total reimbursement to the nursing facility allowed per
patient. Medicare reimburses the skilled nursing facility directly for all
rehabilitation services and the outside suppliers of such services to residents
of the skilled nursing facility must collect payment from the skilled nursing
facility. Under PPS, a per provider limit of $1,500 applies to all
rehabilitation therapy services provided under Medicare Part B ($1,500 for
physical and speech-language pathology services, and a separate $1,500 for
occupational therapy services). Additionally, Medicare Part B therapy services
are no longer being reimbursed on a cost basis; rather, payment for each service
provided is based on fee screen schedules published in November 1998. As a
result of the implementation of PPS, the Company has to date experienced a
substantial reduction in demand for, and reduced operating margins from, therapy
services it provides to third parties, because such providers are admitting
fewer Medicare patients and are reducing utilization of rehabilitation services.
On July 30,1999, HCFA issued the Final Rule and Notice for Prospective Payment
Regulations. The final rule was not significantly different from the interim
final rule previously published. The final rule provides for an effective
inflation adjustment of 1.9%, which, along with a change to the prospective
payments rates, results in an estimated increase to the Federal portion of the
rate of approximately $5.50 per Medicare patient day effective at the next
scheduled update of skilled nursing facility prospective payment rates which
generally for Genesis is October 1, 1999. The estimated increase in the Medicare
rate assumes no change in Medicare patient acuity.
The Company estimates Medicare revenue per patient day in its Genesis Centers
will decline as a result of PPS in Fiscal 2000, to $285, due to further blending
of the federal rate and the facility specific rate. The Company estimates that
its Medicare revenue per patient day in the Multicare centers will decline as a
result of PPS in Fiscal 2000 to $290. 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 future periods 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 business.
Other
Certain of the Company's other outstanding loans contain covenants which,
without the prior consent of the lenders, limit certain activities of the
Company. Such covenants contain limitations relating to the merger or
consolidation of the Company and the Company's ability to secure indebtedness,
make guarantees, grant security interests and declare dividends. In addition,
the Company must maintain certain minimum levels of cash flow and debt service
coverage, and must maintain certain ratios of liabilities to net worth. Under
these loans, the Company is restricted from paying cash dividends on the Common
Stock, unless certain conditions are met. The Company has not declared or paid
any cash dividends on its Common Stock since its inception.
Operating cash flow will depend upon the Company's ability to effect cost
reduction initiatives and to continue to reduce its investment in working
capital. The Company believes that operating cash flow which is expected to be
augmented by planned refinancing transactions, will be sufficient to meet its
future obligations.
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.
21
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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
"Cautionary Statements Regarding 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 Year 2000 mission
critical 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 and equipment and non-IT systems and
equipment (embedded technology) and has completed approximately 96% of its
internal inventory and assessment and approximately 80% 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. In 1998, 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. Additionally, most
intermediaries have reported to the Company that they are either already
compliant or will be prior to the end of 1999. 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 complaint for all its essential systems and equipment by October 31, 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 complaint
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 $1,600,000, of which
approximately $1,000,000 has been spent through June 30, 1999. 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.
22
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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 (i)
the inability to deliver patient care related services in the Company's
facilities and / or in non-affiliated facilities, (ii) the delayed receipt of
reimbursement from the Federal or State governments, private payors, or
intermediaries, (iii) the failure of security systems, elevators, heating
systems or other operational systems and equipment of the Company's facilities
and (iv) the inability to receive critical equipment and supplies from vendors.
Each of these events could have a material adverse affect 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 October 31, 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 ("FASB") 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 April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("Statement 98-5").
Statement 98-5 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. Statement
98-5 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 Statement 98-5 will result in a charge of approximately
$3,500,000, 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 of fiscal years beginning after June 15, 2000. 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.
23
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to changes in interest rates. The Company's objective in
managing its exposure to interest rate changes is to limit the impact of such
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives, the Company primarily uses interest rate swaps to manage
net exposure to interest rate changes related to its portfolio of borrowings.
Notional amounts of interest rate swap agreements are used to measure interest
to be paid or received relating to such agreements and do not represent an
amount of exposure to credit loss. 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 June 30, 1999 is approximately $25,500,000.
24
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink
Pharmacy Services (d\b\a NeighborCare sm), a subsidiary of
Genesis, filed multiple lawsuits requesting injunctive relief
and compensatory damages against HCR Manor Care, Inc. and two
of its subsidiaries and principals. The lawsuits arise from
HCR Manor Care's threatened termination of two long term
pharmacy services contracts effective June 1, 1999.
Vitalink filed a complaint against HCR Manor Care and two of
its subsidiaries in Baltimore City, Maryland circuit court.
Genesis filed a complaint against HCR Manor Care and two of
its subsidiaries and principals in federal district court in
Delaware including, among other counts, securities fraud.
Vitalink has also instituted an arbitration action in
Maryland.
Vitalink is seeking an injunction preventing HCR Manor
Care's threatened termination of two of its long term pharmacy
service contracts and a declaration that it has a right to
provide pharmacy, infusion therapy and related services to all
HCR Manor Care's facilities. Genesis and Vitalink seek over
$100 million in compensatory damages and enforcement of a
10-year non-competition clause.
Genesis acquired Vitalink from Manor Care in August 1998. In
1991, Vitalink and Manor Care entered into long term master
pharmacy agreements which gave Vitalink the right to provide
pharmacy services to all facilities owned or licensed by Manor
Care and its affiliates. In 1998, the terms of the pharmacy
service agreements were extended to September, 2004.
Under the two master service agreements, Genesis and Vitalink
receive revenues at the rate of approximately $100 million per
year.
By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Claims relating to the
master service agreements with the Arbitration matter. Until
such time as a final decision is rendered in said Arbitration,
the parties have agreed to maintain the master service
agreements in full force and effect. Genesis still maintains
its Delaware federal court complaint.
On July 26, 1999, NeighborCare, through its Maryland counsel,
filed an additional complaint against Omnicare Inc. and
Heartland Healthcare (a joint venture between Omnicare and HCR
Manor Care) seeking injunctive relief and compensatory and
punitive damages. The complaint includes counts for tortious
interference with Vitalink's contractual rights under its
three exclusive long term service contracts with HCR Manor
Care.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
25
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Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Number Description
------ -----------
10.1 Letter of Intent dated August 2, 1999 regarding an
understanding among Genesis Health Ventures, Inc.
("Genesis"), The Cypress Group L.L.C., a Delaware
limited liability Company ("Cypress") and TPG
Partners II, L.P., a Delaware limited partnership
("TPG" and together with Cypress and Nazem, Inc., the
"Sponsors") relating to a restructuring of the joint
venture investment in Genesis ElderCare Corp., a
Delaware corporation ("Parent"), and related
transactions.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K dated
August 2, 1999 reporting that it reached an agreement
in principle with The Cypress Group and Texas Pacific
Group related to the restructuring of the Multicare
joint venture. The Current Report on Form 8-K does not
include financial statements.
26
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: August 20, 1999 /s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr.
Executive Vice President and
Chief Financial Officer
27
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Letter of Intent
August 2, 1999
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, PA 19348
Gentlemen,
This letter of intent, upon your execution, will confirm the
understanding among Genesis Health Ventures, Inc., a Pennsylvania corporation
("Genesis"), The Cypress Group L.L.C., a Delaware limited liability company
("Cypress") and TPG Partners II, L.P., a Delaware limited partnership ("TPG",
and together with Cypress and Nazem, Inc., the "Sponsors") relating to a
restructuring of our joint investment in Genesis ElderCare Corp., a Delaware
corporation ("Parent"), and related transactions (the "Transactions").
1. Amendment of Put/Call Agreement. At the closing of the
Transactions (the "Closing"), the put option under the Put/Call Agreement, dated
October 9, 1997 (the "Put/Call Agreement"), among the parties hereto and Nazem,
Inc. shall be terminated and other modifications to the Put/Call Agreement
reasonably satisfactory to the parties shall become effective. In consideration
for the cancellation of the put option under the Put/Call Agreement, Genesis
will issue to the Sponsors at the Closing, in proportion to their respective
investments in Parent, securities as contemplated by Exhibits A and B.
2. Investment in Genesis. At the Closing, Genesis shall sell
to each of Cypress and TPG, and each of Cypress and TPG shall purchase from
Genesis for a purchase price of $25 million, 6.25 million shares of common
stock, par value $.01 per share ("Genesis Common Stock") of Genesis, and
warrants to purchase 1 million shares of Genesis Common Stock (or an aggregate
of 12.5 million shares of Genesis Common Stock and warrants to purchase 2
million shares of Genesis Common Stock for an aggregate purchase price of $50
million). The warrants shall have a term of 10 years, contain customary dilution
protection and be exercisable at any time in whole or in part. The exercise
price for the warrants shall be $5.00 per share and shall be paid in cash.
<PAGE>
2
3. Registration Rights. Holders of the common stock and
warrants referenced in Section 2 and holders of the securities described or
referenced in Exhibits A and B will have customary registration rights with
respect to such securities, including an unlimited number of piggyback
registration rights and 5 demand registration rights. In connection with such
registration rights, Genesis will agree to pay all customary registration
expenses (which shall not include underwriting discounts and commissions).
Demand registration rights shall include the right to have securities registered
on a shelf registration statement pursuant to Rule 415 under the Securities Act
of 1933. Registration right demands may be made by Cypress or TPG or their
affiliated investment funds or by any holder or holders of registrable
securities (including the securities issuable upon conversion, exercise or
exchange of such registrable securities) representing more than 50% of the
shares of common stock of Genesis that are then registrable securities and the
shares of common stock of Genesis then issuable upon conversion, exercise or
exchange of registrable securities. No registration right demand may be made for
registrable securities unless such registrable securities have a market value as
of the date of the demand equal to at least $25 million or constitute all of the
registrable securities held by the holder or holders making the demand. In
addition, no registration right demand may be made for registrable securities
other than common stock of Genesis prior to the 270th day following the first
issuance of registrable securities.
4. Election of Directors. Beginning immediately prior to
Closing and continuing for so long as Cypress and TPG or their affiliated
investment funds own any combination of voting securities of the Company and
securities convertible into voting securities of the Company where all such
voting securities represent more than 10% of the Company's total voting power,
Cypress and TPG, acting jointly (or in the event that only one of Cypress and
TPG shall then own or have the right to acquire shares of Genesis Common Stock,
then such Sponsor), shall be entitled to designate a number of directors
representing at least 23% of the total number of directors constituting the full
board of directors of Genesis; provided, that for so long as the total number of
directors constituting the full board of directors of Genesis is 9 or fewer,
Cypress and/or TPG, as the case may be, shall only be entitled to designate two
directors on the board of directors of Genesis. For purposes of this Section 4,
the Series I Preferred Stock and the securities issuable upon conversion of the
Series I Preferred Stock shall be considered voting securities.
Each committee of the board of directors of Genesis shall
include at least one director designated as provided above; provided, that this
requirement shall not apply with respect to the appointment of any particular
designee to a committee in the event that the rules or regulations of the
primary exchange or quotation system on which Genesis's common stock is then
listed or quoted prohibits the appointment of such director to such committee.
The foregoing provisions shall be reflected in the certificate
of designations relating to the Series H Preferred Stock.
5. Additional Voting Rights. The definitive documentation
relating to the Transactions shall provide that for so long as Cypress and/or
TPG shall have the right to designate directors on the board of directors of
Genesis, Genesis shall not, without the consent of the at least two of such
directors:
(i) modify the terms of Genesis's Series G
Cumulative Convertible Preferred Stock; or
(ii) enter into any transaction or series of
transactions which would constitute a change
in control, as such phrase is defined for
purposes of Genesis's senior subordinated
indebtedness, or engage in any "going
private" transaction pursuant to Rule 13e-3
under the Securities Exchange Act of 1934.
<PAGE>
3
6. Pre-emptive Rights. Cypress and TPG shall each have a pro
rata right, based on the number of shares of common stock of Genesis held by
them and the number of shares of common stock of Genesis issuable upon exercise,
conversion or exchange of other securities held by them, to participate in
acquiring shares of Genesis capital stock and securities exchangeable,
convertible or exercisable for shares of Genesis capital stock issued by
Genesis; provided, that Cypress and TPG shall not have such right in connection
with (i) sales of securities in underwritten public offerings, (ii) sales of
warrants offered in connection with sales of debt securities pursuant to Rule
144A under the Securities Act of 1933, (iii) the issuance of securities in
exchange for assets or all of the stock of another company (whether by merger,
exchange or otherwise), (iv) issuances and sales of securities to employees and
directors pursuant to benefit plans and (v) issuances and sales of securities in
connection with joint ventures or other strategic relationships relating to a
Healthcare Related Business (as such phrase is defined for purposes of Genesis's
senior subordinated indebtedness); provided, that in the case of clause (v) the
securities issued in connection with any joint venture or strategic relationship
or any series of related joint ventures or strategic relationships do not
represent more than 5% of the total voting power of Genesis.
7. Standstill. The definitive documentation relating to the
Transactions shall provide that Cypress and TPG shall agree to customary
standstill provisions; provided, that such restrictions shall terminate if:
(i) the board of directors of Genesis approves a
transaction with any "person" (as that term
is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) and such
transaction would result in such person
beneficially owning securities representing
more than 35% of the total voting power of
Genesis or all or substantially all of its
assets,
(ii) any person (other than Genesis in the case
of an exchange offer) shall have commenced a
tender or exchange offer for voting
securities of Genesis or securities
exchangeable, convertible or exercisable for
voting securities of Genesis where all such
voting securities represent more than 35% of
the total voting power of Genesis or
(iii) Cypress and TPG no longer have the right to
designate directors on the board of
directors of Genesis as contemplated by
Section 4.
8. Stockholders Agreement. Effective as of the Closing, the
Stockholders Agreement, dated as of October 9, 1997, among Parent, the parties
hereto and Nazem, Inc., shall be amended to provide that Genesis may appoint
two-thirds of the members of the Board of Directors of Parent, to make
appropriate changes to the supermajority provisions and to permit Sponsors to
sell their stock of Parent.
<PAGE>
4
9. Irrevocable Proxy. The definitive documentation relating to
the Transactions shall provide that each Sponsor and its affiliated investment
funds owning securities of Genesis described or referenced in Section 2 and
Exhibit A and B shall give to Genesis an irrevocable power of attorney directing
Genesis to cast for, against or as an abstention, in the same proportion as the
other voting securities of Genesis (including the voting securities of Genesis
cast by the Sponsors) are cast, such number of shares of common stock and
preferred stock of Genesis so that the Sponsors do not have the right to vote
more than 35% of the total voting power of Genesis in connection with any vote
in which the holders of common stock of Genesis are entitled to vote generally
by virtue of their ownership of such securities; provided, that such power of
attorney shall terminate upon the existence of circumstances that result in a
termination of the standstill. Prior to each vote of securityholders of Genesis
in which the holders of common stock of Genesis are entitled to vote generally,
each of the Sponsors and their affiliated investment funds having the right to
vote voting securities of Genesis shall deliver to Genesis a true and correct
certificate setting forth the number and type of securities which it has the
right to vote. The votes held by each Sponsor and its affiliated investment
funds shall be reduced pro rata.
10. Representation and Warranties. (a) In the definitive
documentation regarding the Transactions, Genesis shall make customary
representations and warranties, including representations and warranties
regarding the following:
(i) organization and good standing;
(ii) capitalization;
(iii) issuance of securities and securities
issuable upon conversion, exercise or
exchange or in payment of dividends;
(iv) authority relative to definitive agreements;
(v) no conflicts; required filings, consents and
approvals;
(vi) SEC reports and financial statements;
(vii) listing of Genesis Common Stock;
(viii) rights plan amended to allow Transactions;
(ix) state takeover statutes and other
antitakeover provisions contained in
constituent documents not applicable to
Transactions; and
(x) offering of securities not in violation of
the Securities Act of 1933.
<PAGE>
5
(b) In the definitive documentation regarding the
Transactions, Sponsors shall make customary representations and warranties,
including representations and warranties regarding the following:
(i) organization, standing and power;
(ii) authority relative to definitive agreements;
(iii) no conflicts; required filings and consents;
and
(iv) purchase for investment.
11. Conditions. (a) The definitive documentation regarding the
Transactions shall provide for customary conditions of the parties' obligation
to close, including the following:
(i) no injunctions or restraints;
(ii) required filings and consents (including
regulatory, shareholder and third party
consents and termination of the HSR waiting
period), other than as contemplated under
Section 11(b)(x);
(iii) receipt of waivers from Genesis's senior
lenders and amendment to Genesis's senior
credit facility, in each case reasonably
acceptable to Cypress and TPG; and
(iv) receipt of waivers from The Multicare
Companies, Inc.'s senior lenders and
amendment to The Multicare Companies, Inc.'s
senior credit facility, in each case
reasonably acceptable to Cypress and TPG.
(b) The definitive documentation regarding the Transactions
shall provide that the Sponsors' obligation to close shall be further
conditioned on customary conditions, including the following:
(i) consent of Cypress's limited partners;
(ii) listing of Genesis Common Stock;
(iii) customary opinions of Genesis's counsel;
(iv) representations and warranties of Genesis
being true and correct in all material
respects when given and at closing;
(v) reasonable satisfaction with corporate and
other proceedings;
<PAGE>
6
(vi) Genesis shall have taken appropriate actions
(including filing certificates of
designation and amending its articles of
incorporation) to issue or prepare for the
issuance of the securities described or
referenced in Section 2 and Exhibits A and B
and to effect the other provisions and
agreements contemplated hereby;
(vii) no change of control (as defined for
purposes of Genesis's senior subordinated
indebtedness) of Genesis shall have
occurred;
(viii) no material breach of covenants by Genesis;
(ix) no material adverse change in the business,
properties, operations or financial
condition of Genesis; and
(x) regulatory consents in connection with the
disposition by Sponsors of their stock in
Parent in one or more transactions
satisfactory to Sponsors.
(c) The definitive documentation regarding the Transactions
shall provide that the Genesis's obligation to close shall be further
conditioned on customary conditions, including the following:
(i) representations and warranties of Sponsors
being true and correct in all material
respects when given and at Closing; and
(ii) no material breach of covenants by Sponsors.
(d) The parties' obligations hereunder shall be subject to the
negotiation, execution and delivery of definitive documentation satisfactory in
form and substance to the parties, including without limitation, documentation
reflecting modifications to the Put/Call Agreement reasonably satisfactory to
the parties.
12. Covenants. (a) In the definitive documentation regarding
the Transactions, Genesis shall agree to customary covenants, including
covenants relating to:
(i) reasonable best efforts to consummate the
Transactions, including reasonable best
efforts to obtain all necessary consents and
approvals (including regulatory, shareholder
and third party consents and termination of
the HSR waiting period);
(ii) presentation and recommendation of proposals
to shareholders necessary to consummate
the Transactions;
<PAGE>
7
(iii) prior to Closing and subject to reasonable
exceptions (including exceptions related to
consummation of the Transactions), (A)
Genesis will conduct its business only in
the ordinary course consistent with past
practice, (B) no transaction described in
clause (ii) of Section 5; (C) no issuance,
or split, combination or reclassification
of, capital stock; (D) no dividends or
distributions on Genesis Common Stock; and
(E) no amendments to Genesis's charter or
by-laws;
(iv) no acts or omissions materially impairing
Genesis's ability to consummate the
Transactions or causing a condition not to
be satisfied;
(v) advising Sponsors of any change, development
or condition that may materially impair
Genesis's ability to consummate the
Transactions or cause a condition not to be
satisfied;
(vi) public announcements;
(vii) reservation of securities issuable upon
conversion, exchange or exercise;
(viii) filing of certificates of designation and
amendment to Genesis's articles of
incorporation;
(ix) provision of information, including
provision of information sufficient to
permit sales of securities under Rule 144
under the Securities Act of 1933;
(x) if the Closing occurs, payment of Sponsors'
expenses (including fees and expenses of
professional advisors) not to exceed
$1,000,000;
(xi) publicity; and
(xii) no amendment to Genesis's articles of
incorporation, by-laws, shareholder rights
agreement or other constituent document in a
manner adverse to Sponsors (other than in a
manner that affects the Sponsors the same as
other shareholders of Genesis).
(b) In the definitive documentation regarding the
Transactions, Sponsors shall agree to customary covenants, including covenants
relating to:
(i) reasonable best efforts to consummate the
Transactions;
(ii) no affirmative acts materially impairing
Sponsors' ability to consummate the
Transactions;
<PAGE>
8
(iii) public announcements; and
(iv) publicity.
(c) In the definitive documentation regarding the
Transactions, each Sponsor shall also covenant that
(i) for so long as the standstill is in effect,
it will not sell voting securities of
Genesis to:
(A) any person in a transaction or a
series of transactions where such
voting securities, together with any
other voting securities known by
such Sponsor to have been sold to
such person by any other Sponsor,
represent more than 15% of Genesis's
total voting power or
(B) to any "competitor" of Genesis,
except, in any case, in an
underwritten public offering or in a
transaction approved by Genesis's
board of directors; and
(ii) it will give notice to Genesis of any
transfer of securities acquired in
connection with the Transactions, including
the name of the transferee and whether it
believes the transferee and the selling
Sponsor are a "person" (as such term is used
in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934).
For purposes of clause (i)(B), "competitor" shall mean any
person which derives more than $500 million in revenues from the operation of
long-term care facilities and/or institutional pharmacy sales; provided, that
any person which derives more than $200 million in revenues from the operation
of long-term care facilities and/or institutional pharmacy sales solely within
one of two markets in which Genesis then operates (as most recently reported by
Genesis in its filings with the Securities and Exchange Commission) shall be a
"competitor".
<PAGE>
9
13. Indemnification. The definitive documentation relating to
the Transactions shall provide for:
(a) the reciprocal indemnification between
Genesis and Sponsors for breaches of
representations and warranties and breaches
of covenants; provided, that Sponsors'
ability to recover in respect of any breach
of the representation and warranty set forth
in Section 10(a)(vi) or the covenants set
forth in Sections 12(a)(i), (iv), (v), (vi),
(x) and (xi) and Genesis's ability to
recover in respect of any breech of the
covenants set forth in Sections 12(b)(i),
(ii), (iii) and (iv) shall be limited to $50
million;
(b) indemnification of Sponsors' designees to
Genesis's board of directors to the fullest
extent permitted by law (consistent with the
indemnification of Genesis's other
directors); and
(c) indemnification of Sponsors in connection
with the Transactions (other than in respect
of losses arising out of (i) losses of value
of the Sponsors' investments, (ii) claims by
the limited partners in Sponsors' affiliated
investment funds and (iii) tax consequences
of the Transactions).
14. Termination. This letter of intent may be terminated and
the Transactions may be abandoned or terminated (a) at any time by mutual
agreement of Genesis, Cypress and TPG, (b) at the option of Genesis, on the one
hand, and Cypress and TPG, on the other hand, if definitive documentation
relating to the Transactions shall not have been executed by August 31, 1999.
The provisions of Sections 14, 16 and 19 shall survive any termination of this
letter of intent or abandonment or termination of the Transactions.
15. Ordinary Course. Prior to the execution of the definitive
documentation relating to the Transactions, Genesis shall operate its business
only in the ordinary course consistent with past practice and shall not enter
into, or enter into any agreement or make any commitment with respect to, any
extraordinary transaction, in any case, without the prior written consent of
Cypress and TPG or except as, and upon the terms, disclosed in writing to
Cypress and TPG prior to the date hereof.
16. Publicity. Each party shall promptly advise and cooperate
with the other before issuing any press release or other information to the
public with respect to the Transactions; provided, that nothing shall prohibit
any disclosure that may be required by law, regulation or legal or judicial
process or the rules of any securities exchange.
<PAGE>
10
17. Disclosure. Genesis agrees to promptly furnish the
Sponsors with all financial and other information concerning Genesis and related
matters, and access to personnel of Genesis, which the Sponsors may reasonably
request. Genesis will notify the Sponsors promptly of any material adverse
change in the business, properties, operations or financial condition of
Genesis.
18. Definitive Documentation; Reasonable Best Efforts.
Promptly after the execution of this letter of intent, counsel for the Sponsors
and Genesis shall prepare the definitive documentation which shall contain
provisions consistent with this letter of intent and such further terms and
conditions as are customary in documentation of such type or as may otherwise be
mutually agreeable to the parties. The parties shall cooperate and use their
reasonable best efforts to negotiate and execute the definitive documentation as
soon as practical after the date hereof.
19. Miscellaneous. This letter of intent shall be governed by,
and construed in accordance with, the laws of the State of New York.
This letter of intent contains the entire agreement among
the parties relating to the subject matter hereof. This letter of intent may not
be amended or modified except by a written document which shall be executed by
each of the parties hereto. This letter of intent is solely for the benefit of
the parties hereto, and no other person shall acquire or have any rights under
or by virtue of this letter of intent. This letter of intent may not be assigned
by any of the parties hereto; provided, that the Sponsors may assign their
rights and obligations under this letter of intent, and the definitive
documentation relating to the Transactions shall provide that the Sponsors may
assign their rights and obligations thereunder, to their respective affiliated
investment funds; provided, further, that, in connection with any such
assignment, TPG Partners II, L.P., Cypress Merchant Banking Partners L.P. and
Cypress Offshore Partners L.P. shall remain liable for such obligations.
Each party also agrees that unless and until definitive
documentation with respect to the Transactions has been executed and delivered,
the parties hereto shall have no legal obligation of any kind whatsoever with
respect to the Transactions by virtue of this letter or any other written or
oral expression with respect to the Transactions, except for the matters
specifically agreed to in Sections 14 through 19, inclusive, hereof.
This letter of intent may be executed in counterparts, each of
which will be deemed an original, but all of which taken together will
constitute one and the same instrument.
[Signatures follow.]
<PAGE>
S-1
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the enclosed duplicate copy of this
letter of intent.
Very truly yours,
THE CYPRESS GROUP L.L.C.
By:________________________
Name:
Title:
TPG PARTNERS II, L.P.
By: TPG GenPar II, L.P.
By: TPG Advisors II, Inc.
By:________________________
Name:
Title:
Accepted and agreed to as of
the date first written above:
GENESIS HEALTH VENTURES, INC.
By:______________________________
Name:
Title:
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