<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, 2000
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 14, 2000: 48,640,262 shares of common stock
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TABLE OF CONTENTS
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Page
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............................... 1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 37
Part II: OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 38
Item 2. Changes in Securities................................................. 41
Item 3. Defaults Upon Senior Securities....................................... 41
Item 4. Submission of Matters to a Vote of Security Holders................... 41
Item 5. Other Information..................................................... 41
Item 6. Exhibits and Reports on Form 8-K...................................... 41
SIGNATURES.............................................................................. 42
</TABLE>
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our
ability or inability to meet our liquidity needs, scheduled
debt and interest payments and expected future capital
expenditure requirements, and to control costs and to sell
certain assets; and the expected effects of government
regulation on reimbursement for services provided and on the
costs of doing business;
o certain statements in the Notes to Unaudited Condensed
Consolidated Financial Statements concerning pro forma
adjustments; and
o certain statements in "Legal Proceedings" regarding the
effects of litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our bankruptcy cases;
o our default under our senior credit agreement and our senior
subordinated and other notes;
o our substantial indebtedness and significant debt service
obligations;
o the effect of planned dispositions of assets;
o our ability or inability to secure the capital and the related
cost of the capital necessary to fund future growth;
o the impact of health care reform, including the Medicare
Prospective Payment System ("PPS"), the Balanced Budget
Refinement Act ("BBRA") and the adoption of cost containment
measures by the federal and state governments;
o the adoption of cost containment measures by other third party
payors;
o the impact of government regulation, including our ability to
operate in a heavily regulated environment and to satisfy
regulatory authorities;
o the occurrence of changes in the mix of payment sources
utilized by our patients to pay for our services;
o competition in our industry;
o our ability to consummate or complete development projects or
to profitably operate or successfully integrate enterprises
into our other operations; and
o changes in general economic conditions.
1
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On June 22, 2000, Genesis Health Ventures, Inc. and certain of its direct and
indirect subsidiaries filed for voluntary relief under Chapter 11 of the United
States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On the same date, Genesis'
43.6% owned affiliate, The Multicare Companies, Inc. ("Multicare") and certain
of its affiliates also filed for relief under Chapter 11 of the Bankruptcy Code
with the Bankruptcy Court. Both companies are currently operating as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. These
cases, among other factors such as the Company's recurring losses raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern with the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. However, as a result of the bankruptcy cases and
circumstances relating to this event, including the Company's leveraged
financial structure and losses from operations, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. While under
the protection of Chapter 11, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the financial statements. Further, a plan of reorganization could
materially change the amounts reported in the financial statements, which do not
give effect to all adjustments of the carrying value of assets or liabilities
that might be necessary as a consequence of a plan of reorganization.
Additionally, a deadline will be established for the assertion of pre-bankruptcy
claims against the Company (commonly referred to as a bar date); including
contingent, unliquidated or disputed claims, which claims could result in an
increase in liabilities subject to compromise as reported in the accompanying
unaudited condensed consolidated financial statements. The Company's ability to
continue as a going concern is dependent upon, among other things, confirmation
of a plan of reorganization, future profitable operations, the ability to comply
with the terms of the Company's debtor-in-possession financing agreements and
the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
These and other factors have been discussed in more detail in the Company's
periodic reports.
2
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
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2000 1999
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<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 15,607 $ 12,397
Investments in marketable securities 24,968 24,599
Accounts receivable, net of allowance for doubtful accounts 472,288 370,472
Inventory 65,517 63,369
Prepaid expenses and other current assets 58,843 46,964
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Total current assets 637,223 517,801
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Property, plant, and equipment, net 1,180,041 612,301
Notes receivable and other investments 42,348 40,075
Other long-term assets 132,104 112,978
Investments in unconsolidated affiliates 21,123 180,882
Goodwill and other intangibles, net 1,434,715 965,877
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Total assets $ 3,447,554 $ 2,429,914
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Liabilities and Shareholders' Equity
Current liabilities not subject to compromise:
Current installments of long-term debt $ -- $ 37,126
Accounts payable and accrued expenses 81,430 244,971
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Total current liabilities 81,430 282,097
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Long-term debt not subject to compromise:
Mortgages and other long-term debt 101,440 1,484,510
Liabilities subject to compromise 2,481,890 --
Deferred income taxes 47,366 13,827
Deferred gain and other long-term liabilities 69,975 61,590
Minority interest 157,903 --
Redeemable preferred stock 436,292 --
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 587,781 and 590,253 issued and outstanding at
June 30, 2000 and September 30, 1999, respectively 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 48,653,254 and 48,641,154 at June 30, 2000;
36,145,678 and 36,133,578 at September 30, 1999 748 723
Additional paid-in capital 803,596 753,452
Accumulated deficit (731,671) (165,620)
Accumulated other comprehensive loss (1,178) (428)
Treasury stock, at cost (243) (243)
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Total shareholders' equity 71,258 587,890
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Total liabilities and shareholders' equity $ 3,447,554 $ 2,429,914
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</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
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Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
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
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net revenues:
Pharmacy and medical supply services $ 240,330 $ 230,387 $ 697,179 $ 698,505
Inpatient services 331,650 175,887 989,061 527,720
Other revenue 43,871 58,814 121,338 182,686
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Total net revenues 615,851 465,088 1,807,578 1,408,911
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Operating expenses:
Operating expenses 551,485 404,658 1,596,212 1,215,416
Debt restructuring and reorganization costs and other charges 44,124 -- 88,237 9,701
Multicare joint venture restructuring charge -- -- 420,000 --
Depreciation and amortization 29,423 18,887 87,578 55,453
Lease expense 9,661 6,655 28,674 19,641
Interest expense, net 61,180 29,515 170,682 85,295
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Income (loss) before income taxes, minority interest, equity in
net loss of unconsolidated affiliates, extraordinary item and
cumulative effect of accounting change (80,022) 5,373 (583,805) 23,405
Income tax expense (benefit) (20,233) 2,901 (35,968) 10,851
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Income (loss) before minority interest, equity in net loss of
unconsolidated affiliates, extraordinary item and
cumulative effect of accounting change (59,789) 2,472 (547,837) 12,554
Minority interest 10,268 -- 23,295 --
Equity in net loss of unconsolidated affiliates -- (3,475) -- (8,626)
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Income (loss) before extraordinary item and cumulative effect
of accounting change (49,521) (1,003) (524,542) 3,928
Extraordinary item, net of tax -- -- -- (2,100)
Cumulative effect of accounting change -- -- (10,412) --
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Net income (loss) (49,521) (1,003) (534,954) 1,828
Preferred stock dividends 11,416 4,855 31,097 14,568
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Loss attributed to common shareholders $ (60,937) $ (5,858) $ (566,051) $ (12,740)
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Per common share data:
Basic and Diluted
Loss before extraordinary item
and cumulative effect of accounting change $ (1.25) $ (0.17) $ (11.94) $ (0.30)
Net loss $ (1.25) $ (0.17) $ (12.16) $ (0.36)
Weighted average shares of common stock 48,641,154 35,371,499 46,542,614 35,268,910
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</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(534,954) $ 1,828
Net charges included in operations not requiring funds 543,301 70,480
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable (49,060) (28,120)
Accounts payable and accrued expenses (61,056) (18,586)
Other, net 570 (1,800)
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Net cash provided by (used in) operations (101,199) 23,802
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Cash flows from investing activities:
Proceeds from sale (purchase) of marketable securities (1,119) 1,677
Proceeds from sale of Ohio assets 33,000 --
Capital expenditures (40,006) (57,457)
Payments for acquisitions, net of cash acquired -- (12,003)
(Investments in) and proceeds from unconsolidated affiliates 1,383 (24,180)
Notes receivable and other investments, and
other long-term asset additions, net (10,345) (7,677)
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Net cash used in investing activities (17,087) (99,640)
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Cash flows from financing activities:
Net borrowings under working capital revolving credit facilities 140,868 115,200
Repayment of long-term debt and payment of sinking fund requirements (83,339) (143,540)
Proceeds from issuance of long-term debt 10,000 123,050
Proceeds from issuance of common stock 50,000 --
Preferred stock dividends paid -- (5,988)
Debt issuance costs -- (3,088)
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Net cash provided by financing activities 117,529 85,634
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Net increase (decrease) in cash and equivalents (757) 9,796
Cash and equivalents
Beginning of period 16,364 4,902
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End of period $ 15,607 $ 14,698
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</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Genesis Health Ventures, Inc. ("Genesis" or the "Company") provides eldercare in
the eastern United States through a network of over 300 Genesis ElderCare
skilled nursing and assisted living centers plus long term care support services
nationwide including pharmacy, medical equipment and supplies, rehabilitation,
group purchasing, consulting and facility management.
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. On June 22, 2000,
Genesis Health Ventures, Inc. and certain of its direct and indirect
subsidiaries filed for voluntary relief under Chapter 11 of the United States
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On the same date, Genesis' 43.6%
owned affiliate, The Multicare Companies, Inc. ("Multicare") and certain of its
affiliates also filed for relief under Chapter 11 of the Bankruptcy Code with
the Bankruptcy Court. Both companies are currently operating as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. These
cases, among other factors such as the Company's recurring losses raise
substantial doubt about the Company's ability to continue as a going concern.
The financial information as of June 30, 2000, and for the three and nine months
ended June 30, 2000 and 1999, is unaudited and has been prepared in conformity
with the accounting principles and practices as reflected in the Company's
audited annual financial statements. In the opinion of management, the
consolidated financial statements include all necessary adjustments (consisting
of normal recurring accruals and all adjustments pursuant to the adoption of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") for a fair presentation of the financial position
and results of operations for the interim presented.
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, 1999. 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. Voluntary Petition for Relief Under Chapter 11 of the United States
Bankruptcy Code
On June 22, 2000, Genesis Health Ventures, Inc. and certain of its direct and
indirect subsidiaries (the "Genesis Debtors") filed for voluntary relief under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. On the same date,
Genesis' 43.6% owned affiliate, The Multicare Companies, Inc. ("Multicare") and
certain of its affiliates (the "Multicare Debtors") also filed for relief under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. Both companies are
currently operating as debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. These cases, among other factors such as the Company's
recurring losses raise substantial doubt about the Company's ability to continue
as a going concern.
Except for relief that might otherwise be granted by the Bankruptcy Court
overseeing the Chapter 11 cases, and further subject to certain statutory
exceptions, the automatic stay protection afforded by Chapter 11 of the
Bankruptcy Code cases prevents any creditor or other third parties from taking
any action in connection with any defaults under pre-petition debt obligations
or agreements of the Company and those of its subsidiaries or affiliates which
6
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are debtors in the Chapter 11 cases. In connection with the Chapter 11 cases,
the Company expects to develop a plan of reorganization that will be approved by
its creditors and confirmed by the Bankruptcy Court overseeing the Company's
Chapter 11 cases. In the event the plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve successful future operations.
The Bankruptcy court approved, on a final basis, borrowings of up to
$250,000,000 in respect of the Genesis debtor-in-possession financing facility
(the "Genesis DIP Facility") with Mellon Bank, N.A. as Agent and a syndicate of
lenders. The Bankruptcy Court also approved, on a final basis, borrowings of up
to $50,000,000 in respect of the Multicare debtor-in-possession financing
facility (the "Multicare DIP Facility") with Mellon Bank, N.A. as Agent and a
syndicate of lenders. Other than two third party lenders, with respect to which
final orders authorizing use of cash collateral are pending, the Bankruptcy
Court, authorized, on a final basis, the Genesis and Multicare Debtors to use
the cash collateral of certain third party lenders. The Genesis and Multicare
Debtors intend to utilize the DIP Facilities of the respective companies and
existing cash flows to fund ongoing operations during the Chapter 11 cases. As
of June 30, 2000, approximately $91,000,000 of borrowings under the Genesis DIP
Facility were outstanding and no borrowings were outstanding under the Multicare
DIP Facility.
Since the Company filed for protection under the Bankruptcy Code, the
accompanying unaudited condensed consolidated financial statements as of and for
the three and nine months ended June 30, 2000 have been prepared in accordance
with SOP 90-7. Pursuant to SOP 90-7, the Company has reported liabilities
subject to compromise at June 30, 2000.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain pre-petition wages, salaries, benefits and other employee
obligations, as well as to continue in place the Debtors' various employee
compensation programs and procedures. On that date, the Bankruptcy Court also
authorized the Debtors to pay, among other claims, the pre-petition claims of
certain critical vendors and patients. All other unsecured pre-petition
liabilities are classified in the condensed consolidated balance sheet as
liabilities subject to compromise. The Debtors intend to remain in possession of
their assets and continue in the management and operation of their properties
and businesses, and to pay the post-petition claims of their various vendors and
providers in the ordinary course of business.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 follows (in thousands):
As of June 30,
2000
--------------
Liabilities subject to compromise:
Revolving credit and term loans $1,483,898
Senior subordinated notes 615,204
Revenue bonds and other indebtedness 170,360
Accounts payable and accrued liabilities 100,852
Accrued interest 81,626
Accrued preferred stock dividends 29,950
--------------
$2,481,890
==============
A summary of the principal categories of reorganization items follows (in
thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
June 30, 2000 June 30, 2000
<S> <C> <C>
Reorganization items:
Legal, accounting and consulting fees $ 3,967 $ 7,891
Bank fees 5,379 6,429
---------------------------------------------
$ 9,346 $14,320
=============================================
</TABLE>
7
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3. Certain Significant Risks and Uncertainties
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long term care facilities which
utilize our specialty medical services. The healthcare industry is experiencing
the effects of the federal and state governments' trend toward cost containment,
as government and other third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers.
These cost containment measures, combined with the increasing influence of
managed care payors and competition for patients, have resulted in reduced rates
of reimbursement for services provided by the Company.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System
pursuant to the Balanced Budget Act of 1997, as modified by
the Medicare Balanced Budget Refinement Act, and
o the repeal of the "Boren Amendment" federal payment standard
for Medicaid payments to nursing facilities.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that any
future healthcare legislation will not adversely affect the Company's business.
There can be no assurance that payments under governmental and private third
party payor programs will be timely, will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs. The Company's
financial condition and results of operations may be affected by the
reimbursement process, which in the Company's industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled.
4. Long-Term Debt
Genesis Debtor-in-Possession Financing
On June 22, 2000 (the "Petition Date"), the Company and substantially all of its
subsidiaries and affiliates, filed voluntary petitions in the United States
Bankruptcy Court for the District of Delaware under the Bankruptcy Code. While
this action constituted a default under the Company's and such subsidiaries and
affiliates various financing arrangements, Section 362(a) of the Bankruptcy Code
imposes an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by the Company and
those of its subsidiaries and affiliates which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code and (excluding Multicare
and its direct and indirect subsidiaries), b) authorization for the Company to
enter into a secured debtor-in-possession revolving credit facility with a group
of banks led by Mellon Bank, N. A., (the "Genesis DIP Facility") and authorizing
advances in the interim period of up to $150,000,000 out of a possible
$250,000,000 facility. On July 18, 2000, the Bankruptcy Court entered the Final
Order approving the $250,000,000 Genesis DIP Facility and permitting full usage
thereunder. Usage under the Genesis DIP Facility is subject to a Borrowing Base
which provides for maximum borrowings (subject to the $250,000,000 commitment
limit) by the Company equal to the sum of (i) up to 90% of outstanding eligible
accounts receivable and (ii) up to $175,000,000 against real property. The
Genesis DIP Facility matures on December 21, 2001 and advances thereunder accrue
interest at either Prime plus 2.25% or the Eurodollar Rate ("LIBO Rate") plus
3.75%. Proceeds of the Genesis DIP Facility are available for general working
capital purposes and as a condition of the loan, were required to refinance the
8
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$40,000,000 outstanding under the Company's pre-petition priority Tranche II
sub-facility. Additionally, $44,000,000 of proceeds were used to satisfy all
unpaid interest and rent obligations to the senior secured creditors under the
Fourth Amended and Restated Credit Agreement dated August 20, 1999 and the
Synthetic Lease dated October 7, 1996 as adequate protection for any diminution
in value of the pre-petition senior secured lenders in these facilities,
respectively. The Company will continue to pay interest and rent pursuant to
these agreements as adequate protection. Interest is accrued and paid at the
Prime Rate as announced by the administrative agent, or the applicable Adjusted
LIBO Rate plus, in either event, a margin that is dependent upon a certain
financial ratio test. As of June 30, 2000 borrowings outstanding under the
Genesis DIP Facility were $91,000,000. As of July 31, 2000 borrowings
outstanding under the Genesis DIP Facility were $94,000,000. The Genesis DIP
Facility also provides for the issuance of up to $25,000,000 in standby letters
of credit. As of July 31, 2000 there was $11,500,000 in letters of credit issued
thereunder.
Pursuant to the agreement, the Company and each of its subsidiaries named as
borrowers or guarantors under the Genesis DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Genesis DIP Facility) in all unencumbered pre- and post-
petition property of the Company. The Genesis DIP Facility also has priority
over the liens on all collateral pledged under (i) the Fourth Amended and
Restated Credit Agreement dated as of August 20, 1999, (ii) the Synthetic Lease
dated October 7, 1996 and (iii) other obligations covered by the Collateral
Agency Agreement, including any Swap Agreement, which collateral includes, but
is not limited to, all personal property, including bank accounts and investment
property, accounts receivable, inventory, equipment, and general intangibles,
substantially all fee owned real property, and the capital stock of Genesis and
its borrower and guarantor subsidiaries.
The Genesis DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Genesis DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Genesis DIP Facility usage amounts and
maximum capital expenditures. The breach of any such provisions, to the extent
not waived or cured within any applicable grace or cure periods, could result in
the Company's inability to obtain further advances under the Genesis DIP
Facility and the potential exercise of remedies by the Genesis DIP Facility
lenders (without regard to the automatic stay unless reimposed by the Bankruptcy
Court) which could materially impair the ability of the Company to successfully
reorganize under Chapter 11.
Multicare Debtor-in-Possession Financing
On June 22, 2000, Multicare and substantially all of its affiliates, filed
voluntary petitions in the United States Bankruptcy Court for the District of
Delaware under the Bankruptcy Code. While this action constituted a default
under Multicare's and such affiliates various financing arrangements, Section
362(a) of the Bankruptcy Code imposes an automatic stay that generally precludes
creditors and other interested parties under such arrangements from taking any
remedial action in response to any such resulting default without prior
Bankruptcy Court approval. Among the orders entered by the Bankruptcy Court on
June 23, 2000 were orders approving on an interim basis, a) the use of cash
collateral by Multicare and those of its affiliates which had filed petitions
for reorganization under Chapter 11 of the Bankruptcy Code and (b) authorization
for Multicare to enter into a secured debtor-in-possession revolving credit
facility with a group of banks led by Mellon Bank, N. A., (the "Multicare DIP
Facility") and authorizing advances in the interim period of up to $30,000,000
out of a possible $50,000,000. On July 18, 2000, the Bankruptcy Court entered
the Final Order approving the $50,000,000 Multicare DIP Facility and permitting
full usage thereunder. Usage under the Multicare DIP Facility is subject to a
Borrowing Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable and a real estate component. The Multicare DIP Facility matures on
December 21, 2001 and advances thereunder accrue interest at either Prime plus
2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP Facility are
available for general working capital purposes. Through July 31, 2000, there has
been no usage under the Multicare DIP Facility. The
9
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Multicare DIP Facility also provides for the issuance of up to $20,000,000 in
standby letters of credit. As of July 31, there was $3,700,000 in letters of
credit issued thereunder.
Pursuant to the agreement, Multicare and each of its affiliates named as
borrowers or guarantors under the Multicare DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Multicare DIP Facility) in all unencumbered pre- and post-
petition property of Multicare. The Multicare DIP Facility also has priority
over the liens on all collateral pledged under the Pre-petition Senior Credit
Facility dated as of October 9, 1997 as amended, which collateral includes, but
is not limited to, all personal property, including bank accounts and investment
property, accounts receivable, inventory, equipment, and general intangibles,
substantially all fee owned real property, and the capital stock of Multicare
and its borrower and guarantor affiliates.
The Multicare DIP financing agreement limits, among other things, Multicare's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Multicare DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Multicare DIP Facility usage amounts
and maximum capital expenditures. The breach of any such provisions, to the
extent not waived or cured within any applicable grace or cure periods, could
result in Multicare's inability to obtain further advances under the Multicare
DIP Facility and the potential exercise of remedies by the Multicare DIP
Facility lenders (without regard to the automatic stay unless reimposed by the
Bankruptcy Court) which could materially impair the ability of Multicare to
successfully reorganize under Chapter 11.
Genesis Credit Facility
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries (excluding
Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility") for the purpose of: refinancing and funding interest and principal
payments of certain existing indebtedness; funding permitted acquisitions; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of transactions. The fourth amended and
restated credit agreement made the financial covenants for certain periods less
restrictive, required minimum asset sales, increased the Applicable Margin
(defined below), provided the lenders of the Genesis Credit Facility a
collateral interest in certain real and personal property of the Company, and
generally reallocated the proceeds thereof among the Tranche II Facility
(defined below), the Genesis Revolving Facility (defined below) and the Genesis
Term Loans (defined below) and permitted the restructuring of the Put/Call
Agreement, as defined. Additionally, the fourth amended and restated credit
agreement provides for $40,000,000 of additional borrowing capacity, (the
"Tranche II Facility") available to the Company beginning in December 1999.
The Genesis Credit Facility consists of three term loans with original balances
of $200,000,000 each (collectively, the "Genesis Term Loans"), and a
$650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a
$40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly
installments through 2005. The Genesis Term Loans consist of (i) an original six
year term loan maturing in September 2003 with an outstanding balance of
$110,445,000 at June 30, 2000 (the "Genesis Tranche A Term Facility"); (ii) an
original seven year term loan maturing in September 2004 with an outstanding
balance of $152,131,000 at June 30, 2000 (the "Genesis Tranche B Term
Facility"); and (iii) an original eight year term loan maturing in June 2005
with an outstanding balance of $151,378,000 at June 30, 2000 (the "Genesis
Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding
balance of $645,834,000 (excluding letters of credit) at June 30, 2000, becomes
payable in full on September 30, 2003. At June 30, 2000, there were no
outstanding borrowings under the Tranche II Facility. The aggregate outstanding
balance of the Genesis Credit Facility at June 30, 2000 is classified as a
liability subject to compromise.
10
<PAGE>
The Genesis 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, and also by first priority security
interests in substantially all personal property, excluding inventory, including
accounts receivable, equipment and general intangibles. Mortgages on
substantially all of Genesis' subsidiaries' real property were also granted.
Loans under the Genesis 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 "Applicable
Margin") that is dependent upon a certain financial ratio test. Loans under the
Genesis Tranche A Term Facility and Genesis Revolving Facility have an
Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans.
Loans under the Genesis Tranche B Term Facility have an Applicable Margin of
1.75% for Prime Rate loans and 3.50% for LIBO Rate loans. Loans under the
Genesis Tranche C Term Facility have an Applicable Margin of 2.00% for Prime
Rate loans and 3.75% for LIBO Rate loans. Subject to meeting certain financial
ratios, the above referenced interest rates are reduced.
The Genesis 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; cause Genesis and its affiliates to
maintain certain agreements including the Management Agreement and the Put/Call
Agreement (as amended), and to maintain corporate separateness; and cause
Genesis to comply with the terms of other material agreements, as well as to
comply with usual and customary covenants for transactions of this nature.
Multicare Credit Facility
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility") which made the financial covenants
for certain periods less restrictive, permitted a portion of the proceeds of
assets sales to repay indebtedness under the Multicare Tranche A Term Facility
(defined below) and Multicare Revolving Facility (defined below), permitted the
restructuring of the Put/Call Agreement, increased the interest rates applying
to the Multicare Term Loans (defined below) and the Multicare Revolving
Facility, and increased the level of management fee Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
The Multicare Credit Facilities consist of three term loans with an aggregate
original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and
a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortize in quarterly installments through 2005. The loans
consist of (i) an original six year term loan maturing in September 2003 with an
outstanding balance of $132,239,000 at June 30, 2000 (the "Multicare Tranche A
Term Facility"); (ii) an original seven year term loan maturing in September
2004 with an outstanding balance of $138,339,000 at June 30, 2000 (the "Tranche
B Term Facility"); and (iii) and an original eight year term loan maturing in
June 2005 with an outstanding balance of $45,877,000 at June 30, 2000 (the
"Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an
outstanding balance of $107,655,000 at June 30, 2000, becomes payable in full on
September 30, 2003. The aggregate outstanding balance of the Multicare Credit
Facility at June 30, 2000 is classified as a liability subject to compromise.
The Multicare Credit Facility (as amended) is secured by first priority security
interests (subject to certain exceptions) in all personal property, including
inventory, accounts receivable, equipment and general intangibles. Mortgages on
certain of Multicare's subsidiaries' real property were also granted. Loans
under the Multicare Credit Facility bear, at Multicare's option, interest at the
11
<PAGE>
per annum Prime Rate as announced by the administrative agent, or the applicable
Adjusted LIBO Rate plus, in either event, an Annual Applicable Margin that is
dependent upon a certain financial ratio test.
Effective with the Amendment on August 20, 1999, loans under the Multicare
Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at
a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare
Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 4.25%; loans under the Multicare Revolving Credit Facility bear interest
at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting
certain financial covenants, the above-referenced interest rates will be
reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Multicare Credit Facility, the Company is no longer entitled to elect a LIBO
Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term
Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%;
loans under the Multicare Tranche B Term Facility bear interest at a rate equal
to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C
Term Facility bear interest at a rate equal to Prime Rate plus a margin up to
2.5%; loans under the Multicare Revolving Credit Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.0%.
The Multicare Credit Facility contains a number of covenants that, among other
things, restrict the ability of Multicare 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 Multicare 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; cause Multicare and its affiliates
to maintain certain agreements including the Management Agreement and the
Put/Call Agreement (as amended), and to maintain corporate separateness; and
cause Multicare to comply with the terms of other material agreements, as well
as to comply with usual and customary covenants for transactions of this nature.
Multicare is in Default under the Multicare Credit Facility and has not made any
scheduled interest payments since March 29, 2000.
Other Indebtedness
Genesis has outstanding an aggregate of $370,000,000 of Senior Subordinated
Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%.
Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are
due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior
Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the
Multicare Notes is payable semi-annually. Genesis and Multicare are in default
of their respective senior subordinated note indenture agreements. The aggregate
outstanding balance of the Genesis Notes and the Multicare Notes at June, 2000
is classified as a liability subject to compromise.
Certain of these and other of Genesis' and Multicare's outstanding loans contain
covenants which, without the prior consent of the lenders, limit certain of
Genesis' and Multicare's activities. Such covenants contain limitations relating
to the merger or consolidation of Genesis or Multicare and Genesis' and
Multicare's ability to secure indebtedness, make guarantees, grant security
interests and declare dividends. In addition, certain of Genesis and Multicare's
outstanding loans require that Genesis and Multicare maintain certain minimum
levels of cash flow and debt service coverage, and must maintain certain ratios
of liabilities to net worth. Under certain of these loans, Genesis is restricted
from paying cash dividends on the Common Stock, unless certain conditions are
met. Genesis has not declared or paid any cash dividends on its Common Stock
since its inception.
12
<PAGE>
5. Debt Restructuring and Reorganization Costs and Other Charges
During the quarter ended March 31, 2000, the Company began discussions with its
lenders under the Genesis and Multicare Credit Facilities to revise the
Company's capital structure. During the discussion period, which continued into
the quarter ended June 30, 2000, Genesis and Multicare did not make certain
scheduled principal and interest payments under the Genesis and Multicare Credit
Facilities or certain scheduled interest payments under certain of the Genesis
and Multicare's senior subordinated debt agreements. On June 22, 2000 Genesis
filed for voluntary relief under Chapter 11 of the Bankruptcy Court. In
connection with the debt restructuring negotiations and for the costs of the
subsequent reorganization cases, the Company incurred legal, bank, accounting
and other costs of approximately $16,100,000. As a result of the nonpayment of
interest under the Genesis Credit Facility, certain provisions under existing
interest rate swap arrangements with Citibank were triggered. Citibank notified
Genesis that they elected to force early termination of the interest rate swap
arrangements, and have asserted a $28,300,000 obligation, which is classified as
a liability subject to compromise. The professional and other fees and the
interest rate swap termination are reflected in the unaudited condensed
consolidated statement of operations as debt restructuring and reorganization
costs and other charges.
During the nine months ended June 30, 2000, Genesis decided to close three
underperforming owned eldercare centers with 545 combined beds. As a result, a
charge of $9,200,000 was recorded to account for certain impaired assets of the
three owned eldercare centers. In addition, effective May 31, 2000, Multicare
sold 14 eldercare centers with 1,128 beds located in the state of Ohio for
approximately $36,500,000. The Company recorded a loss on sale of the Ohio
properties of approximately $7,900,000. These charges are reflected in the
unaudited condensed consolidated statement of operations as debt restructuring
and reorganization costs and other charges.
During the quarter ended June 30, 2000, the Company recorded a charge of
approximately $19 million to reserve certain trade receivables due from
healthcare providers that filed for bankruptcy protection. This charge is
reflected in the unaudited condensed consolidated statement of operations as
debt restructuring and reorganization costs and other charges.
During the quarter ended December 31, 1999, the Company recorded a non-cash
pre-tax charge of $7,720,000 for a stock option redemption program (the
"Redemption Program") under which current Genesis employees and directors
elected to surrender certain Genesis stock options for unrestricted shares of
Genesis Common Stock. The Redemption Plan was approved by shareholder vote at
the Company's 2000 Annual Meeting. As a result of the Company's financial
condition and other considerations, the Company determined not to proceed with
the Redemption Program. The elections made by optionees would have resulted in
the redemption of approximately 4,600,000 stock options in exchange for
approximately 4,000,000 shares of Genesis common stock. This charge is reflected
in the unaudited condensed consolidated statement of operations as debt
restructuring and reorganization costs and other charges.
5. Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
13
<PAGE>
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put/call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis
ElderCare Corp. common stock at a price determined pursuant to the Put/Call
Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as
defined below) 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 (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"). The Company
completed the Pharmacy Purchase effective January 1, 1998. The Company completed
the Therapy Purchase in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
14
<PAGE>
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis common stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an
irrevocable proxy to vote their shares of common stock of
Genesis ElderCare Corp. on all matters to be voted on by
shareholders, including the election of directors;
o provide that Genesis may appoint two-thirds of the members of
the Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions
receive the approval of at least one designee of each of
Cypress, TPG and Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell
their Genesis ElderCare Corp. stock, subject to certain
limitations;
o provide that Genesis may appoint 100% of the members of the
operating committee of the board of directors of Genesis
ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis common stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
15
<PAGE>
o enter into any transaction or series of transactions which
would constitute a change in control, as defined in the
Restructuring Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part of a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the Multicare restructuring transaction, Genesis accounted for its
investment in Multicare using the equity method of accounting. Upon consummation
of the restructuring transaction, Genesis consolidated the financial results of
Multicare since Genesis has managerial, operational and financial control of
Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses are consolidated at their
recorded historical amounts and the financial impact of transactions between
Genesis and Multicare are eliminated in consolidation. The non-Genesis
shareholders' remaining 56.4% interest in Multicare is carried as minority
interest based on their proportionate share of Multicare's historical book
equity. For so long as there is a minority interest in Multicare, the minority
shareholders' proportionate share of Multicare's net income or loss will be
recorded through adjustment to minority interest.
In connection with the restructuring transaction, Genesis recorded a non-cash
charge of approximately $420,000,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred. The cost to terminate the Put was estimated based upon
the Company's assessment that no incremental value was realized by Genesis as a
result of the changes in the equity ownership structure of Multicare brought
about by the restructuring of the Multicare joint venture.
16
<PAGE>
The following unaudited pro forma statement of operations information gives
effect to the Multicare joint venture restructuring had it occurred on October
1, 1998, after giving effect to certain adjustments, including the elimination
of intercompany transactions, the recording of minority interest, the issuance
of common stock, the recording of preferred stock dividends, the repayment of
debt with proceeds from the issuance of common stock and related income tax
effects. The unaudited pro forma financial information has been prepared to
reflect the consolidation of the financial results of Multicare. Accordingly,
Multicare's revenues and expenses are presented at their recorded historical
amounts and the financial impact of all transactions between Genesis and
Multicare are eliminated in consolidation. The pro forma financial information
does not include the $420,000,000 non-cash charge representing the cost
estimated to terminate the Multicare put. This charge is a direct result of the
Multicare joint venture restructuring. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
the transaction occurred at the beginning of the period presented.
<TABLE>
<CAPTION>
(In thousands, except per
common share data)
Nine Months Ended
Unaudited Pro Forma Statement of Operations Information: June 30, 1999
------------
<S> <C>
Total net revenue $ 1,814,282
Loss before extraordinary item (27,994)
Net loss (30,094)
Loss per common share, before extraordinary item, diluted (0.59)
Loss per common share, diluted $ (0.63)
</TABLE>
17
<PAGE>
7. Loss Per Share
The following table sets forth the computation of basic and diluted loss
attributed to common shares (amounts in table 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,
2000 1999 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic and Diluted Loss Per Share:
Loss before extraordinary item and
cumulative effect of accounting
change $ (60,937) $ (5,858) $(555,639) $ (10,640)
Extraordinary item -- -- -- (2,100)
Cumulative effect of accounting
change -- -- (10,412) --
-------------------------------------------------------------------------
Loss attributed to common
shareholders $ (60,937) $ (5,858) $(566,051) $ (12,740)
-------------------------------------------------------------------------
Weighted average shares 48,641 35,372 46,543 35,269
-------------------------------------------------------------------------
Loss per share before extraordinary
item and cumulative effect of
accounting change $ (1.25) $ (0.17) $ (11.94) $ (0.30)
Extraordinary item -- -- -- (0.06)
Cumulative effect of accounting
change -- -- (0.22) --
-------------------------------------------------------------------------
Loss per share $ (1.25) $ (0.17) $ (12.16) $ (0.36)
-------------------------------------------------------------------------
</TABLE>
For the three and nine months ended June 30, 2000 and 1999, no exercise of stock
options is assumed since their effect is antidilutive. The operating results for
the three and nine months ended June 30, 1999 have been restated to increase
non-cash preferred stock dividends by $486,000 and $1,462,000, respectively, to
adjust the accrual for the increasing rate dividend on the Series G Preferred
Stock on a straight-line basis over the term of this series.
18
<PAGE>
8. Comprehensive Loss
The following table sets forth the computation of comprehensive loss (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,
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss attributed to common
shareholders $ (60,937) $ (5,858) $ (566,051) $ (12,740)
Unrealized loss on marketable
securities (154) (259) (750) (806)
---------------------------------------------------------------
Total comprehensive loss $ (61,091) $ (6,117) $ (566,801) $ (13,546)
---------------------------------------------------------------
</TABLE>
Accumulated other comprehensive loss, which is composed of net unrealized gains
and losses on marketable securities, was ($1,178,000) and ($122,000) at June 30,
2000 and 1999, respectively.
9. Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities",
(SOP 98-5) which requires the costs of start-up activities be expensed as
incurred, rather than capitalized and subsequently amortized. The adoption of
SOP 98-5 resulted in the write-off of $10,412,000, net of tax, of unamortized
start-up costs and is reflected as a cumulative effect of accounting change.
10. Segment Information
The Company has two reportable segments: (1) Pharmacy and medical supplies
services and (2) Inpatient services.
The Company provides pharmacy and medical supply services through its
NeighborCare(R) 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 Genesis operates, as well as to independent healthcare
providers by contract. The Company provides these services through 59
institutional pharmacies and 23 medical supply distribution centers located in
its various market areas. In addition, the Company operates 33 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 91%
of the sales attributable to all pharmacy operations in Fiscal 1999 were
generated through external contracts with independent healthcare providers with
the balance attributable to centers owned or leased by the Company, including
the jointly owned Multicare centers.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at eldercare centers owned
and leased by Genesis and Multicare. The centers offer three levels of care for
their customers: skilled, intermediate and personal.
The accounting policies of the segments are the same as those of the Company.
All intersegment sales prices are market based. The Company evaluates
performance of its operating segments based on income before interest, income
taxes, depreciation, amortization, rent and nonrecurring items.
19
<PAGE>
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column represents operating
information of business units below the prescribed quantitative thresholds.
These business units derive revenues from the following services: rehabilitation
therapy, management services, capitation fees, consulting services, homecare
services, physician services, transportation services, diagnostic services,
hospitality services, group purchasing and other healthcare related services. In
addition, the "Other" column includes the elimination of intersegment
transactions.
<TABLE>
<CAPTION>
Pharmacy and
Medical
Supply Inpatient
(in thousands) Services Services Other Total
----------------------------------------------------------------------------------------------------------------------------
Three months ended
June 30, 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 240,330 $ 331,650 $ 43,871 $ 615,851
Revenue from intersegment
customers 25,560 -- 48,074 73,634
Operating income (1) 21,564 40,448 2,354 64,366
Total assets 1,082,993 1,758,026 615,749 3,447,554
----------------------------------------------------------------------------------------------------------------------------
Three months ended
June 30, 1999
----------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 230,387 175,887 58,814 465,088
Revenue from intersegment
customers 15,702 -- 15,086 30,788
Operating income (1) 28,416 24,993 7,021 60,430
Total assets $1,080,851 $ 842,978 $ 774,597 $2,698,426
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Pharmacy and
Medical
Supply Inpatient
(in thousands) Services Services Other Total
----------------------------------------------------------------------------------------------------------------------------
Nine months ended
June 30, 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 697,179 $ 989,061 $ 121,338 $1,807,578
Revenue from intersegment
customers 77,329 -- 134,034 211,363
Operating income (1) 71,953 117,774 21,639 211,366
Total assets 1,082,993 1,758,026 615,749 3,447,554
----------------------------------------------------------------------------------------------------------------------------
Nine months ended
June 30, 1999
----------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 698,505 527,720 182,686 1,408,911
Revenue from intersegment
customers 43,956 -- 54,250 98,206
Operating income (1) 93,766 79,766 19,963 193,495
Total assets $1,080,851 $ 842,978 $ 774,597 $2,698,426
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating income is defined as income before interest, income taxes,
depreciation, amortization, rent and nonrecurring items. The Company's segment
information does not include an allocation of overhead costs, which are between
3% - 4% of consolidated net revenues.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania
corporation. As used herein, unless the context otherwise requires, "Genesis,"
the "Company," "we," "our," or "us" refers to Genesis Health Ventures, Inc. and
Subsidiaries. Since we began operations in July 1985, we have focused our
efforts on providing an expanding array of specialty medical services to elderly
customers. We generate revenues primarily from two sources: pharmacy and medical
supply services, and inpatient services. However, we also derive revenue from
other sources.
We provide pharmacy and medical supply services through our NeighborCare(R)
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 operated
by Genesis, as well as to independent healthcare providers by contract. We
provide these services through 59 institutional pharmacies and 23 medical supply
distribution centers located in our various market areas. In addition, we
operate 33 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. NeighborCare purchases substantially all of its
pharmaceuticals, approximately $540,000,000 annually, through Cardinal Health,
Inc. under a five-year contract which commenced in May of 1999. NeighborCare has
other sources of supply available to it and has not experienced difficulty
obtaining pharmaceuticals or other supplies used in the conduct of its business.
Approximately 91% of the sales attributable to all pharmacy operations in the
twelve months ended September 30, 1999 were generated through external contracts
with independent healthcare providers with the balance attributable to centers
owned or leased by us, including the jointly owned and consolidated Multicare
centers.
We include in inpatient service revenue all room and board charges and ancillary
service revenue for our eldercare customers at eldercare centers owned and
leased by Genesis and Multicare.
We include the following in other revenues: rehabilitation therapy, management
fees, capitation fees, consulting services, homecare services, physician
services, transportation services, diagnostic services, hospitality services,
group purchasing fees and other healthcare related services.
Certain Transactions and Events
Liquidity and Going Concern Assumption
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue as a going concern with the realization of assets and
the settlement of liabilities and commitments in the normal course of business.
However, as a result of the Bankruptcy cases and circumstances relating to this
event, including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. The Company's ability to continue as a going
concern is dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, the ability to comply with the
terms of the Company's debtor-in-possession financing agreements and the ability
to generate sufficient cash flow.
21
<PAGE>
Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put/call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis
ElderCare Corp. common stock at a price determined pursuant to the Put/Call
Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as
defined below) 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 (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"). The Company
completed the Pharmacy Purchase effective January 1, 1998. The Company completed
the Therapy Purchase in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock, (the "Series H
Preferred") which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
22
<PAGE>
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis common stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an
irrevocable proxy to vote their shares of common stock of
Genesis ElderCare Corp. on all matters to be voted on by
shareholders, including the election of directors;
o provide that Genesis may appoint two-thirds of the members of
the Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions
receive the approval of at least one designee of each of
Cypress, TPG and Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell
their Genesis ElderCare Corp. stock, subject to certain
limitations;
o provide that Genesis may appoint 100% of the members of the
operating committee of the board of directors of Genesis
ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
23
<PAGE>
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis common stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which
would constitute a change in control, as defined in the
Restructuring Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part of a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the Multicare restructuring transaction, Genesis accounted for its
investment in Multicare using the equity method of accounting. Upon consummation
of the restructuring transaction, Genesis consolidated the financial results of
Multicare since Genesis has managerial, operational and financial control of
Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses are consolidated at their
recorded historical amounts and the financial impact of transactions between
Genesis and Multicare is eliminated in consolidation. The non-Genesis
shareholders' remaining 56.4% interest in Multicare will be carried as minority
interest based on their proportionate share of Multicare's historical book
equity. For so long as there is a minority interest in Multicare, the minority
shareholders' proportionate share of Multicare's net income or loss will be
recorded through adjustment to minority interest.
In connection with the restructuring transaction, Genesis recorded a non-cash
charge of approximately $420,000,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred. The cost to terminate the Put was estimated based upon
the Company's assessment that no incremental value was realized by Genesis as a
result of the changes in the equity ownership structure of Multicare brought
about by the restructuring of the Multicare joint venture.
24
<PAGE>
Results of Operations
Three months ended June 30, 2000 compared to three months ended June 30, 1999
The Company's total net revenues for the quarter ended June 30, 2000 were
$615,851,000 compared to $465,088,000 for the quarter ended June 30, 1999, an
increase of $150,763,000 or 32%. Pharmacy and medical supply service revenue was
$240,330,000 for the quarter ended June 30, 2000 versus $230,387,000 for the
quarter ended June 30, 1999. Pharmacy and medical supply service revenues
increased approximately $16,600,000 due to net revenue growth with external
customers. This increase is offset by approximately $6,700,000 due to the
consolidation of Multicare's results with those of Genesis in the June 2000
period and the resulting elimination of pharmacy and medical supply service
revenues earned with the Multicare centers. Inpatient service revenue increased
$155,763,000 or 89% to $331,650,000 from $175,887,000. Of this increase,
approximately $158,787,000 is attributed to the consolidation of Multicare's
inpatient revenues in the quarter ended June 30, 2000, and approximately
$3,000,000 is attributed to volume growth in Genesis' Medicare census. These
increases are offset by reduced revenue of approximately $11,100,000 resulting
from seven fewer eldercare centers operating in the June 30, 2000 quarter
compared to June 30, 1999 quarter. The remaining increase of approximately
$5,100,000 is due to changes in other payor categories and rates. Total patient
days increased 911,368 to 2,136,772 during the quarter ended June 30, 2000
compared to 1,225,404 during the comparable period last year. Of this increase,
990,793 patient days are attributed to the consolidation of Multicare's
inpatient business in the quarter ended June 30, 2000. This increase is offset
by a reduction of 77,342 patient days resulting from seven fewer eldercare
centers operating in the June 30, 2000 quarter compared to the June 30, 1999
quarter and the remaining decrease of 2,083 is the result of a decline in
overall occupancy. Other revenues decreased approximately $14,900,000 from
$58,814,000 to $43,871,000. Approximately $15,600,000 of the decline is
attributed to the consolidation of Multicare's results with those of Genesis and
the resulting elimination of management fee and other service related revenues
with Multicare in the quarter ended June 30, 2000. Approximately $7,100,000 of
this decline is attributed to the termination of a capitation contract in the
Company's Chesapeake region. These declines are offset by increases in other
revenue of approximately $7,800,000 attributed to growth in the Company's other
service businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $595,609,000 for the quarter ended June 30,
2000 compared to $404,658,000 for the quarter ended June 30, 1999, an increase
of $190,951,000 or 47%, of which approximately $110,000,000 is attributed to the
consolidation of Multicare's results with those of Genesis, approximately
$44,124,000 is attributed to certain charges described more fully in the next
three paragraphs, $4,200,000 is attributed to the conversion of the Company's
incentive compensation program from stock-based to cash-based and approximately
$49,700,000 is attributed to growth in cost of sales, insurance related costs
and inflationary increases, principally labor related costs. These increases are
offset by reduced operating expenses of approximately $7,100,000 attributed to a
terminated capitation contract in the Company's Chesapeake region and
approximately $10,000,000 resulting from seven fewer eldercare centers operating
in the June 30, 2000 quarter compared to the June 30, 1999 quarter.
During the quarter ended March 31, 2000, the Company began discussions with its
lenders under the Genesis and Multicare Credit Facilities to revise the
Company's capital structure. During the discussion period, which continued into
the June 30, 2000 quarter, Genesis and Multicare did not make certain scheduled
principal and interest payments under the Genesis and Multicare Credit
Facilities or certain scheduled interest payments under certain of the Genesis
and Multicare senior subordinated debt agreements. On June 22, 2000 Genesis
filed for voluntary relief under Chapter 11 of the Bankruptcy Court. In
connection with the debt restructuring negotiations and for the costs of the
subsequent reorganization cases, the Company incurred legal, bank, accounting
and other costs of approximately $11,100,000. The professional and other fees
are reflected in the unaudited condensed consolidated statement of operations as
debt restructuring and reorganization costs and other charges.
During the quarter ended June 30, 2000, Genesis decided to close two
underperforming owned eldercare centers with 415 combined beds. As a result, a
charge of $6,100,000 was recorded to account for certain impaired assets of the
25
<PAGE>
two owned eldercare centers. In addition, effective May 31, 2000, Multicare sold
14 eldercare centers with 1,128 beds located in the state of Ohio for
approximately $36,500,000. The Company recorded a loss on sale of the Ohio
properties of approximately $7,900,000. These charges are reflected in the
unaudited condensed consolidated statement of operations as debt restructuring
and reorganization costs and other charges.
During the quarter ended June 30, 2000, the Company recorded a charge of
approximately $19 million to reserve certain trade receivables due from
healthcare providers that filed for bankruptcy protection. This charge is
reflected in the unaudited condensed consolidated statement of operations as
debt restructuring and reorganization costs and other charges.
In the quarter ended June 30, 2000, approximately $34,900,000 of revenue, and a
corresponding amount of expense, was eliminated as a result of the consolidation
of Genesis and Multicare.
Depreciation and amortization expense increased $10,536,000, of which $9,435,000
is attributed to the consolidation of Multicare's results with those of Genesis.
The remaining increase is principally attributed to incremental amortization of
deferred financing costs, as well as incremental depreciation expense from
capital expenditures made since June 30, 1999.
Lease expense increased $3,006,000, of which $3,227,000 is attributed to the
consolidation of Multicare's results with those of Genesis, with $776,000 of the
remaining decline attributed to five fewer eldercare centers leased during the
quarter ended June 30, 2000 compared to the quarter ended June 30, 1999, offset
by normal increases in lease rates.
Interest expense increased $31,665,000, of which $19,562,000 is attributed to
the consolidation of Multicare's results with those of Genesis. The remaining
increase in interest expense is primarily due to additional capital and working
capital borrowings and an increase in the Company's weighted average borrowing
rate.
Minority interest of $10,300,000 recorded during the quarter ended June 30, 2000
principally represents Genesis' Multicare joint venture partners' 56.4% interest
in the Multicare net loss for the period.
Preferred stock dividends increased $6,561,000 to $11,416,000 during the quarter
ended June 30, 2000 compared to $4,855,000 during the quarter ended June 30,
1999. This increase is attributed to the issuance of Series H and Series I
Preferred Stock in mid-November, 1999. The June 30, 1999 preferred stock
dividends were restated, resulting in an increase of $486,000, to adjust the
accrual for the increasing rate dividend on the Series G Preferred Stock on a
straight-line basis over the term of that series.
Nine months ended June 30, 2000 compared to nine months ended June 30, 1999
The Company's total net revenues for the nine months ended June 30, 2000 were
$1,807,578,000 compared to $1,408,911,000 for the nine months ended June 30,
1999, an increase of $398,667,000 or 28%. Pharmacy and medical supply service
revenues were $697,179,000 for the nine months ended June 30, 2000 versus
$698,505,000 for the nine months ended June 30, 1999. Pharmacy and medical
supply service revenues increased approximately $18,674,000 due to net revenue
growth with external customers. This increase is offset by approximately
$20,000,000 due to the consolidation of Multicare's results with those of
Genesis in the June 2000 period and the resulting elimination of pharmacy and
medical supply service revenues earned with the Multicare centers. Inpatient
service revenue increased $461,341,000 or 87% to $989,061,000 from $527,720,000.
Of this increase, approximately $475,400,000 is attributed to the consolidation
of Multicare's inpatient revenues in the nine months ended June 30, 2000,
approximately $1,900,000 is attributed to one additional calendar day in the
June 30, 2000 period due to a leap year, and approximately $12,700,000 is
attributed to volume growth in Genesis' Medicare census. These increases are
offset by reduced revenue of approximately $30,500,000 resulting from eight
fewer eldercare centers operating in the June 30, 2000 period compared to the
June 30, 1999 period, and approximately $5,800,000 is attributed to rate
dilution in the Company's Medicare rate per patient day as a result of PPS. The
remaining increase of approximately $7,600,000 is due to shifts in other payor
26
<PAGE>
categories and rates. The Company's average Medicare rate per patient day for
the nine months ended June 30, 2000 was approximately $292 compared to $305 for
the nine months ended June 30, 1999. Total patient days increased 2,818,224 to
6,517,160 during the nine months ended June 30, 2000 compared to 3,698,936
during the comparable period last year. Of this increase, 3,040,395 patient days
are attributed to the consolidation of Multicare's inpatient business in the
nine months ended June 30, 2000, and 13,284 days are attributed to one
additional calendar day in the June 2000 period due to a leap year. These
increases are offset by a reduction of 161,317 patient days resulting from eight
fewer eldercare centers operating in the June 30, 2000 period compared to the
June 30, 1999 period and the remaining decrease of 74,138 is the result of a
decline in overall occupancy. Other revenues decreased approximately $61,348,000
from $182,686,000 to $121,338,000. Approximately $5,300,000 of this decline is
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. Approximately $45,100,000 of the decline is
attributed to the consolidation of Multicare's results with those of Genesis and
the resulting elimination of management fee and other service related revenues
with Multicare in the nine months ended June 30, 2000. Approximately $20,200,000
of this decline is attributed to the termination of a capitation contract in the
Company's Chesapeake region. The remaining increase in other revenue of
approximately $9,300,000 is attributed to growth in the Company's other service
businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $1,684,449,000 for the nine months ended June
30, 2000 compared to $1,225,117,000 for the nine months ended June 30, 1999, an
increase of $459,332,000 or 37%, of which approximately $336,500,000 is
attributed to the consolidation of Multicare's results with those of Genesis,
approximately $78,500,000 is attributed to an increase in certain charges
described more fully in the next three paragraphs, approximately $4,500,000 is
attributed to one additional calendar day in the June 2000 period due to a leap
year, approximately $1,300,000 is attributed to the Company's adoption of a new
accounting principle that requires start-up costs be expensed when incurred,
$4,200,000 is attributed to the conversion of the Company's incentive
compensation program from stock-based to cash-based and approximately
$91,632,000 is attributed to growth in cost of sales, insurance related costs
and inflationary increases, principally labor related costs.. These increases
are offset by reduced operating expenses of approximately $20,200,000 attributed
to a terminated capitation contract in the Company's Chesapeake region and
$37,100,000 resulting from eight fewer eldercare centers operating in the nine
months ended June 30, 2000 compared to the nine months ended June 30, 1999.
During the quarter ended March 31, 2000, the Company began discussions with its
lenders under the Genesis and Multicare Credit Facilities to revise the
Company's capital structure. During the discussion period, which continued into
the June 30, 2000 quarter, Genesis and Multicare did not make certain scheduled
principal and interest payments under the Genesis and Multicare Credit
Facilities or certain scheduled interest payments under certain of the Genesis
and Multicare senior subordinated debt agreements. On June 22, 2000 Genesis
filed for voluntary relief under Chapter 11 of the Bankruptcy Court. In
connection with the debt restructuring negotiations and for the costs of the
subsequent reorganization cases, the Company incurred legal, bank, accounting
and other costs of approximately $16,100,000. As a result of the nonpayment of
interest under the Genesis Credit Facility, certain provisions under existing
interest rate swap arrangements with Citibank were triggered. Citibank notified
Genesis that they elected to force early termination of the interest rate swap
arrangements, and have asserted a $28,300,000 obligation. The professional and
other fees and the interest rate swap termination are reflected in the unaudited
condensed consolidated statement of operations as debt restructuring and
reorganization costs and other charges.
During the nine months ended June 30, 2000, Genesis decided to close three
underperforming owned eldercare centers with 545 combined beds. As a result, a
charge of $9,200,000 was recorded to account for certain impaired assets of the
three owned eldercare centers. In addition, effective May 31, 2000, Multicare
sold 14 eldercare centers with 1,128 beds located in the state of Ohio for
approximately $36,500,000. The Company recorded a loss on sale of the Ohio
properties of approximately $7,900,000. During the nine months ended June 30,
1999, the Company closed a 120 bed leased center resulting in a charge of
approximately $9,700,000 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
27
<PAGE>
costs. These charges are reflected in the unaudited consolidated statement of
operations as debt restructuring and other charges.
During the quarter ended June 30, 2000, the Company recorded a charge of
approximately $19 million to reserve certain trade receivables due from
healthcare providers that filed for bankruptcy protection. This charge is
reflected in the unaudited condensed consolidated statement of operations as
debt restructuring and reorganization costs and other charges.
During the quarter ended December 31, 1999, the Company recorded a non-cash pre
tax charge of $7,720,000 for a stock option redemption program (the "Redemption
Program") under which current Genesis employees and directors elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan was approved by shareholder vote at the
Company's 2000 Annual Meeting. As a result of the Company's financial condition
and other considerations, the Company determined not to proceed with the
Redemption Program. The elections made by optionees would have resulted in the
redemption of approximately 4,600,000 stock options in exchange for
approximately 4,000,000 shares of Genesis common stock. This charge is reflected
in the unaudited condensed consolidated statement of operations as debt
restructuring and reorganization costs and other charges.
In the nine months ended June 30, 2000, approximately $98,600,000 of revenue,
and a corresponding amount of expense, was eliminated as a result of the
consolidation of Genesis and Multicare.
In connection with the Multicare joint venture restructuring, Genesis recorded a
non-cash charge of approximately $420,000,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred. The cost to terminate the Put was estimated based upon
the Company's assessment that no incremental value was realized by Genesis as a
result of the changes in the equity ownership structure of Multicare brought
about by the restructuring of the Multicare joint venture.
Depreciation and amortization expense increased $32,125,000, of which
$28,490,000 is attributed to the consolidation of Multicare's results with those
of Genesis. The remaining increase is principally attributed to incremental
amortization of deferred financing costs, as well as incremental depreciation
expense from capital expenditures made since June 30, 1999.
Lease expense increased $9,033,000, of which $9,762,000 is attributed to the
consolidation of Multicare's results with those of Genesis. This increase is
offset by $2,700,000 attributed to six fewer eldercare centers leased during the
nine months ended June 30, 2000 compared to the nine months ended June 30, 1999,
offset by normal increases in lease rates.
Interest expense increased $85,387,000, of which $56,525,000 is attributed to
the consolidation of Multicare's results with those of Genesis. The remaining
increase in interest expense is primarily due to additional capital and working
capital borrowings and an increase in the Company's weighted average borrowing
rate.
Minority interest of $23,295,000 recorded during the nine months ended June 30,
2000 principally represents Genesis' Multicare joint venture partners' 56.4%
interest in the Multicare net loss for the period.
Effective October 1, 1999, Genesis adopted the provisions of the American
Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be
expensed as incurred. The cumulative effect of expensing all unamortized
start-up costs at October 1, 1999 was $16,400,000 pre tax and $10,400,000 after
tax.
Preferred stock dividends increased $16,529,000. This increase is attributed to
the issuance of Series H and Series I Preferred Stock in mid-November, 1999.
Preferred stock dividends were restated for the nine months ended June 30, 1999,
resulting in an increase of $1,462,000, to adjust the accrual for the increasing
rate dividend on the Series G Preferred Stock on a straight-line basis over the
term of that series.
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Liquidity and Capital Resources
General
On June 22, 2000 (the "Petition Date"), the Company and substantially all of its
subsidiaries and affiliates, filed voluntary petitions in the United States
Bankruptcy Court for the District of Delaware under the Bankruptcy Code. While
this action constituted a default under the Company's and such subsidiaries and
affiliates various financing arrangements, Section 362(a) of the Bankruptcy Code
imposes an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
Among the orders entered by the Bankruptcy Court on June 23, 2000 were orders
approving on an interim basis, a) the use of cash collateral by the Company and
those of its subsidiaries and affiliates which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code and (excluding Multicare
and its direct and indirect subsidiaries), b) authorization the Company to enter
into a secured debtor-in-possession revolving credit facility with a group of
banks led by Mellon Bank, N. A., (the "Genesis DIP Facility") and authorizing
advances in the interim period of up to $150,000,000 out of a possible
$250,000,000 facility. On July 18, 2000, the Bankruptcy Court entered the Final
Order approving the $250,000,000 Genesis DIP Facility and permitting full usage
thereunder. Usage under the Genesis DIP Facility is subject to a Borrowing Base
which provides for maximum borrowings (subject to the $250,000,000 commitment
limit) by the Company equal to the sum of (i) up to 90% of outstanding eligible
accounts receivable and (ii) up to $175,000,000 against real property. The
Genesis DIP Facility matures on December 21, 2001 and advances thereunder accrue
interest at either Prime plus 2.25% or the Eurodollar Rate plus 3.75%. Proceeds
of the Genesis DIP Facility are available for general working capital purposes
and as a condition of the loan, were required to refinance the $40,000,000
outstanding under the Company's pre-petition priority Tranche II sub-facility.
Additionally, $44,000,000 of proceeds were used to satisfy all unpaid interest
and rent obligations to the senior secured creditors under the Fourth Amended
and Restated Credit Agreement dated August 20, 1999 and the Synthetic Lease
dated October 7, 1996 as adequate protection for any diminution in value of the
pre-petition senior secured lenders in these facilities, respectively. The
Company will continue to pay interest and rent pursuant to these agreements as
adequate protection. Interest is accrued and paid at the Prime Rate as announced
by the administrative agent, or the applicable Adjusted LIBO Rate plus, in
either event, a margin that is dependent upon a certain financial ratio test. As
of June 30, 2000 borrowings outstanding under the Genesis DIP Facility were
$91,000,000. As of July 31, 2000 borrowings outstanding under the Genesis DIP
Facility were $94,000,000. The Genesis DIP Facility also provides for the
issuance of up to $25,000,000 in standby letters of credit. As of July 31, 2000
there were $11,500,000 in letters of credit issued thereunder.
Pursuant to the agreement, the Company and each of its subsidiaries named as
borrowers or guarantors under the Genesis DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Genesis DIP Facility) in all unencumbered pre- and post-
petition property of the Company. The Genesis DIP Facility also has priority
over the liens on all collateral pledged under (i) the Fourth Amended and
Restated Credit Agreement dated as of August 20, 1999, (ii) the Synthetic Lease
dated October 7, 1996 and (iii) other obligations covered by the Collateral
Agency Agreement, including any Swap Agreement, which collateral includes, but
is not limited to, all personal property, including bank accounts and investment
property, accounts receivable, inventory, equipment, and general intangibles,
substantially all fee owned real property, and the capital stock of Genesis and
its borrower and guarantor subsidiaries.
The Genesis DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Genesis DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Genesis DIP Facility usage amounts and
maximum capital expenditures. The breach of any such provisions, to the extent
not waived or cured within any applicable grace or cure periods, could result in
29
<PAGE>
the Company's inability to obtain further advances under the Genesis DIP
Facility and the potential exercise of remedies by the Genesis DIP Facility
lenders (without regard to the automatic stay unless reimposed by the Bankruptcy
Court) which could materially impair the ability of the Company to successfully
reorganize under Chapter 11.
On June 22, 2000, Multicare and substantially all of its affiliates, filed
voluntary petitions in the United States Bankruptcy Court for the District of
Delaware under the Bankruptcy Code. While this action constituted a default
under Multicare's and such affiliates various financing arrangements, Section
362(a) of the Bankruptcy Code imposes an automatic stay that generally precludes
creditors and other interested parties under such arrangements from taking any
remedial action in response to any such resulting default without prior
Bankruptcy Court approval. Among the orders entered by the Bankruptcy Court on
June 23, 2000 were orders approving on an interim basis, a) the use of cash
collateral by Multicare and those of its affiliates which had filed petitions
for reorganization under Chapter 11 of the Bankruptcy Code and (b) authorization
for Multicare to enter into a secured debtor-in-possession revolving credit
facility with a group of banks led by Mellon Bank, N. A., (the "Multicare DIP
Facility") and authorizing advances in the interim period of up to $30,000,000
out of a possible $50,000,000. On July 18, 2000, the Bankruptcy Court entered
the Final Order approving the $50,000,000 Multicare DIP Facility and permitting
full usage thereunder. Usage under the Multicare DIP Facility is subject to a
Borrowing Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable and a real estate component. The Multicare DIP Facility matures on
December 21, 2001 and advances thereunder accrue interest at either Prime plus
2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP Facility are
available for general working capital purposes. Through July 31, 2000, there has
been no usage under the Multicare DIP Facility. The Multicare DIP Facility also
provides for the issuance of up to $20,000,000 in standby letters of credit. As
of July 31, there were $3,700,000 in letters of credit issued thereunder.
The obligations of Multicare under the Multicare DIP Facility are jointly and
severally guaranteed by each of Multicare's filing affiliates (the "Filing
Affiliates"). Pursuant to the agreement, Multicare and each of its affiliates
named as borrowers or guarantors under the Multicare DIP Facility have granted
to the lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Multicare DIP Facility) in all unencumbered pre- and post-
petition property of Multicare. The Multicare DIP Facility also has priority
over the liens on all collateral pledged under Pre-petition Senior Credit
Facility dated as of October 9, 1997 as amended, which collateral includes, but
is not limited to, all personal property, including bank accounts and investment
property, accounts receivable, inventory, equipment, and general intangibles,
substantially all fee owned real property, and the capital stock of Multicare
and its borrower and guarantor affiliates.
The Multicare DIP financing agreement limits, among other things, Multicare's
ability to incur additional indebtedness or contingent obligations, to permit
additional liens, to make additional acquisitions, to sell or dispose of assets,
to create or incur liens on assets, to pay dividends and to merge or consolidate
with any other person. The Multicare DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Multicare DIP Facility usage amounts
and maximum capital expenditures. The breach of any such provisions, to the
extent not waived or cured within any applicable grace or cure periods, could
result in Multicare's inability to obtain further advances under the Multicare
DIP Facility and the potential exercise of remedies by the Multicare DIP
Facility lenders (without regard to the automatic stay unless reimposed by the
Bankruptcy Court) which could materially impair the ability of Multicare to
successfully reorganize under Chapter 11.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
enjoined and other contractual obligations generally may not be enforced against
the Company. In addition, the Company may reject executory contracts and lease
obligations. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. If the Company
is able to successfully reorganize, substantially all unsecured liabilities as
of the petition date would be subject to modification under a plan of
reorganization to be voted upon by all impaired classes of creditors and equity
security holders and approved by the Bankruptcy Court.
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<PAGE>
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain pre-petition wages, salaries, benefits and other employee
obligations, as well as to continue in place the Debtors' various employee
compensation programs and procedures. On that date, the Bankruptcy Court also
authorized the Debtors to pay, among other claims, the pre-petition claims of
certain critical vendors and patients. All other unsecured pre-petition
liabilities are classified in the condensed consolidated balance sheet as
liabilities subject to compromise. The Debtors intend to remain in possession of
their assets and continue in the management and operation of their properties
and businesses, and to pay the post-petition claims of their various vendors and
providers in the ordinary course of business.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 follows (in thousands):
As of June 30,
2000
----------------
Liabilities subject to compromise:
Revolving credit and term loans $1,483,898
Senior subordinated notes 615,204
Revenue bonds and other indebtedness 170,360
Accounts payable and accrued liabilities 100,852
Accrued interest 81,626
Accrued preferred stock dividends 29,950
----------------
$2,481,890
================
A summary of the principal categories of reorganization items follows (in
thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
June 30, 2000 June 30, 2000
<S> <C> <C>
Reorganization items:
Legal, accounting and consulting fees $ 3,967 $ 7,891
Bank fees 5,379 6,429
---------------------------------------------
$ 9,346 $14,320
=============================================
</TABLE>
At June 30, 2000, the Company reported working capital of $555,793,000 as
compared to net working capital of $235,704,000 at September 30, 1999 primarily
due to the change to a long-term classification of certain liabilities subject
to compromise at June 30, 2000. Genesis' cash flow from operations for the nine
months ended June 30, 2000 was a use of cash of $101,199,000 compared to a
source of cash of $23,802,000 for the nine months ended June 30, 1999
principally due to increased losses and the timing of vendor payments, as well
as $14,300,000 of debt restructuring and reorganization costs. At June 30, 2000,
included in accounts receivable were approximately $5,300,000 due from HCR Manor
Care (see "Legal Proceedings").
At June 30, 2000, $95,900,000 of receivables and payables, including a deferred
management fee, between Genesis and Multicare were eliminated in consolidation.
Investing activities for the nine months ended June 30, 2000 include
approximately $40,000,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data processing
hardware and software. Of the capital expenditures, approximately $11,400,000
relates to the construction, renovation and expansion of assisted living
facilities. Cash flows provided by investing activities in the 2000 period also
include the proceeds from the sale of Ohio assets effective May 31, 2000.
Multicare sold all of its Ohio operations which included 14 eldercare centers
with 1,128 beds. The net proceeds of the disposition of $33,000,000 are
classified as cash flow provided by investing and were used to pay down
Multicare's Term Loans and Multicare's Revolving Facility.
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<PAGE>
Financing activities during the nine months ended June 30, 2000 include
$50,000,000 of proceeds received for the issuance of common stock to Cypress and
TPG in connection with the Multicare joint venture restructuring transaction.
The Company has incurred approximately $14,300,000 of debt restructuring and
reorganization costs in fiscal 2000. The Company anticipates that such costs
will be incurred throughout the duration of the bankruptcy.
The Company has experienced an adverse effect on operating cash flow beginning
in the third quarter of 2000 due to an increase in the cost of certain of its
insurance programs and the timing of funding new policies. Rising costs of
eldercare malpractice litigation involving nursing care operators and losses
stemming from these malpractice lawsuits has caused many insurance providers to
raise the cost of insurance premiums or refuse to write insurance policies for
nursing homes. Accordingly, the costs of general and professional liability and
property insurance premiums have increased. In addition, as a result of the
Company's current financial condition it is unable to continue certain self
insured programs and has replaced these programs with outside insurance
carriers.
In April of 2000, the Company terminated the Execuflex Plan and the Vitalink
Nonqualified Plan. All amounts in these plans were distributed to the
participants with no material effect to the Company's cash flow.
Credit Facilities and Other Debt
Genesis Credit Facility
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries (excluding
Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility") for the purpose of: refinancing and funding interest and principal
payments of certain existing indebtedness; funding permitted acquisitions; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of transactions. The fourth amended and
restated credit agreement made the financial covenants for certain periods less
restrictive, required minimum asset sales, increased the Applicable Margin
(defined below), provided the lenders of the Genesis Credit Facility a
collateral interest in certain real and personal property of the Company, and
generally reallocated the proceeds thereof among the Tranche II Facility
(defined below), the Genesis Revolving Facility (defined below) and the Genesis
Term Loans (defined below) and permitted the restructuring of the Put/Call
Agreement, as defined. Additionally, the fourth amended and restated credit
agreement provides for $40,000,000 of additional borrowing capacity, (the
"Tranche II Facility") available to the Company beginning in December 1999.
The Genesis Credit Facility consists of three term loans with original balances
of $200,000,000 each (collectively, the "Genesis Term Loans"), and a
$650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a
$40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly
installments through 2005. The Genesis Term Loans consist of (i) an original six
year term loan maturing in September 2003 with an outstanding balance of
$110,445,000 at June 30, 2000 (the "Genesis Tranche A Term Facility"); (ii) an
original seven year term loan maturing in September 2004 with an outstanding
balance of $152,131,000 at June 30, 2000 (the "Genesis Tranche B Term
Facility"); and (iii) an original eight year term loan maturing in June 2005
with an outstanding balance of $151,378,000 at June 30, 2000 (the "Genesis
Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding
balance of $645,834,000 (excluding letters of credit) at June 30, 2000, becomes
payable in full on September 30, 2003. At June 30, 2000, there were no
outstanding borrowings under the Tranche II Facility. The aggregate outstanding
balance of the Genesis Credit Facility at June 30, 2000 is classified as a
liability subject to compromise.
The Genesis 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, and also by first priority security
32
<PAGE>
interests in substantially all personal property, excluding inventory, including
accounts receivable, equipment and general intangibles. Mortgages on
substantially all of Genesis' subsidiaries' real property were also granted.
Loans under the Genesis 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 "Applicable
Margin") that is dependent upon a certain financial ratio test. Loans under the
Genesis Tranche A Term Facility and Genesis Revolving Facility have an
Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans.
Loans under the Genesis Tranche B Term Facility have an Applicable Margin of
1.75% for Prime Rate loans and 3.50% for LIBO Rate loans. Loans under the
Genesis Tranche C Term Facility have an Applicable Margin of 2.00% for Prime
Rate loans and 3.75% for LIBO Rate loans. Subject to meeting certain financial
ratios, the above referenced interest rates are reduced.
The Genesis 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; cause Genesis and its affiliates to
maintain certain agreements including the Management Agreement and the Put/Call
Agreement (as amended), and to maintain corporate separateness; and cause
Genesis to comply with the terms of other material agreements, as well as to
comply with usual and customary covenants for transactions of this nature.
Multicare Credit Facility
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility") which made the financial covenants
for certain periods less restrictive, permitted a portion of the proceeds of
assets sales to repay indebtedness under the Multicare Tranche A Term Facility
(defined below) and Multicare Revolving Facility (defined below), permitted the
restructuring of the Put/Call Agreement, increased the interest rates applying
to the Multicare Term Loans (defined below) and the Multicare Revolving
Facility, and increased the level of management fee Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
The Multicare Credit Facilities consist of three term loans with an aggregate
original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and
a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortize in quarterly installments through 2005. The loans
consist of (i) an original six year term loan maturing in September 2003 with an
outstanding balance of $132,239,000 at June 30, 2000 (the "Multicare Tranche A
Term Facility"); (ii) an original seven year term loan maturing in September
2004 with an outstanding balance of $138,339,000 at June 30, 2000 (the "Tranche
B Term Facility"); and (iii) and an original eight year term loan maturing in
June 2005 with an outstanding balance of $45,877,000 at June 30, 2000 (the
"Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an
outstanding balance of $107,655,000 at June 30, 2000, becomes payable in full on
September 30, 2003. The aggregate outstanding balance of the Multicare Credit
Facility at June 30, 2000 is classified as a liability subject to compromise.
The Multicare Credit Facility (as amended) is secured by first priority security
interests (subject to certain exceptions) in all personal property, including
inventory, accounts receivable, equipment and general intangibles. Mortgages on
certain of Multicare's subsidiaries' real property were also granted. Loans
under the Multicare Credit Facility bear, at Multicare's option, interest at the
per annum Prime Rate as announced by the administrative agent, or the applicable
Adjusted LIBO Rate plus, in either event, an Annual Applicable Margin that is
dependent upon a certain financial ratio test.
33
<PAGE>
Effective with the Amendment on August 20, 1999, loans under the Multicare
Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at
a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare
Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 4.25%; loans under the Multicare Revolving Credit Facility bear interest
at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting
certain financial covenants, the above-referenced interest rates will be
reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Multicare Credit Facility, the Company is no longer entitled to elect a LIBO
Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term
Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%;
loans under the Multicare Tranche B Term Facility bear interest at a rate equal
to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C
Term Facility bear interest at a rate equal to Prime Rate plus a margin up to
2.5%; loans under the Multicare Revolving Credit Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.0%.
The Multicare Credit Facility contains a number of covenants that, among other
things, restrict the ability of Multicare 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 Multicare 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; cause Multicare and its affiliates
to maintain certain agreements including the Management Agreement and the
Put/Call Agreement (as amended), and to maintain corporate separateness; and
cause Multicare to comply with the terms of other material agreements, as well
as to comply with usual and customary covenants for transactions of this nature.
Multicare is in Default under the Multicare Credit Facility and has not made any
scheduled interest payments since March 29, 2000.
Other Indebtedness
Genesis has outstanding an aggregate of $370,000,000 of Senior Subordinated
Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%.
Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are
due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior
Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the
Multicare Notes is payable semi-annually. Genesis and Multicare are in default
of their respective senior subordinated note indenture agreements. The aggregate
outstanding balance of the Genesis Notes and the Multicare Notes at June, 2000
is classified as a liability subject to compromise.
Certain of these and other of Genesis' and Multicare's outstanding loans contain
covenants which, without the prior consent of the lenders, limit certain of
Genesis' and Multicare's activities. Such covenants contain limitations relating
to the merger or consolidation of Genesis or Multicare and Genesis' and
Multicare's ability to secure indebtedness, make guarantees, grant security
interests and declare dividends. In addition, certain of Genesis and Multicare's
outstanding loans require that Genesis and Multicare maintain certain minimum
levels of cash flow and debt service coverage, and must maintain certain ratios
of liabilities to net worth. Under certain of these loans, Genesis is restricted
from paying cash dividends on the Common Stock, unless certain conditions are
met. Genesis has not declared or paid any cash dividends on its Common Stock
since its inception.
34
<PAGE>
The Multicare Restructuring
In connection with the restructuring of the Multicare transaction, Genesis
entered into a Restructuring Agreement with Cypress, TPG and Nazem to
restructure their joint investment in Genesis ElderCare Corp., the parent
company of Multicare. Pursuant to the Restructuring Agreement the Put under the
Put/Call Agreement was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock, which was issued to
Cypress, TPG and Nazem, or their affiliated investment funds,
in proportion to their respective investments in Genesis
ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, which
was issued to Cypress, TPG and Nazem, or their affiliated
investment funds, in proportion to their respective
investments in Genesis ElderCare Corp.
The Series H Preferred are convertible into 27,850,286 shares of Common Stock.
The Series I Preferred are convertible into 20,149,410 shares of non-voting
Common Stock. The Series H and I Preferred have an initial dividend of 5.00%,
which increases 0.05% beginning the sixth anniversary date and an additional
0.05% each anniversary date thereafter through the 12th anniversary date, to a
maximum of 8.5%.
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997
Balanced Budget Act and the Balanced Budget Refinement Act, has resulted in
continuing changes in the Medicare and Medicaid reimbursement programs which has
adversely impacted us. 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. 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 us.
Anticipated Impact of Healthcare Reform
The Genesis eldercare centers began implementation of the Medicare Prospective
Payment System ("PPS") on October 1, 1998 and the majority of the Multicare
eldercare centers began implementation of PPS on January 1, 1999. On July 31,
2000, The Health Care Finance Administration ("HCFA") issued final rules for
PPS. The final rule continues the current PPS methodology, as amended by the
Balanced Budget Refinement Act of 1999 ("BBRA"). Effective April 1, 2000, 15 of
the 44 RUG III (Resource Utilization Groups) payment categories were increased
by 20% until the later of October 1, 2000 or the implementation of a refined RUG
system. This final rule extends the 20% add-on for the 15 RUG III categories
until at least September 20, 2001. Additionally, the final rule formalizes the
BBRA requirement for a 4% across the board increase in the Federal per diem
payment rates, exclusive of the 20% add-on. The final rule also announces the
annual update factor at 2.161%, which is equivalent to the market basket
increase less one percentage point, as mandated by current law. The actual
impact of the July 31, 2000 final rule on our earnings in future periods will
depend on many variables which can not be quantified at this time, including the
effect of regulatory changes, patient acuity, patient length of stay, Medicare
35
<PAGE>
census, referral patterns, ability to reduce costs and growth of ancillary
business. PPS and other existing and future legislation and regulation have
already and may also adversely affect our pharmacy and medical supply revenue,
and other specialty medial services.
Other
In August 1998, in connection with the Vitalink Transaction, the Company issued
the Series G Preferred. The Series G Preferred has a face value of approximately
$295,100,000 and an initial dividend of 5.9375% and generally is not
transferable without our consent. The dividend rate increases on the fourth,
fifth, ninth, eleventh and thirteenth anniversary dates to 6.1875%, 6.6250%,
7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is convertible
into Genesis common stock, par value $.02 per share, 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. At June 30, 2000 there were approximately $30,000,000
of accrued, but unpaid dividends on the Series G Preferred. The accrued
dividends are classified as liabilities subject to compromise at June 30, 2000.
The holders of the Series G Preferred are entitled to be paid in additional
shares of Series G Preferred to the extent that dividends are not declared and
paid or funds continue to not be legally available for the payment of dividends
after four consecutive quarterly periods, as defined.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles, and the number of calendar days
in a given quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. Genesis has
implemented cost control measures to attempt to limit increases in operating
costs and expenses but cannot predict its ability to control such operating cost
increases in the future.
Year 2000 Compliance
The Company did not experience any material interruptions of business as a
result of the Year 2000 computer problem.
New Accounting Pronouncements
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes. Historically, the
Company has employed 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. As a result of the
non-payment of interest under the Genesis Credit Facility, certain provisions
under existing interest rate swap arrangements with Citibank were triggered.
Citibank notified Genesis that they elected to force early termination of the
interest rate swap arrangements, and have asserted a $28,300,000 obligation,
which is classified as a liability subject to compromise. The interest rate swap
termination charge is reflected in the condensed consolidated statement of
operations as debt restructuring and reorganization costs and other charges.
At June 30, 2000, Genesis has no interest rate swap agreements outstanding.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Genesis and Vitalink Actions Against HCR Manor Care
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink
Pharmacy Services (d/b/a NeighborCare(R)), a subsidiary of
Genesis, filed multiple lawsuits requesting injunctive relief
and compensatory damages against HCR Manor Care, Inc. ("HCR
Manor Care") and two of its subsidiaries and principals. The
lawsuits arise from HCR Manor Care's threatened termination of
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
(the "Maryland State Court Action"). 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 (the "Delaware Federal
Action"). Vitalink has also instituted an arbitration action
before the American Arbitration Association (the
"Arbitration"). In these actions, Vitalink is seeking a
declaration that it has a right to provide pharmacy, infusion
therapy and related services to all of HCR Manor Care's
facilities and a declaration that HCR Manor Care's threatened
termination of the long term pharmacy service contracts was
unlawful. Genesis and Vitalink also seek over $100,000,000 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 had entered into long-term
master pharmacy, infusion therapy and related services
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 $100,000,000 per year.
By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Action relating to the
master service agreements with the Arbitration matter.
Accordingly, on May 25, 1999, the Maryland State Court Action
was dismissed voluntarily. 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.
HCR Manor Care and its subsidiaries have pleaded counterclaims
in the Arbitration seeking damages for Vitalink's alleged
overbilling for products and services provided to HCR Manor
Care, a declaration that HCR Manor Care had the right to
terminate the master service agreements, and a declaration
that Vitalink does not have the right to provide pharmacy,
infusion therapy and related services to facilities owned by
HCR prior to its merger with Manor Care. According to an
expert report submitted by HCR Manor Care on May 8, 2000, HCR
Manor Care is seeking $17,800,000 in compensatory damages for
alleged overbilling by Vitalink between September 1, 1998 and
March 31, 2000. On January 14, 2000, HCR Manor Care moved to
dismiss Vitalink's claims in the Arbitration that it has a
right to provide pharmacy and related services to the HCR
Manor Care facilities not previously under the control of
Manor Care. On May 17, the Arbitrator ordered the dismissal of
Vitalink's claims seeking declaratory judgment and injunctive
relief but sustained Vitalink's claim seeking compensatory
damages against HCR Manor Care.
Trial in the arbitration was originally scheduled to begin on
June 12, 2000. On May 23, 2000, however, the Arbitrator
postponed the trial indefinitely due to Vitalink's potential
bankruptcy filing. After Genesis and its affiliates, including
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Vitalink, filed voluntary petitions for restructuring under
Chapter 11 of the Bankruptcy Code on June 22, 2000, the
Arbitration was automatically stayed pursuant to 11 U.S.C. ss.
362(a). On August 1, 2000, HCR Manor Care moved to lift the
automatic stay and compel arbitration. Genesis' response to
this motion is due August 28, 2000, and oral argument is
scheduled for September 5, 2000.
On June 29, 1999, defendants moved to dismiss or stay Genesis'
securities fraud complaint filed in the Delaware Federal
Action. On March 22, 2000, HCR Manor Care's motion was denied
with respect to its motion to dismiss the complaint, but was
granted to the extent that the action was stayed pending a
decision in the Arbitration. As a result, Genesis still
maintains its Delaware federal court complaint. As a result of
Genesis' Chapter 11 filing, this action is also automatically
stayed pursuant to 11 U.S.C. ss. 362(a).
The Vitalink Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel,
filed an additional complaint against Omnicare, Inc.
("Omnicare") 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 tortuous interference with Vitalink's contractual
rights under its three exclusive long-term service contracts
with HCR Manor Care. On November 12, 1999, in response to a
motion filed by the defendants, that action was stayed pending
a decision in the Arbitration. As a result of Genesis' Chapter
11 filing, this action is also automatically stayed pursuant
to 11 U.S.C. ss. 362(a).
The HCR Manor Care Action Against Genesis in Delaware
On August 27, 1999, Manor Care, Inc., a wholly owned
subsidiary of HCR Manor Care, Inc., filed a lawsuit against
Genesis in federal district court in Delaware based upon
Section 11 and Section 12 of the Securities Act. Manor Care
Inc. alleges that in connection with the sale of the Genesis
Series G Preferred Stock issued as part of the purchase price
to acquire Vitalink, Genesis failed to disclose or made
misrepresentations related to the effects of the conversion to
the prospective payment system, the restructuring of the
Multicare joint venture, the impact of the acquisition of
Multicare, the status of Genesis labor relations, Genesis'
ability to declare dividends on the Series G Preferred Stock
and information relating to the ratio of combined fixed
charges and preference dividends to earnings. Manor Care, Inc.
seeks, among other things, compensatory damages and rescission
of the purchase of the Series G Preferred Stock. On November
23, 1999, Genesis moved to dismiss this action on the ground,
among others, that Manor Care's complaint failed to plead
fraud with particularity. On January 18, 2000, Genesis moved
to consolidate this action with the action brought against HCR
Manor Care in Delaware federal court. Both of these motions
have been fully submitted and are awaiting decision. As a
result of Genesis' Chapter 11 filing, this action is also
automatically stayed pursuant to 11 U.S.C. ss. 362(a).
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The HCR Manor Care Action Against Genesis in Ohio
On December 22, 1999, Manor Care filed a lawsuit against
Genesis and others in the United States District Court for the
Northern District of Ohio. Manor Care alleges, among other
things, that the Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred") and
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock (the "Series I Preferred") were
issued in violation of the terms of the Series G Preferred and
the Rights Agreement dated as of April 26, 1998 between
Genesis and Manor Care. Manor Care seeks, among other things,
damages and rescission or cancellation of the Series H and
Series I Preferred. On February 29, 2000, Genesis moved to
dismiss this action on the ground, among others, that Manor
Care's compliant failed to state a cause of action. This
motion has been fully submitted, including supplemental
briefing by both parties, and is awaiting decision. As a
result of Genesis' Chapter 11 filing, this action is also
automatically stayed pursuant to 11 U.S.C. ss. 362(a).
Genesis is not able to predict the results of such litigation.
However, if the outcome is unfavorable to us, and the claims
of HCR Manor Care are upheld, such results would have a
material adverse effect on our financial position. See
"Cautionary Statement Regarding Forward-Looking Statements."
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Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities
On June 22, 2000, the Company and certain of its subsidiaries
and affiliates filed voluntary petitions with the United
States Bankruptcy Court for the District of Delaware to
reorganize their capital structure under Chapter 11 of the
United States Bankruptcy Code. As a result of the Chapter 11
cases, no principal or interest payments will be made on
certain indebtedness incurred by the Company prior to June 22,
2000, including, among others, senior subordinated notes,
until a plan of reorganization defining the payment terms has
been approved by the Bankruptcy Court. Additional information
regarding the Chapter 11 cases is set forth elsewhere in this
Form 10-Q, including Notes 2 to the Condensed Consolidated
Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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
27 Financial Data Schedule
99.1 Revolving Credit and Guaranty Agreement, dated as of
June 22, 2000, among Genesis Health Ventures, Inc.,
a Debtor-in-Possession under Chapter 11 of the
Bankruptcy Code as Borrower and Mellon Bank, N.A.
as Administrative Agent and Arranger, First Union
National Bank as Syndication Agent and Goldman Sachs.
Credit Partners, L.P., as Documentation Agent.
(b) Reports on Form 8-K
On July 7, 2000, the Company filed a Report on Form
8-K reporting that Genesis Health Ventures, Inc., and
certain of its direct and indirect affiliates filed
voluntary petitions for relief under Chapter 11 of
Title 11 of the United States Code with the United
States Bankruptcy Court for the District of Delaware
and are being jointly administered for procedural
purposes in the Bankruptcy Court under Case Nos.
00-2691 through 00-2842. On the same date, The
Multicare Companies, Inc., and certain of its direct
and indirect affiliates also filed voluntary
petitions for relief under Chapter 11 of the
Bankruptcy Code with the Bankruptcy Court and are
being jointly administered for procedural purposes in
the Bankruptcy Court under Case Nos. 00-2494 through
00-2690. Genesis Health Ventures, Inc. owns 43.6% of
The Multicare Companies, Inc.
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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 21, 2000 /s/ George V. Hager, Jr.
------------------------------------
George V. Hager, Jr.
Executive Vice President and Chief Financial Officer
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