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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 December 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of February 9, 2000: 48,640,123 shares of common stock
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TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS..........................................................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements...........................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................28
Part II: OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................29
Item 2. Changes in Securities...........................................................................31
Item 3. Defaults Upon Senior Securities.................................................................31
Item 4. Submission of Matters to a Vote of Security Holders.............................................31
Item 5. Other Information...............................................................................31
Item 6. Exhibits and Reports on Form 8-K................................................................31
SIGNATURES........................................................................................................32
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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 to meet our liquidity needs, scheduled debt and
interest payments and expected future capital expenditure
requirements, and to control costs; 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 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.
These and other factors have been discussed in more detail in the Company's
periodic reports, including its Annual Report on Form 10-K for the fiscal year
ended September 30, 1999.
1
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
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December 31, September 30,
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1999 1999
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Assets
Current assets:
Cash and equivalents $ 20,699 $ 12,397
Investments in marketable securities 35,609 24,599
Accounts receivable, net of allowance for doubtful accounts 472,852 370,472
Inventory 69,500 63,369
Prepaid expenses and other current assets 64,378 46,964
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Total current assets 663,038 517,801
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Property, plant, and equipment, net 1,216,082 612,301
Notes receivable and other investments 43,712 40,075
Other long-term assets 156,738 112,978
Investments in unconsolidated affiliates 19,450 180,882
Goodwill and other intangibles, net 1,447,330 965,877
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Total assets $ 3,546,350 $ 2,429,914
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Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 72,836 $ 37,126
Accounts payable and accrued expenses 288,857 244,971
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Total current liabilities 361,693 282,097
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Long-term debt 2,242,754 1,484,510
Deferred income taxes 76,328 13,827
Deferred gain and other long-term liabilities 78,684 61,590
Minority interest 176,111 -
Redeemable preferred stock 423,335 -
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 589,804 and 590,253 issued and outstanding at
December 31, 1999 and September 30, 1999, respectively 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 48,651,815 and 48,639,715 at December 31, 1999;
36,145,678 and 36,133,578 at September 30, 1999 748 723
Additional paid-in capital 803,426 753,452
Retained deficit (615,803) (165,620)
Accumulated other comprehensive loss (689) (428)
Treasury stock, at cost (243) (243)
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Total shareholders' equity 187,445 587,890
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Total liabilities and shareholders' equity $ 3,546,350 $ 2,429,914
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</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
2
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Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
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Three months ended
December 31,
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1999 1998
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Net revenues:
Pharmacy and medical supply services $ 223,907 $ 236,217
Inpatient services 326,327 176,032
Other revenue 36,650 66,955
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Total net revenues 586,884 479,204
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Operating expenses:
Operating expenses 513,414 408,050
Other charges 7,720 -
Multicare joint venture restructuring charge 420,000 -
Depreciation and amortization 29,118 17,807
Lease expense 9,527 6,367
Interest expense, net 52,776 27,323
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Earnings (loss) before income taxes, minority interest, equity in net loss of
unconsolidated affiliates, extraordinary item and
cumulative effect of an accounting change (445,671) 19,657
Income tax expense (benefit) (7,280) 7,378
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Earnings (loss) before minority interest, equity in net loss of
unconsolidated affiliates, extraordinary item and
cumulative effect of an accounting change (438,391) 12,279
Minority interest 6,927 -
Equity in net loss of unconsolidated affiliates - (892)
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Earnings (loss) before extraordinary item and cumulative effect
of accounting change (431,464) 11,387
Extraordinary item, net of tax - (1,799)
Cumulative effect of accounting change (10,412) -
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Net income (loss) (441,876) 9,588
Preferred stock dividends 8,306 4,911
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Net income (loss) attributed to common shareholders $ (450,182) $ 4,677
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Per common share data:
Basic
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ (10.37) $ 0.18
Net income (loss) $ (10.62) $ 0.13
Weighted average shares of common stock 42,389,715 35,217,418
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Diluted
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ (10.37) $ 0.18
Net income (loss) $ (10.62) $ 0.13
Weighted average shares of common stock and equivalents 42,389,715 35,380,732
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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
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
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Three months ended
December 31,
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1999 1998
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Cash flows from operating activities:
Net income (loss) $ (441,876) $ 9,588
Net charges included in operations not requiring funds 451,117 17,462
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable (7,875) (29,459)
Accounts payable and accrued expenses (33,864) (22,364)
Other, net (6,174) 911
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Net cash used in operations (38,672) (23,862)
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Cash flows from investing activities:
Purchase of marketable securities (11,271) -
Proceeds on maturity or sale of marketable securities - 2,472
Capital expenditures (14,314) (17,551)
Payments for acquisitions, net of cash acquired - (4,125)
(Investments) in and proceeds from unconsolidated affiliates 3,846 (12,474)
Notes receivable and other investment and
other long-term asset additions, net (11,677) (2,692)
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Net cash used in investing activities (33,416) (34,370)
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Cash flows from financing activities:
Net borrowings under working capital revolving credit facilities 39,201 65,539
Repayment of long-term debt and payment of sinking fund requirements (22,778) (120,429)
Proceeds from issuance of long-term debt 10,000 120,200
Proceeds from issuance of common stock 50,000 -
Debt issuance costs - (3,088)
Stock options exercised - 9
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Net cash provided by financing activities 76,423 62,231
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Net increase in cash and equivalents 4,335 3,999
Cash and equivalents
Beginning of year 16,364 4,902
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End of year $ 20,699 $ 8,901
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</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
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GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 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. 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.
5
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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 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, (the
"Series I Preferred") which was 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.
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;
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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:
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.
7
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Accounting Effects
Prior to the 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.
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.
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<CAPTION>
(In thousands, except per
common share data)
Three Months Ended
Unaudited Pro Forma Statement of Operations Information: December 31, 1998
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Total net revenue $ 622,345
Income before extraordinary items 627
Net loss (1,172)
Earnings per common share, before extraordinary items, diluted 0.01
Loss per common share, diluted $ (0.02)
</TABLE>
3. Long-Term 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 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, increased the
Annual Applicable Margin (defined below) and provided the lenders of the Genesis
Credit Facility a collateral interest in certain real and personal property of
the Company, required minimum assets sales and generally reallocated the
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proceeds thereof among the Tranche II Facility (defined below), the Genesis
Revolving Facility (defined below) and the Genesis Term Loans (defined below),
permitted the restructuring of the Put/Call Agreement, as defined, and increased
the interest rates applying to the Term Loans and the Revolving Facility.
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 asset sales required by
the Genesis Credit Facility total $12,000,000 by December 31, 1999, $37,000,000
by June 30, 2000 and $40,000,000 by December 31, 2000. Genesis has satisfied the
requirement through December 31, 1999 and has transactions in process to satisfy
the majority of the aggregate requirement through December 31, 2000.
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, of which $28,670,000 is payable in Fiscal 2000. 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 December 31, 1999
(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
December 31, 1999 (the "Genesis Tranche B Term Facility"); and (iii) an original
eight year term loan maturing in June 2005 with an outstanding balance of
$151,767,000 at December 31, 1999 (the "Genesis Tranche C Term Facility"). The
Genesis Revolving Facility, with an outstanding balance of $645,198,000 at
December 31, 1999, becomes payable in full on September 30, 2003. As of December
31, 1999, there were no borrowings outstanding under the Tranche II Facility.
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 (subject to certain exceptions) in all personal property, including
inventory, accounts receivable, equipment and general intangibles. Mortgages on
certain 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 "Annual 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 Annual Applicable
Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans (an effective
rate of 9.44% at December 31, 1999). Loans under the Genesis Tranche B Term
Facility have an Annual Applicable Margin of 1.75% for Prime Rate loans and
3.50% for LIBO Rate loans (an effective rate of 9.69% at December 31, 1999).
Loans under the Genesis Tranche C Term Facility have an Annual Applicable Margin
of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans (an effective rate
of 9.94% at December 31, 1999). 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
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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, of which
$34,000,000 is payable in Fiscal 2000. The loans consist of (i) an original six
year term loan maturing in September 2003 with an outstanding balance of
$140,000,000 at December 31, 1999 (the "Multicare Tranche A Term Facility");
(ii) an original seven year term loan maturing in September 2004 with an
outstanding balance of $146,625,000 at December 31, 1999 (the "Tranche B Term
Facility"); and (iii) and an original eight year term loan maturing in June 2005
with an outstanding balance of $48,750,000 at December 31, 1999 (the "Multicare
Tranche C Term Facility"). The Multicare Revolving Facility, with an outstanding
balance of $123,534,000 at December 31, 1999, becomes payable in full on
September 30, 2003.
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.
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% (an effective rate of 9.94% at December 31, 1999); loans under the
Multicare Tranche B Term Facility bear interest at a rate equal to LIBO Rate
plus a margin up to 4.0% (an effective rate of 10.16% at December 31, 1999);
loans under the Multicare Tranche C Term Facility bear interest at a rate equal
to LIBO Rate plus a margin up to 4.25%; (an effective rate of 10.44%) loans
under the Multicare Revolving Credit Facility bear interest at a rate equal to
LIBO Rate plus a margin up to 3.75% (an effective rate of 9.94%). Subject to
meeting certain financial covenants, the above-referenced interest rates will be
reduced.
Multicare continues to actively pursue sales of assets in Ohio, Illinois and
Wisconsin. Management is currently engaged in discussions for the asset sales;
however, the Company has no firm commitments from potential purchasers for these
assets. There can be no assurances that any such sales of assets will be
achieved.
All net proceeds of the disposition of certain assets located in Ohio not in
excess of $55,000,000 shall be applied against the Multicare Revolving Facility
at the time outstanding on a pro rata basis in accordance with the relative
aggregate principal amount thereof held be each applicable lender.
All net proceeds of the disposition of certain assets located in Illinois and
Wisconsin shall be applied first against the Multicare Tranche A Term Loan, on a
pro rata basis in accordance with the relative aggregate principal amounts held
by each applicable lender.
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.
10
<PAGE>
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.
Certain of Genesis' and Multicare's other 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, Genesis and Multicare must 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 our
Common Stock since its inception.
4. Certain Significant Risks and Uncertainties
The following information is provided in accordance with the AICPA Statement of
Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of December 31, 1999, the Company had approximately
$2,242,754,000 of long-term indebtedness, excluding the current portion of
indebtedness of $72,836,000, which represented 74% of our total capitalization.
The Company also has significant long-term operating lease obligations with
respect to certain of our eldercare centers. The degree to which we are
leveraged could have important consequences, including, but not limited to the
following:
o the Company's ability to obtain additional financing in
the future for working capital, capital expenditures,
acquisitions or other purposes may be limited or impaired;
o a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and
interest on the Company's indebtedness, thereby reducing the
funds available to us for our operations;
o the Company's operating flexibility is limited by restrictions
contained in some of the Company's debt agreements which set
forth minimum net worth requirements and/or limit the
Company's ability to incur additional indebtedness, to enter
into other financial transactions, to pay dividends, and set
forth minimum net worth requirements;
o the Company's degree of leverage may make it more vulnerable
to industry downturns and less competitive, may reduce the
Company's flexibility in responding to changing business and
industry conditions and may limit the Company's ability to
pursue other business opportunities, to finance the Company's
future operations or capital needs, and to implement its
business strategy; and
o certain of the Company's borrowings are and will continue to
be at variable rates of interest, which exposes the Company's
to the risk of higher interest rates.
The Company expects to satisfy required payments of principal and interest on
indebtedness from its cash flow from operations and the sales of certain assets.
Management is currently engaged in discussions for the asset sales, however, the
Company has no firm commitments from potential purchasers for these assets. The
Company's ability to make scheduled payments of the principal or interest on, or
to refinance indebtedness, depends on the future performance of the Company's
business, which is in turn subject to financial, business, economic and other
11
<PAGE>
factors affecting the Company's business and operations, including factors
beyond its control, such as prevailing industry conditions. There can be no
assurances that cash flow from operations will be sufficient to enable the
Company's to service its debt and meet other obligations. If such cash flow is
insufficient, the Company may be required to refinance and/or restructure all or
a portion of its existing debt, to sell assets or to obtain additional
financing. There can be no assurance that any such refinancing or restructuring
would be possible or that any such sales of assets or additional financing could
be achieved. We also have significant long-term operating lease obligations with
respect to certain of our sites of service, including eldercare centers.
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 health care 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, generally have resulted in
reduced rates of reimbursement for services to be 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
these legislative changes or 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.
5. Other Charges
In November 1999, the Company's Board of Directors approved a plan allowing
employees and directors to elect to redeem unexercised stock options issued to
them prior to January 1, 1999 in exchange for Genesis common stock (the
"Redemption Plan"). If an optionee elected to participate in the Redemption
Plan, every one vested outstanding stock option held as of November 11, 1999 was
exchanged for one share of Genesis common stock, and every two unvested
outstanding stock options held as of November 11, 1999 was exchanged for one
share of Genesis common stock. Nearly all optionees elected to participate in
the Redemption Plan. The Redemption Plan is subject to shareholder approval and
will be voted upon at the Company's 2000 Annual Meeting scheduled for March 16,
2000. The Company believes it has secured sufficient votes on this shareholder
proposal, and as a result, recorded a pretax charge of approximately $7,720,000
in the first fiscal quarter of 2000 to recognize the non-cash compensation
expense of the Redemption Plan. The elections made by optionees will result in
the redemption of approximately 4,600,000 stock options in exchange for
approximately 4,000,000 shares of Genesis common stock.
12
<PAGE>
6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) attributed to common shares (amounts are in thousands except per share
data):
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
December 31, December 31,
1999 1998
-------------------------- --------------------
<S> <C> <C>
Basic Earnings (Loss) Per Share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (439,770) $ 6,476
Extraordinary item - (1,799)
Cumulative effect of accounting change (10,412) -
-------------------------- --------------------
Net income (loss) attributed to common shareholders $ (450,182) $ 4,677
-------------------------- --------------------
Weighted average shares 42,390 35,217
-------------------------- --------------------
Earnings (loss) per share before extraordinary
item and cumulative effect of accounting change $ (10.37) $ 0.18
Extraordinary item - (0.05)
Cumulative effect of an accounting change (0.25) -
-------------------------- --------------------
Earnings (loss) per share $ (10.62) $ 0.13
-------------------------- --------------------
Diluted Earnings (Loss) Per Share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (439,770) $ 6,476
Extraordinary item - (1,799)
Cumulative effect of accounting change (10,412) -
-------------------------- --------------------
Net income (loss) attributed to common shareholders $ (450,182) $ 4,677
-------------------------- --------------------
Weighted average shares & common stock equivalents:
Common shares 42,390 35,217
Dilutive effect of unexcercised stock options - 164
-------------------------- --------------------
Total 42,390 35,381
-------------------------- --------------------
Earnings (loss) per share before extraordinary item
and cumulative effect of accounting change $ (10.37) $ 0.18
Extraordinary item - (0.05)
Cumulative effect of accounting change (0.25) -
-------------------------- --------------------
Earnings (loss) per share $ (10.62) $ 0.13
-------------------------- --------------------
</TABLE>
The operating results of the December 31, 1998 quarter have been restated to
increase non-cash preferred stock dividends by $494,000 to adjust the accrual
for the increasing rate dividend on the Series G Preferred Stock on a straight
line basis over the term of this series.
13
<PAGE>
7. Comprehensive Income
The following table sets forth the computation of comprehensive income (loss)
(amounts in the table are in thousands):
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
December 31, December 31,
1999 1998
-------------------------- -------------------
<S> <C> <C>
Net income (loss) attributed to common shareholders $ (450,182) $ 4,677
Unrealized loss on marketable securities (261) (194)
-------------------------- -------------------
Total comprehensive income (loss) $ (450,443) $ 4,483
-------------------------- -------------------
</TABLE>
Accumulated other comprehensive income (loss), which is composed of net
unrealized gains and losses on marketable securities, was $(689,000) and
$490,000 at December 31, 1999 and 1998, respectively.
8. 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 69
institutional pharmacies (one is jointly-owned) and 19 medical supply
distribution centers located in its various market areas. In addition, the
Company operates 34 community-based pharmacies which are located in or near
medical centers, hospitals and physician office complexes. The community-based
pharmacies provide prescription and over-the-counter medications and certain
medical supplies, as well as personal service and consultation by licensed
professional pharmacists. Approximately 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 221 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.
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 fees and other healthcare related
services. In addition, the "Other" column includes the elimination of
intersegment transactions.
14
<PAGE>
<TABLE>
<CAPTION>
Pharmacy and
Medical
Supply
Services Inpatient
(in thousands) Services Other Total
- ----------------------------------------------------------------------------------------------------------
Three months ended
December 31, 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 223,907 $ 326,327 $ 36,650 $ 586,884
Revenue from intersegment
customers 26,321 - 40,299 66,620
Operating income (1) 25,860 39,208 8,402 73,470
Total assets 1,090,280 1,811,692 644,378 3,546,350
- ----------------------------------------------------------------------------------------------------------
Three months ended
December 31, 1998
- ----------------------------------------------------------------------------------------------------------
Revenue from external customers 236,217 176,032 66,955 479,204
Revenue from intersegment
customers 14,522 - 20,360 34,882
Operating income (1) 33,749 27,655 9,750 71,154
Total assets $1,087,520 $ 850,375 $ 732,783 $ 2,670,678
- ----------------------------------------------------------------------------------------------------------
</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.
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.
15
<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 69 institutional pharmacies (one is
jointly-owned) and 19 medical supply distribution centers located in our various
market areas. In addition, we operate 34 community-based pharmacies which are
located in or near medical centers, hospitals and physician office complexes.
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies, as well as personal service and
consultation by licensed professional pharmacists. 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 221 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
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
16
<PAGE>
"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 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, (the
"Series I Preferred") which was 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.
17
<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:
18
<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 restructuring transaction, Genesis accounted for its investment in
Multicare using the equity method of accounting. Upon consummation of the
restructuring transaction, Genesis will consolidate the financial results of
Multicare since Genesis will have managerial, operational and financial control
of Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses will be consolidated at
their recorded historical amounts and the financial impact of transactions
between Genesis and Multicare will be 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.
Results of Operations
Three months ended December 31, 1999 compared to three months ended December 31,
1998
The Company's total net revenues for the quarter ended December 31, 1999 were
$586,884,000 compared to $479,204,000 for the quarter ended December 31, 1998,
an increase of $107,680,000 or 22%. Pharmacy and medical supply service revenue
from external and intersegment customers was $250,228,000 for the quarter ended
December 31, 1999 versus $250,739,000 for the quarter ended December 31, 1998.
Inpatient service revenue increased $150,295,000 or 85% to $326,327,000 from
$176,032,000. Of this increase, approximately $156,973,000 is attributed to the
consolidation of Multicare's inpatient revenues in the quarter ended December
31, 1999. This increase is offset by reduced revenue of approximately $9,100,000
resulting from seven fewer eldercare centers in the December 31, 1999 quarter
compared to the December 31, 1998 quarter. The remaining increase of
approximately $2,400,000 is due to shifts in payor mix and rates. Total patient
days increased 959,512 to 2,210,839 during the quarter ended December 31, 1999
compared to 1,251,327 during the comparable period last year. Of this increase,
approximately 1,029,138 patient days are attributed to the consolidation of
Multicare's inpatient business in the quarter ended December 31, 1999, offset by
a reduction of 76,042 patient days resulting from seven fewer eldercare centers
19
<PAGE>
in the December 31, 1999 quarter compared to the December 31, 1998 quarter. The
remaining increase of approximately 6,400 patient days is attributed to the fill
up of several recently opened assisted living properties. Other revenues
decreased approximately $30,305,000 from $66,955,000 to $36,650,000.
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 $15,300,000 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 December 31, 1999. Approximately $6,400,000 of this decline
is attributed to the termination of a capitation contract in the Company's
Chesapeake region. The remaining decline in other revenue of approximately
$3,300,000 is attributed to the Company's other heath care services business
lines, including the Company's transportation business.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $513,414,000 for the quarter ended December
31, 1999 compared to $408,050,000 for the quarter ended December 31, 1998, an
increase of $105,364,000 or 26%, of which approximately $113,652,000 is
attributed to the consolidation of Multicare's results with those of Genesis,
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, and
approximately $4,900,000 is principally attributed to inflationary increases.
These increases are offset by reduced operating expenses of approximately
$6,400,000 attributed to a terminated capitation contract in the Company's
Chesapeake region and $8,100,000 resulting from seven fewer eldercare centers
operating in the December 31, 1999 quarter compared to the December 31, 1998
quarter.
The Company recorded a non cash pre tax charge of $7,720,000 in the quarter
ended December 31, 1999 for a stock option redemption program (the "Redemption
Program") under which current Genesis employees and directors have elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan is subject to shareholder approval and will be
voted upon at the Company's 2000 Annual Meeting scheduled for March 16, 2000.
The Company believes it has secured sufficient votes on this shareholder
proposal, and as a result, recorded a pretax charge of approximately $7,720,000
in the first fiscal quarter of 2000 to recognize the non-cash compensation
expense of the Redemption Plan. The elections made by optionees will result in
the redemption of approximately 4,600,000 stock options in exchange for
approximately 4,000,000 shares of Genesis common stock.
In the quarter ended December 31, 1999, approximately $29,100,000 of revenue,
and a corresponding amount of expense, was eliminated in consolidation for
transactions between 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 $11,311,000, of which $9,558,000
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 December 31, 1998.
Interest expense increased $25,453,000, of which $18,239,000 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 $6,927,000 recorded during the quarter ended December 31,
1999 principally represents Genesis' Multicare joint venture partners' 56.4%
interest in the Multicare net loss for the period.
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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 $3,395,000 to $8,306,000 during the quarter
ended December 31, 1999 compared to $4,911,000 during the quarter ended December
31, 1998. This increase is attributed to the issuance of Series H and Series I
Preferred Stock in mid-November, 1999. The December 31, 1998 preferred stock
dividends were restated, resulting in an increase of $494,000, 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.
Liquidity and Capital Resources
General
We have substantial indebtedness and, as a result, significant debt service
obligations. As of December 31, 1999, we had approximately $2,242,754,000 of
long-term indebtedness, excluding the current portion of indebtedness of
$72,836,000, which represented 74% of our total capitalization. The degree to
which we are leveraged could have important consequences, including, but not
limited to the following:
o our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or other
purposes may be limited or impaired;
o a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on
indebtedness, thereby reducing the funds available to us for
our operations;
o our operating flexibility is limited by restrictions contained
in some of our debt agreements which limit our ability to
incur additional indebtedness and enter into other financial
transactions, to pay dividends, and set forth minimum net
worth requirements;
o our degree of leverage may make us more vulnerable to industry
downturns and less competitive, may reduce our flexibility in
responding to changing business and industry conditions and
may limit our ability to pursue other business opportunities,
to finance our future operations or capital needs, and to
implement our business strategy; and
o certain of our borrowings are and will continue to be at
variable rates of interest, which exposes us to the risk of
higher interest rates.
The Company expects to finance required payments of principal and interest on
our indebtedness from its cash flow from operations and the sales of certain
assets. Management is currently engaged in discussions for the asset sales,
however, the Company has no firm commitments from potential purchasers for these
assets. The Company's ability to make scheduled payments of the principal or
interest on, or to refinance indebtedness, depends on the future performance of
the Company's business, which is in turn subject to financial, business,
economic and other factors affecting the Company's business and operations,
including factors beyond its control, such as prevailing industry conditions.
There can be no assurances that the anticipated sales will be consummated and
that cash flow from operations will be sufficient to enable the Company's to
service its debt and meet other obligations. If such cash flow is insufficient,
the Company may be required to refinance and/or restructure all or a portion of
its existing debt, to sell additional assets or to obtain additional financing.
There can be no assurance that any such refinancing or restructuring would be
possible or that any such additional sales of assets or additional financing
could be achieved.
Required payments of principal and interest on our indebtedness is expected to
be satisfied by our cash flow from operations. Our ability to generate
sufficient cash flows from operations depends on a number of internal and
external factors affecting our business and operations, including factors beyond
our control, such as prevailing industry conditions. There can be no assurances
that cash flow from operations will be sufficient to enable us to service our
debt and meet our other obligations. If such cash flow is insufficient, we may
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be required to refinance and/or restructure all or a portion of our existing
debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing or restructuring would be possible or that
any such sales of assets or additional financing could be achieved. Also, the
ability of our Multicare affiliate to meet its obligations is dependent upon its
ability to consummate certain asset sales. There can be no assurances that such
asset sales will be consummated by Multicare. We also have significant long-term
operating lease obligations with respect to certain of our sites of service,
including eldercare centers.
Operating cash flow will depend upon our ability to effect cost reduction
initiatives and to reduce our investment in working capital. We believe that
operating cash flow, which is expected to be augmented by planned refinancing
transactions, will be sufficient to meet our future obligations. However, there
can be no assurances that the cash flow from our operations will be sufficient
to enable us to service our substantial indebtedness and meet our other
obligations.
Working capital increased $65,641,000 to $301,345,000 at December 31, 1999 from
$235,704,000 at September 30, 1999, of which approximately $27,400,000 is due to
a reduction in accounts payable and accrued expenses as a result of the timing
of vendor and interest payments, $20,500,000 is due to growth in trade
receivables, $11,100,000 is due to the purchase of investments in marketable
securities held by the Company's insurance captive and $6,100,000 is due to
growth in inventory balances. Genesis' cash flow from operations for the three
months ended December 31, 1999 was a use of cash of $38,672,000 compared to a
use of cash of $23,862,000 for the three months ended December 31, 1998. At
December 31, 1999, included in accounts receivable were approximately
$11,600,000 due from HCR Manor Care (see "Legal Proceedings") and approximately
$19,800,000 due from Mariner Post-Acute Network, Inc. and Mariner Health Group,
Inc. ("Mariner") for the provision of certain ancillary services rendered. At
December 31, 1999, $34,200,000 of trade receivables and payables between Genesis
and Multicare were eliminated in consolidation.
On January 18, 2000, Mariner Post-Acute Network, Inc. and Mariner Health Group,
Inc. filed separate voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code with the U.S. Bankruptcy Court for the District of Delaware. The Company is
actively pursuing its claim for the receivables from Mariner, including
participating as a member of the official unsecured creditors committee, in
order to ensure the interests of the Company are protected.
Investing activities for the three months ended December 31, 1999 include
approximately $14,300,000 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 $4,900,000
relates to the construction, renovation and expansion of assisted living
facilities. Cash proceeds from investments in unconsolidated affiliates of
approximately $3,800,000 during the three months ended December 31, 1999
represents proceeds raised by joint venture partnerships with outside financing
sources to refinance construction costs initially funded by the Company
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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 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, increases the
Annual Applicable Margin (defined below) and provides the lenders of the Genesis
Credit Facility a collateral interest in certain real and personal property of
the Company, required minimum assets sales 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),
permitted the restructuring of the Put/Call Agreement, as defined, and increased
the interest rates applying to the Genesis Term Loans and the Genesis Revolving
Facility. Additionally, the fourth amended and restated credit agreement
provides for $40,000,000 of additional borrowing capacity, (the "Tranche II
Facility"). The asset sales required by the Genesis Credit Facility total
$12,000,000 by December 31, 1999, $37,000,000 by June 30, 2000 and $40,000,000
by December 31, 2000. Genesis has satisfied the requirement through December 31,
1999 and has transactions in process to satisfy the majority of the aggregate
requirement through December 31, 2000.
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, of which $28,670,000 is payable in Fiscal 2000. 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 December 31, 1999
(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
December 31, 1999 (the "Genesis Tranche B Term Facility"); and (iii) an original
eight year term loan maturing in June 2005 with an outstanding balance of
$151,767,000 at December 31, 1999 (the "Genesis Tranche C Term Facility"). The
Genesis Revolving Facility, with an outstanding balance of $645,198,000 at
December 31, 1999, becomes payable in full on September 30, 2003. As of December
31, 1999, there were no borrowings outstanding under the Tranche II Facility.
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 (subject to certain exceptions) in all personal property, including
inventory, accounts receivable, equipment and general intangibles. Mortgages on
certain 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 "Annual 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 Annual Applicable
Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans (an effective
rate of 9.44% at December 31, 1999). Loans under the Genesis Tranche B Term
Facility have an Annual Applicable Margin of 1.75% for Prime Rate loans and
3.50% for LIBO Rate loans (an effective rate of 9.69% at December 31, 1999).
Loans under the Genesis Tranche C Term Facility have an Annual Applicable Margin
of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans (an effective rate
of 9.94% at December 31, 1999). 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
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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 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
Term Loans amortize in quarterly installments through 2005, of which $34,000,000
is payable in Fiscal 2000. The loans consist of (i) an original six year term
loan maturing in September 2003 with an outstanding balance of $140,000,000 at
December 31, 1999 (the "Multicare Tranche A Term Facility"); (ii) an original
seven year term loan maturing in September 2004 with an outstanding balance of
$146,625,000 at December 31, 1999 (the "Tranche B Term Facility"); and (iii) an
original eight year term loan maturing in June 2005 with an outstanding balance
of $48,750,000 at December 31, 1999 (the "Multicare Tranche C Term Facility").
The Multicare Revolving Facility, with an outstanding balance of $123,534,000 at
December 31, 1999, becomes payable in full on September 30, 2003.
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.
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% (an effective rate of 9.94% at December 31, 1999); loans under the
Multicare Tranche B Term Facility bear interest at a rate equal to LIBO Rate
plus a margin up to 4.0% (an effective rate of 10.16% at December 31, 1999);
loans under the Multicare Tranche C Term Facility bear interest at a rate equal
to LIBO Rate plus a margin up to 4.25%; (an effective rate of 10.44%) loans
under the Multicare Revolving Facility bear interest at a rate equal to LIBO
Rate plus a margin up to 3.75% (an effective rate of 9.94%). Subject to meeting
certain financial covenants, the above-referenced interest rates will be
reduced.
Multicare continues to actively pursue sales of assets in Ohio, Illinois and
Wisconsin. Management is currently engaged in discussions for the asset sales;
however, the Company has no firm commitments from potential purchasers for these
assets. There can be no assurances that any such sales of assets will be
achieved.
All net proceeds of the disposition of certain assets located in Ohio not in
excess of $55,000,000 shall be applied against the Multicare Revolving Facility
at the time outstanding on a pro rata basis in accordance with the relative
aggregate principal amount thereof held be each applicable lender.
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All net proceeds of the disposition of certain assets located in Illinois and
Wisconsin shall be applied first against the Multicare Tranche A Term Loan, on a
pro rata basis in accordance with the relative aggregate principal amounts held
by each applicable lender.
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.
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.
Certain of Genesis' and Multicare's other 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, Genesis and Multicare must 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 our
Common Stock since its inception.
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%.
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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 change 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 PPS on October 1, 1998 and
the majority of the Multicare eldercare centers began implementation of PPS on
January 1, 1999. The actual impact of PPS on our earnings in future periods will
depend on many variables which can not be quantified at this time, including the
effect of the Balanced Budget Refinement Act, regulatory changes, patient
acuity, patient length of stay, Medicare census, referral patterns, ability to
reduce costs and growth of ancillary business. PPS and other existing and future
legislation and regulation may also adversely affect our pharmacy and medical
supply revenue, and other specialty medial services.
As a result of the Balanced Budget Refinement Act, the Company transitioned 24
eldercare centers to the full federal rate effective January 1, 2000. The
Company believes this transaction will result in incremental annualized revenue
of approximately $2,400,000, which will in part be offset by the continued phase
in of PPS.
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 date 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 December 31, 1999 there were approximately
$20,100,000 of accrued, but unpaid dividends on the Series G Preferred. The
Company does not anticipate paying cash dividends on the Series G Preferred in
fiscal 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. As a result
of the Vitalink Transaction, Genesis assumed approximately $87,000,000 of
indebtedness Vitalink had outstanding. The cash portion of the purchase price
was funded through borrowings under the Genesis Credit Facility.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles, and the number of calendar days
in a given quarter.
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Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. To date, the
Company has offset its increased operating costs by increasing charges for its
services and expanding its services. Genesis has also implemented cost control
measures to limit increases in operating costs and expenses but cannot predict
its ability to control such operating cost increases in the future.
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. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to changes in interest rates. The Company's objective in
managing its exposure to interest rate changes is to limit the impact of such
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives, the Company primarily uses interest rate swaps to manage
net exposure to interest rate changes related to its portfolio of borrowings.
Notional amounts of interest rate swap agreements are used to measure interest
to be paid or received relating to such agreements and do not represent an
amount of exposure to credit loss. The fair value of interest rate swap
agreements is the estimated amount the Company would receive or pay to terminate
the swap agreement at the reporting date, taking into account current interest
rates. The estimated amount the Company would pay to terminate its interest rate
swap agreements outstanding at December 31, 1999 is approximately $27,000,000.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Genesis is a party to litigation arising in the ordinary
course of business. Genesis does not believe the results of
such litigation, even if the outcome is unfavorable to us,
would have a material adverse effect on our financial
position. See "Cautionary Statement Regarding Forward-Looking
Statements."
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. and two
of its subsidiaries and principals. The lawsuits arise from
HCR Manor Care's threatened termination of two long term
pharmacy services contracts effective June 1, 1999. Vitalink
filed a complaint against HCR Manor Care and two of its
subsidiaries in Baltimore City, Maryland circuit court.
Genesis filed a complaint against HCR Manor Care and two of
its subsidiaries and principals in federal district court in
Delaware including, among other counts, securities fraud.
Vitalink has also instituted an arbitration action in
Maryland. Vitalink is seeking 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 terminations were
unlawful. Genesis and Vitalink 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 entered into long- term master
pharmacy agreements which gave Vitalink the right to provide
pharmacy services to all facilities owned or licensed by Manor
Care and its affiliates. In 1998, the terms of the pharmacy
service agreements were extended to September, 2004. Under the
two master service agreements, Genesis and Vitalink receive
revenues at the rate of approximately $100,000,000 per year.
By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Claims relating to the
master service agreements with the Arbitration matter.
Accordingly, on May 25, 1999, the Maryland state court case
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. Genesis
still maintains its Delaware federal court complaint.
The Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel,
filed an additional complaint against Omnicare Inc. and
Heartland Healthcare (a joint venture between Omnicare and HCR
Manor Care) seeking injunctive relief and compensatory and
punitive damages. The complaint includes counts for tortious
interference with Vitalink's contractual rights under its
three exclusive long-term service contracts with HCR Manor
Care.
29
<PAGE>
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.
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.
30
<PAGE>
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
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
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K dated
November 15, 1999, reporting the closing of its
transaction with The Cypress Group L.L.C and TPG
Partners II, L.P. to restructure the Multicare
joint-venture. The Current Report on Form 8-K does
not include financial statements.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
GENESIS HEALTH VENTURES, INC.
Date: February 14, 2000 /s/ George V. Hager, Jr.
--------------------------------
George V. Hager, Jr.
Executive Vice President and
Chief Financial Officer
32
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