<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 1-11666
GENESIS HEALTH VENTURES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-1132947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of May 9, 2000: 48,640,262 shares of common stock
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............................................ 1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements............................................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 33
Part II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 34
Item 2. Changes in Securities...............................................................36
Item 3. Defaults Upon Senior Securities.................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders................................ 36
Item 5. Other Information.................................................................. 37
Item 6. Exhibits and Reports on Form 8-K................................................... 37
SIGNATURES............................................................................................38
</TABLE>
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our
ability or inability to meet our liquidity needs, scheduled
debt and interest payments and expected future capital
expenditure requirements, and to control costs and to sell
certain assets; and the expected effects of government
regulation on reimbursement for services provided and on the
costs of doing business;
o certain statements in the Notes to Unaudited Condensed
Consolidated Financial Statements concerning pro forma
adjustments; and
o certain statements in "Legal Proceedings" regarding the
effects of litigation.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our default under our senior credit agreement and certain of
our senior subordinated notes;
o our substantial indebtedness and significant debt service
obligations;
o the effect of planned dispositions of assets;
o our ability or inability to secure the capital and the related
cost of the capital necessary to fund future growth;
o the impact of health care reform, including the Medicare
Prospective Payment System ("PPS"), the Balanced Budget
Refinement Act ("BBRA") and the adoption of cost containment
measures by the federal and state governments;
o the adoption of cost containment measures by other third party
payors;
o the impact of government regulation, including our ability to
operate in a heavily regulated environment and to satisfy
regulatory authorities;
o the occurrence of changes in the mix of payment sources
utilized by our patients to pay for our services;
o competition in our industry;
o our ability to consummate or complete development projects or
to profitably operate or successfully integrate enterprises
into our other operations; and
o changes in general economic conditions.
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
<PAGE>
On March 20, 2000 we elected not to make interest payments due under our senior
credit agreement. We are also in violation of certain covenants under our senior
credit agreement and certain of our senior subordinated notes. We have begun
discussions with our lenders of our senior credit agreement to revise our
capital structure. We have been granted a forbearance period while discussions
on an overall restructuring take place. Under the forbearance agreement, the
majority of the senior creditors agreed to refrain from accelerating the senior
loans or exercising other remedies against us arising from the existence of
certain defaults, including non-payment of principal and interest. During the
initial forbearance period we have not made scheduled interest and principal
payments under our senior credit agreement or interest payments under certain of
our senior subordinated notes. There can be no assurances that the senior
lenders or holders of senior subordinated notes will approve any amendment or
restructuring of the senior credit agreement or the senior subordinated notes.
If the senior lenders or holders of senior subordinated notes accelerate the
obligations under the agreements, such events would have a material adverse
effect on our liquidity and financial position. Under such circumstances, our
financial position would necessitate the development of an alternative financial
structure. Considering the limited financial resources and the existence of
certain defaults, there can be no assurance that we would succeed in formulating
and consummating an acceptable alternative financial structure. In addition, in
light of the Company's current financial condition and the existence of certain
defaults, the Company may need to seek protection under federal bankruptcy law.
2
<PAGE>
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 50,855 $ 12,397
Investments in marketable securities 30,009 24,599
Accounts receivable, net of allowance for doubtful accounts 471,142 370,472
Inventory 59,428 63,369
Prepaid expenses and other current assets 59,532 46,964
----------- -----------
Total current assets 670,966 517,801
----------- -----------
Property, plant, and equipment, net 1,215,853 612,301
Notes receivable and other investments 43,948 40,075
Other long-term assets 146,803 112,978
Investments in unconsolidated affiliates 21,151 180,882
Goodwill and other intangibles, net 1,438,351 965,877
----------- -----------
Total assets $ 3,537,072 $ 2,429,914
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 2,191,664 $ 37,126
Accounts payable and accrued expenses 298,806 244,971
----------- -----------
Total current liabilities 2,490,470 282,097
----------- -----------
Long-term debt 158,165 1,484,510
Deferred income taxes 67,633 13,827
Deferred gain and other long-term liabilities 88,858 61,590
Minority interest 169,976 -
Redeemable preferred stock 429,793 -
Shareholders' equity:
Series G Cumulative Convertible Preferred Stock, par $.01, authorized
5,000,000 shares, 589,781 and 590,253 issued and outstanding at
March 31, 2000 and September 30, 1999, respectively 6 6
Common stock, par $.02, authorized 60,000,000 shares, issued and
outstanding 48,652,362 and 48,640,262 at March 31, 2000;
36,145,678 and 36,133,578 at September 30, 1999 748 723
Additional paid-in capital 803,426 753,452
Accumulated deficit (670,735) (165,620)
Accumulated other comprehensive loss (1,025) (428)
Treasury stock, at cost (243) (243)
----------- -----------
Total shareholders' equity 132,177 587,890
----------- -----------
Total liabilities and shareholders' equity $ 3,537,072 $ 2,429,914
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues:
Pharmacy and medical supply services $ 232,942 $ 231,901 $ 456,849 $ 468,118
Inpatient services 331,084 175,801 657,411 351,833
Other revenue 40,817 56,917 77,467 123,872
----------- ----------- ----------- -----------
Total net revenues 604,843 464,619 1,191,727 943,823
----------- ----------- ----------- -----------
Operating expenses:
Operating expenses 531,313 402,708 1,044,727 810,758
Debt restructuring and other charges 36,393 9,701 44,113 9,701
Multicare joint venture restructuring charge - - 420,000 -
Depreciation and amortization 29,037 18,759 58,155 36,566
Lease expense 9,486 6,619 19,013 12,986
Interest expense, net 56,726 28,457 109,502 55,780
----------- ----------- ----------- -----------
Income (loss) before income taxes, minority interest, equity in
net loss of unconsolidated affiliates, extraordinary items and
cumulative effect of an accounting change (58,112) (1,625) (503,783) 18,032
Income tax expense (benefit) (8,455) 572 (15,735) 7,950
----------- ----------- ----------- -----------
Income (loss) before minority interest, equity in net loss of
unconsolidated affiliates, extraordinary items and
cumulative effect of an accounting change (49,657) (2,197) (488,048) 10,082
Minority interest 6,100 - 13,027 -
Equity in net loss of unconsolidated affiliates - (4,259) - (5,151)
----------- ----------- ----------- -----------
Income (loss) before extraordinary items and cumulative effect
of accounting change (43,557) (6,456) (475,021) 4,931
Extraordinary item, net of tax - (301) - (2,100)
Cumulative effect of accounting change - - (10,412) -
----------- ----------- ----------- -----------
Net income (loss) (43,557) (6,757) (485,433) 2,831
Preferred stock dividends 11,375 4,802 19,681 9,713
----------- ----------- ----------- -----------
Loss attributed to common shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882)
=========== =========== =========== ===========
Per common share data:
Basic
Loss before extraordinary items
and cumulative effect of accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14)
Net loss $ (1.13) $ (0.33) $ (11.10) $ (0.20)
Weighted average shares of common stock 48,640,162 35,218,519 45,498,085 35,217,109
----------- ----------- ----------- -----------
Diluted
Loss before extraordinary items
and cumulative effect of accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14)
Net loss $ (1.13) $ (0.33) $ (11.10) $ (0.20)
Weighted average shares of common stock 48,640,162 35,218,519 45,498,085 35,217,109
----------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six months ended
March 31
-----------------------------
2000 1999
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (485,433) $ 2,831
Net charges included in operations not requiring funds 500,948 45,170
Changes in assets and liabilities excluding the effects of acquisitions
Accounts receivable (9,338) (34,015)
Accounts payable and accrued expenses (46,271) (20,857)
Other, net 6,588 (1,253)
---------- -------
Net cash used in operations (33,506) (8,124)
---------- -------
Cash flows from investing activities:
Purchase of marketable securities (6,007) -
Proceeds on maturity or sale of marketable securities - 2,708
Capital expenditures (27,958) (34,159)
Payments for acquisitions, net of cash acquired - (10,787)
(Investments in) and proceeds from unconsolidated affiliates 1,706 (15,826)
Notes receivable and other investment, and
other long-term asset additions, net (5,676) (4,423)
---------- -------
Net cash used in investing activities (37,935) (62,487)
---------- -------
Cash flows from financing activities:
Net borrowings under working capital revolving credit facilities 89,868 90,000
Repayment of long-term debt and payment of sinking fund requirements (38,962) (131,240)
Proceeds from issuance of long-term debt 10,000 123,050
Proceeds from issuance of common stock 50,000 -
Preferred stock dividends paid - (5,988)
Debt issuance and debt restructuring costs (4,974) (3,088)
---------- -------
Net cash provided by financing activities 105,932 72,734
---------- -------
Net increase in cash and equivalents 34,491 2,123
Cash and equivalents
Beginning of period 16,364 4,902
---------- -------
End of period $ 50,855 $ 7,025
========== =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
has experienced significant losses and has a working capital deficit of
approximately $1,800,000,000 at March 31, 2000 due primarily to the
classification of certain senior and senior subordinated debt as a current
liability resulting from the Company's violation of certain financial covenants
described more fully in footnote 2.
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. 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."
Liquidity and Going Concern Assumption
The accompanying unaudited condensed financial statements have been prepared
assuming that the Company will continue as a going concern with the realization
of the value of assets and the settlement of liabilities and commitments in the
normal course of business. The Company has experienced significant losses and
has a working capital deficit of $1,800,000,000, primarily due to the
classification of certain senior and senior subordinated debt as a current
liability as a result of the Company's violation of certain covenants under the
Genesis Credit Facility and the Multicare Credit Facility (defined in footnote
3) as well as certain of the Genesis Notes (defined in footnote 3) as a result
of the nonpayment of interest and principal under the Genesis Credit Facility
and the Multicare Credit Facility, and the nonpayment of interest under certain
of the Genesis Notes. In addition, the Company has received default notices
from ElderTrust, a real estate investment trust, alleging certain payment and
nonpayment related defaults concerning certain mortgage loans and operating
leases.
Management has begun discussions with the Company's lenders under the Genesis
and Multicare Credit Facilities and certain holders of the Genesis Notes and the
Multicare Notes to revise the capital structures of the respective companies.
Genesis and Multicare have been granted forbearance periods while discussions on
their respective restructurings take place. Under the forbearance agreements,
the senior creditors have, subject to certain conditions, refrained from
accelerating the senior loans or exercising other remedies against Genesis and
Multicare. During the forbearance periods, Genesis and Multicare have not made
scheduled interest and principal payments under the Genesis and Multicare Credit
Facilities. As a result of the uncertainty related to the covenant defaults and
corresponding remedies, amounts outstanding under the Multicare and Genesis
Credit Facilities and the Genesis Notes and the Multicare Notes have been
classified as a current liability at March 31, 2000. The forbearance periods for
both Genesis and Multicare expire on May 19, 2000. The Company is in discussions
to extend the forbearance periods. No assurance can be given that the
forbearance periods will be extended.
There can be no assurances that the senior lenders or holders of the Genesis
Notes or Multicare Notes will approve any amendment or restructuring of the
Genesis and / or Multicare Credit Facilities or the Genesis Notes and / or the
Multicare Notes. The unaudited condensed consolidated financial statements do
not include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that may result from the outcome of the
uncertainty related to the covenant defaults and corresponding remedies.
6
<PAGE>
If the senior lenders or holders of the Genesis Notes and / or the Multicare
Notes accelerate the obligations under the agreements, such events would have a
material adverse effect on the Company's liquidity and financial position. Under
such circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults, there can be
no assurance that the Company would succeed in formulating and consummating an
acceptable alternative financial structure.
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long term care facilities which
utilize our specialty medical services. The healthcare industry is experiencing
the effects of the federal and state governments' trend toward cost containment,
as government and other third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers.
These cost containment measures, combined with the increasing influence of
managed care payors and competition for patients, have resulted in reduced rates
of reimbursement for services provided by the Company.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System
pursuant to the Balanced Budget Act of 1997, as modified by
the Medicare Balanced Budget Refinement Act, and
o the repeal of the "Boren Amendment" federal payment standard
for Medicaid payments to nursing facilities.
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that any
future healthcare legislation will not adversely affect the Company's business.
There can be no assurance that payments under governmental and private third
party payor programs will be timely, will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs. The Company's
financial condition and results of operations may be affected by the
reimbursement process, which in the Company's industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled.
3. Long-Term Debt and Liquidity
Genesis Credit Facility
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries (excluding
Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility") for the purpose of: refinancing and funding interest and principal
payments of certain existing indebtedness; funding permitted acquisitions; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of transactions. The fourth amended and
restated credit agreement made the financial covenants for certain periods less
restrictive, required minimum asset sales, increased the Applicable Margin
(defined below), provided the lenders of the Genesis Credit Facility a
collateral interest in certain real and personal property of the Company, and
generally reallocated the proceeds thereof among the Tranche II Facility
(defined below), the Genesis Revolving Facility (defined below) and the Genesis
Term Loans (defined below) and permitted the restructuring of the Put/Call
Agreement, as defined. Additionally, the fourth amended and restated credit
agreement provides for $40,000,000 of additional borrowing capacity, (the
"Tranche II Facility") available to the Company beginning in December 1999.
7
<PAGE>
The Genesis Credit Facility consists of three term loans with original balances
of $200,000,000 each (collectively, the "Genesis Term Loans"), and a
$650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a
$40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly
installments through 2005. The Genesis Term Loans consist of (i) an original six
year term loan maturing in September 2003 with an outstanding balance of
$110,445,000 at March 31, 2000 (the "Genesis Tranche A Term Facility"); (ii) an
original seven year term loan maturing in September 2004 with an outstanding
balance of $151,131,000 at March 31, 2000 (the "Genesis Tranche B Term
Facility"); and (iii) an original eight year term loan maturing in June 2005
with an outstanding balance of $151,378,000 at March 31, 2000 (the "Genesis
Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding
balance of $645,834,000 (excluding letters of credit) at March 31, 2000, becomes
payable in full on September 30, 2003. At March 31, 2000, the outstanding
balance of the Tranche II Facility was $40,000,000. The aggregate outstanding
balance of the Genesis Credit Facility at March 31, 2000 is classified as a
current liability.
The Genesis Credit Facility is secured by a first priority security interest in
all of the stock, partnership interests and other equity of all of Genesis'
present and future subsidiaries (including Genesis ElderCare Corp.) other than
the stock of Multicare and its subsidiaries, and also by first priority security
interests in substantially all personal property, excluding inventory, including
accounts receivable, equipment and general intangibles. Mortgages on
substantially all of Genesis' subsidiaries' real property were also granted.
Loans under the Genesis Credit Facility bear, at Genesis' option, interest at
the per annum Prime Rate as announced by the administrative agent, or the
applicable Adjusted LIBO Rate plus, in either event, a margin (the "Applicable
Margin") that is dependent upon a certain financial ratio test. Loans under the
Genesis Tranche A Term Facility and Genesis Revolving Facility have an
Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans.
Loans under the Genesis Tranche B Term Facility have an Applicable Margin of
1.75% for Prime Rate loans and 3.50% for LIBO Rate loans. Loans under the
Genesis Tranche C Term Facility have an Applicable Margin of 2.00% for Prime
Rate loans and 3.75% for LIBO Rate loans. Subject to meeting certain financial
ratios, the above referenced interest rates are reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Genesis Credit Facility, the Company is no longer entitled to elect a LIBO Rate.
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.
8
<PAGE>
Multicare Credit Facility
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility") which made the financial covenants
for certain periods less restrictive, permitted a portion of the proceeds of
assets sales to repay indebtedness under the Multicare Tranche A Term Facility
(defined below) and Multicare Revolving Facility (defined below), permitted the
restructuring of the Put/Call Agreement, increased the interest rates applying
to the Multicare Term Loans (defined below) and the Multicare Revolving
Facility, and increased the level of management fee Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
The Multicare Credit Facilities consist of three term loans with an aggregate
original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and
a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortize in quarterly installments through 2005. The loans
consist of (i) an original six year term loan maturing in September 2003 with an
outstanding balance of $139,301,000 at March 31, 2000 (the "Multicare Tranche A
Term Facility"); (ii) an original seven year term loan maturing in September
2004 with an outstanding balance of $145,893,000 at March 31, 2000 (the "Tranche
B Term Facility"); and (iii) and an original eight year term loan maturing in
June 2005 with an outstanding balance of $48,382,000 at March 31, 2000 (the
"Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an
outstanding balance of $123,534,000 at March 31, 2000, becomes payable in full
on September 30, 2003. The aggregate outstanding balance of the Multicare Credit
Facility at March 31, 2000 is classified as a current liability.
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%, loans under the Multicare Tranche B Term Facility bear interest at
a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare
Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 4.25%; loans under the Multicare Revolving Credit Facility bear interest
at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting
certain financial covenants, the above-referenced interest rates will be
reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Multicare Credit Facility, the Company is no longer entitled to elect a LIBO
Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term
Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%;
loans under the Multicare Tranche B Term Facility bear interest at a rate equal
to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C
Term Facility bear interest at a rate equal to Prime Rate plus a margin up to
2.5%; loans under the Multicare Revolving Credit Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.0%.
The Company anticipates selling the assets of 14 eldercare centers in Ohio for
approximately $36,000,000 in accordance with a signed letter of intent. All net
proceeds of the disposition of assets located in Ohio are expected to be applied
against the Multicare Credit Facility at the time outstanding on a pro rata
basis in accordance with the relative aggregate principal amount thereof held by
each applicable lender. There can be no assurances that any such sales of assets
can be consummated.
9
<PAGE>
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. The aggregate outstanding balance of
the Genesis Notes and the Multicare Notes at March 31, 2000 is classified as a
current liability.
Certain of these and other of Genesis' and Multicare's outstanding loans contain
covenants which, without the prior consent of the lenders, limit certain of
Genesis' and Multicare's activities. Such covenants contain limitations relating
to the merger or consolidation of Genesis or Multicare and Genesis' and
Multicare's ability to secure indebtedness, make guarantees, grant security
interests and declare dividends. In addition, certain of Genesis and Multicare's
outstanding loans require that Genesis and Multicare maintain certain minimum
levels of cash flow and debt service coverage, and must maintain certain ratios
of liabilities to net worth. Under certain of these loans, Genesis is restricted
from paying cash dividends on the Common Stock, unless certain conditions are
met. Genesis has not declared or paid any cash dividends on its Common Stock
since its inception.
4. Debt Restructuring and Other Charges
In connection with the potential debt restructuring, the Company incurred during
the quarter ended March 31, 2000 legal, bank, accounting and other professional
fees of approximately $5,000,000. As a result of the non-payment of interest
under the Genesis Credit Facility, certain provisions under existing interest
rate swap arrangements with Citibank were triggered. Citibank notified Genesis
that they have elected to force early termination of the interest rate swap
arrangements, and have asserted a $28,300,000 obligation. These charges are
reflected in the consolidated statement of operations as debt restructuring and
other charges.
During the quarter ended March 31, 2000, the Company decided to close an
underperforming 130 bed eldercare center resulting in a charge of approximately
$3,100,000 for certain closure costs and impaired assets of that center. During
the quarter ended March 31, 1999, the Company closed a 120 bed leased center
resulting in a charge of approximately $9,700,000 consisting of the present
value of future lease payments through the end of the lease term, a residual
lease obligation to be funded at the end of the lease term, severance costs and
other related closure costs. These charges are reflected in the consolidated
statement of operations as debt restructuring and other charges.
The Company also 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 elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan was approved by shareholder vote at the
Company's 2000 Annual Meeting. As a result of the Company's financial condition
and other considerations, the Company determined not to proceed with the
Redemption Program. The elections made by optionees would have resulted in the
redemption of approximately 4,600,000 stock options in exchange for
approximately 4,000,000 shares of Genesis common stock.
10
<PAGE>
5. Multicare Transaction and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors".
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of The
Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned
subsidiary of Genesis ElderCare Corp. In connection with their investments in
the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem
entered into a stockholders agreement dated as of October 9, 1997 (the
"Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered
into a put/call agreement, dated as of October 9, 1997 (the "Put/Call
Agreement") relating to their respective ownership interests in Genesis
ElderCare Corp. pursuant to which, among other things, Genesis had the option to
purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG
and Nazem at a price determined pursuant to the terms of the Put/Call Agreement.
Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis
ElderCare Corp. common stock at a price determined pursuant to the Put/Call
Agreement.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as
defined below) and certain of its subsidiaries pursuant to which Genesis
acquired all of the assets used in Multicare's outpatient and inpatient
rehabilitation therapy business for $24,000,000 (the "Therapy Purchase") and a
stock purchase agreement (the "Pharmacy Purchase Agreement") with Multicare and
certain subsidiaries pursuant to which Genesis acquired all of the outstanding
capital stock and limited partnership interests of certain subsidiaries of
Multicare that are engaged in the business of providing institutional pharmacy
services to third parties for $50,000,000 (the "Pharmacy Purchase"). The Company
completed the Pharmacy Purchase effective January 1, 1998. The Company completed
the Therapy Purchase in October 1997.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement; Issuance of Preferred Stock
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which 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.
11
<PAGE>
In connection with the restructuring transaction, the restrictions in the
Put/Call Agreement related to Genesis' right to take certain corporate actions,
including its ability to sell all or a portion of its pharmacy business, were
terminated. In addition, the Call under the Put/Call Agreement was amended to
provide Genesis with the right to purchase all of the shares of common stock of
Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time
prior to the 10th anniversary of the closing date of the restructuring
transaction.
Investment in Genesis
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Registration Rights
Subject to limitations contained in the Restructuring Agreement, the holders of
the Genesis common stock, warrants, Series H Preferred Stock and Series I
Preferred Stock issued in connection with the restructuring transaction and all
securities issued or distributed in respect of these securities have the right
to register these securities under the Securities Act.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an
irrevocable proxy to vote their shares of common stock of
Genesis ElderCare Corp. on all matters to be voted on by
shareholders, including the election of directors;
o provide that Genesis may appoint two-thirds of the members of
the Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions
receive the approval of at least one designee of each of
Cypress, TPG and Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell
their Genesis ElderCare Corp. stock, subject to certain
limitations;
o provide that Genesis may appoint 100% of the members of the
operating committee of the board of directors of Genesis
ElderCare Corp.; and
o eliminate all pre-emptive rights.
Irrevocable Proxy
Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an
irrevocable power of attorney directing Genesis to cast for, against or as an
abstention in the same proportion as the other Genesis voting securities are
cast, the number of shares of securities of Genesis so that Cypress, TPG and
Nazem together will not have the right to vote more than 35% of the total voting
power of Genesis in connection with any vote other than a vote relating to an
amendment to Genesis' articles of incorporation to amend, modify or change the
terms of any class or series of preferred stock. This power of attorney will
terminate upon the existence of the circumstances that would cause the
standstill to terminate as described below.
12
<PAGE>
Directors of Genesis
Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting
jointly, or in the event that only one of Cypress and TPG then owns or has the
right to acquire Genesis common stock, Cypress or TPG, as applicable, are
entitled to designate a number of directors of Genesis representing at least 23%
of the total number of directors constituting the full board of directors of
Genesis. However, for so long as the total number of directors constituting the
full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only
entitled to designate two directors on the Genesis board of directors. Cypress
and TPG have this right to designate directors so long as they own any
combination of Genesis voting securities or securities convertible into Genesis
voting securities constituting more that 10% of Genesis' total voting power. For
this purpose, the Series I Preferred Stock and the non-voting common stock
issued upon conversion of the Series I Preferred Stock will be considered voting
securities.
For so long as Cypress and/or TPG have the right to designate directors on the
Genesis board of directors, Genesis shall not, without the consent of at least
two of the Cypress/TPG designated directors:
o enter into any transaction or series of transactions which
would constitute a change in control, as defined in the
Restructuring Agreement; or
o engage in a "going private" transaction.
Pre-emptive Rights
As a result of the restructuring transaction, Cypress and TPG each have a right,
subject to the limitations contained in the Restructuring Agreement, to
participate in future offerings of any shares of, or securities exchangeable,
convertible or exercisable for any shares of any class of Genesis' capital
stock.
Standstill
The Sponsors have agreed that, subject to certain termination provisions,
neither they nor their affiliates will, without Genesis' prior written consent,
either alone or as part of a group, acquire any voting securities of Genesis,
except for the voting securities to be issued in the restructuring transaction
and pursuant to stock splits, stock dividends or other distributions or
offerings made available to holders of Genesis voting securities generally.
Accounting Effects
Prior to the Multicare restructuring transaction, Genesis accounted for its
investment in Multicare using the equity method of accounting. Upon consummation
of the restructuring transaction, Genesis consolidated the financial results of
Multicare since Genesis has managerial, operational and financial control of
Multicare under the terms of the Restructuring Agreement. Accordingly,
Multicare's assets, liabilities, revenues and expenses are consolidated at their
recorded historical amounts and the financial impact of transactions between
Genesis and Multicare 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.
13
<PAGE>
The following unaudited pro forma statement of operations information gives
effect to the Multicare joint venture restructuring had it occurred on October
1, 1998, after giving effect to certain adjustments, including the elimination
of intercompany transactions, the recording of minority interest, the issuance
of common stock, the recording of preferred stock dividends, the repayment of
debt with proceeds from the issuance of common stock and related income tax
effects. The unaudited pro forma financial information has been prepared to
reflect the consolidation of the financial results of Multicare. Accordingly,
Multicare's revenues and expenses are presented at their recorded historical
amounts and the financial impact of all transactions between Genesis and
Multicare are eliminated in consolidation. The pro forma financial information
does not include the $420,000,000 non-cash charge representing the cost
estimated to terminate the Multicare put. This charge is a direct result of the
Multicare joint venture restructuring. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
the transaction occurred at the beginning of the period presented.
<TABLE>
<CAPTION>
(In thousands, except per
common share data)
Six Months Ended
Unaudited Pro Forma Statement of Operations Information: March 31, 1999
--------------
<S> <C>
Total net revenue $ 1,217,255
Loss before extraordinary items (16,352)
Net loss (18,452)
Loss per common share, before extraordinary items, diluted (0.34)
Loss per common share, diluted $ (0.39)
</TABLE>
14
<PAGE>
7. Loss Per Share
The following table sets forth the computation of basic and diluted loss
attributed to common shares (amounts are in thousands except per share data):
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Loss Per Share:
Loss before extraordinary items and
cumulative effect of accounting
change $ (54,932) $ (11,258) $ (494,702) $ (4,782)
Extraordinary items - (301) - (2,100)
Cumulative effect of accounting
change - - (10,412) -
--------- --------- ---------- --------
Loss attributed to common
shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882)
--------- --------- ---------- --------
Weighted average shares 48,640 35,219 45,498 35,217
--------- --------- ---------- --------
Loss per share before extraordinary
items and cumulative effect of
accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14)
Extraordinary items - (0.01) - (0.06)
Cumulative effect of accounting
change - - (0.23) -
--------- --------- ---------- --------
Loss per share $ (1.13) $ (0.33) $ (11.10) $ (0.20)
--------- --------- ---------- --------
Diluted Loss Per Share:
Loss before extraordinary items and
cumulative effect of accounting
change $ (54,932) $ (11,258) $ (494,702) $ (4,782)
Extraordinary items - (301) - (2,100)
Cumulative effect of accounting
change - - (10,412) -
--------- --------- ---------- --------
Loss attributed to common
shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882)
--------- --------- ---------- --------
Weighted average shares 48,640 35,219 45,498 35,217
--------- --------- ---------- --------
Loss per share before extraordinary
items and cumulative effect of
accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14)
Extraordinary items - (0.01) - (0.06)
Cumulative effect of accounting
change - - (0.23) -
--------- --------- ---------- --------
Loss per share $ (1.13) $ (0.33) $ (11.10) $ (0.20)
--------- --------- ---------- --------
</TABLE>
The operating results for the quarter and six months ended March 31, 1999 have
been restated to increase non-cash preferred stock dividends by $482,000 and
$976,000, respectively, to adjust the accrual for the increasing rate dividend
on the Series G Preferred Stock on a straight-line basis over the term of this
series.
15
<PAGE>
8. Comprehensive Loss
The following table sets forth the computation of comprehensive loss (amounts in
the table are in thousands):
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Loss attributed to common
shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882)
Unrealized loss on marketable
securities (336) (354) (597) (547)
--------- --------- ---------- --------
Total comprehensive loss $ (55,268) $ (11,913) $ (505,711) $ (7,429)
--------- --------- ---------- --------
</TABLE>
Accumulated other comprehensive income (loss), which is composed of net
unrealized gains and losses on marketable securities, was ($1,025,000) and
$137,000 at March 31, 2000 and 1999, respectively.
9. Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities",
(SOP 98-5) which requires the costs of start-up activities be expensed as
incurred, rather than capitalized and subsequently amortized. The adoption of
SOP 98-5 resulted in the write-off of $10,412,000, net of tax, of unamortized
start-up costs and is reflected as a cumulative effect of accounting change.
10. Segment Information
The Company has two reportable segments: (1) Pharmacy and medical supplies
services and (2) Inpatient services.
The Company provides pharmacy and medical supply services through its
NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply
service revenues are institutional pharmacy revenues, which include the
provision of infusion therapy, medical supplies and equipment provided to
eldercare centers Genesis operates, as well as to independent healthcare
providers by contract. The Company provides these services through 61
institutional pharmacies (one is jointly-owned) and 22 medical supply
distribution centers located in its various market areas. In addition, the
Company operates 33 community-based pharmacies which are located in or near
medical centers, hospitals and physician office complexes. The community-based
pharmacies provide prescription and over-the-counter medications and certain
medical supplies, as well as personal service and consultation by licensed
professional pharmacists. Approximately 91% of the sales attributable to all
pharmacy operations in Fiscal 1999 were generated through external contracts
with independent healthcare providers with the balance attributable to centers
owned or leased by the Company, including the jointly owned Multicare centers.
The Company includes in inpatient service revenue all room and board charges and
ancillary service revenue for its eldercare customers at 220 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.
16
<PAGE>
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column represents operating
information of business units below the prescribed quantitative thresholds.
These business units derive revenues from the following services: rehabilitation
therapy, management services, capitation fees, consulting services, homecare
services, physician services, transportation services, diagnostic services,
hospitality services, group purchasing fees and other healthcare related
services. In addition, the "Other" column includes the elimination of
intersegment transactions.
<TABLE>
<CAPTION>
Pharmacy and
Medical
Supply Inpatient
(in thousands) Services Services Other Total
- ------------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Three months ended
March 31, 2000
- ------------------
Revenue from external customers $ 232,942 $ 331,084 $ 40,817 $ 604,843
Revenue from intersegment
customers 25,448 - 45,558 71,006
Operating income (1) 24,528 38,118 10,884 73,530
Total assets 1,088,689 1,797,492 650,891 3,537,072
---------- ---------- --------- ------------
Three months ended
March 31, 1999
- ------------------
Revenue from external customers 231,901 175,801 56,917 464,619
Revenue from intersegment
customers 13,732 - 18,804 32,536
Operating income (1) 31,601 27,118 3,192 61,911
Total assets $1,089,427 $ 853,220 $ 735,568 $ 2,678,215
---------- ---------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
Pharmacy and
Medical
Supply Inpatient
(in thousands) Services Services Other Total
- ------------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Six months ended
March 31, 2000
- -----------------
Revenue from external customers $ 456,849 $ 657,411 $ 77,467 $ 1,191,727
Revenue from intersegment
customers 51,769 - 85,857 137,626
Operating income (1) 50,388 77,326 19,286 147,000
Total assets 1,088,689 1,797,492 650,891 3,537,072
---------- ---------- --------- ------------
Six months ended
March 31, 1999
- -----------------
Revenue from external customers 468,118 351,833 123,872 943,823
Revenue from intersegment
customers 28,254 - 39,164 67,418
Operating income (1) 65,350 54,773 12,942 133,065
Total assets $1,089,427 $ 853,220 $ 735,568 $ 2,678,215
---------- ---------- --------- ------------
</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.
17
<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 61 institutional pharmacies (one is
jointly-owned) and 22 medical supply distribution centers located in our various
market areas. In addition, we operate 33 community-based pharmacies which are
located in or near medical centers, hospitals and physician office complexes.
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies, as well as personal service and
consultation by licensed professional pharmacists. NeighborCare purchases
substantially all of its pharmaceuticals, approximately $540,000,000 annually,
through Cardinal Health, Inc. under a five year contract which commenced in May
of 1999. NeighborCare has other sources of supply available to it and has not
experienced difficulty obtaining pharmaceuticals or other supplies used in the
conduct of its business. Approximately 91% of the sales attributable to all
pharmacy operations in the twelve months ended September 30, 1999 were generated
through external contracts with independent healthcare providers with the
balance attributable to centers owned or leased by us, including the jointly
owned and consolidated Multicare centers.
We include in inpatient service revenue all room and board charges and ancillary
service revenue for our eldercare customers at 220 eldercare centers owned and
leased by Genesis and Multicare.
We include the following in other revenues: rehabilitation therapy, management
fees, capitation fees, consulting services, homecare services, physician
services, transportation services, diagnostic services, hospitality services,
group purchasing fees and other healthcare related services.
Certain Transactions and Events
Liquidity and Going Concern Assumption
The accompanying unaudited condensed financial statements have been prepared
assuming that the Company will continue as a going concern with the realization
of the value of assets and the settlement of liabilities and commitments in the
normal course of business. The Company has experienced significant losses and
has a working capital deficit of $1,800,000,000 at March 31, 2000 due primarily
to the classification of certain senior and senior subordinated debt as a
current liability resulting from the Company's violation of certain covenants
under the Genesis Credit Facility and the Multicare Credit Facility as well as
certain of the Genesis Notes as a result of the nonpayment of interest and
principal under the Genesis Credit Facility and the Multicare Credit Facility,
and the nonpayment of interest under certain of the Genesis Notes. In addition,
the Company has received default notices from ElderTrust, a real estate
investment trust, alleging certain payment and nonpayment related defaults
concerning certain mortgage loans and operating leases.
Management has begun discussions with the Company's lenders under the Genesis
and Multicare Credit Facilities and certain holders of the Genesis Notes and the
Multicare Notes to revise the capital structures of the respective companies.
Genesis and Multicare have been granted forbearance periods while discussions on
their respective restructurings take place. Under the forbearance agreements,
the senior creditors have, subject to certain conditions, refrained from
accelerating the senior loans or exercising other remedies against Genesis and
Multicare. During the forbearance periods, Genesis and Multicare have not made
scheduled interest and principal payments under the Genesis and Multicare Credit
Facilities. As a result of the uncertainty related to the covenant defaults and
corresponding remedies, amounts outstanding under the Multicare and Genesis
Credit Facilities and the Genesis Notes and the Multicare Notes have been
classified as a current liability at March 31, 2000. The forbearance periods for
both Genesis and Multicare expire on May 19, 2000. The Company is in discussions
to extend the forbearance periods. No assurance can be given that the
forbearance periods will be extended.
18
<PAGE>
There can be no assurances that the senior lenders or holders of the Genesis
Notes or Multicare Notes will approve any amendment or restructuring of the
Genesis and / or Multicare Credit Facilities or the Genesis Notes and / or the
Multicare Notes. The unaudited condensed consolidated financial statements do
not include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that may result from the outcome of the
uncertainty related to the covenant defaults and corresponding remedies.
If the senior lenders or holders of the Genesis Notes and / or the Multicare
Notes accelerate the obligations under the agreements, such events would have a
material adverse effect on the Company's liquidity and financial position. Under
such circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults, there can be
no assurance that the Company would succeed in formulating and consummating an
acceptable alternative financial structure.
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.
19
<PAGE>
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.
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.
20
<PAGE>
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:
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.
21
<PAGE>
Accounting Effects
Prior to the Multicare restructuring transaction, Genesis accounted for its
investment in Multicare using the equity method of accounting. Upon consummation
of the restructuring transaction, Genesis 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 March 31, 2000 compared to three months ended March 31, 1999
The Company's total net revenues for the quarter ended March 31, 2000 were
$604,843,000 compared to $464,619,000 for the quarter ended March 31, 1999, an
increase of $140,224,000 or 30%. Pharmacy and medical supply service revenue was
$232,942,000 for the quarter ended March 31, 2000 versus $231,901,000 for the
quarter ended March 31, 1999. Pharmacy and medical supply service revenues
increased approximately $7,700,000 due to net revenue growth with external
customers. This increase is offset by approximately $6,700,000 due to the
consolidation of Multicare's results with those of Genesis in the March 2000
period and the resulting elimination of pharmacy and medical supply service
revenues earned with the Multicare centers. Inpatient service revenue increased
$155,283,000 or 88% to $331,084,000 from $175,801,000. Of this increase,
approximately $159,642,000 is attributed to the consolidation of Multicare's
inpatient revenues in the quarter ended March 31, 2000, approximately $1,900,000
is attributed to one additional calendar day in the March 31, 2000 quarter due
to a leap year, and approximately $4,500,000 is attributed to volume growth in
the Company's Medicare census. These increases are offset by reduced revenue of
approximately $10,300,000 resulting from seven fewer eldercare centers in the
March 31, 2000 quarter compared to the March 31, 1999 quarter, and approximately
$3,300,000 is attributed to rate dilution in the Company's Medicare rate per
patient day as a result of PPS. The remaining increase of approximately
$2,800,000 is due to changes in other payor categories and rates. The Company's
average Medicare rate per patient day for the quarter ended March 31, 2000 was
approximately $288 compared to $312 for the quarter ended March 31, 1999. Total
patient days increased 947,940 to 2,170,145 during the quarter ended March 31,
2000 compared to 1,222,205 during the comparable period last year. Of this
increase, 1,020,464 patient days are attributed to the consolidation of
Multicare's inpatient business in the quarter ended March 31, 2000, and 13,284
days are attributed to one additional calendar day in the March 31, 2000 quarter
due to a leap year. These increases are offset by a reduction of 72,911 patient
days resulting from seven fewer eldercare centers in the March 31, 2000 quarter
compared to the March 31, 1999 quarter and the remaining decrease of 12,897 is
the result of a decline in overall occupancy. Other revenues decreased
approximately $16,100,000 from $56,917,000 to $40,817,000. Approximately
$14,200,000 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 March 31,
2000. Approximately $6,700,000 of this decline is attributed to the termination
of a capitation contract in the Company's Chesapeake region. These declines are
offset by increases in other revenue of approximately $4,800,000 attributed to
growth in the Company's rehabilitation therapy business.
22
<PAGE>
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $567,706,000 for the quarter ended March 31,
2000 compared to $412,409,000 for the quarter ended March 31, 1999, an increase
of $155,297,000 or 38%, of which approximately $112,900,000 is attributed to the
consolidation of Multicare's results with those of Genesis, approximately
$26,700,000 is attributed to an increase in certain charges described more fully
in the next two paragraphs, approximately $5,200,000 is attributed to one
additional calendar day in the quarter ended March 31, 2000 due to a leap year,
and approximately $26,500,000 is attributed to growth in cost of sales and
inflationary increases, principally labor related costs. These increases are
offset by reduced operating expenses of approximately $6,700,000 attributed to a
terminated capitation contract in the Company's Chesapeake region and $9,300,000
resulting from seven fewer eldercare centers operating in the March 31, 2000
quarter compared to the March 31, 1999 quarter.
During the quarter ended March 31, 2000, the Company began discussions with its
lenders under the Genesis and Multicare Credit Facilities to revise the
Company's capital structure. During the discussion period, Genesis and Multicare
did not make certain scheduled principal and interest payments under the Genesis
and Multicare Credit Facilities or certain scheduled interest payments under
certain of the Genesis senior subordinated debt agreements. In connection with
the potential debt restructuring, the Company incurred during the quarter ended
March 31, 2000 legal, bank, accounting and other professional fees of
approximately $5,000,000. As a result of the nonpayment of interest under the
Genesis Credit Facility, certain provisions under existing interest rate swap
arrangements with Citibank were triggered. Citibank notified Genesis that they
have elected to force early termination of the interest rate swap arrangements,
and have asserted a $28,300,000 obligation. The professional fees and interest
rate swap termination are reflected in the consolidated statement of operations
as debt restructuring and other charges.
During the quarter ended March 31, 2000, the Company decided to close an
underperforming 130 bed eldercare center resulting in a charge of approximately
$3,100,000 for certain closure costs and impaired assets of that center. During
the quarter ended March 31, 1999, the Company closed a 120 bed leased center
resulting in a charge of approximately $9,700,000 consisting of the present
value of future lease payments through the end of the lease term, a residual
lease obligation to be funded at the end of the lease term, severance costs and
other related closure costs. These charges are reflected in the consolidated
statement of operations as debt restructuring and other charges.
In the quarter ended March 31, 2000, approximately $33,700,000 of revenue, and a
corresponding amount of expense, was eliminated as a result of the consolidation
of Genesis and Multicare.
Depreciation and amortization expense increased $10,278,000, of which $9,497,000
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 March 31, 1999.
Lease expense increased $2,867,000, of which $3,284,000 is attributed to the
consolidation of Multicare's results with those of Genesis. This increase is
offset by $955,000 attributed to six fewer eldercare centers leased during the
quarter ended March 31, 2000 compared to the quarter ended March 31, 1999,
offset by normal increases in lease rates.
Interest expense increased $28,269,000, of which $18,634,000 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 $6,100,000 recorded during the quarter ended March 31, 2000
principally represents Genesis' Multicare joint venture partners' 56.4% interest
in the Multicare net loss for the period.
23
<PAGE>
Preferred stock dividends increased $6,573,000 to $11,375,000 during the quarter
ended March 31, 2000 compared to $4,802,000 during the quarter ended March 31,
1999. This increase is attributed to the issuance of Series H and Series I
Preferred Stock in mid-November, 1999. The March 31, 1999 preferred stock
dividends were restated, resulting in an increase of $482,000, 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.
Six months ended March 31, 2000 compared to six months ended March 31, 1999
The Company's total net revenues for the six months ended March 31, 2000 were
$1,191,727,000 compared to $943,823,000 for the six months ended March 31, 1999,
an increase of $247,904,000 or 26%. Pharmacy and medical supply service revenues
were $456,849,000 for the six months ended March 31, 2000 versus $468,118,000
for the six months ended March 31, 1999. Pharmacy and medical supply service
revenues increased approximately $2,100,000 due to net revenue growth with
external customers. This increase is offset by approximately $13,400,000 due to
the consolidation of Multicare's results with those of Genesis in the March 2000
period and the resulting elimination of pharmacy and medical supply service
revenues earned with the Multicare centers. Inpatient service revenue increased
$305,578,000 or 87% to $657,411,000 from $351,833,000. Of this increase,
approximately $316,615,000 is attributed to the consolidation of Multicare's
inpatient revenues in the six months ended March 31, 2000, approximately
$1,900,000 is attributed to one additional calendar day in the March 31, 2000
period due to a leap year, and approximately $9,700,000 is attributed to volume
growth in the Company's Medicare census. These increases are offset by reduced
revenue of approximately $19,400,000 resulting from seven fewer eldercare
centers in the March 31, 2000 period compared to the March 31, 1999 period, and
approximately $5,400,000 is attributed to rate dilution in the Company's
Medicare rate per patient day as a result of PPS. The remaining increase of
approximately $2,200,000 is due to shifts in other payor categories and rates.
The Company's average Medicare rate per patient day for six months ended March
31, 2000 was approximately $289 compared to $308 for the six months ended March
31, 1999. Total patient days increased 1,907,452 to 4,380,984 during the six
months ended March 31, 2000 compared to 2,473,532 during the comparable period
last year. Of this increase, 2,049,602 patient days are attributed to the
consolidation of Multicare's inpatient business in the six months ended March
31, 2000, and 13,284 days are attributed to one additional calendar day in the
March 31, 2000 quarter due to a leap year. These increases are offset by a
reduction of 130,304 patient days resulting from seven fewer eldercare centers
in the March 31, 2000 period compared to the March 31, 1999 period and the
remaining decrease of 25,130 is the result of a decline in overall occupancy.
Other revenues decreased approximately $46,405,000 from $123,872,000 to
$77,467,000. 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 $29,500,000 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 six months ended March 31, 2000. Approximately $13,100,000 of this
decline is attributed to the termination of a capitation contract in the
Company's Chesapeake region. The remaining increase in other revenue of
approximately $1,500,000 is attributed to the Company's other health care
services business lines, principally the Company's rehabilitation therapy
business.
The Company's operating expenses before depreciation, amortization, lease
expense, and interest expense were $1,088,840,000 for the six months ended March
31, 2000 compared to $820,459,000 for the six months ended March 31, 1999, an
increase of $268,381,000 or 33%, of which approximately $226,500,000 is
attributed to the consolidation of Multicare's results with those of Genesis,
approximately $34,412,000 is attributed to an increase in certain charges
described more fully in the next three paragraphs, approximately $4,500,000 is
attributed to one additional calendar day in the quarter ended March 31, 2000
due to a leap year, approximately $1,300,000 is attributed to the Company's
adoption of a new accounting principle that requires start-up costs be expensed
when incurred, and approximately $32,200,000 is attributed to growth in cost of
sales and inflationary increases, principally labor related costs. These
increases are offset by reduced operating expenses of approximately $13,100,000
attributed to a terminated capitation contract in the Company's Chesapeake
region and $17,400,000 resulting from seven fewer eldercare centers operating in
the six months ended March 31, 2000 compared to the six months ended March 31,
1999.
24
<PAGE>
During the quarter ended March 31, 2000, the Company began discussions with its
lenders under the Genesis and Multicare Credit Facilities to revise the capital
structures of the respective companies. During the discussion period, Genesis
and Multicare did not make certain scheduled principal and interest payments
under the Genesis and Multicare Credit Facilities or certain scheduled interest
payments under certain Genesis senior subordinated debt agreements. In
connection with the potential debt restructuring, the Company incurred during
the quarter ended March 31, 2000 legal, bank, accounting and other professional
fees of approximately $5,000,000. As a result of the nonpayment of interest
under the Genesis Credit Facility, certain provisions under existing interest
rate swap arrangements with Citibank were triggered. Citibank notified Genesis
that they have elected to force early termination of the interest rate swap
arrangements, and have asserted a $28,300,000 obligation. The professional fees
and interest rate swap termination are reflected in the consolidated statement
of operations as debt restructuring and other charges.
During the quarter ended March 31, 2000, the Company decided to close an
underperforming 130 bed eldercare center resulting in a charge of approximately
$3,100,000 for certain closure costs and impaired assets of that center. During
the quarter ended March 31, 1999, the Company closed a 120 bed leased center
resulting in a charge of approximately $9,700,000 consisting of the present
value of future lease payments through the end of the lease term, a residual
lease obligation to be funded at the end of the lease term, severance costs and
other related closure costs. These charges are reflected in the consolidated
statement of operations as debt restructuring and other charges.
The Company also 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 elected to
surrender certain Genesis stock options for unrestricted shares of Genesis
Common Stock. The Redemption Plan was approved by shareholder vote at the
Company's 2000 Annual Meeting. As a result of the Company's financial
condition and other considerations, the Company determined not to proceed with
the Redemption Program. The elections made by optionees would have resulted in
the redemption of approximately 4,600,000 stock options in exchange for
approximately 4,000,000 shares of Genesis common stock.
In the six months ended March 31, 2000, approximately $63,200,000 of revenue,
and a corresponding amount of expense, was eliminated as a result of the
consolidation of Genesis and Multicare.
In connection with the Multicare joint venture restructuring, Genesis recorded a
non-cash charge of approximately $420,000,000 representing the estimated cost to
terminate the Put in consideration for the issuance of the Series H Preferred
and Series I Preferred. The cost to terminate the Put was estimated based upon
the Company's assessment that no incremental value was realized by Genesis as a
result of the changes in the equity ownership structure of Multicare brought
about by the restructuring of the Multicare joint venture.
Depreciation and amortization expense increased $21,589,000, of which
$19,100,000 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 March 31, 1999.
Lease expense increased $6,027,000, of which $6,535,000 is attributed to the
consolidation of Multicare's results with those of Genesis. This increase is
offset by $1,600,000 attributed to six fewer eldercare centers leased during the
six months ended March 31, 2000 compared to the six months ended March 31, 1999,
offset by normal increases in lease rates.
Interest expense increased $53,722,000, of which $36,963,000 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.
25
<PAGE>
Minority interest of $13,027,000 recorded during the six months ended March 31,
2000 principally represents Genesis' Multicare joint venture partners' 56.4%
interest in the Multicare net loss for the period.
Effective October 1, 1999, Genesis adopted the provisions of the American
Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be
expensed as incurred. The cumulative effect of expensing all unamortized
start-up costs at October 1, 1999 was $16,400,000 pre tax and $10,400,000 after
tax.
Preferred stock dividends increased $9,968,000. This increase is attributed to
the issuance of Series H and Series I Preferred Stock in mid-November, 1999.
Preferred stock dividends were restated for the six months ended March 31, 1999,
resulting in an increase of $976,000, 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
The accompanying unaudited condensed financial statements have been prepared
assuming that the Company will continue as a going concern with the realization
of the value of assets and the settlement of liabilities and commitments in the
normal course of business. The Company has experienced significant losses and
has a working capital deficit of $1,800,000,000 at March 31, 2000 due primarily
to the classification of certain senior and senior subordinated debt as a
current liability resulting from the Company's violation of certain covenants
under the Genesis Credit Facility and the Multicare Credit Facility as well as
certain of the Genesis Notes as a result of the nonpayment of interest and
principal under the Genesis Credit Facility and the Multicare Credit Facility,
and the nonpayment of interest under certain of the Genesis Notes. In addition,
the Company has received default notices from ElderTrust, a real estate
investment trust, alleging certain payment and nonpayment related defaults
concerning certain mortgage loans and operating leases.
Management has begun discussions with the Company's lenders under the Genesis
and Multicare Credit Facilities and certain holders of the Genesis Notes and the
Multicare Notes to revise the capital structures of the respective companies.
Genesis and Multicare have been granted forbearance periods while discussions on
their respective restructurings take place. Under the forbearance agreements,
the senior creditors have, subject to certain conditions, refrained from
accelerating the senior loans or exercising other remedies against Genesis and
Multicare. During the forbearance periods, Genesis and Multicare have not made
scheduled interest and principal payments under the Genesis and Multicare Credit
Facilities. As a result of the uncertainty related to the covenant defaults and
corresponding remedies, amounts outstanding under the Multicare and Genesis
Credit Facilities and the Genesis Notes and the Multicare Notes have been
classified as a current liability at March 31, 2000. The forbearance periods for
both Genesis and Multicare expire on May 19, 2000. The Company is in discussions
to extend the forbearance periods. No assurance can be given that the
forbearance periods will be extended.
There can be no assurances that the senior lenders or holders of the Genesis
Notes or Multicare Notes will approve any amendment or restructuring of the
Genesis and / or Multicare Credit Facilities or the Genesis Notes and / or the
Multicare Notes. The unaudited condensed consolidated financial statements do
not include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that may result from the outcome of the
uncertainty related to the covenant defaults and corresponding remedies.
If the senior lenders or holders of the Genesis Notes and / or the Multicare
Notes accelerate the obligations under the agreements, such events would have a
material adverse effect on the Company's liquidity and financial position. Under
such circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults, there can be
no assurance that the Company would succeed in formulating and consummating an
acceptable alternative financial structure. In addition, in light of the
Company's current financial condition and the existence of certain defaults, the
Company may need to seek protection under federal bankruptcy law.
26
<PAGE>
The Company reported a working capital deficit of $1,819,504,000 at March 31,
2000, of which approximately $2,120,000,000 is due to the reclassification of
debt under the Genesis Credit Facility, the Multicare Facility, the Genesis
Notes and the Multicare Notes from long-term liabilities to current liabilities
as a result of the Company's' default under certain of these debt agreements.
Genesis' cash flow from operations for the six months ended March 31, 2000 was a
use of cash of $33,506,000 compared to a use of cash of $8,124,000 for the six
months ended March 31, 1999 principally due to increased losses and the timing
of vendor payments, offset by the impact of the Company's non-payment of
interest previously discussed. At March 31, 2000, included in accounts
receivable were approximately $5,700,000 due from HCR Manor Care (see "Legal
Proceedings") and approximately $21,500,000 due from Mariner Post-Acute Network,
Inc. and Mariner Health Group, Inc. ("Mariner") for the provision of certain
ancillary services rendered. 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.
At March 31, 2000, $54,300,000 of trade receivables and payables between Genesis
and Multicare were eliminated in consolidation.
Investing activities for the six months ended March 31, 2000 include
approximately $28,000,000 of capital expenditures primarily related to
betterments and expansion of eldercare centers and investment in data processing
hardware and software. Of the capital expenditures, approximately $8,700,000
relates to the construction, renovation and expansion of assisted living
facilities.
Financing activities during the six months ended March 31, 2000 were positively
impacted by the Company's non-payment of approximately $15,275,000 of principal
obligations under the Genesis and Multicare Credit Facilities. In addition, the
Company received proceeds of $50,000,000 for the issuance of common stock to
Cypress and TPG in connection with the Multicare joint venture restructuring
transaction.
Genesis anticipates an adverse effect on operating cash flow beginning in the
third quarter of 2000 due to an increase in the cost of certain of its insurance
programs and the timing of funding new policies. Rising costs of eldercare
malpractice litigation involving nursing care operators and losses stemming from
these malpractice lawsuits has caused many insurance providers to raise the cost
of insurance premiums or refuse to write insurance policies for nursing homes.
Accordingly, the costs of general and professional liability and property
insurance premiums will increase. In addition, as a result of the Company's
current financial condition it is unable to continue certain self insured
programs and has replaced these programs with outside insurance carriers.
In April of 2000, the Company terminated the Execuflex Plan and the Vitalink
Nonqualified Plan. All amounts in these plans were distributed to the
participants with no material effect to the Company's cash flow.
27
<PAGE>
Credit Facilities and Other Debt
Genesis Credit Facility
Genesis entered into a fourth amended and restated credit agreement on August
20, 1999 pursuant to which the lenders amended and restated the credit agreement
under which the lenders provided Genesis and its subsidiaries (excluding
Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit
Facility") for the purpose of: refinancing and funding interest and principal
payments of certain existing indebtedness; funding permitted acquisitions; and
funding Genesis' and its subsidiaries' working capital for general corporate
purposes, including fees and expenses of transactions. The fourth amended and
restated credit agreement made the financial covenants for certain periods less
restrictive, required minimum asset sales, increased the Applicable Margin
(defined below), provided the lenders of the Genesis Credit Facility a
collateral interest in certain real and personal property of the Company, and
generally reallocated the proceeds thereof among the Tranche II Facility
(defined below), the Genesis Revolving Facility (defined below) and the Genesis
Term Loans (defined below) and permitted the restructuring of the Put/Call
Agreement, as defined. Additionally, the fourth amended and restated credit
agreement provides for $40,000,000 of additional borrowing capacity, (the
"Tranche II Facility") available to the Company beginning in December 1999.
The Genesis Credit Facility consists of three term loans with original balances
of $200,000,000 each (collectively, the "Genesis Term Loans"), and a
$650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a
$40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly
installments through 2005. The Genesis Term Loans consist of (i) an original six
year term loan maturing in September 2003 with an outstanding balance of
$110,445,000 at March 31, 2000 (the "Genesis Tranche A Term Facility"); (ii) an
original seven year term loan maturing in September 2004 with an outstanding
balance of $151,131,000 at March 31, 2000 (the "Genesis Tranche B Term
Facility"); and (iii) an original eight year term loan maturing in June 2005
with an outstanding balance of $151,378,000 at March 31, 2000 (the "Genesis
Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding
balance of $645,834,000 (excluding letters of credit) at March 31, 2000, becomes
payable in full on September 30, 2003. At March 31, 2000, the outstanding
balance of the Tranche II Facility was $40,000,000. The aggregate outstanding
balance of the Genesis Credit Facility at March 31, 2000 is classified as a
current liability.
The Genesis Credit Facility is secured by a first priority security interest in
all of the stock, partnership interests and other equity of all of Genesis'
present and future subsidiaries (including Genesis ElderCare Corp.) other than
the stock of Multicare and its subsidiaries, and also by first priority security
interests in substantially all personal property, excluding inventory, including
accounts receivable, equipment and general intangibles. Mortgages on
substantially all of Genesis' subsidiaries' real property were also granted.
Loans under the Genesis Credit Facility bear, at Genesis' option, interest at
the per annum Prime Rate as announced by the administrative agent, or the
applicable Adjusted LIBO Rate plus, in either event, a margin (the "Applicable
Margin") that is dependent upon a certain financial ratio test. Loans under the
Genesis Tranche A Term Facility and Genesis Revolving Facility have an
Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans.
Loans under the Genesis Tranche B Term Facility have an Applicable Margin of
1.75% for Prime Rate loans and 3.50% for LIBO Rate loans. Loans under the
Genesis Tranche C Term Facility have an Applicable Margin of 2.00% for Prime
Rate loans and 3.75% for LIBO Rate loans. Subject to meeting certain financial
ratios, the above referenced interest rates are reduced.
28
<PAGE>
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Genesis Credit Facility, the Company is no longer entitled to elect a LIBO Rate.
The Genesis Credit Facility contains a number of covenants that, among other
things, restrict the ability of Genesis and its subsidiaries to dispose of
assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Genesis and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; cause Genesis and its affiliates to
maintain certain agreements including the Management Agreement and the Put/Call
Agreement (as amended), and to maintain corporate separateness; and cause
Genesis to comply with the terms of other material agreements, as well as to
comply with usual and customary covenants for transactions of this nature.
Multicare Credit Facility
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 (the "Multicare Credit Facility") which made the financial covenants
for certain periods less restrictive, permitted a portion of the proceeds of
assets sales to repay indebtedness under the Multicare Tranche A Term Facility
(defined below) and Multicare Revolving Facility (defined below), permitted the
restructuring of the Put/Call Agreement, increased the interest rates applying
to the Multicare Term Loans (defined below) and the Multicare Revolving
Facility, and increased the level of management fee Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
The Multicare Credit Facilities consist of three term loans with an aggregate
original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and
a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The
Multicare Term Loans amortize in quarterly installments through 2005. The loans
consist of (i) an original six year term loan maturing in September 2003 with an
outstanding balance of $139,301,000 at March 31, 2000 (the "Multicare Tranche A
Term Facility"); (ii) an original seven year term loan maturing in September
2004 with an outstanding balance of $145,893,000 at March 31, 2000 (the "Tranche
B Term Facility"); and (iii) and an original eight year term loan maturing in
June 2005 with an outstanding balance of $48,382,000 at March 31, 2000 (the
"Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an
outstanding balance of $123,534,000 at March 31, 2000, becomes payable in full
on September 30, 2003. The aggregate outstanding balance of the Multicare Credit
Facility at March 31, 2000 is classified as a current liability.
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.
29
<PAGE>
Effective with the Amendment on August 20, 1999, loans under the Multicare
Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at
a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare
Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin
up to 4.25%; and loans under the Multicare Revolving Credit Facility bear
interest at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to
meeting certain financial covenants, the above-referenced interest rates will be
reduced.
The senior creditors agreed during the forbearance period to waive the
imposition of the Default Rate. However, effective with the default under the
Multicare Credit Facility, the Company shall no longer be entitled to elect a
LIBO Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term
Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%;
loans under the Multicare Tranche B Term Facility bear interest at a rate equal
to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C
Term Facility bear interest at a rate equal to Prime Rate plus a margin up to
2.5%;and loans under the Multicare Revolving Credit Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.0%.
The Company anticipates selling the assets of 14 eldercare centers in Ohio for
approximately $36,000,000 in accordance with a signed letter of intent. All net
proceeds of the disposition of assets located in Ohio are expected to be applied
against the Multicare Credit Facility at the time outstanding on a pro rata
basis in accordance with the relative aggregate principal amount thereof held by
each applicable lender. There can be no assurances that any such sales of assets
can be consummated.
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. The aggregate outstanding balance of
the Genesis Notes and the Multicare Notes at March 31, 2000 is classified as a
current liability.
Certain of these and other of Genesis' and Multicare's outstanding loans contain
covenants which, without the prior consent of the lenders, limit certain of
Genesis' and Multicare's activities. Such covenants contain limitations relating
to the merger or consolidation of Genesis or Multicare and Genesis' and
Multicare's ability to secure indebtedness, make guarantees, grant security
interests and declare dividends. In addition, certain of Genesis and Multicare's
outstanding loans require that Genesis and Multicare maintain certain minimum
levels of cash flow and debt service coverage, and must maintain certain ratios
of liabilities to net worth. Under certain of these loans, Genesis is restricted
from paying cash dividends on the Common Stock, unless certain conditions are
met. Genesis has not declared or paid any cash dividends on its Common Stock
since its inception.
30
<PAGE>
The Multicare Restructuring
In connection with the restructuring of the Multicare transaction, Genesis
entered into a Restructuring Agreement with Cypress, TPG and Nazem to
restructure their joint investment in Genesis ElderCare Corp., the parent
company of Multicare. Pursuant to the Restructuring Agreement the Put under the
Put/Call Agreement was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock, which was issued to
Cypress, TPG and Nazem, or their affiliated investment funds,
in proportion to their respective investments in Genesis
ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, which
was issued to Cypress, TPG and Nazem, or their affiliated
investment funds, in proportion to their respective
investments in Genesis ElderCare Corp.
The Series H Preferred are convertible into 27,850,286 shares of Common Stock.
The Series I Preferred are convertible into 20,149,410 shares of non-voting
Common Stock. The Series H and I Preferred have an initial dividend of 5.00%,
which increases 0.05% beginning the sixth anniversary date and an additional
0.05% each anniversary date thereafter through the 12th anniversary date, to a
maximum of 8.5%.
Cypress and TPG invested in the aggregate, directly or through affiliated
investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of
Genesis common stock and a ten year warrant to purchase 2,000,000 shares of
Genesis common stock at an exercise price of $5.00 per share.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997
Balanced Budget Act and the Balanced Budget Refinement Act, has resulted in
continuing changes in the Medicare and Medicaid reimbursement programs which has
adversely impacted us. The changes have limited, and are expected to continue to
limit, payment increases under these programs. Also, the timing of payments made
under the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Within the statutory framework
of the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings and interpretations which may further affect payments
made under those programs. Further, the federal and state governments may reduce
the funds available under those programs in the future or require more stringent
utilization and quality reviews of eldercare centers or other providers. There
can be no assurances that adjustments from Medicare or Medicaid audits will not
have a material adverse effect on us.
Anticipated Impact of Healthcare Reform
The Genesis eldercare centers began implementation of 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 have already and 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 transition will result in incremental annualized revenue
of approximately $2,400,000, which will in part be offset by the continued
phase-in of PPS at other facilities that have not transitioned to the full
federal rate.
31
<PAGE>
Other
In August 1998, in connection with the Vitalink Transaction, the Company issued
the Series G Preferred. The Series G Preferred has a face value of approximately
$295,100,000 and an initial dividend of 5.9375% and generally is not
transferable without our consent. The dividend rate increases on the fourth,
fifth, ninth, eleventh and thirteenth anniversary dates to 6.1875%, 6.6250%,
7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is convertible
into Genesis common stock, par value $.02 per share, at $37.20 per share and it
may be called for conversion after April 26, 2001, provided the price of common
stock reaches certain trading levels and after April 26, 2002, subject to a
market-based call premium. At March 31, 2000 there were approximately
$25,000,000 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.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles, and the number of calendar days
in a given quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. Genesis has
implemented cost control measures to attempt to limit increases in operating
costs and expenses but cannot predict its ability to control such operating cost
increases in the future.
Year 2000 Compliance
The Company did not experience any material interruptions of business as a
result of the Year 2000 computer problem.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
intends to adopt this accounting standard as required. The adoption of this
standard is not expected to have a material impact on the Company's earnings or
financial position.
32
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes. Historically, the
Company has employed established policies and procedures to manage its exposure
to changes in interest rates. The Company's objective in managing its exposure
to interest rate changes is to limit the impact of such changes on earnings and
cash flows and to lower its overall borrowing costs. To achieve its objectives,
the Company primarily uses interest rate swaps to manage net exposure to
interest rate changes related to its portfolio of borrowings. Notional amounts
of interest rate swap agreements are used to measure interest to be paid or
received relating to such agreements and do not represent an amount of exposure
to credit loss. The fair value of interest rate swap agreements is the estimated
amount the Company would receive or pay to terminate the swap agreement at the
reporting date, taking into account current interest rates. As a result of the
non-payment of interest under the Genesis Credit Facility, certain provisions
under existing interest rate swap arrangements with Citibank were triggered.
Citibank notified Genesis that they have elected to force early termination of
the interest rate swap arrangements, and have asserted a $28,300,000 obligation.
The interest rate swap termination charge is reflected in the condensed
consolidated statement of operations as debt restructuring and other charges.
At March 21, 2000, Genesis has no interest rate swap agreements outstanding.
33
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Genesis and Vitalink Actions Against HCR Manor Care
On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink
Pharmacy Services (d/b/a NeighborCare(R), a subsidiary of
Genesis, filed multiple lawsuits requesting injunctive relief
and compensatory damages against HCR Manor Care, Inc. ("HCR
Manor Care") and two of its subsidiaries and principals. The
lawsuits arise from HCR Manor Care's threatened termination of
long term pharmacy services contracts effective June 1, 1999.
Vitalink filed a complaint against HCR Manor Care and two of
its subsidiaries in Baltimore City, Maryland circuit court
(the "Maryland State Court Action"). Genesis filed a complaint
against HCR Manor Care and two of its subsidiaries and
principals in federal district court in Delaware including,
among other counts, securities fraud (the "Delaware Federal
Action"). Vitalink has also instituted an arbitration action
before the American Arbitration Association (the
"Arbitration"). In these actions, Vitalink is seeking a
declaration that it has a right to provide pharmacy, infusion
therapy and related services to all of HCR Manor Care's
facilities and a declaration that HCR Manor Care's threatened
termination of the long term pharmacy service contracts was
unlawful. Genesis and Vitalink also seek over $100,000,000 in
compensatory damages and enforcement of a 10-year
non-competition clause.
Genesis acquired Vitalink from Manor Care in August 1998. In
1991, Vitalink and Manor Care had entered into long- term
master pharmacy, infusion therapy and related services
agreements which gave Vitalink the right to provide pharmacy
services to all facilities owned or licensed by Manor Care and
its affiliates. In 1998, the terms of the pharmacy service
agreements were extended to September, 2004. Under the two
master service agreements, Genesis and Vitalink receive
revenues at the rate of approximately $100,000,000 per year.
By agreement dated May 13, 1999, the parties agreed to
consolidate the Maryland State Court Action relating to the
master service agreements with the Arbitration matter.
Accordingly, on May 25, 1999, the Maryland State Court Action
was dismissed voluntarily. Until such time as a final decision
is rendered in said Arbitration, the parties have agreed to
maintain the master service agreements in full force and
effect.
HCR Manor Care and its subsidiaries have pleaded counterclaims
in the Arbitration seeking damages for Vitalink's alleged
overbilling for products and services provided to HCR Manor
Care, a declaration that HCR Manor Care had the right to
terminate the master service agreements, and a declaration
that Vitalink does not have the right to provide pharmacy,
infusion therapy and related services to facilities owned by
HCR prior to its merger with Manor Care. According to an
expert report submitted by HCR Manor Care on May 8, 2000, HCR
Manor Care is seeking $17,800,000 in compensatory damages for
alleged overbilling by Vitalink between September 1, 1998 and
March 31, 2000. On January 14, 2000, HCR Manor Care moved to
dismiss Vitalink's claims in the Arbitration that it has a
right to provide pharmacy and related services to the HCR
Manor Care facilities not previously under the control of
Manor Care. Oral argument on that motion will take place on
May 15, 2000. Trial in the Arbitration is scheduled to begin
June 12, 2000.
34
<PAGE>
On June 29, 1999, defendants moved to dismiss or stay Genesis'
securities fraud complaint filed in the Delaware Federal
Action. On March 22, 2000, HCR Manor Care's motion was denied
with respect to its motion to dismiss the compliant, but was
granted to the extent that the action was stayed pending a
decision in the Arbitration. As a result, Genesis still
maintains its Delaware federal court complaint.
The Vitalink Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel,
filed an additional complaint against Omnicare Inc.
("Omnicare") and Heartland Healthcare (a joint venture between
Omnicare and HCR Manor Care) seeking injunctive relief and
compensatory and punitive damages. The complaint includes
counts for tortuous interference with Vitalink's contractual
rights under its three exclusive long-term service contracts
with HCR Manor Care. On November 12, 1999, in response to a
motion filed by the defendants, that action was stayed pending
a decision in the Arbitration.
The HCR Manor Care Action Against Genesis in Delaware
On August 27, 1999, Manor Care Inc., a wholly owned subsidiary
of HCR Manor Care, Inc., filed a lawsuit against Genesis in
federal district court in Delaware based upon Section 11 and
Section 12 of the Securities Act. Manor Care Inc. alleges that
in connection with the sale of the Genesis Series G Preferred
Stock issued as part of the purchase price to acquire
Vitalink, Genesis failed to disclose or made
misrepresentations related to the effects of the conversion to
the prospective payment system, the restructuring of the
Multicare joint venture, the impact of the acquisition of
Multicare, the status of Genesis labor relations, Genesis'
ability to declare dividends on the Series G Preferred Stock
and information relating to the ratio of combined fixed
charges and preference dividends to earnings. Manor Care Inc.
seeks, among other things, compensatory damages and rescission
of the purchase of the Series G Preferred Stock. On November
23, 1999, Genesis moved to dismiss this action on the ground,
among others, that Manor Care's complaint failed to plead
fraud with particularity. On January 18, 2000, Genesis moved
to consolidate this action with the action brought against HCR
Manor Care in Delaware federal court. Both of these motions
have been fully submitted and are awaiting decision.
The HCR Manor Care Action Against Genesis in Ohio
On December 22, 1999, Manor Care filed a lawsuit against
Genesis and others in the United States District Court for the
Northern District of Ohio. Manor Care alleges, among other
things, that the Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred") and
Series I Senior Convertible Exchangeable Participating
Cumulative Preferred Stock (the "Series I Preferred") were
issued in violation of the terms of the Series G Preferred and
the Rights Agreement dated as of April 26, 1998 between
Genesis and Manor Care. Manor Care seeks, among other things,
damages and rescission or cancellation of the Series H and
Series I Preferred. On February 29, 2000, Genesis moved to
dismiss this action on the ground, among others, that Manor
Care's complaint failed to state a cause of action. That
motion will be fully submitted on May 19, 2000.
Genesis is not able to predict the results of such litigation.
However, if the outcome is unfavorable to us, and the claims
of HCR Manor Care are upheld, such results would have a
material adverse effect on our financial position. See
"Cautionary Statement Regarding Forward-Looking Statements."
35
<PAGE>
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
As of March 31, 2000, Genesis and Multicare did not made
scheduled interest and principal payments in the amount of
approximately $36,400,000 under the Genesis and Multicare
Credit Facilities and a lease financing facility. Genesis and
Multicare are also in default of other covenants under the
Genesis and Multicare Credit Facilities.
Genesis has not made scheduled interest payments in the amount
of approximately $5,800,000 due on April 1, 2000 under its
$125,000,000, 9.25% Senior Subordinated Notes Due 2006.
Item 4. Submission of Matters to a Vote of Security Holders
On March 16, 2000, Genesis held its Annual Meeting of
Shareholders and the following actions were taken:
o Stephen E. Luongo, Michael R. Walker, Phillip Gerbino,
Pier C. Borra and Stephen J. Powers were elected
directors; the following directors' terms of office
continued after the meeting: Roger C. Lipitz, Alan B.
Miller, Jack R. Anderson, Richard R. Howard and Samuel
H. Howard. The votes for each nominee were as follows:
--------------------------------------------------------------
For Withhold Authority
--------------------------------------------------------------
Stephen E. Luongo 62,638,240 3,841,981
--------------------------------------------------------------
Michael R. Walker 63,320,255 3,159,966
--------------------------------------------------------------
Phillip Gerbino 63,871,430 2,608,791
--------------------------------------------------------------
Pier C. Borra 586,240 0
--------------------------------------------------------------
Stephen J. Powers 586,240 0
--------------------------------------------------------------
o Amendments to Genesis' Non-Employee Director Stock
Option Plan which: (1) increase the number of shares
issuable under the Plan by 1,650,000 shares to an
aggregate of 1,875,000 shares and (2) increase the
number of shares to be granted annually to each
non-employee director from 4,500 to 15,000 per year;
were approved with 45,535,254 votes cast for; 2,652,191
votes cast against with zero abstentions and 36,045,864
non votes;
o A stock option redemption program under which Genesis
employees and directors may elect to surrender Genesis
stock options for unrestricted shares of Genesis Common
Stock were approved with 43,497,234 votes cast for,
4,691,099 cast against with 177,402 abstentions and
36,045,864 non votes; and
o Amendments to Genesis' Amended and Restated Employee
Stock Option Plan and the Director Plan to provide that
the number of issuable shares under the Employee Stock
Option Plan will be increased by the number of options
surrendered under the stock redemption program, so that
the total number of shares issuable under the Employee
Stock Option Plan will remain at the current level of
6,750,000 were approved with 41,738,650 votes cast for,
6,446,610 cast against with 180,474 abstentions and
36,045,865 non votes.
36
<PAGE>
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
27 Financial Data Schedule
99.1 Forbearance Agreement, dated as of March 20, 2000,
among Genesis Health Ventures, Inc., certain
Subsidiaries thereof, Mellon Bank, N.A. as
Administrative Agent, Issuer of Letters of Credit,
Collateral Agent and Synthetic Lease Facility Agent,
Citicorp USA, Inc. as Syndication Agent, First Union
National Bank as Documentation Agent, Bank of
America, N.A. as Syndication Agent, and the Lenders
and Secured Parties.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated
March 21, 2000, reporting its announcement that it
had begun restructuring discussions with its senior
lenders and that it did not expect to make scheduled
payments due on its senior and subordinated debt
during the discussion period. The Current Report on
Form 8-K does not include financial statements.
37
<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: May 15, 2000 /s/ George V. Hager, Jr.
---------------------------------
George V. Hager, Jr.
Executive Vice President and Chief Financial Officer
38
<PAGE>
Exhibit 99.1
FORBEARANCE AGREEMENT
(GENESIS HEALTH VENTURES, INC.)
FORBEARANCE AGREEMENT, dated as of March 20, 2000, (this "Forbearance
Agreement") among Genesis Health Ventures, Inc., certain Subsidiaries thereof,
Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of Credit,
Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA, Inc. as
Syndication Agent, First Union National Bank as Documentation Agent, Bank of
America, N.A. as Syndication Agent, and the Lenders and Secured Parties referred
to below.
Reference is made to that certain Fourth Amended and Restated Credit
Agreement, dated as of August 20, 1999, among Genesis Health Ventures, Inc.,
certain Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent and
Issuer of Letters of Credit, First Union National Bank as Documentation Agent,
Citicorp USA, Inc. as Syndication Agent, Bank of America, N.A. as Syndication
Agent and the Lenders referred to therein (the "Credit Agreement") and to the
other Loan Documents entered into in connection therewith. Capitalized terms not
otherwise defined herein are used as defined in the Credit Agreement, the
Collateral Agency Agreement referred to therein or in the other Loan Documents
referred to therein.
WHEREAS, a meeting was held on March 14, 2000 in which Genesis
presented certain information and plans (the "Presentation") to the Lenders and
other Secured Parties including, among other things, that it wishes to
restructure certain of its Indebtedness and that there is a possibility that it
will be unable to make certain payments on Indebtedness due to the Lenders and
other Secured Parties on a timely basis;
WHEREAS, the Borrowers have requested an opportunity to more fully
develop and effect certain proposals discussed at that meeting;
WHEREAS, the Lenders and other Secured Parties are willing to accede to
the request of the Borrowers under the circumstances referred to below on the
terms and conditions set forth below;
NOW THEREFORE, the undersigned hereby agree as follows:
1. Definitions. The following terms shall have the meanings specified
herein.
a. "Forbear" means to refrain from accelerating the Loans or other
Obligations or exercising remedies, whether arising by contract, at law or in
equity, under the Loan Documents or otherwise, against the Borrowers or
Collateral or Additional Security or withdrawing or freezing funds in deposit or
other accounts pursuant to set-off rights, rights to charge such accounts or
other similar rights, whether arising under the Loan Documents (including
Section 1.6(c) (Authorization to Charge Accounts) or 12.18 (Set-Off) of the
Credit Agreement) or otherwise or taking similar action or demanding that the
Borrowers comply with
<PAGE>
Section 9.2(a)(iii) of the Credit Agreement (but does not preclude cash
management functions and usual and customary payments made in connection
therewith).
b. "Specified Defaults" means the occurrence or existence of any
Defaults or Events of Default (or similar terms under any Loan Documents)
arising out of any of the following events or conditions:
(i) the failure of the Borrowers to pay any principal or interest
on the Loans (as more fully set forth in Sections 9.1(a) and (b) of the Credit
Agreement);
(ii) the failure of the Borrowers to generally pay debts as they
mature, or pay any subordinated obligations, Synthetic Lease Facility
obligations or other Indebtedness or otherwise default under any such
Indebtedness (including, without limitation, events referred to in Section
9.1(g)(i), (iii) or (iv) of the Credit Agreement unless such events constitute a
separate Event of Default under the Credit Agreement by virtue of a provision
other than Section 9.1(g), in each case so long as the holders of the
subordinated obligations, the Synthetic Lease Facility obligations or other
Indebtedness do not take any action to enforce remedies against the Borrowers or
collateral, if any;
(iii) any default in the financial covenants set forth in Article
7 of the Credit Agreement;
(iv) any Event of Default solely by reason of Section 9.1(j) of
the Credit Agreement (Material Adverse Effect) already disclosed to the Lenders
in writing or in the Presentation;
(v) the failure of the Borrowers to provide cash collateral in
connection with Letters of Credit (i.e., as existing or extended) pursuant to
Section 3.1(h) and 9.2(a) (iii) of the Credit Agreement;
(vi) the failure to pay any commitment fees, Letter of Credit
fees, the Administrative Agent's regular fees and similar fees (but not the
failure to pay costs and expenses);
(vii) any Event of Default that has occurred or may occur under
either the Pledge Agreement or the Security Agreement solely as such defined
term relates to a Default or Event of Default under the Credit Agreement or any
other Loan Document that constitutes a Specified Default as set forth above; and
(viii) any failure by any of the Loan Parties to perform its
obligations under the Loan Documents which failure constitutes a Specified
Default referred to in clauses (i) through (vii) above.
2. Forbearance and Waiver.
a. Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) below, the undersigned in their capacity as Lenders direct the
Administrative
-2-
<PAGE>
Agent, and the Administrative Agent agrees to accept and follow such direction,
to Forebear through May 19, 2000, notwithstanding any Specified Defaults.
b. Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) below, the undersigned in their capacity as Secured Parties,
direct the Collateral Agent, and the Collateral Agent agrees to accept such
direction, to Forbear through May 19, 2000, notwithstanding any Specified
Defaults.
c. Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) below, each of the undersigned in their capacity as Lender, a Swap
Party or other Secured Party, hereby agree to Forbear through May 19, 2000,
notwithstanding any Specified Defaults.
d. Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) below, each of the undersigned in their capacity as a Lender,
hereby agree to waive the imposition during the period commencing on the date of
this Forbearance Agreement and ending on May 19, 2000 of the Default Rate in
connection with any Specified Default.
e. Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) below, and notwithstanding the Borrowers' failure to satisfy each
of the conditions set forth in Section 4.2 (Conditions to Each Loan and Issuance
of Each Letter of Credit) of the Credit Agreement, each of the undersigned in
their capacity as a Lender, hereby agrees that the Issuer of Letters of Credit
may (but is not required to) issue extensions of existing Letters of Credit (in
a face amount no greater than the face amount of the existing Letters of Credit)
for the period commencing on the date hereof and ending on May 19, 2000
notwithstanding any Specified Default.
f. Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) below, each of the undersigned in their capacity as a Lender,
hereby agrees that the Borrowers shall not be required to maintain Interest Rate
Hedging Agreements pursuant to Section 6.12 (Interest Rate Hedging Agreements)
of the Credit Agreement for the period commencing on the date hereof and ending
on May 19, 2000.
3. Certain Limitations. To eliminate any uncertainty, it is expressly
understood and agreed that the Administrative Agent and the Collateral Agent may
take any action granted to any of them under law or contract (including, without
limitation, acceleration, foreclosure on Collateral and Additional Security and
set-off),
a. after May 19, 2000,
b. in connection with any event or condition (including, without
limitation, a filing of a petition in bankruptcy as referred to in section
9.1(n) of the Credit Agreement, a violation of the Indebtedness or Lien
covenants set forth in Sections 8.1 and 8.2 of the Credit Agreement or the entry
of a judgment referred to in Section 9.1(h) of the Credit Agreement) other than
a Specified Default or
-3-
<PAGE>
c. if any of the events or conditions in Section 5 (Conditions/
Additional Undertakings) below are not satisfied on a timely basis.
4. Not a Waiver. THIS AGREEMENT DOES NOT SERVE AS A WAIVER OF ANY
DEFAULTS OR EVENTS OF DEFAULT WHICH MAY NOW OR HEREAFTER EXIST and, except as
expressly provided above to the contrary for the period specified, the Secured
Parties reserve any and all rights and remedies under the Loan Documents and
other Senior Credit Documents, at law or in equity, in connection with such
Defaults or Events of Default. Without limiting the generality of the foregoing,
the Borrowers acknowledge and agree that:
a. from and after the date that the Borrowers default in any payment
obligations under the Loan Documents or there otherwise exists an Event of
Default, without limiting the generality of Section 1.8(b) of the Credit
Agreement, the Borrowers shall no longer be entitled to elect the LIBO Rate
option for Loans and the Lessees shall no longer be entitled to elect a LIBO
Rate option (or similar option) under the Synthetic Lease Facility, such
prohibition to take place automatically without notice from the Administrative
Agent or Synthetic Lease Facility Agent, which notice is hereby waived and
b. in connection with any default in payment of any of the
Obligations, Genesis will, and the Administrative Agent may, send notice to any
and all trustees under subordinated debt instruments of any of the Borrowers
stating that there has been a "Payment Default" or similar term and that the
trustee and bond holders may not accept any payment from the Borrowers.
No delay or failure on the part of the Secured Parties to exercise any right or
remedy hereunder or under the Senior Credit Documents shall operate as a waiver
thereof, and no single or partial exercise of any right or remedy hereunder or
thereunder shall preclude other or further exercise thereof or the exercise of
any other right or remedy. No action or forbearance by the Secured Parties shall
be construed to constitute a waiver of any of the provisions hereof or thereof.
5. Conditions/Additional Undertakings.
a. Attached hereto as Exhibit A are the conditions precedent to the
effectiveness of this Forbearance Agreement (other than the provisions set forth
in Section 6 (Additional Provisions Relating to Synthetic Lease) below). Upon
satisfaction of the conditions on said Exhibit A, the provisions of Section 2
above (Forbearance and Waivers) and all other provisions of this Forbearance
Agreement shall be effective excepting only the provisions of said Section 6,
which shall become effective when and if the conditions specified in said
Section 6 are satisfied. The lack of effectiveness of any provisions set forth
in Section 6 below shall not affect the validity or enforceability of any other
terms hereof.
b. Attached hereto as Exhibit B are the conditions subsequent to the
continued effectiveness of this Forbearance Agreement through May 19, 2000. If
any of the conditions set forth on Exhibit B are not satisfied by the dates
specified on said Exhibit B, then
-4-
<PAGE>
the obligations set forth in Section 2 (Forbearance and Waivers) above shall
immediately terminate without notice on May 20, 2000 or, if earlier for any
reason, upon written notice to the Borrowers given in accordance with the terms
of the Credit Agreement.
c. If at any time the forbearance agreement with Multicare should be
terminated, the obligations set forth in Section 2 (Forbearance and Waivers)
above shall immediately terminate without notice
6. Additional Provisions Relating to Synthetic Lease.
a. At such time as the Required Participants (as such term is
defined in the Synthetic Lease Facility documents) execute counterpart signature
pages hereto the following additional provisions shall become effective:
(i) Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) above, the undersigned in their capacity as participants
in the Synthetic Lease Facility, direct the Synthetic Lease Facility
Agent, and the Synthetic Lease Facility Agent agrees to accept such
direction, to Forbear through May 19, 2000, notwithstanding any
Specified Defaults.
(ii) Subject to the provisions of Section 5 (Conditions/
Additional Undertakings) above, without limiting any of their other
rights and remedies under the Synthetic Lease Facility, the Lenders
under the Synthetic Lease Facility which are parties hereto, hereby
agree that so long as Borrowers shall continue to observe and perform
their respective obligations hereunder, an Event of Default under the
Credit Agreement shall not be deemed to be a Lease Event of Default
under the Synthetic Lease Facility. This waiver shall in no way
constitute a waiver of any other Lease Events of Default or any other
matters under to the Synthetic Lease Facility.
At such time as the Required Participants execute and deliver counterpart
signature pages to this Forbearance Agreement, subject to the provisions of
Section 5 above, the term "Specified Default" shall automatically be modified to
delete the period at the end thereof and replace it with "; and" and the
following language:
"(ix) any Event of Default that has occurred or may occur under
the Synthetic Lease Facility solely as such defined term relates to a
Default or Event of Default under the Credit Agreement or any other
Loan Document that constitutes a Specified Default as set forth above."
b. At such time as all of the SLF Parties execute counterpart
signature pages hereto the following additional provision shall become
effective:
(i) Subject to the provisions of Section 5 (Conditions/Additional
Undertakings) above, each of the undersigned in their capacity as a participant
in the Synthetic Lease Facility, hereby agree to waive the imposition during the
period
-5-
<PAGE>
commencing on the date of this Forbearance Agreement and ending on May 19, 2000
of the Overdue Rate in connection with any Specified Default.
At such time as all of the SLF Parties execute and deliver counterpart signature
pages to this Forbearance Agreement, subject to the provisions of Section 5
above, the term "Specified Default" shall automatically be further modified to
delete the period at the end thereof and replace it with "; and" and the
following language:
"(x) the failure of the Borrowers to pay any Basic Rent under the
Synthetic Lease Facility."
7. Release. As a material inducement to the Secured Parties to enter
into this Forbearance Agreement, the Borrowers and each of them (A) do hereby
remise, release, acquit, satisfy and forever discharge the Secured Parties and
all of their past, present and future officers, directors, employees, agents,
attorneys, representatives, participants, heirs, successors and assigns, from
any and all manner of debts, accountings, bonds, warranties, representations,
covenants, promises, contracts, controversies, agreements, liabilities,
obligations, expenses, damages, judgments, executions, actions, claims, demands
and causes of action of any nature whatsoever, whether at law or in equity,
which any of the Borrowers has by reason of any matter, cause or thing, from the
beginning of the world to and including the date of this Forbearance Agreement
with respect to any matters, transactions, occurrences, agreements, actions, or
events arising out of, in connection with or relating to the Loan Documents and
other Senior Credit Documents; and (B) do hereby covenant and agree never to
institute or cause to be instituted or continue prosecution of any suit or other
form of action or proceeding of any kind or nature whatsoever against the
Secured Parties, or any of their past, present or future officers, directors,
employees, agents, attorneys, representatives, participants, heirs, successors
or assigns, by reason of or in connection with any of the foregoing matters,
claims or causes of action. The Borrowers expressly acknowledge and agree that
the waivers, estoppels and releases contained in this Forbearance Agreement
shall not be construed as an admission of wrongdoing, liability or culpability
on the part of any of the Secured Parties or the existence of any claims of the
Borrowers against any of the Secured Parties.
8. Governing Law. This Forbearance Agreement shall for all purposes be
governed by and construed and enforced in accordance with the substantive law of
the Commonwealth of Pennsylvania without giving effect to the principles of
conflict of laws.
9. Future Negotiations. The parties hereto acknowledge and agree that
(A) the Secured Parties have not agreed to and have no future obligation
whatsoever to discuss, negotiate or agree to any restructuring of the Borrowers'
obligations with respect to the Loan Documents, the other Senior Credit
Documents or any of them, or any modification, amendment, restructuring or
reinstatement of the Senior Credit Documents or, except as expressly provided in
this Forbearance Agreement, to forbear from exercising its rights and remedies
under the Senior Credit Documents, (B) if there are any future discussions among
the Secured Parties and the Borrowers concerning any such restructuring,
modification, amendment or reinstatement, then no restructuring, modification,
amendment, reinstatement, compromise, settlement, agreement or understanding
with respect to the Borrowers' obligations with respect to the Loan Documents or
other Senior Credit Documents, or any of them, or any aspect thereof, shall
constitute a legally
-6-
<PAGE>
binding agreement or contract or have any force or effect whatsoever unless and
until reduced to writing and signed by authorized representatives of all
parties, and that none of the parties hereto shall assert or claim in any legal
proceedings or otherwise that any such agreement exists except in accordance
with the terms of this Section 9.
10. Ratification. Except to the extent and for the period hereby waived
or modified, the Credit Agreement, the Synthetic Lease Facility and each of the
Senior Credit Documents is hereby confirmed and ratified in all respects.
11. Counterpart Signatures. This Forbearance Agreement may be executed
in any number of counterparts, each of which will constitute an original and all
of which together shall constitute one instrument. A faxed copy of a signature
page shall serve as the functional equivalent of a manually-executed copy for
all purposes.
12. Payment of Fees. The Administrative Agent shall allocate the
forbearance fee referred to in paragraph 2 of Exhibit A hereto among those
Secured Parties who sign and deliver a counterpart signature page in the manner
and time set forth in paragraph 1 of said Exhibit A on a pro rata basis, based
on the amount of the Obligations owing to them. The Administrative Agent's
records shall be conclusive for the purposes hereof.
13. Capacity of Signing Parties. Each of the undersigned Secured
Parties signs this in its capacity as a Lender and as a participant in the
Synthetic Lease Facility, if applicable, and in any other capacity as a Secured
Party except that unless and until the Required Participants execute and deliver
counterpart signature pages hereto, Mellon Bank, N.A. shall not be deemed to
sign in its capacity as Synthetic Lease Agent and the Borrowers acknowledge and
agree that Mellon Bank, N. A. in its capacity as the Synthetic Lease Agent under
those circumstances is not bound by the terms hereof and may act in
contravention with the terms hereof.
-7-
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
hereby signs as of the date first above written.
-----------------------------------
Name of Financial Institution(1)
-----------------------------------
By:
Name:
Title:
GENESIS HEALTH VENTURES, INC.,
for itself and each of the Borrowers under
the Credit Agreement
-----------------------------------
By:
Name:
Title:
- ----------------
(1) Subject to Section 13, signing in all applicable capacities as Secured
Parties, whether as Administrative Agent, Lender or otherwise.
-8-
<PAGE>
Exhibit A
To Forbearance Agreement
Conditions Precedent
1. Execution of this Forbearance Agreement by (a) the Borrowers, or by Genesis
on behalf of the Borrowers, (b) the Required Lenders, (c) the Required
Secured Parties, (d) the Administrative Agent, and (e) the Collateral Agent
and return of counterpart signature pages by each to Drinker Biddle & Reath
LLP (to the attention of Jill Bronson) by actual delivery at One Logan
Square, 18th and Cherry Street, Philadelphia, PA 19103 or by facsimile
transmission (facsimile number: 215-988-2757) no later than 5:00 p.m.
(Eastern Standard Time) on March 20, 2000.(2)
2. Upon satisfaction of the condition precedent contained in the immediately
preceding paragraph, payment of an irrevocable and nonrefundable fee to the
Administrative Agent in immediately available funds for the benefit of each
of the Secured Parties that signs and returns a counterpart to this
Forbearance Agreement in the time and manner specified in paragraph 1
above. Such fee shall be in an amount equal to $667,000.
3. Payment of costs and expenses of the Administrative Agent, the Synthetic
Lease Facility Agent and the Collateral Agent including, without
limitation, counsel and financial consultant fees.
4. Effectiveness of a forbearance agreement for Multicare.
- ----------------
(2) For purposes of paragraphs 1 and 2 of this Exhibit A, the Administrative
Agent, in its sole and absolute discretion, is authorized to extend the
deadline set forth in paragraph 1 above for a period not to exceed 2
Business Days and any such action on the part of the Administrative Agent
shall be conclusive and binding for all purposes.
-9-
<PAGE>
Exhibit B
To Forbearance Agreement
Conditions Subsequent
---------------------
1. A financial advisor (that is not the same as the Multicare financial
advisor), reasonably acceptable to the Agents (the "Genesis Financial
Advisor"), shall be retained by Genesis no later than March 24, 2000. The
Agents and Policano and Manzo, financial advisor to the Administrative
Agent, shall be given the opportunity to discuss (by phone or in person)
the affairs of the Borrowers with the Genesis Financial Advisor from time
to time upon reasonable request.
2. Policano and Manzo shall be given full access to the financial records and
to the management of the Borrowers and the Borrowers shall comply with the
requests made by Policano and Manzo in the letter attached hereto as Annex
1 to Exhibit B.
3. The Borrowers shall cooperate with the Collateral Agent in all remaining
aspects of obtaining and perfecting the Additional Security. Without
limiting the generality of the foregoing, the Borrowers will provide second
Liens on the property subject to the Synthetic Lease Facility (to the
extent that the necessary consents have been or can be obtained) no later
than March 24, 2000. Each of the Borrowers agrees that this undertaking is
a material inducement to the forbearance provided herein and but for this
undertaking the Secured Parties would be unwilling to agree to the terms of
this Forbearance Agreement. Further, the Borrowers agree that the value to
the Borrowers of the undertakings of the Secured Parties herein is at least
equal or greater than the value of this undertaking.
4. No later than April 14, 2000, Genesis shall present to the Secured Parties,
a proposed plan of reorganization of its capital structure which proposal
shall be shared, in preliminary form, with the Agents at least one Business
Day prior thereto. The plan will have specific target dates by which
certain actions will be completed. Completion of the specified actions by
the specified target dates shall be additional conditions incorporated
herein by reference.
5. Concurrent with the actions specified in the preceding item #4, Genesis
shall develop a contingency plan. Genesis will provide information to the
Agents on a regular basis as to the development of such plan and, at the
request of the Agents, will present the same to the Secured Parties.
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000874265
<NAME> GENESIS HEALTH VENTURES, INC.
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 50,855,000
<SECURITIES> 30,009,000
<RECEIVABLES> 565,534,000
<ALLOWANCES> (94,392,000)
<INVENTORY> 59,428,000
<CURRENT-ASSETS> 670,966,000
<PP&E> 1,441,294,000
<DEPRECIATION> (225,441,000)
<TOTAL-ASSETS> 3,537,072,000
<CURRENT-LIABILITIES> 2,490,470,000
<BONDS> 0
429,793,000
6,000
<COMMON> 748,000
<OTHER-SE> 131,423,000
<TOTAL-LIABILITY-AND-EQUITY> 3,537,072,000
<SALES> 1,191,727,000
<TOTAL-REVENUES> 1,191,727,000
<CGS> 0
<TOTAL-COSTS> 1,044,727,000
<OTHER-EXPENSES> 77,168,000
<LOSS-PROVISION> 464,113,000
<INTEREST-EXPENSE> 109,502,000
<INCOME-PRETAX> (503,783,000)
<INCOME-TAX> (15,735,000)
<INCOME-CONTINUING> (494,702,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10,412,000)
<NET-INCOME> (505,114,000)
<EPS-BASIC> (10.87)
<EPS-DILUTED> (11.10)
</TABLE>
