As filed with the Securities and Exchange Commission on October 8, 2002
Registration No. 333-98941
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Genesis Health Ventures, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 8051 06-1132947
------------------------------- ---------------------------- -------------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, PA 19348
(610) 444-6350
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(Address, including ZIP code, and telephone number, including area code, of
registrant's principal executive offices)
George V. Hager, Jr.
Executive Vice President and Chief Financial Officer
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, PA 19348
(610) 444-6350
--------------
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
COPIES TO:
Richard J. McMahon, Esquire Mark Gordon, Esquire Megan L. Mehalko, Esquire
Blank Rome Comisky & McCauley LLP Wachtell, Lipton, Rosen & Katz Benesch, Friedlander, Coplan & Aronoff LLP
One Logan Square 51 West 52nd Street 2300 BP Tower - 200 Public Square
Philadelphia, PA 19103 New York, NY 10019 Cleveland, OH 44114
215-569-5500 212-403-1000 216-363-4500
Approximate date of commencement of proposed sale of the securities to
the public: as soon as practicable after this registration statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to
Section 8(a), may determine.
The information in this proxy statement/prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. The proxy
statement/prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
Prospectus, Subject to Completion, Dated October 8, 2002
[LOGO] [LOGO]
Genesis Health Ventures, Inc. and NCS HealthCare, Inc. are providing
this proxy statement/prospectus to you as a holder of NCS Class A common stock
and/or NCS Class B common stock in connection with an NCS special meeting
related to a proposed merger transaction. NCS, Genesis and a wholly owned
subsidiary of Genesis have entered into a merger agreement pursuant to which NCS
will become a wholly owned subsidiary of Genesis. The NCS board of directors
believes that the merger is in the best interests of NCS' stockholders and
unanimously recommends that you vote to adopt the merger agreement. NCS will
hold a special meeting to consider and vote upon the merger agreement.
Only stockholders of record of NCS Class A common stock and NCS Class B
common stock as of October [ ], 2002 are entitled to attend and vote at the NCS
special meeting. The date, time and place of the NCS special meeting is as
follows:
November [ ], 2002 at [ ], local time
[ ]
[ ]
In the merger, each share of NCS Class A common stock and each share of
NCS Class B common stock will be converted into 0.1 of a share of Genesis common
stock. Genesis common stock trades on the Nasdaq National Market under the
symbol "GHVI." In the merger, approximately 2,613,953 shares of Genesis common
stock will be issued in exchange for shares of NCS Class A common stock and NCS
Class B common stock. The Genesis common stock issued in the merger will be
authorized for listing on the Nasdaq National Market.
Genesis and NCS cannot complete the merger unless NCS stockholders
adopt the merger agreement. Adoption of the merger agreement requires the
affirmative vote of a majority of the votes entitled to be cast by the
outstanding shares of NCS Class A common stock and the outstanding shares of NCS
Class B common stock, voting together as a single class. Holders of NCS Class A
common stock are entitled to one vote per share on the adoption of the merger
agreement. Holders of NCS Class B common stock are entitled to ten votes per
share on the adoption of the merger agreement. NCS stockholders who collectively
hold a majority of the total votes to be cast at the NCS special meeting have
agreed in writing to vote in favor of the merger agreement. If an NCS
stockholder fails to return his or her proxy card and fails to vote in person,
the effect will be the same as a vote against the adoption of the merger
agreement. Whether or not you plan to attend the NCS special meeting, please
complete, sign, date and promptly return the enclosed proxy card in the enclosed
postage-paid envelope.
This proxy statement/prospectus provides you with detailed information
about the merger. Genesis and NCS encourage you to read this entire document
carefully along with the merger agreement, which is set forth in Annex A to this
proxy statement/prospectus.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this proxy statement/prospectus. Any representation to
the contrary is a criminal offense.
For a more complete description of the merger, the terms and conditions
of the merger and risk factors associated with the merger, see "The Merger"
beginning on page 32 and "Risk Factors" beginning on page 17.
-----------------
Proxy statement/prospectus dated [ ], 2002
and first mailed to NCS stockholders on or about [ ], 2002
NCS HEALTHCARE, INC.
3201 Enterprise Parkway, Suite 220
Beachwood, Ohio 44122
---------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER [ ], 2002
---------------------------------------------------
To the Stockholders of NCS:
Notice is hereby given that a special meeting of stockholders of NCS
HealthCare, Inc., a Delaware corporation, will be held on November [ ], 2002, at
[ ] (local time), at [ ], to consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated as of July 28, 2002, among NCS, Genesis
Health Ventures, Inc., a Pennsylvania corporation, and Geneva Sub, Inc., a
Delaware corporation and a wholly owned subsidiary of Genesis. The merger
agreement provides that NCS will become a wholly owned subsidiary of Genesis.
Each issued and outstanding share of NCS Class A common stock and each issued
and outstanding share of NCS Class B common stock will be converted into 0.1 of
a share of Genesis common stock, as more fully described in the accompanying
proxy statement/prospectus.
A copy of the merger agreement is set forth in Annex A to the
accompanying proxy statement/prospectus.
Only holders of record of NCS Class A common stock and holders of
record of NCS Class B common stock as of the close of business on October [ ],
2002, are entitled to notice of, and to vote at, the NCS special meeting and any
adjournments or postponements thereof.
If you object to the adoption of the merger agreement but the merger is
completed, you can demand that you be paid an amount for your shares determined
by the Delaware Court of Chancery to be the "fair value" of such shares, but
only if you: file a written demand for appraisal of your shares with NCS at its
main office in Beachwood, Ohio before the NCS special meeting; not vote in favor
of the merger; hold your shares through the completion of the merger; and comply
with other applicable provisions of Delaware law. Failure to comply with the
Delaware appraisal statute could result in the loss of your right to receive
cash in connection with your demand for appraisal of your shares. The Delaware
appraisal statue is more fully described, and set forth, in Annex B to the
accompanying proxy statement/prospectus.
The board of directors of NCS has approved the merger agreement and
unanimously recommends that you vote "FOR" adoption of the merger agreement.
By Order of the Board of Directors of NCS HealthCare, Inc.
Kevin B. Shaw
President and Chief Executive Officer
October [ ], 2002
Whether or not you plan to attend the NCS special meeting in person,
please complete, date, sign and return promptly the enclosed proxy in the
accompanying postage-paid envelope. You may revoke your proxy at any time prior
to its exercise in the manner provided in the accompanying proxy
statement/prospectus.
Additional Information
This proxy statement/prospectus incorporates by reference documents
containing important business and financial information about Genesis that is
not included in or delivered with this proxy statement/prospectus. Copies of any
of these documents are available without charge to any person to whom this proxy
statement/prospectus is delivered, upon written or oral request. Written
requests for Genesis' documents should be directed to Investor Relations, 101
East State Street, Kennett Square, Pennsylvania 19348 and telephone requests may
be directed to Investor Relations at (610) 444-6350. In order to ensure timely
delivery, any request for these documents should be made by no later than [ ],
2002.
Written requests for NCS' documents should be directed to Investor
Relations, 3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122 and
telephone requests may be directed to Investor Relations at (216) 378-6808.
Table of Contents
Page
----
Additional Information............................................................................................i
Where You Can Find More Information.............................................................................iii
Questions and Answers About the Genesis/NCS Merger................................................................1
Summary...........................................................................................................3
The Companies..................................................................................................3
The NCS Special Meeting........................................................................................3
The Merger.....................................................................................................4
Stockholder Litigation.........................................................................................8
Omnicare Tender Offer..........................................................................................9
Comparative Per Share Market Price Information...................................................................10
Dividend Policies................................................................................................10
Selected Historical Financial Data of Genesis Health Ventures, Inc...............................................11
Selected Historical Financial Data of NCS HealthCare, Inc........................................................13
Selected Unaudited Pro Forma Condensed Consolidated Combined Financial Data......................................15
Comparative Per Share Information (Unaudited)....................................................................16
Risk Factors.....................................................................................................17
Forward-Looking Statements and Cautionary Factors................................................................28
Special Meeting of NCS Stockholders..............................................................................30
The Merger.......................................................................................................32
Background of the Merger......................................................................................32
Recommendation and Considerations of the NCS Independent Committee and the NCS Board of Directors; NCS'
Reasons for the Merger.....................................................................................45
Opinion of NCS' Financial Advisor.............................................................................51
Genesis' Reasons for the Merger...............................................................................56
Material Federal Income Tax Consequences......................................................................57
Accounting Treatment..........................................................................................59
Regulatory Approvals..........................................................................................60
Nasdaq Listing................................................................................................60
Resale of Genesis Common Stock Issued in the Merger...........................................................60
Interests of Certain Persons in the Merger....................................................................61
Litigation Relating to the Merger.............................................................................63
Appraisal Rights of NCS Stockholders..........................................................................65
Material Terms of the Merger Agreement...........................................................................67
The Merger....................................................................................................67
Merger Consideration..........................................................................................67
Exchange Procedures...........................................................................................68
Representations and Warranties................................................................................68
Conduct of NCS' Business Prior to the Merger..................................................................70
Special Meeting of the NCS Stockholders.......................................................................71
i
No Solicitation...............................................................................................72
Further Actions...............................................................................................73
Conditions to the Merger......................................................................................74
Termination of the Merger Agreement...........................................................................76
Termination Fee and Expenses..................................................................................76
Amendments, Extensions and Waivers............................................................................77
Voting Agreements................................................................................................77
Information Concerning Genesis...................................................................................79
Description of the Business...................................................................................79
Recent Developments...........................................................................................80
Principal Shareholders of Genesis.............................................................................81
Information Concerning NCS.......................................................................................83
Description of the Business...................................................................................83
Employees.....................................................................................................93
Property......................................................................................................93
Legal Proceedings.............................................................................................93
Management's Discussion and Analysis of Financial Condition and Results of Operations of NCS..................94
Principal Stockholders of NCS................................................................................106
Market Risk..................................................................................................107
Price Range of Common Stock.....................................................................................108
Description of Genesis Capital Stock............................................................................110
Common Stock.................................................................................................110
Preferred Stock..............................................................................................110
Series A Convertible Preferred Stock.........................................................................110
Warrants.....................................................................................................113
Comparison of Stockholder's Rights..............................................................................114
Capital......................................................................................................114
Preferred Stock..............................................................................................114
Stockholder Voting...........................................................................................114
Cumulative Voting............................................................................................117
Meeting of Stockholders and Action by Written Consent........................................................117
Preemptive Rights............................................................................................117
Amendment of Governing Documents.............................................................................117
Size and Classification of the Board of Directors............................................................118
Removal of Directors.........................................................................................119
Shareholder Approval of Business Combinations With Interested Shareholders...................................119
Anti-Takeover Provisions.....................................................................................120
NCS Stockholder Proposals.......................................................................................123
Legal Matters...................................................................................................123
Experts.........................................................................................................123
Unaudited Pro Forma Condensed Consolidated Combined Financial Information.......................................124
Index to Financial Statements and Supplementary Data of NCS.....................................................F-1
Annex A Agreement and Plan of Merger
Annex B Section 262 of the Delaware General Corporation Law - Appraisal Rights
Annex C Opinion of Candlewood Partners, LLC
ii
Where You Can Find More Information
Genesis and NCS file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements and other information that Genesis and NCS file with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. Genesis' and NCS' SEC filings are also
available on the SEC's Internet site as part of the EDGAR database
(http://www.sec.gov).
Genesis has filed a registration statement on Form S-4 to register the
shares of Genesis common stock to be issued in the merger under the Securities
Act. This proxy statement/prospectus is a part of the registration statement on
Form S-4 and constitutes a prospectus of Genesis in addition to being a proxy
statement of NCS for its special meeting. As allowed by SEC rules, this proxy
statement/prospectus does not contain all of the information that you can find
in the registration statement on Form S-4 or the exhibits to the registration
statement on Form S-4.
The SEC also allows Genesis to "incorporate by reference" the
information that it files with the SEC, which means Genesis can disclose
information to you by referring you to another document filed separately with
the SEC. Information incorporated by reference is deemed to be part of this
proxy statement/prospectus. Later information filed by Genesis with the SEC
updates and supersedes this proxy statement/prospectus.
The following documents previously filed by Genesis with the SEC under
the Exchange Act, are incorporated in this proxy statement/prospectus by this
reference:
o Annual Report on Form 10-K for the year ended September 30, 2001;
o Quarterly Report on Form 10-Q for the quarter ended December 31,
2001;
o Quarterly Report on Form 10-Q for the quarter ended March 31,
2002;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2002;
o Current Report on Form 8-K filed on July 1, 2002;
o Current Report on Form 8-K filed on July 29, 2002;
o Current Report on Form 8-K filed on August 16, 2002;
o Current Report on Form 8-K filed on October 4, 2002; and
o the description of Genesis' common stock, par value $0.02 per
share, contained in Genesis' Form 8-A, filed on October 2, 2001,
and all amendments or reports filed for the purpose of updating
the description.
All documents filed by Genesis under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this proxy statement/prospectus
and prior to the NCS special meeting (other than current reports furnished under
Item 9 of Form 8-K) will be deemed to be incorporated by reference in this proxy
statement/prospectus and to be a part of this proxy statement/prospectus from
the date any document is filed.
Neither Genesis nor NCS has authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated [ ], 2002. You
should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus nor the issuance of
Genesis common stock in the merger will create any implication to the contrary.
iii
Questions and Answers About the Genesis/NCS Merger
Q: What is the proposed transaction?
A: NCS, Genesis and Geneva Sub, Inc., a wholly owned subsidiary of
Genesis, have entered into a merger agreement under which Geneva Sub
will merge with and into NCS. NCS will be the surviving corporation in
the merger and will become a wholly owned subsidiary of Genesis.
Q: What will I receive in the merger?
A: For each share of NCS Class A common stock and for each share of NCS
Class B common stock that you hold, you will receive 0.1 of a share of
Genesis common stock, referred to as the "merger exchange ratio."
Q: How do I vote?
A: You vote by indicating on the enclosed proxy card how you want to vote
and signing and mailing the enclosed proxy card, or by appearing in
person at the NCS special meeting. Please send in your proxy as soon as
possible, so that your shares may be represented at the NCS special
meeting. The NCS special meeting will take place on November [ ], 2002.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your shares for you only if you provide
instructions to your broker on how to vote. You should follow the
directions provided by your broker regarding how to instruct your
broker to vote your shares. Without instructions, your shares will not
be voted on the merger, which will have the same effect as voting
against the merger.
Q: What if I want to change my vote?
A: To change your vote, send in a later-dated, signed proxy card before
the NCS special meeting to National City Bank, Department 5352,
Corporate Trust Operations, P.O. Box 92301, Cleveland, Ohio 44193-0900,
telephone: 1-800-622-6757, or attend the NCS special meeting in person
and vote.
Q: Will I have appraisal rights?
A: NCS stockholders who do not wish to accept the Genesis common stock to
be issued in the merger have the right to have the Delaware Chancery
Court determine the "fair value" of their shares. These appraisal
rights are subject to a number of restrictions and technical
requirements. Generally, in order to exercise these appraisal rights:
o an NCS stockholder must not vote in favor of the adoption of the
merger agreement, including by sending in a signed, unmarked
proxy;
o an NCS stockholder must make a written demand for appraisal before
the vote on the adoption of the merger agreement; and
o an NCS stockholder must continuously hold such shares through the
completion of the merger.
Merely voting against the adoption of the merger agreement will not
protect an NCS stockholder's right of appraisal. Annex B contains the
text of the Delaware appraisal statute. Failure to comply with the
requirements of the statute may result in a loss of your appraisal
rights. See "The Merger -- Appraisal Rights of NCS Stockholders."
Q: When is the merger expected to be completed?
A: Genesis and NCS currently expect to complete the merger by [ ] of 2002,
assuming an affirmative vote by the NCS stockholders; however, the
merger is subject to regulatory approvals and conditions.
Q: Should I send in my stock certificates now?
A: No. After Genesis and NCS complete the merger, Genesis' exchange agent
will send NCS stockholders written instructions for exchanging their
stock certificates.
Q: Who should I call with questions or to obtain additional copies of this
proxy statement/prospectus?
A: You should call NCS' Investor Relations at (216) 378-6808 with any
questions about the merger or to obtain additional copies of this proxy
statement/prospectus.
2
Summary
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully, and for more complete
descriptions of the terms of the merger, you should carefully read this entire
proxy statement/prospectus, the documents to which Genesis and NCS have referred
you, and the documents that Genesis has incorporated by reference in this proxy
statement/prospectus. See "Where You Can Find More Information."
The Companies
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, Pennsylvania 19348
(610) 444-6350
Genesis is a leading provider of healthcare and support services to the
elderly. Genesis' operations are comprised of two primary business segments:
pharmacy and medical supply services; and inpatient care in skilled nursing and
assisted living centers. Genesis capitalizes on its industry leadership position
in these businesses by offering an array of other complementary healthcare
services.
Geneva Sub, Inc. is a wholly owned subsidiary of Genesis formed for the
merger. It currently conducts no business.
NCS HealthCare, Inc.
3201 Enterprise Parkway, Suite 220
Beachwood, Ohio 44122
(216) 514-3350
NCS is a leading independent provider of pharmacy services to long-term
care institutions including skilled nursing facilities, assisted living
facilities and other institutional healthcare facilities. NCS also provides
various ancillary healthcare services to complement its core pharmacy services.
The NCS Special Meeting
The special meeting of NCS stockholders will be held at [ ], on
November [ ], 2002, at [ ]. At the NCS special meeting, you will be asked to
consider and vote upon a proposal to adopt the merger agreement.
Record Date; Vote Required (see page 30)
Only NCS stockholders at the close of business on the record date,
October [ ], 2002, will be entitled to notice of, and to vote at, the NCS
special meeting.
Adoption of the merger agreement requires the affirmative vote of a
majority of the votes entitled to be cast by the outstanding shares of NCS Class
A common stock and the outstanding shares of NCS Class B common stock, voting
together as a single class. Holders of NCS Class A common stock are entitled to
one vote per share on the adoption of the merger agreement, while holders of NCS
Class B common stock are entitled to ten votes per share on the adoption of the
merger agreement. As of October [ ], 2002, the directors and executive officers
of NCS had the right to vote, in the aggregate, [ ] shares of NCS Class A common
stock and [ ] shares of NCS Class B common stock, representing approximately [
]% of the total votes entitled to be cast at the NCS special meeting. NCS
stockholders who collectively hold approximately [ ]% of the total votes
entitled to be cast at the NCS special meeting have agreed in writing to vote in
favor of the adoption of the merger agreement. Accordingly, a sufficient number
of the votes required to adopt the merger agreement is assured.
No vote of the Genesis shareholders is required to approve the merger.
3
The Merger
In the merger, each share of NCS Class A common stock and each share of
NCS Class B common stock will be converted into 0.1 of a share of Genesis common
stock. The merger agreement is the legal document that governs the merger and is
set forth in Annex A to this proxy statement/prospectus. Genesis and NCS
encourage you to read the merger agreement to better understand the terms of the
merger.
The merger and ownership of Genesis common stock involve a number of
risks. See "Risk Factors."
Material Federal Income Tax Consequences (see pages 57 to 59)
The merger is intended to qualify as a reorganization for U.S. Federal
income tax purposes. If the merger does so qualify, you will generally not
recognize gain or loss for U.S. federal income tax purposes on the receipt of
Genesis common stock in exchange for your shares of NCS common stock.
Tax matters are complex, and holders of NCS common stock are urged to
consult their own tax advisors as to the consequences to them of the merger.
Reasons for the Merger
NCS (see pages 45 through 51)
In determining to enter into the merger agreement with Genesis, the NCS
independent committee and the full NCS board of directors believed that the
combination of NCS' weakened financial condition and the value, structure,
timing and likelihood of completion of the Genesis transaction made the Genesis
transaction highly beneficial for NCS, its stockholders and other stakeholders.
In particular, the NCS board of directors and the NCS independent committee
considered, among other things:
o that the Genesis transaction offered value and certainty to NCS,
its stockholders and stakeholders;
o that NCS had for more than two years actively explored virtually
every form of strategic alternative, without success, leading the
NCS directors to believe that NCS would have no attractive
strategic alternatives if it were to allow the Genesis opportunity
to pass and the Omnicare indication of interest were not to
materialize into an acceptable transaction;
o Genesis common stock will be issued to NCS stockholders in the
merger, thereby affording the NCS stockholders an opportunity to
share in potential increases in the long-term value of a combined
Genesis/NCS enterprise;
o the 0.1 merger exchange ratio of NCS common stock into Genesis
common stock represents a substantial premium to NCS stockholders
based on the relative trading prices of NCS Class A common stock
and Genesis common stock during recent periods prior to the
announcement of the merger; and
o the merger is expected to generally be tax-free to NCS
stockholders for Federal income tax purposes.
The NCS board of directors and the NCS independent committee also
identified and considered a variety of potential risks and other factors
unfavorable to their respective decisions to approve the merger agreement,
including:
o the risk to NCS stockholders that, because the merger exchange
ratio is fixed, the market value of the Genesis common stock to be
received in the merger could decrease significantly if the value
of Genesis common stock were to fall after the date the merger
agreement was executed, and the absence of any provisions allowing
for an adjustment of the merger exchange ratio or termination of
the merger agreement in that event;
4
o the risk that the terms of the merger agreement and related voting
agreements would prevent NCS from engaging in any alternative or
superior transaction in the future, were such a transaction to
materialize; and
o the NCS stockholders will be subject to the risks associated with
an investment in Genesis, described under "Risk Factors."
Genesis (see pages 56 to 57)
In determining to approve the merger agreement, Genesis' board of
directors considered, among other factors, the following advantage to Genesis
shareholders: the merger would afford Genesis shareholders an opportunity to
share in potential increases in the long-term value of a combined Genesis/NCS
enterprise.
The Genesis board of directors also identified and considered a variety
of potential risks and other factors unfavorable to their decision to approve
the merger agreement and the related transactions, including the following
disadvantages of the merger to Genesis shareholders:
o as a result of the merger, Genesis will increase its leverage; and
o the anticipated benefits of the merger may not be realized in a
timely fashion, or at all.
Conditions to the Merger (see pages 74 to 75)
The completion of the merger depends upon the satisfaction or waiver of
a number of conditions, including the following:
o the approval of the merger agreement by the affirmative vote of
holders of a majority of the voting power of NCS Class A common
stock and NCS Class B common stock voting together as a single
class;
o the expiration or termination of any applicable waiting period
under federal antitrust law;
o the approval for listing on the Nasdaq National Market of the
shares of Genesis common stock to be issued in connection with the
merger;
o the accuracy in all material respects of the representations and
warranties of the parties set forth in the merger agreement;
o the performance in all material respects by the parties of their
respective obligations, covenants and agreements set forth in the
merger agreement;
o the absence of any law, order or injunction prohibiting the
completion of the merger;
o evidence that the redemption of 5.75% convertible subordinated
debentures of NCS, due 2004, referred to as the "NCS notes," is
capable of completion concurrently with or promptly after the
completion of the merger;
o the presence of at least $35.0 million of cash on hand at NCS and
its subsidiaries on a consolidated basis two business days before
the completion of the merger;
o the absence of any change, event, occurrence or development since
July 28, 2002 that has, or could reasonably be expected to have, a
"material adverse effect," as defined in the merger agreement, on
NCS;
5
o the absence of specified governmental actions that could affect
Genesis prior to or after the merger;
o the receipt of material third-party consents and specified
material governmental approvals;
o the exercise of appraisal rights by holders of not more than 15%
of the voting power of outstanding NCS capital stock; and
o other customary conditions specified in the merger agreement.
Termination of the Merger Agreement (see page 76)
The merger agreement may be terminated and the merger abandoned at any
time prior to the merger becoming effective, in a limited number of
circumstances, including the following:
o by mutual written consent of Genesis and NCS;
o by either Genesis or NCS if:
o any law or regulation makes completion of the merger illegal
or otherwise prohibited, or if any final order of a court or
other competent governmental authority enters a final order
enjoining Genesis or NCS from completing the merger;
o the closing of the merger has not occurred on or before
January 31, 2003 (or April 30, 2003, if the merger is not
completed by January 31, 2003 because specified regulatory
approvals have not been received);
o the merger agreement is not adopted by NCS stockholders at the
NCS special meeting; or
o the other party breaches, in any material respect, any of its
representations, warranties or covenants contained in the
merger agreement, or fails to perform in any material respect
any of its covenants or other agreements contained in the
merger agreement and such breach or failure would render a
closing condition unsatisfied, and is not cured within
specified time periods; or
o by Genesis, if:
o the NCS board of directors or the NCS independent committee
has withdrawn, changed or modified its recommendation to the
NCS stockholders that they adopt the merger agreement in a
manner adverse to Genesis;
o the NCS board of directors or the NCS independent committee
has approved, or determined to recommend to NCS stockholders
that they approve an acquisition other than that contemplated
by the merger agreement;
o subject to limited exceptions, NCS fails to call or hold the
NCS special meeting by November 28, 2002;
o any party, other than Genesis, breaches its obligations under
the voting agreements and the NCS stockholder approval of the
adoption of the merger agreement is not otherwise obtained,
and the breach is not cured in accordance with the terms of
the merger agreement; or
o there is a "material adverse effect" on NCS, as defined in the
merger agreement.
6
Termination Fees and Expenses (see pages 76 to 77)
In addition to Genesis' other remedies, the merger agreement requires
NCS to pay Genesis a termination fee in the amount of $6.0 million and/or
Genesis' actual expenses in an amount up to $5.0 million, incurred in connection
with negotiating, entering into, and performing the merger agreement and related
documents, if the merger agreement is terminated for specified reasons.
The merger agreement also requires that if the termination was caused
by a willful breach, the breaching party must indemnify the non-breaching
parties for their actual expenses incurred in negotiating, entering into and
performing the merger agreement and related documents.
Regulatory Approvals (see page 60)
Under some circumstances, the merger may be reportable under the HSR
Act and the rules promulgated under it by the U.S. Federal Trade Commission, and
Genesis and NCS may be required to comply with certain regulatory requirements
imposed by U.S. regulatory authorities before the merger is completed. Many of
the states in which NCS transacts business require Genesis to provide notice of
the merger or to receive approvals in connection with the completion of the
merger. These regulatory requirements relate to licensure, dispensing of
controlled substances and participation in the Medicare and Medicaid programs.
Interests of Certain Persons in the Merger (see pages 61 to 63)
Some members of NCS' management and board of directors have interests
in the merger that are different from, or in addition to, the interests of the
other NCS stockholders. The NCS independent committee of the NCS board of
directors considered these interests and relationships, among other matters, in
recommending that the NCS board of directors approve the merger.
Board of Directors and Management of Genesis Following the Merger (see
page 63)
When Genesis and NCS complete the merger, Genesis will continue to be
managed by its current directors and officers.
Voting Agreements (see pages 77 to 78)
As an inducement to Genesis to enter into the merger agreement and in
connection with the anticipated solicitation of proxies, Jon H. Outcalt,
chairman of the board of NCS, and Kevin B. Shaw, president, chief executive
officer and a director of NCS, in their capacity as NCS stockholders, each
entered into separate voting agreements with Genesis and NCS. The voting
agreements cover all of the shares of NCS Class A common stock and NCS Class B
common stock beneficially owned by Messrs. Outcalt and Shaw. Collectively,
Messrs. Outcalt and Shaw beneficially own 230,968 shares of NCS Class A common
stock, 248,165 shares of NCS Class A common stock underlying vested options,
208,335 shares of NCS Class A common stock underlying non-vested options and
4,617,219 shares of NCS Class B common stock. Accordingly, Messrs. Outcalt and
Shaw collectively hold approximately 65% of the total votes entitled to be cast
at the NCS special meeting. In these voting agreements, Messrs. Outcalt and Shaw
agreed to vote all of their shares of NCS Class A common stock and NCS Class B
common stock in favor of adoption of the merger agreement and against certain
other actions specified in the voting agreements. In the voting agreements, each
of Messrs. Outcalt and Shaw granted an irrevocable limited proxy to each of the
president and secretary of Genesis and any other Genesis-authorized
representative to vote their respective shares of NCS capital stock in favor of
the adoption of the merger agreement and against certain other actions specified
in the voting agreements. Messrs. Outcalt and Shaw also agreed not to transfer
their shares of NCS Class A common stock and NCS Class B common stock or options
convertible into shares of NCS Class A common stock or NCS Class B common stock
before the completion of the merger or termination of the voting agreements.
Accordingly, a sufficient number of the votes required to adopt the merger
agreement is assured.
The voting agreements are terminable by Messrs. Outcalt and Shaw only
if the merger agreement is terminated in accordance with its terms or the merger
agreement is amended and either: the amendment is not approved by NCS' board of
directors or the NCS independent committee, or the amendment results in each of
Messrs. Outcalt or Shaw receiving different treatment or consideration for their
respective shares of NCS common stock on a per-share basis.
7
Opinion of Financial Advisor (see pages 51 to 56)
In deciding to approve the merger agreement, the NCS board of directors
and the NCS independent committee considered, among other items, the opinion of
its financial advisor, Candlewood Partners, LLC, that, as of the date of the
opinion, the merger exchange ratio is fair from a financial point of view to the
NCS stockholders, taken together. This opinion is set forth in Annex C to this
proxy statement/prospectus. You are encouraged to read this opinion.
Listing of Genesis Common Stock (see page 60)
The shares of Genesis common stock issued in connection with the merger
will be listed on the Nasdaq National Market under the trading symbol "GHVI."
Repayment of NCS Debt (see page 74)
At the closing of the merger, Genesis will repay in full or cause NCS
to repay in full the outstanding debt of NCS, which includes $206 million of
senior debt, and, subject to NCS' compliance with specified provisions of the
merger agreement, will cause NCS to redeem $102 million of the NCS notes,
including any accrued and unpaid interest and redemption premium.
Appraisal Rights (see pages 65 to 66)
NCS stockholders who do not wish to accept the Genesis common stock to
be issued in the merger will have the right to have the Delaware Chancery Court
determine the "fair value" of their shares. These appraisal rights are subject
to a number of restrictions and technical requirements. Generally, in order to
exercise these appraisal rights an NCS stockholder must not vote in favor of the
adoption of the merger agreement (including by sending in a signed, unmarked
proxy); must make a written demand for appraisal to NCS at its Beachwood office
before the vote on the adoption of the merger agreement; must hold his or her
shares through the completion of the merger; and must comply with other
provisions of the Delaware appraisal statute. Merely voting against the adoption
of the merger agreement will not protect an NCS stockholder's right of
appraisal. Annex B contains the text of the Delaware appraisal statute. Failure
to comply with the requirements of the Delaware appraisal statute could result
in the loss of your appraisal rights. See "The Merger -- Appraisal Rights of NCS
Stockholders."
Stockholder Litigation (see pages 63 to 64)
Omnicare, on July 26, 2002, delivered a letter to NCS, indicating their
conditional expression of interest in discussing a merger transaction at a price
of $3.00 per share in cash, subject to negotiation and execution of definitive
merger documents and completion of Omnicare's due diligence investigation of
NCS. On July 29, 2002, Omnicare delivered another letter to the NCS board of
directors, indicating Omnicare's conditional expression of interest in acquiring
NCS in a merger transaction at a price of $3.00 per share in cash. Omnicare
submitted a proposed merger agreement to NCS with the July 29, 2002 letter. See
"Recommendation and Considerations of the NCS Independent Committee and the NCS
Board of Directors; NCS' Reasons for the Merger."
As a result of the foregoing, seven stockholder lawsuits (six of which
are purported class action lawsuits), referred to as the "stockholder claims,"
have been filed against NCS and its directors in connection with the merger, and
two of those seven lawsuits were also filed against Genesis and Geneva Sub. The
stockholder claims allege that the directors of NCS breached their fiduciary
duties and certain other duties to stockholders by entering into the merger
agreement, and seek various relief, including: an injunction against completion
of the merger; a judgment that the merger would require approval by both the
holders of NCS Class A common stock and the holders of NCS Class B common stock,
voting as separate classes, a judgment that would rescind the merger if it is
completed prior to a final judgment on the stockholder claims; a declaration
that the voting agreements are null and void; and an award of compensatory
damages and costs. In addition, Omnicare filed an action alleging that the
voting agreements violate NCS' certificate of incorporation and resulted in an
automatic conversion of the NCS Class B common stock to which the voting
agreements pertained into NCS Class A common stock, which would mean Messrs.
Outcalt and Shaw would own less than a majority of the voting power of NCS.
8
Omnicare Tender Offer (see pages 64 to 65)
On August 8, 2002, Omnicare also commenced a tender offer for all
outstanding shares of NCS Class A common stock and NCS Class B common stock at a
price of $3.50 per share. The offer is being made on the terms and conditions
set forth in Omnicare's Tender Offer Statement on Schedule TO filed with the SEC
on August 8, 2002, as amended. Specifically, Omnicare's tender offer is
conditioned upon, among other things, (1) there being validly tendered and not
properly withdrawn prior to the expiration date of the offer that number of
shares representing at least a majority of the total voting power of all of the
outstanding securities of NCS, (2) the Genesis merger agreement having been
terminated on such conditions as may be satisfactory to Omnicare, (3) the voting
agreements entered into by Messrs. Outcalt and Shaw having been terminated on
such terms as may be satisfactory to Omnicare, (4) the provisions of Section 203
of the Delaware General Corporation Law not applying to or otherwise restricting
the Omnicare tender offer and the proposed Omnicare merger, (5) any waiting
periods under applicable antitrust laws having expired or terminated, (6) the
NCS' stockholders not having approved the Genesis merger, (7) NCS not having
entered into or effectuated any agreement or transaction with any person or
entity having the effect of impairing Omnicare's ability to acquire NCS or
otherwise diminishing the expected economic value to Omnicare of the acquisition
of NCS, (8) the provisions of Article VI of NCS' amended and restated
certificate of incorporation being inapplicable to the Omnicare tender offer and
the proposed Omnicare merger, and (9) the termination fee provision in the
Genesis merger agreement having been invalidated or the obligation to pay any
amounts pursuant to such provision having been terminated, without any
termination fee, or any portion thereof, having been paid by NCS or any of its
affiliates to Genesis.
Pursuant to the Omnicare tender offer, each share of NCS Class A common
stock and each share of NCS Class B common stock would receive $3.50 in cash,
assuming all of the conditions to the Omnicare tender offer had been satisfied
or waived by Omnicare. Pursuant to the Genesis merger agreement, each share of
NCS Class A common stock and each share of NCS Class B common stock will be
converted into 0.1 of a share of Genesis common stock. The closing price of
Genesis common stock on July 26, 2002 was $16.00 per share and the closing price
of Genesis common stock on October 2, 2002 was $17.06, representing a per share
value of $1.60 and $1.71, respectively of NCS Class A common stock and NCS Class
B common stock on such dates.
On August 20, 2002, NCS filed Schedule 14D-9 with the SEC recommending
that the holders of NCS Class A common stock and NCS Class B common stock reject
the Omnicare tender offer and not tender their shares pursuant to the Omnicare
tender offer. See "Recommendation and Considerations of the NCS Independent
Committee and the NCS Board of Directors; NCS' Reasons for the Merger,"
including "--Reasons for Continued Recommendation as of October [ ], 2002."
On September 13, 2002, NCS' financial and legal advisors met with Joel
F. Gemunder, president and chief executive officer of Omnicare, and Omnicare's
legal and financial advisors to discuss the terms of Omnicare's offer. The
discussions did not result in any agreement between Omnicare and NCS.
On October 7, 2002, Omnicare delivered an executed merger agreement to
the NCS board of directors. The merger agreement executed by Omnicare:
o commits Omnicare to pay $3.50 per share in cash to the NCS
stockholders;
o contemplates a tender offer followed by a merger;
o does not include a break-up fee if the NCS board of directors
terminated the Omnicare merger agreement in the event a superior
offer is received; and
o commits Omnicare to repay NCS' senior lenders and NCS noteholders
in full, in the same manner as in the Genesis merger.
The Omnicare merger agreement is irrevocable by Omnicare and may be
accepted by NCS on or before the earliest of:
o the closing of the Genesis merger;
o two calendar days after (i) the Genesis merger agreement is
declared illegal, invalid, void or otherwise unenforceable or is
otherwise terminated by either NCS or Genesis in accordance with
the terms of the Genesis merger agreement, or (ii) NCS
stockholders fail to approve the Genesis merger at a meeting
called for such purpose;
o any amendment or waiver of any of the provisions of the Genesis
merger agreement; and
o January 31, 2003.
In addition, the Genesis merger agreement and the voting agreements
entered into by Messrs. Outcalt and Shaw must be terminated in accordance with
their terms or otherwise on terms satisfactory to Omnicare.
9
Comparative Per Share Market Price Information
Genesis common stock currently trades on the Nasdaq National Market
under the symbol "GHVI." From October 15, 2001 until February 7, 2002, Genesis
common stock traded on the OTC Bulletin Board under the symbol "GHVE." The
Genesis common stock that was cancelled in connection with Genesis'
reorganization under the United States Bankruptcy Code was traded on the New
York Stock Exchange through June 22, 2000 and on the OTC Bulletin Board
thereafter.
NCS Class A common stock is traded on the Pink Sheets Electronic
Quotation Service under the symbol "NCSS." Between December 8, 1999 and October
9, 2000, NCS Class A common stock was traded on the Nasdaq SmallCap Market.
Prior to December 8, 1999, NCS Class A common stock was traded on the Nasdaq
National Market. There is no established trading market for NCS Class B common
stock.
The information stated in the table below presents the closing prices
per share of Genesis common stock and NCS Class A common stock on July 26, 2002
and [ ], 2002. July 26, 2002 was the last day on which trading occurred prior to
public announcement of the merger. [ ], 2002 was the last practicable trading
day for which information was available prior to the date of this proxy
statement/prospectus. In addition, the table shows the pro forma equivalent per
share price of NCS Class A common stock and NCS Class B common stock on July 26,
2002 and [ ], 2002, calculated by multiplying the closing sale price per share
of Genesis common stock reflected in the table by 0.1, the merger exchange
ratio.
Pro Forma Price
Equivalent of NCS
Genesis NCS Class A Class A and Class B
Common Stock Common Stock Common Stock
------------ ------------ ------------
July 26, 2002.................................... $16.00 $0.74 $1.60
[ ], 2002...................................
NCS stockholders are urged to obtain current market quotations for both
Genesis common stock and NCS Class A common stock. No assurance can be given as
to the future prices of, or markets for, Genesis common stock or NCS Class A
common stock.
Dividend Policies
Genesis has never declared or paid cash dividends on its common stock.
Genesis' ability to pay dividends is restricted by its senior credit facility
and senior secured note. Genesis does not anticipate paying cash dividends on
its common stock in the foreseeable future.
NCS has never declared or paid cash dividends on either its Class A
common stock or its Class B common stock. NCS' ability to pay dividends is
restricted by the merger agreement and its senior credit facility. NCS does not
anticipate paying cash dividends on NCS Class A common stock or NCS Class B
common stock in the foreseeable future.
10
Selected Historical Financial Data of Genesis Health Ventures, Inc.
(Amounts in thousands, except operating and per share data)
The selected historical consolidated financial data presented below
for, and as of, each of the years in the five-year period ended September 30,
2001 have been derived from Genesis' consolidated financial statements and
accompanying notes, which have been audited by KPMG LLP, independent certified
public accountants. The selected historical consolidated financial data for, and
as of, the nine months ended June 30, 2001 and 2002 have been derived from
Genesis' unaudited consolidated financial statements which, in the opinion of
management, include all adjustments (consisting only of normal recurring items)
necessary for a fair and consistent presentation of such data. The results for
the nine months ended June 30, 2002 are not necessarily indicative of results to
be expected for the full fiscal year.
Upon emergence from its Chapter 11 bankruptcy proceeding on October 2,
2001, Genesis adopted the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting By Entities in Reorganization
Under the Bankruptcy Code," also referred to as "fresh-start reporting,"
effective September 30, 2001. In connection with the adoption of fresh-start
reporting, a new entity has been deemed created for financial reporting
purposes, the provisions of Genesis' plan of reorganization were implemented,
assets and liabilities were adjusted to their estimated fair values and Genesis'
accumulated deficit was eliminated. Any financial information labeled
"predecessor company" refers to periods prior to the adoption of fresh-start
reporting, while those labeled "successor company" refers to periods following
September 30, 2001. Predecessor company and successor company financial
information is generally not comparable, and are therefore separated by a
vertical line. The lack of comparability within the statement of operations data
is most apparent in Genesis' capital costs (lease, interest, depreciation and
amortization), as well as with income taxes, minority interests, debt
restructuring and reorganization costs, and preferred dividends. Predecessor
company and successor company balance sheet data are not comparable due to the
change in accounting basis of long-lived assets to estimated fair value, the
discharge of liabilities subject to compromise and the restructuring of Genesis'
capital structure.
On October 1, 2001, Genesis adopted the provisions of Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," referred to as
"SFAS No. 144." Under SFAS No. 144, discontinued businesses or assets held for
sale are removed from the results of continuing operations. During the nine
months ended June 30, 2002, five eldercare centers, an ambulance business and a
medical supply distribution business were classified as discontinued operations.
The results of operations in the current year and prior year periods, along with
any costs to exit such businesses in the current year period, have been
classified as discontinued operations in the following selected historical
financial data.
The information set forth below should be read in conjunction with
Genesis' consolidated financial statements and the related notes thereto, which
are incorporated by reference in this proxy statement/prospectus. See "Where You
Can Find More Information."
11
Predecessor | Successor
Company | Company
Nine | Nine
Months | Months
Predecessor Company Ended | Ended
Year Ended September 30, June 30, | June 30,
----------------------------------------------------------- ---------- | -----------
1997 1998 1999 2000 2001 2001 | 2002
---------- ---------- ---------- ---------- ---------- ---------- | ----------
Statement of Operations Data: (unaudited) | (unaudited)
Net revenues.............................$1,079,157 $1,380,534 $1,843,270 $2,402,672 $2,533,608 $1,882,159 | $2,019,573
Earnings (loss) from continuing |
operations before extraordinary items, |
cumulative effect of accounting |
change and after preferred dividends..... 49,270 (11,388) (286,954) (872,085) (1,254,418) (95,291) | 63,790
Net income (loss) attributable to |
common shareholders...................... 47,591 (25,900) (290,050) (883,455) 247,009 (97,825) | 57,995
Per common share data (diluted):.......... |
Earnings (loss) from continuing |
operations before extraordinary items and |
cumulative effect of accounting change... 1.36 (0.32) (8.09) (18.52) (25.79) (1.96) | 1.52
Net income (loss) attributable to common |
shareholders............................. $1.33 $(0.74) $(8.17) $(18.77) $5.08 $(2.01) | $1.38
Weighted average shares of common stock |
and equivalents--diluted................. 36,120 35,159 35,485 47,077 48,641 48,461 | 43,340
---------- ---------- ---------- ---------- ---------- ---------- | ----------
Other Financial Data: |
Capital expenditures..................... $61,102 $56,663 $77,943 $51,981 $43,721 $32,530 | $32,954
Operating Data |
Payor Mix |
Private pay and other.................. 39% 45% 47% 41% 39% 39% | 37%
Medicare............................... 24% 20% 14% 16% 18% 18% | 19%
Medicaid............................... 37% 35% 39% 43% 43% 43% | 44%
Average owned/leased eldercare center |
beds (1)................................. 15,132 15,137 15,522 14,286 24,783 24,925 | 24,255
Occupancy Percentage....................... 91.0% 91.5% 90.7% 90.7% 90.8% 90.8% | 90.4%
Average managed eldercare center beds (1).. 6,101 24,234 23,984 23,779 9,215 9,653 | 8,413
Average institutional pharmacy beds served. 51,655 109,520 245,277 244,409 253,224 254,230 | 250,550
Average full-time equivalent personnel..... 27,700 37,708 40,500 40,450 40,425 39,784 | 39,671
| Successor Successor
| Company Company
Predecessor Company September 30, | September 30, June 30,
1997 1998 1999 2000 | 2001 2002
------ ------ ------ ------ | ------ ------
| (unaudited)
Balance Sheet Data: |
Working capital................................ $166,065 $243,461 $235,704 $304,241 | $293,875 $447,680
Total assets................................... 1,434,113 2,627,368 2,429,914 3,127,899 | 1,839,220 1,922,111
Liabilities subject to compromise.............. -- -- -- 2,446,673 | -- --
Long-term debt................................. 651,667 1,358,595 1,484,510 10,441 | 603,268 678,100
Redeemable preferred stock..................... -- -- -- 442,820 | 42,600 44,516
Shareholders' equity (deficit)................. $608,021 $875,072 $587,890 $(246,926) | $834,858 $901,090
----------------------
(1) Beginning September 30, 2001, and in connection with the completion of the
reorganization plan, 10,702 Multicare beds previously classified as "Managed
and Jointly-Owned Facilities" were reclassified as "Owned and Leased
Facilities."
For a description of significant transactions entered into by Genesis,
please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Transactions and Events" included in the Annual
Report on Form 10-K for the year ended September 30, 2001 and the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002 incorporated by
reference in this proxy statement/prospectus. See "Where You Can Find More
Information."
12
Selected Historical Financial Data of NCS HealthCare, Inc.
(Amounts in thousands, except per share data)
The following selected financial data are derived from consolidated
financial statements of NCS and subsidiaries, which have been audited by Ernst &
Young LLP, independent auditors. Ernst & Young LLP's report on the consolidated
financial statements at June 30, 2002 and 2001 and for the three years in the
period ended June 30, 2002, which is included in this proxy
statement/prospectus, includes an explanatory paragraph which describes an
uncertainty about NCS' ability to continue as a going concern. The data should
be read in conjunction with the consolidated financial statements, related
notes, and other financial information included in this proxy
statement/prospectus.
Year Ended June 30,
-----------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Revenues........................................... $ 509,064 $ 717,825 $ 694,530 $ 626,328 $ 645,756
Cost of revenues................................... 380,217 540,547 556,757 514,483 538,926
---------- ---------- ---------- ---------- ----------
Gross profit....................................... 128,847 177,278 137,773 111,845 106,830
Selling general and administrative expenses (1), (3) 93,895 139,522 126,969 123,272 93,776
Special charge to increase allowance for doubtful
accounts (2)..................................... -- 32,384 44,623 -- --
Restructuring, asset impairment and other
nonrecurring charges (2)......................... 8,862 8,115 51,136 -- --
---------- ---------- ---------- ---------- ----------
Operating income (loss)............................ 26,090 (2,743) (84,955) (11,427) 13,054
Interest expense, net.............................. (5,745) (18,301) (26,243) (31,713) (25,195)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative 20,345 (21,044) (111,198) (43,140) (12,141)
effect of accounting change......................
Income tax (expense) benefit....................... (9,014) 7,640 (3,326) (370) (300)
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change............................... 11,331 (13,404) (114,524) (43,510) (12,441)
Cumulative effect of accounting change (1), (4).... -- (2,921) -- -- (222,116)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................. $ 11,331 $ (16,325) $ (114,524) $ (43,510) $ (234,557)
========== ========== ========== ========== ==========
Net income (loss) per share - basic................ $ 0.59 $ (0.81) $ (5.31) $ (1.85) $ (9.89)
========== ========== ========== ========== ==========
Net income (loss) per share - diluted.............. $ 0.58 $ (0.81) $ (5.31) $ (1.85) $ (9.89)
========== ========== ========== ========== ==========
Net income (loss) per share before cumulative
effect of accounting change - basic.............. $ 0.59 $ (0.66) $ (5.31) $ (1.85) $ (0.52)
========== ========== ========== ========== ==========
Net income (loss) per share before cumulative
effect of accounting change - diluted............ $ 0.58 $ (0.66) $ (5.31) $ (1.85) $ (0.52)
========== ========== ========== ========== ==========
Weighted average common shares outstanding - basic. 19,100 20,200 21,551 23,535 23,717
========== ========== ========== ========== ==========
Weighted average common shares outstanding - diluted 19,372 20,200 21,551 23,535 23,717
========== ========== ========== ========== ==========
13
As of June 30,
-----------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Cash and cash equivalents........................ $ 21,186 $ 29,424 $ 16,387 $ 39,464 $ 42,539
Working capital.................................. 149,362 197,395 (93,865) (216,529) (223,430)
Total assets..................................... 623,790 699,499 546,663 513,971 277,793
Line of credit................................... 147,800 214,700 206,130 206,130 206,130
Long-term debt, excluding current portion........ 3,879 1,936 1,291 825 549
Convertible subordinated debentures.............. 102,753 100,000 102,000 102,107 102,361
Stockholders' equity (deficit)................... $ 287,334 $ 276,434 $ 169,705 $ 126,495 $ (108,062)
----------------------------
(1) Selling, general and administrative expenses for 1999 include $11,503 of
pre-tax costs that would have been capitalized prior to the adoption of SOP
98-5, "Reporting on the Costs of Start-up Activities." The cumulative effect
of accounting change represents start-up costs, net of tax, that were
previously capitalized as of June 30, 1998. The fiscal year 2002 cumulative
effect of accounting change represents the implementation of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," referred to as "SFAS No. 142."
(2) For 1998, represents a nonrecurring charge related to restructuring and
other nonrecurring expenses in connection with the implementation and
execution of strategic restructuring and consolidation initiatives of
certain operations and other nonrecurring items. For 1999, represents a
special charge to increase the allowance for doubtful accounts and other
nonrecurring charges in association with the implementation and execution of
strategic restructuring and consolidation initiatives of certain operations
and other nonrecurring items. For 2000, represents a special charge to
increase the allowance for doubtful accounts and restructuring, asset
impairment and other nonrecurring charges associated with the continuing
implementation and execution of strategic restructuring and consolidation
activities, the planned disposition of certain non-core and/or non-strategic
assets, impairment of certain assets and other nonrecurring items. See
"Information Concerning NCS -- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Selling, general and administrative expenses for the year ended June 30,
2001 include the following: (1) $10,043 of additional bad debt expense to
fully reserve for remaining accounts receivable of non-core and
non-strategic businesses exited by NCS, (2) $1,034 of restructuring and
other related charges associated with the continuing implementation and
execution of strategic restructuring and consolidation activities and (3)
$2,106 in fixed asset impairment charges recorded in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," relating primarily to changes in asset values resulting from the impact
of restructuring activities and changes in operational processes under
restructured operations.
(4) For 2002, the cumulative effect of accounting change represents the adoption
of SFAS No. 142. NCS recorded a non-cash charge of $222,116 to reduce the
carrying value of its goodwill in accordance with SFAS No. 142. In
accordance with the adoption of SFAS No. 142, NCS discontinued the
amortization of goodwill effective July 1, 2001. Goodwill amortization for
the year ended June 30, 2001 was $10,396.
14
Selected Unaudited Pro Forma Condensed Consolidated Combined Financial Data
(Amounts in thousands, except per share data)
This selected unaudited pro forma condensed consolidated combined
information, which gives effect to Genesis' adoption of fresh-start reporting in
connection with its emergence from Chapter 11 bankruptcy proceeding, referred to
as the "Genesis bankruptcy emergence," has been included only for the purposes
of illustration. It does not necessarily indicate what the operating results or
financial position of the combined company would have been if the Genesis
bankruptcy emergence or the merger had been completed at the dates indicated.
Moreover, this information does not necessarily indicate what the future
operating results or financial position of the combined company will be. You
should read this unaudited pro forma condensed consolidated combined selected
financial information in conjunction with the "Unaudited Pro Forma Condensed
Consolidated Combined Financial Information" included elsewhere in this proxy
statement/prospectus. This selected unaudited pro forma condensed consolidated
combined financial information does not reflect all cost savings or other
synergies which may result from the merger or any future merger-related
expenses. The selected unaudited pro forma results of operations data gives
effect to the Genesis bankruptcy emergence and the merger as if each had
occurred on October 1, 2000. The unaudited pro forma balance sheet data gives
effect to the merger as if it had occurred on June 30, 2002. The selected
unaudited pro forma condensed consolidated combined financial data should be
read in conjunction with the historical financial statements of Genesis and the
related notes thereto, which are incorporated by reference into this proxy
statement/prospectus, and the historical financial statements of NCS and the
related notes thereto, which are included in this proxy statement/prospectus.
For the Twelve
Months Ended For the Nine
September 30, Months Ended
2001 June 30, 2002
-------------- -------------
Summary Results of Operations
Net revenues............................................................. $3,159,936 $2,507,493
Income (loss) from continuing operations................................. (31,142) 68,281
Earnings (loss) per common share from continuing operations
Basic................................................................. $ (0.72) $ 1.57
Diluted............................................................... $ (0.72) $ 1.54
Weighted average shares outstanding
Basic................................................................. 43,504 43,583
Diluted............................................................... 43,504 45,711
June 30, 2002
-------------
Summary Balance Sheet:
Total assets............................................................................ $2,237,475
Working capital......................................................................... 411,250
Long-term debt, excluding current maturities............................................ 878,649
Shareholders' equity.................................................................... $ 939,090
15
Comparative Per Share Information
(Unaudited)
The table below contains Genesis and NCS per share information for the
twelve months ended September 30, 2001 and the nine months ended June 30, 2002
on both a historical and combined company pro forma basis.
The combined company pro forma information gives effect to the Genesis
bankruptcy emergence and the merger of Genesis and NCS as identified in the
Unaudited Pro Forma Condensed Consolidated Combined Financial Information
included in this proxy statement/prospectus. The NCS pro forma combined
equivalent information is based on the assumed conversion of each NCS common
share into 0.1 of a share of Genesis common stock.
As a consequence of Genesis' implementation of fresh-start reporting
effective September 30, 2001, the "Genesis Historical" per share information
presented below for the twelve months ended September 30, 2001 and the nine
months ended June 30, 2002 are generally not comparable. To highlight the lack
of comparability, a horizontal line separates the pre-emergence financial
information from the post emergence financial information. Any financial
information herein labeled "predecessor company" refers to periods prior to the
adoption of fresh-start reporting, while those labeled "successor company" refer
to periods following adoption of fresh-start reporting.
Cash dividends have never been paid on Genesis common stock or NCS
common stock.
You should read the information below together with the historical
financial statements and the related notes thereto of Genesis incorporated by
reference into this proxy statement/prospectus and those of NCS included in this
proxy statement/prospectus. You should not rely on the unaudited historical
comparative per share data as an indication of the results of operations or the
financial position that would have been achieved if the Genesis bankruptcy
emergence or the merger had taken place earlier or on the results of operations
or financial position of Genesis after completion of the merger.
Genesis NCS Pro
Pro Forma
Genesis NCS Forma Combined
Historical Historical Combined Equivalent
---------- ---------- -------- ----------
Consolidated book value per share:
At June 30, 2002............................................... $20.79 $(4.56) $20.54 $2.05
Income (loss) from continuing operations before extraordinary item
For the twelve months ended September 30, 2001 (Genesis
predecessor company)
Per common share - basic..................................... (25.79) (1.85) (0.72) (0.07)
Per common share - diluted................................... (25.79) (1.85) (0.72) (0.07)
=======
For the nine months ended June 30, 2002 (Genesis successor company)
Per common share - basic..................................... 1.55 (0.31) 1.57 0.16
Per common share - diluted................................... $1.52 $(0.31) $1.54 $0.15
16
Risk Factors
In considering whether to approve the merger and whether or not to
exercise your appraisal rights under Delaware law, you should consider carefully
the risk factors described below together with all of the other information
included in this proxy statement/ prospectus or incorporated by reference into
this proxy statement/prospectus.
Risks Relating to the Merger
The value of the aggregate merger consideration will depend on the market price
of Genesis common stock on the date on which the merger is completed. As a
result, at the time NCS stockholders vote on the merger, they will not know the
market value of the Genesis common stock that they will receive for their
shares.
Under the terms of the merger agreement, Genesis will issue shares of
its common stock in exchange for shares of NCS Class A common stock and shares
of NCS Class B common stock. The number of shares of Genesis common stock that
you will receive for each of your shares of NCS Class A common stock or NCS
Class B common stock is fixed, and the merger agreement contains no mechanism to
adjust the merger exchange ratio in the event that the market price of Genesis
common stock declines prior to the merger. The value of the merger consideration
will depend upon the market price of Genesis common stock on the date on which
the merger is completed. The value of Genesis common stock may decrease
significantly between the time that NCS stockholders vote on the merger and the
time that the merger is completed. Genesis and NCS cannot make any assurances as
to the market price of Genesis common stock at the time the merger is completed.
If NCS stockholders who receive Genesis common stock in the merger sell that
stock immediately, it could cause a decline in the market price of Genesis
common stock.
All of the shares of Genesis common stock to be issued in the merger
will be registered with the SEC and therefore will be immediately available for
resale in the public market, except that shares issued in the merger to NCS
stockholders who are affiliates of NCS before the merger will be subject to
certain restrictions on transferability. Immediately after the merger, NCS
stockholders who are not affiliates may elect to sell the stock that they
receive in the merger or holders of Genesis common stock may sell significant
amounts of Genesis common stock. As a result of such sales or the perception
that these sales could occur, the market price of Genesis common stock may
decline and could decline significantly before or at the time the merger is
completed or immediately thereafter.
The anticipated benefits of the merger may not be realized in a timely fashion,
or at all, and Genesis' operations may be adversely affected if the integration
of NCS' business diverts too much attention away from Genesis' existing
business.
The merger involves risks related to the integration of two companies
that have previously operated independently. The integration of these companies
will be a complex, time-consuming and potentially expensive process and may
disrupt Genesis' business if not completed in a timely and efficient manner. It
is anticipated that it will take approximately one to three years for Genesis to
fully integrate NCS' business and realize the benefits of the merger. Some of
the difficulties that may be encountered by the combined company include:
o the diversion of management's attention from other ongoing
business concerns;
o the inability to effectively integrate and manage NCS pharmacies;
and
o potential conflicts between business cultures.
If Genesis' management focuses too much time, money or effort on the
integration of NCS' operations and assets, it may not be able to execute
Genesis' overall business strategy. The diversion of management's attention and
any difficulties associated with integrating the two companies could have a
material adverse effect on the revenues, the level of expenses and the operating
and financial results of the combined company and the value of Genesis common
stock.
17
The costs of the merger to Genesis may be greater than anticipated as a result
of NCS stockholder litigation or the exercise of appraisal rights by NCS
stockholders.
Since the merger agreement was announced, seven separate lawsuits have
been filed alleging in general that certain officers of NCS breached their
fiduciary duties to the NCS stockholders by entering into the merger agreement
and the voting agreements. In two of the lawsuits, Genesis and Geneva Sub, Inc.
are also named as defendants. In addition to seeking to prevent the merger,
these lawsuits seek monetary damages. If the plaintiffs were to prevail in their
allegations, a court could permit the merger to occur, but award the plaintiffs
monetary damages, which may increase the cost of the transaction to Genesis. See
"The Merger -- Litigation Relating to the Merger."
NCS stockholders who do not wish to accept the Genesis common stock to
be issued in the merger have the right to have the Delaware Chancery Court
determine the "fair value" of their shares. If NCS stockholders properly
exercise that right, the Chancery Court may award them an amount in excess of
the merger consideration. Any award would generally be paid in cash, which may
increase the cost of the transaction.
The merger is subject to the receipt of necessary consents and
approvals from government entities that could delay completion of the merger or
impose conditions that could have a material adverse effect on the combined
company or result in a termination of the merger.
Many of the states in which NCS transacts business require Genesis to
provide notice of the merger or to receive approvals in connection with the
completion of the merger. Additionally, under some circumstances, the merger may
be reportable under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended, referred to as the "HSR Act." If notification filings are required
under the HSR Act, completion of the merger will be conditioned upon the
expiration or termination of the applicable waiting period under the HSR Act. A
substantial delay in obtaining satisfactory approvals or the imposition of
unfavorable terms or conditions in the approvals could have an adverse effect on
the business, financial condition or results of operations of Genesis or NCS, or
may result in a termination of the merger.
Risks Relating to Genesis' Business and Ownership of Genesis Common Stock
Changes in the reimbursement rates or methods of payment from Medicare and
Medicaid have adversely affected Genesis' revenues and operating margins and
additional changes in Medicare and Medicaid or the implementation of other
measures to reduce the reimbursement for Genesis' services may further
negatively impact Genesis.
Genesis currently receives over 60% of its revenues from Medicare and
Medicaid. The healthcare industry is experiencing a strong trend toward cost
containment, as the government seeks to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with providers. These
cost containment measures generally have resulted in reduced rates of
reimbursement for services that Genesis provides, including skilled nursing
facility services, pharmacy services and therapy services.
Legislative and regulatory action has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs, which changes have negatively
affected Genesis, 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;
o adoption of the Benefits Improvement Protection Act of 2000; and
o the repeal of the Boren Amendment federal payment standard for
Medicaid payments to nursing facilities.
18
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. Further, within the statutory
framework of the Medicare and Medicaid programs, there are a substantial number
of areas subject to administrative rulings and interpretations that 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 Genesis.
The Benefits Improvement and Protection Act of 2000 enactment mandates
a phase out of intergovernmental transfer transactions by states whereby states
inflate the payments to certain public facilities to increase federal matching
funds. This action may reduce federal support for a number of state Medicaid
plans. The reduced federal payments may adversely affect aggregate available
funds, thereby requiring states to reduce payments to all providers. Genesis
operates in several of the states that will experience a contraction of federal
matching funds.
With the repeal of the federal payment standards, there can be no
assurances that budget constraints or other factors will not cause states to
reduce Medicaid reimbursement to nursing facilities and pharmacies or that
payments to nursing facilities and pharmacies will be made on a timely basis.
Additionally, the recent economic downturn may reduce state spending on
Medicaid programs. Recent data compiled by the National Conference of State
Legislatures indicates that the recent economic downturn has had a detrimental
effect on state revenues. Historically, these budget pressures have translated
into reductions in state spending. Given that Medicaid outlays are a significant
component of state budgets, Genesis expects continuing cost containment
pressures on Medicaid outlays for nursing homes and pharmacy services in the
states in which it operates.
Effective October 1, 2002, Genesis' revenues are adversely affected by expiring
Medicare provisions; although Congress may restore a portion of lost Medicare
revenues.
A number of provisions of the Balanced Budget Refinement Act and the
Benefits Improvement and Protection Act enactments providing additional funding
for Medicare participating skilled nursing facilities expired on September 30,
2002. The expiration of these provisions is estimated to reduce Genesis'
Medicare per diems per beneficiary, on average, by $34.
On April 23, 2002, the Centers for Medicare and Medicaid Services
issued a press statement announcing that the agency would not proceed with its
previously announced changes in the skilled nursing facility case-mix
classification system. In its announcement, the Centers for Medicare and
Medicaid Services clarified that case-mix refinements would be postponed for a
full year. It issued notice of fiscal year 2003 rates in the Federal Register,
July 31, 2002. Effective October 1, 2002, rates will be increased by a 2.6%
annual market basket adjustment. The Centers for Medicare and Medicaid Services
estimates that, even with this upward adjustment, average Medicare rates will be
8.8% lower than the current year because of the reduced payment caused by the
expiring statutory add-ons.
The House of Representatives passed a package of Medicare amendments in
late June 2002. Under the House-passed measure, portions of the expiring
provisions would be retained. The Balanced Budget Refinement Act increase of 4%
would expire, and the 16.6% add-on of the Benefits Improvement and Protection
Act to the nursing portion of the skilled nursing facility prospective payment
system rates would be reduced to 12% in 2003, 10% in 2004, and 8% in 2005. Under
this proposal, fiscal year 2003 rates would be 5.2% lower than those of the
current year.
On October 1, 2002, key leaders of the Senate Finance Committee
introduced a bipartisan "Beneficiary Access to Care and Medicare Equity Act of
2002." This measure offers moderately more rate assistance than the House-passed
measure altering the nursing portion of the skilled nursing facility prospective
payment system to 15% in 2003, 13% in 2004, and 11% in 2005. The BBRA 4% market
basket adjustment would expire. Under this proposal, fiscal year 2003 rates
would be 4.3% lower than those of the current year. A Medicare provider relief
package is expected to be considered before Congress adjourns. It is premature
to forecast the outcome of Congressional action.
19
Genesis' estimate of the impact of the "Skilled Nursing Facilities
Medicare Cliff", factoring in the administrative decision not to proceed with
changes in the case-mix refinements at this time and without factoring in any
additional Congressional action, exposes the skilled nursing facility sector to
a 10% reduction. For Genesis, this reduction could have an adverse revenue
impact exceeding $35 million annually.
There may be additional provisions in the Medicare legislation
affecting other businesses of Genesis. Congress is expected to consider changes
affecting pharmacy, rehabilitation therapy, diagnostic services and the payment
for services in other health settings.
It is not possible to quantify fully the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on Genesis' business. Accordingly, there can be no
assurance that the impact of these changes or any future healthcare legislation
will not further adversely affect Genesis' 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. Genesis' financial condition and
results of operations may be affected by the reimbursement process, which in the
healthcare industry is complex and can involve lengthy delays between the time
that revenue is recognized and the time that reimbursement amounts are settled.
Changes in pharmacy legislation and payment formulas could adversely affect
Genesis' NeighborCare(R) pharmacy operations.
Pharmacy coverage and cost containment are important policy debates at
both the federal and state levels. The federal government has considered
proposals to expand Medicare coverage for outpatient pharmacy services.
Enactment of such legislation could affect institutional pharmacy services.
Likewise, a number of states have proposed cost containment
initiatives. Changes in payment formulas and delivery requirements could
adversely affect Genesis' NeighborCare pharmacy operations.
Genesis conducts business in a heavily regulated industry, and changes in
regulations and violations of regulations may result in increased costs or
sanctions.
Genesis' business is subject to extensive federal, state and, in some
cases, local regulation with respect to, among other things, licensure and
certification of eldercare centers and pharmacy operations, controlled
substances and health planning in addition to reimbursement. For Genesis'
eldercare centers, this regulation relates, among other things, to the adequacy
of physical plant and equipment, qualifications of personnel, standards of care
and operational requirements. For pharmacy and medical supply products and
services, this regulation relates, among other things, to operational
requirements, documentation, licensure, certification and regulation of
controlled substances. Compliance with these regulatory requirements, as
interpreted and amended from time to time, can increase operating costs and
thereby adversely affect the financial viability of Genesis' business. Because
these laws are amended from time to time and are subject to interpretation,
Genesis cannot predict when and to what extent liability may arise. Failure to
comply with current or future regulatory requirements could also result in the
imposition of various remedies including (with respect to inpatient care) fines,
restrictions on admission, the revocation of licensure, decertification,
imposition of temporary management or the closure of a facility or site of
service.
Genesis is subject to periodic audits by the Medicare and Medicaid
programs, which have various rights and remedies against Genesis if they assert
that Genesis has overcharged the programs or failed to comply with program
requirements. Rights and remedies available to these programs include repayment
of any amounts alleged to be overpayments or in violation of program
requirements, or making deductions from future amounts due to Genesis. These
programs may also impose fines, criminal penalties or program exclusions. Other
third-party payor sources also reserve rights to conduct audits and make
monetary adjustments.
20
Genesis believes that its eldercare centers and other sites of service
are in substantial compliance with the various Medicare, Medicaid and state
regulatory requirements applicable to it. However, in the ordinary course of
Genesis' business, it receives notices of deficiencies for failure to comply
with various regulatory requirements. Genesis reviews such notices and takes
appropriate corrective action. In most cases, Genesis and the reviewing agency
will agree upon the measures that will bring the center or service site into
compliance with regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take various adverse actions against a
provider, including but not limited to:
o the imposition of fines;
o suspension of payments for new admissions to the center; and
o in extreme circumstances, decertification from participation in
the Medicare or Medicaid programs and revocation of a center's
license.
These actions may adversely affect a provider's ability to continue to
operate, the ability to provide certain services and/or eligibility to
participate in the Medicare or Medicaid programs or to receive payments from
other payors. Additionally, actions taken against one center or service site may
subject other centers or service sites under common control or ownership to
adverse remedies.
Genesis is also subject to federal and state laws that govern financial
and other arrangements between healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to encourage the referral of patients to
a particular provider for medical products and services. Furthermore, some
states restrict certain business relationships between physicians and other
providers of healthcare services. Many states prohibit business corporations
from providing, or holding themselves out as a provider of, medical care.
Possible sanctions for violation of any of these restrictions or prohibitions
include loss of licensure or eligibility to participate in reimbursement
programs and civil and criminal penalties. These laws vary from state to state,
are often vague and have seldom been interpreted by the courts or regulatory
agencies. From time to time, Genesis has sought guidance as to the
interpretation of these laws; however, there can be no assurance that such laws
will ultimately be interpreted in a manner consistent with Genesis' practices.
In July 1998, the federal government issued a new initiative to promote
the quality of care in nursing homes. Following this pronouncement, it has
become more difficult for nursing facilities to maintain licensure and
certification. Genesis has experienced and expects to continue to experience
increased costs in connection with maintaining its licenses and certifications
as well as increased enforcement actions.
Genesis faces additional federal requirements that mandate major
changes in the transmission and retention of health information. The Health
Insurance Portability and Accountability Act of 1996 was enacted to ensure,
first, that employees can retain and at times transfer their health insurance
when they change jobs, and second, to simplify health care administrative
processes. This simplification includes expanded protection of the privacy and
security of personal medical data and requires the adoption of standards for the
exchange of electronic health information. Among the standards that the
Secretary of Health and Human Services will adopt pursuant to the Health
Insurance Portability and Accountability Act are standards for electronic
transactions and code sets, unique identifiers for providers, employers, health
plans and individuals, security and electronic signatures, privacy and
enforcement. Although the Health Insurance Portability and Accountability Act
was intended to ultimately reduce administrative expenses and burdens faced
within the healthcare industry, Genesis believes that implementation of this law
will result in additional costs. Failure to comply with the Health Insurance
Portability and Accountability Act could result in fines and penalties that
could have a material adverse effect on Genesis.
The operation of Genesis' eldercare centers is subject to federal and
state laws prohibiting fraud by healthcare providers, including criminal
provisions, which prohibit filing false claims or making false statements to
receive payment or certification under Medicaid, or failing to refund
overpayments or improper payments. Violation of these criminal provisions is a
felony punishable by imprisonment and/or fines. Genesis may be subject to fines
and treble damage claims if it violates the civil provisions that prohibit the
knowing filing of a false claim or the knowing use of false statements to obtain
payment.
21
State and federal governments are devoting increased attention and
resources to anti-fraud initiatives against healthcare providers. The Health
Insurance Portability and Accountability Act and the Balanced Budget Act of 1997
expanded the penalties for health care fraud, including broader provisions for
the exclusion of providers from the Medicaid program. Genesis has established
policies and procedures that it believes are sufficient to ensure that its
facilities will operate in substantial compliance with these anti-fraud and
abuse requirements. While Genesis believes that its business practices are
consistent with Medicaid criteria, those criteria are often vague and subject to
change and interpretation. Aggressive anti-fraud actions, however, could have an
adverse effect on Genesis' financial position, results of operations and cash
flows.
Genesis is subject to federal and state laws that impose repackaging,
labeling and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail outlets. A drug repackager must register with the Food and
Drug Administration, referred to as the "FDA," as a manufacturing establishment
and is subject to FDA inspection for compliance with relevant good manufacturing
practices. Genesis holds all the required registrations and licenses and
believes that it is in compliance with all related regulations. In addition,
Genesis believes that it complies with all relevant requirements of the
Prescription Drug Marketing Act for the transfer and shipment of
pharmaceuticals. Failure to comply with FDA regulations could result in fines
and other penalties, including loss of licensure and could have a material
adverse effect on Genesis' business.
State laws and regulations could affect Genesis' ability to grow.
Many states in which Genesis operates its business have adopted
Certificate of Need, referred to as "CON," or similar laws that generally
require that a state agency approve certain acquisitions and determine that the
need for certain bed additions, new services and capital expenditures or other
changes exist prior to the acquisition or addition of beds or services, the
implementation of other changes or the expenditure of capital. State approvals
are generally issued for a specified maximum expenditure and require
implementation of the proposal within a specified period of time. Failure to
obtain the necessary state approval can result in the inability to provide the
service, to operate the centers, to complete the acquisition, addition or other
change, and can also result in the imposition of sanctions or adverse action on
the center's license and adverse reimbursement action. There can be no assurance
that Genesis will be able to obtain CON approval for all future projects
requiring such approval.
Possible changes in the case mix of patients as well as payor mix and payment
methodologies may significantly affect Genesis' profitability.
The sources and amounts of Genesis' patient revenues will be determined
by a number of factors, including licensed bed capacity and occupancy rates of
its centers, the mix of patients and the rates of reimbursement among payors.
Likewise, payment for pharmacy and medical supply services, including the
institutional pharmacy services of its NeighborCare(R) pharmacy operations and
therapy services provided by Genesis' rehabilitation therapy services business,
will vary based upon payor and payment methodologies. Changes in the case mix of
the patients as well as payor mix among private pay, Medicare and Medicaid will
significantly affect Genesis' profitability. Particularly, any significant
increase in Genesis' Medicaid population could have a material adverse effect on
its financial position, results of operations and cash flow, especially if
states operating these programs continue to limit, or more aggressively seek
limits on, reimbursement rates.
Further consolidation of managed care organizations and other third party payors
may adversely affect Genesis' profits.
Managed care organizations and other third-party payors have continued
to consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage of
the United States population are increasingly served by a small number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
that such organizations terminate Genesis as a preferred provider and/or engage
its competitors as a preferred or exclusive provider, Genesis' business could be
materially adversely affected. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures or the
assumption by healthcare providers of all or a portion of the financial risk
through prepaid capitation arrangements.
22
Genesis faces intense competition in its business.
The healthcare industry is highly competitive. Genesis competes with a
variety of other companies in providing eldercare services, many of which have
greater financial and other resources and may be more established in their
respective communities than Genesis. Competing companies may offer newer or
different centers or services than Genesis does and may thereby attract
customers who are either presently customers of Genesis' eldercare centers or
are otherwise receiving its eldercare services.
Genesis competes in providing pharmacy, medical supply and other
specialty medical services with a variety of different companies. Generally,
this competition is national, regional and local in nature. The primary
competitive factors in the specialty medical services business are similar to
those in the eldercare center business and include reputation, the cost of
services, the quality of clinical services, responsiveness to customer needs,
and the ability to provide support in other areas such as third-party
reimbursement, information management and patient record-keeping.
An increase in insurance costs may adversely affect Genesis' operating cash
flow, and Genesis may be liable for losses not covered by or in excess of its
insurance.
Genesis has experienced an adverse effect on its operating cash flow
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, and losses stemming from these malpractice lawsuits and a
constriction of insurers have caused many insurance carriers to raise the cost
of insurance premiums or refuse to write insurance policies for nursing homes.
Also, a tightening of the reinsurance market has affected property, auto and
excess liability insurance carriers. Accordingly, the costs of all insurance
premiums have increased. These problems are particularly acute in the State of
Florida where, because of a greater number and higher amount of claims, general
liability and professional liability costs have become increasingly expensive.
Genesis owns or leases approximately 1,500 skilled nursing beds in the State of
Florida.
Genesis carries property, workers' compensation insurance, general and
professional liability coverage on its behalf and on behalf of its subsidiaries
in amounts deemed adequate by management. However, there can be no assurance
that any current or future claims will not exceed applicable insurance coverage.
In addition, for certain of Genesis' workers' compensation insurance,
professional liability coverage and health insurance provided to its employees,
Genesis is self-insured. Accordingly, Genesis is liable for payments to be made
under those plans. To the extent claims are greater than estimated, they could
adversely affect Genesis' financial position, results of operations and cash
flows.
Genesis could experience significant increases in its operating costs due to
intense competition for qualified staff and minimum staffing laws in the
healthcare industry.
Genesis and the healthcare industry continue to experience shortages in
qualified professional clinical staff, including pharmacies. Genesis competes
with other healthcare providers and with non-healthcare providers for both
professional and non-professional employees. As the demand for these services
continually exceeds the supply of available and qualified staff, Genesis and its
competitors have been forced to offer more attractive wage and benefit packages
to these professionals and to utilize outside contractors for these services at
premium rates. Furthermore, the competitive arena for this shrinking labor
market has created high turnover among clinical professional staff as many seek
to take advantage of the supply of available positions, each offering new and
more attractive wage and benefit packages. In addition to the wage pressures
inherent in this environment, the cost of training new employees amid the high
turnover rates has caused added pressure on Genesis' operating margins. Lastly,
increased attention to the quality of care provided in skilled nursing
facilities has caused several states to consider minimum staffing laws that
could further increase the gap between demand for and supply of qualified
individuals and lead to higher labor costs. While Genesis has been able to
retain the services of an adequate number of qualified personnel to staff its
facilities appropriately and maintain its standards of quality care, there can
be no assurance that continued shortages will not in the future affect its
ability to attract and maintain an adequate staff of qualified healthcare
personnel. A lack of qualified personnel at a facility could result in
significant increases in labor costs at such facility or otherwise adversely
affect operations at such facility. Any of these developments could adversely
affect Genesis' operating results or expansion plans.
23
If Genesis is unable to control operating costs and generate sufficient cash
flow to meet operational and financial requirements, including servicing its
indebtedness, its business operations may be adversely affected.
Cost containment and lower reimbursement levels by third-party payors,
including the federal and state governments, have had a significant impact on
the healthcare industry as a whole and on Genesis' cash flows. Genesis'
operating margins continue to be under pressure because of continuing regulatory
scrutiny and growth in operating expenses, such as labor costs and insurance
premiums. In addition, as a result of competitive pressures, Genesis' ability to
maintain operating margins through price increases to private patients is
limited. Further, in connection with its reorganization, Genesis entered into
its senior secured credit facility. If Genesis is unable to service its
indebtedness, its business operations will be adversely affected. Therefore,
Genesis will have to generate sufficient cash flow to meet operational and
financing requirements, which includes servicing its indebtedness. If Genesis is
unable to do so, its business operations and revenues may be materially
adversely affected.
As a result of this merger, Genesis will increase its leverage. In addition,
Genesis may further increase its leverage in the future.
At the closing of the merger, Genesis will repay in full or cause NCS
to repay in full the outstanding debt of NCS, which includes $206 million of
senior debt, and, subject to NCS' compliance with specified provisions of the
merger agreement, will cause NCS to redeem $102 million of the NCS notes,
including any accrued and unpaid interest and redemption premium. Genesis
intends to finance the cash portion of the purchase with existing combined cash
on hand of $122 million, and through an expansion of its existing senior credit
facility of $200 million.
As of June 30, 2002, after giving effect to the additional borrowings
under its senior secured credit facility to finance the merger and the issuance
of Genesis' common stock as a result of the merger, Genesis would have had (1)
consolidated total debt of approximately $888 million, and (2) total debt
expressed as a percentage of total capitalization of approximately 48.6%. See
"Capitalization" and "Description of Other Indebtedness."
Genesis' substantial debt could have important consequences. For
example, it could:
o require Genesis to dedicate a substantial portion of its cash flow
from operations and other capital resources to debt service,
thereby reducing its ability to fund working capital, capital
expenditures and other cash requirements;
o limit Genesis' flexibility in planning for, or reacting to,
changes and opportunities in the healthcare industry that may
place Genesis at a competitive disadvantage compared to its
competitors with less indebtedness or lower fixed-costs;
o limit Genesis' ability to incur additional debt on commercially
reasonable terms, if at all; and
o increase Genesis' vulnerability to adverse economic and industry
conditions.
Subject to the terms of Genesis' debt, Genesis may be able to incur
additional debt in the future. If Genesis incurs additional debt, however, the
related risks that it now faces could increase. In this regard, Genesis may make
acquisitions in the future financed through the incurrence of additional debt.
24
If Genesis fails to generate significant cash flow to service its debt, it may
have to refinance all or a portion of its debt to obtain additional financing.
Genesis' ability to make payments on its existing and future debt and
to pay its expenses will depend on its ability to generate cash in the future.
Genesis' ability to generate cash is subject to various risks and uncertainties,
including those disclosed in this section and prevailing economic, regulatory
and other conditions beyond its control. Based on its current level of
operations, Genesis believes that its cash flow from operations and other
capital resources will be sufficient to meet its liquidity needs for the
foreseeable future. However, Genesis cannot assure you that these capital
resources will be sufficient to enable it to repay its debt and to pay its
expenses. If Genesis does not have enough cash to make these payments, it may be
required to refinance all or part of its debt, sell assets, curtail
discretionary capital expenditures or borrow more money. Genesis cannot assure
you that it will be able to do these things on commercially reasonable terms, if
at all. In addition, the terms of Genesis' existing or future debt agreements
may restrict it from pursuing any of these alternatives.
The agreements governing its existing debt and preferred stock contain,
and future debt may contain, various covenants that limit its discretion in the
operation of its business.
The agreements and instruments governing Genesis' existing and future
debt contain and may contain various restrictive covenants that, among other
things, require it to comply with or maintain certain financial tests and ratios
and restrict its ability to:
o incur more debt;
o pay dividends, redeem stock or make other distributions;
o make certain investments;
o create liens;
o enter into transactions with affiliates;
o merge or consolidate; and
o transfer or sell assets.
Genesis' ability to comply with these covenants is subject to various
risks and uncertainties. In addition, events beyond its control could affect its
ability to comply with and maintain the financial tests and ratios. Any failure
by Genesis to comply with and maintain all applicable financial tests and ratios
and to comply with all applicable covenants could result in an event of default
with respect to, and the acceleration of the maturity of, and the termination of
the commitments to make further extension of credit under a substantial portion
of its debt. If Genesis were unable to repay debt to its senior lenders, these
lenders could proceed against the collateral securing that debt. Even if Genesis
is able to comply with all applicable covenants, the restrictions on its ability
to operate its business in its sole discretion could harm its business by, among
other things, limiting its ability to take advantage of financings, mergers,
acquisitions and other corporate opportunities.
The terms of Genesis' outstanding preferred stock also contain
restrictions on its ability to complete certain types of transactions without
the consent of the holders of the preferred stock.
A significant portion of Genesis' business is concentrated in certain markets
and the recent economic downturn or changes in the laws affecting its business
in those markets could have a material adverse effect on its operating results.
Genesis receives approximately 57% of its revenue from operations in
Pennsylvania, New Jersey, Massachusetts and Maryland. The economic condition of
these markets could affect the ability of its customers and third-party payors
to reimburse Genesis for its services through a reduction of disposable
household income or the ultimate reduction of the tax base used to generate
state funding of their respective Medicaid programs. An economic downturn, or
changes in the laws affecting Genesis' business in these markets and in
surrounding markets, could have a material adverse effect on its financial
position, results of operations and cash flows.
25
Genesis' NeighborCare(R) pharmacy operations derive a significant portion of its
revenue from customers pursuant to contracts that expire in April 2003.
Genesis' NeighborCare pharmacy operations provide services to 58
centers operated by Mariner Post-Acute Network, Inc., referred to as "Mariner,"
which represent four percent and two percent of net revenues of NeighborCare and
Genesis, respectively. On January 18, 2000, Mariner filed voluntary petitions
under Chapter 11 with the Bankruptcy Court, giving Mariner certain rights under
the protection of the Bankruptcy Court to reject the service contracts for those
centers.
Effective November 1, 2001, the Mariner Bankruptcy Court approved a
settlement agreement between NeighborCare and Mariner relating to these Mariner
service contracts, whereby, among other things:
o the form of the contracts was restated and new pricing was
implemented; and
o the term of the contracts was extended for eighteen months through
April 30, 2003, except that Mariner has the right to terminate a
limited number of service contracts in the event of the
disposition or closure of the subject facility.
There can be no assurance that these services will continue to be
provided after the contracts' current terms expire.
Genesis' NeighborCare(R) pharmacy operations purchase a significant portion of
its products from one supplier.
Genesis' NeighborCare pharmacy operations obtain approximately 90% of
its products from one supplier pursuant to contracts that are terminable by
either party on 90 days' notice. If these contracts are terminated, there can be
no assurance that NeighborCare's operations would not be disrupted or that
Genesis could obtain the products at similar cost.
Genesis may make additional acquisitions that could subject it to a
number of operating risks.
Genesis anticipates that it may continue to make acquisitions of,
investments in and strategic alliances with complementary businesses to enable
it to add services for its core customer base and for adjacent markets, and to
expand each of its businesses geographically. However, implementation of this
strategy entails a number of risks, including:
o inaccurate assessment of undisclosed liabilities;
o entry into markets in which Genesis may have limited or no
experience;
o diversion of management's attention from Genesis' core business;
o difficulties in assimilating the operations of an acquired
business or in realizing projected efficiencies and cost savings;
o increase in Genesis' indebtedness and a limitation in its ability
to access additional capital when needed; and
o obtaining anticipated revenue synergies or cost reductions are
also a risk in many acquisitions.
Certain changes may be necessary to integrate the acquired businesses
into Genesis' operations to assimilate many new employees and to implement
reporting, monitoring, compliance and forecasting procedures.
26
Financial information related to Genesis' post-emergence operations is limited,
and, therefore, it is difficult to compare post-emergence financial information
with that of prior periods.
Since Genesis emerged from bankruptcy on October 2, 2001, there is
limited operating and financial data available from which to analyze its
operating results and cash flows. As a result of fresh-start reporting, it is
difficult to compare information reflecting Genesis' results of operations and
financial condition after its emergence from bankruptcy to the results of prior
periods. See "Selected Historical Financial Data of Genesis Health Ventures,
Inc."
Shareholders of Genesis common stock may face a lack of liquidity, and the
market price of Genesis common stock may be volatile.
There is limited trading activity in Genesis common stock. Genesis
common stock traded on the OTC Bulletin Board from October 15, 2001 to February
7, 2002, under the symbol "GHVE." Genesis common stock has been trading on the
Nasdaq National Market since February 8, 2002 under the symbol "GHVI." From
February 8, 2002 until October [ ], 2002, there were only [ ] trading days in
which the trading exceeded 200,000. Therefore, it may be difficult for NCS
stockholders to sell Genesis common stock received in the merger promptly.
The market price of Genesis common stock could fluctuate for many
reasons, including in response to the risk factors listed in this proxy
statement/prospectus or for reasons unrelated to Genesis' performance.
Genesis does not expect to pay dividends on its common stock.
Genesis is restricted on its ability to pay dividends under its senior
credit facility and senior secured note. Genesis does not anticipate paying cash
dividends on its common stock for the foreseeable future.
Provisions in Pennsylvania law and Genesis' corporate charter documents could
delay or prevent a change in control.
As a Pennsylvania corporation, Genesis is governed by the Pennsylvania
Business Corporation Law of 1988, as amended, referred to as "Pennsylvania
corporation law." Pennsylvania corporation law provides that the board of
directors of a corporation in discharging its duties, including its response to
a potential merger or takeover, may consider the effect of any action upon
employees, shareholders, suppliers, customers and creditors of the corporation
as well as upon, communities in which offices or other establishments of the
corporation are located and all other pertinent factors. In addition, under
Pennsylvania corporation law, subject to certain exceptions, a business
combination between Genesis and a beneficial owner of more than 20% of its stock
may be accomplished only if certain conditions are met.
Genesis' articles of incorporation contain certain provisions that may
affect a person's decision to implement a takeover of Genesis, including the
following provisions:
o a classified board of directors beginning at the first shareholder
meeting for the election of directors after October 2, 2001, with
each director having a three-year term;
o a provision providing that certain business combinations involving
Genesis, unless approved by at least 75% of the board of
directors, will require the affirmative vote of at least 80% of
the voting stock of Genesis;
o a provision permitting the board of directors to oppose a tender
or other offer for Genesis' constituents and to consider any
pertinent issue in connection with such offer including, but not
limited to, the reputation of the offeror, the value of the
offered securities and any applicable legal or regulatory issues
raised by the offer; and
o the authority to issue preferred stock with rights to be
designated by the board of directors.
27
The overall effect of the foregoing provisions may be to deter a future
tender offer or other offers to acquire Genesis or its shares. Shareholders
might view such an offer to be in their best interest if the offer includes a
substantial premium over the market price of the common stock at that time. In
addition, these provisions may assist Genesis' management in retaining its
position and place it in a better position to resist changes that the
shareholders may want to make if dissatisfied with the conduct of Genesis'
business.
Forward-Looking Statements and Cautionary Factors
Statements in this proxy statement/prospectus which are not historical
facts are forward-looking statements. The Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves without fear of
litigation so long as that information is identified as forward-looking and is
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in the
information. Forward-looking statements are included in this proxy
statement/prospectus regarding Genesis and NCS and are incorporated by reference
from other documents filed by Genesis with the SEC and include statements for
the period from and after the completion of the merger. You can find many of
these statements by looking for words including, for example, "believes,"
"expects," "anticipates," "projects," "estimates" or similar expressions in this
proxy statement/prospectus or in documents incorporated by reference in this
proxy statement/prospectus.
These forward-looking statements include, but are not limited to:
o statements contained in "Risk Factors;"
o statements included in Genesis' "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which
is incorporated by reference into this proxy statement/prospectus,
such as its ability to meet its liquidity needs, scheduled debt
and interest payments, expected future capital expenditure
requirements; Genesis' ability to effect repayment of trade
payables due to its primary supplier of pharmacy products;
Genesis' ability to control costs and sell assets; the expected
effects of government regulation on reimbursement for services
provided; and Genesis' ability to successfully implement its
strategic objectives in "Liquidity and Capital
Resources--Strategic Objectives;"
o statements included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of NCS;
o statements included in Genesis' description of the "Business,"
which is incorporated by reference into this proxy
statement/prospectus, concerning strategy, corporate integrity
programs, government regulations and the Medicare and Medicaid
programs;
o statements included in NCS' "Description of the Business;"
o statements included in Genesis' Notes to Consolidated Financial
Statements concerning pro forma adjustments; and Notes to
Unaudited Condensed Consolidated Financial Statements concerning
pro forma adjustments, which are incorporated by reference into
this proxy statement/prospectus;
o statements included in Genesis' "Legal Proceedings" regarding the
effects of litigation, which is incorporated by reference into
this proxy statement/prospectus; and
o statements included in NCS' "Legal Proceedings" regarding the
effects of certain litigation.
The forward-looking statements involve known and unknown risks,
uncertainties and other factors that are, in some cases, beyond Genesis' and
NCS' control. You are cautioned that these 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, certain of which are discussed more fully
under the caption "Risk Factors:"
28
o the effects of the merger;
o the outcome of certain NCS stockholder derivative suits, the
Omnicare litigation and related cash tender offer and the exercise
of appraisal rights by NCS stockholders;
o changes in the reimbursement rates or methods of payment from
Medicare and Medicaid, or the implementation of other measures to
reduce the reimbursement for Genesis' services;
o the expiration of enactments providing for additional governmental
funding;
o changes in pharmacy legislation and payment formulas;
o the impact of federal and state regulations;
o changes in payor mix and payment methodologies;
o further consolidation of managed care organizations and other
third party payors;
o competition in the businesses of Genesis and NCS;
o an increase in insurance costs and potential liability for losses
not covered by, or in excess of, Genesis' or NCS' insurance;
o competition for qualified staff in the healthcare industry;
o Genesis' or NCS' ability to control operating costs and generate
sufficient cash flow to meet operational and financial
requirements;
o the effects of Genesis' increased leverage;
o an economic downturn or changes in the laws affecting Genesis' or
NCS' business in those markets in which it operates;
o the effect of the expiration of certain service and supply
contracts;
o the impact of Genesis' reliance on one pharmacy supplier to
provide a significant portion of its pharmacy products;
o the impact of acquisitions; and
o acts of God or public authorities, war, civil unrest, fire,
floods, earthquakes and other matters beyond Genesis' control.
In addition to these factors and any risks and uncertainties
specifically identified in the text surrounding forward-looking statements, any
statements in this proxy statement/prospectus or the reports and other documents
filed by Genesis with the SEC that warn of risks or uncertainties associated
with future results, events or circumstances also identify factors that could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements.
All subsequent written and oral forward-looking statements attributable
to Genesis and NCS or any person acting on their behalf are expressly qualified
in their entirety by the cautionary statements contained or referred to in this
section. Neither Genesis nor NCS undertakes any obligation to release publicly
any revisions to these forward-looking statements to reflect events or
circumstances after the date of this proxy statement/prospectus or to reflect
the occurrence of unanticipated events, except as may be required under
applicable securities law.
29
Special Meeting of NCS Stockholders
This proxy statement/prospectus is being furnished to you in order to
provide you with important information regarding the merger and in connection
with the solicitation of your proxy for use at the special meeting to be held to
adopt the merger agreement. The special meeting is scheduled to be held at the
time and place described below. This proxy statement/prospectus is first being
mailed to NCS stockholders on [ ], 2002.
General. The NCS special meeting is scheduled to be held on November [
], 2002 at [ ].m., local time, at [ ]. The purpose of the NCS special meeting is
to consider and vote upon the adoption of the merger agreement, pursuant to
which NCS will become a wholly owned subsidiary of Genesis. Adoption of the
merger agreement will also constitute approval of the merger and the other
transactions contemplated by the merger agreement.
A special committee of independent directors of NCS, as well as the
full NCS board of directors, has unanimously approved the merger agreement and
recommends that NCS stockholders vote "for" adoption of the merger agreement.
Record Date. The NCS board of directors has fixed the close of business
on October [ ], 2002 as the NCS record date for the determination of holders of
shares of NCS Class A common stock and holders of shares of NCS Class B common
stock entitled to notice of and to vote at the NCS special meeting.
Stock Entitled to Vote. At the close of business on October [ ], 2002,
there were [ ] shares of NCS Class A common stock outstanding and [ ] shares
of NCS Class B common stock outstanding. Holders of NCS Class A common stock
will be entitled to one vote for each share that they held of record on October
[ ], 2002. Holders of NCS Class B common stock will be entitled to ten votes
for each share that they held of record on October [ ], 2002. Accordingly, the
holders of NCS Class A common stock and the holders of NCS Class B common stock,
voting together as a single class, are entitled to cast, in the aggregate [ ]
votes.
Required Vote; Quorum. Adoption of the merger agreement requires the
affirmative vote of a majority of the votes entitled to be cast by the
outstanding shares of NCS Class A common stock and NCS Class B common stock,
voting together as a single class. The presence in person or by a properly
executed and delivered proxy, of the holders of a majority of the voting power
of NCS Class A common stock and NCS Class B common stock, as a single class, is
necessary to constitute a quorum.
Stock Ownership. As of October [ ], 2002, the directors and executive
officers of NCS had the right to vote, in the aggregate, [ ] shares of NCS
Class A common stock and [ ] shares of NCS Class B common stock, representing
approximately [ ]% of the total votes entitled to be cast at the NCS special
meeting. Jon H. Outcalt, Chairman of the Board of NCS, and Kevin B. Shaw,
President, Chief Executive Officer and a director of NCS, have agreed in writing
to vote all of their shares of NCS Class A common stock and NCS Class B common
stock at the NCS special meeting in favor of adoption of the merger agreement.
Collectively, Messrs. Outcalt and Shaw are entitled to vote 230,968 shares of
NCS Class A common stock and 4,617,219 shares of NCS Class B Common Stock at the
NCS special meeting representing approximately [ ]% of the total votes entitled
to be cast at the NCS special meeting. Accordingly, a sufficient number of the
votes required to adopt the merger agreement is assured.
Voting and Revocation of Proxies. Shares of NCS Class A common stock
and NCS Class B common stock represented by a proxy properly signed and received
at or prior to the NCS special meeting, unless subsequently revoked, will be
voted in accordance with the instructions on the proxy. If you sign and return
your proxy without indicating any voting instructions, the shares of NCS Class A
common stock and/or the shares of NCS Class B common stock represented by the
proxy will be voted "for" adoption of the merger agreement. You may revoke your
proxy at any time before it is voted by (i) filing with National City Bank, in
its capacity as transfer agent for NCS, at or before the NCS special meeting, a
written notice of revocation bearing a later date than the proxy, (ii) duly
executing a subsequent proxy relating to the shares subject to the proxy and
delivering it to National City Bank at or before the NCS special meeting, or
(iii) attending the NCS special meeting and voting in person (although
attendance at the special meeting will not, in and of itself, constitute a
revocation of a proxy). You should send your written notice revoking a proxy to
National City Bank, Department 5352, Corporate Trust Operations, P.O. Box 92301,
Cleveland, Ohio 44193-0900, telephone: 1-800-622-6757, Attention: Ms. Laura S.
Kress.
30
The NCS board of directors is not aware of any business to be acted
upon at the NCS special meeting other than as described in this proxy
statement/prospectus. If, however, additional matters are brought before the NCS
special meeting, including, among other things, a motion to adjourn or postpone
the NCS special meeting to another time or place for the purpose of soliciting
additional proxies or otherwise, the persons appointed as proxies will have
discretion to vote or act on the matters according to their best judgment. The
grant of a proxy will also confer discretionary authority on the persons named
in the proxy to vote on matters incident to the conduct of the NCS special
meeting.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining whether a quorum is present. Abstentions and broker
non-votes will have the effect of a vote against the adoption of the merger
agreement. Similarly, the failure to either return your proxy card or attend the
NCS special meeting in person and vote in favor of the adoption of the merger
agreement will have the same effect as a vote against the adoption of the merger
agreement. Broker non-votes are shares held in the name of a broker or nominee
for which an executed proxy is received, but which are not voted because the
voting instructions have not been received from the beneficial owner or persons
entitled to vote and the broker or nominee does not have the discretionary power
to vote.
Solicitation of Proxies. The proxies are being solicited on behalf of
the NCS board of directors. The solicitation of proxies may be made by
directors, officers and regular employees of NCS in person or by mail,
telephone, facsimile or telegraph without additional compensation payable for
that solicitation. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries to forward proxy soliciting materials to
the beneficial owners of NCS Class A common stock and NCS Class B common stock
held of record by these persons, and NCS will reimburse them for reasonable
expenses incurred by them in so doing. The cost of the solicitation will be born
by NCS. NCS intends to retain Georgeson Shareholder Communications, Inc., a firm
experienced in the solicitation of proxies on behalf of public companies, to
assist in the proxy solicitation process at a fee of approximately $2,000, which
includes all reasonable out of pocket expenses.
Appraisal Rights of NCS Stockholders. NCS stockholders who do not wish
to accept Genesis common stock to be issued in the merger have the right to have
the Delaware Chancery Court determine the "fair value" of their shares. These
appraisal rights are subject to a number of restrictions and technical
requirements. Generally, in order to exercise these appraisal rights an NCS
stockholder must not vote in favor of the adoption of the merger agreement
(including by sending in a signed, unmarked proxy); must make a written demand
for appraisal before the vote on the adoption of the merger agreement; must hold
his or her shares through completion of the merger; and must comply with other
provisions of the Delaware appraisal statute. Merely voting against the adoption
of the merger agreement will not protect an NCS stockholder's right of
appraisal. Failure to comply with the requirements of the Delaware appraisal
statute could result in a loss of your appraisal rights. Annex B contains the
text of the Delaware appraisal statute. See "The Merger -- Appraisal Rights of
NCS Stockholders."
Stockholder Proposals. See "NCS Stockholder Proposals."
31
The Merger
Background of the Merger
Commencing in 1999, the NCS board of directors and management became
increasingly concerned about NCS' financial condition and its future viability
given developing market conditions and the significant changes occurring in the
healthcare industry. Contraction in reimbursement levels from government
programs and health maintenance organizations, as well as general volatility in
the industry, had led NCS' single largest customer, Lenox Healthcare, Inc., and
a number of other industry participants to seek protection under the federal
bankruptcy laws. The impact of compressed margins resulting from the reduction
in reimbursement rates, coupled with a deterioration of the quality and
collectibility of NCS' accounts receivable and the general market perception of
the healthcare sector, resulted in a precipitous decline in NCS' stock price.
NCS shares dropped from $21.50 per share in January 1999 to $1.44 per share in
January 2000. NCS recorded approximately $77 million of special increases to its
allowance for bad debt during the period June 30, 1999 through June 30, 2000
primarily as a result of the deterioration of the quality and collectibility of
its accounts receivable. In addition, NCS' substantial leverage, consisting of
approximately $206 million principal amount of outstanding senior debt and $102
million principal amount of outstanding subordinated debt, as well as
significant outstanding trade credit, exacerbated these problems for NCS.
As a result of the continued deterioration of conditions in the
healthcare industry and a general downturn in NCS' business, NCS could no longer
remain in compliance with the covenants under its senior credit facility. After
failed attempts to negotiate an amendment to the senior credit facility in order
to provide NCS with additional time to improve its operating performance, NCS
determined to explore strategic alternatives in order to ensure the long-term
viability of NCS and protect the interests of its stakeholders.
In February 2000, NCS retained UBS Warburg LLC as its financial advisor
to assist NCS in identifying possible strategic alternatives. After unsuccessful
preliminary discussions with a significant industry participant, NCS instructed
UBS Warburg to expand the scope of its inquiries. In April 2000, NCS modified
its engagement letter with UBS Warburg to include the evaluation of all
available restructuring alternatives, in addition to a variety of other
strategic transactions. At the direction of NCS, UBS Warburg began identifying
potential strategic and financial acquirors, as well as parties that might be
interested in making an investment in NCS. Over the next several months, UBS
Warburg targeted over 50 different entities in an attempt to solicit their
interest in a variety of transactions with NCS.
During this time period, NCS began to experience increased liquidity
problems, with cash reserves reaching critically low levels. In addition, on
April 21, 2000, NCS received a formal notice of default from the lenders under
the senior credit facility. As a result of this action, NCS experienced
increased pressure from its lenders and suppliers and, in July 2000, an ad hoc
committee, referred to as the "noteholder committee," of the holders of NCS
notes was formed. In order to preserve its remaining operating cash, in late
August 2000, NCS negotiated a change in payment terms with its primary supplier,
placing a moratorium on payments to the supplier and providing relief from NCS'
immediate cash flow problems. As a result, however, NCS agreed to accept a daily
pre-payment arrangement for future purchases from this supplier.
Notwithstanding the efforts of UBS Warburg over the preceding months,
the breadth of its contacts with potential acquirors and investors and the wide
variety of transaction structures considered, by October 2000, NCS' attempt to
pursue restructuring alternatives had produced only one non-binding indication
of interest. At that time, UBS Warburg advised the NCS board of directors and
management that no viable strategic alternatives could be identified and that
the one available indication of interest implied an enterprise value for NCS of
$190 million -- a valuation substantially below the face value of NCS' senior
debt. Throughout this time period, NCS faced continually increasing pressure
from its senior lenders and the recently formed noteholder committee. Given this
state of affairs, NCS considered filing for bankruptcy court protection and
began to seek debtor-in-possession financing, as well as other lending
alternatives and investment models intended to recapitalize NCS as an
independent operating company.
32
In December 2000, NCS terminated its engagement of UBS Warburg
principally because of UBS Warburg's deteriorating relationship with NCS' senior
lenders, and engaged Brown, Gibbons, Lang & Company L.P. as its exclusive
financial advisor. Brown Gibbons was selected, among other reasons, for its
experience in the restructuring field. Hopeful that a non-bankruptcy
restructuring plan could be developed by the spring of the following year, Brown
Gibbons further expanded the scope of alternatives to be considered by NCS. At
meetings with its senior lenders during January and February 2001, NCS discussed
a variety of non-bankruptcy restructuring scenarios involving varying levels of
financing and the issuance of a variety of preferred and common equity
securities and warrants. By March 2001, NCS was continuing to pursue
restructuring alternatives, none of which proved capable of creating consensus
among the lenders. The restructuring alternatives explored by NCS primarily
centered on a financial restructuring of the existing senior credit facility and
the NCS notes which would be accomplished with the proceeds of a new senior
secured revolving line of credit, new subordinated debt issue, subordinated
notes, preferred stock, common stock and warrants to be issued by NCS. Unable to
secure new credit facilities providing sufficient funds to provide an acceptable
cash recovery to NCS' creditors and thereby generate the support of NCS'
creditors, these alternatives were unable to be implemented by NCS. As these
alternatives were discussed and explored, it became increasingly apparent that a
full recovery to the holders of the NCS notes was remote. Moreover, recovery for
NCS' equity holders appeared extremely unlikely.
In February 2001, NCS' senior lenders required NCS to deposit the
$2.875 million semi-annual interest payment due to the NCS noteholders on
February 15, 2001 into a pledge account as additional collateral security for
the senior credit facility. In addition, the senior lenders prohibited NCS from
making any further interest payments on the NCS notes. As a result of its
failure to make the interest payment on the NCS notes and its stated intention
not to make the next required payment on August 15, 2001, on April 6, 2001, NCS
received a formal notice of default and acceleration from the indenture trustee
for the NCS notes. During approximately the same time period, NCS began
discussions with various investor groups regarding a restructuring of NCS in a
"pre-packaged" bankruptcy. A "pre-packaged" bankruptcy is a plan of
reorganization under chapter 11 of the Bankruptcy Code that is negotiated and
agreed to by all essential parties, such as affected creditors and stockholder
groups, prior to the debtor(s) filing of a petition for relief under chapter 11
of the Bankruptcy Code. In early April, 2001, as a result of conversations with
NCS' financial advisors, NCS received a preliminary expression of interest from
a private equity firm. The expression of interest contemplated a pre-packaged
bankruptcy, a $20 million investment by the private equity firm, and a
restructuring of all of NCS' outstanding debt. After NCS agreed to reimburse the
private equity firm for due diligence expenses and executing a confidentiality
agreement, the private equity firm commenced performance of its due diligence
investigation of NCS. Unable to reach agreement in principle regarding the
economic terms of the proposal or to obtain support from NCS' senior lenders,
NCS and the private equity firm terminated discussions in June 2001.
In June 2001, NCS received a preliminary indication of interest from
another private equity firm proposing the acquisition of NCS in a bankruptcy
sale for $185 million. This indication of interest required restructuring of
NCS' debt for less than full value, gave no value to stockholders, and was
subject to due diligence and financing conditions. Discussions continued with
this firm, draft letters of intent were exchanged, and in September 2001, the
private equity firm indicated that unless NCS executed their proposed letter of
intent, which provided for a 45 day exclusivity period and required a $6.5
million break-up fee plus $3 million of expense reimbursement, the private
equity firm would no longer be interested in pursuing discussions with NCS. NCS
elected not to execute the letter, and negotiations were terminated in September
2001.
In July 2001, NCS received another preliminary, non-binding indication
of interest from a private equity firm proposing to acquire NCS in a
pre-packaged bankruptcy or a sale under Section 363 of the United States
Bankruptcy Code for $174 million. After executing a confidentiality agreement
and performing due diligence, this private equity firm revised their proposal to
$145 million and required a 90 day exclusivity period. Unable to reach agreement
in principle regarding the economic terms of the proposal or to obtain support
from NCS' senior lenders, discussions with this private equity firm terminated,
in August 2001.
Also in July 2001, NCS received a preliminary indication of interest
from a lender regarding a new senior credit facility in the $100 million to $125
million range.
Discussions of these types continued in various forms through the
summer of 2001. All of the discussions required substantial economic concessions
of NCS' creditors and none of the foregoing were supported by NCS' creditors or
provided any value to NCS' equity holders. Despite providing a number of parties
with due diligence materials and engaging in fairly advanced negotiations with
certain of these parties, NCS had not received any proposal that it believed
provided an acceptable recovery to its stakeholders.
33
Also in July 2001, the president and chief executive officer of
Omnicare, Inc. approached the president of NCS at an industry conference and
expressed general interest in a transaction between the two companies.
Thereafter, NCS' president contacted Omnicare and indicated that the NCS board
of directors had invited Omnicare to commence discussions with Brown Gibbons
regarding a possible transaction. Rather than contacting NCS' financial advisor,
Omnicare sent a letter dated July 20, 2001, without advance notice to NCS'
public facsimile number. In this letter, Omnicare proposed an acquisition of
substantially all of NCS' assets under Section 363 of the United States
Bankruptcy Code at a purchase price of $225 million, conditioned upon
satisfactory completion of due diligence and other matters. The receipt at the
public fax machine accessible to all employees of a communication of this nature
from NCS' most significant competitor was viewed by NCS as destablizing to NCS'
employee relations and morale. At that time, NCS' indebtedness, including
obligations to trade creditors, was approximately $350 million. Notwithstanding
that this indication of interest contemplated a purchase price substantially
less than the face value of the outstanding NCS debt and would provide little,
if any, recovery to NCS' noteholders and other unsecured creditors, and no
recovery to NCS' equity holders, NCS requested that Omnicare execute a
confidentiality agreement containing provisions that had previously been agreed
to by at least 36 other parties that had expressed interest in a potential
transaction with NCS. Omnicare was unwilling to execute the proposed
confidentiality agreement, objecting to certain restrictions on Omnicare's
activities while engaged in the due diligence review. The principal restrictions
objected to by Omnicare were (i) a standstill provision whereby Omnicare would
be required to agree that, for a period of time following receipt of non-public
information and without the consent of NCS, Omnicare would not (a) acquire
securities of, claims against or property of NCS, (b) propose certain
transactions involving NCS, (c) propose that NCS enter into a plan of
liquidation or dissolution, (d) make or participate in the solicitation of
proxies with respect to the voting of NCS securities, (e) seek to control or
influence the management, board of directors of NCS or policies of NCS, or (f)
take certain other actions, and (ii) a prohibition against inducing any
customer, supplier, licensee or business relation of NCS or its affiliates or
subsidiaries to cease doing business with NCS, other than in the ordinary course
of Omnicare's business and without the use of non-public information received
from NCS. In fact, substantially all parties that expressed interest in a
transaction with NCS and who received non-public information, entered into
confidentiality agreements containing provisions substantially similar to those
objected to by Omnicare. Despite concern over the fact that Omnicare would not
agree to the customary protections afforded NCS by other potential acquirors and
investors, the potential harm to NCS and its stakeholders that might result from
allowing Omnicare to review NCS' non-public information without being subject to
these restrictions and by Omnicare's apparent disregard for NCS' efforts to
maintain confidentiality of discussions and preserve employee loyalty and
productivity in generally uncertain times, NCS attempted to continue discussions
with Omnicare. NCS requested in writing that Omnicare follow certain procedures
for future communications with NCS and provide a definitive list of due
diligence materials required by Omnicare.
After spending a substantial amount of time negotiating a
confidentiality agreement with Omnicare, primarily resulting from Omnicare's
unwillingness to accept customary restrictions on its ability to solicit NCS'
customers and employees, use competitively sensitive non-public information and
acquire NCS' debt securities, on August 9, 2001, NCS received a revised
indication of interest from Omnicare which attached Omnicare's proposed form of
confidentiality agreement. The revised indication of interest also contemplated
a purchase of NCS' assets under Section 363 of the United States Bankruptcy Code
and reflected a proposed purchase price of $270 million, again subject to due
diligence and other conditions. The form of asset purchase agreement submitted
by Omnicare in connection with this revised indication of interest contemplated
payment of a termination fee and expense reimbursement if the transaction was
not closed although no amounts for such fees were identified. Concerned that
Omnicare was unwilling to agree to customary provisions in NCS' proposed
confidentiality agreement, but unwilling to forego the opportunity to consider
all value-enhancing alternatives for NCS' stakeholders, particularly an
opportunity to combine with the industry's largest participant, NCS again
engaged in discussions with Omnicare, ultimately executing a confidentiality
agreement in late September 2001. NCS then provided Omnicare with substantially
all of the documents and information that Omnicare had identified as critical to
its due diligence inquiry. Because the scope of the Omnicare confidentiality
agreement was more limited than NCS' proposed form of confidentiality agreement,
however, NCS did not provide Omnicare, its largest single competitor, with a
limited amount of highly sensitive, non-public competitive information.
Non-public information not provided to Omnicare by NCS included a profit and
loss analyses by pharmacy site, identifying each site by location (although a
profit and loss analyses by unidentified site was provided to Omnicare), and a
schedule of NCS' purchasing volume and cost for the top 150 pharmaceuticals
supplied by NCS to its customers. Certain of this information was provided to
some other strategic purchasers who executed confidentiality agreements
containing the restrictions objected to by Omnicare.
34
In October 2001, a preliminary indication of interest was received from
another private equity investor with substantial experience in the healthcare
field. The indication of interest contemplated a purchase of NCS' assets for
$205 million and was subject to completion of due diligence, financing, and
negotiation of definitive documents among other standard conditions. Late in
October, a draft letter of intent was received by NCS requiring a 90 day
exclusivity period and required a $6 million break-up fee. Discussions continued
with this potential investor as well as substantial due diligence until January
2002. Unable to agree to terms and secure the support of NCS' creditors,
discussions were terminated shortly thereafter in January 2002.
Also in October 2001, representatives of Brown Gibbons met with
representatives of Omnicare's financial advisor, Merrill Lynch, to review
Omnicare's proposal, Brown Gibbons' analysis of the potential synergies
associated with an Omnicare/NCS combination and NCS' views regarding an
appropriate transaction structure and acceptable valuations for NCS. Given the
potential $77 to $87 million of operating synergies Brown Gibbons believed were
associated with such a transaction, Brown Gibbons expressed the view that a
bankruptcy sale under Section 363 did not maximize value to NCS' stakeholders.
The potential operating synergies arising from a combination of the Omnicare and
NCS businesses and identified by NCS fall into three categories:
o reduction of duplicative corporate level sales, general and
administrative expenses;
o reduction in local pharmacy operating costs resulting from
consolidation of geographically duplicative pharmacy facilities;
and
o improved pharmaceutical pricing resulting from increased volume of
drug purchasing associated with the combined businesses.
Because of the significant potential operating synergies associated with an
Omnicare acquisition of NCS, and the fact that Omnicare is a strategic purchaser
unlike the financial purchasers with whom NCS had been in discussions, NCS
reasonably expected that Omnicare should consider those synergies in valuing an
acquisition of NCS and considering a non-bankruptcy transaction with NCS.
The proposed NCS bankruptcy filing would likely adversely affect NCS'
enterprise value and such a sale would not permit a reasonable recovery to NCS
noteholders and other unsecured creditors and would provide no recovery to NCS'
stockholders. On this basis, Brown Gibbons requested that Omnicare reconsider
its proposed transaction structure, suggesting a non-bankruptcy acquisition of
NCS that would provide value to all of NCS' stakeholders and recognize the
potential operating synergies associated with a combination of NCS and Omnicare.
From August 2001 through January 2002, NCS' financial advisors attempted to
communicate with Omnicare regarding a revised structure for a transaction and
review of the due diligence materials provided by NCS. Omnicare, however, never
responded to NCS' proposal regarding an alternative transaction structure,
apparently unwilling to consider a non-bankruptcy transaction structure
that would allow all NCS stakeholders to participate in a reasonable financial
recovery. NCS nevertheless continued to provide Omnicare with the due diligence
materials permitted by the confidentiality agreement between the parties and
responded to additional inquiries from Omnicare as they were received. In late
January 2002, NCS provided Omnicare with updated financial information.
In November 2001, a private equity firm submitted a non-binding
indication of interest proposing an enterprise value range between $200 million
and $250 million. The indication of interest further proposed payment of NCS
senior credit facility at par, a modest recovery to NCS noteholders and no
recovery to NCS' equity holders. After execution of the confidentiality
agreement, NCS provided this private equity firm with due diligence materials;
however, no firm proposal was ever made.
Commencing in the fall of 2000, NCS had implemented a variety of
measures intended to improve cash flows from operations, including reductions in
operating and overhead costs by accelerating the consolidation or closing of
pharmacy locations, continuing reductions in employee headcount and more
aggressive accounts receivable collection and inventory reduction efforts. As a
result of these and other initiatives, by early 2002, NCS began to forecast
improved operating performance, although NCS remained in default on
approximately $350 million of its obligations.
35
In January 2002, representatives of the noteholder committee contacted
Genesis regarding a possible acquisition of NCS. Genesis' primary business
strategy is to expand the service-related component of its business both within
its existing markets and in new markets and to enhance its presence as a
national healthcare services company, and Genesis frequently considers and
reviews opportunities to execute upon this strategy through business
combinations and selective acquisitions. As a result, after receiving the
contact from the noteholder committee, Genesis' legal counsel contacted legal
counsel for NCS and, after negotiating minor modifications, executed NCS'
proposed form of confidentiality agreement on January 14, 2002. In early
February 2002, Genesis began its due diligence investigation of NCS. However,
during the period from January 14, 2002 to May 16, 2002, no negotiations or firm
proposals for a transaction between Genesis and NCS occurred.
Also in February 2002, NCS was informed by representatives of the
noteholder committee that the noteholder committee was engaged in discussions
with Omnicare regarding a possible NCS transaction. Omnicare did not contact NCS
or its legal or financial advisors from February 2002 until the receipt of the
July 26, 2002 letter described below. In mid-February, representatives of the
noteholder committee informed NCS that a draft asset purchase agreement was
being prepared by Omnicare's advisors and that NCS would be receiving the draft
in the near future. When the draft asset purchase agreement was finally
forwarded to NCS by representatives of the noteholder committee on April 10,
2002, the agreement again provided for a Section 363 bankruptcy sale. Although
the consideration proposed by Omnicare had been increased to approximately
$313.8 million, subject to an undefined purchase price adjustment, the
consideration was still less than the amount of NCS' outstanding obligations,
including funded debt and trade credit, which totaled approximately $350 million
at that time. In addition, the terms of the proposal required that 20% of the
purchase price be placed in escrow for an indefinite period of time and provided
for a $12.5 million break-up fee and expense reimbursement up to $1 million if
NCS entered into an alternative transaction and in certain other instances.
After giving effect to the costs and expenses relating to a bankruptcy filing,
NCS calculated that the proposal would have provided a limited recovery to NCS'
noteholders and trade creditors and no recovery to NCS' stockholders. NCS
believed that this proposal did not reflect the potential operating synergies
associated with a combination of NCS and Omnicare. Still believing that a
Section 363 bankruptcy sale was not the appropriate method of maximizing value
to all NCS stakeholders, and that promising alternatives were developing, NCS
indicated to the noteholder committee that it was not interested in this
proposal and would not participate in the noteholder committee's bankruptcy sale
discussions with Omnicare.
In March 2002, the NCS board of directors appointed directors Mr. Boake
A. Sells and Mr. Richard L. Osborne as a special committee of the NCS board,
referred to as the "NCS independent committee," for the purpose of reviewing,
evaluating and negotiating any possible strategic transaction.
Through May 2002, Genesis continued its due diligence investigation of
NCS, requesting and receiving additional materials, some of which had also been
provided to Omnicare. The potential operating synergies anticipated in a
Genesis/NCS transaction include:
o reduction of duplicative corporate level sales, general and
administrative expenses;
o reduction in local pharmacy operating costs resulting from
consolidation of geographically duplicative pharmacy facilities;
and
o improved pharmaceutical pricing resulting from increased volume of
drug purchasing associated with the combined businesses.
These synergies are of the same type and fall into the same categories
as described for Omnicare previously, although not as large due to the different
geographic locations served by Genesis and NCS and the resulting reduction in
pharmacy consolidation synergies to be realized. NCS' financial advisor reviewed
these potential operating synergies with Genesis during Genesis' due diligence
process. Brown Gibbons valued these synergies at approximately $45 to $54
million. During this time, Genesis made clear that any proposal that it would
make to NCS would be conditioned on receipt of the committed support for the
transaction from a significant majority of the NCS noteholders and on Messrs.
Outcalt and Shaw, who in the aggregate own approximately 65% of NCS' voting
power, entering into voting agreements to vote in favor of such proposal and
against any competing proposal. In particular, Genesis indicated that in light
of NCS' financial condition, support of NCS noteholders would be required if any
consideration were to be provided to NCS stockholders. On May 14, 2002, a
meeting of the NCS independent committee was held to review the status of the
restructuring process. At that time, no acceptable proposals were under
consideration by NCS, although preliminary discussions with Genesis were
beginning to progress.
36
On May 16, 2002, representatives of NCS' financial advisor and Mr.
Boake A. Sells, a member of the NCS independent committee of the NCS board of
directors, met with Mr. George Hager, chief financial officer of Genesis, and
Mr. Michael Walker, then the chief executive officer of Genesis, in
Philadelphia, Pennsylvania. At this meeting, Mr. Hager indicated that, while
Genesis had not determined to make any proposal, Genesis was interested in
discussing the parameters required by NCS pursuant to which Genesis would
consider the possibility of making a proposal to acquire NCS, including possible
transaction structures, ranges of prices, recoveries to NCS' creditors and
equity holders and timing. While not agreeing to any particular parameters, NCS'
financial advisor encouraged Genesis to complete their due diligence
investigation of NCS and agreed to follow-up with Genesis at that time.
On June 19, 2002, Mr. Glenn Pollack, a representative of NCS' financial
advisor, met with Mr. Hager at the offices of Genesis' outside legal counsel in
Philadelphia, Pennsylvania. Mr. Hager reviewed Genesis' financial analysis of a
possible transaction and discussed the components of the transaction structure
which would be required by Genesis if a transaction acceptable to both parties
could be achieved, including NCS noteholders representing a significant majority
of the outstanding NCS notes, and stockholders holding a majority of the voting
power of NCS, agreeing to support the transaction if approved by the NCS
independent committee and the NCS board of directors. Mr. Pollack agreed to
relay Genesis' position to the NCS independent committee for consideration. On
June 21, 2002, Mr. Pollack reviewed with Mr. Sells the status of discussions
with the NCS noteholders and with Genesis with respect to relative values that
might be recovered by NCS' creditors and delivered to NCS' stockholders.
Mr. Pollack spoke with Mr. Hager again on June 24 and June 25, 2002
concerning the possible values and structure for a transaction. During these
discussions, Mr. Hager indicated that the terms preliminarily under
consideration by Genesis included repayment of the NCS senior credit facility in
full, an exchange offer or direct purchase of NCS notes providing NCS
noteholders with a combination of cash and Genesis common stock equal in value
to the par value of the NCS notes, and delivery of Genesis common stock valued
at $20 million to NCS stockholders, for a total enterprise value of
approximately $308 million. Mr. Pollack again updated the members of the NCS
independent committee. Based on these discussions, the parties agreed to meet,
together with their respective legal counsel, on June 26, 2002.
On June 26, 2002, the representatives of Genesis and NCS' financial
advisor, together with outside legal counsel for Genesis and NCS, met at the
offices of Genesis' outside legal counsel in New York City, New York, to discuss
process and timing for negotiating the transaction as well as a number of
substantive issues, including regulatory matters, structure, the value to be
paid to NCS noteholders and to NCS' stockholders, procedures for valuing the
Genesis common stock to be issued in the transaction, Genesis' assumption of
NCS' severance and change of control payment obligations to employees, Genesis'
possible assumption of certain transaction costs which might be incurred by NCS
and certain financial covenants which might be required by Genesis. In
particular, NCS' financial advisor requested that Genesis consider increasing
the value to be received by NCS' stockholders. Genesis representatives agreed to
consider NCS' positions and concerns. During the meeting, Genesis reiterated
that any further discussions or negotiations beyond this meeting would be
conditioned on NCS agreeing to deal exclusively with Genesis and on the
requirement that NCS noteholders representing a significant majority of the
outstanding NCS notes, and stockholders holding a majority of the voting power
of NCS, agree to support the transaction if approved by the NCS independent
committee and the NCS board of directors. On June 27, 2002, Genesis' legal
counsel delivered a form of exclusivity agreement for review and consideration
by NCS legal counsel.
Mr. Pollack engaged in subsequent conversations with Mr. Hager and as a
result of those discussions, including Genesis' indication that it would
increase the aggregate proposed value of Genesis common stock to be received by
NCS' stockholders to $24 million, or about $1 per NCS common share, from $20
million, for a total enterprise value of approximately $312 million, the
financial advisor requested a meeting of the NCS independent committee. At the
meeting of the NCS independent committee on July 3, 2002, NCS' financial advisor
presented a summary of the terms of a possible merger transaction proposed by
Genesis. The NCS independent committee considered the proposed terms and
determined that entering into the exclusivity agreement, as required by Genesis,
effective July 1, 2002 and expiring on July 19, 2002, but providing for an
automatic extension until July 26, 2002 if the parties were still in discussions
on the initial expiration date, was appropriate. The exclusivity agreement was
executed by NCS and Genesis on July 3, 2002. Later on July 3, 2002, Genesis
provided NCS with a draft merger agreement, a draft of the NCS noteholders'
support agreement and draft voting agreements to be entered into by Messrs.
Outcalt and Shaw. Genesis' initial draft of the merger agreement contemplated a
$10 million termination fee.
37
During the weeks that followed, NCS and Genesis continued to negotiate
the terms of the definitive merger agreement. These negotiations included
frequent telephone conversations between NCS' financial advisor and Mr. Hager,
and between NCS' and Genesis' respective legal counsel, and one in-person
meeting involving Mr. Pollack, Mr. Hager and other representatives of Genesis,
and the two parties' respective legal counsel, held on July 15, 2002, at the
offices of Genesis' outside legal counsel in New York City. On the following
day, Mr. Hager met with legal counsel to Mr. Outcalt to discuss the matters
eventually reflected in Mr. Outcalt's agreement described under "Interests of
Certain Persons in the Merger - Jon H. Outcalt Agreement." During this period,
NCS and its financial and legal advisors also performed a due diligence review
of Genesis, including interviews with Genesis' senior management. Concurrently,
Genesis continued to negotiate the terms of the NCS noteholders' support
agreement with the noteholder committee. NCS conferred frequently with the
noteholder committee to determine whether the NCS noteholders represented by the
noteholder committee were in fact in support of NCS' Genesis transaction,
including the terms affecting NCS noteholders. During this time period,
improvements to the transaction and to the terms of the various agreements and
other concessions were requested by NCS and the noteholder committee and granted
by Genesis. Also during this time period, Genesis performed additional due
diligence regarding recent developments involving NCS.
On July 24, 2002, the NCS independent committee engaged Candlewood
Partners, LLC to act as a co-financial advisor and to evaluate the fairness of
the proposed Genesis merger and to render an opinion as to the fairness of the
financial terms of the merger to NCS stockholders.
Despite substantial progress over the preceding weeks in the
discussions between NCS and Genesis, and between Genesis and the noteholder
committee, the parties had not finalized the definitive merger agreement or the
NCS noteholders' support agreement prior to July 26, 2002, the expiration date
of the exclusivity agreement between Genesis and NCS. As a result, on the
evening of July 25 and on the morning of July 26, Genesis' legal counsel
requested that NCS agree to extend the exclusive negotiating period to July 31,
2002. By telephonic meeting held at 10:00 in the morning of July 26, 2002, the
NCS independent committee was briefed by NCS' financial and legal advisors
regarding the discussions with Genesis. At that meeting, the NCS independent
committee, believing that NCS and Genesis were close to reaching agreement on
the definitive merger documentation, authorized an extension of the exclusivity
agreement, which would otherwise expire at 11:59 p.m. on July 26, 2002, through
July 31, 2002, as requested by Genesis.
At the time of the extension of the exclusivity agreement, NCS was not
engaged in discussions with any party other than Genesis, NCS had not received
any communications directly from Omnicare since February 2002, and NCS and its
representatives were not aware that Omnicare was considering submitting any
indication of interest other than the bankruptcy sale proposal valued at $313
million that Omnicare discussed with the noteholder committee earlier in the
year. Later that day, at approximately 3:00 p.m. in the afternoon, after NCS had
already signed an extension of the exclusivity agreement with Genesis, NCS
received via facsimile the following letter from Omnicare:
38
July 26, 2002
CONFIDENTIAL
Mr. Jon H. Outcalt
Chairman of the Board of Directors
NCS Healthcare, Inc.
3201 Enterprise Parkway
Suite 220
Beachwood, Ohio 44122
Dear Mr. Outcalt:
As you know, Omnicare and representatives of NCS have held discussions
over an extended period of time regarding an acquisition of NCS by Omnicare. We
are disappointed that these discussions have not progressed in any material way.
We continue to believe that there are clear and compelling advantages
to both Omnicare and NCS from the combination of our two companies and that such
a transaction would create significant value for each of our companies and our
respective security holders. In an effort to consummate a mutually beneficial
transaction, our Board has authorized us to propose that Omnicare acquire NCS
through a negotiated merger transaction in which (i) NCS stockholders would
receive $3.00 in cash for each share of outstanding common stock, representing a
premium of more than 410% over your closing stock price on July 25, 2002 and
(ii) Omnicare would assume and/or retire existing NCS debt at its full principal
amount plus accrued interest. If you prefer, we would also consider a stock
transaction in order to allow NCS stockholders to share in the upside of the
combined companies. We believe this proposal provides exceptional value to the
NCS security holders.
As I am sure you are aware, Omnicare is an important participant in the
institutional pharmacy business, with annual sales in excess of $2.1 billion
during its last fiscal year. We have, as you do, an enviable reputation for the
quality of our products and service. We are extremely impressed with the
businesses you and your management team have developed and the manner in which
they complement our businesses. We believe the complementary aspects of our two
companies' services, customers and distribution capabilities would enable the
combined entity to be an even more effective competitor.
Of course, our proposal contemplates, among other things, the
negotiation and execution of a mutually acceptable definitive merger agreement,
which we believe can be accomplished very quickly. The definitive merger and
other agreements will contain provisions customary for transactions of this
type, including the receipt of any required regulatory and third party approvals
and consents. Please note that we will not request voting or similar agreements
from any NCS stockholder, since we believe that the stockholders should have the
option to choose a transaction providing them with the greatest value. In
addition, since we have not yet been afforded the opportunity to conduct any
meaningful due diligence, we would like to conduct an expedited due diligence
investigation of NCS, which we expect can be completed in seven to ten days from
the date materials are made available to us.
We hope that you and the other members of the NCS Board of Directors
will view this proposal as we do -- an excellent opportunity for the equity and
debt holders of NCS to realize full value for their securities to an extent not
likely to be available to them in the marketplace. In the context of a
negotiated transaction, we are prepared to discuss all aspects of our proposal
with you, including structure, economics and your views as to the proper roles
for our respective management and employees in the combined company. We wish,
and are prepared, to meet immediately with you and your directors, management
and advisors to answer any questions about our proposal and to proceed with
negotiations leading to the execution of a definitive merger agreement.
We trust that you and the other members of the NCS Board of Directors
will give this proposal prompt and serious consideration. At this point we
expect that this letter and its contents will remain confidential. We are
sending copies of this letter to Mr. Kevin Shaw and the other members of the
Board of Directors so they can familiarize themselves with our proposal. We
would request a response as soon as possible and hope this transaction can be
concluded on a consensual basis.
We look forward to hearing from you.
Sincerely,
/s/ Joel F. Gemunder
Joel F. Gemunder
President and Chief Executive Officer
cc: NCS Board of Directors
39
Among other things, NCS noted that, as with Omnicare's prior proposals,
and notwithstanding the due diligence that previously had been performed by
Omnicare, the new Omnicare indication of interest continued to be subject to
satisfactory completion of due diligence. Late in the afternoon on July 26,
2002, NCS representatives received voicemail phone messages from Omnicare
representatives asking to discuss the letter. In light of a new conditional
indication of interest from Omnicare, the restrictions contained in the Genesis
exclusivity agreement, and a nearly definitive merger agreement with Genesis,
NCS' independent committee met on July 26, 2002 to discuss these events.
Notably, by July 26, 2002, Genesis had completed its due diligence review of NCS
and was prepared to execute the definitive merger agreement with NCS within 48
hours.
After discussion, the NCS independent committee directed Mr. Pollack to
request that Genesis improve the economic terms of their proposed transaction.
The NCS independent committee then determined to review the results of those
discussions and develop a course of action based on that review. Because any
communication with Omnicare or its representatives would have been in breach of
the exclusivity agreement in place with Genesis, the NCS independent committee
directed that no contact be made with Omnicare or Omnicare's representatives
regarding the July 26 Omnicare letter during the extended term of the
exclusivity agreement.
Mr. Pollack commenced discussions with Mr. Hager on the evening of July
26, 2002 and suggested that Genesis consider enhancing the economic terms with
respect to the NCS noteholders and the NCS stockholders. Mr. Hager indicated
that he would consider NCS' suggestion, but stated that any improved proposal
would be conditioned upon acceptance, approval and execution of definitive
documentation by the end of the day on July 28, 2002, and that Genesis would
terminate discussions with NCS if no agreement were reached by that time. On
July 27, 2002, Mr. Hager contacted Mr. Pollack with an improved proposal having
a total enterprise value of approximately $340 million in which:
o the outstanding NCS notes would be redeemed in cash at their full
principal amount, including accrued and unpaid interest and
redemption premium, representing approximately a $11 million
increase over the value of Genesis' prior offer; and
o each outstanding share of NCS common stock would be converted into
Genesis common stock at a merger exchange ratio of 0.1, an
increase of approximately 80% over Genesis' prior offer.
Most significantly, however, Mr. Hager reiterated that if this revised proposal
were not accepted and definitive documentation executed by the end of the day on
July 28, 2002, the offer would be withdrawn and Genesis would terminate
discussions.
A meeting of the NCS independent committee was held telephonically on
July 28, 2002. In addition to the members of the NCS independent committee, NCS'
financial and legal advisors participated in the meeting. During the meeting,
NCS' financial advisor updated the members of the NCS independent committee as
to the status of negotiations with Genesis, including Genesis' enhanced terms
and stated requirement that the definitive documentation be executed by midnight
that night or the proposal would be withdrawn. Outside legal counsel discussed
with the members of the NCS independent committee the material terms of the
merger agreement and the related documents, including Genesis' agreement to
redeem the notes in accordance with the indenture in the merger agreement and
including the terms and effects of the stockholder voting agreements and
provisions of the merger agreement affecting NCS' ability to accept superior
proposals, as hereinafter defined, in the future. In particular, legal counsel
reminded the NCS independent committee that under the terms of the merger
agreement and because NCS stockholders representing in excess of 50% of the
outstanding voting power would be required by Genesis to enter into stockholder
voting agreements contemporaneously with the signing of the merger agreement,
and would agree to vote their shares in favor of the merger agreement,
stockholder approval of the merger would be assured even if the NCS board of
directors were to withdraw or change its recommendation. These facts would
prevent NCS from engaging any alternative or superior transaction in the future.
Legal counsel also discussed the limited circumstances in which NCS could be
required to pay a termination fee to Genesis, and noted that a significant
reduction in the termination fee, from $10 million to $6 million, had been
negotiated. The members of the NCS independent committee were informed that
Messrs. Outcalt and Shaw had indicated that if the NCS independent committee and
the NCS board of directors were to approve a transaction with Genesis, Messrs.
Outcalt and Shaw would, as required by Genesis, enter into the voting agreements
committing them to vote their shares in favor of the Genesis transaction. The
members of the NCS independent committee were also informed of the proposed
40
agreement relating to Mr. Outcalt, providing Mr. Outcalt with a guaranteed
four-year consulting relationship with Genesis following the closing of the
transaction, which agreement is further described under "Interests of Certain
Persons in the Merger -- Jon H. Outcalt Agreement." No commitments by Genesis
regarding continued employment were made to Messrs. Outcalt and Shaw in
connection with the voting agreements, other than the consulting relationship
with Mr. Outcalt. Candlewood Partners presented to the NCS independent committee
a summary of the financial analyses related to the merger and orally delivered
its opinion (which was later confirmed in writing), to the effect that, as of
the date thereof and based on and subject to the assumptions, limitations and
qualifications set forth in the opinion, the proposed merger exchange ratio of
0.1 of a share of Genesis common stock for each share of NCS Class A common
stock and NCS Class B common stock was fair, from a financial point of view, to
the holders of NCS common stock, taken together. Following further discussion
and review, the NCS independent committee, by unanimous vote, determined that
the merger agreement and the transactions contemplated thereby were advisable,
fair to and in the best interests of all of NCS' stakeholders (other than
Messrs. Outcalt and Shaw) to whom the NCS board of directors owed a fiduciary
duty, and recommended that the full NCS board of directors approve and adopt the
merger agreement and the transactions contemplated thereby and recommend that
NCS' stockholders approve the merger agreement and the transactions contemplated
thereby.
At a telephonic meeting of the NCS board of directors held later that
day for the purpose of receiving and acting upon the recommendation of the NCS
independent committee, the NCS board of directors considered the proposed merger
agreement and received the recommendations of the NCS independent committee.
Also present at this meeting were NCS' financial and legal advisors. During the
meeting, NCS' financial advisor and legal counsel updated the members of the NCS
board of directors as to the status of negotiations with Genesis, including
Genesis' enhanced terms and stated requirement that the definitive documentation
be executed by midnight that night or their proposal would be withdrawn. Outside
legal counsel discussed with the members of the NCS board of directors the
material terms of the merger agreement and the related documents, including
Genesis' agreement to cause the redemption of the notes in accordance with the
indenture and the merger agreement, and including the terms and effects of the
stockholder voting agreement and provisions of the merger agreement affecting
NCS' ability to accept superior proposals in the future. In particular, legal
counsel reminded the NCS board of directors that, under the terms of the merger
agreement, and because NCS stockholders representing in excess of 50% of the
outstanding voting power would be required by Genesis to enter into stockholder
voting agreements contemporaneously with the signing of the merger agreement and
would agree to vote their shares in favor of the merger agreement, stockholder
approval of the merger would be assured even if the NCS board of directors were
to withdraw or change its recommendation. These facts would prevent NCS from
engaging any alternative or superior transaction in the future. Legal counsel
also discussed the limited circumstances in which NCS could be required to pay a
termination fee to Genesis, and noted that a significant reduction in the
termination fee, from $10 million to $6 million, had been negotiated. The
members of the NCS board of directors were informed that Messrs. Outcalt and
Shaw had indicated that if the NCS independent committee and the NCS board of
directors approved the transaction with Genesis, Messrs. Outcalt and Shaw would,
as required by Genesis, enter into the voting agreements. The members of the NCS
board of directors were also informed of the proposed agreement relating to Mr.
Outcalt, which agreement is described under "Interests of Certain Persons in the
Merger -- Jon H. Outcalt Agreement." Next, Candlewood Partners, LLC presented to
the NCS board of directors a summary of the financial analyses related to the
merger and orally delivered its opinion (which was later confirmed in writing),
to the effect that, as of the date thereof and based on and subject to the
assumptions, limitations and qualifications set forth in the opinion, the
proposed merger exchange ratio of 0.1 of a share of Genesis common stock for
each share of NCS Class A common stock and NCS Class B common stock was fair,
from a financial point of view, to the holders of NCS common stock, taken
together. Thereafter, the NCS board of directors, by unanimous vote, determined
that the merger agreement and the transactions contemplated thereby were
advisable, fair to and in the best interests of all of stakeholders to whom the
NCS board of directors owed a fiduciary duty, and recommended that the
stockholders of NCS approve and adopt the merger agreement and the transactions
contemplated thereby.
41
In addition, the NCS board of directors and the NCS independent
committee considered the Omnicare indication of interest received on July 26,
2002. The NCS board of directors and NCS independent committee believed that
fiduciary duties were owed to all of the stakeholders of NCS (including
creditors) as a result of NCS' financial condition. They further believed that
the certainty of recovery for all NCS stakeholders as a result of the Genesis
merger outweighed the uncertainty and risks associated with commencing
discussions with Omnicare regarding Omnicare's preliminary, last minute,
conditional indication of interest, a party with whom NCS had had little success
engaging in fruitful discussions regarding a potential transaction over the
prior year and a half. The NCS board of directors and NCS independent committee
also considered the risk that NCS would be left with no strategic alternatives
if NCS were to allow the Genesis opportunity to pass and the Omnicare
indication of interest were not to materialize into an acceptable transaction.
See --"Considerations Relating to the Omnicare Indication of Interest Received
July 26, 2002."
Following the meetings of the NCS independent committee and the NCS
board of directors, representatives of NCS and Genesis finalized the merger
agreement and the related documents. Later in the evening of July 28, 2002, NCS,
Genesis and Geneva Sub executed the merger agreement, and Messrs. Outcalt and
Shaw executed the voting agreements with NCS and Genesis pursuant to which they
agreed to vote their NCS stock in favor of the merger and against any competing
proposal. Following the parties execution of the merger agreement and voting
agreements, Genesis and Mr. Outcalt entered into the Binding Term Sheet
providing for certain payments to Mr. Outcalt following the closing of the
transaction, which agreement is described under "Interests of Certain Persons in
the Merger - Jon H. Outcalt Agreement." On the morning of July 29, 2002, Genesis
and NCS issued a press release announcing the transaction and the execution of
the underlying agreements.
At approximately 3:40 a.m. on July 29, 2002, hours after the merger
agreement was executed, Omnicare faxed the following letter to NCS restating its
conditional indication of interest and attaching a draft merger agreement.
Joel F. Gemunder
President and
Chief Executive Officer
July 28, 2002
Mr. Jon H. Outcalt
Chairman of the Board of Directors
NCS Healthcare, Inc.
3201 Enterprise Parkway
Suite 220
Beachwood, Ohio 44122
Dear Mr. Outcalt:
We are writing to express our disappointment that NCS and its
representatives have continued to refuse to meet with us to discuss our proposal
to acquire NCS. Consequently, we feel obligated to send you this letter and make
it public so your equity and debt holders are aware of our proposal. As you
know, we have previously proposed that Omnicare would acquire NCS in a merger
transaction pursuant to which NCS stockholders would receive $3.00 per share in
cash (representing more than 4x your current stock price, which is already at
its highest level in two years) and Omnicare would assume and/or retire existing
NCS debt at its full principal amount plus accrued interest. This proposal would
provide almost $400 million in cash to your security holders. We continue to
believe this proposal provides exceptional value to the NCS security holders.
Our Board has authorized this proposal, and we are prepared to
negotiate quickly and execute a mutually acceptable definitive merger agreement.
To help clarify our proposal, we have enclosed a draft merger agreement, which
contains provisions customary for transactions of this type. Please note that
our proposal is not subject to any financing contingencies. Also, we will not
request voting or similar agreements from any NCS stockholder, and we are not
requesting a "break-up" or similar fee that might act as a deterrent to someone
willing to provide greater value to NCS's equity and debt holders. We believe
that the security holders of NCS should have the option to choose a transaction
providing them with the greatest value without any impediment to that choice or
the payment of any penalty for that choice.
42
As I am sure you are aware, Omnicare is an important participant in the
institutional pharmacy business, with annual sales in excess of $2.1 billion
during its last fiscal year, and has completed numerous acquisitions in this
industry since 1988. In addition, we have been analyzing a combination of our
two companies for quite some time with the assistance of Merrill Lynch, our
financial advisor, and Dewey Ballantine, our legal counsel. We have done
extensive due diligence on NCS's public filings and are extremely comfortable
with that information. Consequently, we need to do only confirmatory due
diligence, which would involve only a review of certain non-public information
typical for a transaction of this type. We believe that, with your cooperation,
we can complete our confirmatory due diligence and execute a definitive merger
agreement in one week.
We hope that you and the other members of the NCS Board of Directors
will view this proposal as we do - an excellent opportunity for the equity and
debt holders of NCS to realize full value for their securities to an extent not
likely to be available to them in the marketplace. In the context of a
negotiated transaction, we are prepared to discuss all aspects of our proposal
with you, including structure, economics and your views as to the proper roles
for our respective management and employees in the combined company. We would
also consider a stock transaction in order to allow NCS stockholders to share in
the upside of the combined companies. With respect to structure, we would be
willing to discuss acquiring the securities of NCS in a tender offer. We wish,
and are prepared, to meet immediately with you and the other directors,
management and advisors to answer any questions about our proposal and to
proceed with negotiations leading to the execution of a definitive merger
agreement.
We continue to believe that there are clear and compelling advantages
to both Omnicare and NCS from the combination of our two companies and that such
a transaction would create significant value for each of our companies and our
respective security holders. We trust that you and the other members of the NCS
Board of Directors will give this proposal immediate and serious consideration.
Your fiduciary duties to your equity and debt holders require no less.
We look forward to hearing from you promptly.
Sincerely,
/s/ Joel F. Gemunder
President and Chief Executive Officer
cc: NCS Board of Directors
Later the same morning, Omnicare issued a press release publicly disclosing the
indication of interest.
Between July 30, 2002 and August 7, 2002, six stockholder lawsuits
relating to the merger were filed against NCS and the NCS board of directors. In
addition, on August 1, 2002, Omnicare filed suit in the Court of Chancery of the
State of Delaware, and filed an amended complaint on August 12, 2002, seeking,
among other things, to enjoin the consummation of the merger. On September 30,
2002 Omnicare filed a motion for summary judgment as to the count of the amended
complaint seeking a judgment declaring that the voting agreements entered into
by Messrs. Outcalt and Shaw violate NCS' amended and restated certificate of
incorporation and as a result Messrs. Outcalt and Shaw automatically and
irrevocably converted their NCS Class B common stock (10 votes per share) into
shares of NCS Class A common stock (1 vote per share). See "The Merger --
Litigation Relating to the Merger." On August 8, 2002, Omnicare commenced a
tender offer for all outstanding NCS Class A common stock and NCS Class B common
stock at a price of $3.50 per share, net to the seller in cash, referred to as
the "Omnicare tender offer."
By letter dated August 8, 2002, Omnicare expressed a desire to discuss
the terms of the Omnicare tender offer with representatives of NCS. This letter
again conditioned Omnicare's proposal on the satisfactory completion of
Omnicare's due diligence investigation of NCS, a condition absent from
Omnicare's tender offer materials distributed to NCS stockholders.
43
Pursuant to the requirements of the HSR Act, Omnicare filed the
required Notification and Report Forms, referred to as the "forms" with the
Antitrust Division of the Department of Justice, referred to as the "Antitrust
Division," and the FTC on August 8, 2002. As required by the HSR Act, NCS filed
the forms on August 19, 2002, the next business day after the tenth calendar day
following the day Omnicare filed its forms. The statutory waiting period
applicable to the purchase of NCS Class A common stock and NCS Class B common
stock pursuant to the Omnicare tender offer expired at 11:59 P.M., Eastern Time,
on August 23, 2002.
By letter dated August 15, 2002, Omnicare submitted a revised merger
agreement to NCS providing for the payment of $3.50 per share to the holders of
the NCS Class A common stock and the NCS Class B common stock and indicated that
Omnicare believed that it could execute that agreement before August 22, 2002.
On August 8, 2002 and on August 19, 2002, the NCS board of directors
met to consider and review the Omnicare tender offer in light of the Genesis
merger. NCS' outside legal counsel and NCS' financial advisor attended both
meetings. On both occasions, the NCS board of directors engaged in detailed
discussions regarding the factors and considerations described below under "--
Recommendation and Considerations of the NCS Independent Committee and the NCS
Board of Directors; NCS' Reasons for the Merger," including under "--Reasons for
Continued Recommendation as of October [ ], 2002." In addition, the NCS
independent committee met, together with NCS' outside legal counsel and NCS'
financial advisor, on August 19, 2002 to consider and review the Omnicare tender
offer in light of the Genesis merger and engaged in discussion regarding the
considerations identified below. As a result of those meetings and the
discussions and analyses provided at each, the NCS board of directors
recommended that Schedule 14D-9 be filed with the SEC on August 20, 2002
recommending that the holders of NCS Class A common stock and NCS Class B common
stock reject the Omnicare tender offer and not tender their shares pursuant to
the Omnicare tender offer. A copy of the Schedule 14D-9 has been mailed to NCS
stockholders.
On August 20, 2002, NCS filed a complaint against Omnicare in the
United States District Court for the Northern District of Ohio, titled NCS
HealthCare, Inc. v. Omnicare, Inc., Case No. 1:02CV1635 (Matia, J.), and, on
August 21, 2002, NCS amended the complaint. The complaint, as amended, alleges,
among other things, that Omnicare's disclosure on Schedule TO, filed on August
8, 2002, in connection with the Omnicare tender offer, contains materially false
and misleading disclosures in violation of Section 14(e) of the Securities
Exchange Act of 1934. On September 30, 2002, NCS filed a motion for a
preliminary injunction seeking to enjoin the Omnicare tender offer until such
time as Omnicare amends the tender offer to correct its materially false and
misleading disclosures.
On August 27, 2002, Omnicare delivered a letter to NCS responding to
the Schedule 14D-9 filed by NCS. The August 27, 2002 letter made the following
statements:
o Let us make one fact perfectly clear. Omnicare's tender offer is
not conditioned on due diligence.
o The conditions to our tender offer relate primarily to the illegal
agreements that NCS and Messrs. Outcalt and Shaw have entered into
with Genesis.
o Omnicare's tender offer is "superior" to the Genesis transaction.
o Omnicare has also made a "superior" merger proposal.
o Omnicare's merger proposal is not conditioned on due diligence.
o NCS bondholders and other creditors will receive equal treatment.
o Omnicare is willing to discuss all aspects of its superior offer.
Pursuant to the merger agreement, NCS is prohibited from, among other
things, directly or indirectly soliciting, initiating, encouraging, knowingly
facilitating or inducing any proposal that constitutes, or could reasonably be
expected to result in, an acquisition proposal. Under the merger agreement, an
"acquisition proposal" is broadly defined to include any proposal to acquire 10%
or more of NCS' net revenues, net income or assets, 10% of any class of NCS'
securities, 10% of NCS' voting power or 40% of the face value of the NCS notes.
44
Notwithstanding the foregoing, NCS may furnish non-public information
to and engage in discussions with a party making an acquisition proposal if the
NCS board of directors determines in good faith, after consultation with its
legal and financial advisors, that the proposal is, or is likely to result in, a
superior proposal. Under the merger agreement, a "superior proposal" is defined
as a bona fide written acquisition proposal for all of NCS' outstanding capital
stock and the NCS notes which the NCS board of directors, in its good faith
judgment after consultation with its financial advisors, determines is superior
to the merger. In making this determination, the NCS board of directors must
take into account all of the terms of the proposal deemed relevant by the NCS
board of directors, including: (i) break-up fees; (ii) expense reimbursement
provisions; (iii) conditions to the transaction; (iv) expected timing; (v) risks
of consummation; (vi) the ability of the party making the proposal to obtain
financing; and (vii) all other legal, financial, regulatory and other aspects of
the transaction. In addition, prior to engaging in discussions with or providing
non-public information to a party making a superior proposal, the party making
the proposal must enter into a confidentiality agreement with NCS on terms no
less restrictive than the terms contained in the confidentiality agreement
between NCS and Genesis.
On September 10, 2002, NCS requested and received a waiver from Genesis
allowing NCS to enter into discussions with Omnicare without having to first
make a determination that Omnicare's proposal is a superior proposal under the
merger agreement and without having to require Omnicare to enter into a
confidentiality agreement with NCS on terms no less restrictive than the terms
contained in the Genesis/NCS confidentiality agreement. This waiver relates
solely to NCS' entering into discussions with Omnicare relating to the Omnicare
proposals and does not allow NCS to furnish Omnicare with non-public
information, unless Omnicare enters into the required confidentiality agreement.
On Friday, September 13, 2002, NCS' legal and financial advisors met
with Joel F. Gemunder, President and Chief Executive Officer of Omnicare and
Omnicare's legal and financial advisors to discuss the terms of Omnicare's
tender offer and merger proposal. The discussions did not result in any
agreement between NCS and Omnicare.
On October 7, 2002, Omnicare delivered an executed merger agreement to
the NCS board of directors. The merger agreement executed by Omnicare:
o commits Omnicare to pay $3.50 per share in cash to the NCS
stockholders;
o contemplates a tender offer followed by a merger;
o does not include a break-up fee if the NCS board of directors
terminated the Omnicare merger agreement in the event a superior
offer is received; and
o commits Omnicare to repay NCS' senior lenders and NCS noteholders
in full, in the same manner as in the Genesis merger.
The Omnicare merger agreement is irrevocable by Omnicare and may be
accepted by NCS on or before the earliest of:
o the closing of the Genesis merger;
o two calendar days after (i) the Genesis merger agreement is
declared illegal, invalid, void or otherwise unenforceable or is
otherwise terminated by either NCS or Genesis in accordance with
the terms of the Genesis merger agreement, or (ii) NCS
stockholders fail to approve the Genesis merger at a meeting
called for such purpose;
o any amendment or waiver of any of the provisions of the Genesis
merger agreement; and
o January 31, 2003.
In addition, the Genesis merger agreement and the voting agreements
entered into by Messrs. Outcalt and Shaw must be terminated in accordance with
their terms or otherwise on terms satisfactory to Omnicare.
The NCS independent committee and the NCS board of directors reserve
the right to revise this recommendation in the event of changed circumstances,
if any. Any such change in the recommendation of the NCS independent committee
or the NCS board of directors will be communicated to stockholders as promptly
as practicable in the event that such a determination is reached.
Recommendation and Considerations of the NCS Independent Committee and the NCS
Board of Directors; NCS' Reasons for the Merger
Recommendations
On July 28, 2002, the NCS independent committee unanimously determined
the merger agreement and the merger and related transactions to be advisable,
fair to and in the best interests of the NCS' stakeholders (other than Messrs.
Outcalt and Shaw) to whom the NCS board of directors owed a fiduciary duty, and
recommended that the full NCS board of directors approve and adopt the merger
agreement and the transactions contemplated thereby and recommend that NCS'
stockholders approve the merger agreement and the transactions contemplated
thereby. The NCS independent committee has reviewed these recommendations in
light of developments subsequent to July 28, 2002 and, after careful
consideration, has determined to continue to make these recommendations.
45
On July 28, 2002, the full NCS board of directors unanimously
determined the merger agreement and the merger and related transactions to be
advisable, fair to and in the best interests of the NCS' stakeholders to whom
the NCS board of directors owed a fiduciary duty and resolved to recommend that
the stockholders of NCS approve and adopt the merger agreement and the
transactions contemplated thereby. The full NCS board of directors has reviewed
these recommendations in light of developments and information known to them
through October [ ], 2002 and after careful consideration has determined to
continue to make these recommendations.
Accordingly, as of October [ ],(1) 2002, the NCS board of directors
unanimously recommends that the NCS stockholders vote for the adoption of the
merger agreement.
Considerations of the NCS Independent Committee and the NCS Board of
Directors in Determining to Approve the Merger Agreement and the Merger on July
28, 2002.
In the course of reaching their respective determinations and
recommendations, the NCS board of directors and the NCS independent committee
consulted with senior management, as well as NCS' outside legal counsel and
financial advisors, and considered the following material factors:
Considerations Relating to NCS' Financial Condition and to the Value,
Structure and Timing of the Genesis Transaction. The NCS independent committee
and the full NCS board of directors believed that the combination of NCS'
financial condition and the value, structure, timing and likelihood of
completion of the Genesis transaction made the Genesis transaction highly
beneficial for NCS, its stockholders and other stakeholders. In particular, the
directors considered:
o their belief that, in light of NCS' distressed financial
condition, including persisting, unremedied default on
approximately $350 million of indebtedness and defaulted trade
payables, the NCS board of directors and the NCS independent
committee owed fiduciary duties not only to NCS' stockholders, but
also to its creditors, which they believed were best discharged by
accepting the Genesis transaction and the associated certainty of
recovery for NCS creditors and stockholders;
o that the Genesis merger offered NCS creditors an opportunity for a
full and complete recovery and also provided significant value to
NCS stockholders, and that the ad hoc committee representing
holders of NCS notes indicated its support for the merger;
o the absence of other strategic or financial alternatives, other
than the Omnicare indication of interest, which the directors
believed to be highly uncertain as to completion, timing,
structure and value, as explained in further detail below;
o that Genesis indicated that its proposal would be withdrawn and
discussions regarding an NCS transaction would be terminated if
definitive documentation were not accepted and definitive
documents executed by the end of the day on July 28, 2002 and the
NCS board of directors and the NCS independent committee's belief
that Genesis was sincere in this demand;
o that the terms of the merger agreement had been extensively
negotiated on an arms'-length basis and that improvements had been
obtained from and concessions granted by Genesis;
o that the nature and relatively limited number of conditions to the
completion of the merger, and the ability of NCS and Genesis to
fulfill those conditions, make completion of the merger on the
terms reflected in the merger agreement and on a timely basis
highly likely;
o that Genesis common stock would be issued to NCS stockholders in
the Genesis merger, thereby affording the stockholders an
opportunity to share in potential increases in the long-term value
of a combined Genesis/NCS enterprise;
o that the 0.1 merger exchange ratio of NCS common stock into
Genesis common stock would represent a substantial premium to NCS
stockholders based on the relative trading prices of NCS Class A
common stock and Genesis common stock during recent periods prior
to the announcement of the merger (which premium was approximately
116% based on closing prices as of July 26, 2002, the last trading
day prior to the announcement of the merger, and more than 400%
based on the closing prices as of July 3, 2002, the date on which
the exclusivity agreement was executed by NCS and Genesis);
o the expectation that the merger would generally be tax-free to NCS
stockholders for federal income tax purposes;
(1) To be updated prior to mailing.
46
o NCS' co-financial advisor, Candlewood Partners, LLC, made detailed
presentations of the financial aspects of the merger, responded to
questions of the NCS independent committee and the NCS board of
directors at the special meetings held on July 28, 2002, and
delivered its opinion to the NCS board of directors that the
merger exchange ratio of 0.1 of a share of Genesis common stock
for each share of NCS Class A common stock and NCS Class B common
stock was fair, from a financial point of view, to the holders of
NCS common stock, taken together, as described more fully in the
text of the opinion attached as Annex C to this proxy
statement/prospectus; and
o that, based upon discussions with legal counsel, the likelihood of
intervention by antitrust or other regulatory authorities is low.
Additional Information. In the course of its deliberations, the NCS
independent committee and the full NCS board of directors informed themselves
of, and received presentations from NCS management and/or NCS' financial and
legal advisors concerning, the following:
o historical information concerning the financial performance and
condition, business operations and prospects of NCS, on a
stand-alone basis and on a combined basis with Genesis;
o historical information concerning the financial performance and
condition, business operations and prospects of Genesis, on a
stand-alone basis and on a combined basis with NCS;
o current industry, economic and market conditions;
o the results of the due diligence investigation of Genesis
conducted by NCS and NCS' financial and legal advisors, which
revealed no material problems; and
o the interests of certain officers and directors, including Messrs.
Outcalt and Shaw, described under "-- Interests of Certain Persons
in the Merger."
Considerations Relating to the Omnicare Indication of Interest Received
July 26, 2002. The NCS independent committee and NCS board of directors believed
that the risk of losing the Genesis transaction outweighed the expected benefits
of Omnicare's indication of interest, which the NCS independent committee and
the NCS board of directors believed was highly uncertain as to the likelihood of
completion, value, structure and timing. In particular, the directors
considered:
o that because NCS had for more than two years actively sought,
explored, solicited and pursued virtually every form of strategic
alternative, including financial restructuring, bankruptcy,
business combinations, sales of assets and sale of the company,
and had engaged in discussions with numerous potential strategic
and financial acquirors and investors, the NCS board of directors
and the NCS independent committee believed that NCS would have no
attractive strategic alternatives if it were to allow the Genesis
opportunity to pass and the Omnicare indication of interest were
not to materialize into an acceptable transaction; this belief was
supported by the presentations made from time to time by NCS'
financial advisors;
o the concern of the NCS independent committee that the Omnicare
indication of interest was predatory in nature and believed to be
intended primarily to disrupt the ongoing discussions with Genesis
due to the fact that Omnicare is a significant competitor of
Genesis and NCS, and the belief that, in any event, the Genesis
transaction had a far greater certainty of completion, value and
timing, based on a variety of factors, including:
- that the Omnicare indication of interest was non-binding,
remained subject to due diligence and other as yet unknown
conditions relating to the transaction and the belief of the
NCS independent committee that the price per share offered by
Omnicare might be subject to reduction following Omnicare's
due diligence review of NCS or if discussions with Genesis
were terminated;
47
- that Omnicare continued to condition its proposal on
satisfactory completion of due diligence, notwithstanding that
Omnicare had previously performed due diligence;
- that the terms of the Genesis transaction had been fully
negotiated and all due diligence had been completed, and the
fact that negotiation of definitive agreements with Omnicare
had not yet commenced, leaving NCS at risk that the terms of
the Omnicare proposal would deteriorate or disappear. This
concern was supported by the following:
o the timing of Omnicare's indication of interest, which was
received in the final stages of negotiation with Genesis,
after the absence of any communication from Omnicare for a
period of several months;
o the course of dealing between NCS and Omnicare over the
preceding year;
o the difficulty encountered by NCS in attempting to
negotiate a confidentiality agreement with Omnicare;
o the unreasonable positions taken by Omnicare in prior
discussions, including:
- Omnicare's unwillingness to accept restrictions on its
ability to purchase NCS debt securities, use
competitively sensitive non-public information or
solicit customers of NCS while engaging in due
diligence;
- the repeated insistence of Omnicare in proposing a
Section 363 bankruptcy sale notwithstanding the
benefits of a non-bankruptcy acquisition to NCS, NCS'
improving operating performance and the potential
operating synergies associated with a combination of
NCS and Omnicare;
- Omnicare's insistence in pursuing an acquisition of
the Company's assets in a bankruptcy proceeding and
seeking to negotiate that transaction with the
noteholder committee rather than negotiating a merger
transaction with NCS;
- the lack of communication from Omnicare to NCS over
the preceding months and the inability to generate a
productive dialogue between the two companies
regarding a transaction; and
- the belief of the NCS independent committee that there
might be greater antitrust risks associated with a
transaction with Omnicare, NCS' single largest
competitor;
o the restrictions contained in the exclusivity agreement between
NCS and Genesis;
o the continued belief by the NCS board of directors and the NCS
independent committee that the Genesis merger represented the best
available alternative for all NCS stakeholders given the value and
certainty of the Genesis merger and the uncertainty associated
with pursuing the Omnicare conditional indication of interest; and
o that under the terms of the merger agreement, the noteholder
committee and holders of approximately 65% of the voting power of
NCS and approximately 20% of the outstanding NCS common stock were
aware of the Omnicare indication of interest but nevertheless
supported the decision to enter into the Genesis transaction.
48
Potential Risks and Other Factors Unfavorable to the Decision to
Approve the Merger. The NCS board of directors and the NCS independent committee
also identified and considered a variety of potential risks and other factors
unfavorable to their respective decisions to approve the merger agreement and
the related transactions, including the following factors and risks:
o the risk to NCS stockholders that, because the merger exchange
ratio is fixed, the market value of Genesis common stock to be
received in the merger could decrease significantly if the value
of Genesis common stock were to fall after the date the merger
agreement was executed, and the absence of any provisions allowing
for an adjustment of the merger exchange ratio or termination of
the merger agreement in that event;
o the limitations imposed by the merger agreement on the conduct of
NCS' business prior to the merger;
o that because NCS stockholders representing in excess of 50% of the
outstanding voting power would be required by Genesis to enter
into stockholder voting agreements contemporaneously with the
signing of the merger agreement, and would be required by Genesis
to agree to vote their shares in favor of the merger agreement,
stockholder approval of the merger is assured even if the NCS
board were to withdraw or change its recommendation, and that
these facts would prevent NCS from engaging in any alternative or
superior transaction in the future;
o the termination fee of $6 million and expense reimbursement of up
to $5 million to be paid by NCS to Genesis if the merger agreement
is terminated under certain circumstances;
o the risk that the potential benefits and synergies sought in the
merger might not be fully realized; and
o the risks associated with an investment in Genesis, described
under "Risk Factors".
The NCS independent committee and full NCS board of directors believed
that the risks were outweighed by the potential benefits to be realized by
agreeing to the merger agreement.
Reasons for Continued Recommendation as of October [ ],(2) 2002.
After careful consideration by the NCS independent committee and the
NCS board of directors, including a thorough review of the Omnicare tender offer
with NCS' outside legal and financial advisors, the NCS independent committee
and, based in part upon the recommendation of the NCS independent committee, the
NCS board of directors have determined to recommend that the NCS stockholders
reject the Omnicare tender offer, not tender their NCS Class A common stock or
NCS Class B common stock in the Omnicare tender offer and continue to recommend
that NCS stockholders vote for the adoption of the merger agreement. As
described in greater detail below, the NCS independent committee and the NCS
board of directors believe that the Omnicare tender offer is highly conditional.
More significantly, the NCS independent committee and the NCS board of
directors, for all of the considerations and reasons identified in
"Considerations of the NCS Independent Committee and NCS Board of Directors in
Determining to Approve the Merger on July 28, 2002," believe that there is a
much higher certainty of consummating the Genesis merger (which provides a full
and complete recovery to NCS' creditors and provides significant value to NCS
stockholders), thereby increasing the likelihood that value will be delivered to
NCS stakeholders.
In reaching their respective determinations to recommend that
stockholders reject the Omnicare tender offer and to continue to recommend that
NCS stockholders approve and adopt the merger, the NCS independent committee and
the NCS board of directors each considered numerous factors, including but not
limited to the following:
o The Omnicare tender offer is subject to numerous conditions,
including, among others, the requirement that: (i) at least a
majority of the total voting power of all outstanding NCS
securities be validly tendered in the Omnicare tender offer and
not withdrawn; (ii) the Genesis merger agreement be terminated;
(iii) the voting agreements with Jon H. Outcalt and Kevin B. Shaw
be terminated; (iv) NCS stockholders not approve and adopt the
Genesis merger agreement; (v) NCS not have entered into or
effectuated any agreement or transaction with any person or entity
having the effect of impairing Omnicare's ability to acquire NCS
or otherwise diminishing the expected economic value to Omnicare
of the acquisition of NCS; and (vi) the termination fee provision
in the Genesis merger agreement be invalidated or the obligation
to pay any amounts under the provision be terminated, without
payment of any fee. In addition to the various conditions
described above, Omnicare's August 8, 2002 letter further
conditioned Omnicare's proposal on the satisfactory completion of
Omnicare's due diligence investigation of NCS, a condition absent
from Omnicare's tender offer materials distributed to NCS
stockholders.
(2) To be updated prior to mailing.
49
o Given the contractual arrangements between Genesis and NCS and the
voting agreements entered into by Messrs. Outcalt and Shaw, it is
not possible to satisfy the many conditions to the Omnicare tender
offer.
o Many of the numerous conditions to the Omnicare tender offer are
incapable of being satisfied, or are left to Omnicare's sole
discretion. In light of the manner in which Omnicare has timed and
structured its tender offer, the NCS independent committee and the
NCS board of directors further believe, as explained more fully
above, that the Omnicare tender offer is predatory in nature and
may primarily be intended to cause disruption to the pending
merger with Genesis (one of Omnicare's significant competitors),
thereby jeopardizing a transaction that will provide for a full
and complete recovery for NCS' debt holders, in addition to
providing substantial value to NCS stockholders.
o All of the conditions to the Omnicare tender offer, including the
due diligence condition referenced in Omnicare's August 8, 2002
letter and the no impairment condition contained in the Omnicare
tender offer, are drafted to provide Omnicare with extremely broad
latitude in determining, in its sole discretion, whether or not to
consummate the Omnicare tender offer.
o Even assuming the numerous conditions to the Omnicare tender offer
could be satisfied or waived, in view of the course of dealing
between NCS and Omnicare over the months preceding the Omnicare
tender offer, as more fully explained above, the NCS independent
committee and the NCS board of directors believe that there is
significant uncertainty as to whether the Omnicare tender offer
would be consummated on the terms proposed or at all because any
number of facts or circumstances identified by Omnicare in the
course of its due diligence investigation, pursuant to the
condition relating to the expected economic value to Omnicare of
the acquisition of NCS, or otherwise, may be used as a basis for
refusing to consummate the Omnicare tender offer or reducing the
value to be delivered to NCS stakeholders.
o In addition to providing a full and complete recovery to NCS' debt
holders, the Genesis merger provides significant value to the NCS
stockholders. The Omnicare tender offer, by contrast, does not
contain a binding commitment from Omnicare to provide a full and
complete recovery to the creditors of NCS. The Omnicare tender
offer materials only indicate that Omnicare "currently intends" to
discharge NCS' senior credit facility and redeem the NCS notes.
Because of the certainty of recovery afforded to NCS debt holders
by the Genesis merger, and in light of the fiduciary duties owed
to creditors by the NCS independent committee and the NCS board of
directors, the NCS independent committee and the NCS board of
directors continue to believe that the Genesis merger represents a
better alternative for NCS stakeholders.
o The Genesis merger offers NCS stockholders the opportunity to
participate in the potential long-term appreciation in the value
of the combined companies, while no similar opportunity is
afforded by the Omnicare tender offer.
The NCS board of directors and the NCS independent committee considered
the absence of other strategic alternatives, the difficulty of raising
substantial additional capital in a period of declining private investment in
its business sector, taking into account NCS' distressed financial condition,
its default on existing indebtedness, and general economic and market
conditions. After full consideration of the availability, feasibility and
desirability of these alternatives, including the Omnicare tender offer, when
compared to the opportunities presented by the merger with Genesis, the NCS
board of directors and the NCS independent committee concluded that the merger
was in the best interests of NCS and its stakeholders and jeopardizing the
Genesis merger was not in the best interests of NCS and its stakeholders in
light of the significant risk that neither the Omnicare indication of interest
nor the Omnicare tender offer would materialize into an acceptable transaction.
50
The foregoing discussion of the information and factors considered by
the NCS board of directors and the NCS independent committee is not intended to
be exhaustive but is believed to include all material factors considered by the
NCS board of directors and the NCS independent committee. In view of the
complexity and wide variety of information and factors, both positive and
negative, considered by the NCS board of directors and the NCS independent
committee, they did not find it practical to quantify, rank or otherwise assign
relative or specific weights to the factors considered. In addition, the NCS
board of directors and NCS independent committee did not reach any specific
conclusion with respect to each of the factors considered, or any aspect of any
particular factor, but, rather, conducted an overall analysis of the factors
described above, including discussions with NCS' management and legal and
financial advisors. In considering the factors described above, individual
members of the NCS board of directors and the NCS independent committee may have
given different weight to different factors. The NCS board of directors and the
NCS independent committee considered all these factors as a whole and believe
that the merger is fair to, and in the best interests of, NCS and its
stakeholders and recommend that the stockholders of NCS approve the merger and
the merger agreement.
Opinion of NCS' Financial Advisor
Candlewood Partners, LLC acted as financial advisor to NCS and the NCS
independent committee of the NCS board of directors in connection with the
merger, and delivered its written opinion to the NCS independent committee and
the NCS board of directors on Sunday, July 28, 2002, to the effect that, as of
July 28, 2002, and based on and subject to the assumptions, limitations,
qualifications and other matters set forth in the opinion, the merger exchange
ratio of 0.1 to be received in the merger by the holders of NCS common stock,
taken together, was fair, from a financial point of view, to such stockholders.
The summary of the Candlewood opinion set forth in this proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion attached as Annex C to this proxy statement/prospectus.
Stockholders should read the opinion in its entirety for a discussion of the
assumptions made, matters considered and limitations of the review undertaken by
Candlewood in rendering its opinion.
No limitations were imposed by NCS on the scope of Candlewood's
investigation or the procedures to be followed by Candlewood in rendering its
opinion. Candlewood was not requested to and did not make any recommendation to
the NCS board of directors as to the form or amount of the consideration to be
received by NCS stockholders, which was determined through arm's length
negotiations between NCS and Genesis. In arriving at its opinion, Candlewood
ascribed a range of values to NCS using the financial and comparative analyses
described below to determine the fairness, from a financial point of view, of
the exchange ratio to be received by the holders of NCS common stock, taken
together. The Candlewood opinion is for the use and benefit of the NCS
independent committee and the NCS board of directors and was rendered to them in
connection with their consideration of the merger. Candlewood was not requested
to opine as to, and its opinion does not address, the underlying business
decision of NCS to proceed with or effect the merger. The Candlewood opinion was
not intended to be, and does not constitute, a recommendation to any stockholder
of NCS with respect to how any stockholder should vote with respect to the
merger or any other matter.
In connection with the preparation and delivery of its opinion to the
NCS board of directors, Candlewood performed several financial and comparative
analyses, as described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the application of those methods to the
particular circumstances; therefore, such an opinion is not readily susceptible
to summary description. Furthermore, in arriving at its opinion, Candlewood made
qualitative judgments as to the significance and relevance of each analysis and
factor. Candlewood therefore believes that its analyses must be considered as a
whole and that considering any portion of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. As a result, the ranges of
valuations resulting from any particular analysis or combination of analyses
described below were merely utilized to create points of reference for
analytical purposes and should not be taken as the view of Candlewood as to the
actual value of NCS or Genesis. In its analyses, Candlewood made assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of NCS and Genesis. Any
estimates or projections in these analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth in these analyses. In
addition, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
51
In arriving at its opinion, Candlewood reviewed and analyzed:
o the merger agreement and specific terms of the merger;
o certain related documents;
o the Plan of Reorganization and Disclosure Statement of Genesis
dated July 6, 2001;
o certain audited historical financial statements of NCS for the
four years ended June 30, 2001;
o certain unaudited historical financial statements of Genesis for
the three months ended June 30, 2002;
o the unaudited financial statements of NCS for the three-month
periods ended December 31, 2001 and March 31, 2002;
o certain internal business, operating and financial information and
forecasts of NCS, referred to as "forecasts," prepared and
provided to Candlewood by the senior management of NCS;
o information regarding publicly available financial terms of
certain other business combinations deemed relevant by Candlewood;
o the financial position and operating results of NCS and Genesis
compared with those of certain other publicly traded companies
deemed relevant by Candlewood;
o current historical and market prices and trading volumes of the
common stock of Genesis; and
o other publicly available information regarding Genesis that
Candlewood believed relevant to its opinion.
In addition, Candlewood had discussions with the management of NCS and
Genesis concerning their respective businesses, operations, assets, financial
condition and prospects, and undertook such other analyses and investigations
that it deemed appropriate.
In arriving at its opinion, Candlewood assumed and relied upon the
accuracy and completeness of the financial and other information used by it,
without assuming any responsibility for the independent verification of such
information, and further relied upon the assurances of the respective members of
management of NCS and Genesis that they were not aware of any facts or
circumstances that would make such information inaccurate or misleading. With
respect to the forecasts provided by NCS, upon advice of NCS, Candlewood assumed
that such forecasts were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of NCS as to the
future financial performance of NCS, and Candlewood reviewed such forecasts in
performing its analysis. Candlewood expressed no views as to such forecasts or
the assumptions on which they were based. Candlewood was not provided with, and
did not have access to, financial forecasts of Genesis prepared by the
management of Genesis. In arriving at its opinion, Candlewood did not conduct a
physical inspection of the properties and facilities of NCS or Genesis and did
not make or obtain any evaluations or appraisals of the assets or liabilities of
NCS or Genesis. Candlewood assumed that the merger will qualify as a tax-free
reorganization within the meaning of Section 368 of the Internal Revenue Code
and, therefore, will be tax free to the holders of NCS common stock. Candlewood
further assumed that:
52
o the representations and warranties of each party contained in the
merger agreement and the other agreements executed in connection
with the merger agreement are true and correct;
o each party will perform all of the covenants and agreements
required to be performed by it under the merger agreement;
o all conditions to the completion of the merger will be satisfied
without amendment or waiver;
o the merger and other transactions contemplated by the merger
agreement will be completed as described in the merger agreement;
and
o all material governmental, regulatory or other consents and
approvals necessary for the completion of the merger will be
obtained without any adverse effect on NCS or Genesis or on the
contemplated benefits of the merger.
Candlewood's opinion necessarily is based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
the opinion and the information made available to it as of that date. Subsequent
developments may affect its opinion, and Candlewood does not have any obligation
to update, revise, or reaffirm its decision.
Candlewood expressed no opinion as to the prices at which shares of
Genesis common stock may trade prior to or following the completion of the
merger and this opinion should not be viewed as providing any assurance that the
market value of Genesis common stock to be held by stockholders of NCS after the
merger will be in excess of the market value of the shares of NCS owned by such
stockholders at any time prior to the announcement or completion of the merger.
The following is a summary of the material financial and comparative
analyses performed by Candlewood and presented to the independent committee and
the NCS board of directors.
Relative Valuation Derived From Public Comparables Analysis
Using publicly available information including estimates in published
third-party research reports, Candlewood reviewed and compared particular
financial statistics of NCS with corresponding financial statistics for selected
companies in the healthcare services industry. Candlewood examined, among other
things, enterprise value as a multiple of revenue, as a multiple of earnings
before interest and taxes and as a multiple of earnings before interest, taxes,
depreciation and amortization, referred to as "EBITDA", of the comparable
companies. Enterprise value is the market valuation of a company's common stock
plus the amount of its outstanding debt less the amount of cash it has on hand.
Three categories of comparable companies were analyzed: strategic competitors;
reimbursement constrained healthcare companies; and healthcare distribution
companies. The strategic competitors were Omnicare, Genesis and
AmerisourceBergen, the parent of Pharmerica. Omnicare was the only strategic
competitor principally engaged in the same business as NCS. Omnicare's
enterprise value was an 8.6 multiple of its EBITDA. AmerisourceBergen, whose
institutional pharmacy business, Pharmerica, represents less than 10% of its
reported revenue, had an enterprise value representing a 14.5 multiple of its
EBITDA. Genesis, whose institutional pharmacy business, NeighborCare(R)
represents approximately 45% of its reported revenue, emerged from Chapter 11 in
October 2001 and did not have 12 months of operations post restructuring and,
therefore, was not included in the strategic competitor analysis. The mean
EBITDA multiple for the strategic competitors was 11.5. The reimbursement
constrained healthcare companies that were analyzed were American Home Patient,
Apria Healthcare Group, D&K Healthcare Resources, Da Vita, Fresenius Medical
Care, Lincare Holdings, Renal Care Group and Syncor International. The
healthcare distribution companies that were analyzed were Henry Schein, Priority
Healthcare and PSS World Medical. The following chart summarizes the range of
mean EBITDA multiples derived from this analysis.
53
Mean Enterprise Value Multiple
Business of EBITDA
---------------------------------------------- ------------------------------
Strategic Competitors 11.5x
Reimbursement Constrained Healthcare Companies 7.8x
Healthcare Distribution Companies 13.0x
Candlewood used the derived EBITDA multiples of the applicable
comparable companies to calculate an implied enterprise value of NCS, ranging
from $156.4 million to $727.4 million.
The implied enterprise values from these analyses in turn implied
exchange ratios ranging from 0 to 1.1212. The implied exchange ratio of zero
reflects the lowest mathematically possible exchange ratio and indicates that,
at the low end of the range of implied enterprise values derived from
Candlewood's analysis, the equity holdings of NCS would have no value.
Because of the inherent differences between the businesses, operations,
financial conditions and prospects of NCS and those of the comparable companies,
Candlewood believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the public comparable analysis and,
accordingly, made qualitative judgments concerning differences between the
characteristics of NCS and those of the comparable companies. In particular,
Candlewood considered the size and desirability of the markets of operation, the
annual revenue, the impact and potential future impact of the healthcare
regulatory environment and current levels and historical rates of growth of NCS
and those of the comparable companies.
Relative Valuation Based on Precedent Transactions
As part of its analysis, Candlewood reviewed publicly available
information regarding the terms and financial characteristics in a number of
transactions involving healthcare services companies since 2000 in order to
derive a relative value of NCS based on the multiples paid in these
transactions. The acquired companies were Apex Therapeutic Care, American
Pharmaceutical Services, Specialty Pharmaceutical Services and Interwest Home
Medical.
Candlewood reviewed the prices paid and calculated the enterprise value
as a multiple of EBITDA of each transaction and derived a range of EBITDA
multiples from 8.25 to 9.81. From this analysis, Candlewood derived implied
enterprise values of NCS ranging from $322.7 million to $383.7 million. The
implied enterprise values from these analyses in turn implied exchange ratios
ranging from 0.0545 to 0.2153.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations and prospects of the
acquired companies included in the selected transactions, Candlewood believed
that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the precedent transactions analysis and, accordingly,
made qualitative judgments concerning differences between the characteristics of
these transactions and the merger that would affect the acquisition values of
NCS and such acquired companies. In particular, Candlewood considered the size
and desirability of the markets of operation, the annual revenue, the impact and
potential future impact of the healthcare regulatory environment, the strategic
fit of the acquired company, the form of consideration offered and the tax
characteristics of the transaction.
Discounted Cash Flow Analysis
Candlewood performed a discounted cash flow analysis of NCS for the
period commencing on July 1, 2002 and ending on June 30, 2007, using the
forecasts obtained from the senior management of NCS.
A discounted cash flow analysis is one method used to value businesses
and involves an analysis of the present value of projected cash flows of a
business for a specified number of years into the future and the present value
of the projected value of the business at the end of that period of years, which
is commonly referred to as terminal value.
The discounted cash flow analysis value of NCS was estimated using a
weighted average cost of capital discount rate of 11.15%, an assumed long-term
growth rate of 3.3% and a terminal multiple of forecasted free cash flow of 8.93
for NCS' fiscal year ending June 30, 2007. From this analysis, Candlewood
derived an implied enterprise value of NCS of $268 million.
54
Utilizing this analysis, Candlewood derived an implied exchange ratio
of zero. The implied exchange ratio of zero reflects the lowest mathematically
possible exchange ratio and indicates that, at the low end of the implied
enterprise value derived from Candlewood's analysis, the equity holdings of NCS
would have no value.
Bond Restructuring Analysis
As of the date of Candlewood's opinion, the NCS notes were in default
and the maturity of the NCS notes had been accelerated. Since a distressed
financial condition can have a material and negative effect on the management,
employees, suppliers, customers and future operations of a business, Candlewood
analyzed completed bond exchange offer transactions of defaulted issues to
determine the subject issuing companies' valuations at the time that the
exchange offer was completed. Comparable bond exchange offers include
transactions in which there is less than par recovery for the bondholders. The
companies whose exchange offers were analyzed were Pentacon, Leiner Health
Products, Anchor Glass Container, Chiquita Brands International, ZiLOG and
Assisted Living Concepts.
Candlewood used the derived EBITDA multiples of the applicable
companies to calculate an implied enterprise value of NCS, ranging from $169.3
million to $486.5 million.
The implied enterprise values from these analyses in turn implied
exchange ratios ranging from 0 to 0.4863. The implied exchange ratio of zero
reflects the lowest mathematically possible exchange ratio and indicates that,
at the low end of the range of implied enterprise values derived from
Candlewood's analysis, the equity holdings of NCS would have no value.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences in both the issues to be restructured and the businesses,
operations and prospects of the companies included in the selected transactions,
Candlewood believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the bond restructuring transactions
analysis and, accordingly, made qualitative judgments concerning differences
between the characteristics of these transactions and the merger that would
affect the value of NCS. In particular, Candlewood considered the nature of the
restructuring, the form of the exchange consideration, the enterprise value and
the annual revenue of the companies completing the exchange transactions.
Chapter 11 Reorganizations
As of the date of Candlewood's opinion, NCS's $206 million senior
credit facility, under which NCS had been in default, had matured, the NCS notes
were in default and the maturity of the NCS notes had been accelerated and its
principal trade obligation was past due and unable to be paid within its
contractual terms, resulting in NCS' material financial distress. Since a
distressed financial condition can have a material and negative effect on the
management, employees, suppliers, customers and future operations of a business,
and given Candlewood's assessment, based on NCS' material financial distress, of
the potential for NCS to undergo a bankruptcy or similar reorganization
proceeding, Candlewood reviewed confirmed plans of reorganization under Chapter
11 of the United States Bankruptcy Code and analyzed the valuations of the
subject companies at the consummation of such reorganizations. The companies
analyzed were Genesis, Kindred Healthcare and Sun Healthcare Group.
Because the reasons for and the circumstances surrounding each of the
reorganizations analyzed were specific to each situation and because of the
inherent differences in the businesses, operations and prospects of the
companies included in the selected reorganizations, Candlewood believed that it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of the Chapter 11 reorganization analysis and, accordingly, made
qualitative judgments concerning differences between the characteristics of
these reorganizations and the merger that would affect the value of NCS. In
particular, Candlewood considered the nature of the reorganization, the
components of the reorganized capital structure, the enterprise value and the
annual revenue of the companies completing the reorganizations.
55
Candlewood used the derived EBITDA multiples of the applicable
reorganizations to calculate implied enterprise values of NCS, ranging from
$246.4 million to $328.5 million.
The implied enterprise values from these analyses in turn implied
exchange ratios ranging from 0 to 0.07. The implied exchange ratio of zero
reflects the lowest mathematically possible exchange ratio and indicates that,
at the low end of the range of implied enterprise values derived from
Candlewood's analysis, the equity holdings of NCS would have no value.
General
Candlewood is an investment banking firm and, as part of its investment
banking activities, is regularly engaged in the evaluation of businesses and
other securities in connection with mergers and acquisitions, competitive bids,
private placements and valuations for corporate and other purposes. The
independent committee and the NCS board of directors selected Candlewood because
of its expertise, reputation and familiarity with NCS in particular and
corporate valuations and restructurings in general. Mr. Glenn C. Pollack, a
founder and Managing Director of Candlewood was previously the senior investment
banker assigned to the NCS engagement for Brown Gibbons. After leaving Brown
Gibbons, Mr. Pollack continued to provide financial advisory services to NCS as
a consultant to Brown Gibbons.
As compensation for its services as financial advisor in connection
with the merger, including rendering its opinion, NCS has agreed to pay
Candlewood a fixed fee. Under the terms of an engagement letter between
Candlewood and NCS, NCS has agreed to pay Candlewood a fee of $567,625 for its
financial advisory services in connection with the merger, a portion of which
was payable upon the execution of the engagement letter, and another portion of
which was payable upon the rendering of Candlewood's opinion and the remainder
of which is contingent upon the completion of a transaction. In addition, NCS
has agreed to pay Candlewood a monthly retainer of $33,250, reimburse Candlewood
for reasonable out-of-pocket expenses incurred in connection with the merger,
including attorney's fees, and to indemnify Candlewood for certain liabilities
that may arise out of its engagement by NCS and the rendering of its opinion,
including certain liabilities under the federal securities laws.
Candlewood is acting as co-financial advisor to NCS and the NCS
independent committee in connection with the merger. Candlewood has not
performed investment banking services for NCS in the past. However, certain
principals of Candlewood have previously provided financial advisory services
for NCS as described above.
Brown, Gibbons, Lang & Company is an investment banking firm and, as
part of its investment banking activities, is regularly engaged in the
evaluation of business and other securities in connection with mergers and
acquisitions, competitive bids, private placements and valuations for corporate
and other purposes. Brown Gibbons was selected by the NCS board of directors
because of its expertise, reputation and familiarity with corporate valuations
and restructurings.
As compensation for its services as financial advisor to NCS, NCS has
agreed to pay Brown Gibbons a monthly retainer equal to $61,750. Fifty percent
of the monthly retainer is applied to reduce any transaction fee which might be
payable to Brown Gibbons by NCS. Assuming the merger closes in November 2002 and
after application of the monthly retainer fees, under the terms of an engagement
letter, as amended, NCS has agreed to pay Brown Gibbons a transaction fee of
$466,875 for its financial advisory services in connection with the merger and
to reimburse Brown Gibbons for reasonable out-of-pocket expenses incurred in
connection with the merger, including attorney's fees, and to indemnify Brown
Gibbons for certain liabilities that may arise out of its engagement by NCS,
including certain liabilities under the federal securities laws.
Brown Gibbons has not provided financial advisory services to NCS in
the past.
Genesis' Reasons for the Merger
Genesis' primary business strategy is to expand the service-related
component of its business both within its existing markets and in new markets
and to enhance its presence as a national healthcare services company. The
Genesis board of directors believes that the merger should further this
strategy. In determining to approve the merger agreement, Genesis' board of
directors considered the following material factors:
56
o the expectation that the merger will be accretive to Genesis'
earnings per share;
o the merger would afford Genesis shareholders an opportunity to
share in potential increases in the long-term value of a combined
Genesis/NCS enterprise;
o the merger will create the second largest institutional pharmacy
in the United States;
o the Genesis board of directors' review, based in part on
presentations by Greenhill Co., LLC, its financial advisor, and
management of the business, operations and financial condition of
NCS, the prospects of the combined business, and the increased
market presence, economies of scale, cost savings opportunities
and enhanced opportunities for growth made possible by the merger
such as enhanced national contracting;
o the Genesis board of directors' recognition of the complementary
nature of the markets served by Genesis and NCS and its
expectation that the merger would provide it with opportunities
for additional growth in both existing and new sales areas;
o the impact the merger is anticipated to have on Genesis'
consolidated results of operations, including anticipated cost
savings;
o the opinion of Greenhill that the exchange ratio to be paid by
Genesis to the holders of NCS common stock pursuant to the merger
agreement is fair, from a financial point of view to Genesis;
o the terms of the merger agreement and the other documents executed
in connection with the merger, and
o the combined pharmacy company resulting from the merger is
expected to benefit from several operational efficiencies
including, but not limited to (a) greater purchasing power which
will allow it to obtain more favorable pricing, (b) elimination of
duplicative administrative functions, (c) reduction of corporate
overhead and other expenses, and (d) site consolidations.
The Genesis board of directors also identified and considered a variety
of potential risks and other factors unfavorable to their decision to approve
the merger agreement, including the following :
o as a result of the merger, Genesis will increase its leverage, see
"Risk Factors - Risks Relating to Genesis' Business and Ownership
of Genesis Common Stock - As a result of this merger, Genesis will
increase its leverage. In addition, Genesis may further increase
its leverage in the future;" and
o the anticipated benefits of the merger may not be realized in a
timely fashion or at all, see "Risk Factors - Risks Relating to
the Merger - The anticipated benefits of the merger may not be
realized in a timely fashion, or at all, and Genesis' operations
may be adversely affected if the integration of NCS' business
diverts too much attention away from Genesis' existing business."
Material Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income
tax consequences of the merger to U.S. holders of NCS Class A common stock
and/or NCS Class B common stock. This discussion is for general information only
and is based on the law in effect as of the date of this proxy
statement/prospectus, including the Internal Revenue Code, existing and proposed
U.S. Treasury regulations promulgated thereunder, rulings, administrative
pronouncements and judicial decisions, all of which are subject to change
(possibly with retroactive effect).
As used herein, the term "U.S. holder" means:
o a citizen or resident of the United States;
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o a corporation (or an entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in or under the
laws of the United States or of any political subdivision thereof;
o an estate the income of which is subject to federal income
taxation regardless of its source; or
o a trust if a U.S. court is able to exercise primary supervision
over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the
trust.
This discussion does not address all of the tax consequences that may
be relevant to a U.S. holder in light of his particular circumstances or to
holders subject to special U.S. tax rules, including, but not limited to,
certain expatriates, dealers in securities or foreign currency, banks, trusts,
insurance companies, tax-exempt organizations, persons that hold shares of NCS
Class A common stock or NCS Class B common stock as part of a straddle, hedge,
constructive sale or conversion transaction, persons that have a functional
currency other than the U.S. dollar, investors in pass-through entities, and
holders who acquired their shares of NCS Class A common stock or NCS Class B
common stock through their exercise of options or otherwise as compensation.
In addition, this discussion is limited to stockholders that hold their
NCS Class A common stock or NCS Class B common stock as a capital asset. This
discussion also does not address any aspect of state, local or foreign taxation
or any federal tax consequences other than federal income tax consequences.
Accordingly, each holder of NCS Class A common stock or NCS Class B
common stock is strongly urged to consult his own tax advisor to determine the
particular tax consequences to him of the merger, including the effects of
applicable federal, state, local, foreign or other tax laws.
The merger is intended to qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Genesis covenants in the
merger agreement that it will use its best efforts to cause the merger to
constitute a reorganization under Section 368(a) of the Internal Revenue Code.
However, no ruling has been or will be sought from the Internal Revenue Service
as to the U.S. federal income tax consequences of the merger. Furthermore, the
merger is not conditioned on the receipt of an opinion from counsel to the
effect that the merger will qualify as a reorganization and neither NCS nor
Genesis has obtained, or intends to obtain, such an opinion. Consequently, there
can be no assurance that the merger will qualify as a reorganization for U.S.
federal income tax purposes. There also can be no assurance that the Internal
Revenue Service will not disagree with, or challenge, any of the conclusions
described below.
Genesis and NCS believe that the merger will qualify as a
reorganization for U.S. federal income tax purposes. Assuming that the merger
qualifies as a reorganization, the tax consequences of the merger generally will
be as follows:
o no gain or loss will be recognized by NCS as a result of the
merger;
o no gain or loss will be recognized by a U.S. holder of NCS Class A
common stock or NCS Class B common stock upon the exchange of
shares of NCS Class A common stock or NCS Class B common stock
solely for Genesis common stock, except with respect to cash
received in lieu of fractional shares of Genesis common stock;
o the aggregate adjusted tax basis of the Genesis common stock
received by a U.S. holder of NCS Class A common stock or NCS Class
B common stock pursuant to the merger (including any fractional
share interests deemed received) will be the same as the aggregate
adjusted tax basis of the NCS Class A common stock or NCS Class B
common stock surrendered in the exchange;
o the holding period of the Genesis common stock received by a U.S.
holder of NCS Class A common stock or NCS Class B common stock
pursuant to the merger (including any fractional share interests
deemed received) will include the holding period of the NCS Class
A common stock or NCS Class B common stock surrendered in the
exchange;
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o a U.S. holder of NCS Class A common stock or NCS Class B common
stock who receives cash in lieu of a fractional share of Genesis
common stock pursuant to the merger will recognize gain or loss on
the exchange in an amount equal to the difference between the
amount of cash received and the basis of the Genesis common stock
allocable to the fractional share. The gain or loss generally will
constitute capital gain or loss. The deductibility of capital
losses is subject to limitations for both individuals and
corporations; and
o a U.S. holder of NCS Class A common stock or NCS Class B common
stock that exercises appraisal rights generally will recognize
gain or loss on the exchange of his NCS common shares for cash in
an amount equal to the difference between (i) the cash received
(other than amounts, if any, which are or are deemed to be
interest for U.S. federal income tax purposes, which amounts will
be taxed as ordinary income) and (ii) his aggregate tax basis in
the NCS common shares. Such gain or loss generally will be capital
gain or loss and generally will be long-term capital gain or loss
with respect to NCS common stock held for more than 12 months at
the completion of the merger. A dissenting stockholder may be
required to recognize any gain or loss in the year the merger
closes, irrespective of whether the dissenting stockholder
actually receives payment for his or her shares in that year.
The information provided in this section of the proxy
statement/prospectus assumes that the merger will be completed in the manner
described in this proxy statement/prospectus, and that all closing conditions in
the merger agreement will be satisfied without waiver, and assumes that certain
factual representations made by Genesis and NCS will be true as of the closing
date of the merger. Any change in such assumptions could affect the
qualification of the merger as a reorganization for U.S. federal income tax
purposes and the consequences described in this section.
Backup Withholding
Under the Internal Revenue Code, non-corporate NCS stockholders who
receive cash in lieu of fractional shares or upon the exercise of dissenters'
rights, may be subject, under certain circumstances, to backup withholding at
the rates provided for in the Internal Revenue Code with respect to such cash
unless such stockholders provide proof of an applicable exemption or a correct
taxpayer identification number, and otherwise comply with applicable
requirements of the backup withholding rules. Amounts withheld under the backup
withholding rules are not additional taxes and may be refunded or credited
against such stockholder's U.S. federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
Consequences to NCS Net Operating Losses
The merger will cause NCS to experience an ownership change within the
meaning of Section 382 of the Internal Revenue Code. As a result of the
ownership change, the ability of NCS to utilize its "pre-change" tax losses and
deductions (losses and deductions occurring prior to the date of the merger) to
offset its "post-change" income and gains (income and gains occurring after the
merger) will generally be limited to an annual limitation (the unused portion of
which may be carried forward to subsequent years) equal to the value of its
stock immediately prior to the merger multiplied by the then applicable
long-term tax-exempt rate applicable to ownership changes.
Accounting Treatment
In accordance with recently issued Statement of Financial Accounting
Standards, No. 141, "Business Combinations," referred to as "SFAS No. 141," and
SFAS No. 142, Genesis will account for the merger under the purchase method of
accounting for a business combination. Consequently, the assets and liabilities
of NCS, including all intangible assets, will be recorded at their respective
fair values. Intangible assets will be amortized over their estimated useful
lives with the exception of goodwill and identifiable intangible assets with
indefinite lives. The financial position, results of operations and cash flows
of NCS will be consolidated with Genesis' financial statements prospectively as
of the completion of the merger.
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Regulatory Approvals
Under some circumstances, the merger may be reportable under the HSR
Act and the rules promulgated under it by the U.S. Federal Trade Commission,
referred to as the "FTC," and Genesis and NCS may be required to comply with
certain regulatory requirements imposed by U.S. regulatory authorities before
the merger is completed. In particular, Genesis and NCS may be required to give
notification under the HSR Act to the FTC and the Antitrust Division. If such a
notification is required to be made, Genesis and NCS may not close the merger
until the initial thirty-day waiting period following such notification expires
or is terminated. If, before the end of that initial thirty-day waiting period,
the FTC or the Antitrust Division makes a request for additional information and
documentary material, the statutory waiting period would be extended until
thirty days after Genesis and NCS substantially comply with the request, unless
the waiting period is terminated earlier or extended with the consent of Genesis
and NCS.
At any time before or after the completion of the merger, however, the
FTC, the Antitrust Division, any state or others could take action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the completion of the merger, to rescind the merger
or to divest all or part of the shares or assets of Genesis or NCS, or seeking
to subject Genesis and/or NCS to operating conditions, before or after the
merger is completed. Private parties or state attorneys general also may seek to
take legal action under the antitrust laws under certain circumstances. A
challenge to the merger on antitrust grounds may be made, and, if such a
challenge is made, it is possible that Genesis and NCS will not prevail.
Genesis and NCS have agreed that, if such notifications are required
under the HSR Act, they will each use their reasonable best efforts to obtain
these consents and approvals. If notifications are necessary, then the
applicable waiting period under the HSR Act must expire or be terminated prior
to completing the merger. Under the merger agreement, at Genesis' request and
only with Genesis' written permission, NCS has agreed to hold separate or divest
any assets or businesses, so long as such actions are conditioned on the merger
closing. Genesis is not required to hold separate or divest any Genesis assets
or businesses, nor is Genesis required to consent or agree to the holding
separate or divestiture of any NCS assets or businesses.
Genesis and NCS may be required, in connection with the merger, to give
notifications to and/or receive approvals from: the U.S. Food and Drug
Administration; the U.S. Drug Enforcement Administration; state agencies
regulating conduct related to controlled substances; state and federal health
care programs, including the Medicaid and Medicare Programs; state Boards of
Pharmacy; the National Association of Boards of Pharmacies; and the National
Council on Prescription Drug Programs. Genesis and NCS do not expect that the
process of obtaining the required approvals and of providing the required
notifications will prevent the completion of the merger. However, there can be
no assurance that all required approvals will be obtained or that the process of
obtaining such approvals and providing such notifications will not result in an
inquiry or investigation that may prevent or materially delay the completion of
the merger.
Nasdaq Listing
Genesis will cause the shares of Genesis common stock to be issued in
connection with the merger to be listed on the Nasdaq National Market.
Resale of Genesis Common Stock Issued in the Merger
Shares of Genesis common stock received by NCS stockholders in the
merger generally will be freely transferable, except that:
o shares of Genesis common stock received by persons who are deemed
to be affiliates of NCS under the Securities Act at the time of
the NCS special meeting may be resold by them only in transactions
permitted by Rule 145 under the Securities Act or as otherwise
permitted under the Securities Act. Persons who may be deemed to
be affiliates of NCS for these purposes generally include
individuals or entities that control, are controlled by or are
under common control with, NCS, and include NCS' directors and
executive officers. The merger agreement requires NCS to use all
reasonable efforts to cause each of its affiliates to deliver to
Genesis not less than 30 days prior to the date of the NCS special
meeting a signed agreement to the effect that the affiliate will
not offer to sell, sell, transfer or otherwise dispose of any
Genesis shares issued to the affiliate in the merger in violation
of the Securities Act or the related SEC rules; and
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o the stockholders who have entered into the voting agreements with
Genesis and NCS are subject to resale restrictions on their NCS
shares prior to the completion of the merger, as described under
"Voting Agreements."
Interests of Certain Persons in the Merger
Some members of NCS' management and of the NCS board of directors have
interests in the merger that are different from or in addition to the interests
of the other NCS stockholders. The NCS independent committee and the NCS board
of directors considered these interests, among other matters, in approving the
merger.
Jon H. Outcalt Agreement
Shortly after the execution of the merger agreement, NCS, Genesis and
Mr. Outcalt entered into a binding term sheet agreement, dated as of July 28,
2002, pursuant to which, among other things, (i) in satisfaction of NCS'
obligation to make certain salary continuation payments to Mr. Outcalt under the
salary continuation agreement, dated September 29, 2000, by and between NCS and
Mr. Outcalt, as amended, Genesis has agreed to make, or cause NCS to make, two
payments to Mr. Outcalt, each equal to his current base salary of $200,000, with
the first payment to be made on the closing date of the merger and the second
payment to be made on the first anniversary of the closing date of the merger;
(ii) Mr. Outcalt will continue to receive all benefits and perquisites that he
currently receives until the closing date of the merger; (iii) in satisfaction
of a pre-existing agreement between NCS and Mr. Outcalt, reflected in the
minutes of the NCS board of directors, dated November 29, 2000, on the closing
date of the merger, Genesis has agreed to pay, or cause NCS to pay, to Mr.
Outcalt a success fee of $200,000 for completing the restructuring plan of NCS;
(iv) Genesis has agreed to retain Mr. Outcalt as a non-employee consultant for a
guaranteed four-year term beginning on the closing date of the merger for a fee
of $175,000 per year; (v) Genesis has agreed to reimburse Mr. Outcalt during the
four-year consulting period for certain customary benefits and perquisites,
including, but not limited to, health insurance and life insurance; (vi) Genesis
has agreed that, at the direction of Mr. Outcalt, it will make certain
charitable contributions on behalf of Mr. Outcalt in the aggregate amount of up
to $100,000 per year, rather than pay such amounts to Outcalt in the form of
consulting fees; (vii) Genesis has agreed to seriously consider Mr. Outcalt to
fill the next available seat on the board of directors of Genesis and to convey
"Founder" status on Mr. Outcalt as of the closing date of the merger; and (viii)
Genesis has agreed to pay all attorney fees incurred by Mr. Outcalt in
connection with the negotiation of the merger agreement, which were estimated to
be approximately $35,000. Genesis sometimes confers "Founder" status to
individuals who manage a business that Genesis acquires. Individuals with
"Founder" status are paid a salary by Genesis and are involved in preserving the
value of the acquired business, as well as assisting Genesis with other matters
on an as-needed basis. Individuals with "Founders" status, however, generally
are not involved in the day-to-day management of Genesis and are not executive
officers of Genesis.
Executive Officer Salary Continuation Agreements
In 1999 and 2000, prior to entering into discussions with Genesis
regarding the merger, NCS entered into salary continuation agreements with Kevin
B. Shaw, Jon H. Outcalt, William B. Byrum, Gerald D. Stethem, Michael J.
Mascali, John P. DiMaggio, Thomas Bryant Mangum, Bradley Pinkerton, Natalie R.
Wenger and Mary Beth Levine, which were amended in 2001. These agreements
generally provide for continuation of salary for a period of 12, 18 or 24 months
following a "change of control," as defined in the agreements, if the executive
officer is terminated for any reason other than death, disability or for cause
prior to the earlier of the date that is 12 months following a change of control
or the first day of the month following the executive officer's 65th birthday
or, in the case of Mr. Outcalt, his 70th birthday. The executive officer would
also be entitled to receive this payment if, following a change of control, the
executive officer terminates his employment with NCS or its successor for good
reason. Good reason, as defined in the agreements, includes, among other things,
a reduction or diminution of base salary or other compensation or benefits, the
relocation of NCS' principal executive offices outside the Cleveland, Ohio
metropolitan area, and the requirement by NCS that the executive officer be
based anywhere other than NCS' principal executive offices or the executive
officer's then current office. In the case of Messrs. Outcalt, Shaw, Byrum, and
Stethem, termination for good reason also includes the naming of an individual
other than Mr. Outcalt, Mr. Shaw or Mr. Byrum (and in the case of Mr. Stethem's
agreement, Mr. Stethem) as chief executive officer of NCS, whether such action
is taken by the NCS board of directors or by any lender or creditor of NCS. If
these agreements are triggered, the executive will receive during the 12, 18 or
24 month period referred to above, base salary at an annual rate equal to the
greater of the highest monthly base salary paid by NCS to the executive during
the 12 months immediately preceding the change of control or the highest monthly
salary paid or payable by NCS at any time from the 90-day period preceding the
change of control through the date of termination of employment. In addition to
salary continuation, if the agreement is triggered, the executive is entitled to
health insurance, life insurance and retirement benefits for the respective
period of salary continuation or such longer period as any plan or policy may
provide.
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Severance Benefit Plan
NCS' Severance Benefit Plan provides severance benefits, in addition to
any salary continuation payments, to Messrs. Shaw, Outcalt, Byrum, Stethem,
Mascali, DiMaggio, Mangum, Pinkerton, Ms. Wenger and Ms. Levine if their
employment is terminated as a result of corporate organizational restructuring.
The severance benefit plan provides that an employee who is terminated as a
result of corporate organizational restructuring will receive one week base
salary for each consecutive full year of service, with a minimum severance
benefit of two weeks and a maximum of ten weeks.
William B. Byrum Employment Agreement
In addition to NCS' salary continuation agreement with Mr. Byrum, Mr.
Byrum, the chief operating officer of NCS, entered into an employment agreement
with NCS, dated July 1, 2001, which provides that if at any time during the term
of the agreement, Messrs. Outcalt and Shaw cease to own or control, in the
aggregate, at least 50% of the voting power of NCS, the scope of the chief
operating officer's responsibilities are materially changed, or Mr. Byrum's
employment with NCS is terminated by NCS for any reason other than disability,
good cause (as defined in the employment agreement) or death, Mr. Byrum is
entitled to receive, as a severance benefit, his annual base salary and benefits
for a period equal to the longer of 18 months or the number of months remaining
in the term of the employment agreement. However, the salary continuation
agreement between Mr. Byrum and NCS is incorporated into the employment
agreement by reference, and, in the event payments are made under the salary
continuation agreement, no severance payments are to be made under the
employment agreement.
Stock Options
At the time the merger is completed, each outstanding NCS option will
be converted into an option to purchase Genesis common stock on the same terms
as in effect immediately prior to the completion of the merger, taking into
account any acceleration of vesting resulting from the completion of the merger
pursuant to such pre-existing terms, except that the number of shares of Genesis
common shares issuable upon the exercise of the option and the exercise price
per share will be adjusted based on the merger exchange ratio. Completion of the
merger will accelerate the vesting of options held by NCS' executive officers
and directors to purchase an aggregate of 750,008 shares of NCS Class A common
stock that were not previously exercisable, held as follows: Mr. Shaw 100,001,
Mr. Byrum 105,000, Mr. Outcalt 108,334, Mr. Sells 55,001, Mr. Osborne 30,000,
Mr. Stethem 68,334, Mr. Mascali 45,001, Mr. DiMaggio 50,001, Mr. Mangum 40,001,
Mr. Pinkerton 56,667, Ms. Wenger 58,334 and Ms. Levine 33,334. These twelve
executive officers and directors currently hold options to purchase an aggregate
of 823,992 additional shares of NCS common stock, which options are already
exercisable. The stock option agreements that document the grant of these stock
options provide that the stock option grants will not be effective unless the
employee receiving the grant signs a noncompetition agreement with NCS.
Executive Officer Bonuses
Pursuant to resolutions adopted by the NCS board of directors on
November 29, 2000 and by the NCS Human Resources Committee on September 26,
2001, respectively, each of Messrs. Outcalt and Shaw is entitled to a bonus of
$200,000 upon a change of control of NCS, which would include the completion of
the merger. These bonuses were granted by the NCS board of directors in lieu of
semi-annual retention payments made by NCS to certain other employees. Mr.
Byrum's employment agreement provides that he is to receive $50,000 on each of
September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003, with
payment of such amounts accelerated upon a change of control, as defined in his
salary continuation agreement.
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Reimbursement of Mr. Shaw's Legal Fees
In connection with the execution of the merger agreement, Genesis has
agreed, by way of letter dated July 28, 2002, to reimburse Mr. Shaw for up to
$7,000 in attorneys fees incurred by Mr. Shaw in connection with the negotiation
of any aspects of the merger.
Director and Officer Retention and Indemnification Agreements
NCS has entered into a retention and indemnification agreement, dated
June 26, 2002, with each of the directors and officers of NCS. The retention and
indemnification agreement provides that NCS will indemnify each director and
officer against certain expenses and amounts that may be incurred in connection
with any actions or proceedings associated with the individual's position as a
director or officer of NCS. The retention and indemnification agreement also
provides for funding of a trust by NCS for purposes of satisfying any expenses
incurred by the directors and officers, as described in the agreement. The trust
has been funded by NCS in the principal amount of $975,000.
Under the merger agreement, Genesis has agreed to cause NCS to
indemnify and hold harmless the present and former officers and directors of NCS
in respect of acts or omissions occurring prior to the completion of the merger
to the extent provided under NCS' certificate of incorporation or bylaws as in
effect as of the date of the merger agreement. In addition, Genesis has agreed
to use all reasonable efforts to cause NCS or itself to maintain NCS' fully paid
existing directors' or officers' liability insurance and, to the extent the
existing policy cannot be maintained, to obtain for a period of six years
following the merger, policies of directors' and officers' liability insurance
at no cost to the beneficiaries thereof with respect to acts or omissions
occurring prior to the merger with substantially the same coverage and
containing substantially similar terms and conditions as existing policies.
However, neither NCS nor Genesis will be required to pay an aggregate premium
for this coverage in excess of 200% of the amount for such current coverage, but
in such case shall purchase as much coverage as reasonably practicable for such
amount.
In addition, NCS has entered into indemnification agreements with
Messrs. Stethem, DiMaggio, Mascali, and Mangum, dated February 25, 1998,
November 23, 1998, December 3, 2001, and June 15, 1998, respectively. These
agreements provide for indemnification of the officer by NCS if the officer is
involved in a proceeding, as defined in the agreement, by reason of the
individual's position as an officer of NCS.
Board of Directors and Management of Genesis Following the Merger
When Genesis and NCS complete the merger, Genesis will continue to be
managed by its current directors and officers.
Litigation Relating to the Merger
Seven stockholder lawsuits (six of which are purported class action
lawsuits), referred to as the "stockholder claims," have been filed against NCS
and its directors in connection with the merger, and two of those seven lawsuits
were also filed against Genesis and Geneva Sub. The stockholder claims include
allegations that the directors of NCS breached their fiduciary duties and
certain other duties to stockholders by entering into the merger agreement, by
not conditioning the closing of the merger upon the approval of the holders of
NCS Class A common stock voting as a separate class and by declining to consider
Omnicare proposals to acquire NCS. In addition, Omnicare filed an amended
complaint alleging that the voting agreements violated NCS' certificate of
incorporation and resulted in an automatic conversion of NCS Class B common
stock subject to the voting agreements into NCS Class A common stock. The
stockholder claims seek various relief, including an injunction against
completion of the merger, a judgment that would require approval by both NCS
Class A common stock and NCS Class B common stock, each voting separately as a
class, a judgment that would rescind the merger if it is completed prior to a
final judgment on the stockholder claims, a declaration that the merger
agreement and the voting agreements are null and void, a declaration that NCS
Class B common stock subject to the voting agreement has been converted into NCS
Class A common stock and an award of compensatory damages and costs.
The following lawsuits were each filed with the Court of Chancery in
the State of Delaware in and for New Castle County on the dates indicated:
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o Dr. Dorrin Beirch and Robert M. Miles on behalf of themselves and
all others similarly situated v. NCS HealthCare, Inc., Jon H.
Outcalt, Kevin B. Shaw, Richard L. Osborne, and Boake A. Sells,
filed on July 30, 2002.
o Anthony Noble v. NCS HealthCare, Inc., Richard L. Osborne, Jon H.
Outcalt, Boake A. Sells, and Kevin B. Shaw, filed on August 1,
2002.
o Jeffery Treadway v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells,
Richard L. Osborne, and NCS HealthCare, Inc., filed on August 2,
2002.
o Tillie Saltzman v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells,
Richard L. Osborne, and NCS HealthCare, Inc., filed on August 2,
2002.
o Amended Complaint of Dolphin Limited Partnership I, L.P. et al v.
Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne,
Genesis Health Ventures, Inc., Genesis Sub, Inc. and NCS
HealthCare, Inc., filed on August 26, 2002 (original complaint
filed on August 7, 2002).
o First Amended Complaint Omnicare, Inc. v. NCS HealthCare, Inc.,
Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne,
Genesis Health Ventures, Inc. and Genesis Sub, Inc., filed on
August 12, 2002 (original complaint filed on August 1, 2002). On
September 30, 2002, Omnicare filed a Motion for Summary Judgment
as to the count of the First Amended Complaint seeking a judgment
declaring that the voting agreements entered into by Messrs.
Outcalt and Shaw violate NCS' amended and restated certificate of
incorporation and therefore Messrs. Outcalt and Shaw automatically
and irrevocably converted their NCS Class B common stock (10 votes
per share) into shares of NCS Class A common stock (1 vote per
share).
On August 12, 2002, Dolphin Limited Partnership moved to consolidate
the Delaware class action suit court actions. The Delaware Chancery court
granted this motion and consolidation of these cases was ordered on August 30,
2002.
The following lawsuit was filed with the Court of Common Pleas for
Cuyahoga County, Ohio:
o Michael Petrovic on behalf of himself and all others similarly
situated v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw,
Richard L. Osborne, and Boake A. Sells, filed on August 1, 2002.
Genesis and NCS believe that the allegations of the complaints are
without merit and intend to contest them vigorously; however, the ultimate
outcome of these lawsuits cannot be predicted with certainty. These lawsuits
could adversely affect the ability of Genesis and NCS to complete the merger.
On August 20, 2002, NCS filed a complaint against Omnicare in the
United States District Court for the Northern District of Ohio, titled NCS
HealthCare, Inc. v. Omnicare, Inc., Case No. 1:02CV1635 (Matia, J.), and, on
August 21, 2002, NCS amended the complaint. The complaint, as amended, alleges,
among other things, that Omnicare's Tender Offer Statement on Schedule TO, filed
on August 8, 2002, in connection with the associated tender offer, contains
materially false and misleading disclosures in violation of Section 14(e) of the
Exchange Act.
On September 30, 2002, NCS filed a motion for a preliminary injunction
seeking to enjoin the Omnicare tender offer until such time as Omnicare amends
the tender offer to correct the materially false and misleading disclosures.
No court dates have been set for these matters.
Omnicare Tender Offer
On August 8, 2002, NCS Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Omnicare, Inc., a Delaware corporation, filed a
Tender Offer Statement on Schedule TO, whereby NCS Acquisition Corp. offered to
purchase all of NCS' outstanding Class A common stock and Class B common stock
at a price of $3.50 per share, net to the seller in cash.
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On August 20, 2002, after careful consideration, and based in part upon
the recommendation of the NCS independent committee, the NCS board of directors
filed a Solicitation/Recommendation Statement under Schedule 14(d)(9)
recommending that NCS stockholders reject the Omnicare tender offer and not
tender their shares. As further explained in the Schedule 14(d)(9), the NCS
independent committee and the NCS board of directors believe that the Omnicare
tender offer is highly conditional, illusory and that many of the conditions to
the offer are not capable of being satisfied as a result of the current
contractual arrangements between NCS, certain NCS stockholders and Genesis.
Given the tenor and results of Omnicare's previous discussions with NCS, the NCS
independent committee and the NCS board of directors believe that there is a
much higher certainty of completing the merger with Genesis.
Appraisal Rights of NCS Stockholders
Holders of NCS Class A common stock and NCS Class B common stock at the
close of business on the record date, October [ ], 2002, are entitled to
appraisal rights under the Delaware General Corporation Law, referred to as
"Delaware corporation law," and, accordingly, have the right to demand and
receive payment of the fair value of their shares in lieu of receiving the
merger consideration, provided that these stockholders comply with the
procedural requirements set forth under Delaware corporation law for perfecting
this right. Failure to comply with the Delaware appraisal statute could result
in the loss of your appraisal rights.
In order to exercise appraisal rights, an NCS stockholder must demand
and perfect the rights in accordance with Section 262 of the Delaware
corporation law. The following is a summary of the material provisions of
Section 262 and is qualified in its entirety by reference to Section 262, a
complete copy of which is attached as Annex B to this proxy
statement/prospectus. You should carefully review Section 262 as well as the
information discussed below to determine your appraisal rights.
In order to perfect your appraisal rights, you must:
o deliver to NCS a written demand for appraisal of the applicable
shares before the vote is taken on the merger agreement at the NCS
special meeting (this written demand for appraisal must be in
addition to and separate from any proxy or vote against the merger
agreement because voting against or abstaining from voting or
failing to vote on the adoption of the merger agreement will not
constitute a demand for appraisal within the meaning of Section
262);
o not vote in favor of, or consent in writing to, the adoption of
the merger agreement (failing to vote or abstaining from voting
will satisfy this requirement, but a vote in favor of the merger
agreement, by proxy or in person, or the return of a signed proxy
card that does not specify a vote against the adoption of the
merger agreement, will constitute a waiver of your right of
appraisal and will nullify any previously filed written demand for
appraisal); and
o continuously hold such shares through the completion of the
merger.
All written demands for appraisal should be addressed to NCS
HealthCare, Inc., 3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122,
Attention: Secretary. This demand must reasonably inform NCS of the identity of
the stockholder and that the stockholder is demanding appraisal of the
applicable shares.
Within 10 days after the completion of the merger, the surviving
corporation of the merger will give written notice of the completion of the
merger to each NCS stockholder that has satisfied the requirements of Section
262 and has not voted for, returned a proxy card that does not specify a vote
against, or consented to the proposal to adopt the merger agreement and the
transactions contemplated by the merger agreement, which stockholders are
referred to as "dissenting stockholders."
Within 120 days after the completion of the merger, the surviving
corporation or any dissenting stockholder may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the applicable
shares that are held by all dissenting stockholders holding shares of such
class. Any dissenting stockholder desiring to file this petition should file
such petition on a timely basis unless the dissenting stockholder receives
notice that a petition has already been filed with respect to such shares by the
surviving corporation or another dissenting stockholder.
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If a petition for appraisal is timely filed, the court will determine
which stockholders are entitled to appraisal rights. The court will then
determine the fair value of the applicable shares held by the dissenting
stockholders, exclusive of any element of value arising from the accomplishment
or expectation of the merger, but together with a fair rate of interest, if any,
to be paid on the amount determined to be fair value. In determining the fair
value, the court will take into account all relevant factors. The court may
determine the fair value to be more than, less than or equal to the
consideration that the dissenting stockholder would otherwise be entitled to
receive under the merger agreement. If a petition for appraisal is not timely
filed, then the right to an appraisal will cease.
The costs of the appraisal proceeding may be determined by the court
and charged against the parties as the court determines to be equitable under
the circumstances. Upon application of a dissenting stockholder, the court may
order all or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts, to be charged
pro rata against the value of all shares which are the subject of the appraisal.
From and after the completion of the merger, no dissenting stockholder
will have any rights of an NCS stockholder with respect to the shares that are
the subject of the appraisal, except to receive payment of their fair value and
to receive payment of dividends or other distributions on the applicable shares,
if any, payable to NCS stockholders of record holding such shares as of a date
prior to the completion of the merger. If a dissenting stockholder delivers to
the surviving corporation a written withdrawal of the demand for an appraisal
within 60 days after the completion of the merger or thereafter with the written
approval of the surviving corporation, or if no petition for appraisal is filed
within 120 days after the completion of the merger, then the right of that
dissenting stockholder to an appraisal will cease and the dissenting stockholder
will be entitled to receive only the merger consideration.
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Material Terms of the Merger Agreement
The following is a summary of the material terms and provisions of the
merger agreement. The summary is qualified in its entirety by the merger
agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus and is incorporated herein by reference. You should read
the merger agreement carefully because it is the legal document that governs the
merger.
The Merger
The merger agreement provides that, at the completion of the merger,
Geneva Sub, a wholly owned subsidiary of Genesis, will merge with and into NCS.
NCS will be the surviving corporation in the merger and will become a wholly
owned subsidiary of Genesis.
The completion of the merger will occur on the fifth business day after
the satisfaction or waiver of all of the conditions in the merger agreement, or
on another date that Genesis and NCS may agree in writing. Genesis and NCS will
make reasonable efforts to have the closing occur on the first day of a calendar
month.
Merger Consideration
Common Stock
The merger agreement provides that each share of NCS Class A common
stock and each share of NCS Class B common stock issued and outstanding
immediately before the completion of the merger (other than shares held by NCS,
which will be canceled) will be converted into 0.1 of a share of Genesis common
stock.
Treatment of Options
All outstanding options to purchase NCS Class A common stock and NCS
Class B common stock will automatically become options to acquire shares of
Genesis common stock in the following manner:
o each new option will be exercisable for a number of shares of
Genesis common stock equal to the product of 0.1 multiplied by the
number of shares of NCS Class A common stock or NCS Class B common
stock that would have been obtained upon the exercise of the
option immediately before the merger, rounded to the nearest whole
share; and
o each new option will have an exercise price equal to the exercise
o price of the option immediately before the merger divided by 0.1,
rounded to the nearest whole cent.
The options will otherwise continue to have the same terms and
conditions as they had before the merger including any acceleration of vesting
that may have occurred as a result of the merger.
Fractional Shares
No fractional shares of Genesis common stock will be issued in the
merger. Any holder of shares of NCS Class A common stock and/or NCS Class B
common stock who otherwise would be entitled to receive a fractional share will
instead receive a cash payment equal to the value of the fractional share
interest, as determined by the closing price of Genesis common stock on the
Nasdaq National Market on the last full trading day immediately before the
completion of the merger.
Appraisal Rights
Shares of NCS Class A common stock and NCS Class B common stock held by
stockholders who neither vote in favor of the merger nor consent thereto in
writing and who demand appraisal of their shares under applicable Delaware law
will not be converted into shares of Genesis common stock. Instead, holders of
such shares will be entitled to receive payment of the appraised value of their
shares in accordance with Delaware corporation law.
See "The Merger-- Appraisal Rights of NCS Stockholders."
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Exchange Procedures
As soon as reasonably practicable after completion of the merger, an
exchange agent will mail a letter of transmittal to each holder of record of NCS
Class A common stock and each holder of record of NCS Class B common stock. This
letter of transmittal must be used in surrendering to the exchange agent
certificates representing NCS Class A common stock or NCS Class B common stock
for cancellation. Upon the surrender of an NCS stock certificate and a duly
executed letter of transmittal to the exchange agent, the former holder of such
certificate will be entitled to receive in exchange (i) a stock certificate
representing the whole number of shares of Genesis common stock that the holder
has the right to receive, (ii) a check representing the amount of cash payable
in lieu of any fractional shares of Genesis common stock, if any, and (iii) any
unpaid dividends and distributions that the holder has the right to receive
pursuant to the merger agreement, after giving effect to the required
withholding tax. NCS stockholders should not send their NCS stock certificates
to the exchange agent until they receive the letter of transmittal.
After completion of the merger, each NCS stock certificate, until
surrendered and exchanged, will represent only the right to receive a
certificate representing shares of Genesis common stock and, if applicable, cash
in lieu of fractional shares and unpaid dividends and distributions. Holders of
NCS stock certificates will not be entitled to receive any dividends or other
distributions payable in respect of Genesis common stock until they exchange
their NCS stock certificates for shares of Genesis common stock. After they
deliver their NCS stock certificates to the exchange agent, those stockholders
will receive, subject to applicable law, accumulated dividends and
distributions, and cash in lieu of any fractional shares of Genesis common
stock, without interest.
Representations and Warranties
The merger agreement contains representations and warranties of Genesis
and Geneva Sub relating to, among other things:
o corporate organization and good standing;
o corporate power and authority to enter into the merger agreement;
o capitalization;
o absence of conflicts between the merger and governing corporate
documents and other contracts;
o accuracy of filings with the SEC;
o accuracy of information supplied for inclusion in the registration
statement of which this proxy statement/prospectus is a part;
o compliance with applicable laws;
o absence of undisclosed material litigation;
o absence of undisclosed adverse changes or events since October 2,
2001;
o absence of actions that would prevent the merger from qualifying
as a reorganization for U.S. federal income tax purposes; and
o absence of undisclosed liabilities.
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The merger agreement also contains representations and warranties made
by NCS relating to, among other things:
o corporate organization and good standing;
o ownership of subsidiaries;
o corporate power and authority to enter into the merger agreement;
o capitalization;
o absence of undisclosed conflicts between the merger and governing
corporate documents and other contracts;
o brokerage and finders' fees;
o accuracy of filings with the SEC;
o accuracy of information supplied for inclusion in the registration
statement of which this proxy statement/prospectus is a part;
o compliance with applicable laws;
o absence of undisclosed material litigation;
o absence of undisclosed adverse changes or events since March 31,
2002;
o tax matters;
o intellectual property;
o title to and leases of real property and other property and
equipment;
o employee benefit plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended, or "ERISA,"
and other compliance and compensation matters;
o validity of specific contracts;
o labor matters;
o absence of undisclosed liabilities;
o possession of licenses and permits;
o compliance with Medicare and Medicaid programs and laws;
o environmental matters;
o accounts receivable and accounts payable arising in the ordinary
course of business;
o the presence of at least $35 million of cash on hand as of July
28, 2002;
o insurance matters;
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o approval of the merger agreement by the NCS board of directors and
the NCS independent committee and recommendation to the NCS
stockholders; and
o absence of actions that would prevent the merger from qualifying
as a reorganization for U.S. federal income tax purposes.
Some representations and warranties contain knowledge qualifiers, some
are qualified by materiality thresholds or a "material adverse effect" standard,
and some are qualified by the disclosure of information necessary to make the
representation true.
The term "material adverse effect," when used in reference to any party
to the merger agreement, means any event, change, occurrence, state of facts or
effect that, individually or aggregated with other such matters, is materially
adverse to the business, assets, properties, financial condition or results of
operations of that party and its subsidiaries, taken as a whole, or materially
impairs the ability of that party to perform its obligations under the merger
agreement. None of the following, however, will be considered a material adverse
effect on a particular party to the merger agreement:
o any adverse effect resulting from a change in the stock price of
the other party to the merger agreement;
o any adverse effect resulting from a change in general economic,
industry or financial market conditions to the extent that such
change does not disproportionately affect such party and its
subsidiaries;
o any adverse effect resulting from a breach of the merger agreement
by the other party to the merger agreement; and
o any adverse effect directly resulting from the announcement or
pendency of the merger.
Conduct of NCS' Business Prior to the Merger
NCS has agreed that, from the date of the merger agreement through the
completion of the merger, it will comply with specified restrictions on its
conduct and operations. Specifically, unless expressly permitted by the merger
agreement or unless Genesis consents in writing, NCS will carry on its business
in the ordinary course in the same manner as previously conducted, and will use
all commercially reasonable efforts to maintain and preserve its business
organization, its relationship with third parties and the services of its
employees. In addition, NCS has agreed, among other things, not to do the
following:
o split, combine or reclassify its capital stock or issue securities
convertible into or exchangeable for any shares of its capital
stock (except in connection with the exercise of NCS options
outstanding as of the date of the merger agreement);
o redeem, purchase or otherwise acquire any shares of its capital
stock;
o declare or pay any dividends on its capital stock;
o sell or transfer any of its property or assets other than in the
ordinary course of business consistent with past practice;
o change or propose to change its certificate of incorporation or
by-laws;
o merge or consolidate with another entity, or dissolve, liquidate
or restructure;
o acquire a material amount of assets or capital stock of another
entity;
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o incur, assume or guarantee indebtedness, other than trade payables
in the ordinary course of business consistent with past practice;
o create any subsidiaries;
o enter into or modify employment or severance agreements other than
in the ordinary course of business consistent with past practice
with respect to non-officer employees of NCS;
o change its accounting methods or principles;
o settle any action involving, individually or in the aggregate, an
amount greater than $250,000;
o modify or waive any material right or claim with respect to its
material contracts;
o enter into any confidentiality agreements or arrangements other
than in the ordinary course of business consistent with past
practice;
o make changes that, individually or in the aggregate, amount to a
material change to the terms of payment or payment practices with
respect to a non-de minimis portion of its accounts receivable or
accounts payable;
o incur capital expenditures not provided for in its annual capital
expenditures budget;
o fail to use all commercially reasonable efforts to collect its
outstanding receivables;
o generate or allow any receivables other than in the ordinary
course of business consistent with past practice;
o enter into or carry out any material transaction other than in the
ordinary and usual course of business;
o make any material tax election or settle any material tax
liability in an amount greater than $250,000, individually or in
the aggregate;
o adopt a plan of liquidation, dissolution, merger or other
reorganization that is inconsistent with the prompt completion of
the merger or that could otherwise reasonably be expected to have
a material adverse effect on NCS; and
o take any action or fail to take any action that would result in
any of NCS' representations and warranties set forth in the merger
agreement becoming false or inaccurate in any material respect.
Special Meeting of the NCS Stockholders
NCS has agreed to hold a special meeting to obtain approval of the
merger by its stockholders as soon as practicable. Regardless of whether the NCS
board of directors changes, withdraws or modifies its recommendation for the
merger, NCS has agreed to submit the merger agreement to the NCS stockholders
for their approval.
The NCS board of directors has also agreed to recommend to its
stockholders that they adopt the merger agreement. However, the NCS board of
directors may withdraw or modify this recommendation if it determines in good
faith, after consultation with outside legal counsel, that such action is
required in order to comply with its fiduciary duties.
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No Solicitation
NCS has agreed that, except under the circumstances described below, it
will not, and will not authorize or permit any of its subsidiaries, officers,
directors or employees to, and will use all reasonable efforts to cause its
advisors, counsel and other representatives not to:
o solicit, initiate, encourage (including by furnishing information)
or knowingly facilitate or induce any inquiry with respect to a
proposal that constitutes or could reasonably be expected to
result in an acquisition proposal;
o participate in any discussions or negotiations regarding, or
furnish to any entity any nonpublic information with respect to,
an acquisition proposal;
o approve or, except under the circumstances described above,
recommend an acquisition proposal; or
o enter into any letter of intent or agreement contemplating or
relating to an acquisition proposal.
In addition, NCS has agreed that it will immediately cease and terminate any
discussions or negotiations that have taken place before the date of the merger
agreement regarding any acquisition proposal, and cause its subsidiaries,
officers, directors and representatives to do the same.
Nevertheless, before the receipt of NCS stockholder approval for the
merger at the NCS special meeting, NCS may engage in discussions with, or
furnish information to, any entity in response to an unsolicited bona fide
written acquisition proposal by that entity, if and only to the extent that:
o NCS is not otherwise in breach of the no-solicitation provisions;
o the NCS board of directors believes in good faith, after
consulting with its financial advisors, that the acquisition
proposal constitutes or may reasonably be expected to result in a
superior proposal; and
o before providing any non-public information to, or engaging in any
discussions or negotiations with, any entity in connection with an
acquisition proposal by that entity, the NCS board of directors
receives from that entity an executed confidentiality agreement
with terms no less restrictive than the comparable terms in the
confidentiality agreement between Genesis and NCS.
In addition, the merger agreement does not prevent NCS from disclosing to its
stockholders a position with respect to a tender or exchange offer to the extent
required by law.
Under the merger agreement, an "acquisition proposal" is any offer or
proposal for, or indication of interest in:
o the acquisition or purchase of NCS or any of its subsidiaries that
constitutes 10% or more of the net revenues, net income or assets
of NCS and its subsidiaries, taken as a whole;
o the acquisition or purchase of:
o 10% or more of any class of equity securities, or 10% of the
voting power, of NCS or any of its subsidiaries that
constitutes 10% or more of the net revenues, net income or
assets of NCS and its subsidiaries, taken as a whole; or
o 40% or more of the face value of the NCS notes;
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o a tender or exchange offer that, if completed, would result in any
entity beneficially owning 10% or more of any class of equity
securities, or 10% or more of the voting power, of NCS or any of
its subsidiaries that constitutes 10% or more of the net revenues,
net income or assets of NCS and its subsidiaries, taken as a
whole;
o the repurchase, retirement, exchange, refinancing or restructuring
of 10% or more of NCS' outstanding notes; or
o a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving NCS or
any of its subsidiaries that constitutes 10% or more of the net
revenues, net income or assets of NCS and its subsidiaries, taken
as a whole.
Under the merger agreement, a "superior proposal" is a bona fide
written proposal to acquire all of the outstanding NCS capital stock and all
outstanding notes, on terms that the NCS board of directors determines in good
faith, after consultation with its financial advisors, are more favorable than
those of the merger agreement to the persons to whom the NCS board of directors
owes fiduciary duties, after taking into account all of the terms and conditions
of the acquisition proposal and the merger agreement deemed relevant by the NCS
board of directors, including any termination fee, expense-reimbursement
provisions, conditions to and expected timing and risks of completion and the
ability of the entity making the acquisition proposal to obtain financing for
such proposal, and after taking into account all other legal, financial and
regulatory aspects of the acquisition proposal.
NCS has agreed to notify Genesis within two business days after receipt
of an acquisition proposal or any request for nonpublic information that NCS
reasonably believes could lead to an acquisition proposal. Upon receipt of an
acquisition proposal, NCS must provide Genesis as promptly as practicable with
all information reasonably necessary to keep Genesis informed of the status and
details of the proposal.
Further Actions
Reasonable Efforts
NCS and Genesis have agreed to use reasonable efforts to take all
actions and do all things necessary or advisable under the merger agreement or
applicable law to complete the merger and the other transactions contemplated by
the merger agreement as soon as practicable. Accordingly, each has agreed to use
all reasonable efforts to:
o obtain all necessary waivers, consents, licenses or approvals from
governmental authorities;
o obtain all consents, approvals or waivers from third parties
related to the merger that are necessary to complete the merger or
that are required to prevent a material adverse effect on NCS or
Genesis from occurring;
o prepare this proxy statement/prospectus and the registration
statement of which it is a part; and
o furnish to each other such information and assistance as
reasonably may be requested in connection with the foregoing.
NCS and Genesis also have agreed to use all reasonable efforts to
resolve any issues and defeat or settle any challenges raised by governmental
authorities under federal antitrust laws.
Genesis is not required, however, to divest or hold separate any of its
businesses, subsidiaries or assets, or agree to take any action or agree to any
limitation on any of its businesses in order to obtain any consent, approval or
authorization for the merger. NCS has agreed that, at the request of Genesis, it
will divest any of its businesses or assets, but only if such divestiture is
conditioned upon the completion of the merger.
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Redemption of the Notes
NCS also has agreed to take all actions necessary to permit the
surviving corporation to redeem the NCS notes on the date of the merger. Subject
to performance of those actions, Genesis has agreed to cause the surviving
corporation in the merger to redeem the NCS notes concurrently with or promptly
after the completion of the merger.
Maintenance of Operations at the Beachwood Location
Genesis has agreed that, for a period of one year after the completion
of the merger, it will cause the surviving corporation to maintain business
operations at NCS' facility in Beachwood, Ohio.
Closing Inventory and Cash on Hand
NCS has agreed that Genesis and its representatives will be permitted
to monitor NCS' regularly scheduled monthly inventories between the date of the
merger agreement and completion of the merger, and that such inventories will be
undertaken in accordance with previously agreed-upon procedures.
NCS also has agreed that, two business days before the completion of
the merger, an independent outside auditor will determine the amount of cash
held by NCS and its subsidiaries on a consolidated basis. Under the merger
agreement, neither NCS nor any of its subsidiaries may, from the day before the
date of this determination until the completion of the merger, make any payment
that is outside the ordinary course consistent with past practice as to timing
or amount to any affiliate or subsidiary of NCS or to any supplier or vendor,
nor make any payment to any accountant, investment banker, legal counsel or
other advisor.
Disposal of Illinois Sub
NCS has agreed that, if requested by Genesis, it will use all
reasonable efforts to sell or dispose of all of its right, title and interest in
NCS HealthCare of Illinois, Inc., on such terms and conditions as Genesis may
specify in writing.
Lease Consents
NCS has agreed to obtain consents required under specific leases.
Conditions to the Merger
Each of Genesis' and NCS' obligations to complete the merger is subject
to the satisfaction or waiver of the following conditions before completion of
the merger:
o the approval of the merger agreement at the NCS special meeting by
the affirmative vote of holders of a majority of the voting power
of NCS Class A common stock and NCS Class B common stock voting
together as a single class;
o the expiration or termination of any applicable waiting period
under the HSR Act;
o the declaration by the SEC of the effectiveness of the
registration statement of which this proxy statement/prospectus is
a part, and the absence of any stop order or threatened or pending
proceedings seeking a stop order; and
o the approval for listing on the Nasdaq of the shares of Genesis
common stock to be issued in connection with the merger.
NCS' obligation to complete the merger is subject to the satisfaction
of the following additional conditions, all of which are subject to waiver by
NCS:
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o the accuracy in all material respects of Genesis' and Geneva Sub's
representations and warranties;
o the performance by Genesis in all material respects of its
covenants and agreements;
o the absence of any law, order or injunction prohibiting the
completion of the merger; and
o evidence that the redemption of the NCS notes is capable of
completion concurrently with or promptly after the completion of
the merger.
Genesis' obligation to complete the merger is subject to the
satisfaction of the following additional conditions, all of which are subject to
waiver by Genesis:
o the accuracy in all material respects of NCS' representations and
warranties;
o the performance by NCS in all material respects of its covenants
and agreements;
o the presence of at least $35.0 million of cash on hand of NCS and
its subsidiaries on a consolidated basis two business days before
the completion of the merger;
o the absence of any change, event, occurrence or development since
July 28, 2002 that has or could reasonably be expected to have a
material adverse effect on NCS;
o the absence of any law, order or injunction prohibiting the
completion of the merger;
o the absence of any governmental action:
o challenging or seeking to restrain the completion of the
merger;
o seeking to impose any prohibition or limitation that Genesis
would not be required to accept or do under the merger
agreement;
o seeking to impose limitations on the ability of Genesis to
acquire or hold any shares of Geneva Sub's capital stock; or
o seeking to prohibit Genesis or any of its subsidiaries from
effectively controlling in any material respect the business
or operations of NCS or any of its subsidiaries;
o the receipt of non-governmental third-party consents or approvals
that are necessary in order to permit the merger to occur, unless
failure to receive such consents or approvals would not in the
aggregate have a material adverse effect on NCS (or on Genesis if
the merger were to be completed);
o the receipt of certain approvals under Medicaid, Medicare, food
and drug laws and state pharmacy laws pursuant to a final,
nonappealable judgment or order, free of any requirement to take
action that would not be required to be taken by Genesis under the
merger agreement;
o the receipt of other consents, approvals, authorizations or
filings, other than those the absence of which could not
reasonably be expected to have a material adverse effect on NCS
(or on Genesis if the merger were to be completed);
o the exercise of appraisal rights by holders of not more than 15%
of the voting power of the outstanding NCS capital stock; and
o the compliance by NCS of its covenant to use all reasonable
efforts, if requested by Genesis, to sell or dispose of all of its
right, title and interest in NCS HealthCare of Illinois, Inc.
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Termination of the Merger Agreement
At any time before the completion of the merger, either Genesis or NCS
may terminate the merger agreement and abandon the merger if:
o Genesis and NCS mutually agree to terminate the merger agreement;
o any law or regulation makes completion of the merger illegal or
otherwise prohibited, or a court or another governmental authority
has issued a final and nonappealable order, decree or ruling
enjoining or otherwise prohibiting the merger;
o the merger is not completed by January 31, 2003 (or April 30,
2003, if the merger is not completed because the waiting period or
approvals under federal antitrust laws, Medicaid, Medicare, food
and drug laws or state pharmacy laws has not expired or been
terminated or received), with the exception that a party may not
terminate the merger agreement if that party's failure to perform
its obligations under the merger agreement is the primary cause of
the merger not being complete by that date;
o the other party to the merger agreement breaches in any material
respect any of its representations, warranties or covenants
contained in the merger agreement, and such breach is not cured
within certain time periods; or
o the NCS stockholders fail to approve the merger agreement at the
NCS special meeting.
Genesis may also terminate the merger agreement and abandon the merger
if:
o the NCS board of directors or the NCS independent committee
withdraws or adversely modifies its recommendation of the merger
to the NCS stockholders, or if the NCS board of directors or the
NCS independent committee approves, or determines to recommend to
the NCS stockholders that they approve, an alternative acquisition
proposal, or if for any reason NCS fails to call or hold the NCS
special meeting within four months of the date of the merger
agreement (except that the date may be extended depending on the
date that the registration statement of which this proxy
statement/prospectus is a part becomes effective);
o any party (other than Genesis) to the voting agreements breaches
its obligations under the voting agreements (and NCS stockholder
approval is not otherwise obtained), and such breach is not cured
within certain time periods; or
o there has been a material adverse effect on NCS.
Termination Fee and Expenses
The merger agreement provides that NCS must pay Genesis a termination
fee of $6 million in the following cases:
o if Genesis terminates the merger agreement because NCS fails to
call or hold the NCS special meeting within four months of the
date of the merger agreement (except that the date may be extended
depending on the date that the registration statement of which
this proxy statement/prospectus is a part becomes effective);
o if either Genesis or NCS terminates the merger agreement because
the NCS stockholders fail to approve the merger agreement at the
NCS special meeting, and, within 12 months of such termination,
NCS enters into an agreement with respect to an alternative
transaction or the NCS board of directors recommends acceptance by
the NCS stockholders of a tender offer or exchange offer with
respect to an acquisition proposal;
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o if Genesis terminates the merger agreement because NCS has
breached a closing condition relating to representations or
covenants, and, within 12 months of such termination, NCS enters
into an agreement with respect to an alternative transaction or
the NCS board of directors recommends acceptance by the NCS
stockholders of a tender offer or exchange offer with respect to
an acquisition proposal; or
o if Genesis terminates the merger agreement because a party to the
voting agreements has breached its obligations under the voting
agreements (and NCS stockholder approval is not otherwise
obtained), and, within 12 months of such termination, NCS enters
into an agreement with respect to an alternative transaction or
the NCS board of directors recommends acceptance by the NCS
stockholders of a tender offer or exchange offer with respect to
an acquisition proposal.
The merger agreement also provides that NCS must reimburse Genesis for
up to $5 million of Genesis' actual, documented expenses (including fees and
expenses of its financial advisors and legal counsel) in connection with the
negotiation, entering into, and performance of the merger agreement if Genesis
terminates the merger agreement because there is a material adverse effect on
NCS.
Under the merger agreement, NCS must pay Genesis a termination fee of
$6 million, as well as reimburse Genesis for up to $5 million of its expenses,
in the following cases:
o if either Genesis or NCS terminates the merger agreement because a
bankruptcy court has entered a final order enjoining Genesis or
NCS from completing the merger; or
o if either Genesis or NCS terminates the merger agreement because
the merger is not complete by the January 31, 2003/April 30, 2003
deadline described above, and, at such time, each of the
conditions to NCS' obligations to complete the merger is satisfied
or waived by Genesis (other than those conditions that are not
satisfied as a result of an action or order of a bankruptcy court
or the failure of NCS to comply with any of its agreements or
obligations under the merger agreement).
The merger agreement also requires that if the termination was caused
by a willful breach, the breaching party must indemnify the non-breaching
parties for their expenses in connection with the negotiation, entering into and
performance of the merger agreement and related documents, the stockholder
meeting and consents.
In all other cases, whether or not the merger is completed, all costs
and expenses incurred in connection with the merger agreement and the merger
will be paid by the party incurring such cost or expense.
Amendments, Extensions and Waivers
The merger agreement may be amended by the parties, and provisions of
the merger agreement may be waived. All amendments must be in writing and signed
by each party, and all waivers must be in writing and signed by the party
against whom the waiver is to be effective.
Voting Agreements
In connection with the execution of the merger agreement, and to induce
Genesis to enter into the merger agreement, Jon H. Outcalt and Kevin B. Shaw,
each in his capacity as a record holder or beneficial owner of shares of NCS
common stock, entered into separate voting agreements with Genesis and NCS, each
dated as of July 28, 2002. The voting agreements cover all of the shares of NCS
common stock beneficially owned by Messrs. Outcalt and Shaw, who collectively
hold approximately 65% of the voting power of NCS capital stock entitled to vote
at the NCS special meeting. Under the terms of the voting agreements, each of
Messrs. Outcalt and Shaw has agreed to vote or cause to be voted all of their
respective shares of NCS capital stock at the NCS special meeting in favor of
the adoption of the merger agreement. Accordingly, a sufficient number of the
votes required to adopt the merger agreement is assured.
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The following is a summary of the material terms and provisions of
these voting agreements. The summary is qualified in its entirety by the voting
agreements, copies of which have been filed as exhibits to the registration
statement of which this proxy statement/prospectus is a part and are
incorporated herein by reference.
Agreements to Vote
Each of Messrs. Outcalt and Shaw has agreed to vote his shares in favor
of the approval of the merger agreement and the merger. In addition, each has
agreed to vote his shares against the approval of:
o any proposal made in opposition to or in competition with the
transactions contemplated by the merger agreement;
o any merger, consolidation, sale of assets, business combination,
o share exchange, reorganization or recapitalization of NCS or any
of its subsidiaries with or involving any other person other than
as contemplated under the merger agreement;
o any liquidation or winding up of NCS;
o any extraordinary dividend by NCS;
o any change in the capital structure of NCS (other than under the
merger agreement); and
o any other action that may reasonably be expected to interfere with
or delay the completion of the merger or result in a breach of any
of the covenants, representations, warranties or other obligations
or agreements of NCS under the merger agreement, which would
materially and adversely affect NCS, Genesis or their respective
abilities to complete the merger.
In furtherance of the foregoing agreements, each of Messrs. Outcalt and
Shaw has agreed to grant to representatives of Genesis an irrevocable proxy to
vote his shares of NCS common stock in accordance with the foregoing agreements.
Transfer Restrictions
Both Messrs. Outcalt and Shaw have agreed that, before the completion
of the merger, they will not assign, sell, transfer or pledge their shares of
NCS common stock subject to the voting agreements, including pursuant to any
tender offer.
Modifications and Termination
Messrs. Outcalt and Shaw will not be required to vote in favor of the
merger if, and only if, NCS and Genesis amend the merger agreement and (a) such
amendment is not approved by the NCS board of directors or the NCS independent
committee or (b) such amendment results in each of Messrs. Outcalt and Shaw
receiving different treatment or consideration for their respective shares of
NCS common stock on a per-share basis.
Except for several surviving provisions, the voting agreements executed
by Messrs. Outcalt and Shaw will terminate upon the earliest to occur of:
o the completion of the merger; or
o the termination of the merger agreement in accordance with its
terms.
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Information Concerning Genesis
Description of the Business
General
Genesis is a leading provider of healthcare and support services to the
elderly. Genesis' operations are comprised of two primary business segments:
pharmacy and medical supply services and inpatient care in skilled nursing and
assisted living centers. In addition, Genesis capitalizes on its industry
leadership position in these businesses by offering an array of other
complementary healthcare services.
Service-Related Businesses
Pharmacy and Medical Supply Services
Genesis' NeighborCare(R) integrated pharmacy and medical supply
business is the third largest institutional pharmacy in the United States with
over $1.1 billion of annual revenue. Genesis has 64 institutional pharmacies, of
which eight are jointly owned, that service approximately 250,000 beds in
long-term care settings in 41 states. In addition to these institutional
pharmacies, NeighborCare operates 22 medical supply and home medical equipment
distribution centers, of which four are jointly owned, and 31 community-based
pharmacies, of which two are jointly owned.
Genesis' institutional pharmacy business provides prescription and
non-prescription pharmaceuticals, infusion therapy, and medical supplies and
equipment to the elderly, chronically ill and disabled in long-term care and
alternate sites, including skilled nursing facilities, assisted living
facilities, residential and independent living communities. Approximately 91% of
NeighborCare revenues are generated from sales to independent healthcare
providers. The pharmacy services provided in these settings are tailored to meet
the needs of the institutional customer. These services include highly
specialized packaging and dispensing systems, computerized medical records
processing and 24-hour emergency services. Genesis also provides pharmacy
consulting services to assure proper and effective drug therapy.
Genesis' professional pharmacies are retail operations located in or
near medical centers, hospitals and physician office complexes and provide
prescription and over-the-counter medications and certain medical supplies as
well as personal service and consultation by licensed registered pharmacists.
Other Service-Related Businesses
Genesis also provides rehabilitation therapy services, management and
consulting services, hospitality services, group purchasing services,
respiratory health services, physician services, diagnostic services, staffing
services and other healthcare related services.
Rehabilitation Therapy. Genesis provides an extensive range of
rehabilitation therapy services, including speech pathology, physical therapy
and occupational therapy, through 14 certified rehabilitation agencies in all
five of its regional market concentrations. These services are provided by
approximately 3,400 licensed rehabilitation therapists and assistants employed
or contracted by Genesis to substantially all of the eldercare centers Genesis
operates, as well as by contract to healthcare facilities operated by others.
Management Services. Genesis provides management services to 70
eldercare centers with approximately 7,200 beds pursuant to management
agreements that provide generally for the day-to-day responsibility for the
operation and management of the centers. In turn, Genesis receives management
fees, depending on the agreement, computed as either an overall fixed fee, a
fixed fee per customer, a percentage of net revenues of the center plus an
incentive fee, or a percentage of gross revenues of the center with some
incentive clauses. The various management agreements, including renewal option
periods, are scheduled to terminate between 2002 and 2011.
Tidewater Group Purchasing. Genesis owns and operates The Tidewater
Healthcare Shared Services Group, Inc., also referred to as "Tidewater," one of
the largest long-term care group purchasing companies in the country. Genesis
has negotiated contracts with 54 national vendors, 92 regional vendors and 107
manufacturers. Tidewater provides purchasing and shared service programs
specially designed to meet the needs of eldercare centers and other long-term
care facilities. Tidewater's services are contracted to approximately 4,000
members with over 390,000 beds in 46 states and the District of Columbia.
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Other Services. Genesis employs or has consulting arrangements with
over 80 physicians, physician assistants and nurse practitioners who are
primarily involved in designing and administering clinical programs and
directing patient care. Genesis also provides an array of other specialty
medical services in certain parts of its eldercare network, including portable
x-ray and other diagnostic services; home healthcare services; consulting
services; respiratory health services, and hospitality services such as dietary,
housekeeping, laundry, plant operations and facilities management services.
Genesis' service-related businesses, which are comprised of pharmacy
and medical supplies services and other service-related businesses, generate
approximately 48% of its revenues.
Inpatient Care
Genesis is a leading regional provider of inpatient care through its
Genesis ElderCare(R) networks of skilled nursing and assisted living centers
primarily located in the eastern United States. The networks include 189
eldercare centers with approximately 24,000 beds concentrated in five regional
markets in order to achieve operating efficiencies, economies of scale and
significant market share. The five regional markets are the following: New
England Region (Massachusetts / Connecticut / New Hampshire / Vermont / Rhode
Island); Midatlantic Region (Greater Philadelphia / Delaware Valley / New
Jersey); Chesapeake Region (Southern Delaware / Eastern Shore of Maryland /
Baltimore, Maryland / Washington, D.C. / Virginia); Southern Region (Central
Florida); and Allegheny / Midwest Region (West Virginia / Western Pennsylvania /
Illinois / Wisconsin). Genesis has established and actively markets programs for
elderly and other customers who are medically complex and require higher levels
of post-acute care. These programs include intravenous therapy, post-surgical
recovery, respiratory management, orthopedic or neurological rehabilitation,
terminal care and various forms of coma, pain and wound management. Private
insurance companies and other third party payors, including certain state
Medicaid programs, have recognized that treating customers requiring medical
care in centers such as those Genesis operates is a cost-effective alternative
to treatment in an acute care hospital. Genesis has consistently achieved high
occupancy and Medicare census by integrating the talents of employed physicians,
a central intake function, case management and comprehensive discharge planning
in coordination with key referring hospitals. Genesis believes that its approach
provides cost-effective care management to achieve superior customer outcomes.
Genesis' skilled nursing centers offer three levels of care for their
customers: skilled, intermediate and personal. Skilled care provides 24-hour per
day professional services of a registered nurse; intermediate care provides less
intensive nursing care; and personal care provides for the needs of customers
requiring minimal supervision and assistance. Each eldercare center is
supervised by a licensed healthcare administrator and engages the services of a
medical director to supervise the delivery of healthcare services to residents
and a director of nursing to supervise the nursing staff. Genesis maintains a
corporate quality assurance program to monitor regulatory compliance and to
enhance the standard of care provided in each center.
Recent Developments
On August 15, 2002, Genesis announced that Genesis and Manor Care, Inc.
have agreed to withdraw all outstanding legal actions against each other
stemming from the acquisition by Genesis' subsidiary, NeighborCare(R), of Manor
Care's pharmacy subsidiary, Vitalink. Both companies have also agreed to
withdraw the prior pharmacy service agreement and have entered into a new
pharmacy service agreement. The new agreement will run through January 2006 and
covers approximately 200 of Manor Care's facilities. The new agreement replaces
the current agreement between the two companies that was set to expire in 2004.
The pricing of the new agreement has been reduced by approximately $8.5
million annually based upon current sales volumes. The agreement is retroactive
to June 1, 2002. Genesis believes that the revenue reduction resulting from the
new agreement will be offset by cost reductions relating to some of its
previously announced strategic objectives.
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On October 2, 2002, Genesis announced that it has retained UBS Warburg
LLC and Goldman Sachs & Co. to assist in exploring certain strategic business
alternatives, including, but not limited to, the potential sale or spinoff of
its ElderCare assets.
Principal Shareholders of Genesis
The following table sets forth information with respect to the
beneficial ownership of Genesis common stock as of October 3, 2002 for: each
person who Genesis knows owns beneficially more than 5% of its common stock;
each of Genesis' most highly compensated executive officers; each of Genesis'
directors; and all of Genesis' executive officers and directors as a group. On
October 3, 2002 there were 41,501,501 shares of Genesis common stock
outstanding, including 811,212 shares to be issued in connection with Genesis'
plan of reorganization confirmed by the Bankruptcy Court on September 20, 2001.
Unless otherwise noted below, and subject to applicable community
property laws, to Genesis' knowledge, each person has sole voting and investment
power over the shares shown as beneficially owned, except to the extent
authority is shared by spouses under applicable law and except as set forth in
the footnotes to the table.
The number of shares beneficially owned by each shareholder is
determined under rules promulgated by the SEC. The information does not
necessarily indicate beneficial ownership for any other purpose. Beneficial
ownership, as set forth in the regulations of the SEC, includes securities owned
by or for the spouse, children or certain other relatives of such person as well
as other securities as to which the person has or shares voting or investment
power or has the right to acquire within 60 days after October 3, 2002. The same
shares may be beneficially owned by more than one person. Beneficial ownership
may be disclaimed as to certain of the securities. For purposes of calculating
each person's or group's percentage ownership, stock options and warrants
exercisable within 60 days after October 3, 2002 are included for that person or
group but not the stock options and warrants of any other person or group.
All addresses for the executive officers and directors are c/o Genesis
Health Ventures, Inc., 101 East State Street, Kennett Square, Pennsylvania
19348.
Shares of Common Percent of
Stock Beneficially Common Stock
Owned (1) Owned (1)
------------------ ------------
Goldman, Sachs Group
85 Broad Street
New York, NY 10004 (2)....................... 6,598,780 15.76%
Highland Capital Management, L.P.
Two Galleria Tower
13455 Noel Road, Suite 1300
Dallas, TX 75240 (3) ........................ 2,997,691 7.19%
Angelo, Gordon & Co., L.P.
245 Park Avenue
New York, NY 10167 (4)...................... 2,107,148 5.08%
James H. Bloem (5)........................... 25,000 *
Edwin M. Crawford (6)........................ 25,000 *
James D. Dondero (3) ........................ 2,997,691 7.19%
Robert H. Fish (7)........................... 25,000 *
Dr. Philip P. Gerbino (8).................... 25,000 *
Joseph A. LaNasa III (2)..................... 6,598,780 15.76%
James E. Dalton, Jr. (9)..................... 25,000 *
Michael R. Walker ........................... - -
Richard R. Howard (10)....................... 40,000 *
George V. Hager, Jr. (11).................... 25,000 *
Robert A. Smith (12)......................... 12,500 *
All executive officers and directors as
a group (23 persons)....................... 9,915,346 23.42%
========== =====
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----------------------------
* Less than one percent.
(1) Includes the number of shares of Genesis common stock into which Genesis
Series A Preferred is convertible as of October 3, 2002.
(2) Goldman, Sachs & Company is a wholly owned subsidiary of Goldman, Sachs
Group. Goldman, Sachs & Co.'s direct beneficial ownership consist of (a)
6,220,613 shares of new common stock and (b) 71,799 shares of Genesis
Series A Preferred (representing 17.02% of the outstanding shares of
Genesis Series A Preferred) which are convertible into 353,167 shares of
new common stock. Joseph A. LaNasa III, a vice president of Goldman, Sachs
& Co., is a member of the successor company's board of directors and was
granted 25,000 shares of stock options in the successor company. Mr. LaNasa
has an understanding with Goldman, Sachs Group pursuant to which he holds
the options for the benefit of the Goldman, Sachs Group. Based upon a
Schedule 13D filed with the SEC on August 12, 2002.
(3) Includes 1,452,434 shares of Genesis common stock beneficially and directly
owned by Highland Capital Management, L.P. ; 82,213 shares of Genesis
common stock underlying 16,714 shares of Genesis Series A Preferred
immediately convertible and beneficially and directly owned by Highland
Capital Management, L.P.; 25,000 stock options granted under Genesis' 2001
Stock Option Plan to Mr. Dondero, president of Highland Capital Management,
L.P., who is a member of Genesis' board of directors, pursuant to which he
holds for the benefit of Highland Capital Management, L.P.; 993,848 shares
of Genesis common stock beneficially and directly owned by Highland
Crusader Offshore Partners, L.P.; 51,328 shares of Genesis common stock
underlying 10,435 shares of Genesis Series A Preferred immediately
convertible and beneficially and directly owned by Highland Crusader
Offshore Partners, L.P.; 239,774 shares of Genesis common stock
beneficially and directly owned by Prospect Street High Income Portfolio
Inc.; 13,694 shares of Genesis common stock underlying 2,784 shares of
Genesis Series A Preferred immediately convertible and beneficially and
directly owned by Prospect Street High Income Portfolio Inc.; 41,100 shares
owned by PCMG Trading Partners XXIII L.P.; and 98,300 shares owned by Mr.
Dondero. Highland Capital Management, L.P. beneficially owns 29,933 shares
of Genesis Series A Preferred representing 7.10% of the outstanding shares
of Genesis Series A Preferred. Mr. Dondero disclaims beneficial ownership
of 2,899,391 shares of Genesis common stock. Based upon a Schedule 13D/A
filed with the SEC on April 8, 2002.
(4) Includes 570 shares of Genesis common stock owned by Angelo, Gordon & Co.,
L.P. and 2,106,578 shares of Genesis common stock held for the account of
sixteen private investment funds for which Angelo, Gordon & Co., L.P. acts
as a General Manager and/or Investment Adviser. Based upon a Schedule 13G
filed with the SEC on February 11, 2002.
(5) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
(6) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
(7) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
(8) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
(9) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
(10) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
(11) Includes 25,000 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
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(12) Includes 12,500 shares of Genesis common stock issuable upon the exercise
of stock options that are exercisable within 60 days of October 3, 2002.
Information Concerning NCS
Description of the Business
General
NCS, which was organized in February 1996 as a Delaware corporation, is
a leading independent provider of pharmacy services to long-term care
institutions including skilled nursing facilities, assisted living facilities
and other institutional healthcare settings. NCS purchases, repackages and
dispenses prescription and non-prescription pharmaceuticals and provides
customer facilities with related management services, automated medical record
keeping, drug therapy evaluation and regulatory assistance. NCS also provides
consultant pharmacist services, including monitoring the control, distribution
and administration of drugs within the long-term care facility, assisting in
compliance with applicable state and federal regulations, therapeutic monitoring
and drug utilization review services. NCS also provides various ancillary
healthcare services to complement its core pharmacy services, including infusion
therapy, software services and other services. At June 30, 2002, NCS provided
pharmacy services to approximately 203,000 long-term care beds in 33 states. NCS
is considered to operate principally in one business segment.
Market Overview
Institutional pharmacies purchase, repackage and distribute
pharmaceuticals to residents of long-term care facilities such as skilled
nursing facilities, assisted living facilities and other institutional
healthcare settings. Unlike hospitals, most long-term care facilities do not
have on-site pharmacies but depend instead on outside sources to provide the
necessary products and services. In response to a changing regulatory
environment and other factors, the sophistication and breadth of services
required by long-term care facilities have increased dramatically in recent
years. Today, in addition to providing pharmaceuticals, institutional pharmacies
provide consultant pharmacy services including monitoring the control,
distribution and administration of drugs within the long-term care facility and
assisting in compliance with applicable state and federal regulations, as well
as therapeutic monitoring and drug utilization review services. With the average
long-term care facility patient taking seven to nine medications per day, high
quality, cost-efficient systems for dispensing and monitoring patient drug
regimens are critical. Providing these services places the institutional
pharmacy in a central role of influencing the effectiveness and cost of care.
The institutional pharmacy market has undergone significant
consolidation over the last few years. Prior to the 1970s, pharmacy needs of
long-term care facilities were fulfilled by local retail pharmacies. Since then,
the pharmacy and information needs of long-term care facilities have grown
substantially and regulatory requirements and the reimbursement environment have
become more complex. Institutional pharmacy companies, both independent and
captive (those owned by an operator of long-term care facilities), have proven
to be better positioned to meet these changing market demands. As a result, over
the past 25 years the proportion of the market served by retail pharmacies has
steadily declined, and institutional pharmacies have become the dominant
providers of pharmacy services to the long-term care market.
There are several factors that drove the consolidation among providers
of long-term care pharmaceutical services. All of these factors relate to the
advantages that large institutional providers have over retail and small
institutional providers.
Scale Advantages. Larger pharmacies are able to (i) realize advantages
associated with size, including purchasing power, service breadth, more
sophisticated sales and marketing programs and formulary management
capabilities, (ii) achieve efficiencies in administrative functions and (iii)
have access to the capital resources necessary to invest in critical computer
systems and automation.
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Ability to Serve Multi-site Customers and Managed Care Payors. As a
result of their ability to serve long-term care customers with several physical
locations, larger pharmacies possess a significant competitive advantage over
their smaller counterparts. Additionally, NCS believes that there are
significant opportunities for full-service institutional pharmacies with a
comprehensive range of services and regional coverage to provide a spectrum of
healthcare products and services to managed care payors.
Regulatory Expertise and Systems Capabilities. Long-term care
facilities are demanding more sophisticated and specialized services from
pharmacy providers due, in part, to the implementation in 1990 of the Omnibus
Budget Reconciliation Act of 1987, referred to as the "OBRA." The OBRA
regulations, which were designed to upgrade and standardize care in nursing
facilities, mandated strict new standards relating to planning, monitoring and
reporting on the progress of patient care to include, among other things,
prescription drug therapy. More recently, the implementation of Medicare's
prospective payment system has required that long-term care facilities estimate
the total cost of stay of a resident prior to admission. The facilities, in
turn, rely on their ancillary providers, such as institutional pharmacy vendors,
to help them manage the costs of care of their Medicare Part A-covered
residents. As a result, long-term care administrators increasingly seek
experienced pharmacists and specialized providers with computerized information
and documentation systems designed to monitor patient care and control the
facilities' and payors' costs.
Changing Reimbursement Environment. The long-term care market has
undergone significant change over the last three years as Medicare's new
prospective payment system has been implemented. This reimbursement change,
which was mandated by the Balanced Budget Act of 1997, pays nursing homes a flat
rate for all services, a significant departure from the prior cost-based system.
In order to assist long-term care customers with this new regulation,
institutional pharmacy providers must be able to offer sophisticated prospective
payment system contracts that include cost-effective formularies.
Business Strategy
NCS expects that the evolution of the institutional pharmacy industry
will follow the path taken by the retail pharmacy industry. Therefore, it is
anticipated that prescription margins will continue to face incremental downward
pressure over time. Institutional pharmacies that remain successful will need
strong internal revenue growth to leverage increased volume over its existing
cost base, the ability to leverage scale across all areas of purchasing
contracts, a low-cost production structure and the ability to leverage size and
technology to establish pharmaceutical manufacturers as purchasers of clinical
data.
NCS' 74 existing pharmacy sites have the ability to access over 80% of
the skilled nursing home patient population. These sites served approximately
203,000 long-term care beds at June 30, 2002 in 33 states. Accordingly, NCS is
positioned to pursue revenue growth opportunities through its existing
infrastructure. NCS has developed an efficient operating structure and can
significantly benefit by leveraging incremental volume through existing
operational sites. In addition, NCS' investment in common information systems
has established a platform to diversify its revenue stream by assisting drug
manufacturers in better understanding prescribing trends and changes in the
competitive landscape across the long-term care and assisted living population.
Services
NCS primarily provides institutional pharmacy products and services to
long-term care facility residents. NCS also provides various ancillary
healthcare services to complement its core pharmacy service, including infusion
therapy, software services, and other services. For the year ended June 30,
2002, approximately 89% of NCS' revenues were derived from providing pharmacy
and consultant pharmacy services to long-term care facilities. An additional 4%
of revenues were derived from providing infusion therapy services, and the
remaining 7% were primarily derived from providing various other products and
services, including hospital pharmacy management, software services, oxygen and
Medicare Part B-covered services.
Pharmacy Services. NCS' core business is providing pharmaceutical
dispensing services to residents of long-term care facilities and other
institutions. NCS purchases, repackages and dispenses prescription and
non-prescription medication in accordance with physician orders and delivers
such prescriptions at least daily to long-term care facilities to be
administered to residents by the nursing staffs of these facilities. NCS
typically serves facilities within a two-hour drive time of its distribution
facilities and provides 24-hour coverage 365 days per year. As of June 30, 2002,
NCS provided its services from 74 sites in 33 states.
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Upon receipt of a doctor's order, the information is entered into NCS'
management information system, which automatically reviews the order for
patient-specific allergies and potentially adverse interactions with other
medications the patient is receiving. Following this analysis, a report on each
order is produced for review by an NCS pharmacist, who performs a prospective
drug utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the FDA. In addition, subject to the
prescribing physician's approval, the pharmacist may make therapeutic
substitutions based on guidelines established by NCS' therapeutic formulary
committee.
NCS provides pharmaceuticals to its clients through a unit dose
distribution system. NCS divides the pharmaceuticals received in bulk form from
its suppliers into unit dose packages for its customers. The unit dose format is
designed to reduce errors, improve control over the distribution of
pharmaceuticals and save nursing administration time relative to the bulk
systems traditionally used by retail pharmacies.
As of June 30, 2002, 93% of NCS' pharmacy operating facilities were
converted to the Concord DX system, NCS' proprietary computer system. NCS
utilizes the Concord DX system to control its work flow and improve operating
efficiencies. In most cases, NCS uses its bar-coding system where a bar code
label is applied to each unit dose package. Through bar coding, information
relating to the contents and destination of each unit dose package distributed
can be automatically entered into the Concord DX system. This bar code
technology enables NCS to monitor pharmaceuticals throughout the production and
distribution process, thereby reducing errors, improving pharmacy control and
enhancing production efficiency.
As an additional service, NCS furnishes its clients with information
captured by its computerized medical records and documentation system. This
system captures patient care information, which is used to create monthly
management and quality assurance reports. NCS believes that this system of
information management, combined with the unit dose delivery system, improves
the efficiency and controls in nursing administration and reduces the likelihood
of drug-related adverse consequences.
Consultant Pharmacy Services. Federal and state regulations mandate
that long-term care facilities improve the quality of patient care by retaining
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 attempted to further upgrade
and standardize healthcare by mandating more stringent standards relating to
planning, monitoring and reporting on the progress of prescription drug therapy
as well as facility-wide drug usage. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.
NCS provides consulting services that help clients comply with federal
and state regulations applicable to long-term care facilities. NCS' services
include: (i) reviewing each patient's drug regimen to assess the appropriateness
and efficacy of drug therapies, including a review of the patient's medical
records, monitoring drug interactions with other drugs or food, monitoring
laboratory test results and recommending alternate therapies or discontinuing
unnecessary drugs; (ii) participating on the pharmacy and therapeutics, quality
assurance and other committees of NCS' clients; (iii) inspecting medication
carts and storage rooms; (iv) monitoring and reporting at least quarterly on
facility-wide drug usage and drug administration systems and practices; (v)
developing and maintaining the client's pharmaceutical policy and procedure
manuals; and (vi) assisting the long-term care facility in complying with state
and federal regulations as they pertain to patient care.
Additionally, NCS offers a specialized line of consulting services
which help long-term care facilities enhance care and reduce and contain costs
as well as comply with state and federal regulations. Under this service line,
NCS provides: (i) data required for OBRA and other regulatory purposes,
including reports on psychotropic drug usage (chemical restraints), antibiotic
usage (infection control) and other drug usage; (ii) plan of care programs that
assess each patient's state of health upon admission and monitor progress and
outcomes using data on drug usage as well as dietary, physical therapy and
social service inputs; (iii) counseling related to appropriate drug usage and
implementation of drug protocols; (iv) on-site continuing education seminars for
the long-term care facilities' staff on topics such as drug information relating
to clinical indications, adverse drug reactions, drug protocols and special
geriatric considerations in drug therapy, information and training on
intravenous drug therapy and updates on OBRA and other regulatory compliance
issues; (v) mock regulatory reviews for nursing staffs; and (vi) nurse
consultant services and consulting for dietary, social services and medical
records.
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Infusion Therapy. Infusion therapy is the intravenous delivery of
medication. NCS' infusion therapy services include pain management, hydration,
antibiotic therapy and chemotherapy for long-term care residents and home care
patients. NCS prepares the product and delivers it to the long-term care
facility to be administered to the patient by the nursing staff. Since the
proper administration of infusion therapy requires a highly trained nursing
staff, NCS provides education and certification programs to its clients in order
to assure proper staff training and compliance with regulatory requirements.
Other. NCS provides long-term care facilities with assistance in
complying with regulations concerning healthy and sanitary environments. NCS
also assists its customers with various regulatory compliance matters and
products and services relating to Medicare Part B-covered products, oxygen and
other miscellaneous services. Finally, NCS offers specialized educational
services that aid facilities in the training of their staff. These services
include surveys to prepare facilities for state reviews and training on
appropriate nursing techniques in infusion therapy, wound care management and
restorative nursing.
Formulary Management
NCS employs formulary management techniques designed to assist
physicians in making the best clinical decision on the appropriate drug therapy
for patients at the lowest cost. Under NCS' formulary programs, NCS pharmacists
assist prescribing physicians in designating the use of particular drugs from
among therapeutic alternatives (including generic substitutions) and in the use
of more cost-effective delivery systems and dosage forms. The formulary takes
into account such factors as pharmacology, safety and toxicity, efficacy, drug
administration, quality of life and other considerations specific to the elderly
population of long-term care facilities.
Successful implementation of formulary guidelines is dependent upon
close interaction between the pharmacist and the prescribing physician. NCS
seeks to attract and retain highly trained clinical pharmacists and encourages
their active participation in the caring for residents of long-term care
facilities, including consultation with the facilities' medical staff and other
prescribing physicians, to increase the likelihood that the most efficacious,
safe and cost-effective drug therapy is prescribed. NCS' formulary program is
directed by the NCS pharmacy and therapeutic committee, which is comprised of
NCS clinical pharmacists, a registered nurse and a physician. NCS believes that
adherence to the NCS formulary guidelines provides the most cost-effective
therapy to the resident and strengthens NCS' purchasing power with
pharmaceutical manufacturers.
Management Information Systems
An integral part of NCS' operations is its proprietary management
information system called "Concord DX," which has extensive capabilities
designed to improve operating efficiencies and controls both internally and at
the customer level. In conjunction with the unit dose distribution system and
the use of a bar-coding label system on unit dose packages, Concord DX is able
to monitor pharmaceuticals within NCS throughout the production and distribution
process. At the customer level, Concord DX automatically screens prescription
orders received from physicians for patient-specific allergies and potentially
adverse reactions given other medications the patient may be receiving. Concord
DX is also used to create individual patient medical records and monthly
management and quality assurance reports for NCS' customers. To date, Concord DX
has been implemented in 93% of NCS' pharmacy operating facilities.
In 1997, NCS acquired Rescot Systems Group, Inc. For the past 13 years,
Rescot has developed one of the premier institutional pharmacy operating systems
used for managing patient and pharmacy data. Rescot has been instrumental in the
design and implementation of Concord DX.
In May 2001, NCS introduced iAstral(TM) which is a web-based internal
company portal. NCS users can access many functions through iAstral(TM)
including:
86
o Real-Time Business Monitoring. This allows NCS personnel to view
real-time information related to pharmacy operations including:
on-line rejected third party claims, therapeutic interchange
opportunities, gross margin opportunities, prescriptions with
missing billing information, and prescriptions connected to
delinquent accounts.
o Historical Financial Information. This allows NCS personnel to
view financial information and operational metrics regarding
customers including gross and net sales, gross margin and
historical rejected claim data.
In addition to these internal capabilities, in May 2000, NCS introduced
its web-based eASTRAL(TM), which is designed to perform the following functions:
(i) improve a nursing home's ability to adapt and operate in an environment of
tightening margins and lower reimbursement levels under the prospective payment
system, (ii) enhance the communication between nursing homes and NCS, and (iii)
improve a nursing home's ability to conform to regulatory requirements. NCS'
eASTRAL(TM) modules are as follows:
o eMedmanager. This allows on-line pre-fill edit reviews. These
reviews provide the nursing home formulary recommendations,
alternative medications and information on potential cost savings
to the nursing home. With access to this type of critical
information, nursing homes can make more informed clinical and
financial decisions.
o Payor Status Reports. This has become critically important for
nursing homes to assist them in controlling their Medicare Part
A-covered costs. Through the use of eASTRAL(TM), NCS customers can
make adjustments to patient status through an internet connection.
o Order Status Report. This provides information on the status of
each patient's medication orders, eliminating the need for the
nursing staff to contact the pharmacy for this information.
o NDC Report. This is available through the internet. This report
provides information needed to complete Section U of the minimum
data set, which must be completed for all long-term care patients.
o eBill. This offers on-line invoice reviews. This is an important
feature, especially for regional or national nursing home chains,
that perform facility to facility cost comparisons.
o Drug Fact. This provides detailed information on any medication,
including its use, side effects, storage, precautions,
interactions and instructions for use.
o Refill Orders. This allows nursing homes to refill orders on-line.
o Medical Records Printing. This allows nursing homes to print
medical records at their facility.
NCS believes that these capabilities distinguish NCS from others in the
institutional pharmacy industry. As nursing homes become more sophisticated,
their interest in and need for these capabilities will increase. NCS believes it
is uniquely positioned to fulfill those needs.
Sales and Marketing
In marketing to prospective customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of account executives, divisional sales managers, national account
managers and a chief development officer. The national account managers, along
with the chief development officer, are responsible for selling to national
chains and other strategically significant accounts. The account executives
report directly to the divisional sales managers and are trained in each of NCS'
products and services. Typically, the account executives sell NCS services
throughout their respective geographic territories most of which consist of
approximately 400 long-term care facilities. These individuals are paid base
salaries with commissions comprising up to 75% of a successful salesperson's
compensation. NCS believes that long-term care facilities change institutional
pharmacies fairly infrequently, but when a change is made, it is generally the
result of a competitor's ability to offer better service or a broader array of
products and services. Additionally, in the prospective payment system
environment, price competition is becoming an increasingly significant factor.
87
NCS' marketing function also reports to the chief development officer.
This function is responsible for the overall branding of NCS through trade
advertising, direct telemarketing, educational seminars, industry press
releases, industry trade shows and competitive information.
Purchasing
NCS purchases pharmaceuticals primarily through a national wholesale
distributor, with whom it has negotiated a prime vendor contract, and directly
from certain pharmaceutical manufacturers. NCS also is a member of industry
buying groups that contract with manufacturers for volume-based discounted
prices which are passed through to NCS by its wholesale distributor. In
addition, NCS has formed a group purchasing organization with two other large
pharmaceutical buyers in the long-term care and acute care industries. NCS
purchases the majority of its pharmaceuticals through this organization. The
organization utilizes the same wholesale distributor as NCS. NCS has numerous
sources of supply available to it and has not experienced any difficulty in
obtaining pharmaceuticals or other products and supplies used in the conduct of
its business.
Customers
At June 30, 2002, NCS had contracts to provide services to more than
203,000 long-term care beds in 33 states. These contracts, as is typical in the
industry, are generally for a period of one year but can be terminated by either
party for any reason upon thirty days' written notice. Over the past few years,
NCS has expanded its customer base to also include rural hospitals. As of June
30, 2002, no individual customer or market group represented more than 5% of the
total sales of NCS' institutional pharmacy business.
Competition
Competition among providers of pharmacy services to long-term care
facilities is intense. NCS believes that it is one of the four largest national
independent institutional pharmacies in the United States. Institutional
pharmacies compete principally on the basis of quality, cost effectiveness and
service level. In the geographic areas it serves, NCS competes with local retail
pharmacies, captive pharmacies and local, regional and national institutional
pharmacies. NCS competes with several other companies with similar marketing
strategies, some of which have greater resources than NCS.
Reimbursement and Billing
As is generally the case for long-term care facility services, NCS
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the fiscal year ended June 30, 2002, NCS'
payor mix was approximately 49% -- Medicaid, 20% -- long-term care facilities
(including amounts for which the long-term care facility receives reimbursement
under Medicare Part A), 14% -- private pay, 11% -- third-party insurance, 1% --
Medicare and 5% -- other sources. The Medicare and Medicaid programs are highly
regulated. The failure of NCS and/or its client institutions to comply with
applicable reimbursement regulations could adversely affect NCS' business.
Private Pay. For those residents who are not covered by
government-sponsored programs or private insurance, NCS generally bills the
patient or other responsible party on a monthly basis. Depending upon local
market practices, NCS may alternatively bill private residents through the
long-term care facility. Pricing for private pay residents is based on
prevailing regional market rates or "usual and customary" charges.
88
Medicaid. The Medicaid program is a federal-state cooperative program
designed to enable states to provide medical assistance to aged, blind or
disabled individuals, or to members of families with dependent children whose
income and resources are insufficient to meet the costs of necessary medical
services. State participation in the Medicaid program is voluntary. To become
eligible to receive federal funds, a state must submit a Medicaid "state plan"
to the United States Secretary of Health and Human Services, for approval. The
federal Medicaid statute specifies a variety of requirements that the state plan
must meet, including requirements relating to eligibility, coverage of services,
payment and administration. For residents eligible for Medicaid, NCS bills the
individual state Medicaid program or, in certain circumstances, the state
designated managed care or other similar organizations. Medicaid programs are
funded jointly by the federal government and individual states and are
administered by the states. The reimbursement rates for pharmacy services under
Medicaid are determined on a state-by-state basis subject to review by the
Centers for Medicare and Medicaid Services (formerly the Health Care Financing
Administration) and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
certain prescription drugs under Medicaid. In most states pharmacy services are
priced at the lower of "usual and customary" charges or cost (which generally is
defined as a function of average wholesale price and may include a profit
percentage) plus a dispensing fee. Most states establish a fixed dispensing fee
that is adjusted to reflect associated costs on an annual or less frequent
basis.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement programs or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect NCS' business. The annual increase in the federal share
would vary from state to state based on a variety of factors. Such provisions,
if ultimately signed into law, could adversely affect NCS' business.
Additionally, any shift from Medicaid to state designated managed care could
adversely affect NCS' business due to historically lower reimbursement rates for
managed care.
Medicare. The Medicare program is a federally funded and administered
health insurance program for individuals aged 65 and over or for certain
individuals who are disabled. The Medicare program consists of two parts:
Medicare Part A, which covers, among other things, inpatient hospital, skilled
long-term care facility, home health care and certain other types of health care
services; and Medicare Part B, which covers physicians' services, outpatient
services and certain items and services provided by medical suppliers. Medicare
Part B also covers a limited number of specifically designated prescription
drugs. Services for residents of long-term care facilities eligible for Part A
coverage are billed directly to the respective long-term care facility.
Medicare Part B provides benefits covering, among other things,
outpatient treatment, physicians' services, durable medical equipment,
orthotics, prosthetic devices and medical supplies. Products and services
covered for Medicare Part B eligible residents in the long-term care facility
include, but are not limited to, enteral feeding products, ostomy supplies,
urological products, orthotics, prosthetics, surgical dressings, tracheostomy
care supplies and a limited number of other medical supplies. All claims for
durable medical equipment, prosthetics, orthotics, prosthetic devices, including
enteral therapy and medical supplies, referred to as "DMEPOS," are submitted to
and paid by four regional carriers known as durable medical equipment regional
carriers. The durable medical equipment regional carriers establish coverage
guidelines, allowable utilization frequencies and billing procedures for DMEPOS.
Payment is based on a fee schedule, which varies depending on the state in which
the patient receiving the items resides. Payments for Medicare Part B-covered
products to eligible suppliers, which include long-term care facilities and
suppliers such as NCS, are made on a per-item basis directly to the supplier. In
order to receive Medicare Part B reimbursement payments, suppliers must meet
certain conditions set by the federal government. NCS, as an eligible supplier,
either bills Medicare directly for Part B-covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility. Medicare
Part B also has an annual deductible as well as a co-payment obligation on
behalf of the patient, and the portion not covered by Medicare is billed
directly to the patient or appropriate secondary payor.
Third-Party Insurance. Third-party insurance includes funding for
residents covered by private insurance plans, veterans' benefits, workers'
compensation and other programs. The resident's individual insurance plan is
billed immediately upon dispensing of the pharmacy services. Additionally, the
resident is billed monthly for a copayment or deductible portion of the pharmacy
services. NCS is under contract directly with the various third party insurance
plans and the reimbursement rates are determined accordingly.
Long-Term Care Facilities. In addition to occasional private patient
billings and those related to drugs for Medicare eligible residents, long-term
care facilities are billed directly for consulting services, certain
over-the-counter medications and bulk house supplies.
89
Government Regulation
Institutional pharmacies, as well as the long-term care facilities that
they service, are subject to extensive federal, state and local laws and
regulations. These laws and regulations cover required qualifications,
day-to-day operations, reimbursement and the documentation of activities. NCS
continuously monitors the effects of regulatory activity on its operations.
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within that state be licensed by the State Board
of Pharmacy. NCS currently has pharmacy licenses in each of the states in which
it operates a pharmacy. In addition, NCS' pharmacies are registered with the
appropriate state and federal authorities pursuant to statutes governing the
regulation of controlled substances.
Long-term care facilities are also separately required to be licensed
in the states in which they operate and, if serving Medicare or Medicaid
patients, must be certified to ensure compliance with applicable program
participation requirements. Long-term care facilities are also subject to the
long-term care facility reforms of OBRA, which impose strict compliance
standards relating to the quality of care for long-term care operations,
including vastly increased documentation and reporting requirements. In
addition, pharmacists, nurses and other health professionals who provide
services on NCS' behalf are in most cases required to obtain and maintain
professional licenses and are subject to state regulation regarding professional
standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling and
Interstate Shipping of Drugs. Federal and state laws impose certain repackaging,
labeling and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail. A drug repackager must register with the FDA. NCS
believes that it holds all required registrations and licenses and that its
repackaging operations are in compliance with applicable state and federal
requirements.
Medicare and Medicaid. For an extensive period of time, the long-term
care facility pharmacy business has operated under regulatory and cost
containment pressures from state and federal legislation primarily affecting the
Medicaid and Medicare programs.
The Medicare program establishes certain requirements for participation
of providers and suppliers in the Medicare program. Pharmacies are not subject
to such certification requirements. Skilled long-term care facilities and
suppliers of DMEPOS, however, are subject to specified standards. Failure to
comply with these requirements and standards may adversely affect an entity's
ability to participate in the Medicare program and receive reimbursement for
services provided to Medicare beneficiaries. See "-- Reimbursement and Billing."
Federal law and regulations contain a variety of requirements relating
to the furnishing of prescription drugs under Medicaid. First, states are given
broad authority, subject to certain standards, to limit or to specify conditions
as to the coverage of particular drugs. Second, federal Medicaid law establishes
standards affecting pharmacy practice. These standards include general
requirements relating to patient counseling and drug utilization review and more
specific requirements for long-term care facilities relating to drug regimen
reviews for Medicaid patients in such facilities. Recent regulations clarify
that, under federal law, a pharmacy is not required to meet the general
standards for drugs dispensed to long-term care facility residents if the
long-term care facility complies with the drug regimen review requirements.
However, the regulations indicate that states may nevertheless require
pharmacies to comply with the general standards, regardless of whether the
long-term care facility satisfies the drug regimen review requirement, and the
states in which NCS operates currently require its pharmacies to comply
therewith. Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid residents. See "--
Reimbursement and Billing -- Medicaid."
In addition to requirements imposed by federal law, states have
substantial discretion to determine administrative, coverage, eligibility and
payment policies under their state Medicaid programs which may affect NCS'
operations. For example, some states have enacted "freedom of choice"
requirements which prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers that deal with the long-term care facility. Such
limitations may increase the competition that NCS faces in providing services to
long-term care facility patients.
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Providers and suppliers who participate in the Medicare and Medicaid
programs are subject to inquiries or audits to evaluate their compliance with
requirements and standards set forth under these programs. NCS believes that its
billing procedures materially comply with applicable state and federal
requirements. However, there can be no assurance that in the future such
requirements will be interpreted in a manner consistent with its interpretation
and application.
The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings, executive orders and freezes and government funding restrictions, all
of which may adversely affect NCS' business. There can be no assurance that
payments for services under the Medicare and Medicaid programs will continue to
be based on current methodologies or remain comparable to present levels. NCS
may be subject to rate reductions as a result of federal budgetary or other
legislation related to the Medicare and Medicaid programs. In addition, various
state Medicaid programs periodically experience budgetary shortfalls which may
result in Medicaid payment reductions and delays in payments.
Healthcare Reform and Federal Budget Legislation. The Balanced Budget
Act of 1997, enacted on August 5, 1997, mandated the implementation of a
prospective payment system for skilled nursing facilities, providing care for
Medicare Part A-covered residents, effective for cost reporting periods
beginning on or after July 1, 1998.
Under prospective payment system, skilled nursing facilities receive a
single per diem payment for all Medicare Part A-covered skilled nursing
facilities services. The new single, per diem federal rate was phased in over a
three-year period that began with cost reporting periods beginning on or after
July 1, 1998. Each Medicare Part A-covered patient is designated into one of 44
resource utilization group, referred to as "RUG," or case-mix categories, as
defined by Centers for Medicare and Medicaid Services. The per diem payment
associated with each RUG category encompasses all costs of furnishing covered
skilled nursing services including routine, ancillary and capital-related costs.
The prospective payment system incorporates payment for pharmacy within the
federal per diem.
The prospective payment system represented a significant change in the
way long term care facilities were reimbursed for care of Medicare Part
A-covered residents. Prior to the prospective payment system, long term care
facilities were reimbursed the actual cost incurred related to care for the
medically complex Medicare Part A-covered residents. The prospective payment
system regulations now reimburse only a predetermined rate for each Part
A-covered resident regardless of the actual cost of care.
On November 29, 1999, Congress enacted the Balanced Budget Refinement
Act of 1999, in response to concerns that the prospective payment system rates
did not adequately reflect the high medication costs of high acuity patients.
The Balanced Budget Refinement Act temporarily increases the federal per diem
rates by 20% for 15 high acuity categories (RUGs) under Extensive Services,
Special Care, Clinically Complex and High and Medium Rehab (effective October 1,
2000). In addition, it increases the per diem payment by four percent for all
acuity categories (calculated exclusive of the 20% RUG increase) for the years
commencing October 1, 2000 and 2001. The Balance Budget Refinement Act also
allows skilled nursing facilities to elect transition to full federal
prospective payment system rates on or after December 15, 1999 instead of
participating in the three-year transition period.
On December 15, 2000, Congress enacted the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 to further mitigate the effects
of reimbursement cuts contained in the Balanced Budget Act. The Benefits
Improvement and Protection Act, effective April 2001, further increases
reimbursement by means of a 6.7% rate increase for certain high-acuity
rehabilitation patients and a 16.66% across the board increase in the nursing
component of the federal rate for all patients.
Certain of the increases in Medicare reimbursement for skilled nursing
facilities provided under the Balanced Budget Refinement Act and the Benefits
Improvement and Protection Act are scheduled to expire on September 30, 2002
unless Congress enacts additional legislation. If no additional legislation is
enacted, the loss of revenues associated with this occurrence could have an
adverse effect on the financial condition of NCS' skilled nursing facilities
customers. While it is hoped that Congress will act in a timely fashion, no
assurances can be given as to whether Congress will take action, the timing of
any action or the form of any relief enacted.
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Moreover, for several years, the federal government has examined the
appropriateness of the "average wholesale price" as a basis for reimbursement of
outpatient prescription drugs under Part B of the Medicare program and certain
state Medicaid programs. "Average wholesale price," or "AWP," is an industry
term that typically is understood to represent a suggested resale price for
wholesale sales to pharmacies. NCS' revenues for drugs dispensed under Medicare
Part B are less than 0.5% of total revenues. Discounted average wholesale price
plus a dispensing fee is also the basis for many state Medicaid programs'
reimbursement of drugs to pharmacy providers for Medicaid beneficiaries
generally as well as under certain private reimbursement programs. If government
or private health insurance programs discontinue or modify the use of average
wholesale price or otherwise implement payment methods that reduce the
reimbursement for pharmaceuticals, it could adversely affect NCS' reimbursement.
With respect to Medicaid, the Balanced Budget Act repealed the Boren
Amendment federal payment standard for Medicaid payments to nursing facilities
effective October 1, 1997, giving states greater latitude in setting payment
rates for such facilities. The law also granted states greater flexibility to
establish Medicaid managed care programs without the need to obtain a federal
waiver. Although these waiver projects generally exempt institutional care,
including nursing facilities and institutional pharmacy services, no assurances
can be given that these programs ultimately will not change the reimbursement
system for long-term care, including pharmacy services, from fee-for-service to
managed care negotiated or capitated rates. NCS is unable to predict what
impact, if any, future changes in Medicaid payments to nursing facilities or
managed care systems might have on its operations.
It is uncertain at this time what additional healthcare reform
initiatives, including an expanded Medicare prescription drug benefit, if any,
will be implemented, or whether there will be other changes in the
administration of governmental health care programs or interpretation of
governmental policies or other changes affecting the health care system. There
can be no assurance that future healthcare or budget legislation or other
changes will not have an adverse effect on NCS' business.
The Health Insurance Portability and Accountability Act of 1996 was
enacted in August 1996. The goals of the legislation are (i) promote the
simplification, standardization and security of the electronic submission of
healthcare information (electronic transactions and code sets rule), (ii) to
protect the security and integrity of healthcare information (security rule) and
(iii) to protect the confidentiality of healthcare information (privacy rule).
NCS has assembled a multi-disciplinary task force to ensure that it has the
systems and procedures in place to comply with the regulations of the Health
Insurance Portability and Accountability Act in a timely manner.
Referral Restrictions. NCS is subject to federal and state laws that
govern financial and other arrangements between healthcare providers. These laws
include the federal anti-kickback statute, which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes that are not necessarily limited to items and
services for which payment is made by Medicare or Medicaid. Other applicable
laws include the federal and state false claims acts, which prohibit the
submission of false claims, the making of false statements to receive payment
under the Medicare and Medicaid programs and the failure to refund overpayments
and improper payments. Violations of these laws may result in fines,
imprisonment and exclusion from the Medicare and Medicaid programs or other
state-funded programs. Federal and state court decisions interpreting these
statutes are limited, but have generally construed the statutes broadly. Recent
Federal legislation has increased the enforcement and penalties for violation of
these statutes.
With respect to the federal anti-kickback statute, federal regulations
establish "Safe Harbors," which give immunity from criminal or civil penalties
to parties in good faith compliance. While the failure to satisfy all the
criteria for a specific Safe Harbor does not necessarily mean that an
arrangement violates the federal statute, the arrangement is subject to review
by the Office of Inspector General for Secretary of Health and Human Services,
which is charged with administering the federal anti-kickback statute. Beginning
January 1, 1997, the Secretary of Health and Human Services began issuing
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific arrangements or proposed arrangements.
Advisory opinions will be binding as to the Secretary and the party requesting
the opinion.
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The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices, which it believes, may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between health care
providers. The OIG has recently issued a Fraud Alert concerning prescription
drug marketing practices that could potentially violate the federal
anti-kickback statute. Pharmaceutical marketing activities may implicate the
federal anti-kickback statute because drugs are often reimbursed under the
Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement actions
against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arise
under state consumer protection laws that generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the FDA exercise greater
regulatory oversight in the area of pharmaceutical promotional activities by
pharmacists. It is not possible to determine whether the FDA will act in this
regard or what effect, if any, FDA involvement would have on NCS' operations.
NCS believes that its contract arrangements with other healthcare
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance, however, that such laws
will not be interpreted in the future in a manner inconsistent with NCS'
interpretation and application.
Environmental Matters. In operating its facilities, NCS makes every
effort to comply with environmental laws. No major difficulties have been
encountered in effecting compliance. In addition, no material capital
expenditures for environmental control facilities are expected. While NCS cannot
predict the effect which any future legislation, regulations or interpretations
may have upon its operations, it does not anticipate any changes that would have
a material adverse impact on its operations.
General. In the ordinary course of its business, NCS is subject to
inspections, audits, inquiries and similar actions by governmental authorities
responsible for enforcing the laws and regulations to which NCS is subject.
Employees
As of June 30, 2002, NCS had approximately 2,500 full-time employees.
None of its employees are represented by a union. NCS considers relations with
its employees to be good.
Property
NCS presently maintains its executive offices in approximately 27,500
square feet of space in Beachwood, Ohio pursuant to a lease expiring in 2005
with an unaffiliated third party. NCS currently considers this space to be
sufficient for its corporate headquarters operations.
As of June 30, 2002, NCS leased or owned 86 properties in 33 states
with a total square footage of 798,000 square feet. The properties range in size
from approximately 500 square feet to approximately 38,000 square feet. The
remaining term of the leases relating to these properties vary from one month to
fourteen years and, in some cases, include options to extend. For information
concerning NCS' rental obligations, see Note 5 (Operating Leases) of the notes
to consolidated financial statements, which is set forth in NCS' financial
statements included in this proxy statement/prospectus.
Legal Proceedings
In addition to matters related to the merger as set forth in "The
Merger -- Litigation Relating to the Merger," in the ordinary course of its
business, NCS is subject to inspections, audits, inquiries and similar actions
by governmental authorities responsible for enforcing the laws and regulations
to which NCS is subject.
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NCS' subsidiary, NCS HealthCare of Illinois, Inc., referred to as "NCS
Illinois," and former owners of the Herrin, Illinois site, were named defendants
in a civil action filed under the federal civil False Claims Act in the United
States District Court for the Southern District of Illinois in the case
captioned "The United States of America, ex rel., Denise Crews, et al. v. Family
Nursing Home Services, Inc., et al." (Case No. 99-4020-GPM). On February 20,
2002, the United States of America filed a Notice of Election to Decline
Intervention. This Notice was filed in camera and under seal. A complaint in the
above-captioned matter was then served on NCS Illinois on July 12, 2002. On
August 20, 2002, NCS was served with a copy of a First Amended False Claims
Complaint with jury demand in the above-captioned matter in which NCS was also
named as a defendant. The amended complaint alleges violations of the federal
and Illinois false claims acts and seeks treble damages and a civil penalty in
the amount of $10,000 for each false claim.
On September 26, 2002, UBS Warburg LLC filed a complaint against NCS in
the Supreme Court of the State of New York for the County of New York, titled
UBS Warburg LLC (f/k/a) Warburg Dillon Read LLC) v. NCS HealthCare, Inc. et al.,
Case No. 603546/02. The lawsuit seeks damages in connection with NCS' alleged
breach of certain engagement letters between NCS and UBS Warburg LLC. UBS
Warburg seeks a money judgment against NCS in excess of $12.5 million. NCS
believes that the allegations set forth in this lawsuit are without merit and
intends to contest them vigorously.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of NCS
Results of Operations
The following table sets forth, for the periods indicated, certain
items from NCS' Statements of Operations, expressed as a percentage of total
revenues.
Year Ended June 30,
-----------------------------------
2002 2001 2000
------- ------ ------
Revenues......................................................... 100.0% 100.0% 100.0%
Cost of revenues................................................. 83.5 82.1 80.2
----- ----- -----
Gross margin..................................................... 16.5 17.9 19.8
Selling, general and administrative expenses..................... 14.5 19.7 18.3
Special charge to increase allowance for doubtful accounts....... -- -- 6.4
Restructuring, asset impairment and other nonrecurring charges... -- -- 7.3
----- ----- -----
Operating income (loss).......................................... 2.0 (1.8) (12.2)
Interest expense, net............................................ (3.9) (5.1) (3.8)
----- ----- -----
Loss before income taxes and cumulative effect of accounting change (1.9) (6.9) (16.0)
Income tax expense............................................... -- -- (0.5)
----- ----- -----
Loss before cumulative effect of accounting change............... (1.9) (6.9) (16.5)
Cumulative effect of accounting change........................... (34.4) -- --
----- ----- -----
Net loss......................................................... (36.3)% (6.9)% (16.5)%
===== ===== =====
Years Ended June 30, 2002 and 2001
Net loss for the year ended June 30, 2002 was $234.6 million or $9.89
per share compared to a net loss of $43.5 million or $1.85 per share for the
year ended June 30, 2001. The increase in net loss from the prior fiscal year
was primarily due to the $222.1 million or $9.37 per share goodwill impairment
charge related to the cumulative effect of the adoption of SFAS No. 142
effective July 1, 2001, partially offset by an increase in operating income and
a decrease in interest expense as further described below.
Net loss for the year ended June 30, 2002, excluding the cumulative
effect of the adoption of SFAS No. 142, was $12.4 million or $0.52 per share
compared to net loss of $43.5 million or $1.85 per share for the year ended June
30, 2001.
Net loss for the year ended June 30, 2002, excluding the cumulative
effect of the adoption of SFAS No. 142 was $12.4 million or $0.52 per share
compared to net loss, excluding bad debt expense for non-core businesses which
had been either sold or shut down (exited businesses), fixed asset impairment
charges and additional expenses related to restructuring activities, of $30.3
million or $1.29 per share for the year ended June 30, 2001.
94
NCS elected early adoption of SFAS No. 142 effective July 1, 2001. In
accordance with SFAS No. 142, goodwill and other indefinite lived intangible
assets are no longer amortized. Under this non-amortization approach, SFAS No.
142 requires that goodwill and other indefinite lived intangible assets be
reviewed for impairment using a fair value based approach upon adoption and at
least annually thereafter. NCS recorded a non-cash charge of $222.1 million to
reduce the carrying value of its goodwill as a result of the adoption of SFAS
No. 142. In accordance with the requirements of SFAS No. 142, the charge has
been recorded as a cumulative effect of accounting change in NCS' consolidated
statement of operations.
The results for the year ended June 30, 2002 exclude goodwill
amortization in accordance with NCS' adoption of SFAS No. 142. In accordance
with SFAS No. 142, the results for the year ended June 30, 2001 are as
originally reported and include goodwill amortization. If SFAS No. 142 would
have been effective for the year ended June 30, 2001, net loss would have been
$33.1 million and net loss per share would have been $1.41, excluding $10.4
million of goodwill amortization.
Revenues for the year ended June 30, 2002 increased $19.5 million or
3.1% to $645.8 million from $626.3 million for the year ended June 30, 2001. The
increase in revenue from the prior fiscal year is primarily attributable to
pharmaceutical inflation over the last year and the increased utilization of
higher priced drugs.
Cost of revenues for the year ended June 30, 2002 increased $24.4
million or 4.7% to $538.9 million from $514.5 million for the year ended June
30, 2001. Cost of revenues as a percentage of revenues increased to 83.5% for
the year ended June 30, 2002 from 82.1% for the year ended June 30, 2001. The
decline in gross margin as a percentage of revenues was primarily due to an
unfavorable change in product mix, the continued shift toward lower margin payor
sources such as Medicaid and third-party insurance plans, and lower Medicaid and
third-party insurance reimbursement levels. Medicaid and third-party insurance
revenues accounted for 60.1% of revenues for the year ended June 30, 2002 versus
57.4% for the year ended June 30, 2001. NCS expects these gross margin trends to
continue in fiscal 2003.
Selling, general and administrative expenses for the year ended June
30, 2002 decreased $29.5 million or 23.9% to $93.8 million from $123.3 million
for the year ended June 30, 2001. Selling, general and administrative expenses
as a percentage of revenues decreased from 19.7% for the year ended June 30,
2001 to 14.5% for the year ended June 30, 2002.
Selling, general and administrative expenses for the year ended June
30, 2001 included $13.2 million for bad debt expense for exited businesses,
fixed asset impairment charges and additional expenses related to restructuring
activities. NCS recorded $10.1 million of additional bad debt expense to fully
reserve for remaining accounts receivable of non-core and non-strategic
businesses exited prior to June 30, 2001. These businesses were ancillary to the
core pharmacy operations and as part of the restructuring activities were either
sold, if there was an available buyer, or shut down. Collection of these
receivables was much more difficult than anticipated. NCS recorded additional
expenses related to restructuring activities of approximately $1.0 million,
primarily for lease terminations associated with the continuing implementation
and execution of strategic restructuring and consolidation activities. NCS
recorded a fixed asset impairment charge of $2.1 million in accordance with SFAS
No. 121. This charge relates primarily to changes in asset values resulting from
the impact of restructuring activities and changes in operational processes
under restructured operations.
As discussed above, NCS adopted SFAS No. 142 effective July 1, 2001 and
accordingly discontinued the amortization of goodwill. If SFAS No. 142 would
have been effective for the year ended June 30, 2001, selling, general and
administrative expenses would have been $112.9 million.
Excluding the impact of the adoption of SFAS No. 142 and bad debt
expense for exited businesses, fixed asset impairment charges and additional
expenses related to restructuring activities, selling, general and
administrative expenses for the year ended June 30, 2001 would have been $99.7
million or 15.9% of sales compared to $93.8 million or 14.5% of sales for the
year ended June 30, 2002. The decrease in expenses from the prior year is a
result of efforts by NCS to reduce operating and overhead costs and a decrease
in bad debt expense, partially offset by an increase in professional fees
related to restructuring activities. The decrease in bad debt expense is
primarily a result of improved collection trends and improved accounts
receivable aging characteristics. The number of days of sales outstanding on net
accounts receivable decreased to 48 days at June 30, 2002 from 55 days at June
30, 2001.
95
Operating income for the year ended June 30, 2002, was $13.1 million or
2.0% of revenues compared to operating income, excluding the impact of the
adoption of SFAS No. 142 and bad debt expense for exited businesses, fixed asset
impairment charges and additional expenses related to restructuring activities,
of $12.2 million or 1.9% of revenues for the year ended June 30, 2001. The
increase is primarily a result of a decrease in operating expenses, partially
offset by an increase in cost of revenues as discussed above. Improvement in
operating performance in fiscal 2002 is also due to a more stable operating
environment for skilled nursing facility customers, as they realized the
benefits of higher statutory reimbursements rates in conjunction with the
implementation of the Balanced Budget Refinement Act, and the Medicare, Medicaid
and SCHIP Benefits Improvement and Protection Act of 2000. Certain of the
increases in Medicare reimbursement for skilled nursing facilities provided
under the Balanced Budget Refinement Act and the Benefits Improvement and
Protection Act will expire in October 2002 unless Congress enacts additional
legislation. If additional legislation is not enacted, the loss of revenues
associated with this occurrence could have a negative impact on the financial
condition of NCS' skilled nursing facilities customers.
NCS had net interest expense of $25.2 million for the year ended June
30, 2002, compared to net interest expense of $31.7 million for the year ended
June 30, 2001. The decrease is primarily attributable to a decrease in interest
rates during fiscal year 2002. As discussed below, the senior credit facility
expired on May 31, 2002 and NCS is currently being charged a default interest
rate.
Years Ended June 30, 2001 and 2000
Net loss for the year ended June 30, 2001 was $43.5 million or $1.85
per share compared to a net loss of $114.5 million or $5.31 per share for the
year ended June 30, 2000. The decrease in net loss from the prior fiscal year is
primarily due to the special charge to increase the allowance for doubtful
accounts and the restructuring, asset impairment and other nonrecurring charges
recorded in fiscal 2000 not recurring in fiscal 2001, partially offset by a
decrease in operating income due primarily to reduced gross margins.
Net loss for the year ended June 30, 2001, excluding bad debt expense
for non-core businesses which had been either sold or shut down (exited
businesses), fixed asset impairment charges and additional expenses related to
restructuring activities, was $30.3 million or $1.29 per share compared to net
loss, excluding restructuring, asset impairment and other nonrecurring charges
and a non-cash charge related to a valuation allowance recorded against NCS' net
deferred tax assets, of $9.5 million or $0.44 per share for the year ended June
30, 2000.
Operating results of NCS in fiscal 2000 and 2001 were negatively
affected by the ongoing difficulty of the operating environment in the long-term
care industry. In particular, the long-term care industry was adversely affected
by the continued impact of the implementation of Medicare's prospective payment
system. The adverse impact of the implementation of the prospective payment
system under the Balanced Budget Act of 1997 for Medicare residents of skilled
nursing facilities was significantly greater than anticipated and resulted in a
difficult operating environment in the long-term care industry. The prospective
payment system resulted in a substantial reduction in reimbursement for skilled
nursing facilities. Consequently, NCS experienced revenue and margin pressure as
a result of these reimbursement changes. Resident acuity level also decreased as
these facilities attempted to avoid high acuity patients, negatively impacting
the overall utilization of drugs, particularly those with higher costs such as
infusion therapy.
For NCS, operating processes for administering and executing
prospective-payment-system-related activities were significantly different than
operating processes prior to the implementation of the prospective payment
system. Contracting processes, data gathering, and operational dispensing
processes for Medicare Part A-covered residents all underwent significant change
resulting in higher costs and lower margins for NCS. These costs were in
addition to the impact of costs associated with customer bankruptcies and their
deteriorating financial condition. During the two years ended June 30, 2001, NCS
made considerable efforts in reducing overhead and operating costs by
accelerating efforts to consolidate and/or close pharmacy and ancillary service
locations, the shutdown or sale of certain non-strategic and/or unprofitable
operations, and continuing its employee reduction plan. In addition, NCS
continued to review the profitability of its customer base and terminated
uneconomic accounts and began applying stricter standards in accepting new
business.
96
Revenues for the year ended June 30, 2001 decreased $68.2 million or
9.8% to $626.3 million from $694.5 million for the year ended June 30, 2000.
Approximately $46.9 million of the decrease in revenue from the prior fiscal
year is attributable to a decrease in revenue from NCS' allied and ancillary
services. This decrease is due to decisions by management to terminate
uneconomic accounts and the shutdown or sale of certain non-strategic or
unprofitable operations. Through June 30, 2001, NCS had disposed of three
ancillary operations that were not contributing to the overall financial
performance of NCS. The remaining $21.3 million of the decrease in revenue is
attributable to NCS' pharmacy operations and is related to net bed loss during
the year and revenue pressure associated with the continued implementation of
the prospective payment system. Although NCS added new customers during fiscal
2001 through its sales and marketing efforts, the number of beds served by NCS
declined due to competitive conditions and decisions by management to terminate
uneconomic accounts and accounts with unacceptable credit risk.
Cost of revenues for the year ended June 30, 2001 decreased $42.3
million or 7.6% to $514.5 million from $556.8 million for the year ended June
30, 2000. Cost of revenues as a percentage of revenues increased to 82.1% for
the year ended June 30, 2001 from 80.2% for the year ended June 30, 2000. Gross
margins for the year ended June 30, 2001 continued to be effected by the impact
of the prospective-payment-system-reimbursement system. Margin pressure resulted
from continued Medicare Part A pricing pressure, lower than anticipated gross
margins on prospective-payment-system-related contracts, reduced acuity levels
and census at customer facilities, a continued shift toward lower margin payer
sources including Medicaid and insurance and lower Medicaid and insurance
reimbursement. This includes the impact of the implementation of the Centers for
Medicare and Medicaid Services federal upper limits, which were implemented in
December 2000 and reflected lower reimbursement from State Medicaid programs.
Selling, general and administrative expenses for the year ended June
30, 2001 decreased $3.7 million or 2.9% to $123.3 million from $127.0 million
for the year ended June 30, 2000. Selling, general and administrative expenses
as a percentage of revenues increased from 18.3% for the year ended June 30,
2000 to 19.7% for the year ended June 30, 2001. Excluding bad debt expense for
exited businesses, fixed asset impairment charges and additional expenses
related to restructuring activities, selling, general and administrative
expenses for the year ended June 30, 2001 decreased $16.9 million or 13.3% to
$110.1 million from $127.0 million for the year ended June 30, 2000. Excluding
bad debt expense for exited businesses, fixed asset impairment charges and
additional expenses related to restructuring activities, selling, general and
administrative expenses as a percentage of revenues decreased from 18.3% for the
year ended June 30, 2000 to 17.6% for the year ended June 30, 2001. The decrease
in expenses from the year ended June 30, 2000 is a result of efforts by NCS to
reduce operating and overhead costs, including continuing the consolidation
and/or closing of pharmacy locations, the restructuring or sale of certain
non-core ancillary lines of business and continuing its employee reduction plan.
These decreases were partially offset by increases in bad debt expense for
continuing businesses and professional fees related to restructuring activities.
Selling, general and administrative expenses for the year ended June
30, 2001 included $13.2 million for bad debt expense for exited businesses,
fixed asset impairment charges and additional expenses related to restructuring
activities. NCS recorded $10.0 million of additional bad debt expense to fully
reserve for remaining accounts receivable of non-core and non-strategic
businesses exited by NCS. These businesses were ancillary to the core pharmacy
operations and as part of the restructuring activities were either sold, if
there was an available buyer, or shut down. Collection efforts on these
receivables were much more difficult than anticipated. NCS recorded additional
expenses related to restructuring activities of approximately $1.1 million,
primarily for lease terminations associated with the continuing implementation
and execution of strategic restructuring and consolidation activities. At June
30, 2002, approximately $0.4 million is included in accrued expenses related to
these expenses. For the year ended June 30, 2001, NCS recorded a fixed asset
impairment charge of $2.1 million in accordance with SFAS No. 121. This charge
relates primarily to changes in asset values resulting from the impact of
restructuring activities and changes in operational processes under restructured
operations.
97
Operating income for the year ended June 30, 2001, excluding bad debt
expense for exited businesses, fixed asset impairment charges and additional
expenses related to restructuring activities, was $1.8 million or 1.9% of
revenues compared to operating income, excluding nonrecurring, restructuring and
special charges described below of $10.8 million or 1.6% of revenues for the
year ended June 30, 2000. The decrease is primarily a result of a decrease in
gross margins as described above and increases in bad debt expense for
continuing businesses and professional fees related to restructuring activities,
partially offset by a decrease in operating expenses as a result of efforts by
NCS to reduce operating and overhead costs, including continuing the
consolidation and/or closing of pharmacy locations, the restructuring or sale of
certain non-core ancillary lines of business and continuing its employee
reduction plan.
During fiscal 2000, NCS recorded restructuring, asset impairment and
other nonrecurring and special charges of $95.8 million. A special charge of
$44.6 million was recorded to increase the allowance for doubtful accounts, and
restructuring, asset impairment and other nonrecurring charges of $51.2 million
were recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations, the planned
disposition of certain non-core and/or non-strategic assets, impairment of
certain assets and other nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from the continuing negative changes observed in industry and customer
trends during the year ended June 30, 2000, and a change in the method of
estimating the allowance necessary for accounts receivable. The financial
condition of NCS' primary customer base and general industry trends continued to
deteriorate throughout the year. Due to the negative trends that NCS' customers
were facing, management re-evaluated the method of estimating the allowances
necessary for these and other customers. The total provision for doubtful
accounts was $53.8 million, $31.8 million and $18.0 million for the years ended
June 30, 2000, 2001 and 2002, respectively. The decrease for the year ended June
30, 2001 as compared to the prior year is primarily due to the implementation of
more restrictive credit and collection policies by NCS, the termination of
certain contracts with high credit risk customers and the improved financial
condition of NCS' customer base. The decrease for the year ended June 30, 2002
as compared to the prior year is primarily a result of improved collection
trends and improved accounts receivable aging characteristics and the effect
during the year ended June 30, 2001 of NCS recording $10.0 million of additional
bad debt expense relating to accounts receivable of exited businesses.
NCS continued its plan of restructuring to consolidate certain pharmacy
sites in order to improve operating efficiencies. As a result, NCS consolidated
thirteen additional pharmacy sites into either a new or existing location. NCS
also shutdown six locations associated with certain ancillary services. During
the year ended June 30, 2000, NCS recorded restructuring charges of $9.7 million
related to these site consolidations and location shutdowns, inclusive of $1.1
million of additional costs incurred on site consolidations previously
announced.
During the year ended June 30, 2000, NCS adopted a formal exit plan to
dispose of certain non-core and/or non-strategic assets. NCS recorded
restructuring, asset impairment and other nonrecurring charges of $30.7 million
related to the planned disposition of assets primarily consisting of impairment
to goodwill and property and equipment. Through June 30, 2002, NCS has disposed
of four ancillary service operations that were not contributing to the overall
financial performance of NCS. Total revenue and operating income of the related
business units was $59.3 million and $1.5 million, respectively, for the year
ended June 30, 2000. The carrying amount of assets held for sale at June 30,
2000 was $7.6 million. At June 30, 2002, NCS has no assets held for sale.
The remaining $10.8 million of the restructuring, asset impairment and
other nonrecurring charges primarily relates to severance incurred during the
year associated with NCS' expense reduction initiatives, additional asset
impairments, costs related to a settlement with federal authorities regarding
the investigation of NCS' Indianapolis, Indiana facility and other nonrecurring
expenses.
During December 1999, NCS reached a settlement with the U.S. Attorney's
office in the Southern District of Indiana regarding the federal investigation
of NCS' facility in Indianapolis, Indiana. As a result, NCS recorded the
settlement amount as a nonrecurring charge. Under the terms of the settlement,
NCS paid $4.1 million to the U.S. Attorney's office. NCS also agreed to maintain
its current level of spending in connection with its compliance systems and
procedures for a period of three years. If NCS does not comply with the terms of
the accord, an additional $1.5 million will be payable to the U.S. Attorney's
office.
98
Employee severance costs included in the charges relate to the
termination of 472 employees. As of June 30, 2002, all terminations associated
with these restructuring activities have been completed.
Details of the fiscal 2000 restructuring, asset impairment, other
nonrecurring and special charges and related activity are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/01 Activity At 6/30/02
------------------------------------------- -------------- ------------ -------- ---------- -------- ----------
(In millions)
Site Consolidations........................
Severance/compensation related.......... Cash $ 1.3 $ (1.3) $ -- $ -- $ --
Lease terminations...................... Cash 2.8 (2.1) .7 (.5) .2
Asset impairments....................... Non-cash 4.4 (4.4) -- -- --
Other................................... Cash 1.2 (1.0) .2 (.1) .1
Special increase to allowance for doubtful
accounts................................ Non-cash 44.6 (44.6) -- -- --
Disposition of Assets......................
Asset impairment........................ Non-cash 30.2 (30.2) -- -- --
Other................................... Cash .5 (.5) -- -- --
Other......................................
Cash.................................... 6.6 (6.5) .1 (.1) --
Non-cash................................ 4.2 (4.2) -- -- --
------- ------- ------ ------ -------
Total...................................... $ 95.8 $ (94.8) $ 1.0 $ (0.7) $ 0.3
======= ======= ====== ====== =======
NCS had net interest expense of $31.7 million for the year ended June
30, 2001, compared to net interest expense of $26.2 million for the year ended
June 30, 2000. The increase is primarily attributable to an increase in interest
rates and other finance related charges during fiscal year 2001. As discussed
below, the senior credit facility expired on May 31, 2002 and NCS is currently
being charged a default interest rate.
Liquidity and Capital Resources
Net cash provided by operating activities was $10.8 million, $27.8
million, and $9.4 million in fiscal 2000, 2001 and 2002, respectively. The
decrease in net cash provided by operating activities in fiscal 2002 resulted
primarily from an increase in accounts payable in the prior year due to a
temporary modification of payment terms negotiated with a major NCS supplier.
The increase in net cash provided by operating activities during fiscal 2001
primarily resulted from a decrease in inventory as a result of NCS' inventory
reduction efforts, a slower growth rate in accounts receivable and an increase
in accounts payable due to the temporary modification of payment terms
negotiated with a major NCS supplier.
Net cash used in investing activities was $11.8 million, $4.1 million,
and $5.9 million in fiscal 2000, 2001 and 2002, respectively.
NCS made capital expenditures of $6.6 million, $3.4 million and $5.5
million in fiscal 2000, 2001 and 2002, respectively. Significant capital
expenditures made by NCS include capitalized software costs associated with the
Concord DX operating system, computer equipment, leasehold improvements and
medication carts.
Net cash used in financing activities was $12.0 million, $0.7 million,
and $0.5 million in fiscal 2000, 2001 and 2002, respectively. The decrease in
fiscal 2001 is primarily attributable to NCS making net payments of $8.6 million
on its senior credit facility in fiscal 2000 with no similar payments in fiscal
2001 and 2002.
In August 1997, NCS issued $100 million of convertible subordinated
debentures, due 2004, referred to as the "NCS notes." The NCS notes carry an
interest rate of 5.75% and are obligations of NCS. The operations of NCS are
currently conducted principally through subsidiaries, which are separate and
distinct legal entities. NCS' ability to make payments of principal and interest
on the NCS notes will depend on its ability to receive distributions of cash
from its subsidiaries. Each of NCS' wholly owned subsidiaries has guaranteed
NCS' payment obligations under the NCS notes, so long as such subsidiary is a
member of an affiliated group (within the meaning of Section 279(g) of the
Internal Revenue Code of 1986, as amended) which includes NCS. The satisfaction
by NCS' subsidiaries of their contractual guarantees, as well as the payment of
dividends and certain loans and advances to NCS by such subsidiaries, may be
subject to certain statutory or contractual restrictions, are contingent upon
the earnings of such subsidiaries and are subject to various business
considerations.
99
NCS elected to not make the semi-annual $2.875 million interest
payments due February 15, 2001, August 15, 2001, February 15, 2002 and August
15, 2002 on the NCS notes. On April 6, 2001, NCS received a formal Notice of
Default and Acceleration and Demand for Payment from the Indenture Trustee. The
Indenture Trustee declared the entire principal and any accrued interest thereon
to be immediately due and payable and demanded immediate payment of such
amounts. If such payments are not made, the Indenture Trustee reserves the right
to pursue remedial measures in accordance with the Indenture, including, without
limitation, collection activities. As of June 30, 2002, the amount of principal
and accrued interest is $110.8 million. As a result of the above noted NCS notes
being in default, an additional $2.4 million of NCS notes are also in default.
Until the defaults are resolved, NCS notes of $102.4 million and related accrued
interest of $10.9 million will be classified as a current liability.
In June 1998, NCS entered into a four-year revolving credit agreement,
referred to as the "senior credit facility," which expired on May 31, 2002. On
June 3, 2002, NCS received correspondence from the senior lenders indicating
that they reserve the right to exercise all rights, powers and privileges
provided for in the credit agreement including the acceleration of the
collection of NCS' obligations and/or exercise other remedies under the credit
agreement including exercising their rights with respect to the pledged
collateral. At the current time, the senior lenders have not chosen to exercise
and enforce the rights and remedies available to them under the credit
agreement. NCS continues to operate under the terms of the senior credit
facility.
The senior credit facility, as amended, had an available commitment of
$207 million, provided all NCS assets as security, limited the availability of
the senior credit facility to use for working capital only, required lender
approval on acquisitions, provided for interest at a variable rate and contained
certain debt covenants including an interest coverage ratio, minimum
consolidated net worth requirements and a restriction on declaration and payment
of cash dividends to NCS stockholders. Prior to the expiration of the senior
credit facility, NCS had been in violation of certain financial covenants of the
senior credit facility. On April 21, 2000, NCS received a formal notice of
default from the senior lenders. As a result of the notice of default, the
interest rate on the senior credit facility (excluding facility fee) increased
to the prime rate plus 2.25% (7.0% at June 30, 2002). The borrowings of $206.1
million under the senior credit facility at June 30, 2002 are classified as a
current liability. Failure to obtain a favorable resolution to the expiration of
the senior credit facility could have a material adverse effect on NCS.
During the past three years, NCS has implemented measures to improve
cash flows generated from operating activities, including reductions in
operating and overhead costs by continuing the consolidation and/or closing of
pharmacy locations, continuing its employee reduction plan, more aggressive
collection activity and inventory reduction efforts, and a temporary
modification of payment terms negotiated with a major NCS supplier. In addition,
NCS continues to review the profitability of its customer base and is
terminating uneconomic accounts as well as applying stricter standards in
accepting new business. NCS expects to meet its financing needs for the next
twelve months through the use of cash generated from operations and its cash
balance of $42.5 million at June 30, 2002. However, NCS may require additional
capital resources for internal working capital needs and may need to incur
additional indebtedness to meet these requirements. Additional funds are
currently not available under the senior credit facility as described above and
there can be no assurance that additional funds will be available.
During the past two years, NCS has been in ongoing discussions with
NCS' senior lenders and with an ad hoc committee of holders of the NCS notes,
regarding the defaults discussed above and potential restructuring options. In
addition, NCS engaged financial advisors and legal counsel to assist in
exploring various capital restructuring and strategic alternatives with third
parties. These defaults, among other factors, raise substantial doubt about NCS'
ability to continue as a going concern.
On July 28, 2002, NCS entered into a definitive merger agreement with
Genesis. If the proposed merger is completed, each outstanding share of common
stock of NCS will be converted into the right to receive 0.1 of a share of
Genesis common stock. At the closing of the proposed merger, Genesis will repay
in full the outstanding debt of NCS, including the borrowings of $206.1 million
under the senior credit facility, and will redeem $102.4 million of the NCS
notes, including any accrued and unpaid interest, plus the applicable redemption
premium.
100
The completion of the proposed merger is subject to regulatory
approvals and other customary conditions, including the approval of the holders
of a majority of the outstanding voting power of NCS' common stock. The timing
and ultimate outcome of the proposed merger or any future negotiations with NCS'
senior lenders and ad hoc committee of noteholders is uncertain and could have a
material adverse effect on NCS. Given the foregoing, no assurances can be given
that NCS will be able to maintain its current level of operations, or that its
financial condition and prospects will not be materially and adversely affected
over the next twelve months.
NCS' effective income tax expense (benefit) rates were, 3.0%, 0.9% and
2.5% for the years ended June 30, 2000, 2001 and 2002, respectively. The
effective tax rate differs from the federal statutory rate primarily as a result
of the recording of a full valuation allowance against NCS' net deferred tax
assets consisting primarily of net operating loss carryforwards.
Contractual Obligations
As of June 30, 2002, NCS had the following contractual obligations:
Payments Due by Period
(In Thousands)
Less Than 5 Years and
Total 1 Year 1-2 Years 3-4 Years After
---------- ---------- ---------- ---------- -----------
Senior credit facility (1).................... $ 206,130 $ 206,130 $ -- $ -- $ --
Convertible subordinated debentures (2)....... 102,361 102,361 -- -- --
Other long-term debt.......................... 823 274 237 130 182
Non-cancelable operating leases............... 22,919 7,114 9,463 4,876 1,466
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations............ $ 332,233 $ 315,879 $ 9,700 $ 5,006 $ 1,648
========== ========== ========== ========== ==========
----------------------------
(1) The senior credit facility expired on May 31, 2002. See above discussion
and Note 2 to the consolidated financial statements of NCS included in
this proxy statement/prospectus.
(2) NCS was in default on the convertible subordinated debentures at June 30,
2002 and the debentures are therefore classified as a current liability.
See above discussion and Note 8 to the consolidated financial statements
of NCS.
Critical Accounting Policies
In December 2001, the SEC issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies,"
referred to as "FR 60," suggesting that companies provide additional disclosure
and commentary on those accounting policies considered most critical. FR 60
considers an accounting policy to be critical if it is important to NCS'
financial condition and results, and requires significant judgment and estimates
on the part of management in its application. NCS believes that the following
represents its critical accounting policies as contemplated by FR 60. For a
summary of all of NCS' significant accounting policies, including the critical
accounting policies discussed below, see Note 1 to NCS' consolidated financial
statements included in this proxy statement/prospectus.
Revenue Recognition
Revenue is recognized when products or services are delivered or
provided to the customer. Upon delivery of products or services, NCS has no
additional performance obligation to the customer. Revenue is recorded on a
monthly basis for products or services provided to customers during that month.
The revenue cycle ends on the last day of the month. As is generally the case
for long-term care facility services, NCS receives payments through
reimbursement from Medicaid and Medicare programs and directly from individual
residents (private pay), private third-party insurers and long-term care
facilities. For the fiscal year ended June 30, 2002, NCS' payor mix was
approximately 49% Medicaid, 20% long-term care facilities (including amounts for
which the long-term care facility receives reimbursement under Medicare Part A),
14% private pay, 11% third-party insurance, 1% Medicare and 5% other sources.
The Medicaid and Medicare programs are highly regulated. The failure of NCS
and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect NCS' business. NCS monitors its receivables
from Medicaid and other third-party payor programs and reports such revenues at
the net realizable amount expected to be received from third-party payors.
101
Contractual Allowances
An estimated contractual allowance is recorded against third-party
sales and accounts receivable (Medicaid and insurance). Accordingly, the net
sales and accounts receivable reported in NCS' financial statements are recorded
at the amount expected to be received from the third-party payor. Contractual
allowances are adjusted to actual as cash is received and claims are reconciled.
No material adjustments to contractual allowances were recorded during the years
ended June 30, 2000, 2001 and 2002. NCS evaluates the following criteria in
developing the estimated contractual allowance percentages each month:
1) Historical contractual allowance trends based on actual claims
paid by third-party payors.
2) Review of contractual allowance information reflecting current
contract terms.
3) Consideration and analysis of changes in customer base, product
mix, payor mix, reimbursement levels or other issues that may
impact contractual allowances.
Allowance for Doubtful Accounts
NCS' ability to collect outstanding receivables is critical to its
operating performance and cash flows. The allowance for doubtful accounts is
approximately 19.7% of the gross accounts receivable balance, net of contractual
allowances, as of June 30, 2002. The provision for doubtful accounts was
$53,825, $31,101 and $18,013 for the years ended June 30, 2000, 2001 and 2002,
respectively.
NCS utilizes the "Aging Method" to evaluate the adequacy of its
allowance for doubtful accounts. This method is based upon applying estimated
standard allowance requirement percentages to each accounts receivable aging
category for each payor. NCS' management developed the estimated standard
allowance requirement percentages by utilizing historical collection trends and
its understanding of the nature and collectibility of receivables in the various
aging categories. The standard allowance percentages were developed by payor
type as the accounts receivable from each payor type have unique
characteristics. The necessary balance sheet allowance for doubtful accounts is
calculated on a monthly basis utilizing the aging method described above and
considers accounts specifically identified as uncollectible. NCS ensures that
the actual balance in the allowance for doubtful accounts is equal to or greater
than the estimated amount calculated by the aging method. Accounts receivable
that NCS management specifically determines to be uncollectible, based upon the
age of the receivables, the results of collection efforts or other
circumstances, are fully reserved for in the allowance for doubtful accounts
until they are written off.
Cost of Goods Sold
Physical inventories are performed on a quarterly basis at all sites.
As NCS does not utilize a perpetual inventory system, cost of goods sold is
estimated during non-inventory months and is adjusted to actual by recording the
results of the quarterly physical inventories. NCS evaluates the following
criteria in developing estimated cost of goods sold during non-inventory months:
1) Historical cost of goods sold trends based on prior physical
inventory results.
2) Review of cost of goods sold information reflecting current
customer contract terms.
3) Consideration and analysis of changes in customer base, product
mix, payor mix, State Medicaid and third-party insurance
reimbursement levels or other issues that may impact cost of goods
sold.
102
Accrued Health Insurance
NCS is self-insured for health insurance claims with a stop-loss
umbrella policy in place to limit the maximum potential liability for both
individual claims and total claims for a plan year. Health insurance claims are
paid as they are submitted to the plan administrator. NCS maintains an accrual
for claims that have been incurred but not yet reported, referred to as IBNR, to
the plan administrator and therefore have not been paid. NCS maintains an IBNR
reserve based on the historical claim lag period and current payment trends of
health insurance claims (generally 2 to 3 months).
NCS records a monthly expense for the health insurance plan in its
financial statements. The initial monthly expense for a plan year is determined
at the beginning of the plan year by reviewing historical claims experience and
the range of liability for the plan year as determined by the plan
administrator. The initial monthly expense is adjusted each month as necessary
to ensure that an adequate IBNR reserve level is maintained.
Obligations Under Prime Wholesaler Agreement
NCS purchases the majority of its inventory through one primary
pharmaceutical supplier. In fiscal 2001, NCS negotiated a temporary modification
of payment terms with this supplier. In June 2002, NCS entered into a letter of
intent with this supplier and is continuing its negotiations to achieve a
permanent modification in payment terms. In addition, NCS earns administrative
fees and amounts from certain other contractual arrangements under a prime
wholesaler agreement with this supplier. The administrative fees and amounts
from other contractual arrangements are accrued on a monthly basis based on
purchasing data and knowledge of the terms of the contractual arrangements. The
monthly accrual is adjusted to actual results when they are communicated to NCS.
The actual amounts due under the contractual arrangements are typically
communicated to NCS on a quarterly or annual basis based on the terms of the
contractual arrangements. As a result of the 2001 temporary modification of
payment terms, the supplier is withholding certain contractual amounts due to
NCS. Receivables from the supplier of $5.9 million and $12.2 million at June 30,
2001 and 2002, respectively, have been netted against accounts payable to the
supplier for financial reporting purposes. NCS believes that the receivables
arising from these contractual arrangements are collectible and is currently
operating under the letter of intent which provides for NCS to make monthly
payments to the supplier based on the net amount payable to the supplier.
Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued SFAS
No. 141 and SFAS No. 142.
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001. NCS adopted SFAS No. 141 on July 1, 2001.
NCS elected early adoption of SFAS No. 142 as of July 1, 2001. In
accordance with SFAS No. 142, goodwill and other indefinite lived intangible
assets will no longer be amortized. Under this non-amortization approach, SFAS
No. 142 requires that goodwill and other indefinite lived intangible assets be
reviewed for impairment using a fair value based approach upon adoption and at
least annually thereafter.
SFAS No. 142 provides a six-month transitional period from the
effective date of adoption for NCS to perform an assessment of whether there is
an indication that goodwill is impaired. To the extent that an indication of
impairment exists, NCS must perform a second test to measure the amount of the
impairment. For purposes of SFAS No. 142, NCS is considered to have one
reporting unit. NCS determined its implied fair value utilizing a market
capitalization approach and compared the fair value of NCS to its carrying
value. This evaluation indicated that goodwill was potentially impaired as of
July 1, 2001. As a result, NCS was required to complete the second step of the
transitional impairment test to measure the amount of the impairment. In
calculating the impairment, the implied fair value of goodwill was determined by
calculating the fair value of all tangible and intangible net assets through
appraisals, external valuations, quoted market prices and other valuation
methods. The implied fair value of goodwill was compared to the carrying value
of goodwill to measure the amount of the impairment. NCS recorded a non-cash
charge of $222.1 million as of July 1, 2001 to reduce the carrying value of its
goodwill as a result of the adoption of SFAS No. 142. As of June 30, 2002,
remaining goodwill was $80.5 million which is subject to continuing review of
impairment under a similar approach as described above.
103
The amount of the impairment primarily reflects the decline in NCS'
stock price and financial condition since the acquisitions were completed that
generated the goodwill. NCS observed significant negative industry and customer
trends during the three years prior to the valuation date of July 1, 2001,
including a net loss of $16.3 million, $114.5 million and $43.5 million for the
years ended June 30, 1999, 2000 and 2001, respectively. These trends primarily
related to increased bankruptcies and significant financial difficulties
experienced by NCS' skilled nursing facility customers primarily as a result of
the greater than expected adverse impact with regard to implementation of the
Medicare prospective payment system under the Balanced Budget Act.
SFAS No. 142 also requires goodwill to be tested annually and between
annual tests if events occur or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. NCS has
elected to perform its annual tests for indications of goodwill impairment as of
April 1 of each year. As of April 1, 2002, NCS' annual assessment indicated that
the remaining goodwill was not impaired.
The methodology of accounting for goodwill under SFAS No. 142 differs
from NCS' previous policy, in accordance with accounting standards existing at
that time, of using undiscounted cash flows over the remaining amortization
period to determine if goodwill is recoverable.
Intangible assets that will continue to be amortized under SFAS No. 142
consist primarily of non-compete covenants and debt issuance costs. Debt
issuance costs are included in other assets and are amortized using the
effective interest method over the life of the related debt. Non-compete
covenants are amortized on a straight-line basis over the life of the contracts
ranging from 3 to 11 years.
Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board, referred to
as "FASB," issued SFAS No. 144. SFAS No. 144 supersedes SFAS No. 121 and amends
APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business." This statement develops one accounting
model (based on the model in SFAS No. 121) for long-lived assets that are
disposed of by sale, as well as addresses the principal implementation issues.
SFAS No. 144 also expands the scope of discontinued operations and changes the
disclosure requirement for discontinued operations. This statement is effective
for fiscal years beginning after December 15, 2001. NCS does not expect this
standard to have a material impact on NCS' consolidated financial position,
results of operations or cash flows.
The FASB recently issued Statements of Financial Accounting Standards,
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
referred to as "SFAS No. 146." SFAS No. 146 addresses the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities or relocate employees, and
termination benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to exit an Activity
(including Certain Costs Incurred in a Restructuring)" and requires liabilities
associated with exit and disposal activities to be recognized when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002.
Certain Regulatory Investigations and Legal Proceedings
In addition to the matters related to the merger described in "The
Merger -- Litigation Relating to the Merger," in the ordinary course of its
business, NCS is subject to inspections, audits, inquiries and similar actions
by governmental authorities responsible for enforcing the laws and regulations
to which NCS is subject.
In January 1997, governmental authorities requested information from
NCS in connection with an audit and investigation of the circumstances
surrounding the apparent drug-related homicide of a non-management employee of
one of NCS' pharmacies. The information provided relates to NCS' inventory and
the possible theft of controlled substances from this pharmacy. The review
identified inadequacies in inventory record keeping and control at this
pharmacy. In a meeting with governmental authorities in August 1997, NCS
discussed its findings and those of the government and documented corrective
measures taken by NCS. In September 1998, NCS was notified by the United States
Department of Justice, United States Attorney for the Southern District of
Indiana, referred to as "USA-Indiana," that the United States Drug Enforcement
Administration had referred this matter to the Office of the USA-Indiana for
possible legal action involving certain numerous alleged violations of federal
law. The USA-Indiana invited NCS to contact the Office of the USA-Indiana in an
effort to resolve the matter. NCS subsequently contacted the Office of the
USA-Indiana and discussions regarding a possible settlement of this matter
ensued.
104
During December 1999, NCS and NCS HealthCare of Indiana, Inc., referred
to as "NCS Indiana," a wholly-owned subsidiary of NCS, reached a settlement with
the USA-Indiana regarding the previously disclosed federal investigation of NCS'
facility in Indianapolis, Indiana. Under the terms of the settlement, NCS paid
$4.1 million to the USA-Indiana. NCS also agreed to maintain its current level
of spending in connection with its compliance systems and procedures for a
period of three years. If NCS does not comply with the terms of the accord, an
additional $1.5 million will be payable to the USA-Indiana.
In January 1998, federal and state government authorities sought and
obtained various documents and records from a Herrin, Illinois pharmacy operated
by a wholly-owned subsidiary of NCS. NCS has cooperated fully and continues to
cooperate fully with the government's inquiry. In June 1999, representatives of
NCS met with attorneys with the Civil and Criminal Divisions of the Office of
the United States Department of Justice, United States Attorney for the Southern
District of Illinois, referred to as "USA-Illinois," regarding the government's
investigation. The USA-Illinois informed NCS that it had information that
allegedly substantiated numerous violations of federal law at that facility. In
May 2001, NCS reached a settlement with the Criminal Division of the
USA-Illinois regarding this investigation and recorded the settlement amount of
$0.45 million in the fiscal 2001 consolidated financial statements.
On June 7, 1999, a lawsuit was filed against NCS in the Superior Court
of Norfolk County, Massachusetts. Plaintiffs were certain selling stockholders
of the PharmaSource Group, Inc., which NCS acquired on September 17, 1997. The
complaint alleged breach of contract and unfair business practices arising out
of NCS' non-payment of certain amounts allegedly payable under the terms of an
earn-out provision included in the acquisition agreement. On January 21, 2000,
NCS reached a settlement of this litigation. Under the terms of the settlement,
NCS issued 1,750,000 Class A common shares and a $2 million convertible
subordinated debenture maturing on August 15, 2004. The note and accrued
"payment-in-kind" interest will be convertible into a maximum of 200,000 shares
of NCS Class A common stock at a conversion price of $8.00 per share.
NCS' subsidiary, NCS HealthCare of Illinois, Inc., referred to as "NCS
Illinois," and former owners of the Herrin, Illinois site, were named defendants
in a civil action filed under the federal civil False Claims Act in the United
States District Court for the Southern District of Illinois in the case
captioned "The United States of America, ex rel., Denise Crews, et al. v. Family
Nursing Home Services, Inc., et al." (Case No. 99-4020-GPM). On February 20,
2002, the United States of America filed a Notice of Election to Decline
Intervention. This notice was filed in camera and under seal. The complaint was
then served on NCS Illinois on July 12, 2002. On August 20, 2002, NCS was served
with a copy of a First Amended False Claims Complaint with jury demand in the
above-captioned matter in which NCS was also named as a defendant. The amended
complaint alleges violations of the federal and Illinois false claims acts and
seeks treble damages and a civil penalty in the amount of $10,000 for each false
claim.
105
On September 26, 2002, UBS Warburg LLC filed a complaint against NCS in
the Supreme Court of the State of New York for the County of New York, titled
UBS Warburg LLC (f/k/a Warburg Dillon Read LLC) v. NCS HealthCare, Inc. et al.,
Case No. 603546/02. The lawsuit seeks damages in connection with NCS' alleged
breach of certain engagement letters between NCS and UBS Warburg LLC. UBS
Warburg seeks a money judgment against NCS in excess of $12.5 million. NCS
believes that the allegations set forth in this lawsuit are without merit and
intends to contest them vigorously.
Principal Stockholders of NCS
The following table sets forth certain information with respect to
beneficial ownership of NCS common stock as of June 30, 2002, unless otherwise
indicated, by (i) each person known by NCS to be the beneficial owner of more
than five percent of any class of NCS common stock, (ii) each NCS director,
(iii) each NCS named executive officer and (iv) all NCS directors and executive
officers as a group.
Class A Common Stock Class B Common Stock
Beneficially Owned Beneficially Owned(1)
--------------------- ----------------------
Name Number Percent Number Percent
---- ------ ------- ------ -------
Jon H. Outcalt(2)....................................... 303,229(3) 1.6 3,476,086(4) 66.1
Kevin B. Shaw(2)........................................ 142,571(5) * 1,141,133(6) 21.7
William B. Byrum........................................ 157,085(7) * -- --
Richard L. Osborne...................................... 67,157(8) * 101,403 1.9
Boake A. Sells.......................................... 37,593(9) * 92,184 1.8
Gerald D. Stethem....................................... 67,333(10) * -- --
Thomas B. Mangum........................................ 36,666(11) * -- --
Natalie R. Wenger....................................... 56,289(12) * -- --
All directors and executive officers as a group (12
persons).............................................. 999,407(13) 5.4 4,810,806 91.5
----------------------------
* Less than one percent.
(1) Each share of NCS Class B common stock carries ten votes per share and is
convertible at any time into one share of NCS Class A common stock.
(2) The beneficial owner's address is c/o NCS HealthCare, Inc., 3201 Enterprise
Parkway, Suite 220, Beachwood, Ohio 44122.
(3) Includes (i) 32,063 shares of NCS Class A common stock held by Mr.
Outcalt's spouse, (ii) 170,000 shares of NCS Class A common stock held by
the custodian of an individual retirement account for the benefit of Mr.
Outcalt, and (iii) options to purchase 101,166 shares of NCS Class A common
stock that are exercisable within 60 days of June 30, 2002.
(4) Owner of record is the Jon H. Outcalt Trust.
(5) Includes (i) 28,905 shares of NCS Class A common stock held by Mr. Shaw's
spouse, and (ii) options to purchase 113,666 shares of NCS Class A common
stock that are exercisable within 60 days of June 30, 2002.
(6) Includes 184,370 shares of NCS Class B common stock owned of record by Mr.
Shaw's spouse.
(7) Includes (i) 280 shares of NCS Class A common stock held by the trustee of
an individual retirement account for the benefit of Mr. Byrum's spouse, and
(ii) options to purchase 109,666 shares of NCS Class A common stock that
are exercisable within 60 days of June 30, 2002.
(8) Includes options to purchase 17,500 shares of NCS Class A common stock that
are exercisable within 60 days of June 30, 2002.
(9) Includes options to purchase 23,333 shares of NCS Class A common stock that
are exercisable within 60 days of June 30, 2002.
(10) Represents options to purchase 67,333 shares of NCS Class A common stock
that are exercisable within 60 days of June 30, 2002.
(11) Represents options to purchase 36,666 shares of NCS Class A common stock
that are exercisable within 60 days of June 30, 2002.
(12) Includes options to purchase 55,666 shares of NCS Class A common stock that
are exercisable within 60 days of June 30, 2002.
(13) Includes options to purchase 649,661 shares of NCS Class A common stock
that are exercisable within 60 days of June 30, 2002.
106
As a result of the merger, each share of NCS Class A common stock and
each share of NCS Class B common stock will be converted into 0.1 of a share of
Genesis common stock. Genesis and NCS anticipate that Genesis will issue
approximately 2,371,680 shares of Genesis common stock to NCS stockholders in
the merger. Genesis and NCS also anticipate that Genesis will issue up to an
additional 251,758 shares of Genesis common stock upon the exercise of options
to purchase NCS common stock to be assumed by Genesis. Based on the number of
shares of Genesis common stock to be issued in the merger, excluding shares
subject to stock options to be assumed by Genesis, following the merger existing
Genesis shareholders will own approximately 94% and former NCS stockholders will
own approximately 6% of the outstanding common stock of Genesis. Accordingly,
the percentage of the outstanding common stock of Genesis of each beneficial
owner of more than five percent of any class of NCS common stock, each NCS
director and all NCS directors and executive officers as a group after the
merger will be approximately 6% of their percentage ownership of NCS.
Market Risk
NCS is exposed to certain market risks from transactions that are
entered into during the normal course of business. NCS has not entered into
derivative financial instruments for trading purposes. NCS' primary market risk
exposure relates to interest rate risk. NCS has managed its interest rate risk
by balancing its exposure between fixed and variable rates while attempting to
minimize its interest costs. NCS had a balance of $206.1 million on its senior
credit facility at June 30, 2002, which is subject to a variable rate of
interest based on the Prime rate. Assuming borrowings at June 30, 2002, a
one-hundred basis point change in interest rates would impact net interest
expense by approximately $2.1 million per year.
107
Price Range of Common Stock
Genesis common stock currently trades on the Nasdaq National Market
under the symbol "GHVI." From October 15, 2001 until February 7, 2002, Genesis
common stock traded on the OTC Bulletin Board under the symbol "GHVE." The
Genesis common stock that was cancelled in connection with Genesis'
reorganization under the United States Bankruptcy Code, was traded on the New
York Stock Exchange through June 22, 2000 and on the OTC Bulletin Board
thereafter.
NCS Class A common stock is traded on the Pink Sheets Electronic
Quotation Service under the symbol "NCSS." Between December 8, 1999 and October
9, 2000, NCS Class A common stock was traded on the Nasdaq SmallCap Market.
Prior to December 8, 1999, NCS Class A common stock was traded on the Nasdaq
National Market. Following the merger, Genesis will deregister the NCS Class A
common stock under the Exchange Act, and the NCS Class A common stock of NCS
will cease trading on the Pink Sheets Electronic Quotation Service. There is no
established trading market for NCS Class B common stock.
The following table sets forth for each of the quarters in the fiscal
year ended September 30, 2000 and September 30, 2001, the range of high and low
closing prices of the Genesis common stock that was cancelled in connection with
Genesis' reorganization under the United States Bankruptcy Code as reported on
the New York Stock Exchange through June 22, 2000 and on the OTC Bulletin Board
thereafter. The following table also shows for each of the quarters in the
fiscal year ended September 30, 2002 the range of high and low sales prices of
the Genesis common stock on the OTC Bulletin Board through February 7, 2002 and
on the Nasdaq National Market thereafter:
Genesis
-------
High Low
---- ---
Fiscal Year Ended September 30, 2000:
First Quarter.......................................... $2.94 $1.94
Second Quarter......................................... 3.50 0.56
Third Quarter.......................................... 0.75 0.02
Fourth Quarter......................................... 0.31 0.06
Fiscal Year Ended September 30, 2001:
First Quarter.......................................... $0.20 $0.03
Second Quarter......................................... 0.41 0.11
Third Quarter.......................................... 0.36 0.02
Fourth Quarter......................................... 0.08 0.01
Fiscal Year Ended September 30, 2002:
First Quarter.......................................... $24.00 $19.50
Second Quarter......................................... 21.50 14.05
Third Quarter.......................................... 20.09 18.45
Fourth Quarter......................................... 18.80 14.66
Fiscal Year Ended September 30, 2003:
First Quarter (through [ ] ) ......................... $ $
The following table sets forth for the periods indicated the range of
high and low sale prices of the NCS Class A common stock, as reported on the
Pink Sheets Electronic Quotation Service and the Nasdaq SmallCap Market:
108
NCS
---
High Low
---- ---
Fiscal Year Ended June 30, 2001:
First Quarter....................................... $0.69 $0.25
Second Quarter...................................... 0.47 0.09
Third Quarter....................................... 0.50 0.16
Fourth Quarter...................................... 0.35 0.17
Fiscal Year Ended June 30, 2002:
First Quarter....................................... $0.25 $0.16
Second Quarter...................................... 0.24 0.12
Third Quarter....................................... 0.19 0.07
Fourth Quarter...................................... 0.26 0.11
Fiscal Year Ended June 30, 2003:
First Quarter....................................... $0.27 $2.58
Second Quarter (through [ ], 2002)......... $ $
On July 26, 2002, the last full trading day prior to the public
announcement of the proposed merger on which shares of Genesis common stock were
traded, the highest sales price of Genesis common stock was $16.25 per share,
the lowest sales price of Genesis common stock was $15.53 per share and the last
reported sales price of Genesis common stock was $16.00 per share. On [ ],
2002, the latest practicable date prior to the printing of this proxy
statement/prospectus, the last reported sales price of Genesis common stock was
$[ ] per share. Genesis and NCS urge NCS stockholders to obtain current market
quotations prior to making any decisions with respect to the merger.
On July 26, 2002, the last full trading day prior to the public
announcement of the proposed merger and Omnicare, Inc.'s public announcement of
its interest in acquiring NCS, the highest sales price of NCS Class A common
stock was $0.81 per share, the lowest sales price of NCS Class A common stock
was $0.71 per share and the last reported sales price of NCS Class A common
stock was $0.74 per share. On [ ], 2002, the latest practicable date prior to
the printing of this proxy statement/prospectus, the last reported sales price
of NCS Class A common stock was $[ ] per share. Genesis and NCS urge NCS
stockholders to obtain current market quotations prior to making any decisions
with respect to the merger.
As of [ ], 2002 there were [ ] holders of record of Genesis common
stock and [ ] holders of record of NCS Class A common stock and [ ] holders
of NCS Class B common stock.
109
Description of Genesis Capital Stock
The following summary of Genesis capital stock is qualified in its
entirety by reference to Genesis' amended and restated articles of
incorporation, which are referred to as "Genesis' articles of incorporation,"
and Genesis' amended and restated bylaws, as amended, which are referred to as
"Genesis' bylaws."
Common Stock
Genesis is authorized to issue 200,000,000 shares of common stock,
$0.02 par value per share. As of August 9, 2002, 40,602,659 shares of Genesis
common stock were outstanding and 815,150 are to be issued in connection with
Genesis' plan of reorganization.
The holders of Genesis common stock are entitled to one vote per share
on all matters to be voted upon by shareholders. Subject to the relative rights,
limitations and preferences of the holders of any then outstanding Genesis
preferred stock, holders of Genesis common stock are entitled, among other
things, (i) to share ratably in dividends if, when and as declared by the board
of directors out of funds legally available therefor and (ii) in the event of
liquidation, dissolution or winding-up of Genesis, to share ratably in the
distribution of assets legally available therefor, after payment of debts and
expenses. The holders of Genesis common stock do not have cumulative voting
rights in the election of directors and have no preemptive rights to subscribe
for additional shares of capital stock of Genesis. There are no redemption or
sinking fund provisions applicable to shares of Genesis common stock. All
outstanding shares of Genesis common stock are fully paid and non-assessable.
Fully paid shares of Genesis common stock are not liable to further call or
assessment. The rights, preferences and privileges of holders of Genesis common
stock are subject to the terms of any series of preferred stock which Genesis
may issue in the future.
For a description of the provisions of Genesis' articles of
incorporation and provisions of Genesis' bylaws that may have the effect of
delaying, deferring or preventing a change in control of Genesis, see
"Description of Genesis Capital Stock -- Anti-Takeover Provisions."
Preferred Stock
Genesis has authority to issue 10,000,000 shares of preferred stock.
Genesis' articles of incorporation authorize the board of directors, without any
further action by the holders of Genesis common stock, to issue preferred stock
in one or more series and to designate relative rights and preferences of shares
of preferred stock. The board's designation of rights and preferences can
include preferences as to liquidation, redemption, conversion or voting rights,
dividends or other preferences, any of which may be dilutive of the interest of
the holders of the common stock or of the preferred stock of any other series.
Series A Convertible Preferred Stock
The Genesis board of directors designated 1,000,000 shares, par value
$0.01 per share, of preferred stock as the Series A convertible preferred stock,
referred to as "Series A convertible preferred stock." As of August 9, 2002,
421,796 shares of Series A convertible preferred stock were outstanding. The
material rights and limitations of Series A convertible preferred stock are
described below.
Dividends
The holders of Series A convertible preferred stock are entitled to
receive preferential dividends at the dividend rate of 6% per annum on the
liquidation preference of $100 per share, payable quarterly in cash or in the
issuance of additional shares of Series A convertible preferred stock, when, as
and if declared by the Genesis board of directors. Dividends are cumulative and
accrue from the date of the original issuance of Series A convertible preferred
stock, whether or not declared and whether or not there are net profits or net
assets of Genesis legally available for the payment of those dividends.
Dividends not paid on the applicable payment date are added to the then
effective liquidation preference on the relevant dividend payment date. Each
payment or accumulated and unpaid dividends for past dividend periods
automatically reduce the then effective liquidation preference per share by an
amount equal to the aggregate amount of payment divided by the number of shares
of Series A convertible preferred stock outstanding on the record date relating
to subsequent dividend payment dates.
110
Liquidation Preferences
In the event of Genesis' liquidation, dissolution or winding up, the
holders of Series A convertible preferred stock then outstanding will be
entitled to be paid out of Genesis' assets available for distribution to
shareholders, before any payment or declaration will be made in respect of any
shares of Genesis common stock or any share of any other class or series of
Genesis preferred stock ranking junior to Series A convertible preferred stock,
an amount equal to the liquidation preference of $100 per share plus all
declared or accrued and unpaid dividends.
Voting Rights
General. Holders of Series A convertible preferred stock are entitled
to vote on all matters voted on by the holders of Genesis common stock, voting
together as a single class with other shares entitled to vote at all meetings of
Genesis' shareholders. A holder of Series A convertible preferred stock can cast
the number of votes equal to the number of shares of Genesis common stock into
which the holder's shares of Series A convertible preferred stock are
convertible on the record date for the vote.
Class Vote. The affirmative vote of the holders of at least a majority
of the outstanding shares of Series A convertible preferred stock, voting
together as a class at a meeting of shareholders or pursuant to a written
consent of shareholders, is necessary to:
o amend Genesis' articles of incorporation to change the terms,
powers, preferences or special rights of the shares of Series A
convertible preferred stock or grant waivers thereof, or which
would adversely affect the rights of Series A convertible
preferred stock;
o issue any shares of Genesis capital stock ranking senior to, or
pari passu with, Series A convertible preferred stock or issue any
securities convertible into or exchangeable for shares of Genesis
capital stock ranking senior to, or pari passu with, Series A
convertible preferred stock; or
o enter into any transaction or series of transactions that would
constitute an "organic change" if the terms of the transaction(s)
do not require the redemption of the balance of Series A
convertible preferred stock.
The term "organic change" means:
o any sale, lease, exchange or other transfer of all or
substantially all of Genesis' property and assets;
o any liquidation, dissolution or winding up of Genesis;
o any merger or consolidation to which Genesis is a party and
results in holders of Genesis voting securities immediately prior
to the merger or consolidation owning less than a majority of the
outstanding voting securities of the surviving entity immediately
following the merger or consolidation; or
o any transaction as a result of which a person or group of persons
will beneficially own 50% or more of Genesis voting securities
then outstanding.
Redemption
Optional Redemption. If an organic change occurs, at the option of a
holder of outstanding Series A convertible preferred stock, Genesis will redeem,
at the redemption price equal to the sum of the liquidation preference of $100
per share plus an amount equal to all accrued and unpaid dividends per share,
those outstanding shares of Series A convertible preferred stock that the holder
of Series A convertible preferred stock has elected to redeem.
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Genesis, at any time and from time to time, has the option to redeem
shares of Series A convertible preferred stock provided that Genesis redeems on
a pro rata basis from all holders of Series A convertible preferred stock.
Mandatory Redemption. Genesis will redeem at the redemption price equal
to the sum of the liquidation preference of $100 per share plus an amount equal
to all accrued and unpaid dividends per share:
o all of the outstanding Series A convertible preferred stock on the
ninth anniversary of the date of the original issuance of shares
of Series A convertible preferred stock; and
o outstanding Series A convertible preferred stock on a pro rata
basis from net cash proceeds actually received by Genesis from
certain specified transactions including:
o the sale of certain property;
o the exercise of the warrants to purchase up to 4,559,475
shares of Genesis common stock for an exercise price of $20.33
issued on or about September 28, 2001, referred to as the "new
warrants;"
o any settlement or resolution of claims filed by Genesis as of
September 28, 2001 against the federal government with respect
to disputed receivables payable to Genesis;
o the settlement or resolution of the claims of Genesis and
Genesis' subsidiaries as of September 28, 2001 against related
nursing home owners affiliated with AGE Holdings, Inc. for,
among other things, unpaid receivables; and
o the issuance of any share of Genesis common stock for cash,
excluding issuances of Genesis common stock upon conversion of
the new warrants or Series A convertible preferred stock, any
issuances of common stock in connection with any acquisition
or merger by Genesis or issuances of common stock, the
proceeds of which should be paid to creditors of Genesis.
Conversion
Each share of Series A convertible preferred stock is convertible at
any time and from time to time, at the option of the holder (optional
conversion) and all shares of Series A convertible preferred stock will be
converted at any time after the first anniversary of the date of original
issuance of shares of Series A convertible preferred stock if the average market
price for a share of Genesis common stock for 20 consecutive trading days
exceeds $30.00 (as adjusted from time to time to reflect stock splits,
dividends, recapitalizations, combinations or the like), at the option of
Genesis (a mandatory conversion), in each case into fully paid and nonassessable
shares of Genesis common stock.
Each share of Series A convertible preferred stock is convertible into
the number of shares of Genesis common stock which results from dividing (x) the
liquidation preference of $100 per each such share plus all accrued and unpaid
dividends by (y) the conversion price per share of $20.33 subject to adjustment,
provided that, upon any conversion of shares of Series A convertible preferred
stock, Genesis will have the right to pay to the converting holder in cash the
accrued and unpaid dividends on the shares of Series A convertible preferred
stock to be converted.
In case of any organic change or any other merger or consolidation to
which Genesis is a party, each share of Series A convertible preferred stock
then outstanding, other than those shares to be redeemed by Genesis pursuant to
the terms of Genesis' articles of incorporation, will be convertible into, the
kind and amount of shares of stock and other securities and property receivable
(including cash) by a holder of that number of shares of Genesis common stock
into which one share of Series A convertible preferred stock was convertible
immediately prior to the organic change.
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Reissuance
No Series A convertible preferred stock acquired by Genesis by reason
of redemption, purchase, or otherwise will be reissued, and all shares
reacquired by Genesis will be cancelled, retired and eliminated from the shares
that Genesis is authorized to issue.
Warrants
In connection with the Genesis' reorganization under the United States
Bankruptcy Code, Genesis issued warrants which are exercisable to purchase up to
4,559,475 shares of Genesis common stock, subject to adjustment. The warrants
are exercisable until October 2, 2002. The exercise price of each warrant is
$20.33 per share of Genesis common stock, subject to adjustment.
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Comparison of Stockholder's Rights
The rights of Genesis shareholders are governed by Genesis' articles of
incorporation, Genesis' bylaws and Pennsylvania corporation law. The rights of
NCS stockholders are governed by NCS' certificate of incorporation, NCS' bylaws
and Delaware corporation law. After the merger is completed, the rights of the
NCS stockholders who become Genesis shareholders will be governed by Genesis'
articles of incorporation, Genesis' bylaws and Pennsylvania corporation law.
The following is a summary of the material differences between Genesis'
shareholder's rights and NCS' stockholder's rights. This summary is not intended
to be complete and is qualified in its entirety by references to applicable
provisions of Pennsylvania corporation law, Delaware corporation law, Genesis'
articles of incorporation and bylaws and NCS' certificate of incorporation and
bylaws.
Capital
Genesis. Genesis has the authority to issue 210,000,000 shares of
capital stock consisting of:
o 200,000,000 shares of common stock with a par value of $0.02 per
share; and
o 10,000,000 shares of preferred stock, 1,000,000 of which are
designated as Series A convertible preferred stock with a par
value of $0.01 per share.
NCS. NCS has the authority to issue 71,000,000 shares of capital stock
consisting of:
o 50,000,000 shares of Class A common stock with a par value of
$0.01 per share;
o 20,000,000 shares of Class B common stock with a par value of
$0.01 per share; and
o 1,000,000 shares of preferred stock with a par value of $0.01 per
share.
Preferred Stock
Genesis. Genesis' articles of incorporation authorize the Genesis board
of directors to issue, from time to time, 10,000,000 shares of preferred stock
in one or more series. Prior to issuance of a series of preferred stock, the
Genesis board of directors may fix the designation and powers, preferences,
rights, qualifications, limitations and restrictions relating to the shares of
the series. Currently, 1,000,000 shares of preferred stock are designated as
Series A convertible preferred stock. See "Description of Genesis Capital Stock
-- Series A Convertible Preferred Stock."
NCS. NCS' certificate of incorporation authorizes the NCS board of
directors to issue, from time to time, 1,000,000 shares of preferred stock in
one or more series and to fix or alter the designations and powers, preferences,
rights, qualifications, limitations and restrictions of such preferred stock. As
of the date of the proxy statement/prospectus, NCS has not issued preferred
stock.
Stockholder Voting
Genesis
General. Corporate actions taken by vote of Genesis' shareholders are
authorized upon receiving the affirmative vote of a majority of the votes cast
by all Genesis' shareholders entitled to vote on such action. Genesis cannot
issue non-voting capital stock to the extent prohibited by Section 1123(a)(6) of
Title 11 of the United States Bankruptcy Code. Therefore, both Genesis common
stock and Series A convertible preferred stock have voting rights. The holders
of Genesis Series A convertible preferred stock have the right to vote on all
matters voted on by the holders of Genesis common stock, voting together as a
single class. With respect to any such vote, a holder of Series A convertible
preferred stock can cast the number of votes equal to the number of shares of
Genesis common stock into which the holder's shares of Series A convertible
preferred stock are convertible on the record date for the vote.
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Pursuant to the applicable provisions of Pennsylvania corporation law,
the candidates for election as directors receiving the highest number of votes
present in person or represented by proxy and entitled to vote in connection
with the election of directors at the annual meeting will be elected to the
board of directors.
Quorum. In general, the presence, in person or by proxy, of
shareholders entitled to cast at least a majority of the votes that all
shareholders are entitled to cast on a particular matter to be acted upon at a
meeting of the shareholders is necessary to constitute a quorum for the purpose
of action on the matter. To the extent that a quorum is present with respect to
certain, but not all matters, to be voted on at the shareholders' meeting,
action on the matters for which a quorum is present may occur. After such
action, the meeting may be adjourned for purposes of action on the matters for
which a quorum is not present.
Approval of Business Combinations. Any business combination, except for
a business combination approved by the affirmative vote of at least 75% of the
entire board of directors of Genesis, will require the affirmative vote of the
holders of at least 80% of the voting power of the then outstanding shares of
Genesis capital stock entitled to vote in the election of directors, voting
together as a single class. The term "business combination" means:
o any merger or consolidation of Genesis or any direct or indirect
subsidiary of Genesis;
o any sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of Genesis or any direct or
indirect subsidiary of Genesis, excluding financing transactions,
such as sale-leaseback transactions;
o the adoption of any plan or proposal for the liquidation or
dissolution of Genesis; or
o any reclassification of securities, including any reverse stock
split, or recapitalization of Genesis, or any merger or
consolidation of Genesis with any of its direct or indirect
subsidiaries.
Class Voting. The affirmative vote of the holders of at least a
majority of the outstanding shares of Genesis Series A convertible preferred
stock, voting together as a class at a meeting of shareholders or pursuant to a
written consent of shareholders, is necessary to:
o amend Genesis' articles of incorporation to change the terms,
powers, preferences or special rights of the shares of Series A
convertible preferred stock, provided that no amendment may,
without the consent of each holder of Series A convertible
preferred stock affected by the amendment:
o change the redemption date of Series A convertible preferred
stock;
o raise the conversion price or reduce the liquidation
preference, dividend rate or redemption price of
Series A convertible preferred stock;
o adversely affect any of the conversion features of Series A
convertible preferred stock described above; or
o reduce the percentage of outstanding Series A convertible
preferred stock necessary to modify or amend its terms;
o issue any shares of Genesis capital stock ranking senior to, or
pari passu with, Series A convertible preferred stock or issue any
securities convertible into or exchangeable for shares of Genesis'
capital stock ranking senior to, or pari passu with, Series A
convertible preferred stock; or
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o enter into any transaction or series of transactions that would
constitute an "organic change" if the terms of the transactions do
not require the redemption of the balance of Series A convertible
preferred stock, which could not be previously redeemed due to
insufficient funds.
NCS.
General. Holders of NCS Class A common stock and holders of NCS Class B
common stock are entitled to one and ten votes, respectively, on all matters
submitted to a vote of stockholders. In general, the affirmative vote of holders
of a majority of NCS' voting power entitled to vote and present (or represented
by a properly executed and delivered proxy) at a meeting at which a quorum is
present is required to approve a matter submitted to a vote of stockholders.
A plurality of the votes present in person or represented by proxy is
required to elect a nominee to the board of directors. The term "plurality"
means that the individuals who receive the largest number of votes cast are
elected as directors up to the maximum number of directors to be chosen at the
meeting.
Quorum. In general, the presence, in person or by proxy, of the holders
of a majority of NCS' voting power entitled to vote at a meeting is necessary to
constitute a quorum to permit action by stockholders. When a series or class of
stock is voting as a series or class, however, the holders of a majority of NCS'
voting power of such series or class entitled to vote at a meeting is necessary
to constitute a quorum to permit action by stockholders.
Approval of Business Combinations. NCS' certificate of incorporation
provides that a business combination between NCS and a "related person" requires
(1) approval by 66 2/3% or more of the voting power of the NCS common stock; and
(2) approval by 51% or more of the voting power of the NCS common stock held by
stockholders other than the related person. The term "related person" means any
person or entity that is, directly or indirectly, the beneficial owner of shares
of common stock representing 5% or more of NCS' voting power, including any
affiliate or associate of such person or entity. The term "business combination"
means virtually any transaction between NCS and a related person, including a
merger, consolidation or sale of assets.
The 66 2/3% and 51% voting requirement is not applicable, however, if
the related person pays a fair price to NCS' stockholders or if a majority of
the NCS board of directors approves the transaction. The term "fair price" means
a price that is at least equal to the greatest of:
o the highest price paid or agreed to be paid by the related person
to purchase any shares of NCS common stock;
o the highest market price of any NCS common stock during the
24-month period prior to the taking of such vote; and
o the per share book value of NCS Class A common stock at the end of
the calendar quarter immediately preceding the taking of such
vote.
In addition, the fair price consideration to be received by NCS'
stockholders must be of the same form and of the same kind as the most favorable
form and kind of consideration paid by the related person in acquiring any of
the shares of NCS common stock already held by such related person.
Class Voting. In general, holders of NCS Class A common stock and NCS
Class B common stock vote together as a single class on all matters submitted to
a vote of stockholders. Holders of NCS Class A common stock and NCS Class B
common stock, however, vote separately as a class with respect to amendments to
NCS' certificate of incorporation that would increase the authorized number of
shares of NCS Class B common stock or that would make other amendments to NCS'
certificate of incorporation (other than increases in the number of authorized
shares of NCS Class A common stock) that adversely change the designations,
powers, preferences, qualifications, limitations, restrictions or the relative
or special rights of either NCS Class B common stock or NCS Class A common
stock.
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Cumulative Voting
Genesis. Holders of Genesis common stock do not have cumulative voting
rights in the election of directors.
NCS. Holders of NCS Class A common stock and NCS Class B common stock
do not have cumulative voting rights in the election of directors.
Meeting of Stockholders and Action by Written Consent
Genesis. Genesis' shareholders can take action by voting at an annual
or special shareholders' meeting or by written consent of all shareholders who
would be entitled to vote at a meeting. Genesis' articles of incorporation
provide that special meetings of the shareholders may be called by the chairman
of the board or by the secretary at the request in writing of a majority of the
board of directors or shareholders entitled to cast 30% of the votes which all
shareholders are entitled to cast at the particular meeting. Any such request of
directors or shareholders should state the purpose of the proposed meeting.
NCS. NCS' stockholders can vote on all matters submitted to a vote of
stockholders at an annual or special meeting. Holders of NCS Class A common
stock and NCS Class B common stock may not act by written consent. NCS' bylaws
provide that special meetings of the stockholders may be called by the chairman
of the board, by the president, or by the board of directors pursuant to a
resolution adopted by a majority of the total number of directors that NCS would
have if there were no vacancies.
Preemptive Rights
Genesis. Holders of Genesis common stock do not have preemptive rights
to subscribe for additional shares of capital stock of Genesis.
NCS. Holders of NCS Class A common stock and NCS Class B common stock
do not have preemptive rights to subscribe for additional shares of NCS capital
stock.
Amendment of Governing Documents
Genesis
Amendment of Articles of Incorporation. The Genesis board of directors
may adopt certain changes to the articles of incorporation, which generally
would not materially affect the rights of Genesis' shareholders, without
shareholder approval. Under Pennsylvania corporation law, a proposed amendment
of the articles of incorporation that requires shareholder approval should be
adopted by an affirmative vote of a majority of the votes cast by all
shareholders entitled to vote on the proposal unless the articles of
incorporation provides for a greater vote.
Pursuant to the terms of Genesis' articles of incorporation, the
amendment of certain of its provisions, including, but not limited to, the
classification and composition of the board of directors, special meetings of
shareholders, business combinations and tender offers, requires an affirmative
vote of at least 80% of the holders of Genesis' common stock and Series A
convertible preferred stock, voting together as a class. However, if at least
75% of the Genesis board of directors approves such amendment, Genesis'
shareholders may approve the amendment by the affirmative vote of the holders of
a majority of Genesis outstanding capital stock, voting together as a single
class. See "-- Stockholder Voting -- Genesis."
The amendment of provisions of the articles of incorporation relating
to the Series A convertible preferred stock requires the affirmative vote of the
holders of at least a majority of the outstanding shares of Genesis Series A
convertible preferred stock, voting together as a class. See "-- Stockholder
Voting -- Genesis."
Amendment of Bylaws. Genesis' bylaws may be amended or repealed by a
majority vote of the members of the Genesis board of directors present and
voting at any meeting of the board. Genesis' shareholders may also amend or
repeal the bylaws as follows:
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o in the case of an amendment or repeal that has previously received
the approval of the board of directors, by a majority of the votes
cast by shareholders at any shareholders' meeting; and
o in the case of an amendment or repeal that has not previously
received the approval of the board of directors, by a vote of
shareholders entitled to cast at least 75% of the votes which all
shareholders are entitled to cast at any meeting of the
shareholders.
The section of the bylaws dealing specifically with an amendment of
bylaws may be amended or repealed only by a vote of shareholders entitled to
cast at least 75% of the votes which all shareholders are entitled to cast at
any meeting of shareholders.
NCS.
Amendment of NCS' Certificate of Incorporation. If an amendment has
been proposed and authorized by the affirmative vote of majority of the NCS
board of directors or relates to provisions of NCS' certificate of incorporation
regarding name, registered office, purpose, capital stock, bylaws, or NCS'
certificate of incorporation, then such amendment must be authorized by the
affirmative vote of a majority of NCS' voting power entitled to vote.
If an amendment relates to provisions of NCS' certificate of
incorporation regarding voting rights of stockholders and dividends and
distributions, board of directors, certain business combinations, amendments,
liability of directors, or the Delaware business combination act and has not
been authorized by the affirmative vote of a majority of the NCS board of
directors, then such amendment must be authorized by the affirmative vote of:
(i) 66 2/3% of the voting power of NCS common stock entitled to vote; and (ii)
51% of the voting power of NCS common stock entitled to vote held by persons
other than the related person. See "-- Stockholder Voting -- NCS."
Amendment of Bylaws. NCS' bylaws may be amended by either the
affirmative vote of a majority of the NCS board of directors or by the
affirmative vote of a majority of NCS' voting power entitled to vote.
Size and Classification of the Board of Directors
Genesis. At present, the Genesis board of directors consists of eight
members and it is not classified.
At the first meeting of shareholders for the election of directors
following the effective date of Genesis' articles of incorporation (October 2,
2001), the board of directors will be divided into three classes, Class I, Class
II and Class III, which will be as nearly equal in number as possible. Each
director will serve for a term ending on the date of the third annual meeting
following the annual meeting at which such director was elected; provided,
however, that each director in Class I will hold office until the first annual
meeting of shareholders following the meeting at which such director was elected
(or until the action of shareholders in lieu of the meeting); each director in
Class II will hold office until the second annual meeting of shareholders
following the meeting at which such director was elected (or until the action of
shareholders in lieu of the meeting); and each director in Class III will hold
office until the third annual meeting of shareholders following the meeting at
which such director was elected (or until the action of shareholders in lieu of
the meeting).
Pursuant to Genesis' bylaws, the board of directors, after an initial
one year term following the effectiveness of Genesis' plan of reorganization,
which became effective on October 2, 2001, will consist of not less than eight
nor more than 13 directors as may be established from time to time by a majority
vote of the directors. Genesis' articles of incorporation provide that the
number of directors determined by the board of directors may be changed only by
receiving the affirmative vote of (i) the holders of at least 80% of all the
shares of Genesis then entitled to vote on the change, or (ii) 75% of the
directors in office at the time of vote. When the number of directors is
changed, any increase or decrease in the number of directorships will be
apportioned among the classes so as to make all classes as nearly equal in
number as possible.
Each director serves until his or her successor is elected and
qualified or until his death, retirement, resignation or removal. Should a
vacancy occur or be created, whether arising through death, resignation,
retirement or removal of a director, such vacancy will be filled by a majority
vote of the remaining directors. A director so elected to fill a vacancy will
serve for the remainder of the then present term of office of the class to which
he was elected.
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NCS. NCS' certificate of incorporation sets the board of directors at
no less than three nor more than 15. NCS' bylaws fix the number of the board of
directors of NCS at seven subject to the right of the board to change the number
by resolution. The board of directors of NCS is currently comprised of four
members with two vacancies. The directors serve staggered terms of three years,
with the members of one class being elected in any year, as follows:
o Class I Directors-- NCS does not currently have any Class I
directors;
o Class II Directors -- Boake A. Sells and Kevin B. Shaw have been
designated as Class II directors and will serve until the 2003
annual meeting of stockholders and until their respective
successors are elected and qualified; and
o Class III Directors -- Richard L. Osborne and Jon H. Outcalt have
been designated as Class III directors and will serve until the
2004 annual meeting of stockholders until their respective
successors are elected and qualified.
Removal of Directors
Genesis. Any director, or the entire board of directors, may be removed
from office at any time, with or without cause, but only by the affirmative vote
of the holders of at least 80% of all of the outstanding shares of capital stock
of Genesis entitled to vote for that purpose, except that if the board of
directors, by an affirmative vote of at least 75% of the entire board of
directors, recommends removal of a director to the shareholders, such removal
may be effected by the affirmative vote of the holders of at least a majority of
the outstanding shares of capital stock of Genesis entitled to vote on the
election of directors at a meeting of shareholders called for that purpose.
NCS. A director, or the entire board of directors, may be removed from
office at any time, but only with cause and only by the affirmative vote of the
holders of at least 66 2/3% of NCS' voting power entitled to vote.
Shareholder Approval of Business Combinations With Interested Shareholders
Genesis. Under Pennsylvania corporation law, subject to certain
exceptions, a business combination between a Pennsylvania corporation that has a
class or series of shares registered under the Exchange Act, and a beneficial
owner of 20% or more of such corporation's voting stock, referred to as an
"interested person," may be accomplished only if:
o the business combination is approved by the corporation's
directors prior to the date on which such person acquired 20% or
more of such stock or if the board approved such person's
acquisition of 20% or more of such stock prior to such
acquisition;
o the interested person owns shares entitled to cast at least 80% of
the votes all shareholders would be entitled to cast in the
election of directors, the business combination is approved by the
vote of shareholders entitled to cast a majority of votes that all
shareholders would be entitled to cast in an election of directors
(excluding shares held by the interested person), which vote may
occur no earlier than three months after the interested person
acquired its 80% ownership, and the consideration received by
shareholders in the business combination satisfies certain minimum
conditions;
o the business combination is approved by the affirmative vote of
all outstanding shares of common stock;
o the business combination is approved by the vote of shareholders
entitled to cast a majority of the votes that all shareholders
would be entitled to cast in the election of directors (excluding
shares held by the interested person), which vote may occur no
earlier than five years after the interested person became an
interested person; or
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o the business combination that meets certain minimum conditions is
approved at a shareholder's meeting called for such purpose no
earlier than five years after the interested person became an
interested person.
A corporation may exempt itself from this provision by an amendment to
its articles of incorporation that requires shareholder approval. Genesis'
articles of incorporation do not provide an exemption from this provision.
Pennsylvania has also adopted other anti-takeover legislation from which Genesis
has elected to exempt itself in its articles of incorporation.
NCS. Section 203 of Delaware corporation law imposes a three-year
moratorium on "business combinations" between a Delaware corporation whose stock
generally is publicly traded or held of record by more than 2,000 stockholders
and a stockholder owning 15% or more of a corporation's outstanding voting
stock, referred to as an "interested stockholder," or an affiliate or associate
of such "interested stockholder" unless:
o prior to an interested stockholder becoming such, the board of
directors of the corporation approved either the business
combination or the transaction resulting in the interested
stockholder becoming such;
o upon completion of the transaction resulting in the interested
stockholder becoming such, the interested stockholder owns 85% of
the voting stock outstanding at the time the transaction commenced
(excluding, from the calculation of outstanding shares, shares
beneficially owned by directors who are also officers and certain
employee stock plans); or
o on or after an interested stockholder becomes such, the business
combination is approved by (i) the board of directors and (ii)
holders of at least 66 2/3% of the outstanding shares, other than
those shares beneficially owned by the interested stockholder, at
a meeting of stockholders.
Under Delaware corporation law, the term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries and transactions which increase
an interested stockholder's percentage ownership of stock.
Anti-Takeover Provisions
Genesis. Genesis is governed by Pennsylvania corporation law which
provides that the board of directors of a corporation in discharging its duties,
including its response to a potential merger or takeover, may consider the
effect of any action upon employees, shareholders, suppliers, customers and
creditors of the corporation as well as upon communities in which offices or
other establishments of the corporation are located and all other pertinent
factors.
Genesis' articles of incorporation contain certain provisions that may
have an impact upon a person's decision to implement a takeover of Genesis,
including the following provisions:
o a classified board of directors beginning at the first shareholder
meeting for the election of directors after October 2, 2002, with
each director having a three-year term;
o a provision providing that certain business combinations involving
Genesis, unless approved by at least 75% of the board of
directors, will require the affirmative vote of at least 80% of
the voting stock of Genesis;
o a provision permitting the board of directors to oppose a tender
or other offer for Genesis' constituents and to consider any
pertinent issue in connection with such offer including, but not
limited to, the reputation of the offeror, the value of the
offered securities and any applicable legal or regulatory issues
raised by the offer;
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o a provision requiring the affirmative vote of at least 80% of
Genesis' voting stock to amend its provisions relating to
anti-takeover measures, unless the amendment is approved by at
least 75% of the board of directors; and
o preferred stock with rights to be designated by the board of
directors.
The overall effect of the foregoing provisions, including the
provisions under "-- Shareholder Approval of Business Combinations with
Interested Shareholders," may be to deter a future tender offer or other offers
to acquire Genesis or its shares. Shareholders might view such an offer to be in
their best interest should the offer include a substantial premium over the
market price of the common stock at that time. In addition, these provisions may
have the effect of assisting Genesis' management to retain its position and
place it in a better position to resist changes that the shareholders may want
to make if dissatisfied with the conduct of Genesis' business.
NCS. Certain provisions of Delaware corporation law and NCS'
certificate of incorporation and bylaws may affect a person's decision to
implement a takeover of NCS including the following provisions:
o a provision requiring a classified board of directors, with each
director having a three-year term;
o a two-tiered business combination provision that requires business
combinations with related persons to be approved by (1) 66 2/3% or
more of the voting power of the NCS common stock entitled to vote
and (2) 51% or more of the voting power of NCS common stock
entitled to vote held by stockholders other than the related
person. The 66 2/3% requirement and the 51% requirement are not
applicable, however, if the related person pays a fair price to
NCS' stockholders for the shares or if a majority of the board of
directors approves the transaction. See "-- Stockholder Voting --
NCS -- Approval of Business Combinations;"
o a provision requiring the affirmative vote of at least (1) 66 2/3%
of the voting power of NCS common stock entitled to vote; and (2)
51% of the voting power of NCS common stock entitled to vote held
by persons other than the related person to amend NCS'
anti-takeover provisions, unless the amendment is approved by the
affirmative vote of the majority of NCS board of directors. See
"-- Stockholder Voting -- NCS -- Amendments to NCS' Certificate of
Incorporation;"
o a provision permitting NCS board of directors to designate the
rights, including voting rights, of preferred stock; and
o a provision providing NCS Class B common stock with the voting
power of ten votes per share. See "--Stockholder Voting--
NCS--Class Voting."
In addition, Section 203 of Delaware corporation law imposes a
three-year moratorium on business combinations between a Delaware corporation
whose stock generally is publicly traded or held of record by more than 2,000
stockholders and an interested stockholder or an affiliate or associate of such
interested stockholder unless:
o prior to an interested stockholder becoming such, the board of
directors of the corporation approved either the business
combination or the transaction resulting in the interested
stockholder becoming such;
o upon completion of the transaction resulting in the interested
stockholder becoming such, the interested stockholder owns 85% of
the voting stock outstanding at the time the transaction commenced
(excluding, from the calculation of outstanding shares, shares
beneficially owned by directors who are also officers and certain
employee stock plans); or
121
o on or after an interested stockholder becomes such, the business
combination is approved by (1) the board of directors and (2)
holders of at least 66 2/3% of the outstanding shares, other than
those shares beneficially owned by the interested stockholder, at
a meeting of stockholders. See "-- Stockholder Approval of
Business Combinations with Interested Stockholders."
The overall effect of the foregoing provisions may deter future tender
offers or other offers to acquire NCS or its shares. Stockholders might view
such an offer to be in their best interest should the offer include a
substantial premium over the market price of the common stock at the time. In
addition, these provisions may have the effect of assisting NCS' management to
retain its position and place it in a better position to resist changes that the
stockholders may want to make if dissatisfied with the conduct of NCS' business.
122
NCS Stockholder Proposals
The NCS 2002 annual stockholders meeting will be held only if the
merger has not been completed by the date set for the annual meeting.
To be considered for inclusion in the proxy statement relating to the
NCS 2002 annual stockholders meeting, stockholder proposals should have been
submitted in writing and hand delivered or mailed by first-class United States
mail, postage prepaid, to Investor Relations Department, NCS HealthCare, Inc.,
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122 and received no later
than July 12, 2002. To be considered for presentation at the NCS 2002 annual
stockholder meeting, although not included in the proxy statement, stockholder
proposals must be received no later than October 11, 2002. In the event that the
date of the NCS 2002 annual stockholder meeting is advanced or delayed by more
than 30 days, stockholder proposals must be delivered no later than the 10th day
following the day on which NCS publishes notice of the date of the meeting.
Stockholder proposals received after the applicable dates referred to above will
not be voted on at the NCS 2002 annual stockholder meeting. If a stockholder
proposal is received before the applicable date, the proxies that the NCS
management solicits for the NCS 2002 annual stockholder meeting, if any, may
confer on the proxy holders authority to vote on such proposal consistent with
the proxy rules of the SEC.
All stockholder proposals shall set forth: (a) the name and address of
the stockholder and the text of the proposal to be introduced; and (b) the
number of shares of stock held of record, owned beneficially and represented by
proxy by such stockholder as of the date of such stockholder proposal. If the
proponent is not a stockholder of record, the stockholder should submit proof of
beneficial ownership. All stockholder proposals must be a proper subject for
action and comply with the proxy rules of the SEC and such other requirements
imposed by NCS' by-laws. The chairman of the NCS 2002 annual stockholder meeting
may refuse to acknowledge the introduction of any stockholder proposal not made
in compliance with the foregoing procedure.
Legal Matters
The validity of the shares of Genesis common stock offered hereby has
been passed upon for Genesis by Blank Rome Comisky & McCauley LLP.
Experts
The consolidated financial statements and schedule of Genesis and
subsidiaries as of September 30, 2001 and 2000, and for each of the years in the
three-year period ended September 30, 2001, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent accountants, also
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The audit report covering the September 30, 2001 consolidated financial
statements contains an explanatory paragraph that states that, on October 2,
2001, Genesis completed a Joint Plan of Reorganization, referred to as the
"Plan," which had been confirmed by the United States Bankruptcy Court. The Plan
resulted in change in ownership of the Predecessor Company and accordingly,
effective September 30, 2001 Genesis accounted for the change in ownership
through "fresh-start" reporting. As a result, the consolidated information prior
to September 30, 2001 is presented on a different cost basis than that as of
September 30, 2001 and, therefore, is not comparable. The audit report also
refers to a change in accounting for the costs of start-up activities effective
October 1, 1999.
The consolidated financial statements of NCS and subsidiaries as of
June 30, 2002 and 2001, and for each of the three years in the period ended June
30, 2002, which is referred to and made a part of this proxy
statement/prospectus, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein (which
contains an explanatory paragraph describing conditions that raise substantial
doubt about NCS and subsidiaries' ability to continue as a going concern as
described in Note 1 to the consolidated financial statements), and are included
in reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
123
Unaudited Pro Forma Condensed Consolidated Combined Financial Information
The following unaudited pro forma financial information for the
combined company gives effect to: (i) Genesis' adoption of fresh-start reporting
in connection with its emergence from Chapter 11 bankruptcy proceedings, and
(ii) the merger.
Genesis adopted the provisions of fresh-start reporting effective
September 30, 2001. In connection with the adoption of fresh-start reporting, a
new entity was deemed created for financial reporting purposes, the provisions
of Genesis' reorganization plan were implemented, assets and liabilities were
adjusted to their estimated fair market values and Genesis' accumulated deficit
was eliminated.
The unaudited pro forma condensed consolidated combined balance sheet
gives effect to the merger (including the repayment of certain NCS debt and
accrued interest and redemption premium in connection with the merger), as if
the merger had occurred on June 30, 2002. The effects of the Genesis bankruptcy
emergence and the adoption of fresh-start reporting are reflected in Genesis'
unaudited condensed consolidated historical balance sheet as of June 30, 2002,
therefore the consolidated balance sheet requires no additional adjustment to
reflect the Genesis bankruptcy emergence. The unaudited pro forma condensed
consolidated combined statements of operations give effect to the Genesis
bankruptcy emergence and the merger as if each had occurred on October 1, 2000.
The following pro forma financial information also gives effect to certain
accounting adjustments labeled "Pro Forma Accounting Adjustments" in the notes
accompanying the unaudited pro forma condensed consolidated combined statements
of operations which represent the reclassification of certain NCS historical
expenses to conform with Genesis' presentation, and the pro-forma impact to NCS'
historical amortization expense in connection with the adoption of Financial
Accounting Standards 142 "Goodwill and Other Intangibles."
The pro forma adjustments are based upon available information and
certain assumptions that management of Genesis and NCS believes are reasonable
and are described in the notes accompanying the unaudited pro forma condensed
consolidated combined financial information. No changes in operating revenues
and expenses have been made to reflect the results of any modification to
operations that might have been made had the Genesis bankruptcy emergence and
the merger been completed on the aforesaid assumed effective dates for purposes
of the pro forma results. The unaudited pro forma condensed consolidated
combined financial information is provided for informational purposes only and
does not purport to represent what Genesis' results of operations or financial
position would actually have been had the Genesis bankruptcy emergence and the
merger in fact occurred at such dates or to project Genesis' results of
operations or financial position at or for any future date or period. Since the
accompanying unaudited pro forma condensed consolidated combined financial
information has been prepared assuming the revaluation of Genesis' property,
plant and equipment, and intangible assets in connection with Genesis' adoption
of fresh-start reporting on September 30, 2001 occurred on October 1, 2000, pro
forma depreciation and amortization expense reported in the accompanying
unaudited pro forma condensed consolidated combined statements of operations do
not necessarily reflect the amounts that would have been reported had the
property, plant and equipment, and intangible assets been revalued as of October
1, 2000. The unaudited pro forma condensed consolidated combined financial
information has been prepared using the purchase method of accounting for the
merger, whereby the purchase price is allocated to tangible and intangible
assets acquired and liabilities assumed based upon their respective fair values
at the effective date of the transaction. Such allocations are based on internal
studies and valuations which have not yet been completed. Accordingly, the
allocations and estimated lives reflected in the unaudited pro forma condensed
consolidated combined financial information are preliminary and subject to
revision.
The following unaudited pro forma financial information should be read
in conjunction with the historical financial statements of Genesis for its
fiscal year ended September 30, 2001 and the nine month period ended June 30,
2002, including the accompanying notes thereto, which are incorporated by
reference in this proxy statement/prospectus and the historical financial
statements of NCS for its fiscal year ended June 30, 2002, including the
accompanying notes thereto, which are included in this proxy
statement/prospectus.
124
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Combined Balance Sheet
June 30, 2002
(In thousands)
NCS Genesis
Transaction Pro Forma
Genesis NCS Pro Forma Consolidated
Historical Historical Adjustments Combined
---------- ---------- ------------ -------------
Assets:
Current assets........................................... $ 679,806 $ 161,803 $ (121,491)(1) $ 720,118
Property, plant, and equipment, net...................... 841,971 28,118 -- 870,089
Goodwill and identifiable intangible assets, net......... 331,527 82,681 156,062 (2) 570,270
Other assets............................................. 68,807 5,191 3,000 (3) 76,998
----------- --------- ---------- -----------
Total assets........................................ $ 1,922,111 $ 277,793 $ 37,571 $ 2,237,475
=========== ========= ========== ===========
Liabilities and Shareholders' Equity (Deficit):
Current liabilities...................................... $ 232,126 $ 385,233 $ (308,491)(4) $ 308,868
Long-term debt, excluding current maturities............. 678,100 549 200,000 (5) 878,649
Deferred income taxes.................................... 3,930 -- -- 3,930
Other liabilities........................................ 52,607 73 -- 52,680
Minority interests....................................... 9,742 -- -- 9,742
Redeemable preferred stock............................... 44,516 -- -- 44,516
Shareholders' equity (deficit)........................... 901,090 (108,062) 146,062 (6) 939,090
----------- --------- ---------- -----------
Total liabilities and shareholders' equity (deficit) $ 1,922,111 $ 277,793 $ 37,571 $ 2,237,475
=========== ========= ========== ===========
See accompanying Notes to Unaudited Pro Forma
Condensed Consolidated Combined Balance Sheet
125
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Combined Balance Sheet
June 30, 2002
($ in thousands, except share and per share amounts)
(1) Represents utilization of $121,491 of existing Genesis and NCS cash
balances to finance a portion of the purchase price.
(2) Represents the excess of purchase price, including estimated direct
costs of the merger, over the estimated fair values of the net assets
acquired. The purchase price is based on the exchange of 0.1 of a share
of Genesis common stock for each share of NCS common stock, the
repayment of $308,491 of NCS senior and subordinated debt, and the
payment of $13,000 of accrued interest, fees and a redemption premium
on the NCS senior and subordinated debt.
Purchase price (see note (7)):
Purchase price (including $38,000 of proceeds related to issuance of
Genesis common stock - assuming a market value of $16 per share) $ 359,491
Estimated direct costs of the merger 10,000
----------
$ 369,491
----------
Net assets acquired:
NCS shareholders' deficit $ (108,062)
Repayment of NCS senior and subordinated debt 308,491
Repayment of accrued interest, fees and redemption premium on
NCS senior and subordinated debt 13,000
----------
Net assets acquired $213,429
----------
Goodwill $156,062
==========
The estimated direct costs of the merger include legal fees, accounting
fees, consulting fees, and contractually obligated payments to certain
key executives more fully described under "Interests of Certain Persons
in the Merger".
(3) Represents $3,000 of direct financing costs in connection with the
expansion of the existing Genesis senior credit facility.
(4) Represents:
Repayment of the current portion of NCS senior and subordinated debt $(308,491)
Repayment of accrued interest and fees on NCS senior and subordinated debt (13,000)
Obligation to pay estimated direct merger costs ($10,000) and direct
financing costs ($3,000) 13,000
---------
Current liabilities $(308,491)
=========
(5) Represents the borrowing of $200,000 under an expansion of Genesis'
senior credit facility to finance the purchase price.
(6) Represents the issuance of $38,000 of Genesis common stock in exchange
for the outstanding common stock of NCS, and the elimination of NCS's
existing shareholders' deficit.
Issuance of Genesis common stock (assuming a market value of $16 per share) $ 38,000
Elimination of NCS existing shareholders' deficit 108,062
---------
Shareholders' equity $ 146,062
=========
126
(7) Upon completion of the merger, each outstanding option to purchase NCS
common stock will become fully vested and will convert into an option
to purchase 0.1 of a share of Genesis common stock. At June 30, 2002,
there were NCS options outstanding to purchase approximately 2,500,000
shares of NCS common stock, which would convert into options to
purchase approximately 250,000 shares of Genesis common stock. The fair
value of the Genesis options has not yet been determined, due to the
complex nature and the variables involved in such calculations, and is
not included in the purchase price described in note (2). Genesis
expects the determination of the fair value of the Genesis options will
be finalized upon completion of the merger, and believes that the
related adjustment to the purchase price will not be material.
127
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Combined Statement Of Operations
Twelve Months Ended September 30, 2001
(In thousands, except share and per share data)
Pro Forma Adjustments
-------------------------------- Successor
Company
Predecessor NCS Genesis
Company Genesis Transaction Pro Forma
Genesis NCS Bankruptcy And Consolidated
Historical Historical* Emergence Accounting Combined
------------ ---------- ---------- ----------- ------------
Net revenues...................................... $ 2,533,608 $ 626,328 $ -- $ -- $3,159,936
Expenses:
Operating expenses.............................. 2,398,466 637,755 3,050 (1) (30,418)(9)(11) 3,008,853
Lease expense................................... 34,946 -- (6,998)(2) -- 27,948
Depreciation and amortization................... 106,419 -- (42,106)(3) 15,197 (9)(10)(12) 79,510
Interest expense, net........................... 118,617 31,713 (72,273)(4) (13,796)(13) 64,261
------------ ----------- ------------ ----------- ---------
Total expenses............................... 2,658,448 669,468 (118,327) (29,017) 3,180,572
------------ ----------- ------------ ----------- ---------
Loss from continuing operations before debt
restructuring and reorganization costs, income
tax expense, equity in net loss of unconsolidated
affiliates and minority interests............... (124,840) (43,140) 118,327 29,017 (20,636)
Debt restructuring and reorganization costs....... 1,097,177 -- (1,097,177)(5) -- --
------------ ----------- ------------ ----------- ---------
Loss from continuing operations before income tax
expense, equity in net loss of unconsolidated
affiliates and minority interests............... (1,222,017) (43,140) 1,215,504 29,017 (20,636)
Income tax expense................................ -- 370 -- (370)(14) --
------------ ----------- ------------ ----------- ---------
Loss from continuing operations before equity in
net loss of unconsolidated affiliates and
minority interests.............................. (1,222,017) (43,510) 1,215,504 29,387 (20,636)
Equity in net loss of unconsolidated affiliates... (10,232) -- -- -- (10,232)
Minority interest................................. 23,453 -- (21,207)(6) -- 2,246
------------ ----------- ------------ ----------- ---------
Loss from continuing operations before
extraordinary items and preferred stock
dividends ...................................... (1,208,796) (43,510) 1,194,297 29,387 (28,622)
Less: Preferred stock dividends................... 45,623 -- (43,103)(7) -- 2,520
Loss from continuing operations before ------------ ----------- ------------ ----------- ---------
extraordinary items............................... $(1,254,419) $ (43,510) $ 1,237,400 $ 29,387 $ (31,142)
=========== =========== ============ ============ ==========
Per common share data:
Basic:
Loss from continuing operations, before
extraordinary items......................... $ (25.79) $ (1.85) $ (0.72)
Weighted average shares........................... 48,641,456 23,535,018 (7,491,456)(1)(8) (21,181,516)(15) 43,503,502
Diluted:
Loss from continuing operations, before
extraordinary items ........................ $ (25.79) $ (1.85) $ (0.72)
Weighted average shares....................... 48,641,456 23,535,018 (7,491,456)(1)(8) (21,181,516)(15) 43,503,502
--------------
* - Twelve months ended June 30, 2001
See accompanying Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
128
Genesis Health Ventures, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Combined Statement of Operations
Nine Months Ended June 30, 2002
(In thousands, except share and per share data)
Pro Forma Adjustments
-------------------------- Successor
Company
Successor NCS Genesis Pro
Company Genesis Transaction Forma
Genesis NCS Bankruptcy and Consolidated
Historical Historical Emergence Accounting Combined
----------- ---------- ---------- ------------- -------------
Net revenues................................. $2,019,573 $ 487,920 $ -- $ -- $2,507,493
Expenses:
Operating expenses......................... 1,827,201 476,715 -- (13,825)(9)(11) 2,290,091
Severance and related costs................ 12,568 -- -- -- 12,568
Gain from arbitration award................ (21,907) -- -- -- (21,907)
Lease expense.............................. 48,235 -- -- -- 48,235
Depreciation and amortization.............. 20,737 -- -- 10,217 (9)(12) 30,954
Interest expense, net...................... 36,862 18,242 -- (6,564) (13) 48,540
---------- ---------- ------- --------- ----------
Total expenses........................... 1,923,696 494,957 -- (10,172) 2,408,481
---------- ---------- ------- --------- ----------
Income (loss) from continuing operations
before debt restructuring and
reorganization costs, income tax expense,
equity in net earnings of unconsolidated
affiliates and minority interests.......... 95,877 (7,037) -- 10,172 99,012
Debt restructuring and reorganization costs.. 4,270 -- (4,270) (5) -- --
---------- ---------- ------- --------- ----------
Income (loss) from continuing operations
before income tax expense, equity in net
earnings loss of unconsolidated affiliates
and minority interests..................... 91,607 (7,037) 4,270 10,172 99,012
Income tax expense........................... 25,416 225 1,665 1,024 (14) 28,330
---------- ---------- ------- --------- ----------
Income (loss) from continuing operations
before equity in net earnings loss of
unconsolidated affiliates and minority
interests.................................. 66,191 (7,262) 2,605 9,148 70,682
Equity in net earnings of unconsolidated
affiliates.................................. 859 -- -- -- 859
Minority interest............................ (1,344) -- -- -- (1,344)
---------- ---------- ------- --------- ----------
Income (loss) from continuing operations
before preferred stock dividends........... 65,706 (7,262) 2,605 9,148 70,197
Less: Preferred stock dividends.............. 1,916 -- -- -- 1,916
---------- ---------- ------- --------- ----------
Income (loss) from continuing operations..... $ 63,790 $ (7,262) $ 2,605 $ 9,148 $ 68,281
========== =========== ========= =========== ===========
Per common share data:
Basic:
Income (loss) from continuing operations. $ 1.55 $ (0.31) $ 1.57
Weighted average shares.................. 41,211,603 23,716,809 (21,345,128)(15) 43,583,284
Diluted:
Income (loss) from continuing operations. $ 1.52 $ (0.31) $ 1.54
Weighted average shares.................. 43,339,666 23,716,809 (21,345,128)(15) 45,711,347
See accompanying Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
129
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
(in thousands, except share data)
General Notes
The accompanying unaudited condensed consolidated combined financial statements
are before the effect of an extraordinary gain of $1,524,823 recognized by
Genesis in the twelve month period ended September 30, 2001 from the
restructuring of pre-petition debts in accordance with the provisions of
Genesis' reorganization plan.
The NCS historical operating expenses for the twelve months ended September 30,
2001 and the nine months ended June 30, 2002 include $6,543 and $1,643,
respectively, of legal, bank, accounting, and other professional fees incurred
in connection with efforts to restructure the NCS senior and subordinated debt
agreements.
Genesis Bankruptcy Emergence
(1) Represents the amortization of restricted stock grants issued in
connection with the reorganization plan and their impact on the
weighted average shares of common stock.
Twelve Months
Ended Nine Months
September 30, Ended June
2001 30, 2002
-------------- --------------
Operating expenses........................................... $ 3,050 $ --
========== =========
Weighted average shares of common stock...................... 150,000 --
========== =========
(2) Represents an adjustment to lease expense for the discharge of a lease
financing facility.
(3) Represents an adjustment to historical depreciation and amortization
expense to reflect the revaluation of property and equipment, the
establishment of reorganization value in excess of amounts allocable to
identifiable intangible assets and the elimination of historical
goodwill amortization.
In addition, the following pro adjustment assumes Genesis adopted the
provisions of Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangibles" on October 1, 2000 which requires that
goodwill and other intangible assets with an indefinite useful life are
not amortized but rather tested periodically for impairment.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2002
------------- -----------
Fresh-start reporting:
Depreciation of property, plant and equipment based on estimated
fair value...................................................... $ 53,332 $ --
Amortization of successor company identifiable intangible assets.. 8,848 --
Other amortization costs.......................................... 2,133 --
--------- -------
Pro forma depreciation and amortization........................... 64,313 --
--------- -------
Historical accounting:
Depreciation of property, plant and equipment..................... 66,322 --
Amortization of goodwill and other intangible assets.............. 33,492 --
Other amortization costs.......................................... 6,605 --
--------- -------
106,419 --
========= =======
$ (42,106) $ --
========= =======
130
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
(in thousands, except share data)
(4) Represents an adjustment to historical interest expense to reflect the
new capital structure of Genesis.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2002
------------ ------------
Successor company interest obligations:
Senior Credit Facility (variable rate of 6.1%)............... $ 17,385 $ --
Senior Secured Notes (variable rate of 7.6%)................. 18,438 --
Other indebtedness (weighted average fixed rate of 9.0%)..... 10,521 --
---------- ----------
Pro forma interest expense................................... 46,344 --
========== ==========
Historical interest expense.................................. 118,617 --
========== ==========
$ (72,273) $ --
========== ==========
Genesis' senior credit facility and senior secured notes bear interest
based on the London Inter-bank Offered Rate ("LIBOR") plus a margin.
For purposes of these pro forma consolidated financial statements,
interest costs related to these loans were calculated using the
effective rates at September 30, 2001. A variance of 1/8 % in LIBOR
would change Genesis' annual interest expense by $660.
(5) Represents the elimination of debt restructuring and reorganization
costs.
Twelve
Months Ended Nine Months
September Ended June
30, 2001 30, 2002
------------- -------------
$ (1,097,177) $ (4,270)
============ ============
(6) Represents the elimination of the 56.4% interest in the net loss of The
Multicare Companies, Inc. attributed to Genesis' Multicare joint
venture partners. Upon emergence from bankruptcy, Genesis and Multicare
merged, effectively terminating the joint venture and any interest the
joint venture partners had in Multicare.
(7) Represents the elimination of preferred stock dividends accrued in
connection with certain preferred stock series that were canceled upon
Genesis' emergence from bankruptcy, offset by the recognition of
preferred stock dividends on the Series A Convertible Preferred Stock
issued in connection with the consummation of the reorganization plan.
Twelve Months
Ended Nine Months
September 30, Ended June 30,
2001 2002
-------------- --------------
Predecessor company preferred stock dividends................ $ (45,623) $ --
Series A Convertible Preferred Stock dividends............... 2,520 --
----------- ------------
Preferred stock dividends................................. $ (43,103) $ --
========== ============
For purposes of calculating the number of weighted average common
shares, the conversion of the Series A Convertible Preferred Stock to
common stock is not assumed in the twelve months ended September 30,
2001 because its effect is antidilutive. The assumed conversion of the
Series A Convertible Preferred Stock is reflected in the Genesis
historical diluted weighted average common shares for the nine months
ended June 30, 2002.
131
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
(in thousands, except share data)
(8) Represents the elimination of weighted average common shares prior to
the Genesis Bankruptcy Emergence and the issuance of the new common
shares in accordance with the reorganization plan.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2002
------------- -------------
Elimination of predecessor company common stock................ (48,641,456) --
Issuance of successor company common stock..................... 41,000,000 --
----------- -----------
(7,641,456) --
=========== ===========
Pro Forma Accounting Adjustments
The following pro forma adjustments represent the reclassification of
certain NCS expenses to conform with Genesis' historical presentation.
(9) NCS classifies depreciation and amortization expenses within operating
expenses. This pro forma adjustment reclassifies such costs to conform
with Genesis' presentation.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2002
------------- -------------
Operating expenses.............................................. $ (24,993) $ (9,767)
Depreciation and amortization................................... 24,993 9,767
----------- -----------
$ -- $ --
=========== ===========
(10) In accordance with SFAS No. 142, NCS discontinued the amortization of
goodwill effective July 1, 2001. Effective July 1, 2001, NCS recognized
the cumulative effect of an accounting change of $222,116 for a
goodwill impairment loss in connection with the adoption of SFAS No.
142, which is not reflected in the accompanying unaudited pro forma
condensed consolidated results of operations. The following pro forma
adjustment eliminates goodwill amortization recorded during the periods
presented.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2002
-------------- -------------
NCS goodwill amortization..................................... (10,396) --
------------- --------------
$ (10,396) $ --
============= ==============
132
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
(in thousands, except share data)
NCS Transaction Pro Forma Adjustments
(11) Represents purchasing discounts under current pharmaceutical supply
contracts based on the existing purchasing volume of the combined
company.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2001
-------------- -------------
Operating expense............................................. $ (5,425) $ (4,058)
============= ============
(12) Represents the amortization of $3,000 of direct
financing costs over 5 years.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2001
-------------- --------------
Depreciation and amortization................................. $ 600 $ 450
============== ==============
(13) The NCS purchase price is to be financed, in part, by an expansion of
Genesis' senior credit facility and available Genesis and NCS cash on
hand. The following pro forma adjustments represent the incremental
interest expense on the expanded Genesis senior credit facility, a
reduction in interest income earned on invested cash to be used to
finance a portion of the purchase price, offset by interest savings
following the repayment of NCS secured and unsecured debts.
Twelve Months
Ended Nine Months
September 30, Ended June 30,
2001 2002
------------- --------------
Interest expense - $271,000 and $200,000 borrowing under
existing senior credit facility for the 2001 and 2002
periods, respectively, at an estimated variable rate
of 5.75%..................................................... $ 15,583 $ 8,601
Less: interest expense - repayment of existing NCS senior and
subordinated debt............................................ (30,129) (16,523)
Less: interest expense - reduced interest income at 1.5% on
$50,000 and $121,000 of cash on hand for the 2001 and 2002
periods, respectively........................................ 750 1,358
------------ -----------
Interest expense, net........................................... $ (13,796) $ (6,564)
============ ===========
For purposes of these pro forma consolidated financial statements,
interest costs related to the borrowings under an expansion to Genesis'
senior credit facility were calculated using an estimated interest rate
of 5.75%. A variance of 1/8 % in LIBOR would change the interest
expense by $339 and $188 for the twelve months ended September 30, 2001
and the nine months ended June 30, 2002, respectively.
133
Genesis Health Ventures, Inc. and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Combined Statements of Operations
(in thousands, except share data)
(14) No income tax expense was recognized for the twelve months ended
September 30, 2001 as the combined company reported a net loss. Income
tax expense for the nine months ended June 30, 2002 is reported at
Genesis' effective tax rate of 39%, offset by $10,285 of tax credits
recognized in the Genesis historical income tax expense as a result of
tax credits realized through the Job Creation and Worker Assistance Act
of 2002.
(15) The NCS purchase price is to be financed, in part, by the issuance
of 0.1 of a share of Genesis common stock for each share of NCS
common stock.
Twelve Months Nine Months
Ended Ended
September 30, June 30,
2001 2002
-------------- ------------
Elimination of NCS common stock................................. (23,535,018) (23,716,809)
Issuance of Genesis common stock................................ 2,353,502 2,371,681
----------- -----------
Weighted average shares of common stock......................... (21,181,516) (21,345,128)
=========== ===========
134
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF NCS
Consolidated Financial Statements
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets at June 30, 2001 and 2002.................................................... F-3
Consolidated Statements of Operations for each of the three years in the period ended June 30, 2002...... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the
period ended June 30, 2002.......................................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2002...... F-6
Notes to Consolidated Financial Statements............................................................... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders NCS HealthCare, Inc.
We have audited the accompanying consolidated balance sheets of NCS
HealthCare, Inc. and subsidiaries as of June 30, 2001 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended June 30, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NCS HealthCare, Inc. and subsidiaries at June 30, 2001 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is in violation of certain
financial covenants under its revolving credit facility. As a result of the
covenant violations, the Company's lenders may accelerate the maturity of the
Company's obligations under the revolving credit facility. In addition, the
Company is in default on its 5 3/4% Convertible Subordinated Debentures due
2004. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan in regard to this matter is also
described in Note 1. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements,
effective July 1, 2001, the Company changed its method of accounting for
goodwill.
August 2, 2002 Ernst & Young LLP
Cleveland, Ohio
F-2
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
June 30,
-----------------------
2002 2001
----------- ---------
CURRENT ASSETS
Cash and cash equivalents........................................................ $42,539 $39,464
Trade accounts receivable, less allowance for doubtful accounts of $21,026 and
$28,332 as of June 30, 2002 and 2001.......................................... 85,808 94,447
Inventories...................................................................... 30,593 32,770
Prepaid expenses and other current assets........................................ 2,863 3,301
--------- ---------
Total current assets....................................................... 161,803 169,982
PROPERTY, PLANT AND EQUIPMENT
Land............................................................................. 130 130
Buildings........................................................................ 2,397 2,397
Machinery, equipment and vehicles................................................ 21,173 23,039
Computer equipment and software.................................................. 34,863 34,817
Furniture, fixtures and leasehold improvements................................... 18,070 18,685
--------- ---------
76,633 79,068
Less accumulated depreciation and amortization................................... 48,515 45,049
--------- ---------
28,118 34,019
Goodwill, net.................................................................... 80,487 301,907
Other assets, net................................................................ 7,385 8,063
--------- ---------
TOTAL ASSETS....................................................................... $277,793 $513,971
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30,
-----------------------
2002 2001
----------- ---------
CURRENT LIABILITIES
Line of credit in default......................................................... $206,130 $206,130
Convertible subordinated debentures in default.................................... 102,361 102,107
Trade accounts payable............................................................ 45,336 56,349
Accrued compensation and related expenses......................................... 8,525 7,715
Other accrued expenses............................................................ 22,607 13,754
Current portion of long-term debt................................................. 274 456
--------- ---------
Total current liabilities................................................... 385,233 386,511
Long-term debt, excluding current portion......................................... 549 825
Other long-term liabilities....................................................... 73 140
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value per share; 1,000,000 shares authorized; none issued -- --
Common stock, $.01 par value per share:
Class A-- 50,000,000 shares authorized; 18,461,599 and 18,421,845 shares issued
and outstanding at June 30, 2002 and 2001, respectively...................... 184 184
Class B-- 20,000,000 shares authorized; 5,255,210 and 5,294,964 shares issued
and outstanding at June 30, 2002 and 2001, respectively...................... 53 53
Paid-in capital..................................................................... 271,943 271,943
Accumulated deficit................................................................. (380,242) (145,685)
--------- ---------
(108,062) 126,495
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $277,793 $513,971
========= =========
See accompanying notes
F-3
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30,
------------------------------------
2002 2001 2000
-------- -------- --------
Revenues............................................................ $645,756 $626,328 $694,530
Cost of revenues.................................................... 538,926 514,483 556,757
---------- --------- ---------
Gross profit........................................................ 106,830 111,845 137,773
Selling, general and administrative expenses........................ 93,776 123,272 126,969
Special charge to increase allowance for doubtful accounts.......... -- -- 44,623
Restructuring , asset impairment and other nonrecurring charges..... -- -- 51,136
---------- --------- ---------
Operating income (loss)............................................. 13,054 (11,427) (84,955)
Interest expense.................................................... (26,642) (34,300) (29,808)
Interest income..................................................... 1,447 2,587 3,565
---------- --------- ---------
Loss before income taxes and cumulative effect of accounting change. (12,141) (43,140) (111,198)
Income tax expense.................................................. 300 370 3,326
---------- --------- ---------
Loss before cumulative effect of accounting change.................. (12,441) (43,510) (114,524)
Cumulative effect of accounting change.............................. (222,116) -- --
---------- --------- ---------
Net loss............................................................ $(234,557) $(43,510) $(114,524)
========= ========= =========
Loss per share data:
Net loss per common share before cumulative effect of accounting
change-- basic and diluted........................................ $(0.52) $(1.85) $(5.31)
Cumulative effect of accounting change.............................. $(9.37) -- --
---------- --------- ---------
Net loss per common share - basic and diluted....................... $(9.89) $(1.85) $(5.31)
========= ========= =========
Weighted average number of common shares outstanding - basic and
diluted............................................................. 23,717 23,535 21,551
========= ========= =========
See accompanying notes
F-4
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Class A Class B Retained Stockholders'
Common Common Paid-In Earnings Equity
Stock Stock Capital (Deficit) (Deficit)
--------- --------- ---------- ---------- ------------
Balance at July 1, 1999...................... $143 $60 $263,882 $12,349 $276,434
Issuance of 2,203,844 shares of Class A
Common Stock for business combinations.... 22 -- 6,811 -- 6,833
Issuance of 497,153 shares of Class A Common
Stock for profit sharing plan............. 5 -- 957 -- 962
Conversion of 197,997 shares of Class B
Common Stock to 197,997 shares of Class A
Common Stock.............................. 2 (2) -- -- --
Net loss..................................... -- -- -- (114,524) (114,524)
------- ------- --------- --------- ---------
Balance at June 30, 2000..................... 172 58 271,650 (102,175) 169,705
Issuance of 733,040 shares of Class A Common
Stock for profit sharing plan............. 7 -- 293 -- 300
Conversion of 512,319 shares of Class B
Common Stock to 512,319 shares of Class A
Common Stock.............................. 5 (5) -- -- --
Net loss..................................... -- -- -- (43,510) (43,510)
------- ------- --------- --------- ---------
Balance at June 30, 2001..................... 184 53 271,943 (145,685) 126,495
------- ------- --------- --------- ---------
Conversion of 39,754 shares of Class B Common
Stock to 39,754 shares of Class A Common
Stock....................................... -- -- -- -- --
Net loss..................................... -- -- -- (234,557) (234,557)
------- ------- --------- --------- ---------
Balance at June 30, 2002..................... $184 $53 $271,943 $(380,242) $(108,062)
======= ======= ========= ========= =========
See accompanying notes
F-5
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended June 30,
----------------------------------------
2002 2001 2000
--------- -------- --------
OPERATING ACTIVITIES
Net loss.......................................................... $(234,557) $(43,510) $(114,524)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of accounting change.......................... 222,116 -- --
Non-cash portion of fixed asset impairment charge............... -- 2,106 --
Non-cash portion of restructuring, asset impairment and other
nonrecurring charges........................................ -- -- 38,555
Depreciation and amortization................................... 13,085 24,993 28,678
Provision for doubtful accounts................................. 18,013 31,101 53,825
Deferred income taxes........................................... -- -- 2,937
Non-cash profit sharing expense................................. -- 300 962
Changes in assets and liabilities, net of effects of assets and
liabilities acquired:
Trade accounts receivable.................................... (17,629) (8,570) (10,309)
Inventories.................................................. 2,536 4,316 12,151
Trade accounts payable....................................... (4,647) 17,363 (5,204)
Accrued expenses............................................. 9,657 (295) (11,251)
Prepaid expenses and other................................... 811 21 14,948
--------- --------- ---------
Net cash provided by operating activities......................... 9,385 27,825 10,768
INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment............ (5,489) (3,359) (6,616)
Proceeds from sales of assets..................................... 230 250 621
Purchases of businesses........................................... (1,371) -- --
Other............................................................. 778 (978) (5,766)
--------- --------- ---------
Net cash used in investing activities (5,852) (4,087) (11,761)
FINANCING ACTIVITIES
Repayment of long-term debt....................................... (458) (661) (3,474)
Borrowings on line-of-credit...................................... -- -- 91,300
Payments on line-of-credit........................................ -- -- (99,870)
--------- --------- ---------
Net cash used in financing activities............................. (458) (661) (12,044)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 3,075 23,077 (13,037)
Cash and cash equivalents at beginning of period.................. 39,464 16,387 29,424
--------- --------- ---------
Cash and cash equivalents at end of period........................ $42,539 $39,464 $16,387
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................................... $21,176 $31,655 $28,975
========= ========= =========
Income taxes.................................................. $304 $355 $404
========= ========= =========
See accompanying notes
F-6
NCS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. Summary Of Significant Accounting Policies
Description of Business
NCS HealthCare, Inc. (the Company) operates in one primary business
segment providing a broad range of health care services primarily to long-term
care institutions including skilled nursing facilities, assisted living
facilities and other institutional health care settings. The Company purchases,
repackages and dispenses prescription and non-prescription pharmaceuticals and
provides client facilities with related management services, automated medical
record keeping, drug therapy evaluation, regulatory assistance and certain
ancillary healthcare services.
Management's Plan to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the ordinary course of business. As shown in the
accompanying consolidated financial statements, the Company has incurred net
losses of $43,510 and $234,557 for the years ended June 30, 2001 and 2002,
respectively. At June 30, 2002 the Company's working capital deficit was
$(223,430), primarily as a result of classifying $206,130 under the revolving
credit facility and $102,361 of convertible subordinated debentures as a current
liability. As discussed in Note 2, the revolving credit facility expired on May
31, 2002. As discussed in Note 8, as of June 30, 2002 the Company is in default
on $102,361 of its 5 3/4% convertible subordinated debentures. All borrowings
under the credit agreement and the convertible subordinated debentures have been
classified as a current liability. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
During the past three years the Company has implemented measures to
improve cash flows generated from operating activities, including reductions in
operating and overhead costs by continuing the consolidation and/or closing of
pharmacy locations, continuing its employee reduction plan, more aggressive
collection activity and inventory reduction efforts, and a temporary
modification of payment terms negotiated with a major Company supplier. In
addition, the Company continues to review the profitability of its customer base
and is terminating uneconomic accounts as well as applying stricter standards in
accepting new business.
During the past two years, the Company has been in ongoing discussions
with the Company's senior lenders and with an ad hoc committee of holders of the
5 3/4% Convertible Subordinated Debentures due 2004 regarding the defaults and
potential restructuring options. In addition, the Company engaged financial
advisors and legal counsel to assist in exploring various capital restructuring
and strategic alternatives with third parties.
On July 28, 2002, the Company entered into a definitive merger
agreement with Genesis Health Ventures, Inc. (Genesis). If the proposed merger
is completed, each outstanding share of common stock of the Company will be
converted into the right to receive 0.1 of a share of Genesis common stock. At
the closing of the proposed merger, Genesis will repay in full the outstanding
debt of NCS, including $206,130 of senior debt, and will redeem $102,361 of 5
3/4% convertible subordinated debentures, including accrued and unpaid interest
and any applicable redemption premiums. The completion of the proposed merger is
subject to regulatory approvals and other customary conditions, including the
approval of the holders of a majority of the outstanding voting power of the
Company's common stock.
The timing and ultimate outcome of the proposed merger or any future
negotiations with the Company's senior lenders and ad hoc committee of debenture
holders is uncertain and could have a material adverse effect on the Company.
Given the foregoing, no assurances can be given that the Company will be able to
maintain its current level of operations, or that its financial condition and
prospects will not be materially and adversely affected over the next twelve
months. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-7
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when products or services are delivered or
provided to the customer. Upon delivery of products or services, NCS has no
additional performance obligation to the customer. Revenue is recorded on a
monthly basis for products or services provided to customers during that month.
The revenue cycle ends on the last day of the month. As is generally the case
for long-term care facility services, the Company receives payments through
reimbursement from Medicaid and Medicare programs and directly from individual
residents (private pay), private third-party insurers and long-term care
facilities. For the fiscal year ended June 30, 2002, the Company's payor mix was
approximately 49% Medicaid, 20% long-term care facilities (including amounts for
which the long-term care facility receives reimbursement under Medicare Part A),
14% private pay, 11% third-party insurance, 1% Medicare and 5% other sources.
The Medicaid and Medicare programs are highly regulated. The failure of NCS
and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect the Company's business. The Company monitors
its receivables from Medicaid and other third-party payor programs and reports
such revenues at the net realizable amount expected to be received from
third-party payors.
Cash Equivalents
The Company considers all investments in highly liquid instruments with
original maturities of three months or less at the date purchased to be cash
equivalents. Investments in cash equivalents are carried at cost, which
approximates market value.
Contractual Allowances
An estimated contractual allowance is recorded against third-party
sales and accounts receivable (Medicaid and insurance). Accordingly, the net
sales and accounts receivable reported in the Company's financial statements are
recorded at the amount expected to be received from the third-party payor.
Contractual allowances are adjusted to actual as cash is received and claims are
reconciled. No material adjustments to contractual allowances were recorded
during the years ended June 30, 2000, 2001, and 2002. The Company evaluates the
following criteria in developing the estimated contractual allowance percentages
each month:
- Historical contractual allowance trends based on actual claims paid
by third-party payors.
- Review of contractual allowance information reflecting current
contract terms.
- Consideration and analysis of changes in customer base, product mix,
payor mix, reimbursement levels or other issues that may impact
contractual allowances.
Allowance for Doubtful Accounts
The Company utilizes the "Aging Method" to evaluate the adequacy of its
allowance for doubtful accounts. This method is based upon applying estimated
standard allowance requirement percentages to each accounts receivable aging
category for each payor. Company management developed the estimated standard
allowance requirement percentages by utilizing historical collection trends and
its understanding of the nature and collectibility of receivables in the various
aging categories. The standard allowance percentages were developed by payor
type as the accounts receivable from each payor type have unique
characteristics. The necessary balance sheet allowance for doubtful accounts is
calculated on a monthly basis utilizing the aging method described above and
considers accounts specifically identified as uncollectible. The Company ensures
that the actual balance in the allowance for doubtful accounts is equal to or
greater than the estimated amount calculated by the aging method. Accounts
receivable that Company management specifically determines to be uncollectible,
based upon the age of the receivables, the results of collection efforts or
other circumstances, are fully reserved for in the allowance for doubtful
accounts until they are written off.
F-8
Movement of the allowance for doubtful accounts is as follows:
Write-offs,
Balance at Provision for Net of Balance at
Beginning of Doubtful Recoveries End of
Period Accounts and Other Period
--------------- -------- ------------ ------------
Fiscal Year Ended
June 30,
2002 $28,332 $18,013 $(25,319) $21,026
2001 $53,926 $31,101 $(56,695) $28,332
2000 $38,880 $53,825 $(38,779) $53,926
Inventories and Cost of Goods Sold
Inventories for all business units consist primarily of purchased
pharmaceuticals and medical supplies and are stated at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method for 4%
of the June 30, 2002 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 96%. If the FIFO inventory valuation method had
been used exclusively, inventories would have been $636 and $512 higher at June
30, 2001 and 2002, respectively.
Physical inventories are performed on a quarterly basis at all sites.
As the Company does not utilize a perpetual inventory system, cost of goods sold
is estimated during non-inventory months and is adjusted to actual by recording
the results of the quarterly physical inventories. The Company evaluates the
following criteria in developing estimated cost of goods sold during
non-inventory months:
o Historical cost of goods sold trends based on prior physical inventory
results.
o Review of cost of goods sold information reflecting current customer
contract terms.
o Consideration and analysis of changes in customer base, product mix, payor
mix, State Medicaid and third-party insurance reimbursement levels or other
issues that may impact cost of goods sold.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation on
property, plant and equipment is computed using the straight-line method over
the estimated useful lives of the assets, which are as follows:
Buildings................................................... 30 years
Machinery, equipment and vehicles........................... 5 - 10 years
Computer equipment and software............................. 3 - 5 years
Furniture, fixtures and leasehold improvements.............. 3 - 10 years
Depreciation expense, including amortization of capital leased assets,
was $15,110, $11,979 and $11,191 for the years ended June 30, 2000, 2001 and
2002, respectively.
In February 2001, the Company recorded a fixed asset impairment charge
of $2,106 in accordance with SFAS No. 121. This charge relates primarily to
changes in asset values resulting from the impact of restructuring activities
and changes in operational processes under restructured operations.
F-9
Goodwill, Intangibles and Other Assets
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001.
The Company elected early adoption of SFAS No. 142 as of July 1, 2001.
In accordance with SFAS No. 142, goodwill and other indefinite lived intangible
assets will no longer be amortized. Under this non-amortization approach, SFAS
No. 142 requires that goodwill and other indefinite lived intangible assets be
reviewed for impairment using a fair value based approach upon adoption and at
least annually thereafter.
SFAS No. 142 provides a six-month transitional period from the
effective date of adoption for the Company to perform an assessment of whether
there is an indication that goodwill is impaired. To the extent that an
indication of impairment exists, the Company must perform a second test to
measure the amount of the impairment. For the purposes of SFAS No. 142, the
Company is considered to have one reporting unit. The Company determined its
implied fair value utilizing a market capitalization approach and compared the
fair value of the Company to its carrying value. This evaluation indicated that
goodwill was potentially impaired as of July 1, 2001. As a result, the Company
was required to complete the second step of the transitional impairment test to
measure the amount of the impairment. In calculating the impairment, the implied
fair value of goodwill was determined by calculating the fair value of all
tangible and intangible net assets through appraisals, external valuations,
quoted market prices and other valuation methods. The implied fair value of
goodwill was compared to the carrying value of goodwill to measure the amount of
the impairment. The Company recorded a non-cash charge of $222,116 as of July 1,
2001 to reduce the carrying value of its goodwill as a result of the adoption of
SFAS No. 142. In accordance with the requirements of SFAS No. 142, the charge
has been recorded as a cumulative effect of accounting change in the Company's
consolidated statement of operations. Since a portion of the impaired goodwill
is not deductible for taxes or as a result of the full valuation allowance on
deferred taxes, no tax benefit was recorded in relation to the non-cash charge.
As of June 30, 2002, remaining goodwill was $80,487 which is subject to
continuing review of impairment under a similar approach as described above.
The amount of the impairment primarily reflects the decline in the
Company's stock price and financial condition since the acquisitions were
consummated that generated the goodwill. The Company observed significant
negative industry and customer trends during the three years prior to the
valuation date of July 1, 2001, including a net loss of $16,325, $114,524 and
$43,510 for the years ended June 30, 1999, 2000 and 2001, respectively. These
trends primarily related to increased bankruptcies and significant financial
difficulties experienced by the Company's skilled nursing facility customers
primarily as a result of the greater than expected adverse impact with regard to
implementation of the Medicare Prospective Payment System (PPS) under the
Balanced Budget Act of 1997.
SFAS No. 142 also requires goodwill to be tested annually and between
annual tests if events occur or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. The
Company has elected to perform its annual tests for indications of goodwill
impairment as of April 1 of each year. As of April 1, 2002, the Company's annual
assessment indicated that the remaining goodwill was not impaired.
The methodology of accounting for goodwill under SFAS No. 142 differs
from the Company's previous policy, in accordance with accounting standards
existing at that time, of using undiscounted cash flows over the remaining
amortization period to determine if goodwill is recoverable.
Intangible assets that will continue to be amortized under SFAS No. 142
consist primarily of non-compete covenants and debt issuance costs. Debt
issuance costs are included in other assets and are amortized using the
effective interest method over the life of the related debt. Non-compete
covenants are amortized on a straight-line basis over the life of the contracts
ranging from 3 to 11 years.
F-10
Accrued Health Insurance
The Company is self-insured for health insurance claims with a
stop-loss umbrella policy in place to limit the maximum potential liability for
both individual claims and total claims for a plan year. Health insurance claims
are paid as they are submitted to the plan administrator. The Company maintains
an accrual for claims that have been incurred but not yet reported (IBNR) to the
plan administrator and therefore have not been paid. The Company maintains an
IBNR reserve based on the historical claim lag period and current payment trends
of health insurance claims (generally 2 to 3 months).
The Company records a monthly expense for the health insurance plan in
its financial statements. The initial monthly expense for a plan year is
determined at the beginning of the plan year by reviewing historical claims
experience and the estimated range of liability for the plan year as determined
by the plan administrator. The initial monthly expense is adjusted each month as
necessary to ensure that an adequate IBNR reserve level is maintained.
Income Taxes
The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the expected enacted tax rates and laws
that apply in the periods in which the deferred tax asset or liability is
expected to be realized or settled.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Earnings Per Share
The Company follows Statement of Financial Accounting Standards No.
128, "Earnings per Share." Under this accounting standard, basic earnings per
share are computed based on the weighted average number of shares of Class A and
Class B shares outstanding during the period. Diluted earnings per share include
the dilutive effect of stock options and subordinated convertible debentures.
Fair Value Of Financial Instruments
The fair value of all financial instruments of the Company approximates
the amounts presented on the consolidated balance sheet.
Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and amends APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business" ("APB
30"). This statement develops one accounting model (based on the model in SFAS
No. 121) for long-lived assets that are disposed of by sale, as well as
addresses the principal implementation issues. SFAS No. 144 also expands the
scope of discontinued operations and changes the disclosure requirement for
discontinued operations. This statement is effective for fiscal years beginning
after December 15, 2001. Management does not expect this standard to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
F-11
The FASB recently issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities or relocate employees, and
termination benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146
supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to exit an
Activity (including Certain Costs Incurred in a Restructuring)" and requires
liabilities associated with exit and disposal activities to be recognized when
the liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results can differ from these estimates depending
upon certain risks and uncertainties.
Material Risks And Uncertainties
Potential risks and uncertainties, many of which are beyond the control
of the Company include, but are not limited to, such factors as the Company's
ability to consummate the proposed merger transaction with Genesis, discussions
with the Company's senior lenders and the ad hoc committee of debenture holders,
overall economic, financial and business conditions, delays in reimbursement by
the government or other payors of the Company and its customers, the overall
financial condition of the Company's customers, the effect of new government
regulation, changes in reimbursement levels from State Medicaid programs and
third-party insurance plans, negotiations regarding payment terms and other
contractual obligations with suppliers, the outcome of litigation, access to
capital and financing, the demand for the Company's products and services,
pricing and competitive factors in the industry and changes in accounting rules
and standards.
The Company purchases the majority of its inventory through one primary
pharmaceutical supplier representing a concentration of credit risk to the
Company. In fiscal 2001, the Company negotiated a temporary modification of
payment terms with this supplier. In June 2002, the Company entered into a
letter of intent with this supplier and is continuing its negotiations to
achieve a permanent modification in payment terms. In addition, the Company
earns administrative fees and amounts from certain other contractual
arrangements under a prime wholesaler agreement with this supplier. The
administrative fees and amounts from other contractual arrangements are accrued
on a monthly basis based on purchasing data and knowledge of the terms of the
contractual arrangements. The monthly accrual is adjusted to actual results when
they are communicated to the Company. The actual amounts due under the
contractual arrangements are typically communicated to the Company on a
quarterly or annual basis based on the terms of the contractual arrangements. As
a result of the 2001 temporary modification of payment terms, the supplier is
withholding certain contractual amounts due to the Company. Receivables from the
supplier of $5,871 and $12,237 at June 30, 2001 and 2002, respectively, have
been netted against accounts payable to the supplier for financial reporting
purposes. The Company believes that the receivables arising from these
contractual arrangements are collectible and is currently operating under the
letter of intent which provides for the Company to make monthly payments to the
supplier based on the net amount payable to the supplier.
F-12
2. Line of Credit
In June 1998, the Company entered into a four-year revolving credit
agreement (Credit Facility) which expired on May 31, 2002. On June 3, 2002, the
Company received correspondence from the senior lenders indicating that they
reserve the right to exercise all rights, powers and privileges provided for in
the credit agreement including the acceleration of the collection of the
Company's obligations and/or exercise other remedies under the credit agreement
including exercising their rights with respect to the pledged collateral. At the
current time, the senior lenders have not chosen to exercise and enforce the
rights and remedies available to them under the credit agreement. The Company
continues to operate under the terms of the Credit Facility.
The Credit Facility, as amended, had an available commitment of $207
million, provided all Company assets as security, limited the availability of
the Credit Facility to use for working capital only, required Lender approval on
acquisitions, provided for interest at a variable rate and contained certain
debt covenants including an interest coverage ratio, minimum consolidated net
worth requirements and a restriction on declaration and payment of cash
dividends to shareholders. Prior to the expiration of the Credit Facility, the
Company had been in violation of certain financial covenants of the Credit
Facility. On April 21, 2000, the Company received a formal notice of default
from the senior lenders. As a result of the notice of default, the interest rate
on the Credit Facility (excluding facility fee) increased to the Prime Rate plus
2.25% (7.0% at June 30, 2002). The borrowings of $206,130 under the Credit
Facility at June 30, 2002 are classified as a current liability. Failure to
obtain a favorable resolution to the expiration of the Credit Facility could
have a material adverse effect on the Company.
See additional discussion regarding the Credit Facility and the
proposed merger with Genesis in Note 1.
3. Long-Term Debt
Long-term debt consists of the following:
June 30,
------------------
2002 2001
---- ----
2% note payable to Pennsylvania Industrial Development Authority due
in monthly installments through June, 2010, and secured through
an interest in a building of the Company........................ $393 $425
Collateralized lease obligations with interest ranging from 7% to
16% due monthly through April, 2004............................. 318 707
Other.............................................................. 112 149
---- -----
Total long-term debt............................................... 823 1,281
Less current portion............................................... 274 456
---- -----
Long-term debt, excluding current portion.......................... $549 $825
==== =====
The aggregate maturities of the long-term debt for each of the five
years subsequent to June 30, 2002 are as follows:
Fiscal Year Ending June 30, Amount
---------------------------- ------
2003........................................................................ $274
2004 ....................................................................... 170
2005........................................................................ 67
2006........................................................................ 70
2007........................................................................ 60
Thereafter.................................................................. 182
-----
$823
=====
F-13
4. Income Tax Expense
Income tax expense (benefit), for each of the three years ended June
30, 2002, consists of:
2002 2001 2000
------------------------- ------------------------ ------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- --------- ----- ------- -------- ----- ------- -------- -----
Federal $ -- $ -- $ -- $ -- $ -- $ -- $ (56) $ 2,505 $ 2,449
State and local 300 -- 300 370 -- 370 445 432 877
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 300 $ -- $ 300 $ 370 $ -- $ 370 $ 389 $ 2,937 $ 3,326
======= ======= ======= ======= ======= ======= ======= ======= =======
Reconciliation of income taxes at the United States Federal statutory
rate to the effective income tax rate for the three years ended June 30, 2002
are as follows:
2002 2001 2000
----------- ---------- -----------
Income tax benefit at the United States statutory rate. $ (79,647) $ (14,668) $ (37,807)
State and local income tax benefit..................... (12,455) (2,327) (2,989)
Amortization/write-off of nondeductible intangible assets 12,806 532 561
Increase in valuation allowance........................ 79,254 16,770 35,993
Nondeductible nonrecurring charges..................... -- -- 6,725
Other - net............................................ 342 63 843
--------- --------- ----------
Total provision for income tax expense................. 300 370 3,326
Income tax benefit from cumulative effect of accounting
change................................................. -- -- --
--------- --------- ----------
Net tax provision...................................... $ 300 $ 370 $ 3,326
========= ========= ==========
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows:
June 30,
-------------------------
2002 2001
---------- ------------
Deferred tax assets (liabilities):
Allowance for doubtful accounts................................ $ 8,550 $ 11,082
Accrued expenses and other..................................... 5,369 4,825
Loss carryforwards............................................. 78,457 65,477
Intangibles.................................................... 40,867 (25,863)
Depreciable assets and other................................... (1,082) (2,245)
Valuation allowance............................................ (132,161) (53,276)
--------- ----------
Net deferred tax assets........................................ $ -- $ --
--------- ----------
The evaluation of the realizability of the Company's net deferred tax
assets in future periods is made based upon historical and projected operating
performance and other factors for generating future taxable income, such as
intent and ability to sell assets. At this time, the Company has concluded that
the realization of deferred tax assets is not deemed to be "more likely than
not" and, consequently, established a valuation allowance during the years ended
June 30, 2001 and 2002 equal to its net deferred tax asset.
At June 30, 2002 the Company has net operating loss carryforwards of
$192.3 million for income tax purposes that expire in years 2010 through 2022.
U.S. tax laws limit the annual utilization of tax loss carryforwards of acquired
businesses.
F-14
5. Operating Leases
The Company is obligated under operating leases primarily for office
facilities and equipment. Future minimum lease payments under noncancelable
operating leases as of June 30, 2002 are as follows:
Fiscal Year Ending June 30, Amount
--------------------------- -------------
2003................................................................ $ 7,114
2004................................................................ 5,639
2005................................................................ 3,824
2006................................................................ 2,843
2007................................................................ 2,033
Thereafter.......................................................... 1,466
-------------
$ 22,919
=============
Total rent expense under all operating leases for the years ended June
30, 2000, 2001 and 2002 was $9,762, $8,698, and $8,446 respectively.
6. Profit-Sharing Plan
The Company maintains a profit sharing plan with an Internal Revenue
Code Section 401(k) feature covering substantially all of its employees. Under
the terms of the plan, the Company will match up to 20% of the first 10% of
eligible employee compensation. Effective January 1, 1999, the Company amended
the profit sharing plan to provide for the Company match to be contributed as
the Company's common stock. Effective October 1, 2000 the Company amended the
profit sharing plan to return the Company match back to a cash contribution.
The Company's aggregate contributions to the plan and related expense
were $962, $852 and $834 for the years ended June 30, 2000, 2001 and 2002,
respectively.
7. Related Party Transactions
The Company currently leases 11 of its facilities from entities
affiliated with former owners of certain businesses acquired, who are employees
of the Company. The buildings are used for operations of the Company. Rent
expense of $1,197, $888 and $890 was incurred under these leasing arrangements
in the years ended June 30, 2000, 2001 and 2002, respectively.
8. Stockholders' Equity/Convertible Subordinated Debentures
Holders of Class A Common Stock and holders of Class B Common Stock are
entitled to one and ten votes, respectively, in corporate matters requiring
approval of the shareholders of the Company. No dividend may be declared or paid
on the Class B Common Stock unless a dividend of equal or greater amount is
declared or paid on the Class A Common Stock.
On August 3, 1999 the Company amended its line of credit agreement
entering into several restrictive covenants including a restriction on the
declaration and payment of cash dividends to shareholders.
On August 13, 1997, the Company issued $100,000 of convertible
subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company
were approximately $97,250, net of underwriting discounts and expenses. The 1998
debentures carry an interest rate of 5 3/4% and are convertible into shares of
Class A Common Stock at any time prior to maturity at $32.70 per share. A
portion of the proceeds from the debenture offering was used to repay
approximately $21,000 of outstanding indebtedness under short-term borrowings.
F-15
The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. Each of the Company's wholly owned
subsidiaries has unconditionally guaranteed, jointly and severally, the
Company's payment obligations under the 1998 debentures. Accordingly, summarized
financial information regarding the guarantor subsidiaries has not been
presented because management of the Company believes that such information would
not be meaningful to investors.
The Company elected not to make the semi-annual $2,875 interest
payments due February 15, 2001, August 15, 2001, February 15, 2002 and August
15, 2002 on the 1998 debentures. On April 6, 2001, the Company received a formal
Notice of Default and Acceleration and Demand for Payment from the Indenture
Trustee. The Indenture Trustee declared the entire principal and any accrued
interest thereon to be immediately due and payable and demanded immediate
payment of such amounts. If such payments are not made, the Indenture Trustee
reserves the right to pursue remedial measures in accordance with the Indenture,
including, without limitation, collection activities. As of June 30, 2002, the
amount of principal and accrued interest is $110,767.
During fiscal 2000, in connection with an acquisition agreement, the
Company issued a $2,000 convertible subordinated debenture maturing on August
15, 2004. The note and accrued "payment-in-kind" interest will be convertible
into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00
per share. During fiscal 2001 and 2002, $107 and $254 of accrued interest was
converted to principal, respectively. As a result of the 1998 debentures being
in default, these debentures are also in default at June 30, 2001 and 2002.
Until the defaults on the debentures are resolved, convertible
subordinated debentures of $102,361 and the related accrued interest of $10,856
will be classified as a current liability. See additional discussion regarding
the convertible subordinated debentures and the proposed merger with Genesis in
Note 1.
9. Stock Options
During the period from 1987 through 1995, the Company granted stock
options to certain directors and key employees which provide for the purchase of
1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71
to $6.19 per share, which represented fair market values on the dates the grants
were made.
During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan that authorized 100,000 shares of Class A Common Stock for awards of
stock options to certain key employees. During fiscal 1995 and 1996 the Company
granted 11,520 and 7,458 options, respectively, at an exercise price of $6.19
and $7.33 per share, respectively, under the provisions of this plan. These
exercise prices represented fair market values on the dates the grants were
made.
In January 1996, the Company adopted a Long Term Incentive Plan (the
Plan) to provide up to 700,000 shares of Class A Common Stock for awards of
incentive and nonqualified stock options to officers and key employees of the
Company. During fiscal 1996, the Company granted 56,500 nonqualified stock
options and 27,540 incentive stock options, all at $16.50 per share. The
nonqualified stock options have a term of five years and became exercisable in
thirds on February 1, 1998, 1999 and 2000. The incentive stock options have a
term of six years and became exercisable in fifths each year on February 1,
1997, 1998, 1999, 2000 and 2001. During fiscal 1997 and 1999 the Company granted
301,250 and 345,250 nonqualified stock options, respectively, at an exercise
price of $20.00 and $15.00 per share, respectively, the market values of the
stock on the dates of the grant. The fiscal 1997 nonqualified stock options have
a term of five years and became exercisable in thirds on April 1, 1999, 2000 and
2001. The fiscal 1999 nonqualified stock options have a term of five years and
become exercisable in thirds on November 1, 2000, 2001, and 2002. During fiscal
2001, the Company granted 240,000 nonqualified stock options at an exercise
price of $0.135, the market value of the stock on the date of the grant. The
options have a term of five years and become exercisable in thirds on November
1, 2002, 2003 and 2004.
F-16
In October 1998, the Company adopted the 1998 Performance Plan (the
1998 Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock
for awards of incentive and nonqualified options to directors, officers, and key
employees of the Company. During fiscal 1999, the Company granted 85,000
nonqualified stock options at an exercise price of $18.50 per share, the market
value of the stock on the date of the grant. These nonqualified stock options
have a term of five years and become exercisable in thirds on January 1, 2001,
2002 and 2003. During fiscal 2000, the Company granted 494,250 and 290,500
nonqualified stock options at an exercise price of $4.25 and $1.47 per share
respectively, the market values of the stock on the date of the grants. The
494,250 nonqualified stock options have a term of five years and become
exercisable in thirds on August 1 2001, 2002 and 2003. The 290,500 nonqualified
stock options have a term of five years and became exercisable in halves on
January 28, 2001 and 2002. During fiscal 2001 the Company granted 460,000
nonqualified stock options at an exercise price of $0.135, the market value of
the stock on the date of the grant. The options have a term of five years and
become exercisable in thirds on November 1, 2002, 2003 and 2004.
In November 2000, the Company adopted the 2000 Performance Plan (the
2000 Performance Plan) to provide up to 2,000,000 shares of Class A Common Stock
for awards of incentive and nonqualified options to directors, officers, and key
employees of the Company. During fiscal 2002, the Company granted 705,000
nonqualified stock options at an exercise price of $0.19 per share, the market
value of the stock on the date of the grant. These nonqualified stock options
have a term of five years and become exercisable in thirds on December 1, 2003,
2004 and 2005.
Substantially all of the Company's outstanding stock options contain
provisions that provide for immediate vesting upon a change in control of the
Company.
F-17
The Company's stock option activity and related information for the
years ended June 30 are summarized as follows:
2002 2001 2000
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
EXERCISE AVERAGE EXERCISE
OPTIONS PRICE OPTIONS EXERCISE PRICE OPTIONS PRICE
--------- ---------- --------- -------------- ------- ---------
Outstanding at beginning of
year 1,954,798 $5.99 1,297,109 $9.14 846,694 $15.82
Granted 705,000 0.19 700,000 0.14 784,750 3.22
Forfeited (142,216) 4.72 (42,311) 5.80 (334,335) 12.32
--------- ------ --------- ------ --------- ------
Outstanding at end of year 2,517,582 $4.44 1,954,798 $5.99 1,297,109 $9.14
========= ====== ========= ====== ========= =====
Exercisable at end of year 850,814 537,828 266,441
========= ======= =======
Information regarding stock options outstanding as of June 30, 2002 is
summarized as follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------- --------------------------
Weighted
Average
Number Weighted Remaining Number Weighted
Outstanding Average Contractual Exercisable Average
At June 30, Exercise Life (In At June 30, Exercise
Range of Exercise Prices 2002 Price Years) 2002 Price
-------------------------- ----------- --------- ---------- ----------- ----------
$0.14 - $0.14 627,000 $0.14 4.50 -- $ --
0.19 - $0.19 694,000 0.19 3.33 -- --
1.47 - 1.47 236,750 1.47 2.58 236,750 1.47
4.25 - 6.19 481,358 4.63 2.23 223,682 5.07
15.00 - 16.50 228.274 15.32 1.81 168,516 15.44
18.50 - 20.00 250,200 19.49 3.74 221,866 19.62
----- ------ --------- ----- ---- ------- -----
$0.14 - $20.00 2,517,582 $4.44 3.28 850,814 $9.92
===== ====== ========= ===== ==== ======= =====
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a
volatility factor of the expected market price of the Company's Class A Common
Stock ranging from .482 to 1.964; and a weighted-average expected option life
ranging from 4 to 4.5 years. The weighted average fair value of options granted
during fiscal 2000, 2001 and 2002 was $1.97, $0.13 and $0.11 per share,
respectively.
F-18
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the three years ended June 30, 2002 is as follows (in
thousands except for earnings per share information):
2002 2001 2000
---------- --------- ----------
Net loss - basic and diluted........................ $(235,293) $(44,554) $(115,577)
Earnings per share - basic and diluted.............. $ (9.92) $ (1.89) $ (5.36)
10. Acquisitions
As described in Note 1, the Company adopted SFAS No. 141 as of July 1,
2001. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. The Company paid cash
of $1,371 for three immaterial acquisitions in fiscal 2002. These acquisitions
have been recorded using the purchase method of accounting and, accordingly,
results of their operations have been included in the Company's consolidated
financial statements since the effective date of the respective acquisitions.
There were no acquisitions during the fiscal years ended June 30, 2000 and 2001.
Certain of the Company's acquisition agreements provided for contingent
purchase price arrangements under which the purchase price paid may be
subsequently increased upon the achievement of specific operating performance
targets during post acquisition periods. The additional purchase price, payable
in cash or Company stock is recorded, if earned, upon resolution of the
contingent factors. The Company issued 2,203,844 shares of Class A Common Stock
valued at $6,833 and a $2,000 convertible subordinated debenture maturing on
August 15, 2004 under contingent purchase price arrangements during fiscal 2000.
As of June 30, 2002, no material contingencies remain from the Company's
acquisition agreements.
11. Restructuring, Asset Impairment, Other Nonrecurring and Special Charges
During fiscal 2000, the Company recorded restructuring, asset
impairment, other nonrecurring and special charges of $95,800. A special charge
of $44,600 was recorded to increase the allowance for doubtful accounts and
restructuring, asset impairment and other nonrecurring charges of $51,200 were
recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations, the planned
disposition of certain non-core and/or non-strategic assets, impairment of
certain assets and other nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from continuing negative changes observed in industry and customer
trends during the year ended June 30, 2000, and a change in the method of
estimating the allowance necessary for accounts receivable. The financial
condition of the Company's primary customer base and negative industry trends
continued to deteriorate throughout the year. Due to the negative trends that
the Company's customers were facing, management re-evaluated the method of
estimating the allowances necessary for these and other customers. The total
provision for doubtful accounts, including the amounts included in the special
charge, was $53,825 for the year ended June 30, 2000.
The Company continued its plan of restructuring to consolidate certain
pharmacy sites in order to improve operating efficiencies. As a result, the
Company consolidated thirteen additional pharmacy sites into either a new or
existing location. The Company also shutdown six locations associated with
certain ancillary services. During the year ended June 30, 2000, the Company
recorded restructuring charges of $9,700 related to these site consolidations
and location shutdowns, inclusive of $1,100 of additional costs incurred on site
consolidations previously announced.
F-19
During the year ended June 30, 2000, the Company adopted a formal exit
plan to dispose of certain non-core and/or non-strategic assets. The Company
recorded restructuring, asset impairment and other nonrecurring charges of
$30,700 related to the planned disposition of assets primarily consisting of
impairment to goodwill and property and equipment. Through June 30, 2002, the
Company has disposed of four ancillary service operations that were not
contributing to the overall financial performance of the Company. Total revenue
and operating income of the related business units was $59,300 and $1,500,
respectively, for the year ended June 30, 2000.
The remaining $10,800 of the restructuring, asset impairment and other
nonrecurring charges primarily relate to severance incurred during the year
associated with the Company's expense reduction initiatives, additional asset
impairments, costs related to a settlement with federal authorities regarding
the investigation of the Company's Indianapolis, Indiana facility and other
nonrecurring expenses.
During December 1999, the Company reached a settlement with the U.S.
Attorney's office in the Southern District of Indiana regarding the federal
investigation of the Company's facility in Indianapolis, Indiana. As a result,
the Company recorded the settlement amount as a nonrecurring charge. Under the
terms of the settlement, the Company paid $4,100 to the U.S. Attorney's office.
The Company also agreed to maintain its current level of spending in connection
with its compliance systems and procedures for a period of three years. If the
Company does not comply with the terms of the accord, an additional $1,500 will
be payable to the U.S. Attorney's office.
Employee severance costs included in the charges relate to the
termination of 472 employees. As of June 30, 2002, all terminations associated
with these restructuring activities have been completed.
Details of the fiscal 2000 restructuring, asset impairment, other
nonrecurring and special charges and related activity are as follows:
Cash/ Nonrecurring Reserve At Reserve At
Description non-cash Charge Activity 6/30/01 Activity 6/30/02
--------------------------------- ------------- ------------ --------- ---------- -------- ----------
(in thousands)
Site Consolidations
Severance/compensation related Cash $1,300 $(1,300) $ -- $ -- $ --
Lease terminations Cash 2,800 (2,100) 700 (500) 200
Asset impairments Non-cash 4,400 (4,400) -- -- --
Other Cash 1,200 (1,000) 200 (100) 100
Special increase to allowance Non-cash 44,600 (44,600) -- -- --
for doubtful accounts
Disposition of Assets
Asset impairment Non-cash 30,200 (30,200) -- -- --
Other Cash 500 (500) -- -- --
Other
Cash 6,600 (6,500) 100 (100) --
Non-cash 4,200 (4,200) -- -- --
------- -------- ------ ----- ----
Total $95,800 $(94,800) $1,000 $(700) $300
======= ======== ====== ===== ====
F-20
12. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
2002 2001 2000
----------- ----------- -----------
Numerator:
Numerator for basic earnings per share - net loss....... $ (234,557) $ (43,510) $ (114,524)
Effect of dilutive securities:
Convertible debentures............................. -- -- --
----------- ----------- -----------
Numerator for diluted earnings per share........... $ (234,557) $ (43,510) $ (114,524)
=========== =========== ===========
Denominator:
Denominator for basic earnings per share - weighted
average common shares............................... 23,717 23,535 21,551
Effect of dilutive securities:
Stock options...................................... -- -- --
Convertible debentures............................. -- -- --
----------- ----------- -----------
Dilutive potential common shares........................ -- -- --
----------- ----------- -----------
Denominator for diluted earnings per share............ 23,717 23,535 21,551
=========== ============ ============
Basic earnings per share:
Loss before cumulative effect of accounting change.... $ (0.52) $ (1.85) $ (5.31)
Cumulative effect of accounting change................ (9.37) -- --
----------- ----------- -----------
Net loss per share.................................... $ (9.89) $ (1.85) $ (5.31)
=========== ============ ============
Diluted earnings per share:
Loss before cumulative effect of accounting change.... $ (0.52) $ (1.85) $ (5.31)
Cumulative effect of accounting change................ (9.37) -- --
----------- ----------- -----------
Net loss per share.................................... $ (9.89) $ (1.85) $ (5.31)
=========== ============ ============
At June 30, 2002, the Company has $102,361 of convertible subordinated
debentures outstanding that are convertible into 3,258,104 shares of Class A
Common Stock and 2,517,582 employee stock options that are potentially dilutive
that were not included in the computation of diluted earnings per share as their
effect would be antidilutive. At June 30, 2001, the Company has $102,107 of
convertible subordinated debentures outstanding that are convertible into
3,258,104 shares of Class A Common Stock and 1,954,798 employee stock options
that are potentially dilutive that were not included in the computation of
diluted earnings per share as their effect would be antidilutive.
F-21
13. Goodwill And Intangible Assets
As described in Note 1, the Company adopted SFAS No. 142 as of July 1,
2001. In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill effective July 1, 2001. A reconciliation of previously reported net
loss and loss per share to the amounts adjusted for the exclusion of the
cumulative effect of accounting change and goodwill amortization, net of the
related income tax effect, follows:
Year Ended June 30,
----------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Net Loss:
As reported...................................... $ (234,557) $ (43,510) $ (114,524)
Goodwill amortization............................ -- 10,396 10,865
Cumulative effect of accounting change........... 222,116 -- --
------------- ------------ -------------
As adjusted...................................... $ (12,114) $ (33,114) $ (103,659)
============= ============ =============
Basic and Diluted Loss Per Share:
As reported...................................... $ (9.89) $ (1.85) $ (5.31)
Goodwill amortization............................ -- 0.44 0.50
Cumulative effect of accounting change........... 9.37 -- --
------------- ------------ -------------
As adjusted...................................... $ (0.52) $ (1.41) $ (4.81)
============= ============ =============
Changes in the carrying amount of goodwill for fiscal 2002 are as follows:
Balance at June 30, 2001......................................................... $ 301,907
Cumulative effect of accounting change........................................... (222,116)
Other............................................................................ 696
-------------
Balance at June 30, 2002......................................................... $ 80,487
=============
Accumulated amortization of goodwill was $44,176 at June 30, 2001.
The gross carrying amount and accumulated amortization of intangible
assets subject to amortization was $11,334 and $6,879, respectively, at June 30,
2001 and $10,128 and $7,934, respectively, at June 30, 2002. Intangible assets
that will continue to be amortized under SFAS No. 142 consist primarily of
non-compete covenants and deferred debenture issuance costs. Amortization
expense for the year ended June 30, 2002 was $1,894. The estimated amortization
expense for each of the five fiscal years subsequent to June 30, 2002 is as
follows:
Fiscal Year Ending June 30, Amount
--------------------------- -------
2003 $ 572
2004 420
2005 247
2006 201
2007 70
14. Contingencies
In the ordinary course of its business, the Company is subject to inspections,
audits, inquiries and similar actions by governmental authorities responsible
for enforcing the laws and regulations to which the Company is subject and is
involved from time to time in litigation on various matters. See Note 15 for
information regarding litigation associated with the proposed merger with
Genesis.
F-22
15. Subsequent Event (Unaudited)
On July 28, 2002, NCS, Genesis and Geneva Sub, Inc., a wholly owned
subsidiary of Genesis ("Sub") entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement"), pursuant to which Sub will merge with and into
NCS (the "Proposed Merger"), with NCS surviving as a wholly owned subsidiary of
Genesis. If the Proposed Merger is completed, each outstanding share of common
stock of NCS, par value $0.01 per share ("NCS Common Stock"), other than the NCS
Common Stock held by NCS and other than dissenting shares, will be converted
into the right to receive 0.1 of a share of common stock of Genesis, par value
$0.02 per share. The completion of the Proposed Merger is subject to regulatory
approvals and other customary conditions, including the approval of the holders
of a majority of the outstanding voting power of NCS Common Stock.
In connection with the Merger Agreement, on July 28, 2002, NCS and
Genesis entered into agreements (the "Voting Agreements") with certain
stockholders of NCS beneficially owning in the aggregate a majority of the
outstanding voting power of NCS Common Stock. In the Voting Agreements, such
stockholders agreed (1) to vote their shares of NCS Common Stock in favor of
adoption and approval of the Merger Agreement and against proposals for certain
other transactions and (2) not to transfer their shares of NCS Common Stock
prior to the consummation of the Proposed Merger
On August 8, 2002, Omnicare, Inc. (Omnicare) commenced a cash tender
offer to purchase all of the outstanding shares of Class A and Class B common
stock of NCS for $3.50 per share. The effect of the Omnicare tender offer on the
proposed merger between NCS and Genesis is not known at this time.
Since the Company entered into the Merger Agreement, seven shareholder
lawsuits (six of which are purported class action lawsuits) were filed against
NCS and its directors in connection with the Proposed Merger with Genesis and,
in two cases, against Genesis and Sub (the "Stockholder Claims"). The
Stockholder Claims allege that the directors of NCS breached their fiduciary
duties, and certain other duties, to stockholders by entering into the Merger
Agreement and seek various relief, including an injunction against consummation
of the Proposed Merger, requiring separate class voting on approval of the
Proposed Merger by NCS Stockholders, rescinding the Proposed Merger if the same
is consummated prior to a final judgment on the Stockholder Claims, declaring
the Voting Agreements null and void and compensatory damages and costs. In
addition, the amended complaint filed by Omnicare alleges that the Voting
Agreements violate the NCS amended and restated certificate of incorporation and
therefore resulted in an automatic conversion of such stockholders' Class B
common shares into Class A common shares. On September 30, 2002, Omnicare filed
a motion for summary judgment seeking a judgment declaring that the voting
agreements entered into by Messrs. Outcalt and Shaw violate NCS' amended and
restated certificate of incorporation and therefore Messrs. Outcalt and Shaw
automatically and irrevocably converted their Class B common stock (10 votes per
share) into shares of Class A common stock (1 vote per share). No court dates
have been set for these matters. NCS believes that the allegations set forth in
these lawsuits are without merit and intends to contest them vigorously;
however, the ultimate outcome of these lawsuits cannot be predicted with
certainty. These lawsuits could adversely affect the Company's ability to
consummate the Merger Agreement with Genesis.
On August 20, 2002, the Company filed a complaint against Omnicare in
the United States District Court for the Northern District of Ohio, titled NCS
Healthcare, Inc. v. Omnicare, Inc., Case No. 1:02CV1635 (Matia, J.), and, on
August 21, 2002, the Company amended the complaint. The complaint, as amended,
alleges, among other things, that Omnicare's disclosure on Schedule TO, filed on
August 8, 2002 in connection with the associated tender offer, contains
materially false and misleading disclosures in violation of Section 14(e) of the
Securities Exchange Act of 1934. On September 30, 2002, NCS filed a motion for a
preliminary injunction seeking to enjoin the Omnicare tender offer until such
time as Omnicare amends the tender offer to correct its materially false and
misleading disclosures.
On September 26, 2002, UBS Warburg LLC filed a complaint against the
Company in the Supreme Court of the State of New York for the County of New
York, titled UBS Warburg LLC (f/k/a Warburg Dillon Read LLC) v. NCS HealthCare,
Inc. et. al., Case No. 603546/02. The lawsuit seeks damages in connection with
the Company's alleged breach of certain engagement letters between the Company
and UBS Warburg LLC. UBS Warburg seeks a money judgment against NCS in excess of
$12.5 million. The Company believes that the allegations set forth in this
lawsuit are without merit and intends to contest them vigorously.
F-23
If the Company is unsuccessful in defending the actions discussed
above, their resolution could have a material effect on the Company's financial
condition and consolidated financial position, results of operations and cash
flows.
16. Quarterly Data (Unaudited)
Selected quarterly data for the years ended June 30, 2001 and 2002:
Year Ended June 30, 2001
-------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Revenues $159,022 $157,461 $154,890 $154,955 $626,328
Gross profit 28,037 28,673 27,676 27,459 111,845
Operating income (loss) (b) 1,036 1,260 (12,800) (923) (11,427)
Net loss (7,113) (7,203) (20,807) (8,387) (43,510)
Earnings per share - basic (a) (0.31) (0.31) (0.88) (0.35) (1.85)
Earnings per share - diluted (a) $ (0.31) $ (0.31) $ (0.88) $ (0.35) $ (1.85)
Year Ended June 30, 2002
-------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Revenues $157,836 $161,708 $163,816 $162,396 $645,756
Gross profit 27,180 26,381 26,418 26,851 106,830
Operating income 1,848 1,292 4,842 5,072 13,054
Net loss as reported (5,179) (5,239) (1,323) (700) (12,441)
Cumulative effect of accounting change (c) (222,116) -- -- -- (222,116)
Net loss as restated (227,295) (5,239) (1,323) (700) (234,557)
Earnings per share as reported - basic (a) (0.22) (0.22) (0.06) (0.03) (0.52)
Earnings per share as reported - diluted (a) (0.22) (0.22) (0.06) (0.03) (0.52)
Earnings per share as restated - basic (a) (9.58) (0.22) (0.06) (0.03) (9.89)
Earnings per share as restated - diluted (a) $ (9.58) $ (0.22) $ (0.06) $ (0.03) $ (9.89)
(a) Earnings per share is calculated independently for each quarter and the sum
of the quarters may not necessarily be equal to the full year earnings per
share amount.
F-24
(b) The operating loss for the year ended June 30, 2001 includes the following:
1) $10,043 of additional bad debt expense to fully reserve for remaining
accounts receivable of non-core and non-strategic businesses exited by the
Company, 2) $1,034 of restructuring and other related charges associated
with the continuing implementation and execution of strategic restructuring
and consolidation activities and 3) $2,106 in fixed asset impairment
charges recorded in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to be Disposed of," relating primarily to changes in
asset values resulting from the impact of restructuring activities and
changes in operational processes under restructured operations.
(c) The cumulative effect of accounting change represents the early adoption of
Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and
Other Intangible Assets." The Company recorded a non-cash charge of
$222,116 as of July 1, 2001 to reduce the carrying value of its goodwill in
accordance with SFAS No. 142. The net loss for the three months ended
September 30, 2001 as originally reported did not include the cumulative
effect of the adoption of SFAS No. 142. In accordance with SFAS No. 142,
the Company had until June 30, 2002 to complete the final step of the
transitional impairment test. The resulting impairment of the Company's
goodwill was required to be recorded as of July 1, 2001.
F-25
Annex A
================================================================================
AGREEMENT AND PLAN OF MERGER
by and among
GENESIS HEALTH VENTURES, INC.,
GENEVA SUB, INC.
and
NCS HEALTHCARE, INC.
Dated as of
July 28, 2002
================================================================================
TABLE OF CONTENTS
ARTICLE I
THE MERGER
1.1. The Merger................................................................................................ A-1
1.2. Closing................................................................................................... A-1
1.3. Effective Time............................................................................................ A-1
1.4. Effects of the Merger..................................................................................... A-2
1.5. Certificate of Incorporation and By-Laws.................................................................. A-2
1.6. Directors and Officers of the Surviving Corporation....................................................... A-2
ARTICLE II
CONVERSION OF SECURITIES
2.1. Conversion of Capital Stock............................................................................... A-2
2.2. Exchange Pool; Exchange Ratio; Fractional Shares; Adjustments............................................. A-2
2.3. Exchange of Certificates.................................................................................. A-3
2.4. Treatment of Stock Options................................................................................ A-5
2.5. Dissenting Shares......................................................................................... A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
3.1. Organization and Standing................................................................................. A-6
3.2. Corporate Power and Authority............................................................................. A-6
3.3. Capitalization of Parent and Sub.......................................................................... A-6
3.4. Conflicts; Consents and Approval.......................................................................... A-6
3.5. Parent SEC Documents...................................................................................... A-7
3.6. Registration Statement; Proxy Statement................................................................... A-7
3.7. Compliance with Law....................................................................................... A-8
3.8. Litigation................................................................................................ A-8
3.9. Absence of Changes........................................................................................ A-8
3.10. Sub's Operations.......................................................................................... A-8
3.11. Reorganization............................................................................................ A-8
3.12. Undisclosed Liabilities................................................................................... A-8
A-i
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1. Organization and Standing............................................................................... A-9
4.2. Subsidiaries............................................................................................ A-9
4.3. Corporate Power and Authority........................................................................... A-9
4.4. Capitalization of the Company........................................................................... A-9
4.5. Conflicts; Consents and Approvals....................................................................... A-10
4.6. Brokerage and Finders' Fees; Expenses................................................................... A-11
4.7. Company SEC Documents................................................................................... A-11
4.8. Registration Statement; Proxy Statement................................................................. A-11
4.9. Compliance with Law..................................................................................... A-12
4.10. Litigation.............................................................................................. A-12
4.11. Absence of Changes...................................................................................... A-12
4.12. Taxes................................................................................................... A-12
4.13. Intellectual Property................................................................................... A-14
4.14. Title to and Condition of Properties.................................................................... A-15
4.15. Employee Benefit Plans.................................................................................. A-15
4.16. Contracts............................................................................................... A-17
4.17. Labor Matters........................................................................................... A-19
4.18. Undisclosed Liabilities................................................................................. A-19
4.19. Licenses; Permits; Compliance........................................................................... A-19
4.20. Institutional Pharmacy Business......................................................................... A-21
4.21. Environmental Matters................................................................................... A-21
4.22. Accounts Receivable; Accounts Payable; Inventories and Cash............................................. A-22
4.23. Insurance............................................................................................... A-22
4.24. Opinion of Financial Advisor............................................................................ A-22
4.25. Related Parties......................................................................................... A-25
4.26. Special Committee; Board Recommendation; Required Vote.................................................. A-25
4.27. Section 203 of the DGCL; No Rights Agreement............................................................ A-25
4.28. Reorganization.......................................................................................... A-25
ARTICLE V
COVENANTS OF THE PARTIES
5.1. Mutual Covenants........................................................................................ A-23
5.2. Covenants of Parent..................................................................................... A-26
5.3. Covenants of the Company................................................................................ A-27
A-ii
ARTICLE VI
CONDITIONS
6.1. Conditions to the Obligations of Each Party............................................................. A-32
6.2. Conditions to Obligations of the Company................................................................ A-32
6.3. Conditions to Obligations of Parent and Sub............................................................. A-33
ARTICLE VII
TERMINATION AND AMENDMENT
7.1. Termination............................................................................................. A-34
7.2. Effect of Termination................................................................................... A-35
7.3. Amendment............................................................................................... A-36
7.4. Extension; Waiver....................................................................................... A-36
ARTICLE VIII
MISCELLANEOUS
8.1. Survival of Representations and Warranties.............................................................. A-37
8.2. Notices................................................................................................. A-37
8.3. Interpretation.......................................................................................... A-37
8.4. Counterparts............................................................................................ A-38
8.5. Entire Agreement........................................................................................ A-38
8.6. Third-Party Beneficiaries............................................................................... A-38
8.7. Governing Law........................................................................................... A-38
8.8. Consent to Jurisdiction; Venue.......................................................................... A-38
8.9. Specific Performance.................................................................................... A-38
8.10. Assignment.............................................................................................. A-38
8.11. Expenses................................................................................................ A-39
8.12 Certain Definitions..................................................................................... A-39
SCHEDULES AND EXHIBITS
EXHIBIT A-- VOTING AGREEMENT
EXHIBIT B-- FORM OF AFFILIATE LETTER
EXHIBIT C-- CASH ON HAND
SCHEDULE 5.3(f)-- INVENTORY PROCEDURES
PARENT DISCLOSURE SCHEDULE
COMPANY DISCLOSURE SCHEDULE
A-iii
INDEX OF DEFINED TERMS
DEFINED TERM SECTION
------------ -------
Acquisition Proposal............................................................... 5.3(c)(vi)
Action............................................................................. 3.8
Affiliate.......................................................................... 8.12(a)
Agreement.......................................................................... Preamble
Antitrust Laws..................................................................... 5.1(a)(ii)
Applicable Laws.................................................................... 3.7
Bankruptcy Court................................................................... 8.12(b)
Cash Determination................................................................. 5.3(g)
Cash on Hand....................................................................... 4.22(d)
Cash Test Date..................................................................... 5.3(g)
Certificate of Merger.............................................................. 1.3
Certificate........................................................................ 2.2(c)
Closing............................................................................ 1.2
Closing Date....................................................................... 1.2
Code............................................................................... Recitals
Company............................................................................ Preamble
Company Affiliate Letter........................................................... 5.3(d)
Company Board Recommendation....................................................... 4.26(b)(ii)
Company By-Laws.................................................................... 4.1
Company Certificate of Incorporation............................................... 4.1
Company Class A Common Stock....................................................... Recitals
Company Class B Common Stock....................................................... Recitals
Company Common Stock............................................................... Recitals
Company Disclosed Contracts........................................................ 4.16(a)
Company Disclosure Schedule........................................................ 4.1
Company Option..................................................................... 2.4
Company Permits.................................................................... 4.19(a)
Company Recent Balance Sheet....................................................... 4.18(a)
Company SEC Agreements............................................................. 4.16(a)
Company SEC Documents.............................................................. 4.7
Company Stockholders............................................................... Recitals
Company Stockholders Meeting....................................................... 5.3(a)
Company Treasury Shares............................................................ 2.1(c)
Commission......................................................................... 3.5
Confidentiality Agreement.......................................................... 5.3(e)
Contract........................................................................... 4.16(a)
Controlled Group Liability......................................................... 4.15(a)
DGCL............................................................................... 1.1
Delaware Secretary of State........................................................ 1.3
Dissenting Shares.................................................................. 2.5(a)
Effective Time..................................................................... 1.3
Environmental Laws................................................................. 4.21
A-iv
DEFINED TERM SECTION
------------ -------
Environmental Permit............................................................... 4.21
ERISA.............................................................................. 4.15(a)
ERISA Affiliate.................................................................... 4.15(a)
Excess Shares...................................................................... 2.2(c)
Exchange Act....................................................................... 3.5
Exchange Agent..................................................................... 2.3(a)
Exchange Fund...................................................................... 2.3(a)
Exchange Ratio..................................................................... 2.2(a)
Expenses........................................................................... 7.2(b)(iv)
FDA................................................................................ 4.19(b)(ii)
Final Order........................................................................ 8.12(c)
GAAP............................................................................... 3.5
Government Programs................................................................ 4.19(c)
Governmental Authority............................................................. 8.12(d)
Hazardous Materials................................................................ 4.21
HSR Act............................................................................ 3.4(b)(ii)
Illinois Sub....................................................................... 5.3(i)
Indenture.......................................................................... 5.1(e)
Intellectual Property.............................................................. 4.13(a)
Knowledge of the Company........................................................... 8.12(e)
Knowledge of Parent and Sub........................................................ 8.12(f)
Lien............................................................................... 8.12(g)
Material Adverse Effect............................................................ 8.12(h)
Material Company-Owned Software.................................................... 4.13(e)
Measured Cash...................................................................... 5.3(g)
Medicare and Medicaid Programs..................................................... 4.19(c)
Merger............................................................................. Recitals
Multiemployer Plan................................................................. 4.15(f)
Multiple Employer Plan............................................................. 4.15(f)
Nasdaq............................................................................. 2.2(c)
NOLs............................................................................... 4.12(e)
Notes.............................................................................. 4.6
Order.............................................................................. 8.12(i)
Other Filings...................................................................... 5.1(c)(i)
Outside Date....................................................................... 7.1(c)
Owned Real Property................................................................ 4.14(b)
Parent............................................................................. Preamble
Parent Certificate of Incorporation................................................ 3.1
Parent By-Laws..................................................................... 3.1
Parent Common Stock................................................................ Recitals
Parent Disclosure Schedule......................................................... 3.3(a)
Parent Exchange Option............................................................. 2.4
Parent Recent Balance Sheet........................................................ 3.12
Parent SEC Documents............................................................... 3.5
Permitted Encumbrances............................................................. 4.14(b)
A-v
Person............................................................................. 8.12(j)
Plans.............................................................................. 4.15(a)
Private Programs................................................................... 4.19(c)
Proxy Statement.................................................................... 3.6
Qualified Plan..................................................................... 4.15(c)
Registration Statement............................................................. 3.6
Required Company Stockholder Approval.............................................. 4.26(b)
Required Governmental Approvals.................................................... 3.4(b)
Section 4.15(i) Arrangements....................................................... 4.15(i)
Securities Act..................................................................... 2.3(d)
Special Committee.................................................................. 4.26(a)
Sub................................................................................ Preamble
Sub By-Laws........................................................................ 1.5
Sub Common Stock................................................................... 2.1(a)
Sub Certificate of Incorporation................................................... 1.5
Subsidiary......................................................................... 8.12(k)
Superior Proposal.................................................................. 5.3(c)(vi)
Surviving Corporation.............................................................. 1.1
Target Date........................................................................ 7.1(g)
Tax Returns........................................................................ 4.12(g)
Taxes.............................................................................. 4.12(h)
Termination Fee.................................................................... 7.2(b)
Voting Agreement................................................................... Recitals
A-vi
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 28, 2002,
is entered into by and among Genesis Health Ventures, Inc., a Pennsylvania
corporation ("Parent"), Geneva Sub, Inc., a Delaware corporation and a direct or
indirect wholly owned subsidiary of Parent ("Sub"), and NCS HealthCare, Inc., a
Delaware corporation (the "Company").
WHEREAS, the Board of Directors and a Special Committee consisting of
independent directors of the Company have approved this Agreement and deem it
advisable and in the best interests of the Company's stockholders (the "Company
Stockholders") to consummate the merger of Sub with and into the Company,
wherein each share of Class A common stock of the Company, par value $0.01 per
share ("Company Class A Common Stock"), and each share of Class B common stock
of the Company, par value $0.01 per share ("Company Class B Common Stock" and,
together with the Company Class A Common Stock, the "Company Common Stock"),
issued and outstanding immediately prior to the Effective Time, other than the
Company Treasury Shares and the Dissenting Shares, shall be converted into a
number of shares of common stock of Parent, par value $0.02 per share ("Parent
Common Stock"), equal to the Exchange Ratio, on the terms set forth in this
Agreement (the "Merger");
WHEREAS, each of the Boards of Directors of Parent and Sub has approved this
Agreement and deemed it advisable and in the best interests of its respective
stockholders to consummate the Merger on the terms set forth in this Agreement;
WHEREAS, for United States federal income tax purposes, the parties to this
Agreement intend that the Merger shall qualify as a "reorganization" within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended
(together with the rules and regulations thereunder, the "Code"); and
WHEREAS, concurrent with the execution of this Agreement, as an inducement to
Parent's willingness to enter into this Agreement, certain Company Stockholders
have entered with the Company and Parent into the Voting Agreement, dated as of
the date hereof, a copy of which is attached hereto as Exhibit A (the "Voting
Agreement"), pursuant to which such Company Stockholders have agreed, among
other things, to vote their shares of capital stock of the Company over which
such Company Stockholders have voting power to approve this Agreement and the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
Section 1.1. The Merger. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the General Corporation Law of the
State of Delaware (the "DGCL"), Sub shall be merged with and into the Company at
the Effective Time. As a result of the Merger, the separate corporate existence
of Sub shall cease, and the Company shall continue as the surviving corporation
and as a wholly owned subsidiary of Parent (in such capacity, the Company is
sometimes referred to as the "Surviving Corporation").
Section 1.2. Closing. Subject to the terms and conditions hereof, the closing of
the Merger and the transactions contemplated by this Agreement (the "Closing")
will take place on the fifth business day after the satisfaction or waiver of
the conditions set forth in Article VI (other than any such conditions that by
their terms cannot be satisfied until the Closing Date, which conditions shall
be required to be so satisfied or waived on the Closing Date), unless another
time or date is agreed to in writing by the parties hereto, it being understood
that the parties desire to cause the Closing to occur on the first day of a
calendar month, and that the parties shall make reasonable efforts to
accommodate such desire (the actual time and date of the Closing, the "Closing
Date"). The Closing shall be held at the offices of Wachtell, Lipton, Rosen &
Katz, 51 West 52nd Street, New York, New York, unless another place is agreed to
in writing by the parties hereto.
Section 1.3. Effective Time. As promptly as possible on the Closing Date, the
parties to this Agreement shall file
A-1
with the Secretary of State of the State of Delaware (the "Delaware Secretary of
State") a certificate of merger (the "Certificate of Merger") in such form as is
required by and executed in accordance with Section 251 of the DGCL. The Merger
shall become effective when the Certificate of Merger has been filed with the
Delaware Secretary of State or at such subsequent time as Parent and the Company
shall agree and specify in the Certificate of Merger (the date and time that the
Merger becomes effective, the "Effective Time").
Section 1.4. Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects as provided for in this Agreement and the applicable
provisions of the DGCL, including those set forth in Section 259 of the DGCL.
Section 1.5. Certificate of Incorporation and By-Laws. The Certificate of Merger
shall provide that, at the Effective Time, (a) the certificate of incorporation
of the Surviving Corporation as in effect immediately prior to the Effective
Time shall be amended as of the Effective Time so as to contain the provisions,
and only the provisions, contained immediately prior to the Effective Time in
the certificate of incorporation of Sub (the "Sub Certificate of
Incorporation"), except for Article I thereof, which shall continue to read "The
name of the Corporation is `NCS HealthCare, Inc.'"; and (b) the by-laws of Sub
(the "Sub By-Laws") in effect immediately prior to the Effective Time shall be
the by-laws of the Surviving Corporation, in each case, until thereafter changed
or amended as provided therein or by Applicable Laws.
Section 1.6. Directors and Officers of the Surviving Corporation. From and after
the Effective Time, (a) the officers of Sub shall be the officers of the
Surviving Corporation; and (b) the directors of Sub as of the Effective Time
shall serve as directors of the Surviving Corporation, in each case, until the
earlier of their death, resignation or removal or otherwise ceasing to be an
officer or a director, as the case may be, or until their respective successors
are duly elected and qualified, as the case may be.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1. Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the Company, Parent or Sub or
their respective shareholders and stockholders, as applicable:
(a) Each share of common stock of Sub, par value $0.01 per share ("Sub
Common Stock") issued and outstanding immediately prior to the Effective Time
shall be converted into one validly issued, fully paid and nonassessable share
of common stock of the Surviving Corporation, par value $0.01 per share. Such
newly issued shares shall thereafter constitute all of the issued and
outstanding capital stock of the Surviving Corporation.
(b) Subject to the other provisions of this Article II, each share of
Company Class A Common Stock and each share of Company Class B Common Stock
issued and outstanding immediately prior to the Effective Time (other than the
Company Treasury Shares to be cancelled pursuant to Section 2.1(c) and the
Dissenting Shares) shall be converted into and represent the right to receive a
fraction of a share of Parent Common Stock equal to the Exchange Ratio.
(c) Each share of capital stock of the Company held in the treasury of
the Company (the "Company Treasury Shares") shall be cancelled and retired, and
no payment shall be made in respect thereof.
Section 2.2. Exchange Pool; Exchange Ratio; Fractional Shares; Adjustments.
(a) The "Exchange Ratio" shall be 0.1 of a share of Parent Common
Stock. Under no circumstances shall Parent or the Company be required or
obligated to issue in the Merger a number of shares of Parent Common Stock
greater than the number of such shares equal to the sum of (i) the product of
the Exchange Ratio multiplied by 23,716,809 and (ii) to the extent Company
Options are exercised prior to the Closing, such additional number of Parent
Common Stock determined by multiplying the Exchange Ratio by the number of
shares of Company Common Stock issued upon such exercise (which shall not exceed
2,517,582 shares of Company Common Stock).
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(b) No certificates for fractional shares of Parent Common Stock shall
be issued as a result of the conversion provided for in Section 2.1(b), and such
fractional share interests will not entitle the owner thereof to vote or have
any rights of a holder of Parent Common Stock.
(c) In lieu of any such fractional share of Parent Common Stock, each
Company Stockholder who holds a certificate or certificates (each, a
"Certificate") that immediately prior to the Effective Time represented
outstanding shares of Company Common Stock and who otherwise would have been
entitled to a fraction of a share of Parent Common Stock upon surrender of such
Company Stockholder's Certificates (determined after taking into account all
Certificates delivered by such Company Stockholder) shall be entitled to receive
a cash payment therefor in an amount equal to the value (determined with
reference to the closing price of Parent Common Stock as reported on The Nasdaq
Stock Market, Inc.'s National Market (the "Nasdaq") on the last full trading day
immediately prior to the Closing Date) of such fractional share. Such payment
with respect to fractional shares is merely intended to provide a mechanical
rounding off, and is not a separately bargained for, consideration. If more than
one certificate representing shares of Company Common Stock shall be surrendered
for the account of the same holder, the number of shares of Parent Common Stock
for which certificates have been surrendered shall be computed on the basis of
the aggregate number of shares represented by the certificates so surrendered.
(d) If, between the date of this Agreement and the Effective Time, the
outstanding Parent Common Stock or Company Common Stock shall have been changed
into a different number of shares or different class by reason of any
reclassification, reorganization, recapitalization, stock split, split-up,
combination or exchange of shares or a stock dividend or dividend payable in any
other securities shall be declared with a record date within such period, or any
similar event shall have occurred, the Exchange Ratio set forth in this Section
2.2 shall be appropriately adjusted to provide the Company Stockholders and
holders of Company Stock Options the same economic effect as contemplated by
this Agreement prior to such event.
Section 2.3. Exchange of Certificates.
(a) Exchange Agent. Promptly following the Effective Time, Parent shall
deposit with Mellon Investor Services LLC or such other exchange agent as may be
designated by Parent (the "Exchange Agent"), for the benefit of the Company
Stockholders, for exchange in accordance with this Section 2.3, certificates
representing shares of Parent Common Stock issuable pursuant to Section 2.1 in
exchange for outstanding shares of Company Common Stock (such shares of Parent
Common Stock, together with any dividends or distributions with respect thereto,
the "Exchange Fund").
(b) Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a Certificate,
(i) a letter of transmittal in customary form (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificate shall pass,
only upon delivery of the Certificate to the Exchange Agent, and shall be in
such form and have such other customary provisions as Parent may reasonably
specify) and (ii) instructions for effecting the surrender of the Certificate in
exchange for a certificate or certificates representing shares of Parent Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with a duly executed letter of transmittal, the holder of the
Certificate shall be entitled to receive in exchange therefor (A) a certificate
or certificates representing that whole number of shares of Parent Common Stock
that the Company Stockholder has the right to receive pursuant to Section 2.1 in
such denominations and registered in such names as the Company Stockholder may
request and (B) a check representing the amount of cash in lieu of fractional
shares, if any, that the Company Stockholder has the right to receive pursuant
to the provisions of this Article II, after giving effect to any required
withholding Tax. The shares of Company Common Stock represented by the
Certificate so surrendered shall forthwith be cancelled. No interest will be
paid or accrued on the cash in lieu of fractional shares of Parent Common Stock,
if any, payable to the Company Stockholders. In the event of a transfer of
ownership of shares of Company Common Stock that is not registered on the
transfer records of the Company, a certificate representing the proper number of
shares of Parent Common Stock, together with a check for the cash to be paid in
lieu of fractional shares, if any, may be issued to the transferee if the
Certificate held by the transferee is presented to the Exchange Agent,
accompanied by all documents reasonably required to evidence and effect the
transfer and to evidence that any applicable stock transfer Taxes have been
paid. Until surrendered as contemplated by this Section 2.3, each Certificate
shall be deemed, at any time after the Effective Time, to represent only the
right to receive upon surrender a certificate representing shares of Parent
Common Stock and cash in lieu of fractional shares, if any, as provided in this
Article II. If any Certificate shall
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have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the Person claiming the Certificate to be lost, stolen or destroyed and,
if required by Parent, the posting by the Person of a bond in such reasonable
amount as Parent may direct as indemnity against any claim that may be made
against it with respect to the Certificate, the Exchange Agent will deliver in
exchange for the lost, stolen or destroyed Certificate, a certificate
representing the proper number of shares of Parent Common Stock, together with a
check for the cash to be paid in lieu of fractional shares, if any, with respect
to the shares of Company Common Stock formerly represented by such Certificate,
and unpaid dividends and distributions on the shares of Parent Common Stock, if
any, as provided in this Article II.
(c) Distributions with Respect to Unexchanged Shares. Notwithstanding
any other provisions of this Agreement, no dividends or other distributions
declared or made after the Effective Time with respect to Parent Common Stock
having a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate, and no cash payment in lieu of fractional shares of
Parent Common Stock shall be paid to any such holder, until such holder shall
surrender such Certificate as provided in this Section 2.3. Subject to the
effect of Applicable Laws, following surrender of a Certificate, there shall be
paid to the holder of the certificates representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such whole
shares of Parent Common Stock and not paid, less the amount of any withholding
Taxes that may be required thereon, and (ii) at the appropriate payment date
subsequent to surrender, the amount of dividends or other distributions with a
record date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole shares of Parent
Common Stock, less the amount of any withholding Taxes that may be required
thereon.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon surrender of a Certificate in accordance with
the terms hereof (including any cash paid pursuant to this Article II) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock represented by such Certificate, and, as of the
Effective Time, the stock transfer books of the Company shall be closed, and
there shall be no further registration of transfers on the stock transfer books
of the Company of shares of Company Common Stock outstanding immediately prior
to the Effective Time. If, after the Effective Time, a Certificate is presented
to the Surviving Corporation for any reason, it shall be cancelled and exchanged
as provided in this Section 2.3. A Certificate surrendered for exchange by any
Person constituting an "affiliate" of the Company for purposes of Rule 145(c)
under the Securities Act of 1933, as amended (together with the rules and
regulations thereunder, the "Securities Act"), shall not be exchanged until
Parent has received written undertakings from such Person in the form attached
to this Agreement as Exhibit B.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to the Company Stockholders six months after the date of
the mailing required by Section 2.3(b) shall be delivered to Parent, upon demand
thereby, and holders of Certificates that have not theretofore complied with
this Section 2.3 shall thereafter look only to Parent for payment of any claim
to shares of Parent Common Stock, cash in lieu of fractional shares thereof, or
dividends or distributions, if any, in respect thereof, or any other
consideration pursuant to this Agreement.
(f) No Liability. None of Parent, the Surviving Corporation or the
Exchange Agent shall be liable to any Person in respect of any shares of Company
Common Stock (or dividends or distributions with respect thereto) or cash from
the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificate shall not have
been surrendered prior to seven years after the Effective Time (or immediately
prior to such earlier date on which any cash, any cash in lieu of fractional
shares or any dividends or distributions with respect to whole shares of Company
Common Stock in respect of such Certificate would otherwise escheat to or become
the property of any Governmental Authority), any such shares, cash, dividends or
distributions in respect of such Certificate shall, to the extent permitted by
Applicable Laws, become the property of Parent, free and clear of all claims or
interest of any Person previously entitled thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall invest any
cash balances in the Exchange Fund as a result of Section 2.2(c), as directed by
Parent, on a daily basis. Any interest and other income resulting from such
investments shall be paid to Parent upon termination of the Exchange Fund
pursuant to Section 2.3(e).
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(h) Withholding Rights. Each of the Surviving Corporation and Parent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock such amounts as it is required to deduct and withhold with respect to the
making of such payment under the Code, or any provision of state, local or
foreign Tax law. To the extent that amounts are so withheld by the Surviving
Corporation or Parent, as the case may be, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder of
the shares of Company Common Stock in respect of which such deduction and
withholding was made by the Surviving Corporation or Parent, as the case may be.
Section 2.4. Treatment of Stock Options. Prior to the Effective Time, Parent and
the Company shall take all such actions as may be necessary to cause each
unexpired and unexercised outstanding option granted or issued under the Company
stock option or equity-incentive plans in effect on the date of this Agreement
(each, a "Company Option") to be automatically converted at the Effective Time
into an option (a "Parent Exchange Option") to purchase that number of shares of
Parent Common Stock equal to the number of shares of Company Common Stock
subject to the Company Option immediately prior to the Effective Time multiplied
by the Exchange Ratio (and rounded to the nearest share or zero if less than
0.5), with an exercise price per share equal to the exercise price per share
that existed under the corresponding Company Option divided by the Exchange
Ratio (and rounded to the nearest whole cent), and with other terms and
conditions that are the same as the terms and conditions of the Company Option
immediately before the Effective Time and taking into account any acceleration
of vesting resulting from the consummation of this Agreement pursuant to such
pre-existing terms and conditions; provided that, with respect to any Company
Option that is an "incentive stock option" (within the meaning of Section 422 of
the Code), the foregoing conversion shall be carried out in a manner satisfying
the requirements of Section 424(a) of the Code.
Section 2.5. Dissenting Shares.
(a) Shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time and that are held by a Company
Stockholder who (i) has not voted such shares in favor of the Merger, (ii) shall
have delivered a written demand for appraisal of such shares in the manner
provided for in the DGCL and (iii) shall not have effectively withdrawn or lost
such right to appraisal as of the Effective Time (the "Dissenting Shares"),
shall be entitled to such rights (but only such rights) as are granted by
Section 262 of the DGCL. Each holder of Dissenting Shares who becomes entitled
to payment for such Dissenting Shares pursuant to Section 262 of the DGCL shall
receive payment therefor from the Surviving Corporation in accordance with the
DGCL; provided, however, that (A) if any such holder of Dissenting Shares shall
have failed to establish such holder's entitlement to appraisal rights as
provided in Section 262 of the DGCL, (B) if any holder of Dissenting Shares
shall have effectively withdrawn his demand for appraisal of such Dissenting
Shares or lost his right to appraisal and payment for his Dissenting Shares
under Section 262 of the DGCL or (C) if neither any holder of Dissenting Shares
nor the Surviving Corporation shall have filed a petition demanding a
determination of the value of all Dissenting Shares within the time provided for
the filing of such petition in Section 262 of the DGCL, such holder shall
forfeit the right to appraisal of such Dissenting Shares, and the holder of each
such Dissenting Share shall be deemed to have been converted into, as of the
Effective Time, the right to receive shares of Parent Common Stock pursuant to
Section 2.1 hereof, without any interest thereon, upon surrender, in the manner
provided in Section 2.3 hereof, of the Certificate or Certificates that formerly
evidenced such shares.
(b) The Company shall give Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of such demands, and any other
instruments served pursuant to the DGCL and received by the Company and (ii) the
opportunity to lead all negotiations and proceedings with respect to demands for
appraisal under the DGCL (it being understood that the Company shall be entitled
to participate therein). The Company shall not, except with the prior written
consent of Parent, make any payment with respect to any demands for appraisal or
offer to settle or settle any such demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub hereby represent and warrant to the Company as follows:
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Section 3.1. Organization and Standing. Each of Parent and Sub is a corporation
duly organized, validly existing and in good standing under the laws of its
state of incorporation with full corporate power and authority to own, lease,
use and operate its properties and to conduct its business as and where now
owned, leased, used, operated and conducted. Each of Parent and Sub is duly
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the property it owns, leases or
operates, requires it to so qualify, except where the failure to be so qualified
or in good standing in such jurisdiction, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect on Parent.
Parent is not in default in the performance, observance or fulfillment of any
provision of its certificate of incorporation, as amended (the "Parent
Certificate of Incorporation"), or its by-laws, as amended (the "Parent
By-Laws"), and Sub is not in default in the performance, observance or
fulfillment of any provisions of the Sub Certificate of Incorporation or the Sub
By-Laws. Prior to the date of this Agreement, each of Parent and Sub has
furnished or made available to the Company complete and correct copies of its
respective certificate of incorporation and by-laws.
Section 3.2. Corporate Power and Authority. Each of Parent and Sub has all
requisite corporate power and authority to enter into and deliver this
Agreement, to perform its obligations under this Agreement and to consummate the
transactions contemplated by this Agreement, including the Merger and the Voting
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement, including the Merger and the
Voting Agreement, by Parent and Sub have been duly authorized by all necessary
corporate action on the part of each of Parent and Sub. This Agreement has been
duly executed and delivered by each of Parent and Sub, and constitutes the
legal, valid and binding obligation of each of Sub and Parent enforceable
against each of them in accordance with its respective terms.
Section 3.3. Capitalization of Parent and Sub.
(a) As of July 2, 2002, Parent's authorized capital stock consisted
solely of (i) 200,000,000 shares of Parent Common Stock, of which (A) 40,288,323
shares were issued and outstanding, (B) 815,166 shares were to be issued in
connection with a plan confirmed by a court, (C) 198,285 shares were issued and
held in treasury, and (D) 10,229,259 shares were reserved for issuance upon the
exercise or conversion of options, warrants or convertible securities granted or
issuable by Parent; and (ii) 10,000,000 shares of preferred stock, with a
liquidation value of $100 per share, of which 438,641 shares were issued and
outstanding. All shares of Parent Common Stock to be issued in connection with
the Merger will be, when issued in accordance with the terms hereof, duly
authorized, validly issued, fully paid and nonassessable, and will not have been
issued in violation of any preemptive or similar rights. Except as set forth in
the first sentence of this Section 3.3(a) (or with respect to any security set
forth in the first sentence of this Section 3.3(a)) or in Section 3.3 to the
disclosure schedule delivered by Parent to the Company and dated as of the date
of this Agreement (the "Parent Disclosure Schedule"), as of the date of this
Agreement, there are no outstanding subscriptions, options, warrants, puts,
calls, agreements, understandings, claims or other commitments or rights of any
type relating to the issuance, sale, repurchase, transfer or registration by
Parent of any equity securities of Parent, nor are there outstanding any
securities that are convertible into or exchangeable for any shares of Parent
capital stock, and Parent has no obligation of any kind to issue any additional
securities. Except as set forth in Section 3.3 to the Parent Disclosure
Schedule, there are no outstanding stock-appreciation rights, security-based
performance units, "phantom" stock or other security rights or other agreements,
arrangements or commitments of any character (contingent or otherwise) pursuant
to which any Person is or may be entitled to receive any payment or other value
based on the revenues, earnings or financial performance, stock price
performance or other attribute of the Parent or any of its Subsidiaries or
assets or calculated in accordance therewith (other than ordinary course
payments or commissions to sales representatives of the Parent).
(b) As of the date of this Agreement, Sub's authorized capital stock
consists solely of 1,000 shares of Sub Common Stock, of which 100 shares were
issued and outstanding and none were reserved for issuance or issued and held in
treasury. As of the date of this Agreement, Parent owns all of the outstanding
shares of Sub Common Stock free and clear of any Liens, claims or encumbrances.
Section 3.4. Conflicts; Consents and Approval.
(a) The execution and delivery of this Agreement by Parent and Sub does
not, and the performance and consummation of this Agreement and the transactions
contemplated hereby will not:
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(i) violate, or result in a breach of any provision of the
Parent Certificate of Incorporation, the Parent By-Laws, the Sub Certificate of
Incorporation or the Sub By-Laws;
(ii) violate, or conflict with, or result in a breach of any
provision of, or constitute a default (or an event that, with the giving of
notice, the passage of time or otherwise, would constitute a default) under, or
entitle any Person (with the giving of notice, the passage of time or otherwise)
to terminate, accelerate, modify or call a default under, or result in the
creation of any Lien upon any of the properties or assets of Parent or any of
its Subsidiaries under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, contract, undertaking,
agreement, lease or other instrument or obligation to which Parent or any of its
Subsidiaries is a party; or
(iii) subject, with respect to consummation, to Section
3.4(b), violate any Applicable Laws relating to Parent or any of its
Subsidiaries or their respective properties or assets, except in the case of
clauses (ii) and (iii) above for any of the foregoing disclosed in Section
3.4(a) to the Parent Disclosure Schedule or that would not, individually or in
the aggregate, have a Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement by Parent and Sub does
not, and the performance and consummation of this Agreement and the transactions
contemplated hereby will not, require Parent or any of its Subsidiaries to
obtain any approval of any Person or approval of, observe any waiting period
imposed by, or make any filing with or notification to or seek any approval or
authorization from any Governmental Authority, other than (i) authorization for
inclusion of shares of Parent Common Stock to be issued in the Merger and the
transactions contemplated by this Agreement on the Nasdaq, subject to official
notice of issuance, (ii) actions required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (together with the rules and regulations
thereunder, the "HSR Act"), (iii) registrations or other actions required under
United States federal and state securities laws and the rules and regulations of
The Nasdaq Stock Market, Inc., (iv) the filing of the Certificate of Merger, and
(v) consents or approvals of any Governmental Authority set forth in Section
3.4(b) to the Parent Disclosure Schedule. The consents and approvals set forth
in Section 3.4(b) to the Parent Disclosure Schedule are referred to as the
"Required Governmental Approvals".
Section 3.5. Parent SEC Documents. Parent has filed with the Securities and
Exchange Commission (the "Commission") all forms, reports, schedules, statements
and other documents required to be filed by it since October 2, 2001 under the
Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act"), or the Securities Act (such
documents, as supplemented and amended since the time of filing, collectively,
the "Parent SEC Documents"). The Parent SEC Documents, including any financial
statements or schedules included in the Parent SEC Documents, at the time filed
(and, in the case of registration statements and proxy statements, on the dates
of effectiveness and the dates of mailing, respectively, and, in the case of any
Parent SEC Document amended or superseded by a filing prior to the date of this
Agreement, then on the date of such amending or superseding filing) (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (b) complied in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be. The
financial statements of Parent included in the Parent SEC Documents at the time
filed (and, in the case of registration statements and proxy statements, on the
dates of effectiveness and the dates of mailing, respectively, and, in the case
of any Parent SEC Document amended or superseded by a filing prior to the date
of this Agreement, then on the date of such amending or superseding filing)
complied as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto, were prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Form 10-Q of the Commission), and
fairly present in all material respects (subject, in the case of unaudited
statements, to normal, recurring audit adjustments) the consolidated financial
position of Parent and its consolidated subsidiaries as at the dates thereof and
the consolidated results of their operations and cash flows for the periods then
ended.
Section 3.6. Registration Statement; Proxy Statement. None of the information
supplied by Parent for inclusion in (a) the registration statement on Form S-4
(as amended, supplemented or modified, the "Registration Statement") to be filed
with the Commission by Parent under the Securities Act, including the prospectus
relating to shares of
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Parent Common Stock to be issued in the Merger, and (b) the proxy statement and
form of proxies relating to the vote of the Company Stockholders with respect to
this Agreement (as amended, supplemented or modified, the "Proxy Statement"), at
the time the Registration Statement becomes effective, or, in the case of the
Proxy Statement, at the date of mailing and at the date of the Company
Stockholders Meeting will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Registration Statement, except for such
portions thereof that relate only to the Company and its Subsidiaries, will
comply as to form in all material respects with the provisions of the Securities
Act.
Section 3.7. Compliance with Law. Except as set forth in Section 3.7 to the
Parent Disclosure Schedule or in the Parent SEC Documents filed prior to the
date hereof, Parent is in compliance with, and at all times has been in
compliance with, all applicable laws, statutes, orders, rules, regulations,
policies or guidelines promulgated, or judgments, decisions or Orders entered by
any Governmental Authority (collectively, "Applicable Laws") relating to Parent,
its securities, business or properties, except where the failure to be in
compliance with such Applicable Laws, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on Parent. Except
as set forth in Section 3.7 to the Parent Disclosure Schedule or in the Parent
SEC Documents filed prior to the date hereof, no investigation or review by any
Governmental Authority with respect to Parent or its Subsidiaries is pending,
or, to the knowledge of Parent, threatened, nor has any Governmental Authority
indicated in writing an intention to conduct the same, other than those the
outcome of which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on Parent.
Section 3.8. Litigation. Except as set forth in Section 3.8 to the Parent
Disclosure Schedule, (a) there is no suit, arbitration, inquiry, prosecution,
claim, action, proceeding, hearing, notice of violation, demand letter or
investigation by, of, in or before any Governmental Authority (an "Action")
pending, or, to the knowledge of Parent, threatened, against Parent or any
executive officer or director of Parent that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect on Parent, and
(b) Parent is not subject to any outstanding Order that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect on
Parent.
Section 3.9. Absence of Changes. Except as set forth in Section 3.9 to the
Parent Disclosure Schedule, and except for liabilities incurred in connection
with this Agreement and the transactions contemplated by this Agreement, since
October 2, 2001, there has been no change, event, development, damage or
circumstance affecting Parent or Sub that, individually or in the aggregate, has
had, or could reasonably be expected to have a Material Adverse Effect on
Parent.
Section 3.10. Sub's Operations. Sub is a direct wholly owned subsidiary of
Parent that was formed solely for the purpose of engaging in the transactions
contemplated by this Agreement and has not (a) engaged in any business
activities, (b) conducted any operations other than in connection with the
transactions contemplated hereby or (c) incurred any liabilities other than in
connection with the transactions contemplated hereby. Parent, as Sub's sole
stockholder, has approved Sub's execution of this Agreement.
Section 3.11. Reorganization. As of the date hereof, to the knowledge of Parent
and Sub after due inquiry, none of Parent and Sub or any Affiliate of Parent or
Sub has taken or agreed to take any action, failed to take any action, or is
aware of any fact or circumstance that is reasonably likely to prevent the
Merger from qualifying as a reorganization under Section 368(a) of the Code.
Section 3.12. Undisclosed Liabilities. Except (i) as and to the extent disclosed
or reserved against on the balance sheet of Parent at March 31, 2002 included in
Parent's Quarterly Report on Form 10-Q for the three-month period ended March
31, 2002 (the "Parent Recent Balance Sheet"), (ii) as set forth in Section 3.12
to the Parent Disclosure Schedule, (iii) as incurred since the date of the
Parent Recent Balance Sheet in the ordinary course of business consistent with
past practice or (iv) as arise in connection with or as a result of the
transactions contemplated by this Agreement or are related to the performance by
Parent or Sub of any of its obligations under this Agreement or the Voting
Agreement, Parent does not have any liabilities or obligations of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due, that, individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect on Parent.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Sub as follows:
Section 4.1. Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with full corporate power and authority to own, lease, use and operate
its properties and to conduct its business as and where now owned, leased, used,
operated and conducted. Each of the Company and each of its Subsidiaries is duly
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the property that it owns, leases
or operates requires it to so qualify, except where the failure to be so
qualified or in good standing in such jurisdiction, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect on
the Company. The Company is not in default in the performance, observance or
fulfillment of any provision of its certificate of incorporation, as amended
(the "Company Certificate of Incorporation"), or its by-laws, as in effect on
the date of this Agreement (the "Company By-Laws"). Prior to the date of this
Agreement, the Company has furnished or made available to Parent complete and
correct copies of the Company Certificate of Incorporation and the Company
By-Laws. Listed in Section 4.1 to the disclosure schedule, dated as of the date
of this Agreement, delivered by the Company to Parent (the "Company Disclosure
Schedule"), is each jurisdiction in which the Company or its Subsidiaries is
qualified to do business and whether the Company (or its Subsidiaries) is in
good standing as of the date of this Agreement in such jurisdictions.
Section 4.2. Subsidiaries. The Company does not own, directly or indirectly, any
equity or other ownership interest in any corporation, partnership, limited
liability company, joint venture or other entity or enterprise, except for the
entities set forth in Section 4.2 to the Company Disclosure Schedule. Except as
set forth in Section 4.2 to the Company Disclosure Schedule, the Company is not
subject to any obligation or requirement to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
such entity or any other Person. Except as set forth in Section 4.2 to the
Company Disclosure Schedule, the Company owns, directly or indirectly, each of
the outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such Subsidiary) of each of the
Company's Subsidiaries. Except as set forth in Section 4.2 to the Company
Disclosure Schedule, each of the outstanding shares of capital stock of each of
the Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by the Company free and
clear of all liens, pledges, security interests, claims or other encumbrances.
The following information for each subsidiary of the Company is set forth in
Section 4.2 to the Company Disclosure Schedule, as applicable: (i) its name and
jurisdiction of incorporation or organization; (ii) its authorized capital stock
or share capital; and (iii) the number of issued and outstanding shares of
capital stock or share capital and the record owner(s) thereof. Other than as
set forth in Section 4.2 to the Company Disclosure Schedule, there are no
outstanding subscriptions, options, warrants, puts, calls, agreements,
understandings, claims or other commitments or rights of any type relating to
the issuance, sale, purchase, repurchase or transfer of any securities of any of
the Company's Subsidiaries, nor are there outstanding any securities that are
convertible into or exchangeable for any shares of capital stock of any of the
Company's Subsidiaries, and neither the Company nor any of its Subsidiaries has
any obligation of any kind to issue any additional securities of any of the
Company's Subsidiaries.
Section 4.3. Corporate Power and Authority. The Company has all requisite
corporate power and authority to enter into and deliver this Agreement, to
perform its obligations under this Agreement, and, subject to receipt of the
Required Company Stockholder Approval, to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement by
the Company have been duly authorized by all necessary corporate action on the
part of the Company, subject to adoption by the Company Stockholders of this
Agreement and the transactions contemplated by this Agreement. This Agreement
has been duly executed and delivered by the Company and constitutes the legal,
valid and binding obligation of the Company enforceable against it in accordance
with its terms.
Section 4.4. Capitalization of the Company. As of July 28, 2002, the Company's
authorized capital stock consisted solely of (i) 50,000,000 shares of Company
Class A Common Stock, of which (A) 18,461,599 shares were issued and
outstanding, (B) no shares were issued and held in treasury, (C) 2,422,724
shares were reserved for issuance
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upon the exercise of Company Options, and (D) 1,477,276 shares were reserved for
future issuance under the existing plans of the Company that provide for the
issuance of Company Options; (ii) 20,000,000 shares of Company Class B Common
Stock, of which (X) 5,255,210 shares were issued and outstanding and (Y) 94,858
shares were reserved for issuance upon the exercise of Company Options; and
(iii) 1,000,000 shares of preferred stock, par value $0.01 per share, of which
no shares were issued and outstanding. Each outstanding share of Company capital
stock is duly authorized, validly issued, fully paid and nonassessable, and has
not been issued in violation of any preemptive or similar rights. The Company
Class A Common Stock and the Company Class B Common Stock are identical in all
respects except that (I) each share of Company Class A Common Stock is entitled
to 1 vote per share, whereas each share of Company Class B Common Stock is
entitled to 10 votes per share; (II) the Company Class A Common Stock is not
convertible into another security, whereas the Company Class B Common Stock is
convertible into shares of Company Class A Common Stock on a one-for-one basis;
and (III) the Company Class B Common Stock is subject to certain transfer
restrictions to which the Company Class A Common Stock is not subject. The
Company has not taken any action or made any determination, pursuant to Section
7(i) of the Company Certificate of Incorporation, that the restrictions on
transfer or other provisions set forth in Section 7 of the Company Certificate
of Incorporation have a material adverse effect on liquidity, marketability or
market value of the outstanding shares of Company Class A Common Stock. Other
than as set forth in the first sentence of this Section 4.4 or in Section 4.4 to
the Company Disclosure Schedule, there are no outstanding subscriptions,
options, warrants, puts, calls, agreements, understandings, claims or other
commitments or rights of any type relating to the issuance, sale, repurchase or
transfer of any securities of the Company, nor are there outstanding any
securities that are convertible into or exchangeable for any shares of Company
capital stock, and neither the Company nor any of its subsidiaries has any
obligation of any kind to issue any additional securities or to pay for or
repurchase any securities of the Company or its predecessors. The issuance and
sale of all of the shares of capital stock described in this Section 4.4 have
been in compliance in all material respects with United States federal and state
securities laws. Section 4.4 to the Company Disclosure Schedule accurately sets
forth the names of, and the number of shares of each class (including the number
of shares issuable upon exercise of Company Options and the exercise price and
vesting schedule with respect thereto) and the number of options held by all
holders of options to purchase Company capital stock. Except as set forth in
Section 4.4 to the Company Disclosure Schedule, the Company has not agreed to
register any securities under the Securities Act or under any state securities
law or granted registration rights to any Person; complete and correct copies of
any such agreements have previously been made available to Parent. Except as set
forth in Section 4.4 of the Company Disclosure Schedule, there are no
outstanding stock-appreciation rights, security-based performance units,
"phantom" stock or other security rights or other agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
Person is or may be entitled to receive any payment or other value based on the
revenues, earnings or financial performance, stock price performance or other
attribute of the Company or any of its Subsidiaries or assets or calculated in
accordance therewith (other than ordinary course payments or commissions to
sales representatives of the Company). The holders of Company Common Stock who
have executed Voting Agreements with Parent hold a majority of the voting power
of the Company Common Stock as of the date hereof.
Section 4.5. Conflicts; Consents and Approvals.
(a) The execution and delivery of this Agreement by the Company does
not, and the performance and consummation of this Agreement and the transactions
contemplated hereby will not:
(i) violate, or result in a breach of any provision of, the
Company Certificate of Incorporation or the Company By-Laws;
(ii) violate, or conflict with, or result in a breach of any
provision of, or constitute a default (or an event that, with the giving of
notice, the passage of time or otherwise, would constitute a default) under, or
entitle any Person (with the giving of notice, the passage of time or otherwise)
to terminate, accelerate, modify or call a default under, or result in the
creation of any Lien upon any of the properties or assets of the Company or any
of its Subsidiaries under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, contract, undertaking,
agreement, lease or other instrument or obligation to which the Company or any
of its Subsidiaries is a party; or
(iii) violate any Applicable Laws relating to the Company, any
of its Subsidiaries or any of their respective properties or assets;
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except, in the case of clauses (ii) and (iii) above, for any
of the foregoing disclosed in Section 4.5(a) to the Company Disclosure Schedule
or that could not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on the Company.
(b) The execution and delivery by the Company of this Agreement does
not, and the performance and consummation of this Agreement and the transactions
contemplated hereby will not, require the Company or any of its Subsidiaries to
obtain any approval of any Person or approval of, observe any waiting period
imposed by, or make any filing with or notification to or seek any approval or
authorization from any Governmental Authority other than (i) the Required
Company Stockholders Approval, (ii) actions required by the HSR Act, (iii)
registrations or other actions required under United States federal and state
securities laws as are contemplated by this Agreement and (iv) consents or
approvals of any Governmental Authority set forth in Section 4.5(b) to the
Company Disclosure Schedule.
Section 4.6. Brokerage and Finders' Fees; Expenses. Except as set forth in
Section 4.6 to the Company Disclosure Schedule (copies of all agreements
relating to such matters disclosed thereon having previously been provided to
Parent), none of the Company, any of its Affiliates or any director, officer or
employee of the Company, has incurred or will incur on behalf of the Company,
any brokerage, finders', advisory or similar fees in connection with the
transactions contemplated by this Agreement. Section 4.6 to the Company
Disclosure Schedule discloses the maximum aggregate amount of all fees and
expenses that will be paid or will be payable by the Company to all brokers,
finders, advisors, attorneys, accountants and investment bankers in connection
with this Agreement and the transactions contemplated hereby, including fees and
expenses payable by the Company in respect of the holders of the 5 3/4%
convertible subordinated debentures, due 2004, of the Company (the "Notes") as
of the Closing Date or, thereafter, as a result of the Closing.
Section 4.7. Company SEC Documents. The Company has filed with the Commission
all forms, reports, schedules, statements and other documents required to be
filed by it since January 1, 2000 under the Exchange Act or the Securities Act
(such documents, as supplemented and amended since the time of filing,
collectively, the "Company SEC Documents"). The Company SEC Documents, including
any financial statements or schedules included in the Company SEC Documents, at
the time filed (and, in the case of registration statements and proxy
statements, on the dates of effectiveness and the dates of mailing, respectively
and, in the case of any Company SEC Document amended or superseded by a filing
prior to the date of this Agreement, then on the date of such amending or
superseding filing) (a) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, and (b) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be. The financial statements of the Company included in the Company SEC
Documents at the time filed (and, in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of mailing,
respectively and, in the case of any the Company SEC Document amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such amending or superseding filing) complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto, were prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q of the Commission), and fairly present in
all material respects (subject, in the case of unaudited statements, to normal,
recurring audit adjustments) the consolidated financial position of the Company
and its consolidated Subsidiaries as at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended. None of
the Company's Subsidiaries is subject to the periodic reporting requirements of
the Exchange Act or required to file any form, report or other document with the
Commission, the Nasdaq, any stock exchange or any other comparable Governmental
Authority.
Section 4.8. Registration Statement; Proxy Statement. None of the information
supplied by the Company for inclusion in (a) the Registration Statement at the
time that it becomes effective, and (b) the Proxy Statement, at the date of
mailing and at the date of the Company Stockholders Meeting, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The Proxy
Statement, except for such portions thereof that relate only to Parent and its
Subsidiaries, will comply as to form in all material respects with the
provisions of the Exchange Act.
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Section 4.9. Compliance with Law. Except as set forth in Section 4.9 to the
Company Disclosure Schedule or in the Company SEC Documents filed prior to the
date hereof, the Company is in compliance and, at all times, has been in
compliance with Applicable Laws relating to the Company or its business or
properties, except where the failure to be in compliance with such Applicable
Laws, individually or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect on the Company. Except as disclosed in Section 4.9 to
the Company Disclosure Schedule or in the Company SEC Documents filed prior to
the date hereof, no investigation or review by any Governmental Authority with
respect to the Company, to the knowledge of the Company, is pending or
threatened, nor has any Governmental Authority indicated in writing to the
Company an intention to conduct the same, other than those the outcome of which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on the Company. Without limiting the foregoing, except
as disclosed in Section 4.9 to the Company Disclosure Schedule, the Company and
each of its Subsidiaries is, and has been since July 1, 2001, in substantial
compliance with the Company's policies (as in effect on the date hereof) with
respect to the recording and issuing of all credits due to the Medicare and
Medicaid programs, copies of which policies have been made available prior to
the date hereof.
Section 4.10. Litigation. Except as set forth in Section 4.10 to the Company
Disclosure Schedule, (a) to the knowledge of the Company, there is no Action
pending or threatened against the Company or any executive officer or director
of the Company that, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect on the Company; and (b) the Company
is not subject to any outstanding Order that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect on the Company.
Section 4.11. Absence of Changes. Except as set forth in Section 4.11 to the
Company Disclosure Schedule, since March 31, 2002, (a) the Company has conducted
its business only in the ordinary course of business consistent with past
practice; (b) there has been no change, event, development, damage or
circumstance affecting the Company or any of its Subsidiaries that, individually
or in the aggregate, has had, or could reasonably be expected to have a Material
Adverse Effect on the Company; and (c) there has not been any material change by
the Company in its accounting methods, principles or practices, any revaluation
by the Company of any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable other than in the ordinary
course of business consistent with past practice.
Section 4.12. Taxes.
(a) Except as set forth in Section 4.12 to the Company Disclosure
Schedule, the Company and its Subsidiaries have filed all material Tax Returns
(including those filed on a consolidated, combined or unitary basis) required to
have been filed by the Company or its Subsidiaries. All of such Tax Returns are
true, complete and correct as to the amount of Tax shown to be due thereon
(except for such inaccuracies that are, individually or in the aggregate, not
material), and the Company and its Subsidiaries have within the time and manner
prescribed by Applicable Laws paid or, prior to the Effective Time, will pay all
Taxes shown to be due on such Tax Returns. Except as disclosed in Section 4.12
to the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has any material liability for any Taxes in excess of the amounts
paid (or reserved, in accordance with GAAP, as reflected on the Company SEC
Documents, as adjusted for operations in the ordinary course of business since
the date of such Company SEC Documents), and neither the Company nor any of its
Subsidiaries is delinquent in the payment of any material Tax. Neither the
Company nor any of its Subsidiaries has requested or filed any document having
the effect of causing any extension of time within which to file any material
Tax Returns in respect of any fiscal year that have not since been filed. Except
as set forth in Section 4.12 to the Company Disclosure Schedule, no deficiencies
for any material Tax have been proposed, asserted or assessed (tentatively or
definitely), in each case in writing, by any Governmental Authority, against the
Company or any of its Subsidiaries for which there are not adequate reserves, in
accordance with GAAP, as reflected on the Company SEC Documents. Except as set
forth in Section 4.12 to the Company Disclosure Schedule, neither the Company
nor any of its Subsidiaries is the subject of any currently ongoing Tax audit.
Except as set forth in Section 4.12 to the Company Disclosure Schedule, there
are no pending requests for waivers of the time to assess any material Tax,
other than those made in the ordinary course and for which either payment has
been made or there are adequate reserves in accordance with GAAP as reflected on
the Company SEC Documents. With respect to any taxable period ended on or prior
to June 30, 1996, all United States federal income Tax Returns including the
Company or any of its Subsidiaries have been audited by the Internal Revenue
Service or are closed by the applicable statute of limitations. Except as set
forth in
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Section 4.12 to the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries has waived any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a material Tax assessment or
deficiency. There are no liens with respect to Taxes upon any of the properties
or assets, real or personal, tangible or intangible of the Company or any of its
Subsidiaries (other than liens for Taxes not yet due). Except as set forth in
Section 4.12 to the Company Disclosure Schedule, no material claim (that is
currently pending or that has been made on or after June 30, 2000) has been made
in writing by an authority in a jurisdiction where the Company does not (or a
Subsidiary does not) file Tax Returns asserting that the Company (or such
Subsidiary) is or may be subject to taxation by that jurisdiction. The Company
has not filed an election under Section 341(f) of the Code to be treated as a
consenting corporation.
(b) Except as set forth in Section 4.12 to the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is obligated by any
contract, agreement or other arrangement to indemnify any other Person (other
than the Company and its Subsidiaries) with respect to material Taxes. Neither
the Company nor any of its Subsidiaries are or were a party to or bound by any
agreement or arrangement (whether or not written and including any arrangement
required or permitted by law) that (i) requires the Company or any of its
Subsidiaries to make any Tax payment to or for the account of any Person (other
than the Company and its Subsidiaries), (ii) affords any other Person the
benefit of any net operating loss, net capital loss, investment Tax credit,
foreign Tax credit, charitable deduction or any other credit or Tax attribute
that could reduce Taxes (including deductions and credits related to alternative
minimum Taxes) of the Company or any of its Subsidiaries, or (iii) requires or
permits the transfer or assignment of income, revenues, receipts or gains to the
Company or any of its Subsidiaries, from any Person.
(c) The Company is not and has not been a United State real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period described in Section 897(c)(1)(A)(ii) of the Code.
(d) Neither the Company nor any of its Subsidiaries has constituted
either a "distributing corporation" or a "controlled corporation" (within the
meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock intended
to qualify for tax-free treatment under Section 355 of the Code (i) in the two
years prior to the date of this Agreement (or will constitute such a corporation
in the two years prior to the Closing Date) or (ii) in a distribution that
otherwise constitutes part of a "plan" or "series of related transactions"
(within the meaning of Section 355(e) of the Code) in conjunction with the
Merger.
(e) The net operating loss carryforwards ("NOLs") for United States
federal income tax purposes of the consolidated group of which the Company is
the common parent as of June 30, 2001 are not less than $125,000,000, and,
except for limitations that may apply by reason of the Merger, such NOLs are not
subject to any material limitation under Section 382 of the Code, Treasury
Regulations Section 1.1502-15, -21 or otherwise.
(f) The Company and its Subsidiaries have withheld and paid all
material Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party.
(g) "Tax Returns" means returns, reports and forms required to be filed
with any Governmental Authority of the United States or any other jurisdiction
responsible for the imposition or collection of Taxes.
(h) "Taxes" means (i) all taxes (whether United States federal, local,
state or foreign) based upon or measured by income and any other tax whatsoever,
including gross receipts, profits, sales, use, occupation, value added, ad
valorem, transfer, franchise, withholding, payroll, employment, excise, or real
or personal property taxes, together with any interest or penalties imposed with
respect thereto and (ii) any obligations under any agreements or arrangements
with respect to any taxes described in clause (i) above.
Section 4.13. Intellectual Property.
(a) The Company or a Subsidiary of the Company is licensed to use or
otherwise possesses legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights and mask works, any applications for and
registrations of such patents, trademarks, trade names, service marks,
copyrights and mask works, and all processes, formulae, methods, schematics,
technology, know-how, computer software programs or
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applications and tangible or intangible trade secrets, proprietary information
or material ("Intellectual Property") that are necessary to conduct the business
of the Company and its Subsidiaries as currently conducted, except for such
Intellectual Property the absence of which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Company.
(b) The Company is not, nor will it as a result of the execution and
delivery of this Agreement or the performance of the Company's obligations under
this Agreement or otherwise be, in breach of or otherwise cause the termination
of or limit any license, sublicense or other agreement relating to the Company's
Intellectual Property, or any licenses, sublicenses and other agreements as to
which the Company or any of its Subsidiaries is a party and pursuant to which
the Company or any of its Subsidiaries is authorized to use any third-party
patents, trademarks or copyrights, including software that is used by the
Company or any of its Subsidiaries, except for those the breach of which could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company.
(c) To the knowledge of the Company, all patents, trademarks, service
marks (or any applications or registrations therefor) and copyrights that are
held by the Company or any of its Subsidiaries, and that are material to the
business of the Company and its Subsidiaries as such business is presently
conducted, and all Intellectual Property rights pertaining to the Material
Company-Owned Software, are current, in effect, valid and subsisting. The
Company (i) has not been party to any Action still pending that involves a claim
of infringement by the Company of any Intellectual Property right of any third
party; and (ii) has no knowledge that the marketing, licensing or sale of its
services infringes any Intellectual Property right of any third party, except as
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on the Company.
(d) The Company has a policy of requiring all employees to enter into
appropriate confidentiality agreements in order to maintain the secrecy and
confidentiality of all of the Company's material Intellectual Property
(including the Material Company-Owned Software), and has done so in all cases
except where the failure to do so could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Company.
(e) Except as set forth in Section 4.13(e) to the Company Disclosure
Schedule, the Company has good and marketable title to, has the full right to
use and owns solely and outright, all of the software products known as
ConcordDX, Long-Term Care Pharmacy (LTCP), eAstral, and iAstral, and all
modifications, revisions, versions, updates, releases, refinements, improvements
and enhancements of such products and all derivative works (as such term is used
in the U.S. copyright laws) based upon any of such products, whether
operational, under development, superseded or inactive, including all object
code, source code, system and database architecture, design features, technical
manuals, test scripts, user manuals and other documentation therefor, whether in
machine-readable form, programming language or any other language or symbols,
and whether stored, encoded, recorded or written on disk, tape, film, memory
device, paper or other media of any nature and any data bases necessary to
operate any such computer program, operating system, application system,
firmware or software (all of the foregoing is collectively referred to as the
"Material Company-Owned Software"), as relating to the Company's and its
Affiliates' respective businesses as conducted by the Company and its Affiliates
at all times on and before the Effective Time, free and clear of any liens,
licenses (other than written license agreements with customers entered into by
the Company in the ordinary course of business and in the form provided by the
Company to Parent) or other encumbrances which would in any way limit or
restrict the Company's ability to market, license, sell, modify, update, and/or
create derivative works for, the Material Company-Owned Software. The Material
Company-Owned Software does not incorporate or embody any third-party
Intellectual Property.
(f) Except as set forth in Section 4.13(f) to the Company Disclosure
Schedule, to the extent that any author or developer of any Material
Company-Owned Software was not a regular full-time employee of the Company or
its predecessors working within the scope of his or her employment with the
Company or its predecessors, at the time such Person contributed to the creation
or modification of any Material Company-Owned Software, such author or developer
has irrevocably assigned to the Company or its predecessors, as applicable, in
writing all copyrights, patent rights, trade secrets and other Intellectual
Property in such Person's work with respect to such Material Company-Owned
Software. None of the Material Company-Owned Software is owned by or registered
in the name of any current or former owner, shareholder, partner, director,
executive, officer, employee, salesman, agent,
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customer, representative or contractor of the Company, any of its predecessors
or any third Person, nor do such have any interest therein or right thereto,
including the right to royalty payments.
(g) To the knowledge of the Company, none of the Material Company-Owned
Software or its respective past or current uses, including the preparation,
distribution, marketing or licensing thereof, has violated or infringed upon, or
is violating or infringing upon, any Intellectual Property of any Person. To the
knowledge of the Company, no Person is violating or infringing upon, or has
violated or infringed upon at any time, any of the Material Company-Owned
Software.
Section 4.14. Title to and Condition of Properties.
(a) The Company owns or holds under valid leases all real property and
all properties, assets and equipment necessary for the conduct of the business
of the Company as presently conducted, except where the failure to own or hold
such real property, properties, assets and equipment would not, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect on
the Company.
(b) Section 4.14(b) to the Company Disclosure Schedule sets forth a
complete and accurate list and description of all real property and interests in
real property owned in fee by the Company or its Subsidiaries (the "Owned Real
Property") and the address thereof. Except as set forth in Section 4.14(b) to
the Company Disclosure Schedule, the Company or one of its Subsidiaries holds
good and marketable fee title to each of the Owned Real Property, free and clear
of any liens, mortgages, easements, rights-of-way, licenses, use restrictions,
claims, charges, options, title defects or encumbrances of any nature
whatsoever, except for the Permitted Encumbrances. All aspects of the Owned Real
Property are in compliance in all material respects with any and all
restrictions and other provisions included in the Permitted Encumbrances, and
there are no matters that create, or that with notice or the passage of time
would create, a default under any of the documents evidencing the Permitted
Encumbrances. As used herein, the term "Permitted Encumbrances" means (i) liens
for Taxes not yet due and payable or that are being contested in good faith and
by appropriate proceedings; (ii) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like liens arising in the ordinary course of
business that are less than $10,000 in amount; or (iii) easements,
rights-of-way, encroachments, restrictions, conditions and other similar
encumbrances of record or incurred or suffered in the ordinary course of
business and that, individually or in the aggregate, (A) are not substantial in
amount in relation to the applicable Owned Real Property; and (B) do not
materially detract from the use, utility or value of the applicable Owned Real
Property or otherwise materially impair the Company's present business
operations at such location.
(c) All leases pursuant to which the Company or any of its Subsidiaries
leases real property are valid and effective and in accordance with their
respective terms, and there is not, under any such lease, any existing default
or event of default by the Company or its Subsidiaries (or event that, with
notice or lapse of time or both, would constitute a material default by the
Company or its Subsidiaries), except where such default could not reasonably be
expected to have a Material Adverse Effect on the Company. To the knowledge of
the Company, the Company has all permits or licenses necessary to use its leased
real property, except where the failure to obtain such permits or licenses could
not reasonably be expected to have a Material Adverse Effect on the Company.
Section 4.15. Employee Benefit Plans.
(a) The following terms have the definitions given below:
"Controlled Group Liability" means any and all liabilities (i) under
Title IV of ERISA, (ii) under Section 302 of ERISA, (iii) under Sections 412 and
4971 of the Code, (iv) resulting from a violation of the continuation coverage
requirements of Section 601 et seq. of ERISA and Section 4980B of the Code or
the group health plan requirements of Sections 601 et seq. of the Code and
Section 601 et seq. of ERISA, and (v) under corresponding or similar provisions
of foreign laws or regulations, in each case, other than pursuant to the Plans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with the rules and regulations thereunder.
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"ERISA Affiliate" means, with respect to any entity, trade or business,
any other entity, trade or business that is a member of a group described in
Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that
includes the first entity, trade or business, or that is a member of the same
"controlled group" as the first entity, trade or business pursuant to Section
4001(a)(14) of ERISA.
"Plans" means all employee benefit plans, programs and other
arrangements providing benefits to any employee or former employee in respect of
services provided to the Company or any of its Subsidiaries or to any
beneficiary or dependent thereof, and whether covering one individual or more
than one individual, sponsored or maintained by the Company or any of its
Subsidiaries or to which the Company or any of its Subsidiaries contributes or
is obligated to contribute. Without limiting the generality of the foregoing,
the term "Plans" includes any defined benefit or defined contribution pension
plan, profit sharing plan, stock ownership plan, deferred compensation agreement
or arrangement, vacation pay, sickness, disability or death benefit plan
(whether provided through insurance, on a funded or unfunded basis or
otherwise), employee stock option or stock purchase plan, bonus or incentive
plan or program, severance pay plan, agreement, arrangement or policy, practice
or agreement, employment agreement, consulting agreements, salary continuation
agreements, retiree medical benefits plan and each other employee benefit plan,
program or arrangement including each "employee benefit plan" (within the
meaning of Section 3(3) of ERISA).
(b) Section 4.15(b) to the Company Disclosure Schedule lists all Plans.
With respect to each Plan, the Company has made available to Parent a true,
correct and complete copy of the following (where applicable): (i) each writing
constituting a part of such Plan, including, without limitation, all plan
documents (including amendments), benefit schedules, trust agreements, and
insurance contracts and other funding vehicles; (ii) the three most recent
Annual Reports (Form 5500 Series) and accompanying schedules, if any; (iii) the
current summary plan description, if any; (iv) the most recent annual financial
report, if any; and (v) the most recent determination letter from the Internal
Revenue Service, if any. Except as specifically provided in the foregoing
documents provided to Parent and except as set forth in Section 4.15(b) to the
Company Disclosure Schedule, there are no amendments to any Plan that have been
adopted or approved nor has the Company or any of its Subsidiaries undertaken to
make any such amendments or to adopt or approve any new Plan.
(c) The Internal Revenue Service has issued a favorable determination
letter with respect to each Plan that is intended to be a "qualified plan"
(within the meaning of Section 401(a) of the Code) (a "Qualified Plan"), and all
applicable foreign qualifications or registration requirements have been
satisfied with respect to any Plan maintained outside the United States. There
are no existing circumstances nor any events that have occurred that would be
reasonably be expected to adversely affect the qualified status of any Qualified
Plan or the related trust or the qualified or registered status of any Plan or
trust maintained outside the United States, other than qualification matters
that can be corrected without material liability.
(d) All material contributions required to be made by the Company or
any of its Subsidiaries or any of their respective ERISA Affiliates to any Plan
by Applicable Laws or by any plan document or other contractual undertaking, and
all material premiums due or payable with respect to insurance policies funding
any Plan, for any period through the date hereof have been made in a
substantially timely manner or paid in full and through the Closing Date will be
made in a substantially timely manner or paid in full. There are no Plans or
related trusts maintained outside the United States.
(e) Except as disclosed in Section 4.15(e) to the Company Disclosure
Schedule, the Company and its Subsidiaries and their respective ERISA Affiliates
have complied, and are now in compliance, in all material respects, with all
provisions of ERISA, the Code and all laws and regulations (including any local
Applicable Laws) applicable to the Plans. Each Plan has been operated in
material compliance with its terms. There is not now, and there are no existing
circumstances that would reasonably be expected to give rise to, any requirement
for the posting of security with respect to a Plan or the imposition of any Lien
on assets of the Company or any of its Subsidiaries or any of their respective
ERISA Affiliates under ERISA or the Code, or similar Applicable Laws of foreign
jurisdictions.
(f) No Plan is subject to Title IV or Section 302 of ERISA or Section
412 or 4971 of the Code. No Plan is a "multiemployer plan" (within the meaning
of Section 4001(a)(3) of ERISA) (a "Multiemployer Plan") or a plan that has two
or more contributing sponsors at least two of whom are not under common control,
within the meaning
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of Section 4063 of ERISA (a "Multiple Employer Plan"), nor has the Company or
any of its Subsidiaries or any of their respective ERISA Affiliates, at any time
within six years before the date of this Agreement, contributed to or been
obligated to contribute to any Multiemployer Plan or Multiple Employer Plan.
(g) There does not now exist, and there are no existing circumstances
that would reasonably be expected to result in, any material Controlled Group
Liability that would be a liability of the Company or any of its Subsidiaries
following the Closing. Without limiting the generality of the foregoing, neither
the Company nor any of its Subsidiaries nor any of their respective ERISA
Affiliates has engaged in any transaction described in Section 4069 or Section
4204 of ERISA other than transactions that are not likely to have a Material
Adverse Effect on the Company or its Subsidiaries.
(h) Except as set forth in Section 4.15(h) of the Company Disclosure
Schedule, except for health continuation coverage as required by Section 4980B
of the Code or Part 6 of Title I of ERISA or similar state laws, neither the
Company nor any of its Subsidiaries has any material liability for life, health,
medical or other welfare benefits to former employees or beneficiaries or
dependents thereof.
(i) Except as disclosed in Section 4.15(i) to the Company Disclosure
Schedule, neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated by this Agreement nor any shareholder, board or
other approval of such transactions will result in, cause the accelerated
vesting or delivery of, or increase the amount or value of, any payment or
benefit to any employee, officer, director or consultant of the Company or any
of its Subsidiaries (either alone or in conjunction with any other event).
Without limiting the generality of the foregoing, except as set forth in Section
4.15(i) to the Company Disclosure Schedule, no amount paid or payable by the
Company or any of its Subsidiaries in connection with the transactions
contemplated by this Agreement, either solely as a result thereof or as a result
of such transactions in conjunction with any other events, will be an "excess
parachute payment" (within the meaning of Section 280G of the Code). The maximum
aggregate dollar value of all obligations of the Company and its Subsidiaries
with respect to their directors, officers, employees and consultants pursuant to
all employment, consulting, severance, salary continuation, change in control,
parachute or similar agreements or Plans (all such arrangements, the "Section
4.15(i) Arrangements"), excluding any obligations of the Company with respect to
continuation of specific retirement and welfare benefits as provided for in the
Section 4.15(i) Arrangements and assuming in each case the consummation of the
transactions contemplated by this Agreement and, where relevant, the termination
(or constructive termination, as the case may be) of such directors, officers,
employees or consultants effective as of the Closing Date, does not exceed the
amount set forth in Section 4.15(i) to the Company Disclosure Schedule. The
names of all such directors, officers, employees or consultants who are parties
to or beneficiaries of the Section 4.15(i) Arrangements (other than the
broadbased Severance Benefit Plan, effective February 20, 1998) are set forth in
Section 4.15(i) to the Company Disclosure Schedule.
(j) There are no pending or, to the knowledge of the Company,
threatened Actions (other than claims for benefits in the ordinary course) that
have been asserted or instituted against the Plans, any fiduciaries thereof with
respect to their duties to the Plans or the assets of any of the trusts under
any of the Plans that would reasonably be expected to result in any material
liability of the Company or any of its Subsidiaries to the Pension Benefit
Guaranty Corporation, the United States Department of Treasury, the United
States Department of Labor or any Multiemployer Plan, or to comparable entities
or Plans under Applicable Laws of jurisdictions outside the United States.
(k) No material disallowance of a deduction under Section 162(m) of the
Code for employee reimbursement of any amount paid or payable by the Company or
any of its Subsidiaries has occurred or is reasonably expected to occur.
Section 4.16. Contracts.
(a) All material contracts required to be filed prior to the date
hereof by the Company or any of its Subsidiaries pursuant to Regulation S-K have
been filed as exhibits to, or incorporated by reference in, a Company SEC
Document filed after December 31, 2001 and prior to the date hereof (such
agreements, the "Company SEC Agreements"). Except as entered into after the date
hereof in compliance with the terms of this Agreement, Section 4.16 to the
Company Disclosure Schedule lists all written or oral contracts, agreements,
guarantees, leases and
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executory commitments other than Plans (each a "Contract"), other than any
Contract that is a Company SEC Agreement, that fall within any of the following
categories:
(i) Contracts not entered into in the ordinary course of
business, other than those that are not material to the Company's business,
(ii) joint venture, partnership and similar Contracts,
(iii) service Contracts or equipment leases involving payments
by the Company of more than $100,000 per year or $250,000 in the aggregate,
(iv) Contracts that contain minimum purchase conditions in
excess of $250,000 or requirements or other terms that restrict or limit the
purchasing relationships of the Company or its Affiliates, or any customer,
licensee or lessee thereof,
(v) Contracts relating to any outstanding commitment for
capital expenditures in excess of $100,000 per Contract,
(vi) Contracts containing covenants purporting to limit the
freedom of the Company to compete in any line of business in any geographic area
or to hire any individual or group of individuals,
(vii) Contracts that, after the Effective Time, would have the
effect of limiting the freedom of Parent or its Subsidiaries (other than the
Company and its subsidiaries) to compete in any line of business in any
geographic area or to hire any individual or group of individuals,
(viii) Contracts relating to the lease or sublease of or sale
or purchase of, or the servicing of, real or personal property involving any
annual expense or price in excess of $100,000,
(ix) Contracts with any labor organization or union,
(x) Contracts relating to indebtedness for borrowed money
(including guaranties) or to any sale-leaseback or leveraged lease or that is an
interest rate swap, equity swap or other swap or derivative instrument, other
than trade payables and accrued expenses arising in the ordinary course of
business consistent with past practices,
(xi) Indentures, mortgages, promissory notes, loan agreements,
guarantees of borrowed money, letters of credit or other Contracts or
instruments of the Company or any of its Subsidiaries or commitments for the
borrowing or the lending by the Company or any of its Subsidiaries or providing
for the creation of any charge, security interest, encumbrance or lien upon any
of the assets of the Company or any of its Subsidiaries,
(xii) Contracts with the 10 largest customers of the Company
and its Subsidiaries on a consolidated basis, based on revenues derived from
such customers for the calendar month of May 2002 (provided that, for purposes
of this paragraph, any group of affiliated or commonly owned or controlled
customers shall be treated as a single customer),
(xiii) Contracts providing for "earn-outs," "savings
guarantees," "performance guarantees," or other contingent payments by the
Company in excess of $50,000 in the aggregate,
(xiv) Contracts with or for the benefit of any Affiliate of
the Company or immediate family member thereof (other than the Company's
Subsidiaries),
(xv) Contracts pursuant to which the Company or any of its
Subsidiaries obtains the right to use any Intellectual Property from any Person
other than the Company or any of the Company's Subsidiaries,
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(xvi) Contracts giving any Person the right to require the
Company to register shares of capital stock or to participate in any such
registration,
(xvii) Contracts outside of the ordinary course of business
that contain material indemnification obligations of the Company or any of its
Subsidiaries to any Person,
(xviii) material Contracts under which there are, or have been
in the past six months, to the knowledge of the Company, any material default by
any party thereto, including the Company and its Subsidiaries,
(xix) Contracts, or amendments or supplements, that
individually or in the aggregate, amount to a material change to the terms of
payment or payment practices with respect to existing Contracts relating to a
non-de minimis portion (by dollar value or number of customers or number of
suppliers) of the Company's accounts receivable or accounts payable,
(xx) Contracts having the effect of limiting the freedom of
any Person to compete with the Company or any of its Subsidiaries in any line of
business in any geographic area or to hire any individual or group of
individuals employed by the Company or any of its Subsidiaries, and
(xxi) Contracts outside the ordinary course of business with
respect to the sale, disposition or encumbrance of any assets or businesses
material to the business of the Company as presently conducted.
The Company SEC Agreements, together with the Contracts
required to be disclosed in Section 4.16 of the Company Disclosure Schedule are
referred to herein as the "Company Disclosed Contracts". The Company has
previously made available to Parent true and complete copies of those Company
Disclosed Contracts requested by Parent.
(b) Each of the Company Disclosed Contracts is a valid and binding
obligation of the Company or one of its Subsidiaries and, to the knowledge of
the Company, the valid and binding obligation of each other party thereto,
except for such Company Disclosed Contract that, if not so valid and binding,
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on the Company. Neither the Company nor any of its
Subsidiaries is or is alleged to be nor, to the knowledge of the Company, is any
other party thereto, in breach or violation of or in default in respect of, nor
has there occurred an event or condition, that with the passage of time or
giving of notice (or both), would constitute a material default under or permit
the termination of, or give rise to or accelerate the timing of any material
rights or penalties under, any Company Disclosed Contract.
Section 4.17. Labor Matters. Except as set forth in Section 4.17 to the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to any labor contracts or collective bargaining agreements. There is no labor
strike, dispute or stoppage pending, or, to the knowledge of the Company,
threatened, against the Company, and neither the Company nor any of its
Subsidiaries has experienced any labor strike, dispute or stoppage or other
material labor difficulty involving its employees since January 1, 2000. To the
knowledge of the Company, since January 1, 2000, no campaign or other attempt
for recognition has been made by any labor organization or employees with
respect to employees of the Company or any of its Subsidiaries.
Section 4.18. Undisclosed Liabilities.
(a) Except (i) as and to the extent disclosed or reserved against on
the balance sheet of the Company at March 31, 2002 included in the Company's
Quarterly Report on Form 10-Q for the three-month period ended March 31, 2002
(the "Company Recent Balance Sheet"), (ii) as incurred since the date of the
Company Recent Balance Sheet in the ordinary course of business consistent with
past practice or (iii) as set forth in Section 4.18(a) to the Company Disclosure
Schedule, the Company does not have any liabilities or obligations of any
nature, whether known or unknown, absolute, accrued, contingent or otherwise and
whether due or to become due, that, individually or in the aggregate, have had
or could reasonably be expected to have a Material Adverse Effect on the
Company.
(b) Except as set forth in Section 4.18(b) to the Company Disclosure
Schedule, since March 31, 2002 through the date of this Agreement, the Company
has not engaged in any transaction that, if done after the execution of this
Agreement, would violate Section 5.3(b).
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Section 4.19. Licenses; Permits; Compliance.
(a) To the knowledge of the Company, the Company and its Subsidiaries
are in possession of all material franchises, grants, authorizations, licenses,
permits, easements, variances, exemptions, consents, certificates, approvals and
orders necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted (collectively, the "Company Permits"), and
there is no Action, pending or, to the knowledge of the Company, threatened,
regarding any of the Company Permits. The Company and its Subsidiaries are not
in material conflict with, or in material default or violation of, any of the
Company Permits.
(b) Except as set forth in Section 4.19(b) to the Company Disclosure
Schedule or as could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Company:
(i) all necessary approvals from Governmental Authorities for
all drug and device products that are manufactured, distributed and/or sold by
the Company and its Subsidiaries have, to the knowledge of the Company, been
obtained, and the Company and its Subsidiaries are in substantial compliance
with the most current form of each applicable approval with respect to the
manufacture, storage, transportation, distribution, promotion and sale by the
Company and its Subsidiaries of such products;
(ii) to the knowledge of the Company, none of the Company, its
Subsidiaries, nor any officer, employee or agent of the Company or its
Subsidiaries (during the term of such individual's employment by the Company or
while acting as an agent of the Company) has made any untrue statement of a
material fact or fraudulent statement to the United States Food and Drug
Administration, (the "FDA") or any other Governmental Authorities, or failed to
disclose a material fact required to be disclosed to the FDA or other
Governmental Authorities;
(iii) to the knowledge of the Company, no article of drug,
device, cosmetic or vitamin manufactured (directly or indirectly) or distributed
by the Company or any of its Subsidiaries is adulterated or misbranded within
the meaning of the Food, Drug and Cosmetic Act or similar governmental act or
law of any jurisdiction; and
(iv) to the knowledge of the Company, none of the Company, its
Subsidiaries, nor any officer, employee or agent of the Company (during the term
of such individual's employment by the Company or while acting as an agent of
the Company) nor its Subsidiaries or Affiliates has been convicted of any crime,
or engaged in any conduct, for which debarment or similar punishment is mandated
or permitted by any Applicable Laws.
(c) Except as set forth in Section 4.19(c) to the Company Disclosure
Schedule, to the extent necessary to operate the Company's business as presently
conducted, the Company and its Subsidiaries are certified for participation and
reimbursement under Titles XVIII and XIX of the Social Security Act (the
"Medicare and Medicaid Programs" and, together with such other similar federal,
state or local reimbursement or governmental programs for which the Company and
its Subsidiaries are eligible, the "Government Programs") and have current
provider agreements for such Government Programs and, to the knowledge of the
Company, except where the failure to so have could not, individually or in the
aggregate, reasonably be expected to result in Material Adverse Effect on the
Company, with such private non-governmental programs, including any private
insurance program under which they, directly or indirectly, are presently
receiving payments (such non-governmental programs, the "Private Programs"). Set
forth in Schedule 4.19(c) to the Company Disclosure Schedule is a correct and
complete list of such authorizations and provider agreements under all of the
Government Programs, complete and correct copies of which have been provided to
the Parent. True, complete and correct copies of all surveys of the Company, its
Subsidiaries or their respective predecessors in interest conducted in
connection with any of the Government Programs, the Private Programs or
licensing or accrediting body during the past two years have been made available
to the Parent.
(d) Except as set forth in Section 4.19(d) to the Company Disclosure
Schedule, to the knowledge of the Company, there is no pending or threatened
Action by any Governmental Authority to revoke, cancel, suspend, modify in any
material respect or refuse to renew any of the Company Permits or the items
listed in Schedule 4.19(c) to the Company Disclosure Schedule. Neither the
Company nor any of its Subsidiaries has received any notice of any Action
pending or recommended by any Governmental Authority having jurisdiction over
any of the
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Company Permits or the items listed in Section 4.19(c) to the Company Disclosure
Schedule, either to revoke, withdraw or suspend any license, right or
authorization, or to terminate the participation of the Company or any of its
Subsidiaries in any of the Government Programs or the Private Programs. To the
knowledge of the Company, and except as could not, individually or in the
aggregate, reasonably be expected to prejudice the ability of Parent or any of
its Subsidiaries to obtain any necessary licenses or permits as of and after the
Closing or to materially interfere with or limit the business of Parent or any
of its Subsidiaries after the Closing on an ongoing basis, no event has occurred
that, with the giving of notice, the passage of time, or both, would constitute
grounds for a violation, order or deficiency with respect to any of the Company
Permits or the items listed in Section 4.19(c)(ii) to the Company Disclosure
Schedule, or to terminate or modify the participation of the Company or any of
its Subsidiaries in any of the Government Programs or the Private Programs.
Except as listed in Section 4.19(d) to the Company Disclosure Schedule, to the
knowledge of the Company, there has been no decision not to renew any provider
or third-party payor agreement of the Company or any of its Subsidiaries by any
Governmental Authority, and no consent or approval of, prior filing with or
notice to, or any Action by, any Governmental Authority or any other third party
in connection with the transfer or change of ownership of such Company Permit,
or the Government Programs or the Private Programs, by reason of the assignment
thereof to the Company upon consummation of the Merger.
(e) Except as set forth in Section 4.19(e) to the Company Disclosure
Schedule, each of the Company and its Subsidiaries has timely filed all reports
and billings required to be filed by it prior to the date hereof in accordance
with the Government Programs and the Private Programs, all fiscal intermediaries
and other insurance carriers and all such reports and billings are complete and
accurate in all material respects and have been prepared in compliance with all
Applicable Laws governing reimbursement and payment claims, except for failures
that could not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect on the Company. True and complete copies of such
reports and billings for the most recent year have heretofore been made
available to Parent. Except as set forth in Section 4.19(e) to the Company
Disclosure Schedule, each of the Company and its Subsidiaries has paid or caused
to be paid all known and undisputed refunds, overpayments, discounts or
adjustments that have become due pursuant to such reports and billings and has
no unpaid liability under any of the Government Programs or the Private Programs
for any refund, overpayment, discount or adjustment, except for failures to pay
that could not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect on the Company. Except as set forth in Section 4.19(e)
to the Company Disclosure Schedule, (i) there are no pending material Actions
relating to such prior reports or billings, and (ii) to the knowledge of the
Company, during the last two years, the Company and its Subsidiaries have not
been subject to any material audit or examination by any of the Government
Programs or the Private Programs. There are no other reports required to be
filed by Parent in order to be paid under any of the Government Programs or the
Private Programs for services rendered by the Company or its Subsidiaries,
except for reports not yet due and except for reports the failure of which to be
filed could not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on the Company.
Section 4.20. Institutional Pharmacy Business.
(a) Section 4.20 to the Company Disclosure Schedule lists each Company
pharmacy utilized by the Company or its Subsidiaries in connection with its
pharmacy business and indicates (i) the location of such pharmacy and (ii)
whether such pharmacy is owned or held pursuant to a leasehold interest. No
other Person has any beneficial ownership or interest in or to any such pharmacy
nor does any other Person have any right or option to acquire any beneficial
ownership or interest in or to any such pharmacy.
(b) Except as set forth in Section 4.20(b) to the Company Disclosure
Schedule, the Company and its Subsidiaries have not violated, and are not now in
violation of, 42 U.S.C. ss.ss. 1320a-7, 1320a-7a, 1320a-7b, 1395nn or 1396b.
(c) Except as could not, individually or in the aggregate, reasonably
be expected to prejudice the ability of Parent or any of its Subsidiaries to
obtain required licenses or permits as of and after the Closing or to materially
interfere with or limit the institutional pharmacy business of Parent or any of
its Subsidiaries after the Closing on an ongoing basis and, except as set forth
on Section 4.19(c) to the Company Disclosure Schedule, (i) the Company and its
Subsidiaries are duly licensed to provide pharmacy services in all states in
which they do business, and also are participants in the Medicare program and
the Medicaid programs of the states listed in Section 4.19 to the Company
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Disclosure Schedule and (ii) the Company and its Subsidiaries are in compliance
with all Applicable Laws affecting (A) such licenses and (B) the participation
by the Company's pharmacies in the Medicare and Medicaid programs.
Section 4.21. Environmental Matters. Except for matters disclosed in Section
4.21 to the Company Disclosure Schedule, (a) to the knowledge of the Company,
the properties, operations and activities of the Company and its Subsidiaries
are in compliance in all material respects with all applicable Environmental
Laws and all past noncompliance of the Company or any of its Subsidiaries with
any Environmental Laws or Environmental Permits has been resolved without any
pending, ongoing or future material obligation, cost or liability; (b) the
Company and its Subsidiaries and the properties and operations of the Company
and its Subsidiaries are not subject to any existing, pending, or, to the
knowledge of the Company, threatened, Action under any Environmental Law; (c) to
the knowledge of the Company, there has been no material release of any
Hazardous Material into the environment by the Company or its Subsidiaries in
connection with their current or former properties or operations in violation of
applicable Environmental Laws; and (d) to the knowledge of the Company, there
has been no material exposure of any Person or property to any Hazardous
Material in connection with the current or former properties, operations and
activities of the Company and its Subsidiaries in violation of applicable
Environmental Laws. "Environmental Laws" means all United States federal, state
or local or foreign laws relating to pollution or protection of human health or
the environment (including ambient air, surface water, groundwater, land surface
or subsurface strata), including laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants, or
industrial, toxic or hazardous substances or wastes (collectively, "Hazardous
Materials") into the environment, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials, as well as all authorizations, codes, decrees,
demands or demand letters, injunctions, judgments, licenses, notices, orders,
permits, plans or regulations issued, entered, promulgated or approved
thereunder. "Environmental Permit" means any permit, approval, grant, consent,
exemption, certificate order, easement, variance, franchise, license or other
authorization required under or issued pursuant to any applicable Environmental
Law.
Section 4.22. Accounts Receivable; Accounts Payable; Inventories and Cash.
(a) All accounts and notes receivable of the Company have arisen in the
ordinary course of business, and the accounts receivable reserve reflected in
the Company Recent Balance Sheet is, as of the date of the Company Recent
Balance Sheet, adequate and established in accordance with GAAP consistently
applied, subject to year-end adjustments and accruals in the ordinary course of
business and not material in amount. Since March 31, 2002, there has been no
event or occurrence that, when considered, individually or together with all
such other events or occurrences, would cause such accounts receivable reserve
to be inadequate, and that could, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on the Company.
(b) Except as set forth in Section 4.22(b) to the Company Disclosure
Schedule, since January 1, 2002, neither the Company nor any of its Subsidiaries
has, with respect to any non-de minimus portion of its trade accounts payable,
(i) failed to pay its trade accounts payable in the ordinary course, or (ii)
extended the terms of payment, whether by contract, amendment, act, deed, or
course of dealing, of any trade account payable.
(c) The assets of the Company and its Subsidiaries that are inventories
(i) are in good and merchantable condition; (ii) to the knowledge of the
Company, have been purchased by the Company or its Subsidiaries directly from
the manufacturer thereof or from an authorized distributor of such products in
accordance with the Federal Prescription Drug Marketing Act, if applicable; and
(iii) are not past the manufacturer's expiration date or less than 30 days from
the manufacturer's expiration date, except for such failures as could not
reasonably be expected to have a Material Adverse Effect on the Company and do
not involve, affect or relate to more than 5% of such inventories by value.
(d) The amount of cash on hand of the Company and its Subsidiaries on a
consolidated basis (determined as set forth in Exhibit C) (the "Cash on Hand"),
as of the date of this Agreement, is not less than $35,000,000.
Section 4.23. Insurance. Section 4.23 to the Company Disclosure Schedule lists
all insurance policies of the Company and its Subsidiaries presently in effect,
and (a) copies of each such policy, as well as the loss run history under and
premium for each such policy, has been made available to Parent prior to the
date hereof, or (b) with respect to such policies as have not been made
available to Parent prior to the date hereof, such policies are in all
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material respects in amounts that are customary, adequate and suitable in
relation to the business, assets and liabilities of the Company or its
Subsidiaries, and are consistent with past practice.
Section 4.24. Opinion of Financial Advisor. The Board of Directors of the
Company has received the written opinion of Candlewood Partners, LLC, the
Company's financial advisor, to the effect that, as of the date of this
Agreement, the Exchange Ratio is fair to the Company Stockholders from a
financial point of view. The Company has provided a copy of such opinion to
Parent, and such opinion has not been withdrawn or revoked or otherwise modified
in any material respect.
Section 4.25. Related Parties. Except as set forth in Section 4.25 to the
Company Disclosure Schedule and except for transactions between the Company and
its directly or indirectly wholly owned Subsidiaries or between two or more
directly or indirectly wholly owned Subsidiaries of the Company, (i) no
Affiliate of the Company is a party with the Company or any of its Subsidiaries
to an agreement that will continue after the Closing Date; (ii) no Affiliate of
the Company owes any money to, nor is such Affiliate owed any money by, the
Company or any of its Subsidiaries, other than pursuant to Plans and other than
reimbursement for or advancement of routine expenses; (iii) neither the Company
nor any of its Subsidiaries has, directly or indirectly, guaranteed or assumed
any indebtedness for borrowed money or otherwise for the benefit of an Affiliate
of the Company; and (iv) since March 31, 2002, neither the Company nor any of
its Subsidiaries has made any payment to, or engaged in any transaction with, an
Affiliate of the Company, or any affiliate of any such Affiliate of the Company,
other than pursuant to Plans and other than reimbursement for or advancement of
routine expenses.
Section 4.26. Special Committee; Board Recommendation; Required Vote.
(a) The special committee of independent directors of the Board of
Directors of the Company (the "Special Committee"), at a meeting duly called and
held, has, by unanimous vote of its members, (i) determined that this Agreement
and the transactions contemplated by this Agreement are advisable and fair to
and in the best interests of the Persons (other than Jon H. Outcalt and Kevin B.
Shaw) to whom the Board of Directors of the Company owes fiduciary duties under
Applicable Laws, and (ii) resolved to recommend that the full Board of Directors
of the Company approve and adopt this Agreement and the transactions
contemplated thereby and make the Company Board Recommendation.
(b) The Board of Directors of the Company, at a meeting duly called and
held, has, by unanimous vote of all of its members, (i) determined that this
Agreement and the transactions contemplated by this Agreement are advisable and
fair to and in the best interests of the Persons to whom the Board of Directors
of the Company owes fiduciary duties, and (ii) resolved to recommend that the
holders of shares of Company Class A Common Stock and the holders of shares of
Company Class B Common Stock approve and adopt this Agreement and the
transactions contemplated by this Agreement, including the Merger (the "Company
Board Recommendation"). The affirmative vote of holders of a majority of the
voting power of the outstanding shares of the Company Common Stock, voting
together as a single class (the "Required Company Stockholder Approval"), is the
only vote of the holders of any class or series of stock of the Company
necessary to adopt this Agreement and approve the transactions contemplated by
this Agreement.
Section 4.27. Section 203 of the DGCL; No Rights Agreement. Prior to the date of
this Agreement, the Board of Directors of the Company has taken all action
necessary to exempt under or make not subject to (a) the provisions of Section
203 of the DGCL and (b) any other state takeover law or state law that purports
to limit or restrict business combinations or the ability to acquire or vote
shares: (i) the execution of this Agreement and the Voting Agreement,
(ii) the Merger and (iii) the transactions contemplated by this Agreement and
the Voting Agreement. The Company does not have any stockholders or shareholder
rights agreement or any similar type of anti-takeover agreement.
Section 4.28. Reorganization. As of the date hereof, to the knowledge of the
Company after due inquiry, none of the Company or any Affiliate of the Company
has taken or agreed to take any action, failed to take any action, or is aware
of any fact or circumstance that is reasonably likely to prevent the Merger from
qualifying as a reorganization under Section 368(a) of the Code.
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ARTICLE V
COVENANTS OF THE PARTIES
The parties to this Agreement agree that:
Section 5.1. Mutual Covenants.
(a) HSR Act Filings; Reasonable Efforts; Notification.
(i) Each of Parent and the Company shall (A) make or cause to
be made the filings required of such party or any of its Subsidiaries or
Affiliates under the HSR Act with respect to the transactions contemplated by
this Agreement, as promptly as practicable and in any event the initial filing
with respect to this Agreement, if required, shall be made within 10 business
days after the date of this Agreement, (B) comply at the earliest practicable
date with any request under the HSR Act for additional information, documents,
or other materials received by such party or any of its Subsidiaries from the
United States Federal Trade Commission or the United States Department of
Justice or any other Governmental Authority in respect of such filings or such
transactions, and (C) act in good faith and reasonably cooperate with the other
party in connection with any such filing (including, with respect to the party
making a filing, providing copies of all such documents to the non-filing party
and its advisors reasonably prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith)
and in connection with resolving any investigation or other inquiry of any such
agency or other Governmental Authority under any Antitrust Laws with respect to
any such filing or any such transaction. To the extent not prohibited by
Applicable Laws, each party to this Agreement shall use all reasonable efforts
to furnish to each other all information required for any application or other
filing to be made pursuant to any Applicable Laws in connection with the
transactions contemplated by this Agreement. Each party to this Agreement shall
give the other parties to this Agreement reasonable prior notice of any
communication with, and any proposed understanding, undertaking, or agreement
with, any Governmental Authority regarding any such filings or any such
transaction. None of the parties to this Agreement shall independently
participate in any meeting, or engage in any substantive conversation, with any
Governmental Authority in respect of any such filings, investigation, or other
inquiry without giving the other parties to this Agreement prior notice of the
meeting and, to the extent permitted by such Governmental Authority, the
opportunity to attend and/or participate. The parties to this Agreement will
consult and cooperate with one another, in connection with any analyses,
appearances, presentations, memoranda, briefs, arguments, opinions and proposals
made or submitted by or on behalf of any party to this Agreement in connection
with proceedings under or relating to the HSR Act or other Antitrust Laws.
(ii) Subject to Section 5.1(a)(iv), each of Parent and the
Company shall use all reasonable efforts to resolve such objections, if any, as
may be asserted by any Governmental Authority with respect to the transaction
contemplated by this Agreement, under the HSR Act, the Sherman Act, as amended,
the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and
any other United States federal or state or foreign statues, rules, regulations,
orders, decrees, administrative or judicial doctrines or other laws that are
designed to prohibit, restrict or regulate actions having the purpose or effect
of monopolization or restraint of trade (collectively, "Antitrust Laws"). In
connection therewith and subject to Section 5.1(a)(iv), if any Action is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as inconsistent with or violative of any
Antitrust Law, each of Parent and the Company shall cooperate and use all
reasonable efforts vigorously to contest and resist such Action, and to have
vacated, lifted, reversed, or overturned any Order whether temporary,
preliminary or permanent, that is in effect and that prohibits, prevents, delays
or restricts consummation of the transactions contemplated by this Agreement,
including by vigorously pursuing all available avenues of administrative and
judicial appeal and all available legislative action, unless Parent determines
that litigation is not in its best interests. Subject to Section 5.1(a)(iv),
each of Parent and the Company shall use all reasonable efforts to take such
action as may be required to cause the expiration of the notice periods under
the HSR Act or other Antitrust Laws with respect to the transactions
contemplated by this Agreement as promptly as possible after the execution of
this Agreement.
(iii) Subject to Section 5.1(a)(iv) below, each of the parties
to this Agreement agrees to use all reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other parties to this Agreement in doing, all things necessary, proper
or advisable to consummate and make
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effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including (A) the obtaining of all other
necessary actions or nonactions, waivers, consents, licenses, permits,
authorizations, orders and approvals from Governmental Authorities and the
making of all other necessary registrations and filings (including other filings
with Governmental Authorities, if any), (B) the obtaining of all consents,
approvals or waivers from third parties related to or required in connection
with the Merger that are necessary to consummate the transactions contemplated
by this Agreement or required to prevent a Material Adverse Effect on Parent or
the Company from occurring prior to or after the Effective Time, (C) the
preparation of the Proxy Statement and the Registration Statement, (D) the
execution and delivery of any additional instruments reasonably necessary to
consummate the transaction contemplated by, and to fully carry out the purposes
of, this Agreement, and (E) the providing of all such information concerning
such party, its Subsidiaries, its Affiliates and its Subsidiaries' and
Affiliates' officers, directors, employees and partners as may be reasonably
requested in connection with any of the matters set forth in this paragraph
(iii).
(iv) At the request of Parent, the Company and its
Subsidiaries shall agree to hold separate (including by trust or otherwise) or
to divest any of their respective businesses, Subsidiaries or assets, or to take
or agree to take any action with respect to, or agree to any limitation on, any
of their respective businesses, Subsidiaries or assets, provided that any such
action is conditioned upon the consummation of the Merger. The Company agrees
and acknowledges that, notwithstanding anything to the contrary in this Section
5.1(a), neither the Company nor any of its Subsidiaries shall, without Parent's
prior written consent, agree to hold separate (including by trust or otherwise)
or to divest any of their respective businesses, Subsidiaries or assets, or to
take or agree to take any action with respect to, or agree to any limitation on,
any of their respective businesses, Subsidiaries or assets. Anything to the
contrary in this Agreement notwithstanding, Parent and its Subsidiaries shall
not be required to hold separate (including by trust or otherwise) or to divest
any of the respective businesses, Subsidiaries or assets of Parent and any of
its Subsidiaries and/or the Company and any of its Subsidiaries, or to take or
agree to take any action with respect to, or agree to any limitation on, any of
their respective businesses in order to satisfy any of their respective
obligations under this Agreement, including under this Section 5.1.
(b) Public Announcements. The initial press release concerning the
transactions contemplated by this Agreement shall be a joint press release.
Unless otherwise required by Applicable Laws or by obligations pursuant to any
listing agreement with or rules of any securities exchange, the Company shall
consult with, and use all reasonable efforts to accommodate the comments
(including as to timing) of Parent, and the Parent shall consult with, and use
all reasonable efforts to accommodate the comments (including as to timing) of
the Company before issuing any press release or otherwise making any public
statement with respect to this Agreement or the transactions contemplated
hereby.
(c) Registration Statement; Other Filings; Board Recommendations.
(i) As promptly as practicable after the execution of this
Agreement, the Company and Parent will cooperate in preparing and will file with
the Commission the Registration Statement, which shall include the Proxy
Statement. Each of the Company and Parent will respond jointly and promptly to
any comments of the Commission, will use all reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing, and the Company will cause the Proxy Statement
to be mailed to the Company Stockholders at the earliest practicable time after
the Registration Statement has been declared effective by the Commission. As
promptly as practicable after the date of this Agreement, each of the Company
and Parent will prepare and file any other documents required to be filed by it
under the Exchange Act, the Securities Act or any other federal, state, foreign
or Blue Sky or related laws relating to the Merger and the transactions
contemplated by this Agreement (the "Other Filings"). No amendment or supplement
to the Proxy Statement or the Registration Statement will be made by the Company
or Parent, without the prior approval of the other party except as required by
Applicable Laws, and then only to the extent necessary. Each of the Company and
Parent will notify the other promptly upon the receipt of any comments from the
Commission or its staff or any other government officials and of any request by
the Commission or its staff or any other government officials for amendments or
supplements to the Registration Statement, the Proxy Statement or any Other
Filings or for additional information and will supply the other with copies of
all correspondence between such party or any of its representatives, on the one
hand, and the Commission, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy Statement, the
Merger or any Other Filing. Whenever any event occurs that is required to be set
forth in an amendment or supplement to the Proxy Statement, the
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Registration Statement or any Other Filing, the Company or Parent, as the case
may be, will promptly inform the other of such occurrence and cooperate in
filing with the Commission or its staff or any other Governmental Authority,
and/or mailing to the Company Stockholders, such amendment or supplement.
(ii) The Company Board Recommendation shall be included in the
Proxy Statement, except that the Board of Directors of the Company may withdraw
or modify in a manner adverse to Parent such recommendation only if the Board of
Directors of the Company determines, in good faith, after consultation with
outside legal counsel, that such action is required in order for the directors
of the Company to comply with their fiduciary duties to those Persons to whom
the Board of Directors of the Company owes fiduciary duties under Applicable
Laws.
(d) Notice of Breaches; Updates.
(i) Parent shall, promptly upon receiving knowledge thereof,
deliver to the Company written notice of any event or development that would (A)
render any statement, representation or warranty of Parent in this Agreement
(including the Parent Disclosure Schedule) inaccurate or incomplete in any
material respect or (B) constitute or result in a breach by Parent of, or a
failure by Parent to comply with, any agreement or covenant in this Agreement.
No such disclosure shall be deemed to avoid or cure any such misrepresentation
or breach.
(ii) The Company shall, promptly upon receiving knowledge
thereof, deliver to Parent written notice of any event or development that would
(A) render any statement, representation or warranty of the Company in this
Agreement (including the Company Disclosure Schedule) inaccurate or incomplete
in any material respect or (B) constitute or result in a breach by the Company
of, or a failure by the Company to comply with, any agreement or covenant in
this Agreement. No such disclosure shall be deemed to avoid or cure any such
misrepresentation or breach.
(e) Outstanding Notes.
(i) Prior to the Closing, the Company shall take all such
actions as are required to be taken in advance of the Closing, including,
without limitation, providing any required notices on a timely basis, in order
to permit the Surviving Corporation to redeem the Notes on the Closing Date in
accordance with the terms of Article Eleven of the Indenture, dated as of August
13, 1997, between the Company and Wells Fargo, as successor trustee, relating to
the Notes (the "Indenture"), as if the Closing Date were the Redemption Date (as
defined in the Indenture).
(ii) Subject to the Company's compliance with the preceding
paragraph, Parent shall cause the Surviving Corporation to redeem the Notes, in
accordance with the terms of Article Eleven of the Indenture, on the Closing
Date concurrently with or promptly after the Effective Time.
Section 5.2. Covenants of Parent.
(a) Conduct of Parent's Operations. During the period from the date of
this Agreement to the Effective Time, Parent shall use all reasonable efforts to
maintain and preserve its business organization and to retain the services of
its officers and key employees, and maintain relationships with customers,
suppliers and other third parties to the end that their goodwill and ongoing
business shall not be impaired in any material respect.
(b) Indemnification; Directors' and Officers' Insurance.
(i) From and after the Effective Time, Parent shall cause the
Surviving Corporation to indemnify and hold harmless the present and former
officers and directors of the Company in respect of acts or omissions occurring
prior to the Effective Time to the extent provided under the Company Certificate
of Incorporation or the Company By-Laws as in effect as of the date of this
Agreement, and
(ii) Parent shall use all reasonable efforts to cause the
Surviving Corporation or Parent to maintain in effect the Company's fully paid
existing directors' or officers' liability insurance and, to the extent the
existing policy cannot be maintained, to obtain for a period of six years after
the Effective Time, policies of directors' and
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officers' liability insurance at no cost to the beneficiaries thereof with
respect to acts or omissions occurring prior to the Effective Time with
substantially the same coverage and containing substantially similar terms and
conditions as existing policies; provided, however, that neither the Surviving
Corporation nor Parent shall be required to pay an aggregate premium for such
insurance coverage in excess of 200% of the amount for such coverage set forth
in Section 4.23 to the Company Disclosure Schedule but in such case shall
purchase as much coverage as reasonably practicable for such amount.
(c) Nasdaq Listing. Parent shall use all reasonable efforts to cause
the shares of Parent Common Stock issuable pursuant to the Merger or upon the
exercise of Parent Exchange Options to be approved for listing on the Nasdaq,
subject to official notice of issuance, prior to the Effective Time.
(d) Employee Benefits. For a period of 12 months after the Closing
Date, Parent or the Surviving Corporation shall provide employees of the
Surviving Corporation with (i) wages or salaries, and commissions, as
applicable, and (ii) employee pension and welfare benefits, in each case, that
are substantially similar in the aggregate to those provided to such employees
immediately prior to the Closing Date or those provided to similarly situated
employees of the Parent and its Affiliates or their Subsidiaries at the sole
discretion of Parent.
Subject to the preceding sentence, Parent and the Surviving Corporation shall
have the right to amend or terminate any benefit plan, program or arrangement.
Nothing contained in this Agreement shall prevent, limit or restrict in any way
Parent's or the Surviving Corporation's right to terminate the employment or
services of any Person at any time following the Closing Date, nor shall it be
construed as a guarantee of employment to any Person.
(e) Tax-Free Treatment. Parent shall use best efforts to cause the
Merger to constitute a "reorganization" under Section 368(a) of the Code. Upon
the request of the Company, Parent shall deliver to the Company and/or its
counsel a representation letter, in form and substance reasonably satisfactory
to counsel to the Company and counsel to Parent, setting forth facts relating to
Parent and Sub relevant to the availability of such "reorganization" treatment
and confirming Parent's compliance with the first sentence of this Section
5.2(e).
(f) Maintenance of Operations at the Beachwood Location. Parent shall
cause the Surviving Corporation to maintain business operations at the
Beachwood, Ohio facility for a period of one year from the Closing Date.
Section 5.3. Covenants of the Company.
(a) The Company Stockholders Meeting. The Company shall take all action
in accordance with the United States federal securities laws, the DGCL and the
Company Certificate of Incorporation and the Company By-Laws necessary to duly
call, give notice of, convene and hold a special meeting of the Company
Stockholders, to be held on the earliest practicable date determined in
consultation with Parent, for the purpose of obtaining the Required Company
Stockholder Approval (the "Company Stockholders Meeting"). Once the Company
Stockholders Meeting has been called and noticed, the Company shall not postpone
or adjourn (other than for the absence of a quorum and then only to the next
possible future date) the Company Stockholders Meeting without Parent's consent.
The Board of Directors of the Company shall submit this Agreement to the Company
Stockholders, whether or not the Board of Directors of the Company at any time
changes, withdraws or modifies the Company Board Recommendation. The Company
shall solicit from the Company Stockholders proxies in favor of the Merger and
shall take all other action necessary or advisable to secure the vote or consent
of the Company Stockholders required by the DGCL and the Company Certificate of
Incorporation and Company By-Laws to authorize and adopt this Agreement and the
Merger. Without limiting the generality of the foregoing, (i) the Company agrees
that its obligation to duly call, give notice of, convene and hold a meeting of
the holders of Company Common Stock, as required by this Section 5.3, shall not
be affected by the withdrawal, amendment or modification of the Company Board
Recommendation and (ii) the Company agrees that its obligations pursuant to this
Section 5.3 shall not be affected by the commencement, public proposal, public
disclosure or communication to the Company of any Acquisition Proposal or
Superior Proposal.
(b) Conduct of the Company's Operations. The Company shall conduct its
operations in the ordinary course consistent with past practice, and shall use
all commercially reasonable efforts to maintain and preserve its business
organization and its material rights and to retain the services of its officers
and key employees and maintain relationships with customers, suppliers, lessees,
licensees and other third parties, and to maintain all of its operating
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assets in their current condition (normal wear and tear excepted), to the end
that their goodwill and ongoing business shall not be impaired in any material
respect (except as a result of the implementation of FAS 142 as required by the
Financial Accounting Standards Board). Without limiting the generality of the
foregoing, during the period from the date of this Agreement to the Effective
Time, the Company and each of its Subsidiaries shall not, except as otherwise
expressly contemplated by this Agreement or as set forth in Section 5.3(b) to
the Company Disclosure Schedule, without the prior written consent of Parent:
(i) do or effect any of the following actions with respect to
its securities: (A) adjust, split, combine or reclassify its capital stock, (B)
make, declare or pay any dividend or distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital stock (other
than dividends or distributions from any directly or indirectly wholly owned
subsidiary of the Company to the Company or another directly or indirectly
wholly owned subsidiary of the Company) or any securities or obligations
convertible into or exchangeable for any shares of its capital stock, (C) grant
any person any right or option to acquire any shares of its capital stock; (D)
issue, deliver or sell or agree to issue, deliver or sell any additional shares
of its capital stock or any securities or obligations convertible into or
exchangeable or exercisable for any shares of its capital stock or such
securities (except pursuant to the exercise of Company Options that are
outstanding as of the date of this Agreement), or (E) enter into any agreement,
understanding or arrangement with respect to the sale, voting, registration or
repurchase of the Company capital stock;
(ii) directly or indirectly sell, transfer, lease, pledge,
mortgage, encumber or otherwise dispose of any non-de minimis portion of its
property or assets other than in the ordinary course of business consistent with
past practice;
(iii) make or propose any changes in its certificate of
incorporation, by-laws or other similar governing documents;
(iv) merge or consolidate with any other Person or dissolve,
liquidate, restructure or otherwise alter the corporate structure of the Company
or any of its Subsidiaries;
(v) acquire a material amount of assets or capital stock of
any other Person;
(vi) incur, create, assume or otherwise become liable for any
indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for the obligations of any other
Person other than trade payables in the ordinary course of business, consistent
with past practice;
(vii) create any Subsidiaries;
(viii) enter into or modify any employment, severance,
termination or similar agreements or arrangements with, or grant any bonuses,
salary increases, severance or termination pay to, any officer, director,
consultant or employee other than in the ordinary course of business consistent
with past practice with respect to non-officer employees of the Company (except
for severance agreements, which, in all cases, shall require the prior written
consent of Parent), or otherwise increase the compensation or benefits provided
to any officer, director, consultant or employee, except as may be required by
Applicable Laws or existing contractual arrangements disclosed to Parent prior
to the date hereof, or grant, reprice, or accelerate the exercise or payment of
any Company Options or other equity-based awards;
(ix) enter into, adopt or amend any Plan, except as shall be
required by Applicable Laws;
(x) take any action that could give rise to severance benefits
(including payments under any Section 4.15(i) Arrangement) payable to any Person
set forth in Section 4.15(i) to the Company Disclosure Schedule (including
taking any action that could give rise to a claim of "Good Reason" termination
or similar claim by any such Person);
(xi) change any material method or principle of Tax or
financial accounting, except to the extent required by Applicable Laws or GAAP
as advised by the Company's regular independent accountants;
(xii) settle any Actions, whether now pending or made or
brought after the date of this Agreement involving, individually or in the
aggregate, an amount in excess of $250,000;
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(xiii) modify, amend or terminate, or waive, release or assign
any material rights or claims, or fail to exercise a right of renewal, with
respect to, any Company Disclosed Contract, any other material contract to which
the Company or a Subsidiary is a party or any confidentiality agreement to which
the Company or a Subsidiary is a party;
(xiv) enter into any confidentiality agreements or
arrangements other than in the ordinary course of business consistent with past
practice (other than as permitted, in each case, by Section 5.3(d));
(xv) make any change to the terms of payment or payment
practices that, individually or in the aggregate, amounts to a material change
to the terms of payment or payment practices with respect to a non-de minimis
portion (by dollar value or number of customers or number of suppliers) of the
Company's accounts receivable or accounts payable;
(xvi) incur, make or commit to any capital expenditures not
provided for in the Company's annual capital expenditures budget provided to
Parent on or prior to the date of this Agreement;
(xvii) fail to use all commercially reasonable efforts to
collect the Company's outstanding receivables;
(xviii) generate, create or allow any receivables other than
in the ordinary course of business consistent with past practice;
(xix) other than with respect to transactions between the
Company and its directly or indirectly wholly owned Subsidiaries or between two
or more of the Company's directly or indirectly wholly owned Subsidiaries, make
any payments in respect of policies of directors' and officers' liability
insurance (premiums or otherwise) other than premiums paid in respect of its
current policies not in excess of the amount paid prior to the date of this
Agreement;
(xx) make any payment to, or engage in any transaction with,
or guarantee or assume any obligation or indebtedness of, or relieve any
obligation to the Company or any of its Subsidiaries of, any Affiliate of the
Company, or any affiliate of any such Affiliate of the Company, other than
pursuant to Plans (to the extent permissible in light of clause (viii) of this
Section 5.3(b)) and other than reimbursement for or advancement of routine
expenses;
(xxi) incur, make or commit to any fees related to this
Agreement and the transactions contemplated hereby (including fees of attorneys,
accountants and investment bankers, including regular fees and any success-based
fees or fees contingent upon such transactions) such that the aggregate of such
fees payable as of the Closing Date or, thereafter, as a result of the Closing
exceeds the amounts set forth in Section 4.6 to the Company Disclosure Schedule.
(xxii) enter into or carry out any other material transaction
other than in the ordinary and usual course of business;
(xxiii) except in the ordinary course of business consistent
with past practice (A) make, revoke or amend any material Tax election, (B)
settle or compromise any material claim or assessment with respect to Taxes, but
only if such settlement or compromise would either individually result in a Tax
liability in excess of $250,000 or in combination with
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all other material Tax claims or assessments settled or compromised since the
date of this Agreement result in aggregate Tax liabilities in excess of
$250,000, (C) execute any consent to any waivers extending the statutory period
of limitations with respect to the collection or assessment of any material
Taxes, or (D) amend any material Tax Returns except in connection with the
settlement or compromise of a claim or assessment that would not either
individually result in a Tax liability in excess of $250,000 or in combination
with all other material Tax claims or assessments settled or compromised since
the date of this Agreement result in aggregate Tax liabilities in excess of
$250,000;
(xxiv) other than pursuant to this Agreement, adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or any of
its Subsidiaries that is inconsistent with the prompt consummation of the
transactions contemplated by this Agreement, or could otherwise reasonably be
expected to have a Material Adverse Effect on the Company;
(xxv) make any payment or distribution to, on or in respect
of, or set aside any funds or establish any "sinking" or similar fund for or in
respect of the Notes, whether in respect of interest, repayment of principal or
otherwise;
(xxvi) take any action that could reasonably be expected to
result in the representations and warranties set forth in Article IV becoming
false or inaccurate in any material respect;
(xxvii) permit or cause any of its Subsidiaries to do any of
the foregoing or agree or commit to do any of the foregoing; or
(xxviii) agree in writing or otherwise to take any of the
foregoing actions.
(c) Acquisition Proposals.
(i) From and after the date of this Agreement until the
earlier of the Closing or the termination of this Agreement in accordance with
its terms, the Company shall not, nor shall it permit any of its Subsidiaries
to, nor shall the Company authorize or permit any of its officers, directors or
employees to, and shall use all reasonable efforts to cause any investment
banker, financial advisor, attorney, accountant, or other representatives
retained by them or any of their respective Subsidiaries not to: (i) solicit,
initiate, encourage (including by way of furnishing information), knowingly
facilitate or induce (directly or indirectly) any inquiry with respect to, or
the making, submission or announcement of, any proposal that constitutes, or
could reasonably be expected to result in, a proposal or offer for an
Acquisition Proposal, (ii) participate in any discussions or negotiations
regarding, or furnish to any Person any nonpublic information with respect to,
or take any other action to knowingly facilitate any inquiries or the making of
any proposal that constitutes or may reasonably be expected to lead to, an
Acquisition Proposal, (iii) approve, endorse or, subject to Section 5.1(c)(ii),
recommend any Acquisition Proposal, or (iv) enter into any letter of intent or
similar document or any contract, agreement or commitment contemplating or
otherwise relating to any Acquisition Proposal or transaction contemplated
thereby.
(ii) Within two business days after receipt of an Acquisition
Proposal or any request for nonpublic information or inquiry that the Company
reasonably believes could lead to an Acquisition Proposal, the Company shall
provide Parent with oral and written notice of the material terms and conditions
of such Acquisition Proposal, request or inquiry, and the identity of the Person
making any such Acquisition Proposal, request or inquiry and a copy of all
written materials provided in connection with such Acquisition Proposal, request
or inquiry. Upon receipt of the Acquisition Proposal, request or inquiry, the
Company shall provide Parent, as promptly as practicable, with oral and written
notice setting forth all such information as is reasonably necessary to keep
Parent informed in all material respects of the status and details (including
material amendments or proposed material amendments) of any such Acquisition
Proposal, request or inquiry, and shall promptly provide to Parent a copy of all
written materials subsequently provided in connection with such Acquisition
Proposal, request or inquiry.
(iii) The Company shall, and shall cause its Subsidiaries to,
immediately cease and cause to be terminated, and cause its officers, directors,
employees, investment bankers, consultants, attorneys, accountants, agents and
other representatives to, immediately cease and cause to be terminated, all
discussions and negotiations, if any, that have taken place prior to the date
hereof with any Persons with respect to any Acquisition Proposal and, upon
request by Parent, shall request the return or destruction of all confidential
information provided to any such Person.
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(iv) The foregoing notwithstanding, the Company and Board of
Directors of the Company may, (A) prior to receipt of the Required Company
Stockholder Approval, furnish nonpublic information to, or enter into
discussions with, any Person in connection with an unsolicited bona fide written
Acquisition Proposal by such Person if and only to the extent that (I) the
Company is not then in breach of its obligations under this Section 5.3(c); (II)
the Company Board of Directors believes in good faith (after consultation with
its legal and financial advisors) that such Acquisition Proposal is, or is
likely to result in, a Superior Proposal and (III) prior to furnishing such
nonpublic information to, or entering into discussions or negotiations with,
such Person, such Board of Directors receives from such Person an executed
confidentiality agreement with terms no less restrictive than those contained in
the Confidentiality Agreement or (B) comply with Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act with regard to an Acquisition Proposal.
(v) The Company (A) agrees not to release any Person from, or
waive any provision of, or fail to enforce, any standstill agreement or similar
agreement to which it is a party related to, or that could affect, an
Acquisition Proposal and (B) acknowledges that the provisions of clause (A) are
an important and integral part of this Agreement.
(vi) "Acquisition Proposal" means any offer or proposal for,
or any indication of interest in, any (A) direct or indirect acquisition or
purchase of the Company or any of its Subsidiaries that constitutes 10% or more
of the net revenues, net income or assets of the Company and its Subsidiaries,
taken as a whole; (B) direct or indirect acquisition or purchase of 10% or more
of any class of equity securities, or 10% of the voting power, of the Company or
any of its Subsidiaries whose business constitutes 10% or more of the net
revenues, net income or assets of the Company and its Subsidiaries, taken as a
whole, or 40% or more of the face value of the Notes; (C) tender offer or note
exchange offer that, if consummated, would result in any Person beneficially
owning 10% or more of any class of equity securities, or 10% of the voting
power, of the Company or any of its subsidiaries whose business constitutes 10%
or more of the net revenues, net income or assets of the Company and its
Subsidiaries, taken as a whole; (D) the direct or indirect repurchase,
retirement, exchange, refinancing or restructuring of 10% or more of the
Company's outstanding Notes; or (E) merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving the
Company or any of its Subsidiaries whose business constitutes 10% or more of the
net revenue, net income or assets of the Company and its Subsidiaries, taken as
a whole, other than the transactions contemplated by this Agreement. "Superior
Proposal" means any bona fide written Acquisition Proposal obtained not in
breach of this Section 5.3(c) for or in respect of all of the outstanding
Company capital stock and all of the outstanding Notes, on terms that the Board
of Directors of the Company determines in its good faith judgment (after
consultation with its financial advisors and taking into account all the terms
and conditions of the Acquisition Proposal and this Agreement deemed relevant by
such Board of Directors, including any break-up fees, expense reimbursement
provisions, conditions to and expected timing and risks of consummation, and the
ability of the party making such proposal to obtain financing for such
Acquisition Proposal and taking into account all other legal, financial,
regulatory and all other aspects of such proposal) are more favorable to the
persons to whom it owes fiduciary duties under Applicable Laws than the Merger.
(d) Affiliates of the Company. The Company shall use all reasonable
efforts to cause each such person that may be at the Effective Time or was on
the date hereof an "affiliate" of the Company for purposes of Rule 145 under the
Securities Act to execute and deliver to Parent, not less than 30 days prior to
the date of the Company Stockholders Meeting, the written undertakings in the
form attached to this Agreement as Exhibit B (the "Company Affiliate Letter").
No later than 45 days prior to such date, the Company, after consultation with
its outside counsel, shall provide Parent with a letter (reasonably satisfactory
to outside counsel to Parent) specifying all of the Persons who, in the
Company's opinion, may be deemed to be affiliates of the Company under the
preceding sentence. The foregoing notwithstanding, Parent shall be entitled to
place legends as specified in the Company Affiliate Letter on the certificates
evidencing any of the shares of Parent Common Stock to be received by (i) any
such affiliate of the Company specified in such letter or (ii) any Person that
Parent reasonably identifies (by written notice to the Company) as being a
Person that may be deemed an affiliate, pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the shares of Parent Common Stock, consistent with the terms of the Company
Affiliate Letters, regardless of whether such Person has executed a Company
Affiliate Letter and regardless of whether such Person's name appears on the
letter to be delivered pursuant to the preceding sentence.
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(e) Access. Subject to contractual restrictions existing as of the date
hereof and legal restrictions (including, without limitation, under Antitrust
Laws), upon reasonable notice throughout the period prior to the earlier of the
Effective Time or the Outside Date, the Company shall permit representatives of
Parent to have full access during normal business hours to the Company's
premises, properties, personnel (including senior executives), books, records,
contracts and documents; provided, however, that such access shall be conducted
in such a manner as to not unreasonably interfere with the Company's business.
Parent will keep the information obtained pursuant to this Section 5.3(e)
confidential pursuant to the terms of the letter agreement related to
confidentiality, dated as of January 11, 2002, by and between Parent and the
Company (the "Confidentiality Agreement") and shall cause its directors,
officers and employees and representatives or advisors who receive any portion
thereof to keep all such information confidential, in accordance with the terms
of the Confidentiality Agreement. No investigation conducted pursuant to this
Section 5.3(e) shall affect or be deemed to modify any representation or
warranty made in this Agreement.
(f) Closing Inventory. Parent, Sub and their representatives (including
their outside auditors) shall be permitted to monitor the Company's regularly
scheduled monthly inventories between the date hereof and the Closing. The
inventories shall be undertaken in accordance with the procedures in Schedule
5.3(f), unless otherwise agreed by the parties. The Company shall conduct (and
Parent, Sub and their representatives (including their outside auditors) shall
be permitted to monitor) a physical inventory in conjunction with the
preparation of the Company's September monthly financial statement at locations
specified by Parent representing approximately 15% of the Company's inventory
balance (which locations shall be in addition to those locations included in the
Company's existing cycle count schedule, which Parent is entitled to monitor
pursuant to the first sentence of this paragraph), as well as a physical
inventory at the Vanguard packaging facility.
(g) Closing Cash on Hand. On the date that is two business days prior
to the Closing Date (the "Cash Test Date"), and in accordance with the
procedures set forth in Exhibit C, the Company's independent outside auditor
shall determine the amount of cash on hand of the Company and its Subsidiaries
on a consolidated basis as of the open of business on the Cash Test Date (the
"Cash Determination"). The Company and its representatives and Parent and Sub
and their representatives (including their outside auditors) shall be permitted
to monitor and comment upon the Cash Determination. At the Closing, an executive
officer of the Company shall deliver a certificate setting forth the amount of
Cash on Hand as of the Cash Test Date (the "Measured Cash"), signed by such
officer on behalf of the Company, certifying that the amount of the Cash on Hand
set forth in such certificate is materially accurate. From the date prior to the
Cash Test Date through and including the Effective Time, neither the Company nor
any of its Subsidiaries shall make (i) any payment that is outside of the
ordinary course consistent with past practice as to timing or amount to any
Affiliate of the Company or its Subsidiaries, nor (ii) any payment, whether in
respect of fees or expenses or otherwise, to any broker, finder, attorney,
accountant, investment banker or other advisor, nor (iii) any payment that is
outside of the ordinary course consistent with past practice as to timing or
amount to any supplier or vendor.
(h) Subsequent Financial Statements. The Company shall provide Parent
with its financial results for any period after the date of this Agreement and
prior to filing any Company SEC Documents after the date of this Agreement.
(i) Disposal of Illinois Sub. If requested in writing by Parent, the
Company shall use all reasonable efforts to (and, if necessary, shall use all
reasonable efforts to cause any relevant Subsidiary to) sell or dispose of all
of its right, title and interest in NCS Healthcare of Illinois, Inc. (the
"Illinois Sub"), including all shares of the capital stock and any other debt or
equity interests in the Illinois Sub, on such terms and conditions as Parent may
so specify in writing, including as to the retention of liability, it being
understood that, for purposes of this Section 5.3(i), the concept of all
reasonable efforts shall be understood in light of the terms and conditions
imposed by Parent and the time available between the date Parent delivers its
written request and the Closing Date.
(j) Lease Consents. Prior to the Closing Date, the Company or its
relevant Subsidiary shall obtain any consent necessary as a result of the
execution, delivery, performance or consummation of this Agreement and the
transactions contemplated hereby with respect to the leases set forth in Section
4.5(a) to the Company Disclosure Schedule.
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ARTICLE VI
CONDITIONS
Section 6.1. Conditions to the Obligations of Each Party. The obligations of the
Company, Parent and Sub to consummate the Merger shall be subject to the
satisfaction (or to the extent legally permissible, waiver) of the following
conditions:
(a) The Required Company Stockholder Approval shall have been received.
(b) Any applicable waiting periods under the HSR Act relating to the
Merger and the transactions contemplated by this Agreement shall have expired or
been terminated.
(c) The Commission shall have declared the Registration Statement
effective under the Securities Act, and no stop order or similar restraining
order suspending the effectiveness of the Registration Statement shall be in
effect and no proceeding for such purpose, and no similar proceeding with
respect of the Proxy Statement, shall be pending before or threatened by the
Commission or any state securities administration.
(d) The shares of Parent Common Stock to be issued in the Merger shall
have been approved for listing on the Nasdaq, subject to official notice of
issuance.
Section 6.2. Conditions to Obligations of the Company. The obligations of the
Company to consummate the Merger and the transactions contemplated by this
Agreement shall be subject to the satisfaction (or waiver by the Company) of the
following conditions:
(a) Each of the representations and warranties of each of Parent and
Sub set forth in Article III that is qualified by "materiality," "Material
Adverse Effect" or similar qualifier shall be true and correct in all respects,
and each of such representations and warranties that is not so qualified shall
be true and correct in all material respects, in each case, on the date of this
Agreement and on and as of the Closing Date as though made on and as of the
Closing Date (except for representations and warranties made as of a specified
date, the accuracy of which will be determined only as of the specified date).
(b) Each of Parent and Sub shall have performed or complied with in all
material respects each obligation, agreement and covenant to be performed or
complied with by it under this Agreement at or prior to the Effective Time.
(c) Each of Parent and Sub shall have furnished the Company with a
certificate dated the Closing Date signed on behalf of it by a duly authorized
officer to the effect that the conditions set forth in Sections 6.2(a) and
6.2(b) have been satisfied.
(d) No Governmental Authority shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other Order (whether temporary, preliminary or permanent) that is
in effect and which has the effect of prohibiting or making illegal consummation
of the Merger.
(e) Subject to compliance by the Company prior to the Effective Time of
its obligations pursuant to Section 5.1(e)(i), Parent shall have provided
evidence (which may be a certificate signed by an officer of Parent) to the
Company that the Note redemption described in Section 5.1(e) shall be capable of
completion on the Closing Date concurrently with or promptly after the Effective
Time in accordance with the terms of Article Eleven of the Indenture.
Section 6.3. Conditions to Obligations of Parent and Sub. The obligations of
Parent and Sub to consummate the Merger and the other transactions contemplated
by this Agreement shall be subject to the satisfaction (or waiver by Parent) of
the following conditions:
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(a) Each of the representations and warranties of the Company set forth
in Article IV that is qualified by "materiality," "Material Adverse Effect" or
similar qualifier, and each of the representations and warranties contained in
Section 4.4, shall be true and correct in all respects, and each of such
representations and warranties that is not so qualified (other than those set
forth in Section 4.4) shall be true and correct in all material respects, in
each case, on the date of this Agreement and on and as of the Closing Date as
though made on and as of the Closing Date (except for representations and
warranties made as of a specified date, the accuracy of which will be determined
only as of the specified date).
(b) The Company shall have performed or complied with in all material
respects each obligation, agreement and covenant to be performed or complied
with by it (except that the covenant contained in the last sentence of Section
5.3(g) shall have been complied with in all respects) under this Agreement at or
prior to the Effective Time.
(c) The Measured Cash shall not be less than $35,000,000.
(d) The Company shall have furnished Parent with a certificate dated
the Closing Date signed on its behalf by a duly authorized officer to the effect
that the conditions set forth in Sections 6.3(a), 6.3(b) and 6.3(c) have been
satisfied.
(e) Since the date of this Agreement, there shall not have been any
change, event, occurrence or development that has had or could reasonably be
expected to have a Material Adverse Effect on the Company.
(f) No Governmental Authority shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other Order (whether temporary, preliminary or permanent) that is
in effect and which has the effect of prohibiting or making illegal consummation
of the Merger.
(g) There shall not be pending any Action by a Governmental Authority
(i) challenging or seeking to restrain or prohibit the consummation of the
Merger or any of the other transactions contemplated by this Agreement, (ii)
seeking to impose any prohibition or limitation, or to require any divestiture,
disposal or other action, that Parent would not be required to accept or do
under Section 5.1(a)(iv), (iii) seeking to impose limitations on the ability of
Parent to acquire or hold, or exercise full rights of ownership of, any shares
of the Surviving Corporation capital stock or (iv) seeking to prohibit Parent or
any of its subsidiaries from effectively controlling in any material respect the
business or operations of Parent or any of its Subsidiaries.
(h) Parent, the Company and their respective Subsidiaries, as
applicable, shall have obtained the consent or approval of any Person (excluding
any Governmental Authority) whose consent or approval shall be required under
any agreement or instrument in order to permit the consummation of the Merger or
any of the other transactions contemplated by this Agreement, except those that
the failure to obtain, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on the Company or Parent if the
Closing were to occur.
(i) All Required Governmental Approvals shall have been obtained
pursuant to Final Orders, free of any conditions that Parent would not be
required to accept pursuant to Section 5.1(a), and all other consents, approval,
authorizations or filings the absence of which could reasonably be expected to
have a Material Adverse Effect on the Company, or on Parent if the Closing were
to occur, shall have been obtained or made.
(j) The Dissenting Shares shall not represent more than 15% of the
voting power of the outstanding Company capital stock.
(k) The Company shall have complied in all respects with its agreements
and obligations set forth in Section 5.3(i).
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ARTICLE VII
TERMINATION AND AMENDMENT
Section 7.1. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of this Agreement by the Company Stockholders):
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited, or if any Order of a court or other competent Governmental Authority
enjoining Parent or the Company from consummating the Merger shall have been
entered and such Order shall have become a Final Order;
(c) by either Parent or the Company, if the Closing shall not have
occurred on or before January 31, 2003 (the "Outside Date"); provided, however,
that, if the Merger shall not have been consummated by such date solely due to
the waiting period (or any extension thereof) or approvals under the HSR Act or
any Required Governmental Approval not having been received, then such date
shall be extended to April 30, 2003; provided, further, that the right to
terminate this Agreement under this Section 7.1(c) shall not be available to any
party to this Agreement whose failure or whose Affiliate's failure to perform
any material covenant or obligation under this Agreement has been the cause of
or resulted in the failure of the Merger to occur on or before such date;
(d) by the Company, if Parent shall have breached in any material
respect any of its representations or warranties or failed to perform in any
material respect any of its covenants or other agreements contained in this
Agreement, which breach or failure to perform would render unsatisfied any
condition contained in Section 6.1 or 6.2 and (i) is incapable of being cured or
(ii) if capable of being cured is not cured prior to the earlier of (A) the
business day prior to the Outside Date or (B) the date that is 30 days from the
date that Parent is notified of such breach;
(e) by Parent, if the Company shall have breached in any material
respect any of its representations or warranties or failed to perform in any
material respect any of its covenants or other agreements contained in this
Agreement, which breach or failure to perform would render unsatisfied any
condition contained in Section 6.1 or 6.3 and (i) is incapable of being cured or
(ii) if capable of being cured is not cured prior to the earlier of (A) the
business day prior to the Outside Date or (B) the date that is 30 days from the
date that the Company is notified of such breach;
(f) by the Company or Parent, upon written notice to the other party,
if a Governmental Authority of competent jurisdiction shall have issued an Order
or taken any other action (which Order or other action the party seeking to
terminate shall have used all reasonable efforts to resist, resolve or lift, as
applicable, subject to the provisions of Section 5.1(a)) enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement,
and such Order shall have become a Final Order;
(g) by Parent, if (i) the Board of Directors of the Company or the
Special Committee shall have withdrawn or changed or modified the Company Board
Recommendation in a manner adverse to Parent; (ii) the Board of Directors of the
Company or the Special Committee shall have approved, or determined to recommend
to the Company Stockholders that they approve an Acquisition Proposal other than
that contemplated by this Agreement; (iii) for any reason the Company fails to
call or hold the Company Stockholders Meeting within four months of the date
hereof; provided that, if the Registration Statement shall not have become
effective for purposes of the federal securities laws by the date (the "Target
Date") that is 30 business days prior to the date that is four months from the
date hereof, then such four-month period shall be extended by the number of days
that elapse from the Target Date until the effective date of the Registration
Statement;
(h) by Parent or the Company, if, at the Company Stockholders Meeting
(including any adjournment or postponement thereof), the Required Company
Stockholder Approval shall not have been obtained;
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(i) by Parent, if any party (other than Parent) to the Voting Agreement
shall have breached any of its obligations under the Voting Agreement and the
Required Company Stockholder Approval is not otherwise obtained, and such breach
is not cured prior to the earlier of (i) the date that is 20 business days prior
to the Outside Date and (ii) the date that is 30 days from the date that the
breaching party is notified or becomes aware of such breach; or
(j) by Parent, if there shall have been a Material Adverse Effect on
the Company.
Section 7.2. Effect of Termination.
(a) In the event of the termination of this Agreement pursuant to
Section 7.1, this Agreement, except for the provisions of this Section 7.2 and
Section 8.11, shall become void and have no effect, without any liability on the
part of any party to this Agreement or their respective directors, officers, or
stockholders or shareholders, as the case may be. Notwithstanding the foregoing,
nothing in this Section 7.2 shall relieve any party to this Agreement of
liability for willful breach; provided, however, that, if it shall be judicially
determined that termination of this Agreement was caused by a willful breach of
this Agreement, then, in addition to other remedies at law or equity for breach
of this Agreement, the party to this Agreement found to have intentionally
breached this Agreement shall indemnify and hold harmless the other parties to
this Agreement for their respective out-of-pocket costs, fees and expenses of
their counsel, accountants, financial advisors and other experts and advisors as
well as fees and expenses incident to negotiation, preparation and execution of
this Agreement and related documentation and stockholders' meetings and
consents.
(b) If:
(i) Parent shall terminate this Agreement pursuant to Section
7.1(g)(iii);
(ii) either Parent or the Company shall terminate this
Agreement pursuant to Section 7.1(h), or Parent shall terminate this Agreement
pursuant to Section 7.1(e) or 7.1(i); or
(iii) Parent shall terminate this Agreement pursuant to
Section 7.1(j);
then, (A) in the case of a termination by Parent under clause
(i) above, the Company shall pay in cash to Parent, not later than the close of
business on the business day following such termination, a termination fee in an
amount equal to $6,000,000 (the "Termination Fee"); (B) in the case of a
termination by Parent or the Company under clause (ii) above, if, within 12
months after the termination of this Agreement, the Company enters into an
agreement with respect to an Acquisition Proposal with any Person (other than
Parent or its Subsidiaries) or an Acquisition Proposal is consummated (it being
understood that in the event that the Board of Directors of the Company
recommends the acceptance by the Company Stockholders of a tender offer or note
exchange offer with respect to an Acquisition Proposal, such recommendation
shall be treated as though an agreement with respect to an Acquisition Proposal
had been entered into on such date), the Company shall pay to Parent, not later
than the date such agreement is entered into (or, if no agreement is entered
into, the date such transaction is consummated), an amount in cash equal to the
Termination Fee; (C) in the case of a termination by Parent under clause (iii)
above, the Company shall pay to Parent an amount in cash (not to exceed
$5,000,000) equal to Parent's actual, documented expenses (including fees and
expenses of its financial advisors and legal counsel) incurred in connection
with negotiation, entering into of, and performance under this Agreement and the
transactions contemplated hereby (the "Expenses"), such payment to be made not
later than the third business day following receipt by the Company of a
statement from Parent setting forth the amount of such Expenses. For purposes of
this Section 7.2, a proposal or offer will be deemed to have been publicly
disclosed, without limitation, if it becomes known to holders of a majority of
the voting power of the Company Common Shares.
(c) If:
(i) either Parent or the Company terminates this Agreement
pursuant to Section 7.1(b), and the Order giving rise to such termination right
shall have been entered by a Bankruptcy Court, or
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(ii) the Closing does not occur on or prior to the Outside
Date or either Parent or the Company terminates this Agreement pursuant to
Section 7.1(c) and, at such time, each of the conditions to the Company's
obligations to complete the Merger set forth in Sections 6.1 and 6.2 (other than
those conditions, such as Section 6.2(c), that are to be satisfied by action to
be taken at the Closing, and other than those conditions that are not satisfied
as a result of an Action or Order of a Bankruptcy Court or the failure of the
Company to comply with any of its agreements, covenant or obligations hereunder)
is satisfied or waived by the Company, then, the Company shall pay to Parent, in
cash, the sum of (x) the Termination Fee and (y) Parent's Expenses, such payment
to be made (1) in the case of the Termination Fee, not later than the close of
business on the business day following such termination and (2) in the case of
the Expenses, not later than the third business day following receipt by the
Company of a statement from Parent setting forth the amount of such Expenses.
(d) All payments and reimbursements made under this Section 7.2 shall
be made by wire transfer of immediately available funds to an account specified
by Parent.
Section 7.3. Amendment. This Agreement may be amended by the parties to this
Agreement, by action taken or authorized by their respective Boards of
Directors, at any time before or after approval of this Agreement by the Company
Stockholders, but, after any such approval, no amendment shall be made that by
law requires further approval or authorization by the Company Stockholders
without such further approval or authorization. Notwithstanding the foregoing,
this Agreement may not be amended, except by an instrument in writing signed on
behalf of each of the parties to this Agreement.
Section 7.4. Extension; Waiver. At any time prior to the Effective Time, Parent
(with respect to the Company) and the Company (with respect to Parent and Sub)
by action taken or authorized by their respective Boards of Directors, may, to
the extent legally allowed, (a) extend the time for the performance of any of
the obligations or other acts of such party to this Agreement, (b) waive any
inaccuracies in the representations and warranties contained in this Agreement
or in any document delivered pursuant to this Agreement and (c) waive compliance
with any of the agreements or conditions contained in this Agreement. Any
agreement on the part of a party to this Agreement to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party to this Agreement.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Survival of Representations and Warranties. The representations and
warranties made in this Agreement by the parties to this Agreement shall not
survive the Effective Time. This Section 8.1 shall not limit any covenant or
agreement of the parties to this Agreement, which by its terms contemplates
performance after the Effective Time or after the termination of this Agreement.
Section 8.2. Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or dispatched by a nationally recognized
overnight courier service to the parties to this Agreement at the following
addresses (or at such other address for a party to this Agreement as shall be
specified by like notice):
(a) if to Parent or Sub:
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, PA 19348
Telecopy No.: (610) 925-4100
Attention: George V. Hager, Jr.
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with a copy to
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telecopy No.: (212) 403-2000
Attention: Mark Gordon, Esq.
(b) if to the Company:
NCS HealthCare, Inc.
3201 Enterprise Parkway, Suite 220
Beachwood, Ohio 44122
Telecopy No.: (216) 464-1194
Attention: Jon H. Outcalt
with a copy to
Benesch, Friedlander, Coplan & Aronoff, LLP
2300 BP Tower 200 Public Square
Cleveland, Ohio 44114
Telecopy No.: (216) 363-4588
Attention: H. Jeffrey Schwartz, Esq.
Section 8.3. Interpretation.
(a) When a reference is made in this Agreement to an Article or
Section, such reference shall be to an Article or Section of this Agreement
unless otherwise indicated. The headings, the table of contents and the index of
defined terms contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include," "includes," or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." When a reference is made in this Agreement to the Company, such
reference shall be deemed to include any and all of the Company's Subsidiaries,
individually and in the aggregate. Nothing set forth on any Company Disclosure
Schedule shall be deemed or otherwise construed as an admission of liability or
wrongdoing. If the end date for any time period or deadline set in this
Agreement shall fall on a weekend or legal holiday, then such end date or
deadline shall be deemed to fall on the next business day following such weekend
or holiday.
(b) Information to be disclosed in any section of the Parent Disclosure
Schedule or Company Disclosure Schedule, as applicable, shall be deemed to be
disclosed for purposes of any other section of such disclosure schedule so long
as the applicability or relevance to such other section is reasonably apparent
on the face of such disclosure. Capitalized terms used in the Parent Disclosure
Schedule or Company Disclosure Schedule not otherwise defined therein have the
meaning given them in this Agreement. The foregoing notwithstanding, each of
Sections 3.5 and 3.9 of this Agreement may be modified only by the information
set forth in Sections 3.5 and 3.9, respectively, to the Parent Disclosure
Schedule, and each of Sections 4.7 and 4.11 of this Agreement may only be
modified by the information set forth in Sections 4.7 and 4.11, respectively, to
the Company Disclosure Schedule.
Section 8.4. Counterparts. This Agreement may be executed in counterparts, which
together shall constitute one and the same Agreement. The parties to this
Agreement may execute more than one copy of this Agreement, each of which shall
constitute an original.
Section 8.5. Entire Agreement. This Agreement (including the documents and the
instruments relating to the Merger referred to in this Agreement), the Voting
Agreement and the Confidentiality Agreement constitute the entire agreement
among the parties to this Agreement and supersede all prior agreements and
understandings, agreements or representations by or among the parties to this
Agreement, written and oral, with respect to the subject matter of this
Agreement and thereof.
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Section 8.6. Third-Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended or shall be construed to create any third-party
beneficiaries.
Section 8.7. Governing Law. Except to the extent that the laws of the
jurisdiction of organization of any party to this Agreement, or any other
jurisdiction, are mandatorily applicable to the Merger or to matters arising
under or in connection with this Agreement, this Agreement shall be governed by
the laws of the State of Delaware without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Delaware or any other
jurisdictions) that would cause application of the laws of any jurisdiction
other than the State of Delaware. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined in any state or federal
court sitting in the State of Delaware.
Section 8.8. Consent to Jurisdiction; Venue.
(a) Each of the parties to this Agreement irrevocably submits to the
exclusive jurisdiction of the state courts of Delaware and to the jurisdiction
of the United States District Court for the District of Delaware, for the
purpose of any action or proceeding arising out of or relating to this Agreement
and each of the parties to this Agreement irrevocably agrees that all claims in
respect to such action or proceeding may be heard and determined exclusively in
any Delaware state or federal court sitting in the State of Delaware. Each of
the parties to this Agreement agrees that a final judgment in any action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
(b) Each of the parties to this Agreement irrevocably consents to the
service of any summons and complaint and any other process in any other action
or proceeding relating to the Merger, on behalf of itself or its property, by
the personal delivery of copies of such process to such party to this Agreement.
Nothing in this Section 8.8 shall affect the right of any party to this
Agreement to serve legal process in any other manner permitted by law.
Section 8.9. Specific Performance. The transactions contemplated by this
Agreement are unique. Accordingly, each of the parties to this Agreement
acknowledges and agrees that, in addition to all other remedies to which it may
be entitled, each of the parties to this Agreement is entitled to a decree of
specific performance, provided that such party to this Agreement is not in
material default hereunder.
Section 8.10. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned by any of the
parties to this Agreement (whether by operation of law or otherwise) without the
prior written consent of the other parties to this Agreement. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties to this Agreement and their respective
successors and assigns.
Section 8.11. Expenses. Subject to the provisions of Section 7.2, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement shall be paid by the party to this Agreement
incurring such costs and expenses.
Section 8.12. Certain Definitions. The following terms have the definitions
given below:
(a) "Affiliate" means a Person that, directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first-mentioned Person, and shall, without limitation, include
any director or officer of the relevant Person;
(b) "Bankruptcy Court" means a United States federal court or
bankruptcy court having competent jurisdiction over the business or assets of
the Company or any of its Subsidiaries pursuant to Title 11 of the United States
Code (11 U.S.C. ss. 101 et seq.).
(c) "Final Order" means an Order that has been granted by the relevant
Governmental Authority as to which (i) no request for a stay or similar request
is pending, no stay is in effect, the Order has not been vacated, reversed, set
aside, annulled or suspended and any deadline for filing such request that may
be designated by statute
A-39
or regulation has passed, (ii) no petition for rehearing or reconsideration or
application for review is pending and the time for the filing of any such
petition or application has passed, (iii) the relevant Governmental Authority
does not have the Order under reconsideration on its own motion and the time
within which it may effect such reconsideration has passed and (iv) no appeal is
pending, including other administrative or judicial review, or in effect and any
deadline for filing any such appeal that may be designated by statute or rule
has passed;
(d) "Governmental Authority" means any nation or government, any state
or other political subdivision thereof or any entity (including a court)
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government;
(e) "knowledge of the Company" means the actual knowledge of the
executive officers of the Company;
(f) "knowledge of Parent and Sub" means the actual knowledge of the
executive officers of Parent and Sub;
(g) "Lien" means any mortgage, pledge, security interest, attachment,
encumbrance, lien (statutory or otherwise), option, conditional sale agreement,
right of first refusal, first offer, termination, participation or purchase or
charge of any kind (including any agreement to give any of the foregoing);
provided, however, that the term "Lien" shall not include (i) statutory liens
for Taxes that are not yet due and payable or are being contested in good faith
by appropriate proceedings, (ii) statutory or common law liens to secure
landlords, lessors or renters under leases or rental agreements confined to the
premises rented, (iii) deposits or pledges made in connection with, or to secure
payment of, workers' compensation, unemployment insurance, old age pension or
other social security programs mandated under Applicable Laws, (iv) statutory or
common law liens in favor of carriers, warehousemen, mechanics and materialmen,
to secure claims for labor, materials or supplies and other like liens, and (v)
restrictions on transfer of securities imposed by applicable federal and state
securities laws;
(h) "Material Adverse Effect" means, with respect to any Person, any
change, event, occurrence, effect or state of facts that, individually or
aggregated with other such matters, (i) is materially adverse to the business,
assets (including intangible assets), properties, financial condition or results
of operations of such Person and its Subsidiaries, taken as a whole, (ii)
materially impairs the ability of such Person to perform its respective
obligations under this Agreement or ability to consummate the Merger; provided,
however, that none of the following shall be considered in determining whether a
Material Adverse Effect has occurred: (A) with respect to the Company, any
adverse change in the stock price of Company, and with respect to Parent, any
adverse change in the stock price of Parent; (B) with respect to either party,
any adverse change, event, circumstance, development or effect resulting from a
change in general economic, industry or financial market conditions (including a
change in general economic, industry or financial market conditions resulting
from any acts of terrorism or war) to the extent that such adverse change,
event, circumstance, development or effect does not disproportionately affect
the relevant party and its Subsidiaries; (C) with respect to either party, any
adverse change, event, circumstance, development or effect resulting from a
breach of this Agreement by the other party and (D) with respect to either
party, any adverse change, event, circumstance, development or effect directly
resulting from the announcement or pendency of the Merger, including the loss by
such party or any of its Subsidiaries of any of such party's customers.
(i) "Order" means, as to any Person, any judgment, order, writ,
injunction, ruling or decree of, or any settlement under the jurisdiction of,
any arbitrator, court or Governmental Authority, in each case applicable to or
binding upon such Person or any of its property or to which such Person or any
of its property or assets is subject;
(j) "Person" includes an individual, corporation, partnership,
association, trust, unincorporated organization, limited liability company,
other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and
(k) "Subsidiary" means, with respect to any Person, any corporation,
partnership, joint venture, limited liability company or other legal entity of
which such Person (either alone or through or together with any other
Subsidiary) owns, directly or indirectly, 50% or more of the economic interests
in, or voting rights with respect to the election of the board of directors or
other governing body of, such corporation or other legal entity.
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IN WITNESS WHEREOF, Parent, Sub and the Company have signed this
Agreement as of the date first written above.
GENESIS HEALTH VENTURES, INC.
By: /s/ George V. Hager, Jr.
------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President
and Chief Financial Officer
GENEVA SUB, INC.
By: /s/ George V. Hager, Jr.
------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President
and Chief Financial Officer
NCS HEALTHCARE, INC.
By: /s/ Jon H. Outcalt
Name: Jon H. Outcalt
Title: Chairman of the Board
A-41
Annex B
Section 262 of the Delaware General Corporation Law
DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
ss.262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
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of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, then either a constituent corporation before the
effective date of the merger or consolidation, or the surviving or resulting
corporation within 10 days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the
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consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
Annex C
Opinion of Candlewood Partners, LLC
July 28, 2002
Board of Directors
NCS HealthCare, Inc.
3201 Enterprise Parkway
Beachwood, OH 44122
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the current holders of the outstanding shares of common stock
(collectively, the "Stockholders"), taken together, of NCS HealthCare, Inc. (the
"Company") of the Merger Consideration as defined in the draft Agreement and
Plan of Merger dated as of July 28, 2002 (the "Merger Agreement") by and among
Genesis Health Ventures, Inc. ("Parent"), Geneva Sub, Inc., a wholly-owned
subsidiary of Parent (the "Merger Sub"), and the Company. Pursuant to the terms
of and subject to the conditions set forth in the Merger Agreement, the Merger
Sub will be merged with and into the Company (the "Merger") and each share of
Class A common stock of the Company, $.01 par value per share and each share of
Class B common stock of the Company, $.01 par value per share, will be converted
into the right to receive .1000 (the "Exchange Ratio") of a common share, $.02
par value, of Parent (the "Parent Common Stock"). The terms and conditions of
the Merger are more fully set forth in the Merger Agreement.
In connection with our review of the proposed Merger and the
preparation of our opinion herein, we have examined: (a) the Merger Agreement;
(b) certain related documents; (c) the Plan of Reorganization and Disclosure
Statement dated July 6, 2001 of Parent; (d) certain audited historical financial
statements of the Company for the four years ended June 30, 2001; (e) certain
unaudited historical financial statements of Parent for the three months ended
June 30, 2002; (f) the unaudited financial statements of the Company for the
three-month periods ended December 31, 2001 and March 31, 2002; (g) certain
internal business, operating and financial information and forecasts of the
Company (the "Forecasts"), prepared and provided to us by the senior management
of the Company; (h) information regarding publicly available financial terms of
certain other business combinations we deemed relevant; (i) the financial
position and operating results of the Company and Parent compared with those of
certain other publicly traded companies we deemed relevant; (j) current and
historical market prices and trading volumes of the common stock of Parent; and
(k) other publicly available information on Parent we believe relevant to our
opinion. We have also held discussions with members of the senior management of
the Company and Parent to discuss the foregoing, have considered other matters
which we have deemed relevant to our inquiry and have taken into account such
other information, financial studies and analyses, and financial, economic and
market criteria as we have deemed relevant.
In rendering our opinion, we have assumed and relied, without assuming
any duty of independent verification, upon the accuracy and completeness of all
the information examined by or otherwise reviewed or discussed with us for
purposes of this opinion, including without limitation the Forecasts. We have
not made or been furnished with an independent valuation or appraisal of the
assets, liabilities or solvency of the Company or Parent. We have been advised
by the senior management of the Company that the Forecasts examined by us have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the senior management of the Company. In that regard,
we have assumed, with your consent, that (i) the Forecasts will be achieved in
the amounts and at the times contemplated thereby and (ii) all material assets
and liabilities (contingent or otherwise) of the Company are as set forth in the
Company's financial statements or other information made available to us. We
express no opinion with respect to the Forecasts or the estimates and judgments
on which they are based. Our opinion herein is based upon economic, market,
financial and other conditions existing and as can be evaluated on, and other
information disclosed to us as of, the date of this letter. It should be
understood that, although subsequent developments may affect this opinion, we do
not have any obligation to update, revise or reaffirm this opinion. Our opinion
does not address the relative merits of the Merger as compared to any
alternative business strategies that might exist for the Company or the effect
of any other transaction in which the Company
C-1
might engage. We were not requested to solicit, and we did not solicit, any
expressions of interest from any other parties with respect to the sale of all
or any part of the Company or any alternative transaction and accordingly have
relied upon our discussions with the Independent Committee of the Board of
Directors of the Company (the "Independent Committee") with respect to the
availability and consequences of alternatives to the transaction. We have relied
as to all legal, regulatory and tax matters related to the Merger on advice of
counsel to the Independent Committee, without assuming any responsibility for
independent verification or liability therefor, and have assumed that the Merger
will be consummated on the terms described in the Merger Agreement, without any
waiver, modification or amendment of any material terms, covenants or conditions
thereof. In addition, we have assumed, with your consent, that the Merger will
be treated as a tax-free reorganization for U.S. federal income tax purposes.
We regularly undertake the valuation of investment securities in
connection with private placements, business combinations, and similar
transactions. We have acted as a financial advisor to the Board of Directors of
the Company in connection with the Merger and will receive a fee from the
Company for our services, a significant portion of which is contingent upon
consummation of the Merger. In addition, the Company has agreed to indemnify us
against certain liabilities arising out of our engagement.
We are expressing no opinion herein as to the value of the Parent
Common Stock when issued to the stockholders pursuant to the Merger, or as to
the price at which it will trade at any future time, or as to the effect of the
announcement or consummation of the Merger on the trading price of the Parent
Common Stock. Such trading price may be affected by a number of factors,
including, but not limited to: (i) dispositions of Parent Common Stock by
stockholders within a short period of time after the effective date of the
Merger, (ii) changes in prevailing interest rates and other factors which
generally influence the price of securities, (iii) adverse changes in the
current capital markets, (iv) the occurrence of adverse changes in the financial
condition, business, assets, results of operations or prospects of the Company
or of Parent or in the markets they serve, (v) any necessary actions by or
restrictions of federal, state or other governmental agencies or regulatory
authorities, and (vi) timely completion of the Merger on terms and conditions
that are acceptable to all parties at interest.
Our advisory services and our opinion were provided for the use and
benefit of the Independent Committee of the Board of Directors of the Company
and the Board of Directors of the Company in connection with and for the purpose
of their consideration of the transaction contemplated by the Merger Agreement.
Our opinion is limited to the fairness, from a financial point of view, to the
stockholders of the Company, taken together, of the Exchange Ratio, and we do
not address the merits of the underlying decision by the Company to engage in
the Merger or any aspect of the Merger other than the Exchange Ratio to the
extent provided in this opinion. This opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the proposed Merger or any other matter. It is understood that this
letter may not be disclosed, referred to or otherwise communicated to any third
party (in whole or in part) for any purpose whatsoever without our prior written
consent, except that this opinion may be included in its entirety in a proxy
statement mailed to the stockholders by the Company with respect to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Exchange Ratio is fair, from a financial point of view, to
the stockholders of the Company, taken together.
Very truly yours,
/s/ Candlewood Partners, LLC
CANDLEWOOD PARTNERS, LLC
C-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
As permitted by Pennsylvania corporation law, Genesis' bylaws provide
that a director will not be personally liable for monetary damages for any
action taken, or any failure to take any action, unless the director breaches or
fails to perform the duties of his or her office under Pennsylvania corporation
law, and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. These provisions of Genesis' bylaws, however, do not
apply to the responsibility or liability of a director pursuant to any criminal
statute, or to the liability of a director for the payment of taxes pursuant to
local, Pennsylvania or federal law.
Genesis' bylaws provide that Genesis must indemnify its directors and
officers to the fullest extent permitted by law against expenses reasonably
incurred by them in connection with any threatened, pending or completed action,
suit or proceeding to which they are or were a party, or are threatened to be
made a party, by reason of being or having been a director or officer of
Genesis, or serving or having served any other business enterprise or trust as a
director, officer, employee, general partner, agent or fiduciary at Genesis'
request. Genesis' bylaws also permit Genesis to indemnify any person in any
situation not covered by Genesis' bylaws to the extent permitted by applicable
law. However, under Genesis' bylaws, no indemnification will be provided to any
of Genesis' directors or officers (i) for liabilities arising under Section
16(b) of the Exchange Act; (ii) if a final unappealable judgment or award
establishes that such director or officer engaged in self-dealing, willful
misconduct or recklessness; (iii) for expenses or liabilities which have been
paid directly to such person by an insurance carrier and (iv) for amounts paid
in settlement of any action, suit, or proceeding without the written consent of
Genesis.
Sections 1741 through 1750 of Subchapter 17D of Pennsylvania
corporation law contain provisions for mandatory and discretionary
indemnification of a representative of the corporation, including, but not
limited to, its directors and officers. Under Section 1741, subject to certain
limitations, a corporation has the power to indemnify directors and officers
under certain prescribed circumstances against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with an action or proceeding, whether civil, criminal,
administrative or investigative (excluding derivative actions) to which any of
them is a party by reason of his or her being a representative of the
corporation or serving at the request of the corporation as a representative of
another corporation, partnership, joint venture, trust or other enterprise, if
he or she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Section 1742 provides for indemnification in derivative actions except
in respect of any claim, issue or matter as to which an officer or director has
been adjudged to be liable to the corporation unless and only to the extent that
the proper court determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court deems
proper.
Under Section 1743, indemnification is mandatory to the extent that an
officer or director has been successful on the merits or otherwise in defense of
any action or proceeding referred to in Section 1741 or 1742 above if the
appropriate standards of conduct are met.
Section 1744 provides that, unless ordered by a court, any
indemnification under Section 1741 or 1742 will be made by the corporation only
as authorized in the specific case upon a determination that an officer or
director met the applicable standard of conduct set forth in those sections, and
such determination will be made by (i) the board of directors by a majority vote
of a quorum of directors not parties to the action or proceeding; (ii) if a
quorum is not obtainable, or if obtainable and a majority of disinterested
directors so directs, by independent legal counsel; or (iii) by the
shareholders.
Section 1745 provides that expenses incurred by an officer or director
in defending any action or proceeding referred to in Subchapter 17D of
Pennsylvania corporation law may be paid by a corporation in advance
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of the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that he or she is not entitled to be indemnified by the
corporation.
Section 1746 provides generally that, except in any case where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17D of
Pennsylvania corporation law will not be deemed exclusive of any other rights to
which a person seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding that office.
Section 1747 grants to a corporation the power to purchase and maintain
insurance on behalf of its directors and officers against any liability incurred
by them in their capacity as such directors or officers, whether or not the
corporation would have the power to indemnify such person against that liability
under the provisions of Subchapter 17D of Pennsylvania corporation law.
Sections 1748 and 1749 extend the indemnification and advancement of
expenses provisions of Subchapter 17D to successor corporations in fundamental
changes and to representatives serving as fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, Subchapter 17D will, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be an officer or director of the corporation and will inure to the
benefit of the heirs and personal representative of such person.
Genesis provides insurance coverage to its directors and officers for
up to $50.0 million.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Regulation S-K
Exhibit Numbers Description
--------------- -----------
2.1 Agreement and Plan of Merger, dated as of July 28, 2002, by and among Genesis Health Ventures,
Inc., Geneva Sub, Inc. and NCS HealthCare, Inc (included as Annex A to the proxy
statement/prospectus).
4.1(4) Amended and Restated Articles of Incorporation of Genesis Health Ventures, Inc.
4.2(5) Amended and Restated Bylaws, as amended, of Genesis Health Ventures, Inc.
4.3(1) Specimen of Common Stock Certificate of Genesis Health Ventures, Inc.
4.4(2) Specimen of First Mortgage Bonds (Series A), due 2007, for Genesis Health Ventures, Inc.
4.5(3) Indenture of Mortgage and Deed of Trust, dated as of September 1, 1992, by and among Genesis
Health Ventures, Inc., Delaware Trust Company and Richard N. Smith.
4.6(4) Form of Warrant, included in the Warrant Agreement by and between Genesis Health Ventures, Inc.
and Mellon Investor Services, LLC, as Warrant Agent, dated as of October 2, 2001.
4.7(4) Certificate of Designation of the Series A Convertible Preferred Stock of Genesis Health
Ventures, Inc. (included in Exhibit 4.1).
4.8(4) Indenture for Second Priority Secured Notes due 2007, dated as of October 2, 2001, by and among
Genesis, as Issuer, the Guarantors, and the Bank of New York, as Trustee.
5.1(7) Opinion of Blank Rome Comisky & McCauley LLP.
10.1(6) Voting Agreement, dated as of July 28, 2002, by and among Jon H. Outcalt, NCS HealthCare, Inc.
and Genesis Health Ventures, Inc.
10.2(6) Voting Agreement, dated as of July 28, 2002, by and among Kevin B. Shaw, NCS HealthCare, Inc.
and Genesis Health Ventures, Inc.
23.1 Consent of KPMG LLP.
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Regulation S-K
Exhibit Numbers Description
--------------- -----------
23.2 Consent of Ernst & Young LLP.
23.3(7) Consent of Blank Rome Comisky & McCauley LLP (included in Exhibit 5.1).
23.4(7) Consent of Candlewood Partners, LLC.
24.1(7) Power of Attorney.
99.1(7) Opinion of Candlewood Partners, LLC, (included as Annex C to the proxy statement/prospectus).
99.2(7) Form of NCS Proxy Card.
----------------------------
(1) Incorporated by reference to Genesis' Form 8-A filed on October 2, 2001.
(2) Incorporated by reference to Genesis' Registration Statement on Form S-1, dated September 4, 1992 (as
amended) (Registration No. 33-51670).
(3) Incorporated by reference to Genesis' Annual Report on Form 10-K for the fiscal year ended September 30, 1992.
(4) Incorporated by reference to Genesis' Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
(5) Incorporate by reference to Genesis' Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.
(6) Incorporated by reference to Genesis' Current Report on Form 8-K dated July 29, 2002.
(7) Previously filed.
(b) Financial Statement Schedules
None.
(c) Report, Opinion or Appraisal Exhibits
Attached as Annex C to the proxy statement/prospectus.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof), which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and
(iii) include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) that, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant Section 15(d) of the Exchange Act) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
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(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act, and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first-class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(g) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (f) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act, and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
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SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kennett Square, State of
Pennsylvania, on the date indicated.
Genesis Health Ventures, Inc.
Date: October 8, 2002 By: /s/ Robert H. Fish
------------------------------------------------
Robert H. Fish
Interim Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated:
Signatures Title Date
----------------------------------------- ----------------------------------------------- ------------------
/s/ Robert H. Fish Director and Interim Chief Executive October 8, 2002
----------------------------------------- Officer (Principal Executive Officer)
Robert H. Fish
* Chairman of the Board October 8, 2002
-----------------------------------------
Michael R. Walker
* Executive Vice President and Chief October 8, 2002
----------------------------------------- Financial Officer (Principal Financial Officer
George V. Hager, Jr. and Principal Accounting Officer)
* Director October 8, 2002
-----------------------------------------
James H. Bloem
Director October , 2002
-----------------------------------------
Edwin M. Crawford
* Director October 8, 2002
-----------------------------------------
James E. Dalton, Jr.
Director October , 2002
-----------------------------------------
James D. Dondero
* Director October 8, 2002
-----------------------------------------
Dr. Philip P. Gerbino
Director October , 2002
-----------------------------------------
Joseph A. LaNasa III
*By: /s/ Robert H. Fish October 8, 2002
----------------------------
Robert H. Fish
Attorney-In-Fact