-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U/8JeFUJYRLJaTxtZe77vcpUxjteUSE+eHMhzA84s43xYgP8UtcZtTR45IgwxeGH Dyrfr4nBMSQmJtU+FIMS4w== 0000890925-98-000001.txt : 19980218 0000890925-98-000001.hdr.sgml : 19980218 ACCESSION NUMBER: 0000890925-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980217 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MULTICARE COMPANIES INC CENTRAL INDEX KEY: 0000890925 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 223152527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22090 FILM NUMBER: 98541279 BUSINESS ADDRESS: STREET 1: 433 HACKENSACK AVE CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2014888818 MAIL ADDRESS: STREET 1: 411 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from January 1, 1997 to September 30, 1997 Commission File Number 34-22090 THE MULTICARE COMPANIES, INC. (Exact name of registrant as specified in its charter) Delaware 22-3152527 (State or other jurisdiction of (I.R.S. employer incorporation or organization) Identification no.) 433 Hackensack Avenue Hackensack, New Jersey 07601 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 488-8818 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by non-affiliates of the Registrant: Not Applicable Class Outstanding at February 10, 1998 Common Stock $.01 Par Value 100 shares Cautionary Statements Regarding Forward Looking Statements Certain oral statements made by management from time to time and certain statements contained herein, including certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" such as statements concerning Medicare and Medicaid programs and the Company's ability to meet its liquidity needs and control costs; certain statements contained in "Business" such as statements concerning strategy, government regulation, Medicare and Medicaid programs, managed care initiatives, and recent transactions and competition; certain statements in "Legal Proceedings" and certain statements in the Notes to Consolidated Financial Statements, such as certain of the pro forma financial information; and other statements contained herein regarding matters that are not historical facts are forward looking statements (as such term is defined in the Securities Act of 1933) and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed below. Certain Financial Considerations. The Multicare Companies, Inc. ("Multicare" or the "Company") has substantial indebtedness and, as a result, significant debt service obligations. As of September 30, 1997, after giving pro forma effect to the Merger (as defined under "The Tender Offer and Merger") and the related financing (as such item is defined in "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Certain Transactions") and the use of proceeds therefrom, the Company would have had approximately $751 million of long-term indebtedness which would have represented 50% of its total capitalization. The degree to which the Company is leveraged could have important consequences, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations may be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) certain of the Company's borrowings are and will continue to be at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; and (iv) certain of the Company's indebtedness contains financial and other restrictive covenants, including those restricting the incurrence of additional indebtedness, the creation of liens, the payment of dividends, sales of assets and minimum net worth requirements. Failure by the Company to comply with such covenants may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. The Company's ability to make scheduled payments or to refinance its obligations with respect to its indebtedness depends on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. Although the Company's cash flow from its operations has been sufficient to meet its debt service obligations in the past, there can be no assurance that the Company's operating results will continue to be sufficient for payment of the Company's indebtedness. Risk of Adverse Effect of Healthcare Reform. In addition to extensive existing government healthcare regulation, there are numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. It is not clear at this time what proposals, if any, will be adopted, or what effect such proposals would have on the Company's business. Aspects of certain of these healthcare proposals, such as reductions in funding of the Medicare and Medicaid programs, potential changes in reimbursement regulations by the Health Care Financing Administration ("HCFA"), enhanced pressure to contain healthcare costs by Medicare, Medicaid and other payors and permitting greater state flexibility in the administration of Medicaid, could adversely affect the Company. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs or regulations will not have a material adverse effect on the Company. Concern about the potential effects of the proposed reform measures has contributed to the volatility of prices of securities of companies in healthcare and related industries, including the Company, and may similarly affect the price of the Company's securities in the future. See "Business Governmental Regulation." Regulation. The federal government and all states in which the Company operates regulate various aspects of the Company's business. In particular, the development and operation of eldercare centers and the provision of healthcare services are subject to federal, state and local laws relating to the delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting and 1 compliance with building codes and environmental laws. Eldercare centers are subject to periodic inspection by governmental and other authorities to assure continued compliance with various standards, their continued licensing under state law, certification under the Medicare and Medicaid programs and continued participation in the Veterans Administration program and the ability to participate in other third party programs. The failure to obtain or maintain any required regulatory approvals or licenses could prevent the Company from offering services or adversely affect its ability to receive reimbursement of expenses and could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicaid or Medicare program, restrictions on the ability to acquire new facilities or expand existing facilities and, in extreme cases, revocation of the facility's license or closure of a facility. There can be no assurance that the facilities owned, leased or managed by the Company, or the provision of services and supplies by the Company, will meet or continue to meet the requirements for participation in the Medicaid or Medicare programs or state licensing authorities will not adopt changes or new interpretations of existing regulations that would adversely affect the Company. Many states have adopted Certificate of Need or similar laws which generally require that the appropriate state agency approve certain acquisitions and determine that a need exists for certain bed additions, new services and capital expenditures or other changes prior to beds and/or new services being added or capital expenditures being undertaken. To the extent that Certificates of Need or other similar approvals are required for expansion of Company operations, either through center acquisitions or expansion or provision of new services or other changes, such expansion could be adversely affected by the failure or inability to obtain the necessary approvals, changes in the standards applicable to such approvals and possible delays and expenses associated with obtaining such approvals. In addition, in most states the reduction of beds or the closure of a facility requires the approval of the appropriate state regulatory agency and if the Company were to reduce beds or close a facility the Company could be adversely impacted by a failure to obtain or a delay in obtaining such approval. The Company is also subject to federal and state laws which 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 induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the federal "Stark legislations" which prohibit, with limited exceptions, the referral of patients for certain services, including home health services, physical therapy and occupational therapy, by a physician to an entity in which the physician has an ownership interest and the federal "anti-kickback law" which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients or the purchasing, leasing, ordering or arranging for any goods, facility services or items for which payment can be made under Medicare and Medicaid. A violation of the federal "anti-kickback law" could result in the loss of eligibility to participate in Medicare and Medicaid programs, or in the imposition of civil or criminal penalties. The federal government, private insurers and various state enforcement agencies have increased their scrutiny of providers, business practices and claims in an effort to identify and prosecute fraudulent and abusive practices. In addition, the federal government has issued recent fraud alerts concerning nursing services, double billing, home health services and the provision of medical supplies to nursing facilities; accordingly, these areas may come under closer scrutiny by the government. See "Business -- Governmental Regulation." 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, the Company 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 the practices of the Company. In the ordinary course of business, the Company's facilities receive notices of deficiencies following surveys for failure to comply with various regulatory requirements. From time to time, survey deficiencies have resulted in various penalties against certain facilities and the Company. These penalties have included monetary fines, temporary bans on the admission of new patients and the placement of restrictions on the Company's ability to 2 obtain or transfer certificates of need in certain states. There can be no assurance that future surveys will not result in penalties or sanctions which could have a material adverse effect on the Company. Payment by Third Party Payors. For the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997, respectively, the Company derived approximately 41%, 40% and 43% of its net revenues from private pay and other sources, 25%, 25% and 24% from Medicare and 34%, 35% and 33% from various state Medicaid agencies. Both governmental and private third party payors have employed cost containment measures designed to limit payments made to healthcare providers such as the Company. Those measures include the adoption of initial and continuing recipient eligibility criteria which may limit payment for services, the adoption of coverage and duration criteria which limit the services which will be reimbursed and the establishment of payment ceilings which set the maximum reimbursement that a provider may receive for services. Furthermore, government payment programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially increase or decrease the rate of program payments to the Company for its services. There can be no assurance that payments under governmental and private third party payor programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company's financial condition and results of operations may be affected by the revenue reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. The majority of the third-party payor balances are settled within two or three years following the provision of services. The Company's financial condition and results of operations may also be affected by the timing of reimbursement payments and rate adjustments from third-party payors. The Company has from time to time experienced delays in receiving reimbursement from third-party payors. In addition, there can be no assurance that centers owned, leased or managed by the Company, or the provision of services and supplies by the Company, now or in the future will initially meet or continue to meet the requirements for participation in such programs. The Company could be adversely affected by the continuing efforts of governmental and private third party payors to contain the amount of reimbursement for healthcare services. In an attempt to limit the federal budget deficit, there have been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid reimbursement for healthcare services. In certain states there have been proposals to eliminate the distinction in Medicaid payment for skilled versus intermediate care services and to establish a case mix prospective payment system pursuant to which the payment to a facility for a patient is based upon the patient's condition and need for services. The Company cannot at this time predict whether any of these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on the Company. 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. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue. See "Business -Sources of Revenue." 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 such organizations terminate the Company as a preferred provider and/or engage the Company's competitors as a preferred or exclusive provider, the Company's business could be materially adversely affected. For those specialty medical services covered by the Medicare program, the Company is reimbursed for its direct costs plus an allocation of indirect costs up to a regional limit. As the Company expands its specialty medical services, the costs of care for these patients are expected to exceed the regional reimbursement limits. As a result, the Company has submitted and will be required to submit further exception requests to recover the excess costs from Medicare. There is no assurance the Company will be able to recover such excess costs under pending or any future requests. The failure to recover these excess costs in the future will adversely affect the Company's financial position and results of operations. The Company is subject to periodic audits by the Medicare and Medicaid programs, and the paying agencies for these programs have various rights and remedies against the Company if they assert that the Company has overcharged the programs or failed to comply with program requirements. Such 3 payment agencies could seek to require the Company to repay any overcharges or amounts billed in violations of program requirements, or could make deductions from future amounts due to the Company. Such agencies could also impose fines, criminal penalties or program exclusions. Geographic Payor Concentration. The Company's operations are located in Connecticut, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin. Any adverse change in the regulatory environment, the reimbursement rates paid under the Medicaid program or in the supply and demand for services in the states in which the Company operates, and particularly in Massachusetts, New Jersey and Pennsylvania, could have a material adverse effect on the Company. Competition. The healthcare industry is highly competitive. The Company competes with a variety of other companies in providing eldercare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than the Company. Competing companies may offer newer or different centers or services than the Company and may thereby attract the Company's customers who are either presently customers of its eldercare centers or are otherwise receiving its eldercare services. See "Business -- Competition." Risks Associated with Recent Acquisitions and Acquisition Strategy. The Company has completed several acquisitions of eldercare businesses. There can be no assurance that the Company will be able to realize expected operating and economic efficiencies from its recent acquisitions or from any future acquisitions or that such acquisitions will not adversely affect the Company's results of operations or financial condition. Risks Associated with the Multicare Acquisition. As a result of the Merger of Genesis ElderCare Acquisition Corp. with the Company, Genesis Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis ElderCare Corp., which owns 100% of the outstanding capital stock of the Company. The Company and Genesis have entered into a Management Agreement pursuant to which Genesis manages the Company's operations. The Company also uses Genesis' clinical administration and healthcare management information system to monitor and measure clinical and patient outcome data. Certain problems may arise in implementing the Management Agreement; for example, difficulties may be encountered by Genesis as a result of the loss of key personnel of the Company, the integration of the Company's corporate, accounting, financial reporting and management information systems with Genesis' systems and strain on existing levels of its personnel managing both businesses. There can be no assurance that Genesis will be able to successfully implement the Management Agreement or manage the Company's operations; failure to do so effectively and on a timely basis could have a material adverse effect on the Company's financial condition and results of operations. The Company may in the future engage in transactions with Genesis and its affiliates. Mr. Michael R. Walker, the Chairman of the Board and Chief Executive Officer of Genesis, has become the Chairman and Chief Executive Officer of the Company and Mr. George V. Hager, Jr., the Chief Financial Officer of Genesis, has become the Chief Financial Officer of the Company. In addition, Mr. Walker, Mr. Hager and Mr. Richard R. Howard, President and a member of the board of directors of Genesis, have become members of the board of directors of the Company. Based on the foregoing, Genesis and Messrs. Walker, Hager and Howard have substantial influence on the Company and the outcome of any matters submitted to the Company's stockholders for approval and are in positions that may result in conflicts of interest with respect to transactions involving the Company and Genesis. Genesis and its affiliates will provide healthcare and related services to the Company's customers and facilities either directly or through contracts with the Company. Conflicts of interest may arise in connection with the negotiation of the terms of such arrangements. Genesis is in the business of providing healthcare and support services to the elderly, and substantially all of its markets are contiguous to or overlap with the Company's existing markets. Genesis may compete with the Company in certain of these markets or in the provision of certain healthcare services. Although directors of the Company who are also directors or officers of Genesis have certain fiduciary obligations to the Company under Delaware law, such directors and Genesis are in positions that may create potential conflicts of interest with respect to certain business opportunities available to and certain transactions involving the Company. Neither Genesis nor 4 Messrs. Walker, Hager and Howard are obligated to present to the Company any particular investment opportunity which comes to their attention, even if such opportunity is of a character which might be suitable for investment by the Company. Adequacy of Certain Insurance. The provision of healthcare services entails an inherent risk of liability. The Company maintains liability insurance providing coverage which it believes to be adequate. In addition, the Company maintains property, business interruption, and workers' compensation insurance covering all facilities in amounts deemed adequate by the Company. There can be no assurance that any future claims will not exceed applicable insurance coverage or that the Company will be able to continue its present insurance coverage on satisfactory terms, if at all. 5 Item 1. Business. General The Multicare Companies, Inc. ("Multicare" or the "Company") is a leading provider of high quality eldercare and specialty medical services in selected geographic regions. Multicare's eldercare services include skilled nursing care, assisted living, Alzheimer's care and related support activities traditionally provided in eldercare facilities. The Company's specialty medical services consist of (i) sub-acute care such as ventilator care, intravenous therapy, and various forms of coma, pain and wound management and (ii) rehabilitation therapies such as occupational, physical and speech therapy and stroke and orthopedic rehabilitation. The Company also provides management services to 51 facilities and consulting services to 14 facilities. Multicare believes it is well-positioned in its markets because it provides high quality care in concentrated geographic regions. As a result, Multicare believes it has achieved high occupancy rates, a favorable payor mix and sustained total and same store growth in net revenues and operating profits. Multicare's overall occupancy rate was approximately 92% and 91% for the years ended December 31, 1995 and 1996, respectively, and 90% for the nine month period ended September 30, 1997. Multicare achieved a quality mix (defined as non-Medicaid revenues) of 66%, 65% and 67% of net revenues for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997, respectively. As of September 30, 1997, Multicare operated 155 eldercare facilities, 11 assisted living facilities and 2 outpatient rehabilitation centers (90 owned, 27 leased and 51 managed) in Connecticut, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin with 17,615 beds. In terms of beds, the Company is the largest provider of eldercare services in Massachusetts, New Jersey and West Virginia. In addition, the Company is one of the largest providers of eldercare services in Pennsylvania, Ohio and Wisconsin. The Company believes it operates high quality, attractive facilities, many of which are newly constructed; approximately one-third of the Company's beds are less than five years old. The Tender Offer and Merger On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation formed by Genesis Health Ventures, Inc. ("Genesis"), The Cypress Group L.L.C (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the shares of common stock of Multicare, pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger") of Acquisition Corp. with and into Multicare in accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition Corp., Genesis and the Company. Upon consummation of the Merger, Multicare became a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with the Merger, Multicare and Genesis entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages the Company's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1,991,666 and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23,900,000 in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non- extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare will be paid by Multicare. Genesis also entered into an asset purchase agreement (the "Therapy Sale Agreement") with Multicare and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 subject to adjustment (the "Therapy Sale") and a stock purchase agreement (the "Pharmacy Sale Agreement") with Multicare and certain subsidiaries pursuant to which Genesis will acquire all of the outstanding capital stock and limited partnership interest of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to 6 third parties for $50,000,000, subject to adjustment (the "Pharmacy Sale"). The Company expects to complete the Pharmacy Sale in the first calendar quarter of 1998. Patient Services Basic Healthcare Services Basic healthcare services are those traditionally provided to elderly patients in eldercare facilities and assisted living residences with respect to daily living activities and general medical needs. The Company provides 24- hour skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides in all of its skilled nursing facilities. Each eldercare facility is managed by an on-site licensed administrator who is responsible for the overall operations of the facility, including quality of care. The medical needs of patients are supervised by a medical director who is a licensed physician. While treatment of patients is the responsibility of patients' attending physicians who are not employed by the Company, the medical director monitors all aspects of patient treatment. The Company also provides a broad range of support services including dietary services, therapeutic recreational activities, social services, housekeeping and laundry services, pharmaceutical and medical supplies and routine rehabilitation therapy. Each eldercare facility offers a number of activities designed to enhance the quality of life for patients. These activities include entertainment events, musical productions, arts and crafts and programs encouraging community interaction with patients and visits to the facility. The Company provides housing, personal care and support services as well as certain routine nursing services in its assisted living residences. The Company currently provides specialized care for Alzheimer's patients under the supervision of specially trained skilled nursing, therapeutic recreation and social services personnel. The Company's Alzheimer's programs include music therapy, gross and fine motor activity, reality orientation and cognitive stimulation designed to counter the hyperactivity, memory loss, confusion and reduced learning ability experienced by Alzheimer's patients. Specialty Medical Services Specialty medical services are provided to patients with medically complex needs who generally require more intensive treatment and a higher level of skilled nursing care. These services typically generate higher profit margins than basic healthcare services because the higher complexity of the patients' medical conditions results in a need for increased levels of care and ancillary services. Sub-acute Care. Sub-acute care includes services provided to patients with medically complex conditions who require ongoing nursing and medical supervision and access to specialized equipment and services, but do not require many of the other services provided by an acute care hospital. Services in this category include ventilator care, intravenous therapy, wound care management, traumatic brain injury care, post-stroke CVA (cerebrovascular accident) care, CAPD (continuous ambulatory peritoneal dialysis), pain management, hospice care, and tracheotomy and other ostomy care. The Company provides a range of sub-acute care services to patients at its facilities. The Company plans to continue to expand its sub-acute care capabilities by supplementing and expanding currently available services and by developing expertise in additional services. Rehabilitation Therapies. The Company provides rehabilitation therapy programs at substantially all of its facilities. To complement the routine rehabilitation therapy services provided to its eldercare patients, the Company has developed specialized rehabilitation therapy programs to serve patients with complex care needs, such as motor vehicle and other accident victims, persons suffering from job-related injuries and disabilities, and joint-replacement patients. The Company employs full time physical, occupational, and speech therapists at a majority of its facilities. The Company also offers respiratory services at selected facilities. In addition, Multicare operates two outpatient rehabilitation facilities in New Jersey and Illinois. Upon consummation of the Merger, the Company sold its contract rehabilitation therapy business to Genesis. See "The Tender Offer and Merger." Institutional Pharmacy Services. Multicare operates eight institutional pharmacies which currently serve a total of approximately 30,000 beds. The pharmacies provide eldercare healthcare facilities and other institutions a variety of products and services including prescription drugs, pharmacy consulting, and enteral, urological and intravenous therapies. 7 Concurrently with the consummation of the Merger, the Company agreed to sell its pharmacy business to Genesis. The Company expects to complete the Pharmacy Sale in the first calendar quarter of 1998. Operations General. The day-to-day operations of each eldercare facility are managed by an on-site state licensed administrator who is responsible for the overall operation of the facility, including quality of care, marketing, and financial performance. The administrator is assisted by an array of professional and non-professional personnel (some of whom may be independent providers), including a medical director, nurses and nursing assistants, social workers, therapists, dietary personnel, therapeutic recreation staff, and housekeeping, laundry and maintenance personnel. The business office staff at each facility manage the day-to-day administrative functions, including data processing, accounts payable, accounts receivable, billing and payroll. Historically, the facilities operated by Multicare were divided into five divisions, each supervised by a team including a divisional director, a divisional controller, a marketing director, an operations performance director, and a clinical services director. The divisional and facility personnel were supported by a corporate staff based at Multicare's New Jersey headquarters. Upon consummation of the Merger, Genesis and the Company entered into the Management Agreement pursuant to which Genesis manages the Company's operations. Genesis is in the process of overlaying its existing regional and business unit management over the existing regional and business unit management at Multicare. The Company believes that the integration of Genesis and Multicare management will be facilitated by the geographic concentration of Multicare's facilities, the proximity of Multicare facilities to Genesis' existing markets, the quality of Multicare's unit and regional management and Multicare's existing information systems which will allow a rational phase-in of Genesis' management. See "Certain Agreements-- Management Agreement." Marketing. Upon completion of the Merger, Genesis manages the Company's marketing program. Marketing for eldercare centers will be focused at the local level and will be conducted primarily by the center administrator and its admissions director who call on referral sources such as doctors, hospitals, hospital discharge planners, churches and various organizations. Genesis management's marketing objective for the Company is to maintain public awareness of the eldercare center and its capabilities. Genesis' management will take advantage of the Company's regional concentrations in its marketing efforts, where appropriate, through consolidated marketing programs which benefit more than one center. The Genesis corporate business development department, through regional managers, will market the Company's sub-acute program directly to insurance, managed care organizations and other third party payors. In addition, the Genesis marketing department, will support the eldercare centers in developing promotional materials and literature focusing on Genesis management's philosophy of care, services provided and quality clinical standards. See "Government Regulation" for a discussion of the federal and state laws which limit financial and other arrangements between healthcare providers. Genesis has consolidated its core business, and will consolidate the Company's core business, under the name Genesis ElderCare. The Genesis ElderCare logo and trademark have been featured in a series of print advertisements and publications serving many of the regional markets in which the Company operates. The marketing of Genesis ElderCare is aimed at increasing awareness among decision makers in key professional and business audiences. Genesis is using and will continue to use advertising to promote the Genesis ElderCare brand name in trade, professional and business publications and to promote services directly to consumers. Sources of Revenue The Company derives its revenues from private pay sources, state Medicaid programs for indigent patients and the federal Medicare program for certain elderly and disabled patients. The Company classifies payments from persons or entities other than the government as private pay and other revenue. The private pay and other revenue classification also includes revenues from commercial insurers, health maintenance organizations and other charge-based payment sources. The Company's rates for private pay patients are typically higher than rates for patients eligible for assistance under state- administered reimbursement programs. The private pay rates charged by the Company are influenced primarily by the rates charged by 8 other providers in the local market and by Medicaid and Medicare reimbursement rates. Specialty medical services are usually reimbursed under casualty and health insurance coverages. The acuity levels for these insurance patients are generally higher and require additional staff and increased utilization of facility resources, resulting in higher payment rates. Individual cases are either negotiated on a case by case basis with the insurer or the rates are prescribed through managed care contract provisions. Medicare is a federally funded and administered health insurance program that consists of Parts A and B. Participation in Part B is voluntary and is funded in part through the payment of premiums. Subject to certain limitations, benefits under Part A include inpatient hospital services, skilled nursing in a skilled nursing facility and medical services such as physical, speech and occupational therapy, certain pharmaceuticals and medical supplies. Part B provides coverage for physician services. Part B also reimburses for medical services with the exception of pharmaceutical services. Medicare benefits are not available for intermediate and custodial levels of care including but not limited to residence in assisted living facilities; however, medical and physician services furnished to such patients may be reimbursable under Part B. Under the Part A reimbursement methodology, each skilled nursing facility receives an interim payment during the year which is adjusted to reflect actual allowable direct and indirect costs of services based on the submission of a cost report at the end of each year. Final settlements are subject to an audit of the filed cost report whereby adjustments may result in additional payments to the Company or in recoupments from the Company. As the Company is reimbursed for its direct costs plus an allocation of indirect costs up to a regional limit, to the extent that the Company expands its specialty medical services, the costs of care for these patients are expected to exceed the regional reimbursement limits. As a result, the Company has submitted and will be required to submit further exception requests to recover the excess costs from Medicare. There can be no assurance that the Company will be able to recover such excess costs under pending or any future requests. The failure to recover these excess costs in the future would adversely affect the Company's financial position and results of operations. For services not billed through a facility, the Company's specialty medical operations bill Medicare, when appropriate, directly for nutritional support services, infusion therapy, certain medical supplies and equipment, physician services and certain therapy services as provided. Medicare payments for these services may be based on reasonable cost charges or a fixed-fee schedule determined by Medicare. To date, adjustments from Medicare and Medicaid audits have not had a material adverse effect on the Company. There can be no assurance that future adjustments will not have a material adverse effect on the Company. While speculation exists surrounding the impact of the August 5, 1997 Balanced Budget Act of 1997 (the "Act") on the long-term care industry, principally the establishment of a Medicare prospective payment system, the substantive details and timing of implementing any such prospective payment system are not known yet. To date, the Company has not experienced any significant impact to its business as a consequence of the adoption of the Act. In the future the Company may choose to participate in the Medicare+ Choice program established by the Act. The Medicare+ Choice program provides reimbursement under a new Part C to such entities as coordinated care plans including HMO's, PPO's and provider sponsored programs. Under the Medicare+ Choice program, the coordinated care plan would receive monthly payments for each person enrolled. Medicaid is the state administered reimbursement program that covers both skilled nursing facilities and intermediate eldercare. Although Medicaid programs vary from state to state, typically they provide for payment for services including nursing facility services, physician's services, therapy services and prescription drugs, up to established ceilings, at rates based upon cost reimbursement principles. Reimbursement rates are typically determined by the state from cost reports filed annually by each facility, on a prospective or retrospective basis. In a prospective system, a rate is calculated from historical data and updated using an inflation index. The resulting prospective rate is final, but in some cases may be adjusted pursuant to an audit. In this type of payment system, facility cost increases during the rate year do not affect payment levels in that year. In a retrospective system, final rates are based on reimbursable costs for that year. An interim rate is calculated from previously filed cost reports, and may include an inflation factor to account for the time lag between the final cost report settlement and the rate period. Consequently, facility cost increases during any year may affect revenues in that year. Certain states are scheduled to convert, or have recently converted, from a retrospective system, which generally recognizes only two or three levels of care, to a case mix prospective pricing system, pursuant to which payment to a facility for patient services directly considers the individual patient's condition and need for services. The effect, if any, of such a payment system on the Company is unclear. 9 The following table identifies Multicare's net revenues attributable to each of its revenue sources for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997.
1995 1996 1997 Private and other 41% 40% 43% Medicaid 34% 35% 33% Medicare 25% 25% 24% Total 100% 100% 100%
See "Cautionary Statements Regarding Forward Looking Statements." Competition The Company competes with a variety of other companies in providing healthcare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than the Company. Competing companies may offer newer or different centers or services than the Company and may thereby attract the Company's customers who are either presently residents of its eldercare centers or are otherwise receiving its healthcare services. The Company operates eldercare centers in 11 states. In each market, the Company's eldercare centers may compete for customers with rehabilitation hospitals, sub-acute units of hospitals, skilled or intermediate nursing centers, personal care or residential centers and assisted living facilities which offer comparable services to those offered by the Company's centers. Certain of these providers are operated by not-for-profit organizations and similar businesses which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company. In competing for customers, a center's local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, other community organizations, health maintenance organizations and the customer's families and friends. Members of a customer's family generally actively participate in selecting an eldercare center. Competition for sub-acute patients is intense among hospitals with long-term care capability, rehabilitation hospitals and other specialty providers and is expected to remain so in the future. Important competitive factors include the reputation in the community, services offered, the appearance of a center and the cost of services. The Company competes in providing 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 quality of clinical services, responsiveness to patient needs, and the ability to provide support in other areas such as third party reimbursements, information management and patient record- keeping. The Company believes that state regulations which require the issuance of a Certificate of Need before a new eldercare center can be constructed or additional beds can be added to an existing facility reduce the possibility of overbuilding and promote higher utilization of existing facilities. However, a relaxation, expiration or elimination of Certificate of Need requirements could lead to an increase in competition. In addition, as cost containment measures have reduced occupancy rates at acute care hospitals, a number of these hospitals have converted portions of their facilities into sub-acute units. Competition from acute care hospitals could adversely affect the Company and certain states in which the Company operates have considered or are considering action that could facilitate such competition. Government Regulation The federal government and all states in which the Company operates regulate various aspects of the Company's business. The Company's facilities are subject to certain federal statutes and regulations and to statutory and regulatory licensing and other requirements imposed by state and local authorities. All of the Company's facilities and programs, to the extent required, are licensed under applicable law and have any required Certificates of Need from responsible state authorities. Substantially all facilities and healthcare services, or practitioners providing the services 10 therein, are certified or approved as providers under one or more of the Medicaid, Medicare or Veterans Administration programs. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State and local agencies survey licensed facilities on a regular basis to determine whether such facilities are in compliance with governmental operating and health standards and conditions for participation in government sponsored third party payor programs. The Company believes that its facilities are in substantial compliance with the various Medicare and Medicaid regulatory requirements applicable to them. However, in the ordinary course of its business, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. The Company reviews such notices and takes appropriate corrective action. In most cases, the Company and the reviewing agency will agree upon the measures to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take various adverse actions against a facility, including the imposition of fines, temporary suspension of admission of new patients to the facility, suspension or decertification from participation in the Medicare or Medicaid programs and, in extreme circumstances, revocation of a facility's license. These actions may adversely affect the facilities' ability to continue to operate, the ability of the Company to provide certain services, and eligibility to participate in the Medicare, Medicaid or Veterans Administration programs or to receive payments from other payors. Additionally, actions taken against one facility may subject other facilities under common control or ownership to adverse measures, including loss of licensure or eligibility to participate in Medicare and Medicaid programs. From time to time, survey deficiencies have resulted in various penalties against certain facilities and the Company. These penalties have included monetary fines, temporary bans on the admission of new patients and the placement of restrictions on the Company's ability to obtain or transfer certificates of need in certain states. To date, no survey deficiencies or any resulting penalties have had a material adverse effect on the Company's operations, however, there can be no assurance that future surveys will not result in penalties or sanctions which could have a material adverse effect on the Company. Both initial and continuing qualifications of an eldercare facility to participate in the Medicare and Medicaid programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls. Failure to comply with these standards could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, the issuance of a provisional license for a facility, suspension or decertification from the Medicaid or Medicare program, restrictions on the ability to acquire new facilities or expand existing facilities and, in extreme cases, the imposition of limitations on a facility's license, the appointment of third-party temporary management for a facility, revocation of the facility's license or closure of a facility. There can be no assurance that the facilities owned, leased or managed by the Company, or the provision of services and supplies by the Company, will meet the requirements for participation in the Medicaid or Medicare programs or state licensing authorities. Under the various Medicaid programs, the federal government supplements funds provided by the participating states for medical assistance to "medically indigent" persons. The programs are administered by the applicable state welfare or social service agencies. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates based generally on cost reimbursement principles. States in which the Company operates generally have adopted Certificate of Need or similar laws which 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 exists prior to the acquisition or addition of beds or services, the implementation of other changes, or the expenditure of capital. Certificate of Need legislation is currently in place in all states in which the Company operates, except in Pennsylvania where the existing Certificate of Need legislation expired on December 18, 1996. A bill has been introduced in the Pennsylvania legislature to re-establish Certificate of Need requirements; however, the Company has been advised that there is little likelihood such bill will be passed. The Pennsylvania Department of Public Welfare has issued a policy statement to the effect that generally it will not enter into a provider agreement with any eldercare facility which did not receive Certificate of Need approval for the beds at issue prior to the sunset of Pennsylvania's Certificate of Need law. In addition, in most states the reduction of beds or the closure of a facility requires the approval of the appropriate state regulatory agency and, if the Company were to determine to reduce beds or close a facility, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. 11 The Company is also subject to federal and state laws which 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 induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the "anti-kickback" provisions of the Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. These laws also include the "Stark legislation" which prohibits, with limited exceptions, the referral of patients by physicians for certain services, including home health services, physical therapy and occupational therapy, to an entity in which the physician has an ownership interest. In addition, 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, the Company 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 the practices of the Company. Although the Company has contractual arrangements with some healthcare providers to which the Company pays fees for services rendered or products provided, the Company believes that its practices are not in violation of these laws. The Company cannot accurately predict whether enforcement activities will increase or the effect of any such increase on its business. There have also been a number of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. In particular, the federal government has issued fraud alerts concerning double billing, home health services and the provisions of medical supplies. Accordingly, it is anticipated that these areas may come under closer scrutiny by the government. The Company cannot accurately predict the impact of any such initiatives. There are numerous legislative and executive initiatives at the federal and state levels for healthcare reform with a view toward, among other things, slowing the overall rate of growth in healthcare expenditures. The Company is unable to predict the impact of healthcare reforms on the Company; however it is possible that such proposals could have a material adverse effect on the Company. The Company is also subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by health care providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls, and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials and wastes; and certain other requirements. In its role as owner and/or operator of properties or facilities, the Company may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including such substances that may have migrated off, or emitted, discharged, leaked, escaped or been transported from, the property. Ancillary to the Company's operations are, in various combinations, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. There can be no assurance that the Company will not encounter such risks in the future, and such risks may have a material adverse effect on the operations or financial condition of the Company. Employees As of September 30, 1997, Multicare employed approximately 15,500 persons. Approximately 2,000 employees at 28 of Multicare's facilities are covered by collective bargaining agreements. The Company believes that it has had good relationships with its employees and 12 with the unions that represent its employees, but it cannot predict the effect of continued union representation or organizational activities on its future operations. The healthcare industry has at times experienced a shortage of qualified healthcare personnel. The Company competes with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. While the Company 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 the ability of the Company 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 the Company's operating results or expansion plans. Insurance The provision of healthcare services entails an inherent risk of liability. The Company maintains liability insurance providing coverage which it believes to be adequate. In addition, Multicare maintains property, business interruption, and workers' compensation insurance covering all facilities in amounts deemed adequate by Multicare. There can be no assurance that any future claims will not exceed applicable insurance coverage or that the Company will be able to continue its present insurance coverage on satisfactory terms, if at all. Item 2. Properties. As of September 30, 1997, Multicare operated 155 eldercare facilities, 11 assisted living facilities and 2 outpatient rehabilitation centers (90 owned, 27 leased and 51 managed). Twenty-seven of Multicare's facilities are leased by the respective operating entities from third parties. The inability of the Company to make rental payments under these leases could result in loss of the leased property through eviction or other proceedings. Certain facility leases do not provide for non disturbance from the mortgagee of the fee interest in the property and consequently each such lease is subject to termination in the event that the mortgage is foreclosed following a default by the owner. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. The following table summarizes by state certain information regarding Multicare's facilities and outpatient rehabilitation centers at September 30, 1997 (excluding 14 facilities with 1,668 beds at which Multicare provides quality assurance consulting services):
Owned(1) Leased (2) Managed Total Fac Beds Faci Beds Faci Beds Faci Beds ili liti liti liti ties es es es Massachusetts 8 1,118 5 742 37 2,459 50 4,319 New Jersey 13 1,425 8 1,294 4 659 25 3,378 Pennsylvania 16 1,805 - - 3 654 19 2,459 West Virginia 17 1,503 4 326 1 62 22 1,891 Ohio 10 896 4 250 - - 14 1,146 Connecticut 5 766 2 250 6 872 13 1,888 Illinois 10 876 1 92 - - 11 968 Wisconsin 6 729 2 231 - - 8 960 Rhode Island 3 373 - - - - 3 373 Virginia 1 90 1 85 - - 2 175 Vermont 1 58 - - - - 1 58 90 9,639 27 3,270 51 4,706 168 17,615
(1)Includes seven facilities with 883 beds which are not wholly owned. (2)In connection with the Merger, the Company acquired five of the facilities in Massachusetts and a facility in Virginia that were previously leased under the Company's lease facility. 13 Item 3. Legal Proceedings. The Company is a party to claims and legal actions arising in the ordinary course of business. The Company does not believe that any litigation to which Multicare is currently a party, alone or in the aggregate, will have a material adverse effect on the Company. See "Cautionary Statements Regarding Forward Looking Statements." Item 4. Submission of Matters to a Vote of Security Holders. None. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The following table indicates the high and low sale prices per share, as reported by the New York Stock Exchange:
Calendar Year High Low 1997 First Quarter $ 20 1/4 $ 17 3/4 Second Quarter 27 3/8 17 1/2 Third Quarter 27 13/16 27 1/16 1996 First Quarter 19 1/4 14 7/8 Second Quarter 20 7/8 17 1/2 Third Quarter 21 3/4 18 Fourth Quarter 22 3/8 17 3/4
The Company has not paid any cash dividends on its Common Stock since its inception. 14 Item 6. Selected Consolidated Financial Data Nine Month Period Years Ended December 31, Ended September 30, 1993 1994 1995 1996 1996 1997 Statement of Operations Data: Net revenues $162,384 $262,416 $353,048 $532,230 $386,890 $533,952 Expenses: Operating expenses 123,819 198,427 265,185 400,897 291,494 406,173 Corporate, general and administrative 6,338 11,446 17,643 25,408 18,627 25,203 Depreciation and amortization 6,292 9,358 13,171 22,344 16,048 21,620 Lease expense 862 2,823 5,039 12,110 8,874 12,693 Interest expense, net 13,229 12,866 16,065 25,164 18,947 21,640 Debenture conversion expense (1) --- --- --- --- --- 785 Total Expenses 150,540 234,920 317,103 485,923 353,990 488,114 Income before income taxes and extraordinary item 11,844 27,496 35,945 46,307 32,900 45,838 Income tax expense 4,727 10,454 13,798 17,570 12,505 17,087 Income before extraordinary item 7,117 17,042 22,147 28,737 20,395 28,751 Extraordinary item, net of tax benefit (2) 3,863 1,620 3,722 2,827 1,481 873 Net income $ 3,254 $ 15,422 $ 18,425 $ 25,910 $ 18,914 $ 27,878 Per common share data (fully diluted): Income before extraordinary item per share $ .42 $ .71 $ .84 $ .99 $ .71 $ .85 Net income per share $ .19 $ .64 $ .69 $ .90 $ .67 $ .82 Weighted average number of shares outstanding 16,962 23,967 26,513 33,172 32,748 36,832 Other Financial Data: EBITDA (3) $ 31,365 $ 49,720 $ 65,181 $ 93,815 $ 67,895 $ 89,883 EBITDAR (4) $ 32,227 $ 52,543 $ 70,220 $105,925 $ 76,769 $102,576 Ratio of EBITDA to interest expense, net 2.4x 3.9x 4.1x 3.7x 3.6x 4.1x Ratio of EBITDAR to interest expense, net, plus lease expense 2.3x 3.3x 3.3x 2.8x 2.8x 3.0x Ratio of earnings to fixed charges (5) 1.9x 2.9x 2.9x 2.5x 2.8x 2.8x Capital expenditures $ 18,730 $ 31,785 $ 39,917 $64,215 $ 49,510 $ 39,301 Operating Data: Average number of licensed beds 4,241 6,006 6,861 11,620 11,168 16,224 Occupancy 90.4% 92.2% 91.7% 91.0% 91.7% 90.4% Payor Mix: Quality Mix (6) 56.0% 62.5% 66.3% 64.5% 64.3% 67.3% Medicaid 44.0% 37.5% 33.7% 35.5% 35.7% 32.7% Balance Sheet Data: Working capital $ 15,158 $ 34,005 $ 55,542 $ 39,327 $ 69,135 $ 51,882 Total assets 162,255 308,755 470,958 761,667 659,096 823,133 Long-term debt, including current portion 106,137 156,878 283,082 429,168 427,983 424,046 Stockholders' equity $ 32,591 $100,105 $113,895 $207,935 $138,632 $263,174
(1) Represents a non-recurring charge relating to the early conversion of $11.0 million of Multicare's 7% Convertible Debentures. (2) Multicare incurred extraordinary charges relating to the early extinguishment of debt. (3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit) and debenture conversion expense. EBITDA should not be considered an alternative measure of Multicare's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare's ability to service debt. (4) EBITDAR represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit), debenture conversion expense and lease expense. EBITDAR should not be considered an alternative measure of Multicare's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare's ability to service debt. (5) For the purpose of computing the ratio to fixed charges, earnings consist of the sum of earnings before income taxes and extraordinary items (net of tax benefit) plus fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt issuance costs and one-third of rental expense, which Multicare believes to be representative of the interest factor. The definition of fixed charges used in this calculation differs from that used in the Consolidated Fixed Charge Coverage Ratio contained in the Indenture. (6) Quality mix is defined as non-Medicaid patient revenues. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Multicare has experienced significant growth in the four-year period ended December 31, 1996 and the nine months ended September 30, 1997, primarily through acquisitions of eldercare facilities and increased utilization of specialty medical services. It has been Multicare's strategy to expand through selective acquisitions, development of new facilities with geographically concentrated operations, and growth of specialty medical services. Upon consummation of the Merger, the Company and Genesis entered into the Management Agreement pursuant to which Genesis manages the Company's operations. Under Genesis' management, the Company's strategy is to integrate the talents of physicians with case management, comprehensive discharge planning and, where necessary, home support services, to provide cost effective care management to achieve superior outcomes and return the Company's customers to the community. Genesis' management believes that achieving improved customer outcomes will result in increased utilization of specialty medical services and a broader base of repeat customers in the Company's network. Moreover, the Company believes that this strategy will lead to continued high levels of occupancy of available beds, a high quality payor mix and same store growth in net revenues and EBITDAR. Genesis' management also will focus on the revenue and cost opportunities presented through the further integration of the Company's recent acquisitions. It is contemplated that the Company will do little, if any, new acquisitions or new construction after the Merger; accordingly, capital expenditures after the Merger should decrease significantly from historical levels. Summarized below are the recent significant acquisitions completed in 1996: - - In February 1996, the Company acquired the outstanding capital stock of Concord Health Group, Inc., a long-term care provider through 15 long-term care facilities with approximately 2,600 beds and ancillary businesses in Pennsylvania. - - In December 1996, the Company acquired The A.D.S Group, which owns, operates or manages over 50 long-term care and assisted-living facilities with over 4,200 licensed beds, principally in Massachusetts. The Tender Offer and Merger On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation formed by Genesis, The Cypress Group L.L.C (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the shares of common stock of Multicare, pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger") of Acquisition Corp. with and into Multicare in accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare became a wholly-owned subsidiary of Genesis ElderCare Corp. Multicare is in the business of providing eldercare and specialty medical services in selected geographic regions. In connection with the Merger, Multicare and Genesis entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1,991,666 and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23,900,000 million in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. Genesis also entered into an asset purchase agreement (the "Therapy Sale Agreement") with Multicare and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 16 subject to adjustment (the "Therapy Sale") and a stock purchase agreement (the "Pharmacy Sale Agreement") with Multicare and certain subsidiaries pursuant to which Genesis will acquire all of the outstanding capital stock and limited partnership interest of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000, subject to adjustment (the "Pharmacy Sale"). The Company expects to complete the Pharmacy Sale in the first calendar quarter of 1998. Genesis ElderCare Corp. (the "Multicare Parent") paid approximately $1,492,000,000 to (i) purchase the shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses to be incurred in connection with the completion of the Tender Offer, Merger and the financing transactions in connection with therewith, (iii) refinance certain indebtedness of Multicare and (iv) make certain cash payments to employees. Of the funds required to finance the foregoing, approximately $745,000,000 were furnished to Acquisition Corp. as capital contributions by the Multicare Parent from the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis Eldercare Corp. Common Stock") to Cypress, TPG, Nazem and Genesis. Cypress, TPG and Nazem purchased shares of Genesis ElderCare Corp. Common Stock for a purchase price of $210,000,000, $199,500,000 and $10,500,000, respectively, and Genesis purchased shares of Genesis ElderCare Corp. Common Stock for a purchase price of $325,000,000 in consideration for approximately 44% of the Common Stock of the Multicare Parent. The balance of the funds necessary to finance the foregoing came from (i) the proceeds of loans from a syndicate of lenders in the aggregate amount of $525,000,000 and (ii) $250,000,000 from the sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997. Results of Operations The Company has changed its fiscal year end to September 30 from December 31. Nine month period ended September 30, 1997 compared to nine month period ended September 30, 1996 Net Revenues. Net revenues for the nine month period ended September 30, 1997 increased 38% or $147.1 million from the same period last year to $534.0 million. Of the net revenues increase for the nine months ended September 30, 1997, 24% is attributable to the inclusion of results for the Company's recent acquisitions. The internal growth rate of revenues amounted to 14% in the nine months ended September 30, 1997, resulting mainly from increases in payor rates and changes in census mix, development and opening of additional beds, and growth in specialty medical service revenues. The Company's quality mix of private, Medicare and insurance revenues was 67% of net revenues for the nine months ended September 30, 1997 compared to 64% in the similar periods of 1996. Occupancy rates were 90% for the nine months ended September 30, 1997 compared to 92% in the similar period of 1996. Operating Expense and Margins. Operating expenses for the nine months ended September 30, 1997 increased 39% or $114.7 million from the comparable period in 1996 to $406.2 million. The increases in operating expenses reflect the inclusion of results for the recent acquisitions of $69.6 million. The remainder of the increase resulted primarily from higher salaries, wages and benefits and the expanded utilization of salaried therapists and nursing staffing levels to support higher patient acuities and more complex product lines such as subacute and Alzheimers care. Operating margins before interest were 13% of net revenues for the nine months ended September 30, 1997 and 1996. Income before interest, taxes, depreciation, amortization and lease expense (EBITDAR) before debenture conversion expense was 19% and 20% of net revenues for the nine month periods ended September 30, 1997 and 1996, respectively. Corporate, General and Administrative Expense. Corporate, general and administrative expense remained consistent at approximately 5% of net revenues for the nine month periods ended September 30, 1997 and 1996. The expenses include resources devoted to operations, finance, legal, risk management, and information systems in order to support the Company's operations. 17 Lease Expense. Lease expense for the nine months ended September 30, 1997 increased 43% or $3.8 million from the same period last year to $12.7 million. The increases were primarily due to the inclusion of lease expense relating to a recent acquisition. Depreciation and Amortization Expense. Depreciation and amortization expense for the nine months ended September 30, 1997 increased 35% from the same period in 1996 to $21.6 million. The increases were primarily due to the inclusion of results for recent acquisitions. Interest Expense, net. Net interest expense for the nine months ended September 30, 1997 increased 14% from the same period in 1996 to $21.6 million. This is primarily a result of increased borrowings under the Company's credit facility in connection with the financing of recent acquisitions. These increases have been offset by decreases relating to the conversion of the Company's convertible debt and the purchase of the Company's senior notes. Debenture Conversion Expense. Debenture conversion expense for the nine months ended September 30, 1997 relates to the premium paid in January 1997 to convert $11 million of convertible debentures into common stock. Year ended December 31, 1996 compared to year ended December 31, 1995 Net Revenues. Net revenues increased 51% or $179.2 million to $532.2 million in 1996 from the year ended December 31, 1995. Of the 1996 revenues increase, 37% is primarily attributable to the inclusion of results for the recent acquisitions. The internal growth rate of revenues amounted to 14% in 1996, resulting mainly from increases in payor rates and changes in census mix, development and opening of additional beds, and growth in specialty medical service revenues. Multicare's quality mix of non-Medicaid patient revenues was 65% and 66%, respectively, in 1996 and 1995. The 1996 percentages reflect the impact of certain of Multicare's recent acquisitions which historically have generated lower revenues in these areas. Occupancy rates were 91% and 92%, respectively, for 1996 and 1995. Operating Expenses and Margins. Operating expenses increased 53% or $142.8 million to $413.0 million in 1996 from the year ended December 31, 1995. Operating margins were 13% in 1996 and 15% in 1995. The decrease in operating margin in 1996 is due primarily to an increase in lease expense of $7.1 million relating to new operating leases. EBITDAR margins were 20% in 1996 and 1995. The increases in operating expenses in 1996 reflect the inclusion of results for the recent acquisitions of $100.2 million. The remaining increases resulted primarily from higher salaries, wages, and benefits ($23.4 million) for cost of living increases and the expanded utilization of salaried therapists and staffing levels to support higher patient acuities and more complex product lines. Corporate, General and Administrative Expenses. Corporate, general and administrative expenses remained consistent at 5% of net revenues in 1996 and 1995. The expenses include resources devoted to operations, finance, legal, risk management, and information systems to support Multicare's operations. Depreciation and Amortization. Depreciation and amortization increased by $9.2 million in 1996 from 1995. The increases related primarily to inclusion of depreciation and amortization for the recently acquired entities and to a lesser extent, amortization of debt issuance costs and other assets. Other Income (Expense). Net other expense increased 57% or $9.1 million in 1996 to $25.2 million, primarily as a result of interest expense from increased borrowings under Multicare's various credit agreements in connection with the financing of recent acquisitions. 18 Extraordinary item. Multicare incurred extraordinary charges of $2.8 million and $3.7 million in 1996 and 1995, respectively, relating to the restructuring of its bank credit facilities and the purchase of Multicare's 12.5% Senior Subordinated Notes ("12.5% Notes"). Liquidity and Capital Resources The Company maintains adequate working capital from operating cash flows and lines of credit for continuing operations, debt service, and anticipated capital expenditures. At September 30, 1997, the Company had working capital of $51.8 million, compared to $39.3 million at December 31, 1996. Cash flow from operations was $37.0 million for the nine months ended September 30, 1997 compared to cash from operations of $19.0 million in the comparable period of 1996. This increase is due, in part, to improved collections of accounts receivable and the inclusion of results for recent acquisitions. Net accounts receivable were $119.5 million at September 30, 1997 compared to $102.2 million at December 31, 1996. The increase in net accounts receivable is attributable to the recent acquisitions, the utilization of specialty medical services for higher acuity level patients, and the timing of third-party interim and settlement payments. Legislative and regulatory action and government budgetary constraints could change the timing of payments and reimbursement rates of the Medicare and Medicaid programs in the future. These changes could have a material adverse effect on the Company's future operating results and cash flows. The Company anticipates its capital requirements for the construction of new facilities and the expansion and renovation of existing facilities to approximate $30 million over the next twelve months based on existing construction commitments and plans. In January 1997 the Company purchased $6.5 million of its 12.5% Senior Subordinated Notes. In addition, in the nine month period ended September 30, 1997 $26.5 million of the Company's Convertible Debentures were converted into common stock. In connection with the Merger, Multicare entered into three term loans and a revolving credit facility of up to $525 million, in the aggregate (collectively, the "Senior Facilities"), provided by a syndicate of banks and other financial institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as administrative agent (the "Administrative Agent"), pursuant to a certain credit agreement (the "Long Term Credit Agreement") dated as of October 14, 1997. The Senior Facilities are being used for the purpose of (i) refinancing certain short term facilities in the aggregate principal amount of $431.6 million which were funded on October 9, 1997 to acquire the Shares in the Tender Offer, refinance certain indebtedness of Multicare and pay fees and expenses related to the transactions, (ii) funding interest and principal payments on such facilities and on certain remaining indebtedness and (iii) funding working capital and general corporate purposes. The Senior Facilities consist of: (1) a $200 million six year term loan (the "Tranche A Term Facility"); (2) a $150 million seven year term loan (the "Tranche B Term Facility"); (3) a $50 million term loan maturing on June 1, 2005 (the "Tranche C Term Facility"); (4) a $125 million six year revolving credit facility (the "Revolving Credit Facility"); and (5) one or more Swing Loans (collectively, the "Swing Loan Facility") in integral principal multiples of $500,000 up to an aggregate unpaid principal amount of $10 million. The Tranche A Term Facility, Tranche B Term Facility and Tranche C Term Facility are subject to amortization in quarterly installments, commencing at the end of the first calendar quarter after the date of the consummation of the Merger (the "Closing Date"). The Revolving Credit Facility will mature six years after the Closing Date. All net proceeds received by Multicare from (i) the sale of assets of Multicare or its subsidiaries other than sales in the ordinary course of business (and other than the sales of Multicare's rehabilitation therapy business and pharmacy business to the extent that there are amounts outstanding under the Revolving Credit Facility) and (ii) any sale of common stock or debt securities of Multicare in respect of common stock will be applied as a mandatory prepayment. Fifty percent of Excess Cash Flow must be applied to the Senior Facilities and shall be payable annually. 19 The Senior Facilities are secured by a first priority security interest in all of the (i) stock of Multicare, (ii) stock, partnership interests and other equity of all of Multicare's present and future direct and indirect subsidiaries and (iii) intercompany notes among Genesis ElderCare Corp. and any subsidiaries or among any subsidiaries. Loans under the Senior Facilities bear, at Multicare's option, interest at the per annum Prime Rate as announced by the Administrative Agent, or the applicable Adjusted LIBO Rate. Loans under the Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 2.5%; loans under the Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 2.75%; loans under the Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.0%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 2.5%; and loans under the Swing Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the parties. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. The Long Term Credit Agreement contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, prepay debt, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents. In addition, the Long Term Credit Agreement requires that Multicare and its affiliates maintain the Management Agreement as well as comply with certain financial covenants. On August 11, 1997, Acquisition Corp. sold $250 million principal amount of 9% Notes which were issued pursuant to the Indenture. The 9% Notes bear interest at 9% per annum from August 11, 1997, payable semiannually on February 1 and August 1 of each year, commencing on February 1, 1998. The 9% Notes are unsecured, general obligations of the issuer, subordinated in right of payment to all existing and future Senior Indebtedness, as defined in the Indenture, of the issuer, including indebtedness under the Senior Facilities. The 9% Notes rank pari passu in right of payment with any future senior subordinated indebtedness of the issuer and are senior in right of payment to all future subordinated indebtedness of the issuer. The 9% Notes are redeemable at the option of the issuer, in whole or in part, at any time on or after August 1, 2002, initially at 104.5% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after August 1, 2004. The 9% Notes are subject to mandatory redemption at 101%. Upon a Change in Control, as defined in the Indenture, the issuer is required to make an offer to purchase the 9% Notes at a purchase price equal to 101% of their principal amount, plus accrued interest. The Indenture contains a number of covenants that, among other things, restrict the ability of the issuer of the 9% Notes to incur additional indebtedness, pay dividends, redeem capital stock, make certain investments, issue the capital stock of its subsidiaries, engage in mergers or consolidations or asset sales, engage in certain transactions with affiliates, and create dividend and other restrictions affecting its subsidiaries. Upon the consummation of the Merger, Multicare assumed all obligations of Acquisition Corp. with respect to and under the 9% Notes and the related Indenture. On October 9, 1997, Multicare, Genesis and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1.9 million and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23.9 million in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. 20 On October 10, 1997, Genesis entered into the Therapy Sale pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24 million, subject to adjustment. On October 10, 1997, Genesis and one of its wholly-owned subsidiaries entered into the Pharmacy Sale pursuant to which Genesis will acquire all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50 million, subject to adjustment (the "Pharmacy Sale"). The Company expects to complete the Pharmacy Sale in the first calendar quarter of 1998. In February 1998 ElderTrust ("ETT"), a Maryland real estate investment trust sponsored by Genesis, made term loans to subsidiaries of the Company with respect to the lease-up of two assisted living facilities. The loans have a fixed annual rate of interest of 10.5% and mature three years from the date of the loans, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" (as defined) as of the third anniversary of the loan (or at the end of any extension period, if applicable). In February 1998 ETT also made one construction loan a subsidiary of the Company to fund construction of an assisted living facility being developed by the Company. The note bears interest at a fixed annual rate of 10.5%, and will mature on the third anniversary of the loan, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" as of such third anniversary (or at the end of any extension period, if applicable). ETT is obligated to purchase and leaseback the three facilities that secure the term and construction loans being made to the Company, upon the earlier of the facility reaching stabilized occupancy or the maturity of the loan secured by the facility provided, however, that the Company will not be obligated to sell any facility if the purchase price for the facility would be less than the applicable loan amount. The purchase agreements provide for a cash purchase price in an amount which will result in an annual yield of 10.5% to ETT. If acquired by ETT, these facilities would be leased to the Company under minimum rent leases. The initial term of any minimum rent lease will be ten years, and the Company will have the option to extend the term for up to two five-year extension periods upon 12 months notice to ETT. Minimum rent for the first lease year under any minimum rent lease will be established by multiplying the purchase price for the applicable facility times 10.5%, and the increase each year by an amount equal to the lesser of (i) 5% of the increase in the gross revenues for such facility (excluding any revenues derived from ancillary healthcare services provided by Genesis or its affiliates to residents of the applicable facility) during the immediately preceding year or (ii) one-half of the increase in the Consumer Price Index during the immediately preceding year. During the last four years of the term (as extended, if applicable), the Company is required to make minimum capital expenditures equal to $3,000 per residential unit in each assisted living facility covered by a minimum rent lease. The Company enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates. Subsequent to September 30, 1997 the Company entered into swap agreements with notional principal amounts totaling $100,000. These agreements effectively convert underlying variable-rate debt based on LIBOR into fixed-rate debt whereby the Company makes quarterly payments at a weighted average fixed rate of 5.65% and receives quarterly payments at a floating rate based on three month LIBOR (approximately 5.78% at February 10, 1998). Legislative and regulatory action and government budgetary constraints could change the timing of payments and reimbursement rates of the Medicare and Medicaid programs in the future. These changes could have a material adverse effect on the Company's future operating results and cash flows. There are numerous legislative and executive initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services, including without limitation, discussions at the federal level concerning budget reductions and the implementation of prospective payment systems for the Medicare and Medicaid programs. The Company is unable to predict the impact of healthcare reform proposals on the Company; however, it is possible that such proposals could have a material adverse effect on the Company. 21 Any changes in reimbursement levels under Medicaid and Medicare and any changes in applicable government regulations could significantly affect the profitability of the Company. Various cost containment measures adopted by governmental pay sources have begun to limit the scope and amount of reimbursable healthcare expenses. Additional measures, including measures that have already been proposed in states in which the Company operates, may be adopted in the future as federal and state governments attempt to control escalating healthcare costs. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. In particular, changes to the Medicare reimbursement program that have been proposed could materially adversely affect the Company's revenues derived from ancillary services. See "Government Regulation." The Company's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, seasonal census cycles and the number of calendar days in a given quarter. The healthcare industry is labor intensive. Wages and other labor related costs are especially sensitive to inflation. In addition, suppliers pass along rising costs to Multicare in the form of higher prices. When faced with increases in operating costs, Multicare has increased its charges for services. The Company's operations could be adversely affected if it is unable to recover future cost increases or experiences significant delays in increasing rates of reimbursement of its labor and other costs from Medicaid and Medicare revenue sources. Item 8. Financial Statements and Supplementary Data. 22 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements Independent Auditors' Report 24 Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 25 Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1996 (unaudited) and 1997 26 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997 27 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1996 (unaudited) and 1997 28 Notes to Consolidated Financial Statements 29-41 23 The Board of Directors The Multicare Companies, Inc. We have audited the accompanying consolidated balance sheets of The Multicare Companies, Inc. and subsidiaries as of December 31, 1996 and September 30, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows each of the years in the two-year period ended December 31, 1996 and for the nine month period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of The Multicare Companies, Inc. and subsidiaries as of December 31, 1996 and September 30, 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996 and for the nine month period ended September 30, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Philadelphia, Pennsylvania February 4, 1998 24 The Multicare Companies, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share data)
December September 31, 30, 1996 1997 ASSETS Current assets: Cash and cash equivalents $ 1,150 2,118 Accounts receivable, net of allowance for doubtful accounts of $11,531 and $11,069 in 1996 and 1997, respectively 102,234 119,522 Prepaid expenses and other current 14,586 21,808 assets Deferred taxes 3,833 2,806 Total current assets 121,803 146,254 Property, plant and equipment: Land, buildings and improvements 386,870 417,021 Equipment, furniture and fixtures 58,963 71,419 Construction in progress 43,373 34,856 489,206 523,296 Less accumulated depreciation and 46,187 62,496 amortization 443,019 460,800 Goodwill, net 157,298 171,324 Debt issuance costs, net 4,017 2,768 Other assets 35,530 41,987 $ 761,667 823,133 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 26,948 28,863 Accrued liabilities 54,707 64,944 Current portion of long-term debt 821 625 Total current liabilities 82,476 94,432 Long-term debt 428,347 423,421 Deferred taxes 42,909 42,106 Stockholders' equity: Preferred stock, par value $.01, 7,000,000 shares authorized, none issued --- --- Common stock, par value $.01, 70,000,000 shares authorized, 30,133,535 and 31,731,963 issued and outstanding in 1996 and 1997, respectively 301 317 Additional paid-in capital 143,513 170,858 Retained earnings 64,121 91,999 Total stockholders' equity 207,935 263,174 $ 761,667 823,133
See accompanying notes to consolidated financial statements. 25 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data)
Nine month Years ended period ended December 31, September 30, 1995 1996 1996 1997 (Unaudited) Net revenues $353,048 532,230 386,890 533,952 Expenses: Operating expenses: Salaries, wages and benefits 171,471 258,404 189,146 255,762 Other operating expenses 93,714 142,493 102,348 150,411 Corporate, general and administrative expense 17,643 25,408 18,627 25,203 Lease expense 5,039 12,110 8,874 12,693 Depreciation and amortization expense 13,171 22,344 16,048 21,620 Interest expense, net 16,065 25,164 18,947 21,640 Debenture conversion expense --- --- --- 785 Total expenses 317,103 485,923 353,990 488,114 Income before income taxes and extraordinary item 35,945 46,307 32,900 45,838 Income tax expense 13,798 17,570 12,505 17,087 Income before extraordinary item 22,147 28,737 20,395 28,751 Extraordinary item - loss on extinguishment of debt, net of tax benefit 3,722 2,827 1,481 873 Net income $ 18,425 25,910 18,914 27,878 Income per common and common equivalent share data: Income before extraordinary item $ .84 1.02 .74 .89 Net income $ .69 .92 .69 .87 Weighted average number of common and common equivalent shares outstanding 26,513 28,062 27,506 32,172 Income per common share assuming full dilution: Income before extraordinary item $ .84 .99 .71 .85 Net income $ .69 .90 .67 .82 Weighted average number of common shares outstanding assuming full dilution 26,513 33,172 32,748 36,832
See accompanying notes to consolidated financial statements. 26 The Multicare Companies, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997 (In thousands)
Common Stock Total Shar Amou Paid-In Retained Stockholders' es nt Capital Earnings Equity Balances, December 31, 1994 17,662 $ 177 $ 80,054 $ 19,874 $ 100,105 Exercise of stock options (including 19 --- 304 --- 304 tax benefit) Proceeds from issuance of --- --- 373 --- 373 put options Contingent stock purchase --- --- (5,312) --- (5,312) commitment Net income --- --- --- 18,425 18,425 Balances, December 31, 1995 17,681 177 75,419 38,299 113,895 Exercise of stock options (including tax benefit) 21 --- 347 --- 347 Shares issued under stock purchase plan 30 --- 442 --- 442 Contingent stock purchase commitment --- --- 5,312 --- 5,312 Stock split 8,847 88 --- (88) --- Issuance of common stock in connection with public offering 3,000 30 51,982 52,012 Issuance of stock in acquisition 555 6 10,011 10,017 Net income --- --- --- 25,910 25,910 Balances, December 31, 1996 30,134 301 143,513 64,121 207,935 Exercise of stock options (including 21 --- 277 --- 277 tax benefit) Debt conversion 1,530 15 26,087 --- 26,102 Shares issued under stock purchase plan 45 1 773 --- 774 Contingent stock purchase commitment and other 1 --- 208 --- 208 Net income --- --- --- 27,878 27,878 Balances, September 30, 1997 31,731 317 170,858 91,999 263,174
See accompanying notes to consolidated financial statements. 27 The Multicare Companies, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands)
Nine month Years ended period ended December 31, September 30, 1995 1996 1996 1997 (Unaudited) Cash flows from operating activities: Net income $ 18,425 $ 25,910 $ 18,914 $ 27,878 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item 6,101 4,711 2,469 1,456 Depreciation and amortization 13,204 22,029 15,811 21,332 Provision for doubtful accoun ts 3,483 4,760 3,475 3,521 Changes in assets and liabilities: Deferred taxes (445) (1,208) 1,725 --- Accounts receivable (25,104) (13,967) (14,798) (19,717) Prepaid expenses and other current assets (1,479) (2,528) (3,344) (7,001) Accounts payable and accrued liabilities (3,174) 10,566 (5,255) 9,579 Net cash provided by operating activities 11,011 50,273 18,997 37,048 Cash flows from investing activities: Net marketable securities (acquired) sold (200) 202 202 --- Assets and operations acquired (63,415) (193,067) (122,940) (22,568) Capital expenditures (39,917) (64,215) (49,510) (39,301) Proceeds from sale-leaseback 12,522 --- --- --- Proceeds from repayment of construction advances 11,000 --- --- 13,100 Other assets (1,072) (5,531) (2,207) (9,465) Net cash used in investing activities (81,082) (262,611) (174,455) (58,234) Cash flows from financing activities: Proceeds from issuance of common stock --- 52,012 70 --- Proceeds from exercise of stock options and stock purchase plan 245 717 441 1,075 Proceeds from issuance of put options 373 --- --- 184 Proceeds from long-term debt 278,154 562,981 218,200 112,400 Payments of long-term debt (208,358) (402,848) (62,874) (91,310) Debt issuance costs (4,431) (3,295) (2,407) (195) Net cash provided by financing activities 65,983 209,567 153,430 22,154 Increase (decrease) in cash and cash equivalents (4,088) (2,771) (2,028) 968 Cash and cash equivalents at beginning of period 8,009 3,921 3,921 1,150 Cash and cash equivalents at end $ 3,921 $ 1,150 $ 1,893 $ 2,118 of period Supplemental disclosure of non cash investing and financing activities: Fair value of assets and operations acquired 134,323 213,873 149,748 24,937 Debt and liabilities assumed in connection with assets and operations acquired 70,908 10,789 26,808 2,369 Stock issued in connection with assets and operations acquired --- 10,017 --- --- $ 63,415 $ 193,067 $122,940 $ 22,568
See accompanying notes to consolidated financial statements. 28 The Multicare Companies, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years Ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997 (In thousands, except share and per share data) The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the "Company") own, operate and manage skilled nursing facilities which provide long-term care and specialty medical services in selected geographic regions within the eastern and midwestern United States. In addition, the Company operates assisted-living facilities, institutional pharmacies, medical supply companies, outpatient rehabilitation centers and other ancillary healthcare businesses. (1)Organization and Basis of Presentation The Multicare Companies, Inc. was organized in March 1992. The consolidated financial statements include the accounts of the Company and its majority owned and controlled subsidiaries. Investments in affiliates that are not majority owned are reported using the equity method. All significant intercompany transactions and accounts of the Company have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Multicare changed its fiscal year end to September 30 from December 31. (2)Summary of Significant Accounting Policies (a) Cash Equivalents Cash equivalents consist of highly liquid instruments with original maturities of three months or less. (b) Financial Instruments The carrying amounts of cash, marketable securities, and other current assets and current liabilities approximate fair value due to the short term maturity of these instruments. The fair value of the Company's long term debt is estimated based on quoted market prices or current rates offered to the Company for similar instruments with the same remaining maturities. (c) Debt Issuance Costs Debt issuance costs are amortized on a straight-line basis which approximates the effective interest rate over periods of four to ten years. (d) Goodwill Goodwill resulting from acquisitions accounted for as purchases is amortized on a straight-line basis over periods of fifteen to forty years. At December 31, 1996, and September 30, 1997 accumulated amortization of goodwill was $4,636, and $7,745, respectively. 29 Goodwill is reviewed for impairment whenever events or circumstances provide evidence that support that the carrying amount of goodwill may not be recoverable. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance will be recovered through projected undiscounted future cash flows. (e) Other Assets At December 31, 1996, and September 30, 1997 other assets include $1,331, and $1,393 representing amounts due from stockholders. Direct costs incurred to develop and implement new specialty medical services at certain facilities are deferred during the start-up period and amortized on a straight-line basis over five years. At December 31, 1996 and September 30, 1997 investments in non- consolidated affiliates included in other assets amounted to $19,913 and $20,287, respectively. Results of operations relating to the non- consolidated affiliates were insignificant to the Company's consolidated financial statements in 1996, and the nine month period ended September 30, 1997. (f) Net Revenues Net revenues primarily consist of services paid for by patients and amounts for services provided that are reimbursable by certain third-party payors. Medicare and Medicaid revenues are determined by various rate setting formulas and regulations. Net revenues are recorded net of contractual allowances. Final determinations of amounts paid by Medicaid and Medicare are subject to review or audit. In the opinion of management, adequate provision has been made for any adjustment that may result from these reviews or audits. To the extent that final determination may result in amounts which vary from management estimates, future earnings will be charged or credited. (g) Property, Plant and Equipment Land, buildings and improvements, equipment, furniture and fixtures are stated at cost. Depreciation of buildings and improvements is calculated using the straight-line method over their estimated useful lives that range from twenty to forty years. Depreciation of equipment and furniture and fixtures is calculated using the straight-line method over their estimated useful lives that range from five to ten years. Depreciation expense was $10,875, $17,724, and $15,969, respectively for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997. (h) Income Taxes The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. (i) Net Income Per Share The computation of primary earnings per share is based on the weighted average number of outstanding shares during the period and includes, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options. Fully diluted earnings per share additionally assumes the conversion of the Company's Convertible Subordinated Debentures. Net income used in the computation of fully diluted earnings 30 per share was determined on the assumption that the convertible debentures were converted and net income was adjusted for the amounts representing interest and amortization of debt issuance costs, net of tax effect. (j) Stock Split In May 1996, the Company effected a three-for-two stock split in the form of a 50% stock dividend. In 1996, stockholders' equity has been adjusted to give recognition to the stock split by reclassifying from retained earnings to common stock the par value of the additional shares arising from the stock split. All references to average number of shares outstanding, stock options, and per share amounts have been restated to reflect the stock split. (3)Tender Offer and Merger and Acquisitions On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware corporation formed by Genesis Health Ventures, Inc. ("Genesis"), The Cypress Group L.L.C (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates "Nazem"), acquired 99.65% of the shares of common stock of Multicare, pursuant to a tender offer commenced on June 20, 1997 (the "Tender Offer"). On October 10, 1997, Genesis ElderCare Corp. completed the merger (the "Merger") of Acquisition Corp. with and into Multicare in accordance with the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition Corp., Genesis and Multicare. Upon consummation of the Merger, Multicare became a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with the Merger, Multicare and Genesis entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1,992 and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23,900 in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non- extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. Genesis also entered into an asset purchase agreement (the "Therapy Sale Agreement") with Multicare and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000 subject to adjustment (the "Therapy Sale") and a stock purchase agreement (the "Pharmacy Sale Agreement") with Multicare and certain subsidiaries pursuant to which Genesis will acquire all of the outstanding capital stock and limited partnership interest of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000, subject to adjustment (the "Pharmacy Sale"). The Company expects to complete the Pharmacy Sale in the first calendar quarter of 1998. Genesis Eldercare Corp. (the "Multicare Parent") paid approximately $1,492,000 to (i) purchase the Shares pursuant to the Tender Offer and the Merger, (ii) pay fees and expenses to be incurred in connection with the completion of the Tender Offer, Merger and the financing transactions in connection with therewith, (iii) refinance certain indebtedness of Multicare and (iv) make certain cash payments to employees. Of the funds required to finance the foregoing, approximately $745,000 were furnished to Acquisition Corp. as capital contributions by the Multicare Parent from the sale by Genesis ElderCare Corp. of its Common Stock ("Genesis ElderCare Corp. Common Stock") to Cypress, TPG, Nazem and Genesis. Cypress, TPG and Nazem purchased 31 shares of Genesis ElderCare Corp. Common Stock for a purchase price of $210,000, $199,500 and $10,500, respectively, and Genesis purchased shares of Genesis ElderCare Corp. Common Stock for a purchase price of $325,000 in consideration for approximately 44% of the Common Stock of the Multicare Parent. The balance of the funds necessary to finance the foregoing came from (i) the proceeds of loans from a syndicate of lenders in the aggregate amount of $525,000 and (ii) $250,000 from the sale of 9% Senior Subordinated Notes due 2007 (the "9% Notes") sold by Acquisition Corp. on August 11, 1997. In connection with the Merger, Genesis, Cypress, TPG and Nazem entered into an agreement (the "Put/Call Agreement") pursuant to which, among other things, Genesis will have the option, on the terms and conditions set forth in the Put/Call Agreement to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter, at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem will have the option, on the terms and conditions set forth in the Put/Call Agreement, to require Genesis to purchase (the "Put") such Genesis ElderCare Corp. Common Stock commencing on October 9, 2002 and for a period of one year thereafter, at a price determined pursuant to the Put/Call Agreement. The prices determined for the Put and Call are based on a formula that calculates the equity value attributable to Cypress', TPG's and Nazem's Genesis ElderCare Corp. Common Stock, plus a portion of the Genesis pharmacy business (the "Calculated Equity Value"). The Calculated Equity Value will be determined based upon a multiple of Genesis ElderCare Corp.'s earnings before interest, taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR") after deduction of certain liabilities, plus a portion of the EBITDAR related to the Genesis pharmacy business. The multiple to be applied to EBITDAR will depend on whether the Put or the Call is being exercised. Any payment to Cypress, TPG or Nazem under the Call or the Put may be in the form of cash or Genesis common stock at Genesis' option. Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum their original investment plus a 25% compound annual return thereon regardless of the Calculated Equity Value. Any additional Calculated Equity Value attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. Common Stock will be determined on the basis set forth in the Put/Call Agreement which provides generally for additional Calculated Equity Value of Genesis ElderCare Corp. to be divided based upon the proportionate share of the capital contributions of the stockholders to Genesis ElderCare Corp. Upon exercise of the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress, or TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited to Cypress', TPG's, or Nazem's share of the Calculated Equity Value based upon a formula set forth in the terms of the Put/Call Agreement which provides generally for the preferential return of the stockholders' capital contributions (subject to certain priorities), a 25% compound annual return on Cypress', TPG's and Nazem's capital contributions and the remaining Calculated Equity Value to be divided based upon the proportionate share of the capital contributions of the stockholders to Genesis ElderCare Corp. Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon an event of bankruptcy of Genesis, a change of control of Genesis or an extraordinary dividend or distribution or the occurrence of the leverage recapitalization of Genesis. Upon an event of acceleration or the failure by Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and Nazem will have the right to terminate the Stockholders' Agreement and Management Agreement and to control the sale or liquidation of Genesis ElderCare Corp. In the event of such sale, the proceeds from such sale will be distributed among the parties as contemplated by the formula for the Put option exercise price and Cypress, TPG and Nazem will retain a claim against Genesis for the difference, if any, between the proceeds of such sale and the put option exercise price. In December 1996, the Company completed the acquisition of The A.D.S Group (A.D.S). The Company paid approximately $10,000, repaid or assumed approximately $29,800 in debt, financed $51,000 through a lease facility, and issued 554,973 shares of its common stock for A.D.S. Total goodwill approximated $30,700. 32 In February 1996, the Company completed the acquisition of Concord Health Group, Inc. (Concord). The Company acquired the outstanding capital stock and warrants of Concord for approximately $75,000 including transaction costs, repaid approximately $41,000 of debt, and assumed historical debt of approximately $4,000. Total goodwill approximated $61,000. All acquisitions have been accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements reflect the results of operations of each facility from the date of acquisition. The following 1996 unaudited pro forma financial information has been prepared as if the Concord and A.D.S acquisitions had been consummated on January 1, 1996. The 1997 unaudited pro forma information has been prepared as if the Merger and the Pharmacy Sale had been completed on January 1, 1997. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the transactions occurred at the beginning of the respective periods presented and is based on preliminary allocations of the purchase price to property, plant and equipment and goodwill that are subject to change.
December Septemb 31, er 30, 1996 1997 (unaudited) Net revenues $ 599,022 $ 479,885 Income (loss) before extraordinary item 29,095 (10,032) Net income (loss) $ 26,267 (10,905) Total assets 1,720,000 Total debt 771,407 Total equity $ 745,000
(4)Income Taxes The provision for income taxes, exclusive of income taxes related to the extraordinary items, consists of the following:
December 31, September 30, 1995 1996 1997 Federal: Current $ 11,092 $ 13,554 $ 15,029 Deferred (35) 1,275 133 State: Current 2,876 2,695 1,908 Deferred (135) 46 17 $ 13,798 $ 17,570 $ 17,087
The difference between the Company's effective tax rate and the Federal statutory tax rate of 35% is primarily attributable to state taxes. 33 The tax effects of temporary differences giving rise to deferred tax assets and liabilities are as follows:
December September 31, 30, 1996 1997 Deferred tax assets: Accounts receivable $ 1,642 $ 1,311 Employee benefits and 2,191 1,495 compensated absences $ 3,833 $ 2,806 Deferred tax liabilities: Property, plant and equipment $ 42,033 $ 41,254 Other 876 852 $ 42,909 $ 42,106
Cash paid for income taxes was $12,910, $14,555 and $6,580 in the years ended December 1995 and 1996 and the nine month period ended September 30, 1997, respectively. (5)Financing Obligations A summary of long-term debt is as follows:
Bank credit facility, with interest at approximately 7% in 1996 and 1997 $ 276,429 $ 305,129 Convertible debentures, due 2003, with interest at 7%, convertible at $17.33 per share 86,250 59,744 Senior subordinated notes, due 2002, net of unamortized original issue discount of $682 and $524 in 1996 and 1997, respectively, with interest at 12.5% 29,719 23,377 Mortgages and other debt, including unamortized premium of $3,412 and $3,110 in 1996 and 1997, respectively, payable in varying monthly or quarterly installments with interest at rates between 6% and 12%. These loans mature between 1999 and 2033 26,135 26,164 Revenue bonds, rates ranging from 7% to 10%, with maturities between 2004 and 2015, net of unamortized discount of $431 and $391 in 1996 and 1997, respectively 10,635 9,632 429,168 424,046 Less current portion 821 625 $ 428,347 $ 423,421
In October 1997, in connection with the Merger, Multicare entered into three term loans and a revolving credit facility of up to $525 million, in the aggregate (collectively, the "Senior Facilities"), provided by a syndicate of banks and other financial institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as administrative agent (the "Administrative Agent"), pursuant to a certain credit agreement (the "Long Term Credit Agreement") dated as of October 14, 1997. The Senior Facilities are being used for the purpose of (i) refinancing certain short term facilities in the aggregate principal amount of $431.6 million which were funded on October 9, 1997 to acquire the Shares in the Tender Offer, refinance certain indebtedness of Multicare (including the Company's bank credit and lease facilities with NationsBank, N.A., the Company's 7% Convertible Subordinated Debentures, and the Company's 12.5% 34 Senior Subordinated Notes) and pay fees and expenses related to the transactions, (ii) funding interest and principal payments on such facilities and on certain remaining indebtedness and (iii) funding working capital and general corporate purposes. The Senior Facilities consist of: (1) a $200 million six year term loan (the "Tranche A Term Facility"); (2) a $150 million seven year term loan (the "Tranche B Term Facility"); (3) a $50 million term loan maturing on June 1, 2005 (the "Tranche C Term Facility"); (4) a $125 million six year revolving credit facility (the "Revolving Credit Facility"); and (5) one or more Swing Loans (collectively, the "Swing Loan Facility") in integral principal multiples of $500,000 up to an aggregate unpaid principal amount of $10 million. The Tranche A Term Facility, Tranche B Term Facility and Tranche C Term Facility are subject to amortization in quarterly installments, commencing at the end of the first calendar quarter after the date of the consummation of the Merger (the "Closing Date"). The Revolving Credit Facility will mature six years after the Closing Date. All net proceeds received by Multicare from (i) the sale of assets of Multicare or its subsidiaries other than sales in the ordinary course of business (and other than the sales of Multicare's rehabilitation therapy business and pharmacy business to the extent that there are amounts outstanding under the Revolving Credit Facility) and (ii) any sale of common stock or debt securities of Multicare in respect of common stock will be applied as a mandatory prepayment. Fifty percent of Excess Cash Flow must be applied to the Senior Facilities and shall be payable annually. The Senior Facilities are secured by a first priority security interest in all of the (i) stock of Multicare, (ii) stock, partnership interests and other equity of all of Multicare's present and future direct and indirect subsidiaries and (iii) intercompany notes among Parent and any subsidiaries or among any subsidiaries. Loans under the Senior Facilities bear, at Multicare's option, interest at the per annum Prime Rate as announced by the Administrative Agent, or the applicable Adjusted LIBO Rate. Loans under the Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 2.5%; loans under the Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 2.75%; loans under the Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.0%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 2.5%; and loans under the Swing Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the parties. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. The Long Term Credit Agreement contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, prepay debt, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents. In addition, the Long Term Credit Agreement requires that Multicare and its affiliates maintain the Management Agreement as well as comply with certain financial covenants. On August 11, 1997, Acquisition Corp. sold $250 million principal amount of Notes which were issued pursuant to the Indenture. The Notes bear interest at 9% per annum from August 11, 1997, payable semiannually on February 1 and August 1 of each year, commencing on February 1, 1998. 35 The 9% Notes are unsecured, general obligations of the issuer, subordinated in right of payment to all existing and future Senior Indebtedness, as defined in the Indenture, of the issuer, including indebtedness under the Senior Facilities. The 9% Notes rank pari passu in right of payment with any future senior subordinated indebtedness of the issuer and are senior in right of payment to all future subordinated indebtedness of the issuer. The 9% Notes are redeemable at the option of the issuer, in whole or in part, at any time on or after August 1, 2002, initially at 104.5% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after August 1, 2004. The 9% Notes are subject to mandatory redemption at 101%. Upon a Change in Control, as defined in the Indenture, the issuer is required to make an offer to purchase the 9% Notes at a purchase price equal to 101% of their principal amount, plus accrued interest. The Indenture contains a number of covenants that, among other things, restrict the ability of the issuer of the 9% Notes to incur additional indebtedness, pay dividends, redeem capital stock, make certain investments, issue the capital stock of its subsidiaries, engage in mergers or consolidations or asset sales, engage in certain transactions with affiliates, and create dividend and other restrictions affecting its subsidiaries. Upon the consummation of the Merger, Multicare assumed all obligations of Acquisition Corp. with respect to and under the 9% Notes and the related Indenture. In 1997 the Company purchased $6,500 principal amount of its 12.5% Senior Subordinated Notes ("12.5% Notes"), resulting in an extraordinary charge of $873, net of tax of $583, relating to the premiums paid above recorded values and the write-off of debt issuance costs and original issue discounts. In 1995 and 1996 the Company recorded extraordinary charges of $3,722 and $2,827 respectively, net of tax amounts of $2,379 and $1,884, respectively, relating to the restructuring of its credit agreements and the purchase of its 12.5% Notes. The charges are comprised of the write-off of debt issuance costs and original issue discounts, prepayment penalties, and premiums paid above recorded values. In 1996 the Company entered into a $350,000 credit facility and a $60,000 lease facility with NationsBank, N.A., as agent. In March 1995, the Company completed an offshore offering and a concurrent private placement in the United States of $86,250 of its Convertible Debentures due 2003. The Convertible Debentures are convertible at a price of $17.33 per share. The net proceeds approximated $83,300 of which $23,000 was used to repay amounts outstanding under the Company's credit agreement, with the remainder utilized for general corporate purposes. In 1997, $26,506 of Convertible Debentures were converted into common stock. In connection with the early conversion of a portion of the Convertible Debentures, the Company recorded a charge of $785 relating to premiums paid upon conversion. The fair value of the Company's debt, based on quoted market prices or current rates for similar instruments with the same maturities was approximately $432,398 and $462,393 at December 31, 1996 and September 30, 1997, respectively. The Company is subject to various financial and restrictive covenants under its credit facility and other indebtedness and is in compliance with such covenants at September 30, 1997. The Company is in compliance with covenants on its Senior Facilities and 9% Notes. 36 The aggregate maturities of long-term debt for the five years ending September 30, 2002 and thereafter as adjusted for the borrowings and repayments in connection with the Merger are as follows: 1998 $ 20,220 1999 30,647 2000 34,699 2001 38,743 2002 42,811 Thereafter 601,824 768,944 Discount (1,345) Premium 3,808 $ 771,407
Interest expense of $1,605, $2,773 and $1,816 was capitalized in the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997, respectively, in connection with new construction and facility renovations and expansions. Cash paid for interest was $17,704, $25,762 and $22,817 in the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997, respectively. (6)Accrued Liabilities At December 31, 1996 and September 30, 1997 accrued liabilities consist of the following:
1996 1997 Salaries and wages $ 19,469 $ 26,291 Deposits from patients 3,386 3,106 Interest 4,742 3,705 Insurance 7,079 10,456 Other 20,031 21,386 $ 54,707 $ 64,944
(7) Commitments and Contingencies The Company has operating leases on certain of its facilities and offices. Three of such leases are with entities that are owned wholly or in part by certain stockholders of the Company. Minimum rental commitments under all noncancelable leases at September 30, 1997 as adjusted for refinancing its lease facility in connection with the Merger are as follows: 1998 $ 13,505 1999 13,233 2000 12,827 2001 12,758 2002 12,688 Thereafter 60,966 $ 125,977
37 (7)Commitments and Contingencies, Continued. Letters of credit ensure the Company's performance or payment to third parties in accordance with specified terms and conditions. At September 30, 1997, letters of credit outstanding amounted to $1,750. The Company has guaranteed $13,100 of indebtedness to others. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for guarantees, loan commitments and letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments. The Company does not anticipate any material losses as a result of these commitments. In February 1998 ElderTrust ("ETT"), a Maryland real estate investment trust sponsored by Genesis, made term loans to subsidiaries of the Company with respect to the lease-up of two assisted living facilities. The loans have a fixed annual rate of interest of 10.5% and mature three years from the date of the loans, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" (as defined) as of the third anniversary of the loan (or at the end of any extension period, if applicable). In February 1998 ETT also made one construction loan to a subsidiary of the Company to fund construction of an assisted living facility being developed by the Company. The note bears interest at a fixed annual rate of 10.5%, and will mature on the third anniversary of the loan, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" as of such third anniversary (or at the end of any extension period, if applicable). ETT is obligated to purchase and leaseback the three facilities that secure the term and construction loans being made to the Company, upon the earlier of the facility reaching stabilized occupancy or the maturity of the loan secured by the facility provided, however, that the Company will not be obligated to sell any facility if the purchase price for the facility would be less than the applicable loan amount. The purchase agreements provide for a cash purchase price in an amount which will result in an annual yield of 10.5% to ETT. If acquired by ETT, these facilities would be leased to the Company under minimum rent leases. The initial term of any minimum rent lease will be ten years, and the Company will have the option to extend the term for up to two five-year extension periods upon 12 months notice to ETT. Minimum rent for the first lease year under any minimum rent lease will be established by multiplying the purchase price for the applicable facility times 10.5%, and the increase each year by an amount equal to the lesser of (i) 5% of the increase in the gross revenues for such facility (excluding any revenues derived from ancillary healthcare services provided by Genesis or its affiliates to residents of the applicable facility) during the immediately preceding year or (ii) one-half of the increase in the Consumer Price Index during the immediately preceding year. During the last four years of the term (as extended, if applicable), the Company is required to make minimum capital expenditures equal to $3 per residential unit in each assisted living facility covered by a minimum rent lease. Included in the accompanying consolidated financial statements are management fees and interest income from related parties of $1,689, $123 and $92 for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997, respectively. There are numerous legislative and executive initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services, including without limitation, discussions at the federal level concerning budget reductions and the implementation of prospective payment systems for the Medicare and Medicaid programs. The Company is unable to predict the impact of healthcare reform proposals on the Company; however, it is possible that such proposals could have a material adverse effect on the Company. Any changes in reimbursement levels under Medicaid and Medicare and any changes in applicable government regulations could significantly affect the profitability of the Company. Various cost 38 (7)Commitments and Contingencies, Continued. containment measures adopted by governmental pay sources have begun to limit the scope and amount of reimbursable healthcare expenses. Additional measures, including measures that have already been proposed in states in which the Company operates, may be adopted in the future as federal and state governments attempt to control escalating healthcare costs. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. In particular, changes to the Medicare reimbursement program that have been proposed could materially adversely affect the Company's revenues derived from ancillary services. The healthcare industry is labor intensive. Wages and other labor related costs are especially sensitive to inflation. In addition, suppliers pass along rising costs to the Company in the form of higher prices. When faced with increases in operating costs, the Company has increased its charges for services. The Company's operations could be adversely affected if it is unable to recover future cost increases or experiences significant delays in increasing rates of reimbursement of its labor and other costs from Medicaid and Medicare revenue sources. The Company is from time to time subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of pending legal proceedings will not have a material effect on the Company's consolidated financial statements. (8)Capital Stock and Stock Plans In May 1996, the Company increased the number of authorized shares of preferred and common stock for the purpose of effecting a three-for-two stock split in the form of a 50% stock dividend. In October 1996, the Company completed a public offering of 3,000,000 shares of its common stock, resulting in net proceeds of $52,000. The proceeds from the offering were used to repay a portion of outstanding bank indebtedness under the Company's credit agreement which was incurred to finance certain of the Company's acquisitions. The Company's 1993 Stock Option Plan and Non-Employee Director Stock Option Plan (Plans) provided for the issuance of options to directors, officers, key employees and consultants of the Company. The aggregate number of shares authorized for issuance under the Plans was 5,390,000. Options were issued at market value on the date of the grant, vested ratably over maximum periods of five years, and expired ten years from the date of the grant. In connection with the Merger, the unexercisable portion of each outstanding stock option became immediately exercisable in full and was canceled in exchange for the right to receive an amount in cash equal to the product of (i) the number of shares previously subject to such option and (ii) the excess, if any, of the tender offer price of $28.00 per share over the exercise price per share previously subject to such options. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", and applies APB Opinion No. 25 in accounting for its Plans and, accordingly, has not recognized compensation cost for stock option plans and stock purchase plans in its consolidated financial statements. Had the Company determined compensation cost based on the 39 (8)Capital Stock and Stock Plans, Continued. fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below:
December 31, September 30, 1995 1996 1997 Net income--as reported $ 18,425 $ 25,910 $ 27,878 Net income--pro forma 17,530 24,181 24,628 Net income per share--as reported - fully diluted .69 .90 .82 Net income per share--pro forma - fully diluted .66 .85 .73
The fair value of the stock options granted in 1995, 1996 and 1997 is estimated at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
December 31, September 1995 and 30, 1996 1997 Dividend yield 0% 0% Expected volatility 38.4% 36.8% Risk-free interest rate 6.5% 5.5% Expected life 9.9 years 9.8 years
Presented below is a summary of the stock option plans for the years ended December 31, 1995, 1996 and the nine month period ended September 30, 1997:
1995 1996 1997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options outstanding at beginning of year 1,772,778 $10.74 2,441,364 $11.46 3,167,237 $13.03 Granted 750,828 13.10 828,746 17.60 664,500 18.37 Exercised (27,969) 8.73 (24,789) 11.05 (22,562) 12.65 Forfeited/expired (54,273) 12.15 (78,084) 13.10 (127,989) 13.64 Options outstanding at end of year 2,441,364 $11.46 3,167,237 $13.03 3,681,186 $13.97 Weighted-average grant-date fair value of options granted $ 8.23 $11.06 $10.77
The following table summarizes information for stock options outstanding at September 30, 1997:
Weighte d Weighted Weighted Number Avg. Avg. Avg. Range of Exercise Outstand Contractual Exercise Number Exercise Prices ing Life Price Exercisable Price $6.67-$10.83 257,251 6.0 $ 7.77 228,000 $ 7.81 $11.17-$14.67 2,020,372 6.8 11.96 1,290,429 11.87 $16.00-$22.25 1,403,563 9.0 18.00 162,424 17.16 3,681,186 7.6 $ 13.97 1,680,853 $ 11.83
40 The Company's Employee Stock Purchase Plan (ESPP) was adopted by the Company's Board of Directors in 1995 and approved by shareholders in 1996. The ESPP permitted employees of the Company to purchase the Company's common stock at a price equal to the lesser of 85% of the fair market value of the common stock on the first or last day of each quarter. There were 1,200,000 shares authorized for issuance under the ESPP. In 1996, the Company adopted the Directors Retainer and Meeting Fee Plan (Directors Plan) under which a director who is not an employee of the Company may elect to receive payment of all or any portion of his or her annual cash retainer and meeting fees either in cash or shares of the Company's common stock. The number of shares payable is determined by the fair market value of a share on the date payment is due. The aggregate number of shares authorized for issuance under the Directors Plan was 75,000. In connection with the Merger, the ESPP and Directors Plan were terminated. (9) Quarterly Results of Operations (Unaudited)
Year ended December 31, 1996(2) First Second Third Fourth Quarter(1) Quarter Quarter Quarter(1) Net revenues $ 120,057 $ 131,889 $ 134,944 $ 145,340 Income before extraordinary item 6,197 6,780 7,418 8,342 Net income 4,716 6,780 7,418 6,996 Income per common share assuming full dilution: Income before extraordinary item .23 .24 .26 .27 Net income $ .18 $ .24 $ .26 $ .23
Nine month period ended September 30, 1997 First Second Third Quarter(1) Quarter Quarter Net revenues $ 168,792 $ 179,164 $ 185,996 Income before extraordinary item 8,760 10,181 9,810 Net income 7,887 10,181 9,810 Income per common share assuming full dilution: Income before extraordinary item .27 .30 .28 Net income $ .24 $ .30 $ .28
(1) The Company incurred extraordinary charges related to extinguishment of debt. (2) Income per share has been adjusted for a 50% stock dividend in May 1996. 41 Item 10. Directors and Executive Officers of the Company. The following table sets forth certain information regarding each of the directors and executive officers of the Company. Each was elected in connection with the Merger: Name Age Position Michael R. Walker 49 Chairman, Chief Executive Officer and Director George V. Hager, Jr. 41 Senior Vice President, Chief Financial Officer and Director James L. Singleton 42 Vice President, Assistant Secretary and Director James G. Coulter 37 Vice President, Assistant Secretary and Director Jonathan J. Coslet 33 Director Richard R. Howard 48 Director Karl I. Peterson 27 Director William L. Spiegel 35 Director James A. Stern 47 Director
Michael R. Walker is the Chairman of the Board, Chief Executive Officer and a director of the Company. Mr. Walker is the founder of Genesis and has served as Chairman and Chief Executive Officer of Genesis since its inception in 1985. In 1981, Mr. Walker co-founded Health Group Care Centers ("HGCC"). At HGCC, he served as Chief Financial Officer and, later, as President and Chief Operating Officer. Prior to its sale in 1985, HGCC operated eldercare facilities with 4,500 nursing beds in 12 states. From 1978 to 1981, Mr. Walker was the Vice President and Treasurer of AID Healthcare Centers, Inc. ("AID"). AID, which owned and operated 20 nursing centers, was co-founded in 1977 by Mr. Walker as the nursing home division of Hospital Affiliates International. Mr. Walker holds a Master of Business Administration degree from Temple University and a Bachelor of Arts in Business Administration from Franklin and Marshall College. Mr. Walker serves on the Board of Directors of Renal Treatment Centers, Inc. and on the Board of Trustees of Universal Health Realty & Income Trust. George V. Hager, Jr. is the Senior Vice President, Chief Financial Officer and a director of the Company. Mr. Hager has served as the Senior Vice President and Chief Financial Officer of Genesis since February 1994. Mr. Hager joined Genesis in July 1992 as Vice President and Chief Financial Officer. Prior thereto, Mr. Hager was the partner in charge of the healthcare practice for KPMG Peat Marwick LLP in the Philadelphia office. Mr. Hager began his career at KPMG Peat Marwick LLP in 1979 and has over 15 years of experience in the healthcare industry. Mr. Hager received a Bachelor of Arts degree in Economics from Dickinson College in 1978 and a Master of Business Administration degree from Rutgers Graduate School of Management. He is a certified public accountant and a member of the American Institute of Certified Public Accountants and Pennsylvania Institute of Certified Public Accountants. James L. Singleton is a Vice President, Assistant Secretary and a director of the Company. Mr. Singleton has been a Vice Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, he was a Managing Director in the Merchant Banking Group of Lehman Brothers Inc. Mr. Singleton holds a Master of Business Administration degree from the University of Chicago Graduate School of Business and a Bachelor of Arts degree from Yale University. Mr. Singleton serves on the Board of Directors of Able Body Corporation, Cinemark USA, Inc., L.P. Thebault Company and Williams Scotsman, Inc. James G. Coulter is a Vice President, Assistant Secretary and a director of the Company. Mr. Coulter was a founding partner of TPG in 1992. Prior to forming TPG, Mr. Coulter was a Vice President of Keystone, Inc., the personal investment vehicle of Fort Worth, Texas-based investor, Robert M. Bass. Mr. Coulter holds a Master of Business Administration degree from Stanford University and a Bachelor of Arts degree from Dartmouth College. Mr. Coulter is Co-Chairman of the Board of Beringer Wine Estates. He also serves on the Board of Directors of America West Airlines, Inc., Virgin Cinemas Limited, Paradyne Partners, L.P. and Del Monte Corp. Mr. Coulter is also an officer of the general partner of Colony Investors and Newbridge Investment Partners. 42 Jonathan J. Coslet is a director of the Company. Mr. Coslet has been a partner of TPG since 1993. Prior to joining TPG, Mr. Coslet was in the Investment Banking Department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high-yield finance. Mr. Coslet holds a Master of Business Administration degree from Harvard Business School, where he was a Baker Scholar and a Loeb Fellow, and a Bachelor of Science degree in Economics from the University of Pennsylvania Wharton School. Mr. Coslet serves on the Board of Directors of PPOM, L.P. Richard R. Howard is a director of the Company. Mr. Howard has served as a director of Genesis since its inception and as Chief Operating Officer since June 1986. Mr. Howard joined Genesis in September 1985 as Vice President of Development. Mr. Howard's background in healthcare includes two years as the Chief Financial Officer of HGCC. Mr. Howard's experience also includes over ten years with Fidelity Bank, Philadelphia, Pennsylvania and one year with Equibank, Pittsburgh, Pennsylvania. Mr. Howard is a graduate of the University of Pennsylvania Wharton School, where he received a Bachelor of Science degree in Economics in 1971. Karl I. Peterson is a director of the Company. Mr. Peterson has served as Vice President of TPG since 1995. Prior to joining TPG, Mr. Peterson was in the Mergers and Acquisitions Department and the Leveraged Buyout Group of Goldman, Sachs & Co. Mr. Peterson holds a Bachelor of Business Administration degree in Finance from the University of Notre Dame. William L. Spiegel is a director of the Company. Mr. Spiegel has been a Principal of Cypress since its formation in April 1994. Prior to joining Cypress, Mr. Spiegel was with Lehman Brothers Inc. where he worked in the Merchant Banking Group. Mr. Spiegel holds a Master of Business Administration degree from the University of Chicago Graduate School of Business, a Master of Arts degree in Economics from the University of Western Ontario and a Bachelor of Science degree in Economics from The London School of Economics. James A. Stern is a director of the Company. Mr. Stern has been Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, Mr. Stern spent his entire career with Lehman Brothers Inc., most recently as head of the Merchant Banking Group. He served as head of Lehman's High Yield and Primary Capital Markets Groups, and was co-head of Investment Banking. In addition, Mr. Stern was a member of Lehman's Operating Committee. Mr. Stern holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science degree from Tufts University where he is a trustee. Mr. Stern is a director of Amtrol Inc., Cinemark USA, Inc., Lear Corporation, Noel Group, Inc. and R.P. Scherer Corporation. 43 Item 11. Executive Compensation. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS (1) Number of Securities ANNUAL COMPENSATION Underlying All (2) Other Name and Principal Year Salary Bonus Options Compensation Position Moshael J. Straus(3) (4)1997 $ 450,000 $ 562,500 110,000 $ 133,315(5) Chairman of the Board 1996 600,000 750,000 93,750 100,808(5) of Directors 1995 600,000 600,000 170,900 149,433(5) and Co-Chief Executive Officer Daniel E. Straus(3) (4)1997 450,000 562,500 110,000 100,531(5) President, Co-Chief 1996 600,000 750,000 93,750 133,171(5) Executive Officer 1995 600,000 600,000 170,900 174,396(5) and Director Stephen R. Baker(3) (4)1997 225,000 133,605 60,000 --- Executive Vice 1996 300,000 178,125 23,438 --- President, Chief 1995 250,000 125,000 42,162 --- Operating Officer and Director Susan S. Bailis(6) (4)1997 186,154 93,750 --- --- Senior Vice President, 1996 8,111 8,111 97,500 --- ADS/Multicare 1995 --- --- --- --- Mark R. Nesselroad(7) (4)1997 150,000 75,000 25,000 --- Senior Vice President, 1996 164,000 55,070 4,500 --- Acquisitions 1995 12,500 --- 22,500 --- Construction & Development Keith F. Helmer(8) (4)1997 168,974 52,500 10,000 --- Vice President, 1996 --- --- --- --- Operations 1995 --- --- --- ---
(1) The Company did not grant any long term incentive plan payouts ("LTIPs") to any of the executive officer named in this table nor does the Company maintain any LTIPs. Excludes perquisites and other personal benefits, securities or property, the aggregate amount of which received by any named person did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus for such officer as well as certain incidental personal benefits to executive officers of the Company resulting from expenses incurred by the Company in interacting with the financial community and identifying potential acquisition targets. (2) Options adjusted for three-for-two stock split in May 1996. (3) Executive officers terminated on October 10, 1997 in connection with Merger. (4) Represents amounts earned from January 1, 1997 through September 30, 1997. (5) Amounts paid in connection with obtaining term life insurance to fund a stock purchase right from the other Co-Chief Executive Officer in connection with an agreement among the Company and each of the Co-Chief Executive Officers. (6) Ms. Bailis joined the Company in December 1996. (7) Mr. Nesselroad joined the Company in December 1995. (8) Mr. Helmer joined the Company in January 1997. Stock Option Grants The following table sets forth as to each of the individuals named in the Summary Compensation Table the following information with respect to stock option grants during the period from January 1, 1997 through September 30, 1997 ("Fiscal 1997") and the potential realizable value of such option grants: (i) the number of shares of Common Stock underlying options granted during Fiscal 1997, (ii) the percentage that such options represent of all options granted to employees during Fiscal 1997, (iii) the exercise price, (iv) the expiration date and (v) grant date present value. 43 OPTION(1) GRANTS DURING FISCAL 1997 AND ASSUMED POTENTIAL REALIZABLE VALUE
Number of % of Underlying Total Grant Date Options Grated Exercise Expiration Present Name Granted in 1997 Price Date Value Moshael J. Straus 110,000 18% $ 19.50 2/4/2007 $ 935,000 Daniel E. Straus 110,000 18% 19.50 2/4/2007 935,000 Stephen R. Baker 60,000 10% 19.50 2/4/2007 510,000 Mark R. Nesselroad 25,000 4% 19.50 2/4/2007 212,500 Keith F. Helmer 10,000 2% 19.50 1/31/2007 85,000
(1) There were no SARs granted in 1997. (2) The Company calculated the grant date present value at the Tender Offer price of $28.00 per share. (3) Options vest at a rate of 33 1/3% per year over a three year period and expire ten years from the date of grant. Ten Year Option Repricings The following table sets forth the information noted for all repricings of all options held by any executive officer of the Company in the Company's last 10 complete fiscal years. OPTION REPRICING TABLE (1)
Length Securities Market of Original Underlying Price of Exercise Option Term Options Stock at Price at New Remaining Repriced Time of Time of Exercise at Date of Name Date or Amended Pricing Repricing Price Repricing Stephen R. August 17, Baker 1993(2) 90,000 $ 7.33(3) $ 7.39 $ 6.67 9 years 7 months
(1) Options and per share amounts adjusted for three-for two stock split in May 1996. (2) Stephen R. Baker was originally granted options to purchase 90,000 shares of Common Stock on April 1, 1993 at an exercise price of $7.39 per share. Subsequently, coinciding with the Company's 1993 initial public offering of its Common Stock at $6.67 per share, Mr. Baker's options were amended such that the exercise price would equal that of the Company's 1993 initial public offering price. (3) This represents the closing price of the Common Stock on August 19, 1993 which was the first day the Common Stock was traded on The Nasdaq Stock Market. Prior to August 19, 1993, there was no public market for the Common Stock Stock Option Values The following table sets forth the number and aggregate dollar value of unexercised options held at September 30, 1997 by the individuals named in the Summary Compensation Table. None of the named individuals exercised any options prior to September 30, 1997. 44 AGGREGATE OPTION VALUES
Value of Unexercised Number of Unexercised in the Money Options Options at September at September 30, 30, 1997(2) 1997(1)(2) Name Exercisable Unexercisable Exercisable Unexercisable Moshael J. Straus 516,847 457,467 $ 8,283,319 $ 6,433,820 Daniel E. Straus 516,847 457,467 8,283,319 6,433,820 Stephen R. Baker 134,786 107,681 2,502,470 1,366,879 Susan S. Bailis --- 97,500 --- 877,500 Mark R. Nesselroad 9,000 43,000 117,975 479,700 Keith F. Helmer --- 10,000 --- 85,000
(1) The value of unexercisable in the money options was determined by using the Tender Offer price of $28.00 per share. (2) In connection with the Tender Offer options for all employees were accelerated and fully vested on the Tender Offer date. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information regarding the beneficial ownership of the common stock on February 12, 1998, with respect to (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding Common Stock; (ii) each person who is currently a director or nominee to be a director of the Company; (iii) all current directors and executive officers of the Company as a group; and (iv) those persons named in the Summary Compensation Table. To the best of the Company's knowledge, except as otherwise noted, the holder listed below has sole voting power and investment power over the Common Stock owned beneficially own. Name of Beneficial Owner(1)(2) Number of Percent of Shares Class Genesis ElderCare Corp. 100 100% (1) None of the current directors or executive officers of the Company beneficially own stock of the Company. (2) None of the persons named in the Summary Compensation beneficially own stock of the Company. Item 13. Certain Relationships and Related Transactions. In connection with the Merger, Multicare and Genesis entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages the Company's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1,991,666 and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23,900,000 in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non- extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. Genesis also entered into an asset purchase agreement (the "Therapy Sale Agreement") with Multicare and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 subject to adjustment and a stock purchase agreement (the "Pharmacy Sale Agreement") with Multicare and certain subsidiaries pursuant to which Genesis will acquire all of the outstanding capital stock and limited partnership interest of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Sale"), subject to adjustment. The Company expects to complete the Pharmacy Sale in the first calendar quarter of 1998. In connection with the Merger, Genesis acquired from certain former stockholders of the Company the land and buildings of an eldercare facility located in New London, Connecticut, for a purchase price of $8.4 million. The Company's operating subsidiary that leases the facility pays annual rent to Genesis of $725,000. 45 Genesis has sponsored the formation of ElderTrust ("ETT"), a Maryland real estate investment trust. Michael R. Walker, Chairman and Chief Executive Officer of the Company and Genesis is Chairman of ETT. In February 1998 ETT made term loans to the Company with respect to the lease-up of two assisted living facilities. The loans have a fixed annual rate of interest of 10.5% and mature three years from the date of the loans, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" (as defined) as of the third anniversary of the loan (or at the end of any extension period, if applicable). The Company guaranteed 20% of the principal amount of these term loans. In February 1998 ElderTrust ("ETT") made term loans to subsidiaries of the Company with respect to the lease up of two assisted living facilities. The loans have a fixed annual rate of interest of 10.5% and mature three years from the date of the loans, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" (as defined) as of the third anniversary of the loan (or at the end of any extension period, if applicable). In February 1998 ETT also made one construction loan to a subsidiary of the Company to fund construction of an assisted living facility being developed by the Company. The note bears interest at a fixed annual rate of 10.5%, and will mature on the third anniversary of the loan, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" as of such third anniversary (or at the end of any extension period, if applicable). ETT is obligated to purchase and leaseback the three facilities that secure the term and construction loans being made to the Company, upon the earlier of the facility reaching stabilized occupancy or the maturity of the loan secured by the facility provided, however, that the Company will not be obligated to sell any facility if the purchase price for the facility would be less than the applicable loan amount. The purchase agreements provide for a cash purchase price in an amount which will result in an annual yield of 10.5% to ETT. If acquired by ETT, these facilities would be leased to the Company under minimum rent leases. The initial term of any minimum rent lease will be ten years, and the Company will have the option to extend the term for up to two five-year extension periods upon 12 months notice to ETT. Minimum rent for the first lease year under any minimum rent lease will be established by multiplying the purchase price for the applicable facility times 10.5%, and the increase each year by an amount equal to the lesser of (i) 5% of the increase in the gross revenues for such facility (excluding any revenues derived from ancillary healthcare services provided by Genesis or its affiliates to residents of the applicable facility) during the immediately preceding year or (ii) one-half of the increase in the Consumer Price Index during the immediately preceding year. During the last four years of the term (as extended, if applicable), the Company is required to make minimum capital expenditures equal to $3,000 per residential unit in each assisted living facility covered by a minimum rent lease. Employment Agreements In January 1995, the Company entered into an employment agreement with each of Moshael J. Straus and Daniel E. Straus. Each agreement provides for an initial term of five years, which will extend automatically at the end of the initial five year term for additional one year periods unless, not less than 180 days prior to the end of the initial term or any such additional term, notice of non-extension is given by either the Company or the respective Co- Chief Executive Officer. Each employment agreement provides for an annual base salary at an initial rate of $600,000, which may be increased at the discretion of the Board of Directors, and a bonus, to be determined pursuant to the Company's Key Employee Incentive Compensation Plan ("KEICP"), ranging from 70%-150% of base salary, based upon goals and targets set forth in a business plan negotiated with the Compensation Committee. Each of these employment agreements provides that if the Company terminates the Co-Chief Executive Officer without Cause (as defined) or fails to renew his employment agreement, or if such Co-Chief Executive Officer terminates his employment agreement for Good Reason (as defined) or upon Change of Control (as defined) then (1) the Company will be obliged to pay the respective Co-Chief Executive Officer the greater of (x) any remaining salary payable during the term or (y) an amount equal to two times the annual salary for the then current employment year (or, with respect to Change of Control, three times annual salary plus an amount equal to the highest bonus received during the prior three years); (2) all stock options, stock awards and similar 46 equity rights will immediately vest and become exercisable; and (3) the Company must maintain in effect the Co-Chief Executive Officer's other benefits for a period equal to the greater of the remainder of the term or two years. Each of the Co-Chief Executive Officers is also entitled (i) to life insurance benefits in an amount equal to five times his then current salary (to a maximum of $5 million); (ii) life insurance benefits in an amount not exceeding $50 million in connection with a buy-sell arrangement between the Co-Chief Executive Officers; and (iii) disability insurance in an amount equal to 66.67% of his then current salary. In January 1995, the Company entered into an employment agreement with Stephen R. Baker. The agreement provides for an initial term of three years which will be renewed automatically at the end of the initial three year term for additional one-year periods unless, not less than 180 days prior to the end of the initial term or any such additional term, notice of non-renewal is given either by the Company or the employee. The agreement provides for an annual base salary at an initial rate of $250,000 which may be reviewed annually by the Board of Directors, and a bonus to be determined pursuant to the Company's KEICP, ranging from 30%-75% of base salary, based upon goals and targets set forth in a business plan prepared by the Co-Chief Executive Officers. The agreement provides that if the Company terminates the employee without Cause (as defined) or fails to renew his employment agreement, or if the employee terminates his employment agreement for Good Reason (as defined) or upon Change of Control (as defined) then (1) the Company will be obliged to pay him the greater of (x) any remaining salary payable during the term or (y) an amount equal to two times the annual salary for the then current employment year (or, with respect to Change of Control, three times annual salary plus an amount equal to the highest bonus received during the prior three years); (2) all stock options, stock awards and similar equity rights will immediately vest and become exercisable; and (3) the Company must maintain in effect the employee's other benefits for a period equal to the longer of the remainder of the term or two years. Mr. Baker is also entitled to life insurance benefits in an amount equal to four times his then current salary (to a maximum of $2 million) and disability insurance in an amount equal to 66.67% of his salary. In December 1996, in connection with the Company's acquisition of The ADS Group the Company entered into an employment agreement with Susan Bailis. The agreement provides for an initial term of three years which will be renewed automatically at the end of the initial three year term for additional one- year periods unless, not less than 180 days prior to the end of the initial term or any such additional term, notice of non-renewal is given either by the Company or the employee. The agreement provides for an annual base salary at an initial rate of $200,000 which may be reviewed by the Board of Directors, and a bonus, to be determined pursuant to the Company's KEICP. The agreement provides that if the Company terminates the employee without Cause (as defined) or fails to renew his employment agreement, or if the employee terminates her employment agreement for Good Reason (as defined) or upon Change of Control (as defined) then (1) the Company will be obliged to pay her the greater of (x) any remaining salary payable during the term or (y) an amount equal to the annual salary for the then current employment year (or, with respect to Change of Control, three times annual salary plus an amount equal to the highest bonus received during the prior three years); (2) all stock options, stock awards and similar equity rights will immediately vest and become exercisable; and (3) the Company must maintain in effect the employee's other benefits for a period equal to the longer of the remainder of the term or two years. Ms. Bailis is also entitled to disability insurance in an amount of 66.67% of her salary. In December 1995, in connection with the Company's acquisition of Glenmark Associates, Inc. the Company entered into a three year employment agreement with Mark R. Nesselroad. The agreement provides for an annual base salary at an initial rate of $150,000 and a bonus to be determined pursuant to the Company's KEICP under which Mr. Nesselroad may earn a maximum annual bonus equal to 35% of base salary. 47 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a.) 1)Financial Statements Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997 Notes to Consolidated Financial Statements 2)Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 3)Exhibits Exhibit No. Description (1)2 Reorganization and Subscription Agreement, dated as of August 21, 1992, among The Multicare Companies, Inc., Daniel E. Straus, Moshael J. Straus, Adina S. Rubin and Bethia S. Quintas (2)3.1 Restated Certificate of Incorporation of The Multicare Companies, Inc. 3.2 Certificate of Amendment of Restated Certificate of Incorporation of The Multicare Companies, Inc. (2)3.3 By-laws of The Multicare Companies, Inc. (1)4.1 Indenture for Senior Subordinated Notes (5)4.2 Fiscal Agency Agreement for Subordinated Convertible Debentures (1)10.1 Lease, dated July 29, 1986, between Jackson Health Care Associates and Health Resources of Jackson, Inc. (2)10.2 Amended and Restated Amendment of Lease, dated as of November 18, 1992 between Straus Associates and Health Resources of Colchester, Inc. (2)10.3 Amended and Restated 1993 Stock Option Plan (3)10.4 Amendments dated March 15 and April 4, 1994 to the Amended and Restated 1993 Stock Option Plan (3)10.5 Non-Employee Directors' Stock Option Plan (4)10.6 First Amendment Agreement dated as of October 19, 1995 among The Multicare Companies, Inc., Subsidiary Co-Borrowers, Subsidiary Guarantors, and The Chase Manhattan Bank, N.A. (5)10.7 The Multicare Companies, Inc. Employee Stock Purchase Plan (5)10.8 The Multicare Companies, Inc. Directors Retainer and Meeting Fee Plan (5)10.9 The Multicare Companies, Inc. Key Employee Incentive Compensation Plan (5)10.10 Amended and Restated Credit Agreement dated as of March 31, 1995 among The Multicare Companies, Inc., Subsidiary Co-Borrowers, Subsidiary Guarantors and The Chase Manhattan Bank, N.A. (5)10.11 Loan Agreement dated October 13, 1992 between Meditrust Mortgage Investments, Inc. and various Glenmark entities (5)10.12 First Amendment to Loan Agreement dated as of November 30, 1995 48 (5)10.13 Intercreditor Agreement dated December 1, 1995 between The Chase Manhattan Bank, N.A. , Meditrust Mortgage Investments, Inc. and Meditrust of West Virginia, Inc. (5)10.14 Second Amendment to Loan Agreement entered into effective as of November 30, 1995 (5)10.15 Agreement and Plan of Merger Among HRWV, Inc., Glenmark Associates, Inc., Glenmark Holding Company Limited Partnership, Mark R. Nesselroad and Glenn T. Adrian (5)10.16 Facility Lease Agreement dated as of November 30, 1995 between Meditrust of West Virginia, Inc. and Glenmark Limited Liability Company (5)10.17 Second Amendment Agreement dated as of February 22, 1996 among The Multicare Companies, Inc. Subsidiary Co-Borrowers, Subsidiary Guarantors, the Banks Signatory hereto, and The Chase Manhattan Bank, N.A., as Agent (6)10.18 Agreement and Plan of Merger, dated as of January 15, 1996, among The Multicare Companies, Inc., CHG Acquisition Corp., and Concord Health Group, Inc. (7)10.19 Second Amended and Restated Credit Agreement, dated as of May 22, 1996, among The Multicare Companies, Inc., the Subsidiary Co- Borrowers, the Subsidiary Guarantors, the Banks Signatory thereto and The Chase Manhattan Bank, N.A., as Agent (7)10.20 Acquisition Agreement, dated as of June 17, 1996, by and among A.D.S/Multicare, Inc. and Alan D. Solomont, David Solomont, Ahron M. Solomont, Jay H. Solomont, David Solomont, Susan S. Bailis and the Seller Entities signatory thereto (the "A.D.S Acquisition Agreement") (7)10.21 Amendment No. 1, dated August 12, 1996, to the A.D.S Acquisition Agreement. (8)10.22 Amendment No. 2, dated as of September 25, 1996 to the A.D.S Acquisition Agreement. (8)10.23 Amendment No. 3, dated as of October 29, 1996 to the A.D.S Acquisition Agreement. (8)10.24 Amendment No. 4, dated as of December 11, 1996 to the A.D.S Acquisition Agreement. (8)10.25 Third Amended and Restated Credit Agreement dated as of December 11, 1996 among The Multicare Companies, Inc. and certain of its Subsidiaries, and NationsBank, N.A. as Administrative Agent. (8)10.26 Master Lease, Open End Mortgage and Purchase Option dated as of December 11, 1996 among Academy Nursing Home, Inc., Nursing and Retirement Center of the Andovers, Inc., Prescott Nursing Home, Inc., Willow Manor Nursing Home, Inc., and A.D.S/Multicare, Inc. (8)10.27 Appendix A to Participation Agreement, Master Lease, Supplements, Loan Agreement, and Lease Facility Mortgages. (8)10.28 Participation Agreement, dated as of December 11, 1996 among The Multicare Companies, Inc., as Guarantor, Various Subsidiaries of The Multicare Companies, Inc. as Lessees, Selco Service Corporation, as Lessor, Various Financial Institutions as Tranche B Lenders, Nationsbank, N.A., as Lease Agent for the Lenders, and Nationsbank, N.A., as Collateral Agent for the Secured Parties. (9)10.29 The Multicare Companies, Inc. Non-qualified Stock Purchase Plan 49 (9)10.30 Employment Agreement, dated as of January 1, 1995, between The Multicare Companies, Inc. and Daniel E. Straus (9)10.31 Employment Agreement, dated as of January 1, 1995, between The Multicare Companies, Inc. and Moshael J. Straus (9)10.32 Employment Agreement, dated as of January 1, 1995, between The Multicare Companies, Inc. and Stephen R. Baker (9)10.33 Employment Agreement, dated as of January 1, 1995, between The Multicare Companies, Inc. and Paul J. Klausner (9)10.34 Employment Agreement, dated as of January 1, 1995, between Care 4, L.P., and Andrew Horowitz (9)10.35 Employment Agreement, dated as of December 1, 1995, between Glenmark Associates, Inc. and Mark R. Nesselroad (9)10.36 Amendment, dated July 19, 1996, to Agreement and Plan of Merger among HRWV, Inc., Glenmark Associates, Inc., Glenmark Holding Company Limited Partnership, Mark R. Nesselroad and Glenn T. Adrian (10)10.37 Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis ElderCare Acquisition Corp., Genesis Health Ventures, Inc. and The Multicare Companies, Inc. (11)10.38 Third Amended and Restated Credit Agreement dated October 9, 1997 to Genesis Health Ventures, Inc. from Mellon Bank, N.A., Citicorp USA, Inc., First Union National Bank and NationsBank, N.A. (12)10.39 Credit Agreement dated October 14, 1997 to The Multicare Companies, Inc. from Mellon Bank, N.A., Citicorp USA, Inc., First Union National Bank and NationsBank, N.A. (12)10.40 Management Agreement dated October 9, 1997 among The Multicare Companies, Inc., Genesis Health Ventures, Inc. and Genesis ElderCare Network Services, Inc. (11)10.41 Stockholders' Agreement dated October 9, 1997 among Genesis ElderCare Corp., The Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc. and Genesis Health Ventures, Inc. (11)10.42 Put/Call Agreement dated October 9, 1997 among The Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc. and Genesis Health Ventures, Inc. (12)10.43 Stock Purchase Agreement dated October 10, 1997 among Genesis Health Ventures, Inc., The Multicare Companies, Inc., Concord Health Group, Inc., Horizon Associates, Inc., Horizon Medical Equipment and Supply, Inc., Institutional Health Care Services, Inc., Care4, L.P., Concord Pharmacy Services, Inc., Compass Health Services, Inc. and Encare of Massachusetts, Inc. (12)10.44 Asset Purchase Agreement dated October 10, 1997 among Genesis Health Ventures, Inc., The Multicare Companies, Inc., Health Care Rehab Systems, Inc., Horizon Rehabilitation, Inc., Progressive Rehabilitation Centers, Inc. and Total Rehabilitation Center, L.L.C. (10)10.45 Letter Agreement dated June 16, 1997 between Genesis Health Ventures, Inc. and Straus Associates. 11 Statement re: Computation of Earnings Per Share (9) 13 1996 Annual Report to stockholders 21 Subsidiaries of the Registrant 27 Financial Data Schedule (1) Incorporated by reference from Registration Statement No. 33-51176 on Form S-1 effective November 18, 1992. (2) Incorporated by reference from Registration Statement No. 33-65444 on Form S-1 effective August 18, 1993. (3) Incorporated by reference from Registration Statement No. 33-79298 effective June 22, 1994. (4) Incorporated by reference from Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. (5) Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1995. (6) Incorporated by reference from the Tender Offer Statement on Schedule 14D- 1 of CHG Acquisition Corp., and The Multicare Companies, Inc., dated January 22, 1996. (7) Incorporated by Reference from Registration Statement No. 333-12819 on Form S-3 effective October 24, 1996. (8) Incorporated by reference from Current Report on Form 8-K, dated December 26, 1996. 50 (9) Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1996. (10) Incorporated by reference to the Tender Offer on Schedule 14D-1 filed by Genesis ElderCare Acquisition Corp. on June 20, 1997. (11) Incorporated by reference to Amendment No.7 to the Tender Offer Statement on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp. on June 20,1997. (12) Incorporated by reference to Genesis Health Ventures, Inc.'s Current Report on Form 8-K dated October 9, 1997. 51 Independent Auditors' Report The Board of Directors The Multicare Companies, Inc.: Under date of February 4, 1998, we reported on the consolidated balance sheets of The Multicare Companies, Inc. and subsidiaries as of December 31, 1996 and September 30, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows each of the years in the two- year period ended December 31, 1996 and the nine month period ended September 30, 1997 as contained in the annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule in the Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Philadelphia, Pennsylvania February 4, 1998 SCHEDULE II THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES . Valuation and Qualifying Accounts Years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997 (In thousands)
Balance Charged Charged Balance at to to at end Classifications beginning costs other of of period expenses accounts Deductions period (1) (2) Year ended September 30, 1997: Allowance for doubtful accounts $11,531 3,521 125 4,108 11,069 Year ended December 31, 1996: Allowance for doubtful accounts $ 5,241 4,760 2,502 972 11,531 Year ended December 31, 1995: Allowance for doubtful accounts $ 2,726 3,483 --- 968 5,241
(1) Represents amounts related to acquisitions (2) Represents amounts written-off as uncollectible. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The Multicare Companies, Inc. By: MICHAEL R. WALKER . Chairman and Chief Executive Officer February 10, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Chairman of the Board, Chief Executive /S/ MICHAEL Officer February 10, 1998 R. WALKER and Director (Principal Executive Officer) Michael R. Walker Senior Vice President, /S/ GEORGE V. Chief Financial February 10, 1998 HAGER, JR. Officer (Principal Accounting Officer) George V. Hager, Jr. Vice President, Assistant /S/ JAMES L. Secretary and February 10, 1998 SINGLETON Director James L. Singleton Vice President, Assistant /S/ JAMES Secretary and February 10, 1998 G. COULTER Director James G. Coulter /S/ JONATHAN Director February 10, 1998 J. COSLET Jonathan J. Coslet /S/ RICHAR Director February 10, 1998 R. HOWARD Richard. R. Howard /S/ KARL I. Director February 10, 1998 PETERSON Karl J. Peterson /S/ WILLIAM Director February 10, 1998 L. SPIEGEL William L. Spiegel /S/ JAMES Director February 10, 1998 A. STERN James A. Stern EXHIBIT 21 Jurisdiction of Percentage of Subsidiaries of The Multicare Companies, Inc. Incorporation Ownership Academy Nursing Home, Inc. MA 100% ADS Apple Valley Limited Partnership MA 100% ADS Apple Valley, Inc. MA 100% ADS Consulting, Inc. MA 100% ADS Danvers ALF, Inc. DE 100% ADS Dartmouth ALF, Inc. DE 100% ADS Dartmouth General Partnership MA 100% ADS Hingham ALF, Inc. DE 100% ADS Hingham Nursing Facility Limited Partnership MA 100% ADS Hingham Nursing Facility, Inc. MA 100% ADS Home Health, Inc. DE 100% ADS Management, Inc. MA 100% ADS Palm Chelmsford, Inc. MA 49% ADS Recuperative Center Limited Partnership MA 100% ADS Recuperative Center, Inc. MA 100% ADS Reservoir Waltham, Inc. MA 49% ADS Senior Housing, Inc. MA 100% ADS Village Manor, Inc. MA 100% ADS/Multicare, Inc. DE 100% ANR, Inc. DE 100% Applewood Health Resources, Inc. DE 100% Assisted Living Associates of Wall, Inc. NJ 100% Automated Professional Accounts, Inc. WV 100% Berkeley Haven Limited Partnership WV 50% Berks Nursing Homes, Inc. PA 100% Bethel Health Resources, Inc. DE 100% Breyut Convalescent Center, Inc. NJ 100% Breyut Convalescent Center, L.L.C. NJ 100% Brightwood Property, Inc. WV 100% Canterbury of Sheperdstown Limited Partnership WV 50% Care Haven Associates NJ 100% Care Haven Associates Limited Partnership WV 68.69% Care4, L.P. DE 100% Century Care Construction, Inc. NJ 100% Century Care Management, Inc. DE 100% Charlton Nursing Care Center MA 20% Chateau Village Health Resources, Inc. DE 100% CHG Investment Corp., Inc. DE 100% CHNR-1, Inc. DE 100% Colonial Hall Health Resources, Inc. DE 100% Colonial House Health Resources, Inc. DE 100% Compass Health Services, Inc. WV 100% Concord Companion Care, Inc. PA 100% Concord Health Group, Inc. DE 100% Concord Healthcare Services, Inc. PA 100% Concord Home Health, Inc. PA 100% Concord Pharmacy Services, Inc. PA 100% Concord Rehab, Inc. PA 100% Concord Service Corporation PA 100% Courtyard Nursing Care Center Partnership MA 33.33% Cumberland Associates of Rhode Island, L.P. DE 100% CVNR, Inc. DE 100% Dawn View Manor, Inc. WV 100% Delm Nursing, Inc. PA 100% Elmwood Health Resources, Inc. DE 100% Encare of Massachusetts, Inc. DE 100% Encare of Mendham, Inc. NJ 100% Encare of Mendham, L.L.C. NJ 100% Encare of Pennsylvania, Inc. PA 100% Encare of Pennypack, Inc. PA 100% Encare of Quakertown, Inc. PA 100% Encare of Wyncote, Inc. PA 100% ENR, Inc. DE 100% Glenmark Associates - Dawnview Manor, Inc. WV 100% Glenmark Associates, Inc. WV 100% Glenmark Limited Liability Company I WV 100% Glenmark Properties I, Limited Partnership WV 100% Glenmark Properties, Inc. WV 100% GMA - Brightwood, Inc. WV 100% GMA - Madison, Inc. WV 100% GMA - Uniontown, Inc. PA 100% GMA Construction, Inc. WV 100% GMA Partnership Holding Company, Inc. WV 100% Groton Associates of Connecticut, L.P. DE 100% Health Resources of Academy Manor, Inc. DE 100% Health Resources of Arcadia, Inc. DE 100% Health Resources of Boardman, Inc. DE 100% Health Resources of Bridgeton, Inc. NJ 100% Health Resources of Bridgeton, L.L.C. NJ 100% Health Resources of Brooklyn, Inc. DE 100% Health Resources of Cedar Grove, Inc. NJ 100% Health Resources of Cinnaminson, Inc. NJ 100% Health Resources of Cinnaminson, L.L.C. NJ 100% Health Resources of Colchester, Inc. CT 100% Health Resources of Columbus, Inc. DE 100% Health Resources of Cranbury, Inc. NJ 100% Health Resources of Cranbury, L.L.C. NJ 100% Health Resources of Cumberland, Inc. DE 100% Health Resources of Eatontown, Inc. NJ 100% Health Resources of Emery, Inc. DE 100% Health Resources of Emery, L.L.C. NJ 100% Health Resources of Englewood, Inc. NJ 100% Health Resources of Englewood, L.L.C. NJ 100% Health Resources of Ewing, Inc. NJ 100% Health Resources of Ewing, L.L.C. NJ 100% Health Resources of Fair Lawn, Inc. DE 100% Health Resources of Fair Lawn, L.L.C. NJ 100% Health Resources of Farmington, Inc. DE 100% Health Resources of Gardner, Inc. DE 100% Health Resources of Glastonbury, Inc. CT 100% Health Resources of Groton, Inc. DE 100% Health Resources of Jackson, Inc. NJ 100% Health Resources of Jackson, L.L.C. NJ 100% Health Resources of Karmenta and Madison, Inc. DE 100% Health Resources of Lakeview, Inc. NJ 100% Health Resources of Lakeview, L.L.C. NJ 100% Health Resources of Lemont, Inc. DE 100% Health Resources of Lynn, Inc. NJ 100% Health Resources of Marcella, Inc. DE 100% Health Resources of Middletown (R.I.), Inc. DE 100% Health Resources of Montclair, Inc. NJ 100% Health Resources of Morristown, Inc. NJ 100% Health Resources of Norfolk, Inc. DE 100% Health Resources of North Andover, Inc. DE 100% Health Resources of Norwalk, Inc. CT 100% Health Resources of Pennington, Inc. NJ 100% Health Resources of Ridgewood, Inc. NJ 100% Health Resources of Ridgewood, L.L.C. NJ 100% Health Resources of Rockville, Inc. DE 100% Health Resources of Solomont/Brookline, Inc. DE 100% Health Resources of South Brunswick, Inc. NJ 100% Health Resources of Tazewell, Inc. DE 100% Health Resources of Troy Hills, Inc. NJ 100% Health Resources of Voorhees, Inc. NJ 100% Health Resources of Wallingford, Inc. DE 100% Health Resources of Warwick, Inc. DE 100% Health Resources of West Orange, L.L.C. NJ 100% Health Resources of Westwood, Inc. DE 100% Healthcare Rehab Systems, Inc. PA 100% Helstat, Inc. WV 100% Hingham Healthcare Limited Partnership MA 50% HMNH Realty, Inc. DE 100% HNCA, Inc. PA 100% Holly Manor Associates of New Jersey, L.P. DE 100% Horizon Associates, Inc. WV 100% Horizon Medical Equipment and Supply, Inc. WV 100% Horizon Mobile, Inc. WV 100% Horizon Rehabilitation, Inc. WV 100% HR of Charleston, Inc. WV 100% HRWV Huntington, Inc. WV 100% Institutional Health Care Services, Inc. NJ 100% Lakewood Health Resources, Inc. DE 100% Laurel Health Resources, Inc. DE 100% Lehigh Nursing Homes, Inc. PA 100% LRC Holding Company, Inc. DE 100% LWNR, Inc. DE 100% Mabri Convalescent Center, Inc. CT 100% Markglen, Inc. WV 100% Marlington Associates Limited Partnership WV 44.06% Marpe Development Company, Inc. CT 100% Marshfield Health Resources, Inc. DE 100% Mercerville Associates of New Jersey, L.P. DE 100% Merry Heart Health Resources, Inc. DE 100% MHNR, Inc. DE 100% Middletown (RI) Associates of Rhode Island, L.P. DE 100% Montgomery Nursing Homes, Inc. PA 100% Multicare AMC, Inc. DE 100% Multicare Home Health of Illinois, Inc. DE 100% Multicare Management, Inc. NY 100% Multicare Member Holding Corp. NJ 100% Multicare Payroll Corp. NJ 100% National Pharmacy Service, Inc. PA 100% Northwestern Management Services, Inc. OH 100% Nursing and Retirement Center of the Andovers, Inc. MA 100% PHC Operating Corp. DE 100% Pocahontas Continuous Care Center, Inc. WV 100% Point Pleasant Haven Limited Partnership WV 100% Pompton Associates, L.P. NJ 100% Pompton Care, Inc. NJ 100% Pompton Care, L.L.C. NJ 100% Prescott Nursing Home, Inc. MA 100% Progressive Rehabilitation Centers, Inc. DE 100% Providence Funding Corporation DE 100% Providence Health Care, Inc. DE 100% Providence Medical, Inc. DE 100% Raleigh Manor Limited Partnership WV 100% Rest Haven Nursing Home, Inc. WV 100% Ridgeland Health Resources, Inc. DE 100% River Pines Health Resources, Inc. DE 100% Rivershores Health Resources, Inc. DE 100% RLNR, Inc. DE 100% Roephel Convalescent Center, Inc. NJ 100% Roephel Convalescent Center, L.L.C. NJ 100% Romney Health Care Center Limited Partnership WV 100% Rose Healthcare, Inc. NJ 100% Rose View Manor, Inc. PA 100% Roxborough Nursing Homes, Inc. PA 100% RSNR, Inc. DE 100% RVNR, Inc. DE 100% S.T.B. Investors, LTD. NY 100% Schuylkill Nursing Homes, Inc. PA 100% Schuylkill Partnership Acquisition Corp. PA 100% Scotchwood Institutional Services, Inc. NJ 100% Scotchwood Massachusetts Holding Company, Inc. DE 100% Senior Living Ventures, Inc. PA 100% Senior Source, Inc. MA 100% Sisterville Haven Limited Partnership WV 100% Snow Valley Health Resources, Inc. DE 100% Solomont Family Fall River Venture, Inc. MA 100% Solomont Family Medford Venture, Inc. MA 100% Stafford Convalescent Center, Inc. DE 100% SVNR, Inc. DE 100% Teays Valley Haven Limited Partnership WV 100% The ADS Group, Inc. MA 100% The Apple Valley Center Limited Partnership MA 50% The House of Campbell, Inc. WV 100% The Multicare Companies, Inc. DE 100% The Recuperative Center Limited Partnership MA 47.55% The Straus Group - Hopkins House, L.P. NJ 100% The Straus Group - Old Bridge, L.P. NJ 100% The Straus Group - Quakertown Manor, L.P. NJ 100% The Straus Group - Ridgewood, L.P. NJ 100% TMC Acquisition Corp. NJ 100% Total Rehabilitation Center, Inc. DE 100% Total Rehabilitation Center, L.L.C. NJ 100% Tri State Mobile Medical Services, Inc. WV 100% Wallingford Associates of Connecticut, L.P. DE 100% Warwick Associates of Rhode Island, L.P. DE 100% Westford Nursing and Retirement Center, Inc. MA 100% Westford Nursing and Retirement Center Limited Partnership MA 100% Willow Manor Nursing Home, Inc. MA 100% EX-11 2 EXHIBIT 11 The Multicare Companies, Inc. and Subsidiaries Statement re: Computation of Earnings per Share (In thousands, except per share data) Year ended Nine months December 31, 1996 September 30 1995 1996 1997 Income per common and common equivalent share: Income before extraordinary item $ 28,737 20,395 28,751 Net Income $ 25,910 18,914 27,878 Weighted average number of common and common equivalent shares outstanding 28,062 27,506 32,172 Income before extraordinary item per common and common equivalent share 1.02 .74 .89 Net income per common and common equivalent share .92 .69 .87 Income per common and common equivalent share assuming full dilution: Income before extraordinary item $ 28,737 20,395 28,751 Net income 25,910 18,914 27,878 Adjustments to income: Interest expense and amortization of debt issuance costs relating to convertible debt, net of tax 4,022 2,973 2,427 Adjusted net income $ 29,932 21,887 30,305 Weighted average number of common and common equivalent shares outstanding 28,196 27,772 32,512 Convertible debt shares 4,976 4,976 4,320 Adjusted shares 33,172 32,748 36,832 Income before extraordinary item per share assuming full dilution $ .99 .71 .85 Net income per common share assuming full dilution $ .90 .67 .82
EX-27 3
5 THE SCHEDULE CONTAINS SUMMARY FIANCIAL INFORMATION EXTRACTED FROM THE MULTICARE COMPANIES, INC. FORM 10-K TRANSITIONAL REPORT FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-30-1997 SEP-30-1997 2,118 0 130,591 11,069 0 146,254 523,296 62,496 823,133 94,432 423,421 0 0 317 262,857 823,133 0 533,952 0 406,173 21,620 0 21,640 45,838 17,087 28,751 0 873 0 27,878 .87 .82
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