-----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, GhBh92mbwdrlEqv9uXQr+IPLPro9EFB/9r0rnqmIdaHesxJ8DDjKDxHvWxBnobM4 qmjMVmPFFrqfAc/rs0B/sg== 0000950116-99-001052.txt : 19990518 0000950116-99-001052.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950116-99-001052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22090 FILM NUMBER: 99627179 BUSINESS ADDRESS: STREET 1: 101 EAST STATE STREET STREET 2: OMITTED INTENTIONALLY CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: (610) 925-4144 MAIL ADDRESS: STREET 1: 411 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission File Number: 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 Identification No.) incorporation or organization) 101 East State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at May 17, 1999 - ----------------------------- --------------------------- Common Stock ($.01 Par Value) 100 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Table of Contents Page ---- CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS......................1 Part I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets March 31, 1999 (Unaudited) and September 30, 1998............2 Consolidated Statements of Operations Three months ended March 31, 1999 and 1998 (Unaudited).......3 Consolidated Statements of Cash Flows Six months ended March 31, 1999 and 1998 (Unaudited).........4 Notes to Consolidated Financial Statements ................5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................8-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................................17 Part II: OTHER INFORMATION ...................................................18 SIGNATURES ..........................................................19 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES CAUTIONARY STATEMENT 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 Medicaid and Medicare programs and the Company's ability to meet its liquidity needs and control costs, certain statements in "Qualitative and Quantitative Disclosures about Market Risk", certain statements in Notes to Unaudited Condensed Consolidated Financial Statements, such as certain Pro Forma Financial Information; and other statements contained herein regarding matters which 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: 1. Changes in the United States healthcare system, including changes in reimbursement levels under Medicaid and Medicare, implementation of the Medicare Prospective Payment System and consolidated billing and other changes in applicable government regulations that might affect the profitability of the Company. 2. The Company's substantial indebtedness and significant debt service obligations. 3. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth. 4. The Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities, thereby avoiding a number of potentially adverse consequences, such as the imposition of fines, temporary suspension of admission of patients, restrictions on the ability to acquire new facilities, suspension or decertification from Medicaid or Medicare programs, and, in extreme cases, revocation of a facility's license or the closure of a facility, including as a result of unauthorized activities by employees. 5. The occurrence of changes in the mix of payment sources utilized by the Company's customers to pay for the Company's services. 6. The adoption of cost containment measures by private pay sources such as commercial insurers and managed care organizations, as well as efforts by governmental reimbursement sources to impose cost containment measures. 7. The level of competition in the Company's industry, including without limitation, increased competition from acute care hospitals, providers of assisted and independent living and providers of home health care and changes in the regulatory system, such as changes in certificate of need laws in the states in which the Company operates or anticipates operating in the future that facilitate such competition. 8. The Company and its payors' and suppliers ability to implement a Year 2000 readiness program. These and other factors have been discussed in more detail in the Company's periodic reports, including its Annual Report on Form 10-K as amended for the fiscal year ended September 30, 1998 PART I: FINANCIAL INFORMATION Item 1. Financial Statements THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
March 31, September 30, 1999 1998 ----------- ------------- (Unaudited) Assets Current Assets: Cash and cash equivalents $ 4,091 $ 11,344 Accounts receivable, net 125,750 114,210 Prepaid expenses and other current assets 16,645 16,208 Deferred taxes - current portion 2,027 2,117 ---------- ---------- Total current assets 148,513 143,879 ---------- ---------- Property, plant and equipment, net 716,588 719,112 Goodwill, net 774,736 778,231 Other assets 59,415 57,733 ---------- ---------- $1,699,252 $1,698,955 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 28,453 $ 30,188 Accrued liabilities 44,076 60,226 Current portion of long-term debt 32,675 30,647 ---------- ---------- Total current liabilities 105,204 121,061 ---------- ---------- Long-term debt 747,700 725,194 Deferred taxes 104,926 105,023 Due to Genesis Health Ventures, Inc. and other liabilities 20,919 14,439 Stockholders' Equity: Common stock, par value $.01, 100 shares authorized 100 shares issued and outstanding -- -- Additional paid-in-capital 733,000 733,000 Retained earnings (deficit) (12,497) 238 ---------- ---------- Total stockholders' equity 720,503 733,238 ---------- ---------- $1,699,252 $1,698,955 ========== ==========
See accompanying notes to consolidated financial statements. 2 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (In thousands)
Three Months Ended Six Months Ended March 31, March 31, --------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net revenues $ 154,725 170,164 323,209 $ 355,942 Expenses: Operating expense 127,541 127,777 257,353 269,120 Management fee 9,278 10,210 19,329 21,855 Depreciation and amortization 11,310 11,090 22,591 22,874 Lease expense 3,330 3,246 6,454 6,689 Interest expense, net 16,227 14,994 32,412 29,712 ---------- ------- ------- --------- Total expenses 167,686 167,317 338,139 350,250 ---------- ------- ------- --------- Earnings (loss) before income taxes (12,961) 2,847 (14,930) 5,692 Income tax provision (benefit) (2,804) 1,480 (2,195) 2,967 ---------- ------- ------- --------- Net income (loss) $ (10,157) 1,367 (12,735) $ 2,725 ========== ======= ======= =========
See accompanying notes to consolidated financial statements. 3 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six months ended March 31, ----------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net cash provided by (used in) operating activities $ (26,551) $ 3,856 Cash flows from investing activities: Capital expenditures (8,396) (18,683) Other assets and liabilities 4,548 (18,154) --------- ---------- Net cash used in investing activities (3,848) (36,837) Cash flows from financing activities: Proceeds from long-term debt 229,900 1,698,832 Repayments of long-term debt (205,367) (984,370) Equity contribution -- 745,000 Proceeds from sale of pharmacy business -- 50,000 Proceeds from sale of therapy business -- 24,000 Purchase of shares in tender offer -- (921,326) Debt and other financing obligation repayments in connection with merger -- (452,223) Severance, option payouts and transaction fees in connection with merger -- (104,851) Debt issuance costs (1,387) (21,582) --------- ---------- Net cash provided by financing activities 23,146 33,480 --------- ---------- Increase (Decrease) in cash and cash equivalents (7,253) 499 Cash and cash equivalents at beginning of period 11,344 2,118 --------- ---------- Cash and cash equivalents at end of period $ 4,091 $ 2,617 ========= ==========
See accompanying notes to consolidated financial statements. 4 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (Unaudited) (In thousands, except share data) (1) Organization and Basis of Presentation The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the "Company") own, operate and manage skilled eldercare and assisted living 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 operated institutional pharmacies, medical supply companies, outpatient rehabilitation centers and other ancillary healthcare businesses before the Merger (as defined below). 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 financial information as of March 31, 1999, and for the three and six months ended March 31, 1999 and 1998, is unaudited and has been prepared in conformity with the accounting principles and practices as reflected in the Company's audited annual financial statements. The unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of March 31, 1999 and the operating results for the three and six months ended March 31, 1999 and 1998 and the cash flows for the six months ended March 31, 1999 and 1998. Results for interim periods are not necessarily indicative of those to be expected for the year. 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. (2) Tender Offer and Merger and Recent 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. 5 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued. (2) Tender Offer and Merger and Recent Acquisitions, Continued Genesis earns 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 acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000 subject to adjustment (the "Pharmacy Sale"). The Company completed the Therapy Sale and the Pharmacy Sale effective October 1, 1997 and January 1, 1998, respectively. 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 therewith, (iii) refinance certain indebtedness of Multicare and (iv) make certain cash payments to employees. Of the funds required to finance the foregoing, approximately $733,000 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, $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) $246,800 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. 6 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued. (2) Tender Offer and Merger and Recent Acquisitions, Continued 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, 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. 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. The following 1998 pro forma financial information has been prepared as if the Pharmacy Sale had been completed on October 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. Six months ended March 31, 1998 ---------------- Net revenues $336,200 Income before income taxes 4,608 Net income $ 2,221 7 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General 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 case managers, comprehensive discharge planning and, 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 a high quality payor mix and continued high levels of occupancy. Genesis' management also will focus on the revenue and cost opportunities presented through the further integration of the Company's 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 have decreased significantly from historical levels. The Tender Offer and Merger On October 9, 1997 Acquisition Corp., Cypress, TPG and Nazem acquired 99.65% of the shares of common stock of Multicare, pursuant to the Tender Offer commenced on June 20, 1997. On October 10, 1997, Genesis ElderCare Corp. completed the Merger of Acquisition Corp. with and into Multicare in accordance with the Merger Agreement. 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 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 is 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 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 Pharmacy Sale Agreement with Multicare and certain subsidiaries pursuant to which Genesis acquired 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 Company completed the Therapy Sale and the Pharmacy Sale effective October 1, 1997 and January 1, 1998, respectively. 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 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 $733,000,000 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. 8 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Results of Operations Three Months Ended March 31, 1999 Compared to Three Months ended March 31, 1998 Net revenues. Net revenues for the three months ended March 31, 1999 decreased $15.4 million or 9.1% from the same period last year to $154.7 million. The decrease in revenues for the three months ended March 31, 1999 was due in part to the implementation of the Medicare Prospective Payment System ("PPS") which caused a Medicare rate dilution of $11.7 million as compared to the three months ended March 31, 1998. The remainder of the decrease is principally caused by a deterioration of quality mix. The average rate per Medicare patient day decreased $103 per day from the prior quarter ended March 31, 1998. The Company's quality mix of private, Medicare and insurance patient days was 40.6% of patient days for the three months ended March 31, 1999 compared to 44.7% in the similar period of last year. Occupancy rates were 90.5% and 91.1% for the three months ended March 31, 1999 and 1998, respectively. Operating Expense. Operating expenses for the three months ended March 31, 1999 decreased $0.2 million from the comparable period last year to $127.5 million. For the three months ended March 31, 1999, a decline in ancillary expenses of $2.20 per patient day was offset by increases in salaries, wages and benefits and expanded nursing staffing levels to support higher patient acuities. Facility operating margins were 17.6% and 24.9% for the three months ended March 31, 1999 and 1998, respectively. Management Fee. In connection with the Management Agreement, Genesis manages Multicare's operations for a fee of approximately six percent of Multicare's non-extraordinary sales (as defined by the Management Agreement) and is responsible for Multicare's corporate general and administrative expenses other than certain specified third party expenses. Management fees decreased by $0.9 million or 9.1% to 9.3 million for the three months ended March 31, 1999 due to the decline in revenue. Lease Expense. Lease expense of $3.3 million and $3.2 million for the three months ended March 31, 1999 and 1998, respectively, was relatively unchanged. Depreciation and Amortization. Depreciation and amortization expense of $11.3 million and $11.1 million for the three months ended March 31, 1999 and March 31, 1998 remained relatively unchanged. Interest Expense, net. Interest expense, net for the three months ended March 31, 1999 increased $1.2 million or 8.2% to $16.2 million from the same period in the prior year. The increase is due to the increase in average debt balance in the current year period over the prior period. This is due in part to incremental borrowings incurred to finance the Merger which was not outstanding for the entire prior period. Income Tax Expense. The provision for income taxes for the three months ended March 31, 1999 decreased by $4.3 million to a benefit of $2.8 million. The tax benefit related to the loss before income taxes is partially offset by a provision related to non-deductible goodwill amortization resulting from the Merger. Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998 Net revenues. Net revenues for the six months ended March 31, 1999 decreased $32.7 million or 9.2% from the same period in last year to $323.2 million. The decrease in revenues for the six month period ended March 31, 1999 is comprised of approximately $20.8 million relating to the exclusion of the results of the pharmacy business due to the Pharmacy Sale and $11.6 million due to Medicare rate dilution. The remainder of the decrease is caused by a deterioration of quality mix. The average rate per Medicare patient day decreased $53 per day from the six month period ended March 31, 1998. The Company's private, Medicare and insurance patient days was 41.0% of patient days for the six month period ended March 31, 1999 as compared to 44.1% in the similar period of last year. Occupancy rates were 90.8% and 91.6% for the six months ended March 31, 1999 and 1998, respectively. 9 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Operating Expense. Operating expenses for the six months ended March 31, 1999 decreased $11.8 million or 4.4% from the comparable period last year to $257.4 million. For the six months ended March 31, 1999, a decrease of $16.3 million relates to the exclusion of results for the pharmacy businesses due to the Pharmacy Sale. The offsetting increase resulted primarily from higher salaries, wages and benefits and expanded nursing staffing levels to support higher patient acuities and more complex product lines such as subacute and Alzheimers care. Facility operating margins were 20.4% and 24.4% for the six months ended March 31, 1999 and 1998, respectively. Management Fee. In connection with the Management Agreement, Genesis manages Multicare's operations for a fee of approximately six percent of Multicare's non-extraordinary sales (as defined by the Management Agreement) and is responsible for Multicare's corporate general and administrative expenses other than certain specified third party expenses. Management fees decreased by $2.5 million or 11.6% to $19.3 million for the six months ended March 31, 1999, due to the exclusion of the results of the pharmacy business in connection with the Pharmacy Sale and the overall revenue decline. Lease Expense. Lease expense for the six months ended March 31, 1999 decreased $0.2 million from the same period last year to $6.5 million. The decrease relates to the sale of certain leased facilities in connection with the Pharmacy Sale. Depreciation and Amortization. Depreciation and amortization expense for the six months ended March 31, 1999 decreased $0.3 million from the same period last year to $22.6 million. Depreciation decreased due to the sale of certain plant, property, and equipment in connection with the Pharmacy Sale. Interest Expense, net. Interest expense, net for the six months ended March 31, 1999 increased $2.7 million or 9.1% to $32.4 million from the same period in the prior year. The increase is due to the increase in average debt balance in the current year period over the prior period. This is due in part to incremental borrowings incurred to finance the Merger which was not outstanding for the entire prior period. Income Tax Expense. The provision for income taxes for the six months ended March 31, 1999 decreased by $5.2 million from the same period last year to a benefit of $2.2 million. The tax benefit related to the loss before income taxes is partially offset by a provision related to non-deductible goodwill amortization resulting from the Merger. Liquidity and Capital Resources Operating cash flow will depend upon the Company's ability to effect cost reduction initiatives and to continue to reduce its investment in working capital. The Company maintains adequate working capital from operating cash flows and lines of credit for continuing operations, debt service, and anticipated capital expenditures. At March 31, 1999 and September 30, 1998, the Company had working capital of $43.3 and $22.8 million, respectively. Cash flow used in operations was $26.6 million for the six months ended March 31, 1999 compared to cash flow provided by operations of $3.9 million in the prior period. The decline in cash flow from operations is primarily attributable to the decrease in revenues due to the implementation of PPS. Net accounts receivable at March 31, 1999 were $125.8 million compared to $114.2 million as of September 30, 1998. The increase in net accounts receivable is attributable to the timing of third-party interim and settlement payments and the utilization of specialty medical services for higher acuity level patients. Legislative and regulatory action and government budgetary constraints will 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. 10 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES 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 were provided 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% 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 $162.0 million six year term loan (the "Tranche A Term Facility"); (2) a $147.8 million seven year term loan (the "Tranche B Term Facility"); (3) a $49.1 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"); which includes 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 Revolving Credit Facility will mature on September 30, 2003. 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 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. The Third Amendment to the Credit Facility, ("the Amendment") dated February 11, 1999, made the financial covenants for certain periods less restrictive and increased the interest rates. 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. Effective with the Amendment on February 11, 1999 the loans under the Tranche A Term Facility bear interest at a rate equal to the Prime Rate plus a margin of .75% or the LIBO Rate plus a margin of 3.0%; loans under the Tranche B Term Facility bear interest at a rate equal to Prime Rate plus 1.5% or LIBO Rate plus a margin of 3.25%; loans under the Tranche C Term Facility bear interest at a rate equal to Prime Rate plus 1.25% or LIBO Rate plus a margin up to 3.5%; loans under the Revolving Credit Facility bear interest at a rate equal to Prime Rate plus .75% or LIBO Rate plus a margin up to 3.0%; 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. On August 11, 1997, Acquisition Corp. sold $250 million principal amount of 9% Notes which were issued pursuant to the Indenture. Interest on the 9% Notes is payable semiannually on February 1 and August 1 of each year. 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. 11 THE MULTICARE COMPANIES, INC. AND 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 is 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 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. At March 31, 1999 $20.5 million is subordinated and due to Genesis. 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. 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 acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50 million, subject to adjustment (the "Pharmacy Sale"). The Company completed the Pharmacy Sale effective January 1, 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 three 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). ETT is obligated to purchase and leaseback the three facilities that secure the term 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. Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid reimbursement programs which has adversely impacted the Company. The changes have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers or other providers. There can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on the Company. 12 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Pursuant to the Balanced Budget Act commencing with cost reporting periods beginning on July 1, 1998, PPS began to be phased in for skilled nursing facilities at a per diem rate for all covered Part A skilled nursing facility services as well as many services for which payment may be made under Part B when a beneficiary who is a resident of a skilled nursing facility receives covered skilled nursing facility care. The consolidated per diem rate is adjusted based upon the RUG. In addition to covering skilled nursing facility services, this consolidated payment will also cover rehabilitation and non-rehabilitation ancillary services. Physician services, certain nurse practitioner and physician assistant services, among others, are not included in the per diem rate. For the first three cost reporting periods beginning on or after July 1, 1998, the per diem rate will be based on a blend of a facility specific-rate and a federal per diem rate. In subsequent periods, and for facilities first receiving payments for Medicare services on or after October 1, 1995, the federal per diem rate will be used without any facility specific blending. The Balanced Budget Act also required consolidated billing for skilled nursing facilities. Under the Balanced Budget Act, the skilled nursing facility must submit all Medicare claims for Part A and Part B services received by its residents with the exception of physician, nursing, physician assistant and certain related services, even if such services were provided by outside suppliers. Medicare will pay the skilled nursing facilities directly for all services on the consolidated bill and outside suppliers of services to residents of the skilled nursing facilities must collect payment from the skilled nursing facility. Although consolidated billing was scheduled to begin July 1, 1998 for all services, it has been delayed until further notice for beneficiaries in a Medicare Part A stay in a skilled nursing facility not yet using PPS and for the Medicare Part B stay. There can be no assurance that the Company will be able to provide skilled nursing services at a cost below the established Medicare level. The second quarter of fiscal 1999 is the Company's first quarter fully implemented under PPS. The Company's current Medicare per diem rate will be adjusted during the phase in period during which the Company's rate will be based on a blend of a facility specific rate and on a federal per diem rate. The Company expects its Medicare per diem rated based on current acuity levels and on a non-inflation adjusted basis to be $283 in fiscal year 2000, $269 in fiscal year 2001 and $255 in fiscal year 2002. The actual impact of PPS on the Company's future earnings will depend on many variables which can not be quantified at this time, including regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, and ability to reduce costs. Effective April 10, 1998, regulations were adopted by the Health Care Financing Administration, which revise the methodology for determining the reasonable cost for contract therapy services, including physical therapy, respiratory therapy, occupational therapy and speech language pathology. Under the regulations, the reasonable costs for contract therapy services are limited to geographically-adjusted salary equivalency guidelines. However, the revised salary equivalency guidelines will no longer apply when the PPS system applicable to the particular setting for contract therapy services (e.g. skilled nursing facilities, home health agencies, etc.) goes into effect. The Balanced Budget Act also repealed the Boren Amendment federal payment standard for Medicaid payments to Medicaid nursing facilities effective October 1, 1997. The Boren Amendment required Medicaid payments to certain health care providers to be reasonable and adequate in order to cover the costs of efficiently and economically operated health care facilities. States must now use a public notice and comment period in order to determine rates and provide interested parties a reasonable opportunity to comment on proposed rates and the justification for and the methodology used in calculating such rates. There can be no assurance that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to nursing facilities and pharmacies or that payments to nursing facilities and pharmacies will be made on a timely basis. The law also grants greater flexibility to states to establish Medicaid managed care projects without the need to obtain a federal waiver. Although these waiver projects generally exempt institutional care, including nursing facilities and institutional pharmacy services, no assurances can be given that these projects ultimately will not change the reimbursement system for long-term care, including pharmacy services from fee-for-service to managed care negotiated or capitated rates. The Company anticipates that federal and state governments will continue to review and assess alternative health care delivery systems and payment methodologies. In July 1998, the Clinton Administration issued a new initiative to promote the quality of care in nursing homes. This initiative includes, but is not limited to (i) increased enforcement of nursing home safety and quality regulations; (ii) increased federal oversight of state inspections of nursing homes; (iii) prosecution of egregious violations of regulations governing nursing homes; (iv) the publication of nursing home survey results on the Internet; and (v) continuation of the development of the Minimum Data Set ("MDS"), a national automated clinical data system. Accordingly, with this new initiative, it may become more difficult for eldercare facilities to maintain licensing and certification. The Company may experience increased costs in connection with maintaining its licenses and certifications as well as increased enforcement actions. In addition, beginning January 1, 1999, outpatient therapy services furnished by a skilled nursing facility to a resident not under a covered Part A stay or to non-residents who receive outpatient rehabilitation services will be paid according to the Medicare Physician Fee Schedule. Under PPS, the reimbursement for certain speech, occupational, physical and respiratory therapy services provided to nursing facility patients is a component of the total reimbursement to the nursing facility allowed per patient. Medicare reimburses the skilled nursing facility directly for all rehabilitation services and the outside suppliers of such services to residents of the skilled nursing facility must collect payment from the skilled nursing facility. Under PPS, a per provider limit of $1,500 applies to all rehabilitation therapy services provided under Medicare Part B ($1,500 for physical and speech-language pathology services, and a separate $1,500 for occupational therapy services). Additionally, Medicare Part B therapy services are no longer being reimbursed on a cost basis; rather, payment for each service provided is based on fee screen schedules published in November 1998. As a result of the implementation of PPS, the Company has to date experienced a substantial reduction in demand for, and reduced operating margins from, therapy services it provides to third parties, because such providers are admitting fewer Medicare patients and are reducing utilization of rehabilitative services. 13 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES The Company believes that its liquidity needs can be met by expected operating cash flow and availability of borrowings under its credit facilities. At April 30, 1999, approximately $465.8 million was outstanding under the Senior facilities, and approximately $16.3 million was available under the credit facilities after giving effect to approximately $1.7 million in outstanding letters of credit issued under the credit facilities. Seasonality The Company's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, seasonal census cycles, and the number of calendar days in a given quarter. Impact of Inflation The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. To date, the Company has offset its increased operating costs by increasing charges for its services and expanding its services. Genesis has also implemented cost control measures to limit increases in operating costs and expenses but cannot predict its ability to control such operating cost increases in the future. Year 2000 Compliance The Company has implemented a process to address its Year 2000 compliance issues. The process includes (i) an inventory and assessment of the compliance of essential systems and equipment of the Company and of year 2000 mission critical suppliers and other third parties, (ii) the remediation of non-compliant systems and equipment, and (iii) contingency planning. The Company's Year 2000 compliance work is being performed and paid for by Genesis, manager of the Company's operations under the terms of The Management Agreement. The Company's manager is in the process of conducting an inventory, assessment and remediation of its information technology ("IT") systems, equipment and non-IT systems and equipment (embedded technology). It has completed approximately 70% of its internal inventory and approximately 30% of its assessment of the systems and equipment of critical suppliers and other third parties. With respect to the Year 2000 compliance of critical third parties, the Company derives a substantial portion of its revenues from the Medicare and Medicaid programs. Congress' General Accounting Office ("GAO") recently concluded that it is highly unlikely that all Medicare systems will be compliant on time to ensure the delivery of uninterrupted benefits and services into the Year 2000. While the Company does not receive payments directly from Medicare, but from intermediaries, the GAO statement is interpreted to apply as well to these intermediaries. The Company intends to actively confirm the Year 2000 readiness status for each intermediary and to work cooperatively to ensure appropriate continuing payments for services rendered to all government-insured patients. The Company is remediating its critical IT and non-IT systems and equipment. The Company has also begun contingency planning in the event that essential systems and equipment fail to be Year 2000 compliant. The Company is planning to be Year 2000 complaint for all its essential systems and equipment by September 30, 1999, although there can be no assurance that it will achieve its objective by such date or by January 1, 2000, or that such potential non-compliance will not have a material adverse effect on the Company's business, financial condition or results of operations. In addition there can be no assurance that all of the Company's critical suppliers, and other third parties will be Year 2000 complaint by January 1, 2000, or that such potential non-compliance will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company's analysis of its Year 2000 issues is based in part on information from third party suppliers; there can be no assurance that such information is accurate or complete. 14 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES The failure of the Company or third parties to be fully Year 2000 compliant for essential systems and equipment by January 1, 2000 could result in interruptions of normal business work operations. The Company's potential risks include (i) the inability to deliver patient care-related services in the Company's facilities and/or in non-affiliated facilities, (ii) the delayed receipt of reimbursement from the Federal or State governments, private payors, or intermediaries, (iii) the failure of security systems, elevators, heating systems or other operational systems and equipment and (iv) the inability to receive equipment and supplies from vendors. Each of these events could have a material adverse affect on the Company's care-related business, results of operations and financial condition. Contingency plans for the Company's Year 2000-related issues continue to be developed and include, but are not limited to, identification of alternate suppliers, alternate technologies and alternate manual systems. The Company is planning to have contingency plans completed for essential systems and equipment by June 30, 1999; however, there can be no assurance that it will meet this objective by such date or by January 1, 2000. The Year 2000 disclosure set forth above is intended to be a "Year 2000 statement" as such term is defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure relates to year 2000 processing of the Company or to products or services offered by the Company, is also intended to be "Year 2000 readiness disclosure" as such term is defined in the Year 2000 Act. New Accounting Pronouncements In June 1997, the FASB also issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 supersedes Statement of Financial Standards No. 14, Financial Reporting for Segments of a Business Enterprise, and establishes new standards for reporting information about operation segments in annual financial statements and requires selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Statement 131 is effective for periods beginning after December 15, 1997, or the Company's fiscal year end September 30, 1999. This Statement will have no impact on the Company's financial statements, results of operations, financial condition or liquidity. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 requires costs of start-up activities, including organizational costs, to be expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. SOP 98-5 is effective for fiscal years beginning after December 15, 1998 or the Company's fiscal year ending September 30, 2000. The Company currently estimates the adoption of SOP 98-5 will result in a change of approximately $2.6 million net of tax which will be recorded as a cumulative effect of a change in accounting principle. 15 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters beginning after June 15, 1999. The Company intends to adopt this accounting standard as required, in the fourth quarter of fiscal 1999. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. 16 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of interest rate changes. In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates. The Company's objective in managing its exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. Notional amounts of interest rate swap agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates. The estimated amount the Company would pay to terminate its interest rate swap agreements outstanding at March 31, 1999 is approximately $2,256,000. The fair value of the Company's debt, based on quoted market prices or current rates for similar instruments with same maturities was approximately $694,671,000 and $743,332,000 March 31, 1999 and September 30, 1998, respectively. 17 PART II: OTHER INFORMATION Item 1. Legal Proceedings. Not Applicable. Item 2. Changes in Securities and Use of Proceeds. Not Applicable. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description ----------- ----------- 27 Financial Data Schedule. (b) Reports on Form 8-K. Not Applicable. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MULTICARE COMPANIES, INC. Date: May 17, 1999 /S/ George V. Hager, Jr. ---------------------------------------------------- George V. Hager, Jr. Executive Vice President and Chief Financial Officer 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000890925 MULTICARE COMPANIES 1 U.S. DOLLARS 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 1 4,091 0 125,750 0 0 148,513 716,588 0 1,699,252 105,204 747,700 0 0 0 720,503 1,699,252 323,209 323,209 257,353 257,353 48,374 0 32,412 (14,930) (2,195) (12,735) 0 0 0 (12,735) 0 0
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