-----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, R+sXDRDutpBxvFd/kgZzeVZvkaKPbkJHKIi4An6lxUPLaX265bV/4DE5GRccq2nN SvgQJmEXleAuMV+lTCRh0Q== 0000950116-99-002354.txt : 19991230 0000950116-99-002354.hdr.sgml : 19991230 ACCESSION NUMBER: 0000950116-99-002354 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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-K SEC ACT: SEC FILE NUMBER: 000-22090 FILM NUMBER: 99782454 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended September 30, 1999 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.) 101 East State Street Kennett Square, Pennsylvania 19348 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 444-6350 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 December 23, 1999 ---------------------------- -------------------------------- Common Stock $.01 Par Value 100 shares Documents Incorporated By Reference None.
INDEX PAGE Cautionary Statements Regarding Forward Looking Statements .....................................................2-6 ITEM 1: BUSINESS General .................................................................................................7 Patient Services.........................................................................................8 Revenue Sources.......................................................................................9-12 Marketing...............................................................................................12 Personnel...............................................................................................12 Employee Training and Development.......................................................................12 Governmental Regulation..............................................................................13-14 Competition.............................................................................................15 Insurance...............................................................................................15 ITEM 2: PROPERTIES..............................................................................................16 ITEM 3: LEGAL PROCEEDINGS.......................................................................................16 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................16 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........................................................................17 ITEM 6: SELECTED FINANCIAL DATA.................................................................................18 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................................19-29 ITEM 7A: QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................30 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................31-49 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................................50 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................50 ITEM 11: EXECUTIVE COMPENSATION.................................................................................51 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................................51 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................51-52 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K......................................53-57
Cautionary Statements Regarding Forward Looking Statements Statements made in this report, and in our other public filings and releases, which are not historical facts contain "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to statements as to: o certain statements in "Management's Discussion and Analysis of Financial Condition and Results Of Operations", such as our ability to meet our liquidity needs, scheduled debt and interest payments and expected future capital expenditure requirements, and to control costs; the expected effects of government regulation on reimbursement for services provided and on the costs of doing business; and the expected effects of the "Year 2000" problem. The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that any statements are not guarantees of future performance and that actual results and trends in the future may differ materially. Factors that could cause actual results to differ materially include, but are not limited to the following: o our substantial indebtedness and significant debt service obligations; o the affect of planned dispositions of assets; o our ability or inability to secure the capital and the related cost of the capital necessary to fund future operations; o the impact of health care reform, including the Medicare Prospective Payment System ("PPS"), and the adoption of cost containment measures by the federal and state governments; o the adoption of cost containment measures by other third party payors; o the impact of government regulation, including our ability to operate in a heavily regulated environment and to satisfy regulatory authorities; o the occurrence of changes in the mix of payment sources utilized by our patients to pay for our services; o competition in our industry; o our ability to consummate or complete development projects or to profitably operate or successfully integrate enterprises into our other operations; o the "Year 2000" problem, including the possible failure of our payors, suppliers and other third parties to adequately remediate Year 2000 issues; and o changes in general economic conditions. 2 There can be no assurances that the cash flow from our operations will be sufficient to enable us to service our substantial indebtedness and meet our other obligations. There can be no assurance that currently planned dispositions of assets necessary to service our indebtedness will be consummated. We have substantial indebtedness and, as a result, significant debt service obligations. As of September 30, 1999, we had approximately $741,256,000 of long-term indebtedness (excluding current portion of $34,700,000) which represented 69% of our total capitalization. We also have significant long-term operating lease obligations with respect to certain of our eldercare centers. The degree to which we are leveraged could have important consequences, including, but not limited to the following: o our ability to obtain additional financing in the future for working capital, capital expenditures, or other purposes may be limited or impaired; o a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for our operations; o our operating flexibility is limited by restrictions contained in some of our debt agreements which set forth minimum net worth requirements and/or limit our ability to incur additional indebtedness, to enter into other financial transactions, to pay dividends, or to sell assets; o our degree of leverage may make us more vulnerable to economic downturns and less competitive, may reduce our flexibility in responding to changing business and economic conditions and may limit our ability to pursue other business opportunities, to finance our future operations or capital needs, and to implement our business strategy; and o certain of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of greater interest rates. We expect to finance required payments of principal and interest on our indebtedness from our cash flow from operations and from the anticipated sale of certain assets in Illinois, Wisconsin and Ohio in the second quarter of our fiscal year 2000. Our ability to make scheduled payments of the principal or interest thereon, or to refinance our indebtedness, depends on the future performance of our business, which is in turn subject to financial, business, economic and other factors affecting our business and operations, including factors beyond our control, such as prevailing economic conditions. Our ability to make scheduled payments of the principal or interest depends on our ability to complete the sale of assets in Illinois, Wisconsin and Ohio. Management is currently engaged in discussions for the asset sales, however, we have no firm commitments from potential purchasers of these assets. There can be no assurances the anticipated sales will be consummated and that cash flow from operations will be sufficient to enable us to service our debt and meet our other obligations. If such cash flow is insufficient, we may be required to refinance and/or restructure all or a portion of our existing debt, to sell additional assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such sales of additional assets or additional financing could be achieved. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Limitations on reimbursement including the implementation of the Medicare Prospective Payment System and other health care reforms may adversely affect our business. We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, and other third party payors. The health care industry is experiencing a strong trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, generally have resulted in reduced rates of reimbursement for services to be provided by us. 3 In recent years, several significant actions have been taken with respect to Medicare and Medicaid reimbursement, including the following: o the adoption of the Medicare Prospective Payment System pursuant to the Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget Refinement Act; and o the repeal of the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities. While we have prepared certain estimates of the impact of the above changes, it is not possible to fully quantify the effect of recent legislation, the interpretation or administration of such legislation or any other governmental initiatives on our business. Accordingly, there can be no assurance that the impact of these changes will not be greater than estimated or that these legislative changes or any future healthcare legislation will not adversely affect our business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the revenue reimbursement process, which in our industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. See "Business-Revenue Sources" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Extensive regulation by the federal and state governments may adversely affect our cost of doing business. Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, licensure, certification and health planning. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, the revocation of licensure, decertification, imposition of temporary management or the closure of a facility. In July 1998, the Clinton administration issued a new initiative to promote the quality of care in nursing homes. See "Business - Governmental Regulation." Following this pronouncement, it has become more difficult for nursing facilities to maintain licensing and certification. We have experienced and expect to continue to experience increased costs in connection with maintaining our licenses and certifications as well as increased enforcement actions. Changes in applicable laws and regulations, or new interpretations of existing laws and regulations, could have a material adverse effect on reimbursement, certification or licensure of our nursing facilities or other aspects of our business, including eligibility for participation in federal and state programs, costs of doing business, or the levels of reimbursement from governmental or private sources. We cannot predict the content or impact of future legislation and regulations affecting us. There can be no assurance that regulatory authorities will not adopt changes or new interpretations of existing regulations that could adversely affect us. See "Business - Revenue Sources" and "Business - Governmental Regulation." We face intense competition in our business. The healthcare industry is highly competitive. We compete with a variety of other companies in providing eldercare services, many of which have greater financial and other resources and may be more established in their respective communities than us. Competing companies may offer newer or different centers or services than us and may thereby attract our customers who are either presently customers of our eldercare centers or are otherwise receiving our eldercare services. 4 Because of the Multicare Merger and its Restructuring We Face Additional Risks. As a result of the Merger of Genesis ElderCare Acquisition Corp. with us, Genesis Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis ElderCare Corp., which owns 100% of our outstanding capital stock. We and Genesis have entered into a Management Agreement pursuant to which Genesis manages our operations. We also use 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 our key personnel, the integration of our 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 our operations; failure to do so effectively and on a timely basis could have a material adverse effect on our financial condition and results of operations. On October 8, 1999, Genesis entered into a restructuring agreement ("the Restructuring Agreement") with The Cypress Group L.L.C. ("Cypress"), TPG Partners II, L.P. ("TPG") and Nazem Inc. ("Nazem"), to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Genesis has the right to purchase all of the common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. On November 15, 1999, the Multicare Stockholders Agreement was amended to provide among other things, that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors and omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis. We 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, is our Chairman and Chief Executive Officer and Mr. George V. Hager, Jr., the Chief Financial Officer of Genesis, is our Chief Financial Officer. In addition, Mr. Walker, Mr. Hager and Mr. Richard R. Howard, President and a member of the board of directors of Genesis, constitute our board of directors. Based on the foregoing, Genesis and Messrs. Walker, Hager and Howard control Multicare and the outcome of any matters submitted to our stockholders for approval and are in positions that may result in conflicts of interest with respect to transactions involving us and Genesis. Genesis and its affiliates provide healthcare and related services to our customers and facilities either directly or through contracts with us. Genesis is the principal supplier to our customers of all pharmacy and rehabilitation services either directly or through contracts with us. 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 our existing markets. Genesis may compete with us in certain of these markets or in the provision of certain healthcare services. Although our directors who are also directors or officers of Genesis have certain fiduciary obligations to us 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 us. Neither Genesis nor Messrs. Walker, Hager and Howard are obligated to present to us any particular investment opportunity which comes to their attention, even if such opportunity is of a character which might be suitable for investment by us. 5 The "Year 2000 problem" may adversely affect us. If our efforts to address Year 2000 compliance issues (as defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000 Act"))were not successful, or if the systems of our suppliers are not compliant, we may be unable to engage in normal business activities for a period of time after January 1, 2000. Our potential risks include: o the inability to deliver patient care related services; o the delayed receipt of reimbursement from the federal or state governments, or other payors or intermediaries; o the failure of security systems, elevators, heating systems or other operational systems and equipment; o the inability to obtain critical equipment and supplies from vendors; and, o the loss of existing or potential clients and damage to our reputation in the industry. Each of these events could have a material adverse effect on our business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." 6 Item 1. Business. General The Multicare Companies, Inc. is a leading provider of high quality eldercare and specialty medical services in selected geographic regions. As used herein, unless the context otherwise requires, "Multicare", the "Company", "we", "our", or "us" refers to The Multicare Companies, Inc. Multicare's eldercare services include skilled nursing care, assisted living, Alzheimer's care and related support activities traditionally provided in eldercare facilities. We provide sub-acute care such as ventilator care, intravenous therapy, and various forms of coma, pain and wound management. We also provide management services to 30 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. Multicare's overall occupancy rate was approximately 91%, 92%, and 90% for the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997, respectively. Multicare achieved a quality mix (defined as non-Medicaid revenues) of 55%, 62% and 67% of net revenues for the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997, respectively. As of September 30, 1999, Multicare operated 137 eldercare facilities and 14 assisted living facilities (91 wholly owned, 8 joint ventures, 22 leased and 30 managed) in Connecticut, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin with 16,376 beds. In terms of beds, we are the largest provider of eldercare services in Massachusetts, New Jersey and West Virginia. In addition, we are one of the largest providers of eldercare services in Pennsylvania, Ohio and Wisconsin. We anticipate selling 28 eldercare centers with approximately 2,700 beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year 2000. The Tender Offer and Merger On October 9, 1997, Genesis Eldercare Acquisition Corp., ("Acquisition Corp."), The Cypress Group, (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG"), and Nazem, Inc. ("Nazem"), acquired 99.65% of the shares of the common stock of Multicare, pursuant to a Tender Offer commenced on June 20, 1997. 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 our 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 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - The Tender Offer and Merger and its Restructuring." 7 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. We provide 24-hour skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides in all of our 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 us, the medical director monitors all aspects of patient treatment. We also provide 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, arts and crafts and programs encouraging community interaction with patients and visits to the facility. We provide housing, personal care and support services as well as certain routine nursing services in our assisted living residences. We currently provide specialized care for Alzheimer's patients under the supervision of specially trained skilled nursing, therapeutic recreation and social services personnel. Our 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 care, medical supervision, 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. We provide a wide range of sub-acute care services to patients at our facilities. 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. 8 Upon consummation of the Merger, Genesis and Multicare entered into the Management Agreement pursuant to which Genesis manages our operations. We believe that the integration of Genesis and Multicare management is 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' systems. Revenue Sources We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, and other third party payors. The health care industry is experiencing the effects of the federal and state governments' trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, generally have resulted in reduced rates of reimbursement for services to be provided by us. The sources and amounts of our patient revenues will be determined by a number of factors, including licensed bed capacity and occupancy rates of our centers, the mix of patients and the rates of reimbursement among payors. Changes in the case mix of patients as well as payor mix among private pay, Medicare, and Medicaid will significantly affect our profitability. Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act), known as "Medicare," has made available to nearly every American 65 years of age and older a broad program of health insurance designed to help the nation's elderly meet hospital and other health care costs. Health insurance coverage has been extended to certain persons under age 65 qualifying as disabled and those having end-stage renal disease. Medicare includes three related health insurance programs: (i) hospital insurance ("Part A"); and (ii) supplementary medical insurance ("Part B"); and (iii) a managed care option for beneficiaries who are entitled to Part A and enrolled in Part B ("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently administered by fiscal intermediaries (for Part A and some Part B services) and carriers (for Part B) under the direction of the Health Care Financing Administration ("HCFA") of the Department of Health and Human Services ("HHS"). Medicaid (Title XIX of the Social Security Act) is a federal-state cooperative program, whereby, 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 determined in accordance with each state's regulations. Most states pay prospective rates, and have some form of acuity adjustment. Medicare and Medicaid are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the timing and/or levels of payments to us for our services. We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. Such rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. Such programs may also impose fines, criminal penalties or program exclusions. Other payor sources also reserve rights to conduct audits and make monetary adjustments. 9 The Balanced Budget Act of 1997 (the "1997 Act"), signed into law on August 5, 1997, seeks to achieve a balanced federal budget, by, among other things, reducing federal spending on the Medicare and Medicaid programs. Most significantly, under the 1997 Act, nursing facilities are reimbursed under a prospective payment system ("PPS") which commenced with a facility's first cost reporting period beginning on or after July 1, 1998. PPS is being phased in over a four-year period and has an adverse impact on the Medicare revenues of many skilled nursing facilities. PPS reimbursement is based largely on a nursing facility's costs for the services it provided to Medicare beneficiaries in the 1994-1995 base year. Under the new system, nursing facilities are paid a predetermined amount per patient, per day (per diem) based on the anticipated costs of treating patients. The per diem rate is determined by classifying each patient into a resource utilization group ("RUG") using the information gathered during the minimum data set ("MDS") assessment. There is a separate per diem rate for each of the RUG classifications. The per diem rate also covers rehabilitation and non-rehabilitation ancillary services. Facilities that did not receive any Medicare payments prior to October 1, 1995 are reimbursed one hundred percent (100%) based on the federal per diem rates beginning with their first cost reporting period on or after July 1, 1998. For nursing facilities that received Medicare payments before October 1, 1995, there is a three-year transition period. During the transition period, the per diem rates are comprised of a blend between a "facility-specific" rate and a "federal" (prospective) rate, as follows: (a) for the first cost reporting period, the "facility specific" percentage is seventy-five percent (75%) and the federal per diem percentage is 25%. These percentages change to fifty/fifty (50%-50%) and to twenty-five/seventy-five (25%-75%) for the second and third cost reporting periods. The facility-specific rate is based on the costs for certain Medicare-covered services that the facility provided during its base year, which is the facility's first cost reporting period beginning after September 30, 1994. The facility specific rate is updated by the "nursing facility market basket increase", minus one percent, through federal fiscal year 1999, and by the full market basket increase thereafter. The federal rate is wage and case mix adjusted, and within each metropolitan statistical area and rural area within each state, there is a federal rate for each RUG classification. Also, Congress included provisions in the 1997 Act that would require nursing facilities to submit all claims for all Medicare-covered services that their residents receive, both Medicare Part A and Part B, even if such services are provided by outside suppliers, including but not limited to pharmacy and therapy providers, except for certain excluded services ("Consolidated Billing"). The 1997 Act initially required Consolidated Billing to be effective on July 1, 1998, with a transition period through December 31, 1998 for those nursing facilities lacking the systems and billing capability to comply. However, in a final rule issued in July 1999, HCFA announced that all skilled nursing facilities must begin Consolidated Billing as of the date the facility shifts to PPS, for those residents who are in a covered Part A stay. Outside suppliers of services to residents of the facility must collect payment from the facility. For those skilled nursing facility residents who are not in a covered Part A stay (for example, residents who have exhausted their available days of coverage under the Part A nursing facility benefit), the final rule postponed Consolidated Billing indefinitely. In November 1999, the Medicare Balanced Budget Refinement Act ("Refinement Act") was passed in Congress. The Refinement Act addresses certain reductions in Medicare reimbursement caused by the 1997 Act, including: o For covered skilled nursing facility services furnished on or after April 1, 2000, and before October 1, 2000 (or a later date if HCFA does not complete certain mandated reviews of current RUG weightings), for 15 RUG categories, the federal per diem rate will be increased by 20%; o For fiscal years 2001 and 2002, the federal per diem rates shall be increased by an additional 4%; 10 o For cost report years beginning on or after January 1, 2000, skilled nursing facilities may waive the PPS transition period and elect to receive 100% of the federal per diem rate; o Through the cost reporting period beginning in October, 2000, certain specific services (such as prostheses and chemotherapy drugs) may be reimbursed separately from, and in addition to, the federal per diem rate. The 1997 Act repealed the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities effective October 1, 1997. The Boren Amendment required that Medicaid payments to certain health care providers be reasonable and adequate in order to cover the costs of efficiently and economically operated healthcare 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 assurances that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to nursing facilities and pharmacies or that payments to nursing facilities and pharmacies will be made on timely basis. The 1997 Act also grants greater flexibility to states to establish Medicaid managed care projects without the need to obtain a federal waiver. Although these 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 methodology for nursing facility services or pharmacy services from fee-for-service to managed care negotiated or capitated rates. We anticipate that federal and state governments will continue to review and assess alternative health care delivery systems and payment methodologies. While we have prepared certain estimates of the impact of the above changes, it is not possible to fully quantify the effect of the 1997 Law, the Refinement Act, the interpretation or administration of such legislation or other legislation which affects our business. Accordingly, there can be no assurance that the impact of these changes will not be greater than estimated or that these changes will not adversely affect our business. In addition, Congress and state governments continue to focus on efforts to curb spending on health care programs such as Medicare and Medicaid. Such efforts have not been limited to skilled nursing facilities, but have and will most likely include other services, including pharmacy and therapy services. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue. Managed care organizations and other third party payors have continued to increase their influence over the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a relatively small number of managed care organizations and third party payors. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent such organizations terminate us or choose not to utilize us as a provider, and/or engage our competitors as a preferred or exclusive provider, our business could be materially adversely affected. In addition, private payors, including managed care payors increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation arrangements. 11 The following table identifies Multicare's net revenues attributable to each of its revenue sources for the years ended September 30, 1999 and 1998, and the nine months ended September 30, 1997. 1999 1998 1997 ---- ---- ---- Private and other 33% 37% 43% Medicaid 45% 38% 33% Medicare 22% 25% 24% ---- ---- ---- Total 100% 100% 100% ==== ==== ==== See "Cautionary Statements Regarding Forward Looking Statements" and "Business - Governmental Regulation." Marketing Genesis manages our marketing program. Marketing for eldercare centers is focused at the local level and is 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 is to maintain public awareness of the eldercare center and its capabilities. Genesis' management also takes advantage of our regional concentrations in its marketing efforts, and where appropriate, through consolidated marketing programs which benefit more than one center. Genesis has consolidated our core business under the name Genesis ElderCare (SM). 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 we operate. 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. Personnel As of September 30, 1999, Multicare employed approximately 15,100 persons. Approximately 2,300 employees at 31 of Multicare's facilities are covered by collective bargaining agreements. In addition, certain of our facilities have been subject to an aggressive union organizing campaign. We believe that our relationship with our employees is generally good. The healthcare industry has at times experienced a shortage of qualified healthcare personnel. We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. While we have been able to retain the services of an adequate number of qualified personnel to staff our facilities appropriately and maintain our standards of quality care, there can be no assurance that continued shortages will not in the future affect our ability to attract and maintain an adequate staff of qualified healthcare personnel. A lack of qualified personnel at a facility could result in significant increases in labor costs at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect our operating results. Employee Training and Development We believe that nursing and professional staff retention and development has been and continues to be a critical factor in the successful operation of Multicare. In response to this challenge, a compensation program which provides for annual merit reviews as well as financial and quality of care incentives has been implemented to promote center staff motivation and productivity and to reduce turnover rates. Management believes that our wage rates for professional nursing staff are commensurate with market rates. We also provide employee benefit programs which management believes, as a package, exceed industry standards. 12 Governmental Regulation Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, licensure, certification and health planning. This regulation relates, among other things, to the adequacy of physical plant and equipment, qualifications of personnel, standards of care and operational requirements. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, the revocation of licensure, decertification, imposition of temporary management or the closure of the facility. 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 o increased enforcement of nursing home safety and quality regulations; o increased federal oversight of state inspections of nursing homes; o prosecution of egregious violations of regulations governing nursing homes; o the publication of nursing home survey results on the Internet; o in certain cases, immediate imposition of sanctions without any grace period to correct problems; o imposition of civil monetary penalties for each instance of "serious or chronic violation;" and o federal and state official focused enforcement on nursing homes within chains that have a record of non-compliance with federal rules. Following this pronouncement, it has become more difficult for nursing facilities to maintain licensing and certification. We have experienced and expect to continue to experience increased costs in connection with maintaining our licenses and certifications as well as increased enforcement actions. All of our eldercare centers and healthcare services, to the extent required, are licensed under applicable law. All skilled nursing centers and healthcare services, or practitioners providing the services therein, are certified or approved as providers under one or more of the Medicaid and Medicare programs. Generally, assisted living centers are not eligible to be certified under Medicare or Medicaid. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State and local agencies survey all skilled nursing centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government sponsored third party payor programs. We believe that our centers are in substantial compliance with the various Medicare, Medicaid and state regulatory requirements applicable to them. However, in the ordinary course of our business, we receive notices of deficiencies for failure to comply with various regulatory requirements. Multicare reviews such notices and takes appropriate corrective action. In most cases, Multicare and the reviewing agency will agree upon the measures to be taken to bring the center into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take various adverse actions against a provider, including: o the imposition of fines; o suspension of payments for new admissions to the center; and o in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and revocation of a center's license. 13 These actions may adversely affect a centers' ability to continue to operate, the ability for us to provide certain services, and/or eligibility to participate in the Medicare or Medicaid programs or to receive payments from other payors. Additionally, actions taken against one center may subject other centers under common control or ownership to adverse measures, including loss of licensure or eligibility to participate in Medicare and Medicaid programs. All Multicare eldercare centers are currently certified to receive benefits under Medicaid. Both initial and continuing qualifications of an eldercare center to participate in such programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls. Assisted living facilities are not eligible to be certified under Medicare or Medicaid. Many states in which Multicare operates 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 exist prior to the acquisition or addition of beds or services, the implementation of other changes, or the expenditure of capital. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability to provide the service, to operate the centers, to complete the acquisition, addition or other change, and can also result in the imposition of sanctions or adverse action on the center's license and adverse reimbursement action. We are 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 o the "anti-kickback" provisions of the federal 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; and o the "Stark laws" which prohibit, 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 a financial 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, we have 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 our practices. Although we have contractual arrangements with some healthcare providers to which we pay fees for services rendered or products provided, we believe that our practices are not in violation of these laws. We cannot accurately predict whether enforcement activities will increase or the effect of any such increase on our 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 recent fraud alerts concerning double billing, home health services and the provision of medical supplies to nursing facilities. Accordingly, it is anticipated that these areas may come under closer scrutiny by the government. We cannot accurately predict the impact of any such initiatives. See "Cautionary Statements Regarding Forward Looking Statements" and "Business - Revenue Sources." 14 Competition in the Healthcare Services Industry We compete 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 us. Competing companies may offer newer or different centers or services than us and may thereby attract our customers who are either presently residents of our eldercare centers or are otherwise receiving our healthcare services. We operate eldercare centers in 11 states. In each market, our eldercare centers may compete for customers with: o rehabilitation hospitals; o subacute units of hospitals; o skilled or intermediate nursing centers; and o personal care or residential centers which offer comparable services to those offered by our 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 us. In competing for customers, a center's local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, health maintenance organizations, the customer's families and friends, and other community organizations. Members of a customer's family generally actively participate in selecting an eldercare center. Competition for subacute 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. Multicare 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 cost of services, the quality of clinical services, responsiveness to patient needs, and the ability to provide support in other areas such as third party reimbursement, information management and patient record-keeping. Insurance Multicare carries property and general liability insurance, professional liability insurance, and medical malpractice insurance coverage in amounts deemed adequate by management. However, there can be no assurance that any current or future claims will not exceed applicable insurance coverage. Multicare also requires that physicians practicing at its eldercare centers carry medical malpractice insurance to cover their individual practices. 15 Item 2. Properties. As of November 30, 1999, Multicare operated 137 eldercare facilities and 14 assisted living facilities (91 wholly owned, 8 joint ventures, 22 leased and 30 managed). Twenty-two of Multicare's facilities are leased from third parties. Our inability 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. We believe our physical properties are well maintained and suitable for the purposes for which they are being used. The following table summarizes by state certain information regarding Multicare's eldercare centers at November 30, 1999 (excluding 14 facilities with 1,668 beds at which Multicare provides quality assurance consulting services):
Owned Joint Venture Leased Managed Total ----------------- ----------------- ----------------- ----------------- --------------- Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Massachusetts 8 1,107 5 753 --- --- 25 2,067 38 3,927 New Jersey 14 1,674 --- --- 8 1,294 2 410 24 3,378 Pennsylvania 18 1,969 --- --- --- --- 1 360 19 2,329 West Virginia 15 1,387 3 208 4 326 1 62 23 1,983 Ohio 10 878 --- --- 4 250 --- --- 14 1,128 Connecticut 6 766 --- --- 2 250 1 90 9 1,106 Illinois 9 876 --- --- 1 92 --- --- 10 968 Wisconsin 6 720 --- --- 2 231 --- --- 8 951 Rhode Island 3 373 --- --- --- --- --- --- 3 373 Virginia 1 90 --- --- 1 85 --- --- 2 175 Vermont 1 58 --- --- --- --- --- --- 1 58 --- ----- --- --- --- ----- --- ----- --- ------ 91 9,898 8 961 22 2,528 30 2,989 151 16,376 === ===== === === === ===== === ===== === ======
We anticipate selling 28 eldercare centers with approximately 2,700 beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year 2000. We may manage these facilities subsequent to the sale. Management is currently engaged in discussions for the asset sales, however, we have no firm commitments from potential purchasers for these assets. There can be no assurance that any such sales of assets will be achieved. See "Cautionary Statements Regarding Forward Looking Statements." Item 3. Legal Proceedings. We are a party to claims and legal actions arising in the ordinary course of business. We do not believe that any litigation to which Multicare is currently a party, alone or in the aggregate, will have a material adverse effect on us. See "Cautionary Statements Regarding Forward Looking Statements." Item 4. Submission of Matters to a Vote of Security Holders. None. 16 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Upon completion of the merger our shares are no longer traded. See "The Tender Offer and Merger and its Restructuring." 17 Item 6. Selected Consolidated Financial Data.
Nine Months Fiscal Year Ended Twelve Months Ended September 30, September 30, Ended December 31, --------------------------------- -------------- ------------------- 1999 1998 1997(8) 1997(8) 1996(8) 1995(8) ---- ---- ----- ----- ----- ----- Statement of Operations Data: (unaudited) Net revenues $ 640,414 $ 695,633 $ 679,292 $ 533,952 $ 532,230 $ 353,048 Expenses: Operating expenses 515,800 524,542 515,576 406,173 400,897 265,185 Corporate, general and administrative --- --- 31,984 25,203 25,408 17,643 Management fee 38,360 42,235 --- --- --- --- Depreciation and amortization 45,702 44,875 27,916 21,620 22,344 13,171 Lease expense 12,955 13,194 15,929 12,693 12,110 5,039 Interest expense, net 66,671 61,728 27,857 21,640 25,164 16,065 Debenture conversion expense (1) --- --- 785 785 --- --- Impairment charges (2) 397,269 --- --- --- --- --- ----------- ----------- --------- ---------- ---------- ---------- Total expenses 1,076,757 686,574 620,047 488,114 485,923 317,103 ----------- ----------- --------- ---------- ---------- ---------- Income (loss) before income taxes & extraordinary item (436,343) 9,059 59,245 45,838 46,307 35,945 Income tax provision (benefit) (29,016) 8,821 22,152 17,087 17,570 13,798 ----------- ----------- --------- ---------- ---------- ---------- Income (loss) before extraordinary item (407,327) 238 37,093 28,751 28,737 22,147 Extraordinary item, net of tax benefit (3) --- --- 2,219 873 2,827 3,722 ----------- ----------- --------- ---------- ---------- ---------- Net income (loss) $ (407,327) $ 238 $ 34,874 $ 27,878 $ 25,910 $ 18,425 =========== =========== ========= ========== ========== ========== Other Financial Data: EBITDA (4) $ 73,299 $ 115,662 $ 115,803 $ 89,883 $ 93,815 $ 65,181 EBITDAR(5) 86,254 128,856 131,732 102,576 105,925 70,220 Ratio of EBITDA to interest expense, net 1.1x 1.9x 4.2x 4.1x 3.7x 4.1x Ratio of EBITDAR to interest expense, net, 1.1x 1.7x 3.0x 3.0x 2.8x 3.3x plus lease expense Ratio of earnings to fixed charges (6) 0.5x 1.1x 2.7x 2.8x 2.5x 2.9x Capital expenditures $ 15,307 $ 25,803 $ 54,226 $ 39,301 $ 64,215 $ 39,917 Operating Data: Average number of licensed beds 17,524 17,355 15,222 15,934 11,620 6,861 Occupancy 90.5% 91.6% 91.1% 90.4% 91.0% 91.7% Payor mix: Quality mix (7) 55.4% 62.1% 66.8% 67.3% 64.5% 66.3% Medicaid 44.6% 37.9% 33.2% 32.7% 35.5% 33.7% Balance Sheet Data: Working capital $ 10,350 $ 22,818 $ 51,822 $ 51,822 $ 39,327 $ 55,542 Total assets 1,302,364 1,698,955 823,133 823,133 761,667 470,958 Long-term debt, including current portion 775,956 755,841 424,046 424,046 429,168 283,082 Stockholders' equity $ 325,911 $ 733,238 $ 263,174 $ 263,174 $ 207,935 $ 113,895
- ------------------------------------------------------ (1) Represents a non-recurring charge relating to the early conversion of $11.0 million of Multicare's 7% Convertible Debentures. (2) Represents non-cash impairment charges relating to the write-down of long-lived assets. (3) Multicare incurred extraordinary charges relating to early extinguishment of debt. (4) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit), debenture conversion expense and impairment charges. EBITDA should not be considered an alternative measure of Multicare's net income (loss), operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare's ability to service debt. (5) EBITDAR represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit), debenture conversion expense, impairment charges, 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. (6) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of the sum of earnings before income taxes impairment charges, 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. (7) Quality mix is defined as non-Medicaid patient revenues. (8) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - The Tender Offer and Merger and its Restructuring." 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Upon consummation of the Merger in October 1997, Multicare and Genesis entered into the Management Agreement pursuant to which Genesis manages our operations. Under Genesis' management, our 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 our 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 our network. Moreover, we believe that this strategy will lead to a high quality payor mix and continued high levels of occupancy. Genesis' management also focuses on the revenue and cost opportunities presented through the further integration of our acquisitions. We have completed no new acquisitions and little new construction since the Merger; accordingly, capital expenditures since the Merger have decreased significantly from historical levels. In December 1996, we acquired The AoDoS Group, which owned, operated or managed over 50 long-term care and assisted-living facilities with over 4,200 licensed beds, principally in Massachusetts. The Tender Offer and Merger and its Restructuring In October 1997, Genesis, affiliates of Cypress, TPG and certain of its affiliates and an affiliate of Nazem, acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors." In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put / call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Genesis also entered into an asset purchase agreement (the "Therapy 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 (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 $50,000,000 (the "Pharmacy Sale"). The Company completed the Pharmacy Sale effective January 1, 1998. The Company completed the Therapy Sale in October 1997. 19 Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for shares of Genesis preferred stock. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. Results of Operations Effective September 30, 1997, we changed our fiscal year end to September 30 from December 31. Fiscal 1999 Compared to Fiscal 1998 Net Revenues. Net revenues decreased 7.9% or $55.2 million to $640.4 million in 1999 from the prior year ended September 30, 1998. Of the net revenues decrease for the year ended September 30, 1999, $31.7 million or 4.6% is attributable to Medicare rate dilution as a result of the Medicare Prospective Pay System implemented on January 1, 1999. Effective January 1, 1998, the Company sold its institutional pharmacy business to Genesis. A decrease in net revenues of $19.7 million or 2.8% relates the impact of the Pharmacy Sale. The remaining decrease is primarily attributable to an overall decrease in census and quality mix in our eldercare centers. Our quality mix of non-Medicaid patient revenues was 55% and 62% for the years ended September 30, 1999 and 1998, respectively. The decrease is primarily due to the exclusion of pharmacy revenues effective January 1998. Occupancy rates were 91% and 92% for the years ended September 30, 1999 and 1998, respectively. 20 Operating Expense and Margins. Operating expenses for the year ended September 30, 1999 decreased $8.7 million or 2% from the prior year to $515.8 million. The decrease in operating expenses reflects the impact of the Pharmacy Sale of $16.3 million ($5.2 million of salaries, wages and benefits and $11.1 million of other operating expenses). The offsetting increase of $7.6 million resulted primarily from $10.8 million in higher salaries, wages and benefits offset by a decline in ancillary expenses of $3.2 million. Facility operating margins (net revenues less operating expense) were 19.5% and 24.6% for the years ended September 30, 1999 and 1998, respectively. Income before interest expense, income taxes, depreciation and amortization, debenture conversion expense, impairment charges, and lease expense (EBITDAR) was 13.5% and 18.5% of net revenues for the years ended September 30, 1999 and 1998, respectively. The dilution in margins is principally due to Medicare Rate dilution as a result of PPS. Management Fee Expense. In connection with the Management Agreement, Genesis manages Multicare's operations for a fee of 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 $3.9 million or 9% to $38.4 million due to the decline in net revenues. Lease Expense. Lease expense of $13.0 million and $13.2 million for the year ended September 30, 1999 and 1998, respectively was relatively unchanged as the same number of eldercare centers were leased in 1999 as in 1998. Depreciation and Amortization. Depreciation and amortization expense for the year ended September 30, 1999 increased $0.8 million or 2% from the prior year to $45.7 million. The increase is due to capital expenditures for routine maintenance and renovation. The Company has not completed any acquisitions and has begun little new construction since the Merger. Interest Expense, net. Net interest expense for the year ended September 30, 1999 increased $4.9 million from the prior year to $66.7 million. The increase is principally due to an increase in the effective borrowing rate of approximately 0.7% to 8.6% for the year ended September 30, 1999. Impairment Charges. The impairment charges of $397.3 million for the year ended September 30, 1999 relate to the write-down of long-lived assets pursuant to SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, ("SFAS 121"). The Company evaluated the recoverability of its long-lived assets, including goodwill. In part, changes in government regulations since the Merger has precluded the Company from achieving operating profits from levels that existed prior to the Merger. In the fourth quarter of fiscal 1999, the Company determined that estimated undiscounted future cash flows were below the carrying value of long-lived assets for 21 centers. The fair market value of the impaired eldercare centers was estimated based on a multiple of projected cash flows resulting in a write-down of $167.4 million of primarily goodwill. In addition, the Company anticipates the sale of 28 centers in Ohio, Illinois and Wisconsin, in the second quarter of fiscal 2000. These centers were evaluated based on the anticipated sales price. Long-lived asset values of all centers anticipated to be sold were compared to the anticipated sales price resulting in a write-down of $229.9 million of primarily goodwill. Income Tax Provision (Benefit). The provision for income taxes for the year ended September 30, 1999 decreased by $37.8 million to a benefit of $29.0 million. Of the decrease $20.8 million relates to the tax effect of the impairment charge. The remainder of the decrease, $17.0 million, relates to the decrease in operating income before impairment charges of $48.1 million at an effective rate of 35%. 21 Fiscal 1998 Compared to Fiscal 1997 Net Revenues. Net revenues increased 2.4% or $16.3 million to $695.6 million in 1998 from the prior year ended September 30, 1997. Of the net revenues increase for the year ended September 30, 1998, $64.7 million or 9.5% is attributable to internal growth, resulting mainly from increases in payor rates and development and opening of additional beds. This growth is offset by a decrease in net revenues of $59.6 million or 8.8% relating to the impact of the Pharmacy Sale and the Therapy Sale. The remaining growth is due to the inclusion of results for the acquisition of the AoDoS Group for a full year in fiscal 1998 as compared to nine months in fiscal 1997. Our quality mix of non-Medicaid patient revenues was 62% and 67% for the years ended September 30, 1998 and 1997, respectively. The 1997 percentage reflects the inclusion of the Pharmacy and Therapy revenue included in non-Medicaid patient revenues. Occupancy rates were 92% and 91% for the years ended September 30, 1998 and 1997, respectively. Operating Expense and Margins. Operating expenses for the year ended September 30, 1998 increased $9.0 million or 2% from the prior year to $524.5 million. An increase of $56.7 million 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. The offsetting decreases in operating expenses reflect the impact of the Pharmacy Sale and the Therapy Sale of $47.7 million ($21.9 million of salaries, wages and benefits and $25.8 of other operating expenses). Facility operating margins (net revenues less operating expenses) were 24.6% and 24.1% for the years ended September 30, 1998 and 1997, respectively. Income before interest expense, income taxes, depreciation and amortization, debenture conversion expense, and lease expense (EBITDAR) was 18.5% and 19.4% of net revenues for the years ended September 30, 1998 and 1997, respectively. Management Fee and Corporate, General and Administrative Expense. In connection with the Management Agreement, beginning with fiscal 1998, Genesis manages Multicare's operations for a fee of six percent of Multicare's revenues and is responsible for Multicare's corporate general and administrative expenses. The corporate, general and administrative expenses for the year ended September 30, 1997 included Multicare's resources devoted to operations, finance, legal, risk management and information systems. Lease Expense. Lease expense for the year ended September 30, 1998 decreased $2.7 million or 17% to $13.2 million. Included in the prior year, was lease expense of $2.9 million for six eldercare centers that were leased in the prior year but acquired in connection with the Merger. Depreciation and Amortization. Depreciation and amortization expense for the year ended September 30, 1998 increased $17.0 million or 61% from the prior year to $44.9 million. The increase is due to depreciation on the allocation of the purchase price to property, plant and equipment and to amortization of goodwill relating to the Merger. Interest Expense, net. Net interest expense for the year ended September 30, 1998 increased $33.9 million from the prior year to $61.7 million. This increase is a result of incremental borrowings under the Company's Senior Facilities and 9% Notes incurred to finance the Merger. Debenture Conversion Expense. Debenture conversion expense for the year ended September 30, 1997 relates to the premium paid in January 1997 to convert $11 million of convertible debentures into common stock. 22 Income Tax Expense. The provision for income taxes increased to 97% of pre-tax income for the year ended September 30, 1998 from 37% of pre-tax income in the prior year. The increase relates to non-deductible goodwill amortization resulting from the Merger. Liquidity and Capital Resources General We have substantial indebtedness and, as a result, significant debt service obligations. As of September 30, 1999, we had approximately $741,256,000 (excluding current portion of $34,700,000) of long-term indebtedness which represented 69% of our total capitalization. We also have significant long-term operating lease obligations with respect to certain of our eldercare centers. The degree to which we are leveraged could have important consequences, including, but not limited to the following: o our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be limited or impaired; o a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on indebtedness, thereby reducing the funds available to us for our operations; o our operating flexibility is limited by restrictions contained in some of our debt agreements which limit our ability to incur additional indebtedness and enter into other financial transactions, to pay dividends, or sell assets and set forth minimum net worth requirements; o our degree of leverage may make us more vulnerable to economic downturns and less competitive, may reduce our flexibility in responding to changing business and economic conditions and may limit our ability to pursue other business opportunities, to finance our future operations or capital needs, and to implement our business strategy; and o certain of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of higher interest rates. Required payments of principal and interest on our indebtedness is expected to be financed from our cash flow from operations and from the anticipated sale of certain assets in Illinois, Wisconsin and Ohio in the second quarter of our fiscal year 2000. Our ability to make scheduled payments of the principal of, to pay interest thereon, or to refinance our indebtedness, depends on the future performance of our business, which will in turn be subject to financial, business, economic and other factors affecting our business and operations, including factors beyond our control, such as prevailing economic conditions. Our ability to make scheduled payments of the principal or interest depends on our ability to complete the sale of assets in Illinois, Wisconsin and Ohio. Management is currently engaged in discussions for the asset sales, however, we have no firm commitments from potential purchases for these assets. There can be no assurances that the anticipated sales will be consummated and that cash flow from operations will be sufficient to enable us to service our debt and meet our other obligations. If such cash flow is insufficient, we may be required to refinance and/or restructure all or a portion of our existing debt, to sell additional assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such additional sales of assets or additional financing could be achieved. We also have significant long-term operating lease obligations with respect to certain of our sites of service, including eldercare centers. Operating cash flow will depend upon our ability to effect cost reduction initiatives and to continue to reduce our investment in working capital. We believe that operating cash flow which is expected to be augmented by planned asset sales and refinancing transactions, will be sufficient to meet our future obligations. However, there can be no assurances that the cash flow from our operations will be sufficient to enable us to service our substantial indebtedness and meet our other obligations. At September 30, 1999 and 1998, we had working capital of $10.3 million and $22.8 million, respectively. 23 Cash flow used in operations was $19.9 million for the year ended September 30, 1999 compared to cash flow provided by operations of $23.1 million in the comparable period of 1998. The decrease in operating cash flows results primarily from the decline in earnings before impairment charges of $30.0 million which is attributable to decreased revenue as a result of the implementation of PPS. Net accounts receivable were $123.1 and $114.2 million at September 30, 1999 and 1998, respectively. 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 have had a material adverse effect on the Company's future operating results and cash flows. Cash flows from investing in fiscal year 1999 includes the deferred management fees due to Genesis of $12.8 million as a source of cash. Capital expenditures of $15.3 million are principally for routine maintenance and renovation. The Company has not completed any new acquisitions and has begun little new construction since the Merger. Credit Facility and Other Debt 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 "Credit Facility"), provided by a syndicate of banks and other financial institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as administrative agents (the "Administrative Agent"), pursuant to a certain credit agreement (the "Long Term Credit Agreement") dated as of October 14, 1997, as amended from time to time. Multicare entered into a fourth amended and restated credit agreement on August 20, 1999 which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Tranche A Term Facility and Revolving Facility (defined below), permitted the restructuring of the Put / Call Agreement, as defined, and increased the interest rates applying to the Term Loans (defined below) and the Revolving Facility. The Credit Facilities consist of three term loans with an aggregate original balance of $400 million (collectively, the "Term Loans"), and a $125 million revolving credit loan (the "Revolving Facility"). The Term Loans amortize in quarterly installments through 2005, of which $34 million is payable in Fiscal 2000. The loans consist of: o an original six year term loan maturing in September 2003 with an outstanding balance of $148 million at September 30, 1999 (the "Tranche A Term Facility"); o an original seven year term loan maturing in September 2004 with an outstanding balance of $147 million at September 30, 1999 (the "Tranche B Term Facility"); and o an original eight year term loan maturing in June 2005 with an outstanding balance of $49 million at September 30, 1999 (the "Tranche C Term Facility"). o The Revolving Facility, with an outstanding balance of $116 million at September 30, 1999, becomes payable in full on September 30, 2003. The Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. 24 Effective with the Amendment on August 20, 1999, loans under the Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%; loans under the Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0%; loans under the Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. All net proceeds of the disposition of certain assets located in Ohio not in excess of $55 million shall be applied against the Revolving Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held be each applicable lender. All net proceeds of the disposition of certain assets located in Illinois and Wisconsin shall be applied first against the Tranche A Term Loan, on a pro rata basis in accordance with the relative aggregate principal amounts held by each applicable lender. The Company anticipates selling 28 eldercare centers with approximately 2,700 beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year 2000. The Company may manage these centers subsequent to the sale. Based on the anticipated sales, debt amortization on Tranche A is expected to be reduced by approximately $12.9 million in the fiscal year 2000, $19.3 million in fiscal year 2001, $21.4 million in fiscal year 2002, and $21.4 million in fiscal year 2003. There can be no assurance that any such sales of assets will be achieved. The Credit Facility contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; causes Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), as defined, and corporate separateness; and will cause Multicare to comply with the terms of other material agreements, as well as comply with usual and customary covenants for transactions of this nature. On August 11, 1997, Genesis ElderCare Acquisition Corp. sold $250 million principal amount of 9% Senior Subordinated Notes due 2007 ("the 9% Notes"). 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 other restrictions affecting its subsidiaries. 25 Merger and Other Transactions 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. At September 30, 1999 $26.9 million is subordinated and due to Genesis Health Ventures, Inc. 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 $24.0 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 $50.0 million, subject to adjustment (the "Pharmacy Sale"). We 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 our subsidiaries 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 our right 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 and construction loans being made to us, upon the earlier of the facility reaching stabilized occupancy or the maturity of the loan secured by the facility provided, however, that we 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 us under minimum rent leases. The initial term of any minimum rent lease will be ten years, and then we 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: o 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 o one-half of the increase in the Consumer Price Index during the immediately preceding year. 26 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 Issues Legislative and regulatory action, including but not limited to the 1997 Act and the Refinement Act, has resulted in continuing change in the Medicare and Medicaid reimbursement programs which has adversely impacted us. The changes have limited, and are expected to continue to limit, payments increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers or other providers. There can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on us. See "Cautionary Statements Regarding Forward Looking Statements," "Business - Revenue Sources" and "Business-Government Regulation." Anticipated Impact of Healthcare Reform The majority of the Multicare eldercare centers began implementation of PPS on January 1, 1999. The actual impact of PPS on our earnings in future periods will depend on many variables which can not be quantified at this time, including the effect of the Refinement Act, regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, and our ability to reduce costs. See "Cautionary Statements Regarding Forward Looking Statements," "Business - Revenue Sources" and "Business Governmental Regulation." Seasonality Our 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, we have offset our increased operating costs by increasing charges for our services. We have also implemented cost control measures to limit increases in operating costs and expenses but cannot predict our ability to control such operating cost increases in the future. See "Cautionary Statements Regarding Forward Looking Statements." 27 Year 2000 Compliance We have implemented a process to address our Year 2000 compliance issues. The process includes: o an inventory and assessment of the compliance of the essential systems and equipment of the Company and of Year 2000 mission critical suppliers, customers, and other third parties, o the remediation of non-compliant systems and equipment, and o contingency planning. Our Year 2000 work is being performed and paid for by Genesis Health Ventures , Inc., manager of our operations under the terms of a long-term management agreement. Our manager has concluded its inventory and assessment work and has concluded its remediation of information technology ("IT") systems and equipment and non-IT systems and equipment (embedded technology). Our manager has substantially completed its review of the systems and equipment of critical suppliers, customers and other third parties. With respect to the Year 2000 compliance of critical third parties, we derive a substantial portion of our revenues from the Medicare and Medicaid programs. In 1998, the HCFA Administrator asserted that all systems necessary to make payments to fiscal intermediaries would be compliant. The Administrator provided further assurance that intermediary systems would also be compliant well in advance of the deadline. All Medicare and most Medicaid intermediaries have reported to our manager that they are either already compliant or will be prior to the end of 1999. Our manager has worked actively to confirm the Year 2000 readiness status for each intermediary and continues to work cooperatively with a few remaining Medicaid plans to ensure appropriate continuing payments for services rendered to all government-insured patients. We have remediated our critical IT and non-IT systems and equipment. We have also prepared contingency plans in the event that essential systems and equipment fail to be Year 2000 compliant. We believe we have achieved Year 2000 compliance for all our essential systems and equipment; although there can be no assurance that potential non-compliance will not have a material adverse effect on our business, financial condition or results of operations. In addition there can be no assurance that all of our critical suppliers and other third parties will be Year 2000 compliant 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. Our manager's aggregate costs directly related to Year 2000 compliance efforts is approximately $2,100,000. Our analysis of our 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. Our failure or the failure of third parties to be fully Year 2000 compliant for essential systems and equipment by January 1, 2000 could result in interruptions of normal business operations. Our potential risks include: o the inability to deliver patient care related services in the Company's facilities and / or in non- affiliated facilities, o the delayed receipt of reimbursement from the Federal or State governments, private payors, or intermediaries, o the failure of security systems, elevators, heating systems or other operational systems and equipment of the Company's facilities and 28 o the inability to receive critical equipment and supplies from vendors. Each of these events could have a material adverse affect on the Company's business, results of operations and financial condition. Contingency plans for our Year 2000-related issues have been developed and include, but are not limited to, identification of alternate suppliers, alternate technologies and alternate manual systems. 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 April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("the Statement"). This statement 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. This Statement is effective for fiscal years beginning after December 15, 1998 or our fiscal year ending September 30, 2000. We expect the cumulative effect of the accounting change to be approximately $3.1 million, net of tax, which will be recorded in the Company's quarter ending December 31, 1999. 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, 2000. We intend to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on our earnings or financial position. 29 Item 7a. Quantitative and Qualitative Disclosures about Market Risk We are exposed to the impact of interest rate changes. In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates. Our objective in managing our exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to our 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 we would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates. The three-month LIBO rate is approximately 5.51% at September 30, 1999. The estimated amount we would pay to terminate our interest rate swap agreements outstanding at September 30, 1999 is approximately $1.0 million. The fair value of our debt, based on quoted market prices or current rates for similar instruments with same maturities was approximately $408,257,000 and $743,332,000 September 30, 1999 and September 30, 1998, respectively. The table below represents the contractual or notional balances of our fixed rate and market sensitive instruments at expected maturity dates and the weighted average interest rates. ($ in thousands)
Liabilities ------------------------------------------------------------------------------------------------------------------ Expected Maturity 2000 2001 2002 2003 2004 Thereafter Total ------------------------------------------------------------------------------------------------------------------ Long Term Debt: Fixed Rate $700 $20,394 $15,103 $710 $773 $278,401 $316,081 Average Interest 9.1% 9.1% 9.1% 9.0% 9.0% 9.4% 9.1% Rate Variable Rate $34,000 $38,000 $42,000 $158,000 $153,000 $34,875 $459,875 Average Interest Rate Libor +3.9% Libor +3.9% Libor +3.9% Libor +3.9% Libor +4.1 Libor +4.3 Libor + 3.9 ------------------------------------------------------------------------------------------------------------------
Interest Rate Derivatives ------------------------------------------------------------------------------------------------------------------ Expected Maturity 2000 2001 2002 2003 2004 Thereafter Total ------------------------------------------------------------------------------------------------------------------ Interest Rate Swaps: Variable to Fixed $100,000 $100,000 Average Fixed 5.6% 5.6% Pay Rate Average Variable Rate Libor Libor ------------------------------------------------------------------------------------------------------------------
30 Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ..................................................................... 32 Consolidated Balance Sheets as of September 30, 1999 and 1998 .................................... 33 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997 (unaudited) and the nine month period ended September 30, 1997 .............................. 34 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997 ........................................... 35 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997, (unaudited) and the nine month period ended September 30, 1997 ............................... 36 Notes to Consolidated Financial Statements .......................................................37-49
31 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 September 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended September 30, 1999 and 1998, and 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 September 30, 1999 and 1998, and the results of their operations and their cash flows for the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997 in conformity with generally accepted accounting principles. KPMG LLP Philadelphia, Pennsylvania December 1, 1999 32 The Multicare Companies, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share and per share data)
September 30, ------------------------------ 1999 1998 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 3,967 $ 11,344 Accounts receivable, net of allowance for doubtful accounts of $18,494 and $10,080 in 1999 and 1998, respectively 123,131 114,210 Prepaid expenses and other current assets 13,130 16,208 Deferred taxes 2,027 2,117 ------------ ------------- Total current assets 142,255 143,879 Property, plant and equipment: Land, buildings and improvements 590,334 678,748 Equipment, furniture and fixtures 57,996 51,013 Construction in progress 15,197 9,627 ------------ ------------- 663,527 739,388 Less: accumulated depreciation and amortization 42,156 20,276 ------------ ------------- 621,371 719,112 Goodwill, net 480,809 778,231 Debt issuance costs, net 17,444 18,956 Other assets 40,485 38,777 ------------ ------------- $ 1,302,364 $ 1,698,955 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 44,062 $ 30,188 Accrued liabilities 53,143 60,226 Current portion of long-term debt 34,700 30,647 ------------ ------------- Total current liabilities 131,905 121,061 Long-term debt 741,256 725,194 Deferred taxes 76,007 105,023 Due to Genesis Health Ventures, Inc. and Other Liabilities 27,285 14,439 Stockholders' equity: Common stock, par value $.01, 100 shares authorized, 100 issued and outstanding in 1999 and 1998 --- --- Additional paid-in capital 733,000 733,000 Retained earnings (deficit) (407,089) 238 ------------ ------------- Total stockholders' equity 325,911 733,238 ------------ ------------- $ 1,302,364 $ 1,698,955 ============ =============
See accompanying notes to consolidated financial statements. 33 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands)
Nine month Year ended period ended September 30, September 30, --------------------------------------- ------------- 1999 1998 1997 1997 --------- ------- ------- ------------- (unaudited) Net revenues $ 640,414 695,633 679,292 $533,952 Expenses: Operating expenses: Salaries, wages and benefits 330,254 341,859 325,020 255,762 Other operating expenses 185,546 182,683 190,556 150,411 Corporate, general and administrative expense --- --- 31,984 25,203 Management fee 38,360 42,235 --- --- Lease expense 12,955 13,194 15,929 12,693 Depreciation and amortization expense 45,702 44,875 27,916 21,620 Interest expense, net 66,671 61,728 27,857 21,640 Debenture conversion expense --- --- 785 785 Impairment charges 397,269 --- --- --- --------- ------- ------- ------- Total expenses 1,076,757 686,574 620,047 488,114 Income (loss) before income taxes and extraordinary item (436,343) 9,059 59,245 45,838 Income tax provision (benefit) (29,016) 8,821 22,152 17,087 --------- ------- ------- ------- Income (loss) before extraordinary item (407,327) 238 37,093 28,751 Extraordinary item - loss on extinguishment of debt, net of tax benefit --- --- 2,219 873 --------- ------- ------- ------- Net income (loss) $(407,327) 238 34,874 $27,878 ========= ======= ======= =======
See accompanying notes to consolidated financial statements. 34 The Multicare Companies, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended September 30, 1999 and 1998 and the Nine Month Period Ended September 30, 1997 (In thousands)
Common Stock Additional Retained Total ------------ Paid-In Earnings Stockholders' Shares Amount Capital (Deficit) Equity --------- --------- ----------- ----------- ---------- Balances, December 31, 1996 30,134 $ 301 $ 143,513 $ 64,121 $ 207,935 Exercise of stock options (including tax benefit) 21 --- 277 --- 277 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 Merger with Genesis Eldercare Acquisition Corp. (31,731) (317) (170,858) (91,999) (263,174) Equity Contribution, net --- --- 733,000 --- 733,000 Net income --- --- --- 238 238 --------- --------- ----------- ----------- ---------- Balances, September 30, 1998 --- $ --- $ 733,000 $ 238 $ 733,238 Net loss --- --- --- (407,327) (407,327) --------- --------- ----------- ----------- ---------- Balances, September 30, 1999 --- $ --- $ 733,000 $ (407,089) $ 325,911 ========= ========= =========== =========== ==========
See accompanying notes to consolidated financial statements. 35 THE MULTICARE COMPANIES, INC AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Nine Month Fiscal Years Ended September 30, Period Ended --------------------------------------------- September 30, 1999 1998 1997 1997 ---------- ----------- -------------- -------------- Cash flows from operating activities: (Unaudited) Net income (loss) $(407,327) $ 238 $ 34,874 $ 27,878 Adjustments to reconcile net income to net cash provided by operating activities: Impairment charges 397,269 --- --- --- Extraordinary item --- --- 3,698 1,456 Depreciation and amortization 45,702 44,722 27,706 21,332 Changes in assets and liabilities: Deferred taxes (29,016) 28,724 (2,953) --- Accounts receivable (35,704) (42,734) (14,080) (16,196) Prepaid expenses and other current assets 3,077 (4,402) (6,185) (7,001) Accounts payable and accrued liabilities 6,108 (3,433) 25,153 9,579 ---------- ----------- -------------- ------ Net cash provided by (used in) operating activities (19,891) 23,115 68,213 37,048 ---------- ----------- -------------- ------ Cash flows from investing activities: Assets and operations acquired --- (1,563) (92,695) (22,568) Capital expenditures (15,307) (25,803) (54,226) (39,301) Purchase of shares in tender offer --- (921,326) --- --- Costs in connection with merger --- (102,733) --- --- Proceeds from repayment of construction advances --- --- 13,100 13,100 Proceeds from sale of pharmacy business --- 50,000 --- --- Proceeds from sale of therapy business --- 24,000 --- --- Other 10,653 (4,212) (12,024) (9,465) ---------- ----------- -------------- ------ Net cash used in investing activities (4,654) (981,637) (145,845) (58,234) ---------- ----------- -------------- ------ Cash flows from financing activities: Proceeds from issuance of common stock --- --- 51,942 --- Proceeds from exercise of stock options and stock purchase plan --- --- 1,351 1,075 Proceeds from issuance of put options --- --- 184 184 Equity contribution --- 733,000 --- --- Debt and other financing obligation repayments in connection with merger --- (453,725) --- --- Proceeds from long-term debt 320,911 2,306,947 457,181 112,400 Payments of long-term debt (300,796) (1,596,892) (431,718) (91,310) Debt issuance costs (2,947) (21,582) (1,083) (195) ---------- ----------- -------------- ------ Net cash provided by financing activities 17,168 967,748 77,857 22,154 ---------- ----------- -------------- ------ Increase (decrease) in cash and cash equivalents (7,377) 9,226 225 968 Cash and cash equivalents at beginning of period 11,344 2,118 1,893 1,150 ---------- ----------- -------------- ------ Cash and cash equivalents at end of period $ 3,967 $ 11,344 $ 2,118 $ 2,118 ========== =========== ============== ====== Supplemental disclosure of non cash investing and financing activities: Fair value of assets and operations acquired $ --- $ 16,622 $ 121,026 $ 24,937 Debt and liabilities assumed in connection with assets and operations acquired --- 15,059 18,314 2,369 Stock issued in connection with assets and operations acquired --- --- 10,017 --- ---------- ----------- -------------- ------ $ --- $ 1,563 $ 92,695 $ 22,568 ========== =========== ============== ======
See accompanying notes to consolidated financial statements. 36 The Multicare Companies, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years Ended September 30, 1999 and 1998, and the Nine Month Period Ended September 30, 1997 (In thousands, except share data) 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. (1) Organization and Basis of Presentation The consolidated financial statements include the accounts of the Company and its majority owned and controlled subsidiaries. Investments in affiliates in which the Company has a 20% to 50% equity interest are reported using the equity method. The operations of Multicare before the Merger (as defined below) are referred to as the Predecessor Company. Effective September 30, 1997, Multicare changed its fiscal year end to September 30 from December 31. All significant intercompany transactions and accounts of the Company have been eliminated. Multicare operates predominantly in one industry segment, operating skilled eldercare centers, which represents over 95% of consolidated revenues. 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. (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 37 The carrying amounts of cash and cash equivalents, 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) Property, Plant and Equipment Land, buildings and improvements, equipment, furniture and fixtures are stated at fair market value at the date of the Merger (as defined below). Subsequent additions 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 thirty-five years. Depreciation of equipment and furniture and fixtures is calculated using the straight-line method over their estimated useful lives of seven years. Depreciation expense was $22,197, $22,227 and $15,969, respectively for the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997. The Company records impairment losses on long-lived assets including property, plant and equipment used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. (d) Goodwill Goodwill resulting from acquisitions accounted for as purchases of $520,109 and $797,411 at September 30, 1999 and 1998 is amortized on a straight-line basis over periods of five to forty years. As of September 30, 1999 and 1998 accumulated amortization of goodwill was $39,300 and $19,180, respectively. 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. See Note 6. (e) Debt Issuance Costs Debt issuance costs are amortized on a straight-line basis which approximates the effective interest method over periods of seven to ten years. (f) Other Assets Direct costs of $4,946 and $2,041 at September 30, 1999 and 1998 were incurred to develop certain facilities and were deferred during the start-up period and amortized on a straight-line basis over five years. At September 30, 1999 and 1998, investments in non-consolidated affiliates included in other assets amounted to $16,684 and $18,792, respectively. Results of operations relating to the non-consolidated affiliates were insignificant to the Company's consolidated financial statements the years ended September 30, 1999 and 1998. (g) 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. Net revenues also include management fees revenue of $10,978, $13,306 and $9,995 for the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997, respectively. 38 The distribution of net patient service revenue by class of payor was as follows:
Year Ended Year Ended Nine Months Ended Class of Payor September 30, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------ Private pay and other $211,558 256,699 232,260 Medicaid 285,559 263,507 174,651 Medicare 143,297 175,427 127,041 ------- ------- ------- $640,414 695,633 533,952 ======= ======= =======
(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) New Accounting Pronouncements In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("the Statement"). This statement 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 operations. The Company expects the cumulative effect of the accounting change to be approximately $3.1 million, net of tax which will be recorded in the Company's quarter ending December 31, 1999. 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, 2000. We intend to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on our earnings or financial position. (3) Certain Significant Risks and Uncertainties The following information is provided in accordance with the AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties." We have substantial indebtedness and, as a result, significant debt service obligations. As of September 30, 1999, we had approximately $741,256 of long-term indebtedness (excluding current portion of $34,700) which represented 69% of our total capitalization. We also have significant long-term operating lease obligations with respect to certain of our eldercare centers. The degree to which we are leveraged could have important consequences, including, but not limited to the following: 39 o the Company's ability to obtain additional financing in the future for working capital, capital expenditures, or other purposes may be limited or impaired; o a substantial portion of the Company's cash flow from operations will be dedicated to the payment of principal and interest on the Company's indebtedness, thereby reducing the funds available to us for our operations; o the Company's operating flexibility is limited by restrictions contained in some of the Company's debt agreements which set forth minimum net worth requirements and/or limit the Company's ability to incur additional indebtedness, to enter into other financial transactions, to pay dividends, or to sell assets; o the Company's degree of leverage may make it more vulnerable to economic downturns and less competitive, may reduce the Company's flexibility in responding to changing business and economic conditions and may limit the Company's ability to pursue other business opportunities, to finance the Company's future operations or capital needs, and to implement its business strategy; and o certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company's to the risk of greater interest rates. The Company expects to finance required payments of principal and interest on our indebtedness from its cash flow from operations and from the anticipated sale of certain assets in Illinois, Wisconsin and Ohio in the second quarter of our fiscal year 2000. Management is currently engaged in discussions for the asset sales, however, the Company has no firm commitments from potential purchasers for these assets. The Company's ability to make scheduled payments of the principal or interest on, or to refinance indebtedness, depends on the future performance of the Company's business, which is in turn subject to financial, business, economic and other factors affecting the Company's business and operations, including factors beyond its control, such as prevailing economic conditions. There can be no assurances that the anticipated sales will be consummated and that cash flow from operations will be sufficient to enable the Company's to service its debt and meet other obligations. If such cash flow is insufficient, the Company may be required to refinance and/or restructure all or a portion of its existing debt, to sell additional assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such additional sales of assets or additional financing could be achieved. The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, and other third party payors. The health care industry is experiencing a strong trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, generally have resulted in reduced rates of reimbursement for services to be provided by the Company. In recent years, several significant actions have been taken with respect to Medicare and Medicaid reimbursement, including the following: o the adoption of the Medicare Prospective Payment System ("PPS") pursuant to the Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget Refinement Act; and o the repeal of the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities. 40 While the Company has prepared certain estimates of the impact of the above changes, it is not possible to fully quantify the effect of recent legislation, the interpretation or administration of such legislation or any other governmental initiatives on its business. Accordingly, there can be no assurance that the impact of these changes will not be greater than estimated or that these legislative changes or any future healthcare legislation will not adversely affect the Company's business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company's financial condition and results of operations may be affected by the 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. (4) Tender Offer and Merger and its Restructuring In October 1997, Genesis, affiliates of Cypress, TPG and certain of its affiliates and an affiliate of Nazem, acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors." Genesis also entered into an asset sale 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 (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 (the "Pharmacy Sale"). The Company completed the Pharmacy Sale effective January 1, 1998. The Company completed the Therapy Sale in October 1997. In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put / call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for shares of Genesis preferred stock. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. 41 Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. (5) Acquisitions/Dispositions In December 1996, the Company completed the acquisition of The AoDoS Group (AoDoS). 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 AoDoS. Total goodwill approximated $30,700 which was amortized over period of twenty-five to forty years. 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 1998 unaudited pro forma 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. September 30, 1998 ------------- (Unaudited) Net revenues $678,589 Income (loss) before extraordinary item 474 Net income (loss) $ 474 42 (6) Asset Impairment Pursuant to SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company evaluated the recoverability of its long-lived assets, including goodwill. In part, changes in government regulations since the Merger have precluded the Company from achieving operating profits from levels that existed prior to the Merger. In the fourth quarter of fiscal 1999, the Company determined that estimated undiscounted future cash flows for 21 centers were below the carrying value of long-lived assets. The fair market value of the impaired eldercare centers was estimated based on a multiple of projected cash flows resulting in a write-down, primarily of goodwill of $167.4 million. In addition, the Company anticipates the sale of 28 centers in Ohio, Illinois and Wisconsin, in the second quarter of fiscal 2000. Management is currently engaged in discussions for the asset sales, however, the Company has no firm commitments from potential purchasers for these assets. These centers were evaluated based on the anticipated sales price. Long-lived asset values of all centers anticipated to be sold were compared to the expected sales price resulting in a write-down, primarily of goodwill, of $229.9 million. (7) Income Taxes The provision for income taxes, exclusive of income taxes related to the extraordinary items, consists of the following: September 30, 1999 1998 1997 ----------- -------- --------- Federal: Current $ --- $ 8,647 $ 15,029 Deferred 29,016 79 133 State: Current --- 87 1,908 Deferred --- 8 17 ----------- -------- --------- $ 29,016 $ 8,821 $ 17,087 =========== ======== ========= Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to net income before income taxes and extraordinary items as a result of the following:
Year Ended Year Ended Nine Months Ended September 30, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------ Computed "expected" tax expense $(152,720) 3,170 $16,043 Increase in income taxes resulting from: State and local income taxes, net of federal tax benefits --- 95 169 Amortization of goodwill 123,704 6,280 875 Work opportunity tax credits --- (724) --- --------- ------ ------- $ (29,016) 8,821 $17,087 ========= ====== =======
43 The tax effects of temporary differences giving rise to deferred tax assets and liabilities are as follows: September 30, 1999 1998 ------- -------- Deferred tax assets: Accounts receivable $ 1,325 $ 1,325 Employee benefits and compensated absences 702 792 ------- -------- $ 2,027 $ 2,117 ======= ======== Deferred tax liabilities: Property, plant and equipment $75,491 $104,179 Other 516 844 ------- -------- $76,007 $105,023 ======= ======== Cash paid for income taxes was $0, $1,542, and $6,580 in the years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997, respectively. (8) Financing Obligations A summary of long-term debt follows:
September 30, 1999 1998 --------- --------- Bank credit facility, with interest at approximately 8.3% and 8.2% in 1999 and 1998 ("Senior Facilities") $ 459,875 $ 438,875 Senior subordinated notes, due 2007, net of unamortized original issue discount of $1,101 and $1,241 in 1999 and 1998, respectively with interest at 9.0% 248,899 248,759 Term Loans with ElderTrust with interest at 10.5% 19,650 19,650 Mortgages and other debt, including unamortized premium of $3,259 and $3,573 in 1999 and 1998, respectively, payable in varying monthly or quarterly installments with interest at rates between 6.0% and 11.5%. These loans mature between 2002 and 2033 47,532 48,557 --------- --------- 775,956 755,841 Less current portion 34,700 30,647 --------- --------- Long-term debt, less current portion $ 741,256 $ 725,194 ========= =========
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 "Credit Facility"), provided by a syndicate of banks and other financial institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as administrative agents (the "Administrative Agent"), pursuant to a certain credit agreement (the "Long Term Credit Agreement") dated as of October 14, 1997, as amended form time to time. On August 20, 1999 Multicare entered into a certain Amendment No. 4 and Waiver to Credit Agreement ("Amendment") which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Tranche A Term Facility and Revolving Facility (defined below), permitted the restructuring of the Put / Call Agreement, as defined, and increased the interest rates applying to the Term Loans (defined below) and the Revolving Facility. 44 The Credit Facilities consist of three term loans with an aggregate original balances of $400 million (collectively, the "Term Loans"), and a $125 million revolving credit loan (the "Revolving Facility"). The Term Loans amortize in quarterly installments through 2005, of which $34 million is payable in Fiscal 2000. The loans consist of: o an original six year term loan maturing in September 2003 with an outstanding balance of $148 million at September 30, 1999 (the "Tranche A Term Facility"); o an original seven year term loan maturing in September 2004 with an outstanding balance of $147 million at September 30, 1999 (the "Tranche B Term Facility"); and o an original eight year term loan maturing in June 2005 with an outstanding balance of $49 million at September 30, 1999 (the "Tranche C Term Facility"). o The Revolving Facility, with an outstanding balance of $116 million at September 30, 1999, becomes payable in full on September 30, 2003. The Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. Effective with the Amendment on August 20, 1999, loans under the Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%; loans under the Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0%; loans under the Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. All net proceeds of the disposition of certain assets located in Illinois and Wisconsin shall be applied first against the Tranche A Term Loan, on a pro rata basis in accordance with the relative aggregate principal amounts held by each applicable lender. All net proceeds of the anticipated disposition of certain assets located in Ohio not in excess of $55 million shall be applied against the Revolving Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held be each applicable lender. The Company anticipates selling 28 eldercare centers with approximately 2,700 beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year 2000. The Company anticipates managing these centers subsequent to the sale. Based on the anticipated sales, debt amortization on Tranche A is expected to be reduced by approximately $12.9 million in the fiscal year 2000, $19.3 million in fiscal year 2001, $21.4 million in fiscal year 2002, and $21.4 million in fiscal year 2003. There can be no assurance that any such sales of assets will be achieved. The Credit Facility (as amended) contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; causes Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), as defined, and corporate separateness; and will cause Multicare to comply with the terms of other material agreements, as well as comply with usual and customary covenants for transactions of this nature. 45 On August 11, 1997, Genesis ElderCare Acquisition Corp. sold $250 million principal amount of Senior Subordinated Notes due 2007 (the "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. Upon the consummation of the Merger, the Company assumed all obligations of Acquisition Corp. with respect to and under the 9% Notes and the related Indenture. In the nine month period ended September 30, 1997 the Company recorded extraordinary charges of $873 net of tax benefits of $583 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 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 Company is subject to various financial and restrictive covenants under its Senior Facilities, the 9% Notes and other indebtedness and is in compliance with such covenants at September 30, 1999. The aggregate maturities of long-term debt for the five years ending September 30, 2004 and thereafter are as follows: Year Maturities ---------- 2000 $ 34,700 2001 58,394 2002 57,103 2003 158,710 2004 153,773 Thereafter 311,118 ---------- 773,798 Discount (1,101) Premium 3,259 ---------- $ 775,956 ========== 46 The Company enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates. These agreements generally convert underlying variable-rate debt based on three month LIBO Rates into fixed-rate debt. At September 30, 1999, the notional principal amount of these agreements totaled $100,000. At September 30, 1999, the notional principal amount the Company made quarterly payments at a weighted average fixed rate of 5.6% and received payments at a floating rate based on three month LIBO Rate. Interest expense of $967, $2,136 and $1,816 was capitalized in the years ended September 30, 1999 and 1998, and in the nine month period ended September 30, 1997, respectively, in connection with new construction and facility renovations and expansions. Cash paid for interest was $67,619, $60,498 and $22,817 in the years ended September 30, 1999 and 1998, and in the nine month period ended September 30, 1997, respectively. (9) Accrued Liabilities At September 30, 1999 and 1998 accrued liabilities consist of the following: 1999 1998 ------- ------- Salaries and wages $15,898 $24,924 Interest 7,165 7,071 Insurance 9,682 10,849 Other 20,398 17,382 ------- ------- $53,143 $60,226 ======= ======= (10) Other Long Term Liabilities At September 30, 1999 and 1998 other long term liabilities include $26,868 and $14,079 of accrued management fees under the terms of the Management Agreement (See Note (4) - Tender Offer and Merger and its Restructuring). Since inception of the Management Agreement, 2% of Multicare's net revenue payable as a management fee to Genesis has been deferred. 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. (11) Commitments and Contingencies The Company has operating leases on certain of its facilities and offices. Minimum rental commitments under all noncancelable leases at September 30, 1999 are as follows: Year 2000 $12,610 2001 12,711 2002 12,754 2003 11,699 2004 10,518 Thereafter 35,577 ------- $95,869 ======= Letters of credit ensure the Company's performance or payment to third parties in accordance with specified terms and conditions. At September 30, 1999 letters of credit outstanding amounted to $1.7 million. 47 The Company has guaranteed $7.7 million 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 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 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. 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. (12) Fair Value of Financial Instruments The Company believes the carrying amount of cash and equivalents, accounts receivable (net of allowance for doubtful accounts), cost report receivables, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued compensation, accrued interest and income taxes payable approximates fair value because of the short-term maturity of these instruments. The Company also believes the carrying value of mortgage notes and other notes receivable, and non marketable debt securities approximate fair value based upon the discounted value of expected future cash flows using interest rates at which similar investments would be made to borrowers with similar credit quality and for the same remaining maturities. 48 The Company's investments in joint ventures are stated at original appraised values which approximates fair value. 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 it's interest rate swap agreements outstanding at September 30, 1999 is approximately $1 million. The fair value of the Company's commitments to provide certain financial guarantees is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Since the Company has not charged fees for currently outstanding commitments there is no fair value of such financial instruments. 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 $408,257 and $743,332 at September 30, 1999 and 1998, respectively. (13) Quarterly Results of Operations (Unaudited) Fiscal Year Ended September 30, 1999 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter(1) ------- ------- ------- ---------- Net revenues $168,484 $154,725 $157,295 $159,910 Net (loss) (2,578) (10,157) (8,509) (386,083) Fiscal Year Ended September 30, 1998 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net revenues $185,778 $170,164 $170,703 $168,988 Net income (loss) 1,358 1,367 1,511 (3,998) In the fourth quarter of the year ended September 30, 1998, the Company changed its estimate of the effective tax rate for the year from 52% to 97% due to revised estimates of non-deductible goodwill and earnings. - --------- (1) The Company incurred non-cash impairment charges related to the impairment of long-lived assets. See Note 6 49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 10. Directors and Executive Officers of the Company. The following table sets forth certain information regarding each of our directors and executive officers. Each was elected in connection with the restructuring of the Merger: Name Age Position - ---- --- -------- Michael R. Walker 51 Chairman, Chief Executive Officer and Director George V. Hager, Jr. 43 Executive Vice President, Chief Financial Officer and Director Richard R. Howard 50 Director Michael R. Walker is the Chairman of the Board, Chief Executive Officer and a director of Genesis. Mr. Walker is the founder of Genesis and has served as Chairman and Chief Executive Officer of Genesis since its inception. 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 nursing homes 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 has served as Chairman of the Board of Trustees of ElderTrust since its inception in January 1998. George V. Hager, Jr. is our Executive Vice President, Chief Financial Officer and a director. Mr. Hager has served as Executive 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. Mr. Hager was previously partner in charge of the healthcare practice for KPMG LLP in the Philadelphia office. Mr. Hager began his career at KPMG 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 AICPA and PICPA. Richard R. Howard is a director of Multicare. Mr. Howard has served as a director of Genesis since its inception, as Vice President of Development from September 1985 to June 1986, as President and Chief Operating Officer from June 1986 to April 1997, as President from April 1997 to November 1998 and as Vice Chairman since November 1998. 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 Wharton School, University of Pennsylvania, where he received a Bachelor of Science degree in Economics in 1971. 50 Item 11. Executive Compensation. In connection with the Merger, the Company's Directors and Officers are not employees of the Company and are compensated by other sources. 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 o each person known to the Company to be the beneficial owner of more than 5% of the outstanding Common Stock; o each person who is currently a director or nominee to be a director of the Company; o all current directors and executive officers of the Company as a group; and o those persons named in the Summary Compensation Table. To the best of our 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 Shares Percent of 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 the Management Agreement pursuant to which Genesis manages our 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 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 the 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. In connection with the Merger, Genesis acquired from certain former stockholders of Multicare the land and buildings of an eldercare facility located in New London, Connecticut, for a purchase price of $8.4 million. Our operating subsidiary that leases the facility pays annual rent to Genesis of $725,000. 51 Genesis sponsored the formation of ElderTrust ("ETT"), a Maryland real estate investment trust. Michael R. Walker, our Chairman and Chief Executive Officer and Genesis is Chairman of ETT. In February 1998 ETT made term loans to Multicare 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 our right 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 ElderTrust ("ETT") made term loans to our subsidiaries 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 our right 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 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 we 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 us under minimum rent leases. The initial term of any minimum rent lease will be ten years, and we 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 o 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 o 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), we are required to make minimum capital expenditures equal to $3,000 per residential unit in each assisted living facility covered by a minimum rent lease. 52 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a.) 1. Financial Statements Independent Auditors' Report Consolidated Balance Sheets as of September 30, 1999 and 1998 Consolidated Statements of Operations for the years ended September 30, 1999, 1998, and 1997 (unaudited), and the nine months ended September 30, 1997 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999 and 1998, and the nine months ended September 30, 1997 Consolidated Statements of Cash Flows for the years ended September 30, 1999 1998 and 1997 (unaudited), and the nine months ended September 30, 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 1999 and 1998, 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) 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 (4) 4.2 Fiscal Agency Agreement for Subordinated Convertible Debentures among The Multicare Companies, Inc., Subsidiary Co-Borrowers, Subsidiary Guarantors and The Chase Manhattan Bank, N.A. (4) 10.1 Loan Agreement dated October 13, 1992 between Meditrust Mortgage Investments, Inc. and various Glenmark entities (4) 10.2 Intercreditor Agreement dated December 1, 1995 between The Chase Manhattan Bank, N.A., Meditrust Mortgage Investments, Inc. and Meditrust of West Virginia, Inc. (4) 10.3 Second Amendment to Loan Agreement entered into effective as of November 30, 1995 (4) 10.4 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 (5) 10.5 Acquisition Agreement, dated as of June 17, 1996, by and among AoDoS/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 "AoDoS Acquisition Agreement")
53
(5) 10.6 Amendment No. 1, dated August 12, 1996, to the AoDoS Acquisition Agreement. (6) 10.7 Amendment No. 2, dated as of September 25, 1996 to the AoDoS Acquisition Agreement. (6) 10.8 Amendment No. 3, dated as of October 29, 1996 to the AoDoS Acquisition Agreement. (6) 10.9 Amendment No. 4, dated as of December 11, 1996 to the AoDoS Acquisition Agreement. (6) 10.10 Appendix A to Participation Agreement, Master Lease, Supplements, Loan Agreement, and Lease Facility Mortgages. (7) 10.11 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. (8) 10.12 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. (9) 10.13 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. (9) 10.14 Management Agreement dated October 9, 1997 among The Multicare Companies, Inc., Genesis Health Ventures, Inc. and Genesis ElderCare Network Services, Inc. (8) 10.15 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. (8) 10.16 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. (9) 10.17 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. (9) 10.18 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) 10.19 Amendment No. 1 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank, N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A. (10)10.19 Amendment No. 1 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank, N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A. (10) 10.20 Amendment No. 2 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank, N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A. (10) 10.21 Amendment No. 3 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank, N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A.
54
10.22 Amendment No. 4 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank, N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A. 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 Annual Report on Form 10-K for the year ended December 31, 1995. (5) Incorporated by reference from Registration Statement No. 333-12819 on Form S-3 effective October 24, 1996. (6) Incorporated by reference from Current Report on Form 8-K, dated December 26, 1996. (7) Incorporated by reference to the Tender Offer on Schedule 14D-1 filed by Genesis ElderCare Acquisition Corp. on June 20, 1997. (8) 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. (9) Incorporated by reference to Genesis Health Ventures, Inc.'s Current Report on Form 8-K dated October 9, 1997. (10) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly period ended December 31, 1998.
55 Independent Auditors' Report The Board of Directors The Multicare Companies, Inc.: Under date of December 1, 1999, we reported on the consolidated balance sheets of The Multicare Companies, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended September 30, 1999 and 1998, 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 LLP Philadelphia, Pennsylvania December 1, 1999 56 SCHEDULE II THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES . Valuation and Qualifying Accounts Years ended September 30, 1999 and 1998, and the nine month period ended September 30, 1997 (In thousands)
Balance at Charged to Charged to Disposition Balance beginning of costs and other Deductions of at end Classifications period expenses accounts(1) (2) Business of period --------------- ------------ ---------- ----------- ---------- ----------- --------- Year ended September 30, 1999: Allowance for doubtful accounts $ 10,080 11,406 --- 2,992 --- 18,494 ====== ====== === ===== === ====== Year ended September 30, 1998: Allowance for doubtful accounts $ 11,069 4,702 533 5,100 1,124 10,080 ====== ===== === ===== ===== ====== Nine Months ended September 30, 1997 Allowance for doubtful accounts $ 11,531 3,521 125 4,108 --- 11,069 ====== ===== === ===== === ======
- --------- (1) Represents amounts related to acquisitions (2) Represents amounts written off as uncollectible 57 Signature Page 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: /s/ MICHAEL R. WALKER ------------------------------------ Chairman and Chief Executive Officer December 29, 1999 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 --------- ----- ---- /s/ MICHAEL R. WALKER Chairman of the Board, December 29, 1999 - ------------------------------------------ Chief Executive Officer Michael R. Walker and Director (Principal Executive Officer) /s/ GEORGE V. HAGER, JR. Executive Vice President, December 29, 1999 - ------------------------------------------ Chief Financial Officer George V. Hager, Jr. (Principal Accounting Officer) /s/ RICHARD. R. HOWARD Director December 29, 1999 - ------------------------------------------ Richard. R. Howard
EX-21 2 EXHIBIT 21 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% ADS-NDNE Danvers, L.L.C. MA 100% ADS-NDNE Dartmouth, L.L.C. MA 100% ADS-NDNE Hingham, L.L.C. MA 100% ANR, Inc. DE 100% Applewood Health Resources, Inc. DE 100% Assisted Living Associates of Berkshire, Inc PA 100% Assisted Living Associates of Lehigh, Inc PA 100% Assisted Living Associates of Pennington, Inc. NJ 100% Assisted Living Associates of Sanatoga, Inc. PA 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% Century Care Construction, Inc. NJ 100% Century Care Management, Inc. DE 100% Chardon Quality Care, Inc OH 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%
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 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% Dartmouth Assisted Living L.L.C. DE 100% Dawn View Manor, Inc. WV 100% Delm Nursing, Inc. PA 100% Elmwood Health Resources, 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 Madison, Inc. DE 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 Stafford, 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% HRWV, Inc. WV 100% HRWV-1, Inc WV 100% HNCA, Inc. PA 100% Holly Manor Associates of New Jersey, L.P. DE 100% Horizon Associates, Inc. WV 100% Horizon Mobile, Inc. WV 100% HR of Charleston, Inc. WV 100% HRWV Huntington, Inc. WV 100% Lakewood Health Resources, Inc. DE 100% Laurel Health Resources, Inc. DE 100% Lehigh Nursing Homes, Inc. PA 100% Long Term Assets, Inc. DE 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% 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% RPNR, Inc DE 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 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% 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-10.22 3 EXHIBIT 10-22 Exhibit 10-22 AMENDMENT NO. 4 AND WAIVER TO CREDIT AGREEMENT (Multicare) AMENDMENT NO. 4 AND WAIVER TO CREDIT AGREEMENT, dated as of August 20, 1999, (this "Amendment No. 4") by and among: The Multicare Companies, Inc. and certain Subsidiaries identified on the signature pages hereto as "Borrowers"; the institutions identified on the signature pages hereto as "Lenders"; Mellon Bank, N.A. as Issuer of Letters of Credit and as Administrative Agent; Citicorp USA, Inc. as Syndication Agent; First Union National Bank as Documentation Agent; and Bank of America, N.A. (as successor to NationsBank, N.A. and Bank of America, NT&SA) as Syndication Agent. Background A Credit Agreement, dated as of October 9, 1997, was entered into by and among The Multicare Companies, Inc. and certain of its Subsidiaries as Borrowers, Mellon Bank, N.A. as Issuer of Letters of Credit and Administrative Agent, Citicorp USA, Inc. as Syndication Agent, First Union National Bank as Documentation Agent, NationsBank, N.A. as Syndication Agent, and the Lenders and other Agents identified therein and was amended pursuant to that certain Amendment No. 1 and Waiver, dated as of March 5, 1998, was further amended pursuant to that certain Amendment No. 2 and Waiver, dated as of August 28, 1998 and was further amended pursuant to that certain Amendment No. 3 and Waiver, dated as of February 11, 1999. The Credit Agreement, as so amended, is referred to herein as the "Current Credit Agreement". The Current Credit Agreement, as the same may be amended, modified, restated or supplemented from time to time is herein referred to as the "Credit Agreement" or the "Agreement". Terms are used in this Amendment No. 4 as defined in the Current Credit Agreement unless otherwise specified. The Borrowers have requested certain changes to the Current Credit Agreement including, among others, the following: (1) a modification of the Adjusted Total Debt/Cash Flow Ratio; (2) a modification to the Fixed Charge Coverage Ratio; (3) a modification of the Adjusted Senior Debt/Cash Flow Ratio; (4) a modification of certain prepayment provisions and (5) a modification to the Consolidated Net Worth Covenant. The Agents and Lenders are willing to make such modifications and the waivers herein, subject to, among other things, the granting of additional security by the Borrowers, the elimination of the availability of Swing Loans, the inclusion of new pricing tiers and adjustments to other pricing tiers and the other terms and conditions set forth below. NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows. Agreement 1. Amendments to Current Credit Agreement on Amendment No. 4 Effective Date. The Current Credit Agreement is amended in each of the following respects, as of the Amendment No. 4 Effective Date (as defined in Section 3 below). 1.1 Elimination of Swing Loans. The Swing Loan Lender has and shall have no further obligation to make and the RC Lenders have and shall have no further obligation to purchase participations in any Swing Loans. In connection therewith, Sections 1.1(c) and 1.3(e) are hereby deleted in their entirety and all references in the Current Credit Agreement to Swing Line Loans are hereby eliminated, provided however, in the event all or any portion of any amount paid by any Borrower on account of a Swing Line Loan, or any interest or other amount due in connection therewith is thereafter recovered from any Lender Party, the obligations of Borrowers to pay such amount shall automatically be restored to the extent of such recovery. 1.2 Application of Prepayments in Connection with Net Proceeds of Dispositions. Section 1.5(c)(iii) is deleted in its entirety and replaced with the following: (iii) Timing and Application of Mandatory Prepayments from the Disposition of Assets Identified on Schedule 8.5(d). Any mandatory prepayment pursuant to paragraph (b) of this Section 1.5 resulting from the disposition of assets identified on Schedule 8.5(d) shall be applied in accordance with the following provisions. The Net Cash Proceeds of the disposition of assets identified on Schedule 8.5(d) located in Ohio not in excess of $55,000,000 shall be applied in accordance with clause (1) below. The Net Cash Proceeds of the disposition of any other assets identified on Schedule 8.5(d) (excluding the first $55,000,000 of Net Cash Proceeds from the disposition of assets located in Ohio) shall be applied in accordance with clause (2) below. (1) Prepayments shall be applied against the RC Loans (without a corresponding reduction in the RC Commitments) and shall be applied against the RC Loans at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held by each applicable Lender, provided however that, in the event that and to the extent that the Net Cash Proceeds from a disposition of assets identified on Schedule 8.5(d) located in Ohio exceed $10,000,000, within 12 months of the date such Net Cash Proceeds are received, the Borrower receiving such Net Cash Proceeds in excess of $10,000,000 shall either (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay the Loans or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement; provided that, if such agreement is terminated, such Borrower may invest such Net Cash Proceeds prior to the end of the 12 month period commencing on the date of receipt of such Net Cash Proceeds or six months after the termination of such agreement, whichever is later), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature and type, or engaged in a business) similar or related to the nature or type of the property and assets or the business of, the Borrowers existing on the date of such investment. -2- (2) Except as set forth in the preceding paragraph (1), any mandatory prepayments pursuant to paragraph (c)(iii) of this Section 1.5 shall be applied in the following order: (A) First, prepayments shall be applied against the Tranche A Term Loan, on a pro rata basis in accordance with the relative aggregate principal amounts held by each applicable Lender. Prepayments of the Tranche A Term Loan shall be applied to each of the respective remaining installments thereof set forth in Section 1.4 on a pro rata basis in accordance with the relative amounts thereof. (B) Second, subject to the terms of paragraph (d) below (Tranche B/Tranche C Opt-Out), prepayments shall be applied against the Tranche B Term Loans and the Tranche C Term Loans at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amounts thereof held by each applicable Lender. Prepayments of the Tranche B Term Loans and the Tranche C Term Loans shall be applied to each of the respective remaining installments thereof set forth in Section 1.4 on a pro rata basis in accordance with the relative amounts thereof. (C) Third, prepayments shall be applied against the RC Loans with a corresponding reduction in the amount of the RC Commitment and shall be applied among the RC Loans at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held by each applicable Lender. Prepayments shall be applied to any other amounts owing in respect of the Loan Obligations or deposited in the Letter of Credit cash collateral account and, if all such Loan Obligations have been paid in full and the amount of outstanding Letters of Credit is less than the sum of the amount in the cash collateral account and the Available RC Commitment, then any excess shall be returned to Multicare (on behalf of the Borrowers) or as otherwise required by applicable law. 1.3 Amendments to Representations and Warranties to Reflect the Granting of a Security Interest in the Additional Security. Section 5.1(d) and (e) of the Current Credit Agreement are amended as follows: (a) Section 5.1(d) is deleted in its entirety and replaced with the following: (d) Security. The Pledge Agreement creates in favor of the Administrative Agent for the benefit of the Secured Parties a legal, valid and enforceable Lien on all right, title and interest of each Borrower in the Collateral described therein, and the Administrative Agent has, for the benefit of the Secured Parties, a fully perfected and continuing first priority Lien on all of the right, title and interest of each Borrower in the Collateral described in the Pledge Agreement, subject to no Liens other than Permitted Liens. The Security Agreement creates in favor of the Administrative Agent for -3- the benefit of the Secured Parties a legal, valid and enforceable Lien on all right, title and interest of each Borrower in the Additional Security described therein, and the Administrative Agent has (or upon the filing of the UCC-1 financing statements and UCC-3 statements of amendment delivered by the Borrowers pursuant to the Security Agreement, will have) for the benefit of the Secured Parties, a fully perfected and continuing first priority Lien on all of the right, title, and interest of each Borrower in the Additional Security described in the Security Agreement, subject to no Liens other than Permitted Liens. (b) The following language is hereby added to the end of the first sentence of Section 5.1(e): and Security Agreement and other than the recording of the Mortgages which are being delivered and recorded pursuant to the terms of Section 6.20 (Further Assurances) below and except for (i) certain landlord waivers and other third party consents relating to specific items of Additional Security which waivers and consents not so obtained, in the aggregate, are not material and (ii) those consents and waivers which have been obtained and are in full force and effect. (c) The second sentence of Section 5.1(e) is amended to add the words "or security" after the word "guarantee" in the second line thereof. (d) The parenthetical phrase in clause (ii) of Section 5.1(e) is deleted in its entirety and replaced with the following: (except for any Lien in favor of the Administrative Agent pursuant to the Pledge Agreement, the Security Agreement and the Mortgages) 1.4 Amendment to Certain Transaction Documents. Section 5.1(x) is amended to incorporate after the end of clause (ii) an additional clause (iii) which shall read as follows: and (iii) the Permitted Put/Call Amendment. 1.5 Representations and Warranties with Respect to Mortgaged Property. Article 5 of the Current Credit Agreement is amended to incorporate Section 5.1A which shall read as follows: 5.1A REPRESENTATIONS AND WARRANTIES WITH RESPECT TO MORTGAGED PROPERTY (a) Each Borrower represents and warrants to each Lender Party, with respect to each Mortgaged Property owned or leased by such Borrower, as follows: (i) With respect to any owned Mortgaged Property owned by a Borrower, such Borrower has good and marketable title to the Mortgaged Property in fee simple and has the absolute right to mortgage, grant and convey the Mortgaged Property to free of the interest of any other Person except for any interest presently of record. -4- (ii) With respect to any leased Mortgaged Property of a Borrower, such Borrower holds a valid leasehold estate in the Mortgaged Property pursuant to a lease that is in full force and effect as of the Amendment No. 4 Effective Date; that as of the Amendment No. 4 Effective Date there exists no default nor any event which would, with the passage of time or the giving of notice or both, constitute a default under the lease; and that it has the absolute right to mortgage, grant and convey the Mortgaged Property free of the interest of any other Person except for any interest presently of record; (iii) No executive officer of any Borrower has been notified, or has knowledge, of any notification having been filed with regard to, a Release on, into, about or beneath the Mortgaged Property for which such Borrower may be held liable; and (iv) No Borrower has received any summons, citation, notice of violation, administrative order, directive, letter or other written communication, from any judicial or administrative body or governmental or quasi-governmental authority concerning any intentional or unintentional action or omission related to the generation, storage, transportation, handling, transfer, disposal or treatment of Environmental Concern Materials in violation of any Environmental Law or related to any Release or threat of Release of Environmental Concern Materials. 1.6 Monthly Financial Reports. A new paragraph (m) shall be added to Section 6.1 of the Current Credit Agreement immediately following paragraph (l) thereof as follows: (m) Monthly Operating Reports. As soon as practicable, and in any event within 30 days after the end of each month, Multicare, on behalf of the Borrowers, shall furnish to the Administrative Agent, the Issuer and each Lender, the following operating data for the Borrowers: a census, census mix, total accounts payable and accounts receivable as of the end of such month, and net free cash flow as of the end of such month, all of which shall be in form acceptable to the Administrative Agent. 1.7 Insurance. Section 6.8 of the Current Credit Agreement is deleted in its entirety and replaced with the following: 6.8 Insurance. (a) Each Borrower shall maintain with financially sound and reputable insurers insurance with respect to its properties and business and against such liabilities, casualties and contingencies and of such types and in such amounts as are customary in the case of Persons engaged in the same or similar businesses or having similar properties similarly situated, including insurance covering its respective properties, buildings, machinery, equipment, tools, furniture, fixtures and operations, and medical malpractice, professional liability and public liability, as well as "stop loss" and business interruption. The Borrowers shall (i) deliver to the Administrative Agent the certificates evidencing such insurance annually and at least thirty days prior to the anniversary date of -5- such insurance policies and any other time requested by the Administrative Agent and (ii) have the Administrative Agent named as additional insured and lender loss payee, as appropriate, under each such policy. Without limiting the generality of the foregoing, the Borrowers shall keep all buildings and improvements now or hereafter erected upon the Mortgaged Properties insured for the benefit of the Administrative Agent against loss by fire and other casualties and hazards required by the Administrative Agent, upon terms and with insurance companies and in such amounts as shall substantially cover any loss related to such properties. (b) So long as no Event of Default has occurred and is continuing, the Borrowers may settle all casualty damage and other claims which do not exceed (individually or combined with other related claims) $5,000,000 consistent with past practice and reasonable business judgment and may demand, receive and receipt for all moneys becoming payable thereunder and under all condemnation awards which do not exceed (individually or combined with other related awards) $5,000,000. The Borrowers shall promptly notify the Administrative Agent and/or the Administrative Agent upon the occurrence of any condemnation, or threatened condemnation, affecting the Mortgaged Property, or any casualty damage or other claim, in each case if the amount involved exceeds the $5,000,000 value referred to above or if an Event of Default has occurred and is continuing (any such claim or condemnation award being herein referred to as an "Agent-Involved Claim"). No Borrower shall settle with any insurance company or public entity or authority for any Agent-Involved Claim without the Administrative Agent's prior written approval thereof. The proceeds of any Agent-Involved Claim shall be paid directly to the Administrative Agent, and the Administrative Agent in its sole discretion may apply the amount so collected, or any part thereof, toward the payment of the Obligations, whether or not then due and payable, or toward the alteration, reconstruction, repair or restoration of the damaged and/or untaken portion, as the case may be, of the Mortgaged Property or other Additional Security on such terms and conditions as the Administrative Agent shall in its sole discretion require. 1.8 Grant of Additional Security by Joining Subsidiary. Section 6.10 is amended to add after the first sentence thereof the following sentence which shall read as follows: Each Borrower shall cause all other material assets and property (other than Excluded Assets) to be pledged or mortgaged to the Administrative Agent pursuant to the Security Agreement and/or the Mortgages. 1.9 Affirmative Covenants with Respect to the Additional Security. Article 6 of the Current Credit Agreement is amended to incorporate Sections 6.19 and 6.20 which shall read as follows: -6- 6.19 MORTGAGED PREMISES AND OTHER ADDITIONAL SECURITY. (a) Payment of Obligations; Protection of Liens. Each Borrower will pay all sums due and becoming due under the Mortgages on the Mortgaged Properties, all such payments to be made as and when due. Each Borrower shall preserve, protect and defend the title, validity and priority of the Mortgages on the Mortgaged Properties and the Liens on the other Additional Security against all claims and demands whatsoever, subject to Permitted Liens and dispositions permitted under this Agreement. (b) Taxes and Insurance Premiums. Subject to the provisions of Section 6.9 (Payment of Taxes and Other Charges), each Borrower shall pay, prior to the accrual of any interest or penalty thereon, all taxes (including, without limitation, all real estate taxes and corporate taxes), water and sewer rents, charges, claims, assessments, liens and encumbrances now or hereafter assessed with respect to the Mortgaged Properties, and the premiums on all policies of insurance held by the Borrowers pursuant to the provisions of Section 6.8 (Insurance) above. (c) Repair and Condition of Additional Security. The Borrowers shall keep the Mortgaged Property and improvements thereon and the other Additional Security in good condition and repair, ordinary wear and tear excepted and shall not remove, demolish or materially alter the buildings or improvements on the Mortgaged Property (except to the extent that, in the reasonable business judgment of the Borrower that owns or leases the applicable property, such demolition, removal or alteration is in the best interest of such Borrower and not adverse to the interests of the Secured Parties taken as a whole), nor commit or suffer waste with respect thereto. The Borrowers shall materially comply with all laws, rules, regulations and ordinances made or promulgated by lawful authority which may now or hereafter become applicable to the Mortgaged Property or other Additional Security, and the Borrowers shall prohibit any use of the Mortgaged Property which would permit the confiscation or seizure thereof. The Borrowers shall permit the Administrative Agent at any reasonable time and from time to time to enter upon the Mortgaged Property and the buildings and improvements thereon erected for the purpose of inspecting and appraising the same, and shall make restorations and replacements reasonably required by the Administrative Agent. The Borrowers shall not take or permit any action with respect to the Mortgaged Property or other Additional Security which will in any manner impair the security of the Mortgage on the Mortgaged Property or the Lien on the other Additional Security. (d) Administrative Agent's Right to Cure. In the event of the failure of any Borrower to pay the taxes and other charges set forth in Section 6.19(b) (Taxes and Insurance Premiums), or to furnish and pay for the insurance as set forth in Section 6.8 (Insurance), or to keep the Mortgaged Property in good condition and repair as provided in subsection 6.19(c) (Repair and Condition of Mortgaged Property), the Administrative Agent may, at its option, but without any obligation to do so, pay any or all such items, together with -7- penalties and interest thereon, and procure and pay for such insurance and repairs; and any such Agent may at any time and from time to time advance such additional sum or sums as such Agent in its sole discretion may deem necessary to protect the security of the Mortgage on the Mortgaged Property. All such sums so paid or advanced by the Administrative Agent shall immediately and without demand be repaid by the Borrowers, together with interest thereon at the Default Rate, and shall be added to the principal indebtedness secured by the Mortgage on the Mortgaged Property. The production of a receipt by the Administrative Agent shall be conclusive proof of a payment or advance authorized hereby, and the amount and validity thereof. (e) Obligations under Leases. Each Borrower who is a tenant or subtenant under a lease with respect to a Mortgaged Property shall perform all of its obligations under such lease and send to the Administrative Agent a copy of any notice relating to default, termination or the like relating to such lease within one (1) Business Day after receipt thereof by such Borrower. The Administrative Agent is hereby granted the right (but not the obligation) to cure any default by any Borrower under a lease. (f) Environmental Laws. Each Borrower covenants and agrees with each Lender Party to comply (and to cause all occupants of the Mortgaged Property to comply) in all material respects with all Environmental Laws, and to give prompt written notice to the Administrative Agent of any violation or alleged violation of any Environmental Law with respect to the Mortgaged Property. Without limiting any other indemnification provision, each Borrower will indemnify and defend each Lender Party and hold each Lender Party harmless from any loss, liability, damage, claim, action or cause of action, including, without limitation, court costs and attorney's fees, consultants' fees and any costs associated with any Remedial Action, arising from any violation or alleged violation of any Environmental Law with respect to the Mortgaged Property owned or leased by such Borrower, which undertaking shall not be subject to any limitation on such Borrower's liability as may be contained in any Loan Document, and which shall survive repayment of the Loan Obligations and/or the foreclosure of the Mortgage on the applicable Mortgaged Property. 6.20 FURTHER ASSURANCES. (a) The Borrowers shall continue to use commercially reasonable efforts to provide additional Mortgages (including leasehold mortgages) on all real property owned or leased by the Borrowers other than the Excluded Assets provided, however, at a minimum, the Borrowers shall cause, (i) at least 61 Mortgages on owned or leased property to be delivered to the Administrative Agent in form and substance (with all exhibits) ready for recording on or before 9/30/99 (which number of properties shall include those recorded on or before the Amendment No. 4 Effective Date) together with such title reports and flood certifications as the Administrative Agent may reasonably request; and -8- (ii) at least 68 Mortgages on owned or leased property to be delivered to the Administrative Agent in form and substance (with all exhibits) ready for recording on or before 10/31/99 (which number of properties shall include those recorded on or before 9/30/99) together with such title reports and flood certifications as the Administrative Agent may reasonably request. (b) Each of the Borrowers agrees that it shall execute and deliver such documents and statements as the Administrative Agent may reasonably request and shall take any other action that may be required to perfect, protect or extend the Lien or priority of the Mortgage on the Mortgaged Property and the Lien or priority on the other Additional Security. In addition, each of the Borrowers agrees that it will take such other action as the Administrative Agent may reasonably request to carry out the purposes of this Agreement. 1.10 Fixed Charge Coverage Ratio. The covenant set forth in Section 7.1(a) of the Current Credit Agreement is amended to replace the table set forth therein with the following table: Period Ratio ------ ----- 7/1/99 through 3/30/00 1.10 3/31/00 through 9/29/00 1.15 9/30/00 through 9/29/02 1.20 9/30/02 and thereafter 1.25 1.11 Consolidated Net Worth. The first clause of Section 7.1(b) of the Current Credit Agreement is amended to read as follows: (b) Consolidated Net Worth. The Consolidated Net Worth of Multicare and its Restricted Subsidiaries at any date of determination after the Amendment No. 4 Effective Date shall be not less than the sum of: (i) Six Hundred Five Million Dollars ($605,000,000.00) plus (ii) an amount equal to the sum of: (A) an amount equal to the net proceeds of all equity offerings of Surety on a cumulative basis commencing on the Amendment No. 4 Effective Date through such date of determination, plus -9- (B) 75% of the cumulative amount of Net Income (which shall not be reduced by the amount of any net loss for any fiscal quarter) of Multicare and its Restricted Subsidiaries, on a consolidated basis, for the period commencing on the first day of the fiscal quarter in which the Amendment No. 4 Effective Date occurs through the last day of the fiscal quarter ending on, or most recently prior to, such date of determination, plus (C) any reduction in the amount of debt of Multicare and its Restricted Subsidiaries as a result of the conversion of convertible debt securities into equity (excluding Multicare's Convertible Subordinated 7% Debentures). 1.12 Adjusted Total Debt/Cash Flow Ratio. The covenant set forth in Section 7.1(c) of the Current Credit Agreement is amended to replace the table set forth therein with the following table: Period Ratio ------ ----- 4/1/99 through 6/30/99 10.50 7/1/99 through 12/30/99 11.15 12/31/99 through 3/30/00 10.50 3/31/00 through 12/30/00 9.10 12/31/00 through 9/29/01 8.85 9/30/01 through 9/29/02 8.50 9/30/02 through 9/29/03 7.75 9/30/03 through 9/29/04 6.75 9/30/04 and thereafter 6.00 1.13 Adjusted Senior Debt/Cash Flow Ratio. The covenant set forth in Section 7.1(d) of the Current Credit Agreement is amended to replace the table set forth therein with the following table: Period Ratio ------ ----- 4/1/99 through 6/30/99 7.50 7/1/99 through 12/30/99 8.10 12/31/99 through 3/30/00 7.50 3/31/00 through 12/30/00 6.15 12/31/00 through 9/29/01 6.00 9/30/01 through 9/29/02 5.50 9/30/02 through 9/29/03 5.00 9/30/03 through 9/29/04 4.25 9/30/04 and thereafter 4.00 1.14 Calculation of Financial Covenants. Section 7.2 of the Current Credit Agreement is deleted in its entirety and replaced with the following: -10- 7.2 CALCULATION OF FINANCIAL COVENANTS. (a) The financial covenants set forth in this Article 7 shall be maintained continuously and shall be tested at the end of each fiscal quarter (based on the financial information delivered pursuant to Section 6.1 (Reporting Requirements) above) and at such other times as may be required by the terms of this Agreement. (b) Following the effective date of any Acquisition that is effected by Multicare or any of its Restricted Subsidiaries and that is permitted under Section 8.4 (Acquisitions, Etc.) below, the financial covenants set forth in this Article 7 shall be computed on a pro forma basis as if the effective date of such Acquisition had been the first day of the earliest of the four fiscal quarters ended on, or most recently prior to, such actual date of the Acquisition. For purposes of such computation, the Borrowers may elect to make pro forma income statement adjustments at the time of the effective date of such Acquisition under the following circumstances: (i) adjustments to reflect the elimination of that portion of salary and employee benefit expenses that will no longer be incurred after the Acquisition, to the extent demonstrated by Multicare to the satisfaction of the Administrative Agent, and (ii) adjustments to reflect any other savings in expenses which will be realized by such Person so acquired as a consequence of such Acquisition, to the extent demonstrated by Multicare to the satisfaction of the Administrative Agent. Following the effective date of any disposition that is effected by Multicare or any of its Restricted Subsidiaries and that is permitted under Section 8.5 (Dispositions) below, the financial covenants set forth in this Article 7 shall be computed on a pro forma basis as if the effective date of such disposition had been the first day of the earliest of the four fiscal quarters ended on, or most recently prior to, such actual date of disposition. Unless otherwise agreed to by the Required Lenders, the financial condition and results of operations of the Excluded Subsidiaries shall not be combined with those of the Borrowers for purposes of calculating the financial covenants set forth in this Article 7. (c) For purposes of determining the Fixed Charge Coverage Ratio, the Adjusted Total Debt/Cash Flow Ratio and the Adjusted Senior Debt/Cash Flow Ratio, the amount of Cash Flow, Interest Expense, income taxes, Rental Expenses and principal payments required to be made on Total Funded Indebtedness (and each component of the foregoing): (i) will be calculated as the product of two (2) times the two most recently completed fiscal quarters for the reporting periods beginning with the quarter ended 6/30/99 and thereafter through and including the quarter ending 9/30/00; (ii) will be calculated as the product of four-thirds (4/3) times the three most recently completed fiscal quarters for the reporting periods ending 12/31/00 and 3/31/01; and (iii) will be calculated on a rolling four quarter basis for each quarter ended prior to 6/30/99 and from and after 6/30/01. -11- 1.15 Pledge of Assets of Subsidiaries. Section 8.6 of the Current Credit Agreement is amended to add the following after the words "pursuant to the Pledge Agreement" in the proviso: and their material assets shall be pledged to the Administrative Agent pursuant to the Security Agreement and the Mortgages 1.16 Permitted Put/Call Amendment. Section 8.11(b) of the Current Credit Agreement is amended to incorporate the following at the end thereof: and except for the Permitted Put/Call Amendment. 1.17 Avoidance of Other Conflicts. Section 8.14 of the Current Credit Agreement is amended to add the following prior to the word "conflict" in the second line thereof: enter into agreements which 1.18 Management Fee. Effective on the later to occur of the following two conditions (a) the date the Permitted Put/Call Amendment is effective and (b) the date Genesis receives an aggregate amount equal to Fifty Million Dollars ($50,000,000) in cash for the sale of common stock on substantially the terms set forth in the Sponsor Letter of Intent, Section 8.16 of the Current Credit Agreement shall be deleted in its entirety and replaced with the following: 8.16 MANAGEMENT FEE. The Borrowers shall not pay management fees under the Multicare Management Agreement in any fiscal year (including the payment in such year of accrued management fees in accordance with the third sentence of this Section 8.16) in excess of 6% of the consolidated net revenue of the Borrowers, provided however that, to the extent such management fees in any fiscal year (including the payment in such year of accrued management fees in accordance with the third sentence of this Section 8.16) would exceed 4% of the consolidated net revenue of the Borrowers, such excess amount shall be payable only to the extent that, both before and after giving effect to such payment, (i) there exists no Event of Default or Default, (ii) Borrower's Fixed Charge Coverage Ratio shall be not less than 1.4 for the two most recent completed fiscal quarters of the Borrowers, and (iii) the Adjusted Total Debt/Cash Flow Ratio for the two most recently completed fiscal quarters of the Borrowers shall be less than 4.00. Such management fees may be accrued but not paid except that the Borrowers may not accrue more than 4% (on an annualized basis) of the management fees due under the Multicare Management Agreement in any fiscal year. Management Fees accrued in accordance with the foregoing sentence may be paid in accordance with the first sentence of this Section 8.16 to the extent they do not exceed in any fiscal year 4% of the consolidated net revenue of the Borrowers. All such management fees shall be subordinated to the obligations of the Borrowers hereunder in accordance with the terms contained in the Multicare Management Subordination Agreement as in effect on the date hereof. No Borrower shall agree, or permit Surety to agree, with any Person (other than the Lender Parties) to withhold, defer or change the amount or timing of payments under the Multicare Management Agreement. -12- Until the two conditions set forth in this Section 1.18 occur, the provisions of Section 8.16 of the Current Credit Agreement (prior to giving effect to this Amendment No. 4) shall remain in effect. 1.19 Events of Default for Covenant Defaults. Section 9.1(c) is deleted in its entirety and replaced with the following: (c) Covenant Defaults. (i) There shall occur a default in the due performance or observance of any term, covenant or agreement to be performed or observed pursuant to any of Sections 6.1(f)(ii), 6.2, 6.3, 6.7, 6.10, 6.11, 6.14 or 6.17 or any Section in Article 7 or Article 8. (ii) The Borrowers shall fail to deliver any certificates, statements or reports required to be delivered in accordance with Sections 6.1(a), (b) or (c) and such default shall continue unremedied for fourteen (14) days. (iii) There shall occur any default in the due performance or observance of any term, covenant or agreement to be performed or observed pursuant to the provisions of this Agreement (other than as provided in paragraph (a) or paragraph (b) above or subparagraphs (i) or (ii) of this paragraph (c)) and, if capable of being remedied, such default shall continue unremedied for thirty (30) days after any Borrower becomes aware, or should in the exercise of reasonable diligence have become aware, of such default. 1.20 Events of Default for Failure Related to Security Interests Generally. Section 9.1(h) is amended to incorporate the following language at the end thereof: Without limiting the generality of the foregoing, (a) subject to the provisions of Section 6.20 (Further Assurances) above, the Administrative Agent ceases to have a first-priority perfected security interest in the material assets of the Borrowers (other than the Excluded Assets) subject only to Permitted Liens and permitted dispositions or (b) after a Cash Management Notice is given (as such term is defined in the Security Agreement) pursuant to the Security Agreement, the Borrowers shall permit funds to be deposited in a deposit account other than as permitted in the Security Agreement or shall allow any Person other than the Borrowers and the Administrative Agent to have dominion and control over any Restricted Assignment Lockbox Account (as such term is defined in the Security Agreement) or any time after a Cash Management Notice is given pursuant to the Security Agreement requiring the same, the Borrowers fail to keep sweep authorizations and required tri-party agreements in place. 1.21 Events of Default for Failure Related to Security Interests in Subsidiaries. Section 9.1(l) is deleted in its entirety and replaced with the following: -13- (l) Subsidiaries as Loan Parties. Any direct or indirect Subsidiary of Multicare, other than Excluded Subsidiaries, shall fail to be, or shall cease to be, or fail to become, a Borrower hereunder; or the equity of any such Person owned by any Borrower shall cease to be, or fail to be, pledged under the Pledge Agreement; or, subject to the provisions of Section 6.20 (Further Assurances) above, the material assets (other than Excluded Assets) of any Borrower shall cease to be pledged to the Administrative Agent pursuant to the Security Agreement and/or the Mortgages. 1.22 [Intentionally omitted] 1.23 Administrative Agent's Duties. Section 10.2(d) is amended to incorporate the following language at the end thereof: or could impose any liability on the Administrative Agent. 1.24 Joinder of Affiliates As Parties to Qualified Interest Rate Hedging Agreements. Section 10.14 of the Current Credit Agreement is deleted in its entirety and replaced with the following: 10.14 JOINDER OF AFFILIATES AS PARTIES TO QUALIFYING INTEREST RATE HEDGING AGREEMENTS; APPOINTMENT OF AGENT. Any Affiliate of a Lender Party that now or hereafter is a party to an Interest Rate Hedging Agreement entered into with any Borrower or Borrowers pursuant to the terms of this Agreement may become a secured party under the Pledge Agreement and a secured party under the Security Agreement and the Mortgages (and the Interest Rate Hedging Agreement shall thereby become a Qualifying Interest Rate Hedging Agreement secured by the Collateral under the Pledge Agreement and the Additional Security under the Security Agreement and the Mortgages) if (i) the Administrative Agent consents in writing to such Person becoming a secured party (such consent not to be unreasonably withheld) and (ii) such Affiliate signs a Joinder to this Agreement agreeing to the terms hereof. By signing a Joinder to this Agreement in form and substance satisfactory to the Administrative Agent, each such Affiliate shall be deemed to be a "Lender" and a "Lender Party" for purposes of this Article 10 (but shall not be included as a Required Lender for voting or other purposes) and shall be deemed to have appointed the Administrative Agent as its agent for the purposes set forth in the Loan Documents and to have agreed to the exculpation and indemnification provisions set forth in such Loan Documents relative to such agent. Without limiting the generality of the foregoing, (a) the Administrative Agent is authorized and directed to accept any and all payments under the Loan Documents (including, without limitation, the Pledge Agreement, Security Agreement and Mortgages) on behalf of, among others, such Affiliate and to make payments to, among others, such Affiliate in accordance with the provisions of the Loan Documents and (b) such Affiliate understands that any Qualifying Interest Rate Hedging Agreement shall be secured pari passu with the Loans and other Obligations for so long as the Obligations under the Credit Agreement remain outstanding and so secured, but that such Affiliate is not entitled to voting or other rights under this Agreement and the other Loan Documents. -14- 1.25 Adjusted Senior Debt/Cash Flow Ratio. The definition of "Adjusted Senior Debt/Cash Flow Ratio" in Section 11.1 of the Current Credit Agreement is deleted in its entirety and replaced with the following: "Adjusted Senior Debt/Cash Flow Ratio" means as of any date of determination: (a) Adjusted Senior Debt as of such date of determination divided by (b) Cash Flow of Multicare and its Restricted Subsidiaries, on a consolidated basis. 1.26 Adjusted Total Debt/Cash Flow Ratio. The definition of "Adjusted Total Debt/Cash Flow Ratio" in Section 11.1 of the Current Credit Agreement is deleted in its entirety and replaced with the following: "Adjusted Total Debt/Cash Flow Ratio" means as of any date of determination: (a) Adjusted Total Debt as of such date of determination divided by (b) Cash Flow of Multicare and its Restricted Subsidiaries, on a consolidated basis. 1.27 Definition of Agents. The definition of Agents is deleted in its entirety and replaced with the following: "Agents" means collectively the Administrative Agent, Citicorp USA, Inc. as Syndication Agent, First Union National Bank as Documentation Agent and Bank of America, N.A. (as successor to NationsBank, N.A. and Bank of America NT&SA) as Syndication Agent. 1.28 Applicable Margin Definition. Subsection (a), (b) and (c) of the definition of Applicable Margin are deleted in their entirety and replaced with the following: (a) For any RC Loans or Tranche A Term Loans, the Applicable Margin shall be the percentage amount set forth below under the caption "Applicable Margin for RC Loans and Tranche A Term Loans" opposite the relevant Adjusted Total Debt/Cash Flow Ratio: -15- Adjusted Total Applicable Margin for RC Loans Debt/Cash Flow Ratio and Tranche A Term Loans -------------------- --------------------------------- Prime Rate Loans LIBO Rate Loans ---------------- --------------- below 3.0 0 1.00% > 3.0 < 3.5 0 1.25% - > 3.5 < 4.0 0 1.50% - > 4.0 < 4.5 0 1.75% - > 4.5 < 5.0 0 2.00% - > 5.0 < 5.5 .25% 2.25% - > 5.5 < 6.0 .50% 2.50% - > 6.0 < 6.5 .75% 2.75% - > 6.5 < 7.0 .75% 3.00% - > 7.0 < 7.5 .75% 3.25% - > 7.5 < 8.0 1.75% 3.50% - > 8.0 2.00% 3.75% - (b) For any Tranche B Term Loan, the Applicable Margin at all times after the Amendment No. 4 Effective Date for LIBO Rate Loans shall be 4.00%, provided, however, that any time that the Adjusted Total Debt/Cash Flow Ratio is less than 4.5 to 1.0, the Applicable Margin for Tranche B Term Loans shall be 3.25%. For any Tranche B Term Loan, the Applicable Margin at all times after the Amendment No. 4 Effective Date for Prime Rate Loans shall be 2.25% provided, however, that at any time that the Adjusted Total Debt/Cash Flow Ratio is less than 4.5 to 1.0, the Applicable Margin for Tranche B Loans which are Prime Rate Loans shall be 1.50%. (c) For any Tranche C Term Loan, the Applicable Margin at all times after the Amendment No. 4 Effective Date for LIBO Rate Loans shall be 4.25%, provided, however, that any time that the Adjusted Total Debt/Cash Flow Ratio is less than 4.5 to 1.0, the Applicable Margin for Tranche C Term Loans shall be 3.50%. For any Tranche C Term Loan, the Applicable Margin at all times after the Amendment No. 4 Effective Date for Prime Rate Loans shall be 2.50% provided, however, that at any time that the Adjusted Total Debt/Cash Flow Ratio is less than 4.5 to 1.0, the Applicable Margin for Tranche C Loans which are Prime Rate Loans shall be 1.75%. 1.29 Cash Flow Definition. The definition of "Cash Flow" in Section 11.1 of the Current Credit Agreement is amended by adding the following clause after the words "Multicare Management Agreement": (provided that such management fees are actually accrued during such period in accordance with Section 8.16 hereof) 1.30 Change of Control Definition. The definition of "Change of Control" in Section 11.1 of the Current Credit Agreement is amended to delete subsection (b) thereof in its entirety and replace it with the following: -16- (b) TPG, Cypress, Nazem and Genesis, collectively, shall cease to own beneficially and of record at least 51% of the shares of each class of capital stock of Surety (and all rights and options to purchase such shares of capital stock) subject to no Liens, provided however that, after the effective date of the Permitted Put/Call Amendment, TPG, Cypress, Nazem, Permitted Transferees and Genesis, collectively, shall cease to own beneficially and of record at least 51% of the shares of each class of capital stock of Surety (and all rights and options to purchase such shares of capital stock) subject to no Liens; 1.31 Fixed Charge Coverage Ratio Definition. The definition of "Fixed Charge Coverage Ratio" in Section 11.1 of the Current Credit Agreement is deleted in its entirety and replaced with the following: "Fixed Charge Coverage Ratio" means, as of any date of determination, the result of: (a) Cash Flow of Multicare and its Restricted Subsidiaries, on a consolidated basis. divided by (b) the sum of (i) Interest Expense, income taxes and Rental Expense of Multicare and its Restricted Subsidiaries, on a consolidated basis, and (without duplication) (ii) principal payments scheduled or required to be made on Total Funded Indebtedness. Notwithstanding the foregoing, for calculations of the Fixed Charge Coverage Ratio with respect to the period commencing October 1, 1998 and ending December 30, 2000, there shall not be added to the denominator principal payments scheduled or required to be made on Total Funded Indebtedness. For calculations made with respect to any period ending after December 30, 2000, the calculation shall be made without regard to the adjustment set forth in the preceding sentence. 1.32 Definition of Loan Documents. The definition of "Loan Documents in Section 11.1 of the Current Credit Agreement is amended by inserting after the phrase "the Pledge Agreement," the following: the Security Agreement, the Mortgages, 1.33 Put/Call Agreement Definition. The definition of "Put/Call Agreement" in Section 11.1 of the Current Credit Agreement is deleted in its entirety and replaced with the following: "Put/Call Agreement" means the Put/Call Agreement dated as of October 9, 1997 among Genesis, TPG and Cypress as the same may be amended consistent with Section 8.11 (Limitation on Modification of Certain Documents) above. -17- 1.34 New Definitions. Section 11.1 of the Current Credit Agreement is amended by adding the following new definition in their correct alphabetical location: "Additional Security" means all of the property and assets subject to the Mortgages and/or the Security Agreement, from time to time. "Agent-Involved Claim" has the meaning ascribed to such term in Section 6.8 hereof. "Amendment No. 4" means that certain Amendment No. 4 and Waiver to Credit Agreement among the Borrowers and the Lender Parties dated as of August 20, 1999. "Amendment No. 4 Effective Date" means the date that Amendment No. 4 to this Agreement becomes effective as more particularly set forth in said Amendment No. 4 hereto. "Consolidated Net Worth" shall mean the total amount of stockholders equity of Multicare and its Restricted Subsidiaries, on a consolidated basis, provided that Consolidated Net Worth shall not be reduced by the non-cash charges resulting from asset impairment and the write-off of good will. "Excluded Assets" are (a) those assets listed on Schedule 11.1- Part A attached hereto, (b) any other assets which the Required Lenders agree to include on Schedule 11.1- Part A from time to time as additional Excluded Assets, so long as the Required Lenders so agree prior to the date such assets are acquired or created by the Borrowers and (c) those assets designated as "Excluded Assets" pursuant to the terms of this Agreement. "Mortgaged Property" means any property, from time to time, subject to any Mortgage. "Mortgages" means the mortgages, deeds of trust and other conveyance instruments and agreements granting a Lien on real property of the Borrowers in favor of the Administrative Agent from time to time, as such instruments and agreements may be amended, restated, modified and/or supplemented from time to time. "Obligations" means Loan Obligations. "Permitted Put/Call Amendment" means an amendment to the Put/Call Agreement which (a) is substantially on the terms described in the Sponsor Letter of Intent; (b) is substantially concurrent with, or subsequent to, the receipt by Genesis of at least $50,000,000 in cash in exchange for its common stock or warrants therefor; -18- (c) is accompanied by agreements insuring that at all times during the period beginning on the date of the Permitted Put/Call Amendment and ending on the date that Genesis acquires 100% of the capital stock of Surety it shall, under all circumstances, maintain control of the Board of Directors of Multicare and of Surety; and (d) would not cause a "Change of Control" as defined in any indenture applicable to Multicare or cause any default under such indenture. "Permitted Transferee" means a transferee or assignee of the shares of common stock in Surety held by TPG, Cypress or Nazem who receives such common stock in connection with, and substantially contemporaneously with the execution of, the Permitted Put/Call Amendment "Release" means a release, spill, emission, leaking, pumping, emptying, escaping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Environmental Concern Materials through or in the air, soil, surface water, groundwater or property. "Remedial Action" means actions necessary to comply with any Environmental Law with respect to (a) clean up, removal, treatment or handling of Environmental Concern Materials in the indoor or outdoor environment; (b) prevention of Releases or threats of Releases or minimization of further Releases of Environmental Concern Materials so they do not migrate or endanger or threaten to endanger public or employee health or safety or welfare or the indoor or outdoor environment; or (c) performance of pre-remedial studies and investigations and post-remedial monitoring and care. "Security Agreement" has the meaning ascribed to that term in Amendment No. 4. "Sponsor Letter of Intent" means that certain Letter of Intent, dated on or about August 2, 1999, among TPG, Cypress, Nazem and Genesis. "Transfer" has the meaning ascribed to such term in Section 6.19 hereof. 1.35 Deletion of Certain Definitions. Section 11.1 of the Current Credit Agreement is amended by deleting the following definitions: "Swing Line Lender" "Swing Line Loan" 1.36 Amendments; Waivers. Section 12.8 is deleted in its entirety and replaced with the following: -19- 12.8 Amendments; Waivers. Any term, covenant, agreement or condition of any Loan Document to which the Lenders (or the Administrative Agent) are party may be amended, and any right under the Loan Documents may be waived, if, but only if, such amendment or waiver is in writing and is signed by the Required Lenders (or by the Administrative Agent at the direction of the Required Lenders); provided, however, if the rights and duties of the Administrative Agent are affected thereby, such amendment or waiver must be executed by the Administrative Agent; and provided, further, that any amendment or waiver of the terms of Article 3 hereof or any other amendment or waiver that relates to Letters of Credit or rights or obligations relating thereto or the rights or obligations of the Issuer must also be executed by the Issuer (and any amendments to any Letter of Credit, itself, need only be approved by the Borrowers and the Issuer); and provided, further, that no such amendment or waiver shall be effective unless in writing and signed by each Lender referred to below, if it would (a) increase such Lender's Commitment or the outstanding amount of such Lender's Loans or Letters of Credit Participations, or (b) extend the maturity of any Loan held by such Lender, or the time of any scheduled principal payment of any Loan of such Lender; (c) decrease the rate of interest or amount of fees due to such Lender or decrease the principal amount in respect of any Loan of such Lender or extend the time of payment of interest or fees due to such Lender, provided that the written consent of the Required Lenders, rather than the consent of all Lenders, shall be sufficient to waive imposition of the Default Rate, (d) reduce or waive any payment owing to such Lender in respect to any unreimbursed Drawings; or (e) change the number of Lenders which are required to consent to any proposed action under this Agreement before such action may be taken under this Agreement if such change could cause such Lender to lose its right to participate in such consent; and provided, further, that no such amendment or waiver shall be effective unless in writing and signed by all the Lenders if it would (i) amend the definition of "Required Lenders" or (ii) release any Borrower of its Obligations or release any guaranty or collateral security granted pursuant to the Loan Documents; -20- provided, however, the Administrative Agent shall, without the consent of any Person, release any Borrower, guarantor or collateral security granted pursuant to the Loan Documents, (A) as a court of competent jurisdiction may direct, or (B) in connection with a disposition permitted under Section 8.5 above (other than a disposition to another Borrower) or as may be otherwise provided under the Loan Documents and provided, further, that for purposes of determining whether" all Lenders", "the Required Lenders" or "any Lender" has consented to any amendment or waiver, no effect shall be given to the determination of any Lender who has lost its right to vote pursuant to Sections 1.3(c), 1.3(e)(ii), or 1.6(e) and provided, further, any amendment to cash collateral or cash management documents that may be entered into may be amended by the Administrative Agent without the Required Lenders. Without limiting the generality of the foregoing, the Administrative Agent is authorized and directed to take such action as it deems necessary or desirable (including, without limitation, the execution and filing of UCC-3 termination statements or the giving of direction to another Person to do the same) to release any security interest referred to in the proviso to this clause (ii). Further, the Administrative Agent and the Lenders may amend or modify the provisions of Article 10 hereof (except for Section 10.9 (Successor Administrative Agent) and paragraph (b) of Section 10.12 (Other Agents) and Article 10A hereof) without the need for any consent or approval from the Borrowers, it being acknowledged that the Borrowers are not third party beneficiaries of the provisions of said Article 10 (except for Section 10.9 (Successor Administrative Agent) and paragraph (b) of Section 10.12 (Successor Agent)) and (y) without the consent of any Lenders, the Administrative Agent may enter into amendments and modifications to this Agreement and the other Loan Documents as necessary or desirable to cure any ambiguities herein or therein or to add additional Borrowers or add additional Collateral. Reference is made to Article 10A of the Genesis Credit Agreement which affects the right of the parties hereto to amend certain provisions set forth in Section 12.9 below without the consent of certain Lenders party thereto; accordingly, when amending Section 12.9 below, consideration shall be given to the provisions of said Section 10A of the Genesis Credit Agreement. 1.37 Consents to Assignments. The eighth line of Section 12.9(c) is amended by changing "consent" to "consents" both places it appears. 1.38 Incorporation of Terms. The terms of this Amendment No. 4 and Schedule 11.1 attached hereto are hereby incorporated into the Credit Agreement as if fully set forth therein. 2. Representations and Warranties. In order to induce the Lenders, the Issuer and the Agents to agree to amend the Current Credit Agreement, each of the Borrowers, jointly and severally, makes the following representations and warranties, which shall survive the execution and delivery of this Amendment No. 4. -21- 2.1 The execution, delivery and performance of this Amendment No. 4 does not require any consent of, notice to, or filing with any governmental entity or any other third party, does not violate the terms of any agreement or instrument binding on any Borrower (including, without limitation, the constituent documents of such Borrower) or violate any Law applicable to such Borrower. On and after the Amendment No. 4 Effective Date, the Current Credit Agreement as amended by the amendments hereunder to be effective on the Amendment No. 4 Effective Date, shall be the legal, valid and binding obligation of each Borrower enforceable against such Borrower in accordance with its terms. 2.2 No Default or Event of Default has occurred and is continuing, after giving effect to the amendments contained herein. 2.3 Each of the representations and warranties set forth in the Credit Agreement is true and correct in all material respects both before and after giving effect to the amendments and transactions contemplated hereby as though each such representation and warranty were made at and as of the date hereof and as of the Amendment No. 4 Effective Date. 3. Amendment No. 4 Effective Date. The amendments set forth in Section 1 (Amendments to Current Credit Agreement on Amendment No. 4 Effective Date) above shall be effective on the date (the "Amendment No. 4 Effective Date") that each of the following conditions is satisfied (provided however that, the Lender Parties shall have no obligation to enter into this Amendment No. 4 and this Amendment No. 4 shall not become effective unless the conditions set forth herein are satisfied on or prior to August 31, 1999): 3.1 Secretary's Certificates. The Borrowers shall have delivered, or caused to be delivered, a certificate of the Secretary or an Assistant Secretary (or general partner, as applicable) of each of the Borrowers, with specimen signatures of the authorized signatories to the Loan Documents, and to which shall be attached copies of the following, as applicable: articles or certificates of incorporation, bylaws, partnership agreements, resolutions and shareholder agreements provided, however, if any such articles, by-laws or partnership agreements of Subsidiaries were delivered to the Administrative Agent since October 14, 1997 and if there have been no changes to such documents, additional copies need not be delivered pursuant to this Section 3.2 so long as the certifying officer signs a statement to such effect in the applicable Secretary's Certificate. 3.2 Good Standing Certificates. The Borrowers shall have delivered, or caused to be delivered, a good standing or subsistence certificate, as the case may be, issued as of a recent date with respect to each Borrower (and corporate general partner of Borrowers that are partnerships), issued by the Secretary of State or other appropriate official of its jurisdiction of formation and also each jurisdiction where it is required to qualify to do business and, if any such certificate is dated more than twenty-one (21) days prior to the Closing Date, a confirmation (which may be provided by a reputable corporate service) of the information in such certificate. 3.3 Lien Searches. The Borrowers shall have delivered to the Administrative Agent Uniform Commercial Code, tax, and judgment lien searches of the Borrowers, in such form, as of such date and with such content as are acceptable to the Administrative Agent. 3.4 Execution of Amendment No. 4. Each of the Borrowers and the Required Lenders shall have executed this Amendment No. 4 and the Surety shall have executed the acknowledgement set forth below. -22- 3.5 Opinions of Counsel. (a) The Borrowers shall have delivered favorable opinions of counsel, dated as of the Amendment No. 4 Effective Date, from Blank Rome Comisky & McCauley, counsel to the Borrowers, as to the absence of conflicts with other financing agreements and other material agreements of the Borrowers, the perfection of security interests under the Security Documents, the due organization of the Borrowers, the due authorization of the transactions referred to herein, the enforceability of the Loan Documents and such other matters as the Agents may reasonably request, in form and substance satisfactory to the Agents. (b) The Borrowers shall have delivered such local counsel opinions as the Administrative Agent may request, in form and substance satisfactory to the Administrative Agent. 3.6 Consents and Approvals. The Borrowers shall have delivered all material corporate, governmental, judicial and third party consents and approvals necessary in connection with this Agreement and the other Loan Documents provided, however that the Borrowers shall only be required to use commercially reasonable efforts to produce landlord consents and other third party consents to specific items of Additional Security. 3.7 Sponsor Letter of Intent and Related Matters. The Borrowers shall have delivered to the Lenders a copy of the Sponsor Letter of Intent executed by the Sponsors. In addition, the Borrowers shall have delivered a written acknowledgement from Cypress and TPG stating that the terms of this Amendment No. 4 and the related documents are acceptable to them within the meaning of the Sponsor Letter of Intent. 3.8 Insurance. The Borrowers shall have delivered to the Administrative Agent evidence of the insurance required by Section 6.8 of the Agreement. 3.9 Fees and Expenses. The Borrowers shall have paid the fees required to be paid to the Agents and the Lenders on or before the Amendment No. 4 Effective Date and the fees and disbursements of counsel for the Administrative Agent in connection with the negotiation, preparation, execution and delivery of this Amendment No. 4 and related transactions. 3.10 Security Agreement. The Borrowers shall have executed and delivered a Security Agreement (as such agreement is amended, restated, modified and/or supplemented from time to time, the "Security Agreement") in substantially the form of Exhibit A hereto, together with such UCC-1 financing statements and/or UCC-3 statements of amendment as are required thereby. 3.11 Mortgages. The Borrowers shall have executed and delivered mortgages or other appropriate collateral conveyance documents for so much of their real property (owned or leased) as they can provide using commercially reasonable efforts but, in any event, for at least 14 owned properties, together with such title reports and flood zone certifications as the Administrative Agent may reasonably request. -23- 3.12 Truth of Representation and Absence of Defaults. The representations and warranties set forth in this Amendment No. 4, the Agreement and the other Loan Documents shall be true and correct in all material respects and there shall be no Default or Event of Default after giving effect to the amendments and waivers set forth hereunder. 3.13 Other Information. The Borrowers shall have delivered such other information as the Agents may reasonably request. Also effective on the Amendment No. 4 Effective Date, the Lenders hereby waive any Defaults or Events of Default existing under the Current Credit Agreement to the extent (but only to the extent) that such Defaults or Events of Default would not exist after giving effect to this Amendment No. 4. In addition, the Lenders hereby waive any Default or Event of Default caused by the failure to deliver financial statements and an Officer's Compliance Certificate by August 15, 1999 so long as such financial statements and Officer's Compliance Certificate are delivered by August 23, 1999. The foregoing waivers are limited to their express terms and do not imply any similar or future waivers. 4. Counterparts. This Amendment No. 4 may be executed in counterparts and by different parties hereto in separate counterparts, each of which, when executed and delivered, shall be deemed to be an original and all of which, when taken together, shall constitute one and the same instrument. A photocopied or facsimile signature shall be deemed to be the functional equivalent of a manually executed original for all purposes. 5. Ratification. The Current Credit Agreement, as amended by this Amendment No. 4, and the other Loan Documents, are, and shall continue to be, in full force and effect and are hereby in all respects confirmed, approved and ratified. 6. Payment of Fees and Expenses. Without limiting other payment obligations of the Borrowers set forth in the Loan Documents, the Borrowers hereby, jointly and severally, agree to pay (a) all costs and expenses incurred by the Administrative Agent in connection with the preparation, execution and delivery of this Amendment No. 4 and any other documents or instruments which may be delivered in connection herewith, including, without limitation, the reasonable fees and expenses of its counsel, Drinker Biddle & Reath LLP, (b) a fee to each Lender who signs and returns a signature page hereto no later than 5:00 p.m. on August 20, 1999 (or such other date and time as is mutually agreed upon) in an amount equal to .25% of such Lender's total Commitment under the Agreement, and (d) such other fees as Multicare has agreed to pay in connection herewith. 7. Authorization to Agent. The Lenders hereby authorize the Administrative Agent to take such action (including, without limitation, signing amendments to Loan Documents) as shall be consistent with the purposes hereof and as it shall deem necessary or appropriate to carry out the purposes of this Amendment No. 4. 8. Governing Law. This Amendment No. 4 shall be construed in accordance with, and governed by, the laws of the Commonwealth of Pennsylvania, without regard to choice of law principles. -24- 9. References. From and after the Amendment No. 4 Effective Date, each reference in the Credit Agreement to "this Agreement", "hereof", "hereunder" or words of like import, and all references to the Credit Agreement in any and all Loan Documents, other agreements, instruments, documents, certificates and writings of every kind and nature, shall be deemed to mean the Current Credit Agreement as modified and amended by this Amendment No.4 and as the same may be further amended, modified or supplemented in accordance with the terms thereof. -25- IN WITNESS WHEREOF, the parties have caused this Amendment No.4 to be duly executed as of the date first above written. BORROWERS: THE MULTICARE COMPANIES, INC., a Delaware corporation By____________________________ Name: Barbara J. Hauswald Title: Treasurer Address for notices: 101 East State Street Kennett Square, PA 19348 Attention: Ira C. Gubernick, Vice President Chairman's Office & Corporate Secretary Telephone: (610) 444-6350 Facsimile: (610) 444-3365 ADS APPLE VALLEY LIMITED PARTNERSHIP, a Massachusetts limited partnership, by: ADS Apple Valley, Inc. its General Partner ADS DARTMOUTH GENERAL PARTNERSHIP, a Massachusetts general partnership, by ADS Dartmouth ALF, Inc. and ADS Senior Housing, Inc., its General Partners ADS HINGHAM LIMITED PARTNERSHIP, a Massachusetts limited partnership, by ADS Hingham Nursing Facility, Inc., its General Partner ADS RECUPERATIVE CENTER LIMITED PARTNERSHIP, a Massachusetts limited partnership, by ADS Recuperative Center, Inc., its General Partner CARE HAVEN ASSOCIATES LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc. and GMA Partnership Holding Company, Inc., its General Partners CUMBERLAND ASSOCIATES OF RHODE ISLAND, L.P., a Delaware limited partnership, by Health Resources of Cumberland, Inc., its General Partner GLENMARK PROPERTIES I, LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc. and GMA Partnership Holding Company, Inc., its General Partners GROTON ASSOCIATES OF CONNECTICUT, L.P., a Delaware limited partnership, by Health Resources of Groton, Inc., its General Partner MIDDLETOWN (RI) ASSOCIATES OF RHODE ISLAND, L.P., a Delaware limited partnership, by Health Resources of Middletown (R.I.), Inc., its General Partner POINT PLEASANT HAVEN LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc., its General Partner RALEIGH MANOR LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc., its General Partner ROMNEY HEALTH CARE CENTER LTD., LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc., its General Partner SISTERVILLE HAVEN LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc., its General Partner TEAYS VALLEY HAVEN LIMITED PARTNERSHIP, a West Virginia limited partnership, by Glenmark Associates, Inc., its General Partner THE STRAUS GROUP - HOPKINS HOUSE, L.P., a New Jersey limited partnership, by Encare of Wyncote, Inc., its General Partner THE STRAUS GROUP - QUAKERTOWN MANOR, L.P., a New Jersey limited partnership, by Encare of Quakertown, Inc., its General Partner WALLINGFORD ASSOCIATES OF CONNECTICUT, L.P., a Delaware limited partnership, by Health Resources of Wallingford, Inc., its General Partner WARWICK ASSOCIATES OF RHODE ISLAND, L.P., a Delaware limited partnership, by Health Resources of Warwick, Inc., its General Partner By: ______________________________ On behalf of each of the foregoing General Partners by Barbara J. Hauswald, Treasurer HOLLY MANOR ASSOCIATES OF NEW JERSEY, L.P., a Delaware limited partnership, by Encare of Mendham, L.L.C., its General Partner, by Century Care Management, Inc., its authorized manager MERCERVILLE ASSOCIATES OF NEW JERSEY, L.P., a Delaware limited partnership, by Breyut Convalescent Center, L.L.C., its General Partner, by Century Care Management, Inc., its authorized manager POMPTON ASSOCIATES, L.P., a New Jersey limited partnership, by Pompton Corp., L.L.C., its General Partner, by Century Care Management, Inc., its authorized manager THE STRAUS GROUP - OLD BRIDGE, L.P., a New Jersey limited partnership, by Health Resources of Emery, L.L.C., its General Partner, by Century Care Management, Inc., its authorized manager THE STRAUS GROUP - RIDGEWOOD, L.P., a New Jersey limited partnership, by Health Resources of Ridgewood, L.L.C., its General Partner, by Century Care Management, Inc., its authorized manager By:__________________________ On behalf of each of the foregoing General Partners by Barbara J. Hauswald as Treasurer of the Authorized Manager Address for notices: 101 East State Street Kennett Square, PA 19348 Attention: Ira C. Gubernick, Vice President Chairman's Office & Corporate Secretary Telephone: (610) 444-6350 Facsimile: (610) 444-3365 ACADEMY NURSING HOME, INC., a Massachusetts corporation ADS APPLE VALLEY, INC., a Massachusetts corporation ADS CONSULTING, INC., a Massachusetts corporation ADS DANVERS ALF, INC., a Delaware corporation ADS DARTMOUTH ALF, INC., a Delaware corporation ADS HINGHAM ALF, INC., a Delaware Corporation ADS HINGHAM NURSING FACILITY, INC., a Massachusetts corporation ADS HOME HEALTH, INC., a Delaware corporation ADS MANAGEMENT, INC., a Massachusetts corporation ADS/MULTICARE, INC., a Delaware corporation ADS RECUPERATIVE CENTER, INC., a Massachusetts corporation ADS SENIOR HOUSING, INC., a Massachusetts corporation ADS VILLAGE MANOR, INC., a Massachusetts corporation ANR, INC., a Delaware corporation APPLEWOOD HEALTH RESOURCES, INC., a Delaware corporation AUTOMATED PROFESSIONAL ACCOUNTS, INC., a West Virginia corporation BERKS NURSING HOMES, INC., a Pennsylvania corporation BETHEL HEALTH RESOURCES, INC., a Delaware corporation BRIGHTWOOD PROPERTY, INC., a West Virginia corporation CENTURY CARE CONSTRUCTION, INC., a New Jersey corporation CENTURY CARE MANAGEMENT, INC., a Delaware corporation CHATEAU VILLAGE HEALTH RESOURCES, INC., a Delaware corporation CHG INVESTMENT CORP., INC., a Delaware corporation CHNR-I, INC., a Delaware corporation COLONIAL HALL HEALTH RESOURCES, INC., a Delaware corporation COLONIAL HOUSE HEALTH RESOURCES, INC., a Delaware corporation CONCORD HEALTH GROUP, INC., a Delaware corporation CONCORD HOME HEALTH, INC., a Pennsylvania corporation CONCORD REHAB, INC., a Pennsylvania corporation CONCORD SERVICE CORPORATION, a Pennsylvania corporation CVNR, INC., a Delaware corporation DELM NURSING, INC., a Pennsylvania corporation ELMWOOD HEALTH RESOURCES, INC., a Delaware corporation ENCARE OF PENNYPACK, INC., a Pennsylvania corporation ENCARE OF QUAKERTOWN, INC., a Pennsylvania corporation ENCARE OF WYNCOTE, INC., a Pennsylvania corporation ENR, INC., a Delaware corporation GLENMARK ASSOCIATES, INC., a West Virginia corporation GMA - BRIGHTWOOD, INC., a West Virginia corporation GMA CONSTRUCTION, INC., a West Virginia corporation GMA - MADISON, INC., a West Virginia corporation GMA PARTNERSHIP HOLDING COMPANY, INC., a West Virginia corporation GMA - UNIONTOWN, INC., a Pennsylvania corporation HEALTH RESOURCES OF BOARDMAN, INC., a Delaware corporation HEALTH RESOURCES OF CEDAR GROVE, INC., a New Jersey corporation HEALTH RESOURCES OF COLCHESTER, INC., a Connecticut corporation HEALTH RESOURCES OF COLUMBUS, INC., a Delaware corporation HEALTH RESOURCES OF CUMBERLAND, INC., a Delaware corporation HEALTH RESOURCES OF EATONTOWN, INC., a New Jersey corporation HEALTH RESOURCES OF FARMINGTON, INC., a Delaware corporation HEALTH RESOURCES OF GARDNER, INC., a Delaware corporation HEALTH RESOURCES OF GLASTONBURY, INC., a Connecticut corporation HEALTH RESOURCES OF GROTON, INC., a Delaware corporation HEALTH RESOURCES OF LAKEVIEW, INC., a New Jersey corporation HEALTH RESOURCES OF LEMONT, INC., a Delaware corporation HEALTH RESOURCES OF LYNN, INC., a New Jersey corporation HEALTH RESOURCES OF KARMENTA AND MADISON, INC., a Delaware corporation HEALTH RESOURCES OF MARCELLA, INC., a Delaware corporation HEALTH RESOURCES OF MIDDLETOWN (R.I.), INC., a Delaware corporation HEALTH RESOURCES OF MORRISTOWN, INC., a New Jersey corporation HEALTH RESOURCES OF NORFOLK, INC., a Delaware corporation HEALTH RESOURCES OF NORWALK, INC., a Connecticut corporation HEALTH RESOURCES OF PENNINGTON, INC., a New Jersey corporation HEALTH RESOURCES OF ROCKVILLE, INC., a Delaware corporation HEALTH RESOURCES OF SOUTH BRUNSWICK, INC., a New Jersey corporation HEALTH RESOURCES OF TROY HILLS, INC., a New Jersey corporation HEALTH RESOURCES OF WALLINGFORD, INC., a Delaware corporation HEALTH RESOURCES OF WARWICK, INC., a Delaware corporation HEALTHCARE REHAB SYSTEMS, INC., a Pennsylvania corporation HORIZON ASSOCIATES, INC., a West Virginia corporation HORIZON MOBILE, INC., a West Virginia corporation HORIZON REHABILITATION, INC., a West Virginia corporation HR OF CHARLESTON, INC., a West Virginia corporation HRWV Huntington, Inc., a West Virginia corporation LAKEWOOD HEALTH RESOURCES, INC., a Delaware corporation LAUREL HEALTH RESOURCES, INC., a Delaware corporation LEHIGH NURSING HOMES, INC., a Pennsylvania corporation LWNR, INC., a Delaware corporation MABRI CONVALESCENT CENTER, INC., a Connecticut corporation MARKGLEN, INC., a West Virginia corporation MARSHFIELD HEALTH RESOURCES, INC., a Delaware corporation MONTGOMERY NURSING HOMES, INC., a Pennsylvania corporation MULTICARE AMC, INC., a Delaware Corporation MULTICARE HOME HEALTH OF ILLINOIS, INC., a Delaware corporation NURSING AND RETIREMENT CENTER OF THE ANDOVERS, INC., a Massachusetts corporation PHC OPERATING CORP., a Delaware corporation POCAHONTAS CONTINUOUS CARE CENTER, INC., a West Virginia corporation PRESCOTT NURSING HOME, INC., a Massachusetts corporation PROGRESSIVE REHABILITATION CENTERS, INC., a Delaware corporation PROVIDENCE HEALTH CARE, INC., a Delaware corporation REST HAVEN NURSING HOME, INC, a West Virginia corporation RIDGELAND HEALTH RESOURCES, INC., a Delaware corporation RIVER PINES HEALTH RESOURCES, INC., a Delaware corporation RIVERSHORES HEALTH RESOURCES, INC., a Delaware corporation RLNR, INC., a Delaware corporation ROSE HEALTHCARE, INC., a New Jersey corporation ROSE VIEW MANOR, INC., a Pennsylvania corporation RSNR, INC., a Delaware corporation RVNR, INC., a Delaware corporation SENIOR LIVING VENTURES, INC., a Pennsylvania corporation SCHUYLKILL NURSING HOMES, INC., a Pennsylvania corporation SCHUYLKILL PARTNERSHIP ACQUISITION CORP., a Pennsylvania corporation SENIOR SOURCE, INC., a Massachusetts corporation SNOW VALLEY HEALTH RESOURCES, INC., a Delaware corporation SOLOMONT FAMILY FALL RIVER VENTURE, INC., a Massachusetts corporation SOLOMONT FAMILY MEDFORD VENTURE, INC., a Massachusetts corporation STAFFORD CONVALESCENT CENTER, INC., a Delaware corporation S.T.B. INVESTORS, LTD., a New York corporation SVNR, INC., a Delaware corporation THE ADS GROUP, INC., a Massachusetts corporation TRI-STATE MOBILE MEDICAL SERVICES, INC., a West Virginia corporation WESTFORD NURSING AND RETIREMENT CENTER, INC., a Massachusetts corporation WILLOW MANOR NURSING HOME, INC., a Massachusetts corporation ASL, INC., a Massachusetts corporation HMNH REALTY, INC., a Delaware corporation By:______________________________ Barbara J. Hauswald as Treasurer on behalf of each of the foregoing Address for notices: 101 East State Street Kennett Square, PA 19348 Attention: Ira C. Gubernick, Vice President Chairman's Office & Corporate Secretary Telephone: (610) 444-6350 Facsimile: (610) 444-3365 BREYUT CONVALESCENT CENTER, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager ENCARE OF MENDHAM, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF BRIDGETON, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF CINNAMINSON, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF CRANBURY, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF EMERY, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF ENGLEWOOD, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF EWING, L.L.C., a New Jersey limited liability company. by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF FAIR LAWN, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF JACKSON, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF RIDGEWOOD, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager HEALTH RESOURCES OF WEST ORANGE, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager POMPTON CARE, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager ROEPHEL CONVALESCENT CENTER, L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager TOTAL REHABILITATION CENTER L.L.C., a New Jersey limited liability company, by Century Care Management, Inc., its authorized manager By:______________________________ On behalf of each of the foregoing Authorized Managers by its Treasurer The foregoing Amendment No. 4 is acknowledged and agreed to by the undersigned Surety (whether in its capacity as Surety, pledgor under the Pledge Agreement or otherwise) as of the date first above written. GENESIS ELDERCARE CORP. By:______________________ Name: Barbara J. Hauswald Title: Treasurer AGENTS, ISSUER AND LENDERS: MELLON BANK, N.A., as a Lender, as Issuer and as Administrative Agent By________________________________ Name: Title: Address for notices: street address: AIM 199-5220 Mellon Independence Center 701 Market Street Philadelphia, Pennsylvania 19106 mailing address: AIM 199-5220 P.O. Box 7899 Philadelphia, Pennsylvania 19101-7899 Attention: Linda Sigler, Loan Administration Telephone: 215-553-4583 Facsimile: 215-553-4789 With a copy to Mellon Bank, N.A. One Mellon Bank Center Room 151-4440 Pittsburgh, PA 15258-0001 Attention: Marsha Wicker Vice President Telephone: 412-236-1631 Facsimile: 412-236-0287 With a copy for notices respecting assignments to: MELLON BANK, N.A. One Mellon Bank Center 43rd Floor Pittsburgh, PA 15258-0001 Attention: Dean Hazelton Telephone: 412-236-0316 Facsimile: 412-236-9176 CITICORP USA, INC., as a Lender and as Syndication Agent By________________________________ Name: Title: Address for notices: 399 Park Avenue 8th Floor, Zone 11 New York, NY 10043 Attention: James J. McCarthy Telephone: 212-559-0501 Facsimile: 212-793-0289 FIRST UNION NATIONAL BANK, as a Lender and as Documentation Agent By________________________________ Name: Title: FIRST UNION NATIONAL BANK (as successor to CORESTATES BANK, N.A.) By________________________________ Name: Title: Address for notices: One First Union Center TW-5 Charlotte, NC 28288-0735 Attention: Joe Towell Telephone: 704-383-3844 Facsimile: 704-383-9144 BANK OF AMERICA, N.A. (as successor to NationsBank, N.A. and Bank of America, NT&SA), as a Lender and as a Syndication Agent By_______________________________ Name: Title: Address for notices: 101 North Tryon Street 15th Floor Charlotte, NC 28255 NC1-001-15-11 Attention: Robert Campbell Telephone: 704-388-8799 Facsimile: 704-388-0922 With a copy to 100 North Tryon Street 17th Floor Charlotte, NC 28255 NC1-007-1711 Attention: Ms. Marty Mitchell Telephone: 704-388-1115 Facsimile: 704-386-3893 CREDIT LYONNAIS NEW YORK BRANCH By:_________________________________ Name: Title: Address for notices: Credit Lyonnaise New York Branch 1301 Avenue of the Americas New York, NY 10019 Attention: Farboud Tavanger Telephone: (212) 261-7832 Facsimile: (212) 261-3440 FLEET NATIONAL BANK By_____________________________ Name: Title: Address for notices: Fleet National Bank One Federal Street MA OF D07B Boston, MA 02110 Attention: Carol Paige Telephone: (617) 346-4619 Facsimile: (617) 346-4699 THE INDUSTRIAL BANK OF JAPAN, LIMITED By_______________________________ Name: Title: Address for notices: The Industrial Bank of Japan, Limited 1251 Avenue of the Americas New York, NY 10020 Attention: Randall Wernes Telephone: (212) 282-3461 Facsimile: (212) 282-4488 NATIONAL WESTMINSTER BANK Plc By_______________________________ Name: Title: Address for notices: National Westminster Bank Plc 65 East 55th Street, 21st Floor New York, NY 10022 Attention: Andrew S. Weinberg Phone: (212) 401-1330 Facsimile: (212) 401-1390 THE SAKURA BANK, LIMITED By______________________________ Name: Title: Address for notices: The Sakura Bank, Limited 277 Park Avenue, 45th Floor New York, NY 10172 Attention: Stephen Chan Telephone: (212) 909-4554 Facsimile: (212) 909-4599 PARIBAS By:____________________________ Name: Title: By:____________________________ Name: Title: Address for notices: Paribas 787 Seventh Avenue New York, NY 10019 Attention: Stas Byhovsky Telephone: (212) 841-2568 Facsimile: (212) 841-2292 THE BANK OF NEW YORK By:____________________________ Name: Title: Address for notices: The Bank of New York One Wall Street, 21st Floor New York, NY 10286 Attention: Stephen Brennan Telephone: (212) 635-8020 Facsimile: (212) 635-8092 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By:____________________________ Name: Title: Address for notices: Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor New York, NY 10020-1104 Attention: Douglas Weir Telephone: (212) 782-4503 Facsimile: (212) 782-4935 CRESTAR BANK By:____________________________ Name: Title: Address for Notices: Crestar Bank c/o Suntrust Bank Nashville P.O. Box 305110 Nashville, TN 37230 Attention: Jan Naifeh Telephone: (615) 748-4026 Facsimile: (615) 748-5700 DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By:____________________________ Name: Title: By:____________________________ Name: Title: Address for notices: Dresdner Bank AG, New York 75 Wall Street, 25th Floor New York, NY 10005-2889 Attention: Brigit Anderson Telephone: (212) 429-2747 Facsimile: (212) 429-2129 FINOVA CAPITAL CORPORATION By:____________________________ Name: Title: Address for notices: Finova Capital Corporation 311 S. Wacker, Suite 4400 Chicago, IL 60606 Attention: Brian Williamson Telephone: (312) 294-4175 Facsimile: (312) 322-3553 KEY CORPORATE CAPITAL INC. By:_______________________________ Name: Title: Address for notices: Key Corporate Capital Inc. c/o Key Bank, N.A. 127 Public Square Cleveland, OH 44114 Attention: Arthur E. Cutler OH-01-27-0504 Telephone: (216) 689-0854 Facsimile: (216) 689-8468 ALLFIRST BANK (successor to FMB BANK, formerly known as FIRST NATIONAL BANK OF MARYLAND) By:____________________________ Name: Title: Address for notices: Allfirst Bank 25 S. Charles Street, 18th Floor Baltimore, MD 21201 Attention: Robert H. Hauver Telephone: (410) 244-4246 Facsimile: (410) 244-4388 NATEXIS BANQUE BFCE By:____________________________ Name: Title: By:____________________________ Name: Title: Address for notices: Natexis Banque BFCE 645 Fifth Avenue, 20th Floor New York, NY 10022 Attention: Frank Madden Telephone: (212) 872-5180 Facsimile: (212) 872-5045 NATIONAL CITY BANK OF PENNSYLVANIA By:____________________________ Name: Title: Address for notices: National City Bank of Pennsylvania 20 Stanwix Street, 46-25-191 Pittsburgh, PA 15222 Loc. 46-25-191 Attention: Bruce G. Shearer Telephone: (412) 644-7726 Facsimile: (412) 471-4883 THE SANWA BANK, LIMITED By:____________________________ Name: Title: Address for notices: The Sanwa Bank, Limited 55 E. 52nd Street New York, NY 10055 Attention: Chris DiCarlo Telephone: (212) 339-6336 Facsimile: (212) 754-1304 SUMMIT BANK By:____________________________ Name: Title: Address for notices: Summit Bank 250 Moore Street, 2nd Floor Hackensack, NJ 07601 Attention: Tom Hanrahan Telephone: (201) 646-5859 Facsimile: (201) 646-9497 THE DAI-ICHI KANGYO BANK, LTD. By:____________________________ Name: Title: Address for notices: The Dai-Ichi Kangyo Bank, Ltd. One World Trade Center, 48th Floor New York, NY 10048 Attention: Takayuki Kumagai Telephone: (212) 432-6651 Facsimile: (212) 488-8955 BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By:____________________________ Name: Title: By:____________________________ Name: Title: Address for notices: Bank Austria Creditanstalt Corporate Finance, Inc. Two Greenwich Plaza Greenwich, CT 06830 Attention: Clifford L. Wells Telephone: (203) 861-6417 Facsimile: (203) 861-0297 CREDIT SUISSE FIRST BOSTON By:____________________________ Name: Title: By:____________________________ Name: Title: Address for notices: Credit Suisse First Boston 11 Madison Avenue New York, NY 10010 Attention: William S. Lutkins Telephone: (212) 325-9705 Facsimile: (212) 325-8319 FIRST NATIONAL BANK OF CHICAGO By_____________________________ Name: Title: Address for notices: First National Bank of Chicago 1 First National Plaza Mailcode: IL1-0536 Chicago, IL 60670 Attention: Tom Harkless/ Greg Tomczyk Telephone: (312) 732-1134 Facsimile: (312) 732-2016 SCOTIABANC, INC. By:____________________________ Name: Title: Address for notices: ScotiaBanc, Inc. 600 Peachtree Street NE Suite 2700 Atlanta, GA 30308 Attention: Dana Maloney Telephone: (404) 877-1524 Facsimile: (404) 888-8998 CIBC INC. By:____________________________ Name: Title: Address for notices: CIBC Inc. 425 Lexington Avenue, 8th Floor New York, NY 10025 Attention: John Livingston Telephone: (212) 856-3581 Facsimile: (212) 856-3761 AMSOUTH BANK By:____________________________ Name: Title: Address for notices: AmSouth Bank 1900 5th Ave. N. AST7FL Birmingham, AL 35203 Attention: Ken DiFatta Telephone: (205) 801-0358 Facsimile: (205) 326-4790 PFL LIFE INSURANCE COMPANY By:____________________________ Name: Title: Address for notices: PFL Life Insurance Company c/o Aegon USA Investment Management, Inc. 4333 Edgewood Road, NE Cedar Rapids, IA 52499 Attention: John Bailey, Securities Analyst Telephone: (319) 369-2811 Facsimile: (319) 369-2666 MONUMENTAL LIFE INSURANCE COMPANY (successor by merger to PEOPLES SECURITY LIFE INSURANCE COMPANY) By:____________________________ Name: Title: Address for notices: Monumental Life Insurance Company c/o Aegon USA Investment Management, Inc. 4333 Edgewood Road, NE Cedar Rapids, IA 52499 Attention: John Bailey, Securities Analyst Telephone: (319) 369-2811 Facsimile: (319) 369-2666 Payment Advice Attention: Marla Johnson Monumental Life Insurance Company c/o AEGON USA Investment Management, Inc. 4333 Edgewood Road, NE Cedar Rapids, IA 52499 Fax Number: (319) 398-8695 FLOATING RATE PORTFOLIO By: INVESCO Senior Secured Management, Inc., as attorney in fact By:____________________________ Name: Title: Address for notices: Floating Rate Portfolio c/o INVESCO Senior Secured Management, Inc. 1166 Avenue of the Americas, 27th Floor New York, NY 10036 Attention: Kathleen Lenarcic Telephone: (212) 278-9794 Facsimile: (212) 278-9619 MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By:____________________________ Name: Title: Address for notices: Morgan Stanley Dean Witter Prime Income Trust c/o Morgan Stanley Dean Witter Advisors 72nd Floor Two World Trade Center New York, NY 10048 Attention: Kevin Egan Telephone: (212) 392-5845 Facsimile: (212) 392-5345 EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management as Investment Advisor By:____________________________ Name: Title: Address for notices: State Street Bank & Trust Company Corporate Trust Division One Enterprise Drive North Quincy, MA 02171 Attention: Patrick McEnroe Telephone: (617) 664-5367 Facsimile: (617) 664-5366 Eaton Vance Management 255 State Street, 8th Floor Boston, MA 02109 Attention: Payson Swaffield Telephone: (617) 598-8484 Telecopier: (617) 695-9594 Reference: ING HIGH INCOME PRINCIPAL PRESERVATION FUND HOLDINGS, LDC By: ING Capital Advisors, Inc., As Investment Advisor By:____________________________ Name: Title: Address for notices: ING High Income Principal Preservation Fund Holdings, LDC c/o ING Capital Advisors, Inc. 333 South Grand Avenue, Suite 4250 Los Angeles, CA 90071 Attention: Helen Rhee Telephone: (213) 346-3983 Facsimile: (213) 346-3995 SENIOR DEBT PORTFOLIO BY: Boston Management and Research as Investment Advisor By:____________________________ Name: Title: Address for notices: Eaton Vance Management 255 State Street, 8th Floor Boston, MA 02109 Attention: Payson Swaffield Telephone: (617) 598-8484 Facsimile: (617) 695-9594 MASSACHUSETTS MUTUAL LIFE INSURANCE CO. By:____________________________ Name: Title: Address for notices: Massachusetts Mutual Life Insurance Co. 1295 State Street Springfield, MA 01111 Attention: John Wheeler, Managing Director Telephone: (413) 744-6228 Facsimile: (413) 744-2022 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By:____________________________ Name: Title: MERRILL LYNCH PRIME RATE PORTFOLIO By: Merrill Lynch Asset Management, L.P., as Investment Advisor By:____________________________ Name: Title: Address for notices: Merrill Lynch Senior Floating Rate Fund, Inc. c/o Merrill Lynch Asset Management 800 Scudders Mill Road - Area 1B Plainsboro, NJ 08536 Attention: Colleen Cunniffe Telephone: (609) 282-2093 Facsimile: (609) 282-2756 MERRILL LYNCH GLOBAL INVESTMENT SERIES Income Strategies Portfolio By: Merrill Lynch Asset Management, L.P., as Investment Advisor As assignee By:____________________________ Name: Title: Address for notices: Merrill Lynch Global Investment Series c/o Merrill Lynch Asset Management, L.P. 800 Scudders Mill Road - Area 1B Plainsboro, NJ 08536 Attention: Colleen Cunniffe Telephone: (609) 282-2093 Facsimile: (609) 282-2756 METROPOLITAN LIFE INSURANCE COMPANY By:____________________________ Name: Title: Address for notices: Metropolitan Life Insurance Company 334 Madison Avenue Convent Station, NJ 07961-0633 Attention: James Dingler Asst. Vice President Telephone: (973) 254-3206 Facsimile: (973) 254-3050 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By:____________________________ Name: Title: Its Authorized Representative Address for notices: The Northwestern Mutual Life Insurance Company 720 E. Wisconsin Avenue Milwaukee, WI 53202 Attention: David A. Barras Director-Investments Northwestern Investment Management Company Telephone: (414) 299-1618 Facsimile: (414) 299-7124 NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION By: New York Life Insurance Company By:____________________________ Name: Title: Address for notices: New York Life Insurance and Annuity Corporation c/o New York Life Insurance Company 51 Madison Avenue, Room 206 New York, NY 10010 Attention: Christine Villaluz/Tony Malloy Telephone: (212) 576-7590 Facsimile: (212) 447-4122 OAK HILL SECURITIES FUND, L.P. By: Oak Hill Securities GenPar, L.P., Its General Partner By: Oak Hill Securities MGP, Inc., Its General Partner By:____________________________ Name: Title: Address for notices: Oak Hill Securities Fund, L.P. c/o O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, NY 10112 Attention: Michael Kontokosta Telephone: (212) 408-2475 Facsimile: (212) 728-5950 OCTAGON LOAN TRUST By:____________________________ Name: Title: Address for notices: Octagon Loan Trust 380 Madison Avenue, 12th Floor New York, NY 10017 Attention: James P. Ferguson Managing Director Telephone: (212) 622-3070 Facsimile: (212) 622-3797 PARIBAS CAPITAL FUNDING LLC By:____________________________ Name: Title: Address for notices: Paribas Capital Funding LLC 787 Seventh Avenue, 32nd Floor New York, NY 10019 Attention: Francois Gauvin Telephone: (212) 841-2144 Facsimile: (212) 841-2548 with a copy to: State Street Bank & Trust Co. Corporate Trust Dept. Attn: Bill Connolly Phone: (617) 664-5410 Fax: (617) 664-5366(67)(68) ROYALTON COMPANY By: Pacific Investment Management Company, as its Investment Advisor By: PIMCO Management Inc., a general partner By:____________________________ Name: Title: Address for notices: Royalton Company c/o Pacific Investment Management Co. 840 Newport Center Drive Newport Beach, CA 92658 Attention: Melissa Fejdasz Telephone: (949) 721-5169 Facsimile: (949) 718-2623 NORTHERN LIFE INSURANCE COMPANY By:____________________________ Name: Title: Address for notices: Northern Life Insurance Company c/o Reliastar Investment Research, Inc. 100 Washington Avenue South, Suite 800 Minneapolis, MN 55401-2121 Attention: James V. Wittich Telephone: (612) 372-3553 Facsimile: (612) 372-5368 KZH SOLEIL LLC By:____________________________ Name: Title: Address for notices: KZH Soleil LLC c/o The Chase Manhattan Bank 450 West 33rd Street - 15th Floor New York, NY 10001 Attention: Virginia Conway Telephone: (212) 946-7575 Facsimile: (212) 946-7776 with a copy to: SAI Investment Adviser, Inc. 1 SunAmerica Center, 34th Floor Los Angeles, CA 90067 Attention: Sabur Moini Telephone: (310) 772-6256 Facsimile: (310) 772-6078 KZH III LLC By:____________________________ Name: Title: Address for notices: KZH III LLC c/o The Chase Manhattan Bank 450 West 33rd Street - 15th Floor New York, NY 10001 Attention: Virginia Conway Telephone: (212) 946-7575 Facsimile: (212) 946-7776 VAN KAMPEN PRIME RATE INCOME TRUST By:____________________________ Name: Title: VAN KAMPEN CLO I, LIMITED by: Van Kampen Management, Inc., as Collateral Manager By:____________________________ Name: Title: VAN KAMPEN SENIOR INCOME TRUST By:____________________________ Name: Title: Address for notices: In care of: Van Kampen Management One Parkview Plaza, 5th Floor Oakbrook Terrace, IL 60181 Attention: Scott Fries Telephone: (630) 684-6026 Facsimile: (630) 684-6740 CANADIAN IMPERIAL BANK OF COMMERCE By:____________________________ Name: Title: Address for notices: Canadian Imperial Bank of Commerce 425 Lexington Avenue, 7th Floor New York, NY 10025 Attention: William Swenson Telephone: (212) 856-3935 Facsimile: (212) 856-3799 NEW YORK LIFE INSURANCE COMPANY By:____________________________ Name: Title: Address for notices: New York Life Insurance and Annuity Corporation c/o New York Life Insurance Company 51 Madison Avenue Room 206 New York, New York 10010 Attention: Christine Villaluz Telephone: (212) 576-7590 Facsimile: (212) 447-4122 CITY NATIONAL BANK By:____________________________ Name: Title: Address for notices: City National Bank 400 N. Roxbury Drive, 3rd Floor Beverly Hills, CA 90210 Attention: Randall Watsek Telephone: 310/888-6131 Fax: 310/888-6564 TORONTO-DOMINION (NEW YORK), INC. By:____________________________ Name: Title: Address for notices: c/o TORONTO DOMINION AGENCY SERVICES 909 Fannin, Suite 1700 Houston, TX 77010 Attention: Carolyn Faeth Telephone: 713/427-8520 Fax: 713/951-9921 LEHMAN COMMERCIAL PAPER INC. By:____________________________ Name: Title: Address for notices: Lehman Commercial Paper Inc. 3 World Financial Center New York, NY 10285 Attention: Michele Swanson Telephone: 212/526-0330 Fax: 212/526-0242 CAPTIVA II FINANCE LTD. By:____________________________ Name: Title: Address for notices: Captiva II Finance Ltd. c/o Deutsche Bank (Cayman) Limited P.O. Box 1984GT, Elizabethan Square Grand Cayman, Cayman Islands Attention: Director Telephone: (345) 949-8244 Facsimile: (345) 949-8178 with a copy to: Stanfield Capital Partners 330 Madison Avenue, 27th Flr. New York, NY 10017 Attention: Christopher Bondy Telephone: (212) 284-4304 Facsimile: (212) 284-4320 CERES FINANCE LTD. By:____________________________ Name: Title: Address for notices: Ceres Finance Ltd. c/o Deutsche Bank (Cayman) Limited P.O. Box 1984GT, Elizabethan Square Grand Cayman, Cayman Islands Attention: Director Telephone: (345) 949-8244 Facsimile: (345) 949-8178 with a copy to: Stanfield Capital Partners 330 Madison Avenue, 27th Flr. New York, NY 10017 Attention: Christopher Bondy Telephone: (212) 284-4304 Facsimile: (212) 284-4320 COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By:____________________________ Name: Title: By:____________________________ Name: Title: Address for notices: Rabobank Nederland 245 Park Avenue New York, NY 10167 Attention: Richard Mattner Telephone: (212) 916-6848 Facsimile: (212) 916-7821 AMARA-2 FINANCE LTD. By:____________________________ Name: Title: Address for notices: Amara-2 Finance Ltd. c/o Stanfield Capital Partners LLC 330 Madison Avenue, 27th Flr. New York, NY 10017 Attention: Christopher Bondy Telephone: (212) 284-4304 Facsimile: (212) 284-4320 MLCBO IV (CAYMAN) LTD. BY: HIGHLAND CAPITAL MANAGEMENT L.P., as Collateral Manager By:____________________________ Name: Title: Address for notices: MLCBO IV (CAYMAN) LTD. c/o Highland Capital Management L.P. as Collateral Manager 1150 Two Galleria Tower 13455 Noel Road, LB #45 Dallas, TX 75240 Attention: Patrick Daugherty Telephone: (972) 233-4300 Facsimile: (972) 233-4343 PAMCO CAYMAN LTD. BY: HIGHLAND CAPITAL MANAGEMENT L.P., as Collateral Manager By:____________________________ Name: Title: Address for notices: PAMCO CAYMAN LTD. c/o Highland Capital Management L.P., as Collateral Manager 1150 Two Galleria Tower 13455 Noel Road, LB #45 Dallas, TX 75240 Attention: Patrick Daugherty Telephone: (972) 233-4300 Facsimile: (972) 233-4343 JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc., as attorney- in-fact, on behalf of Jackson National Life Insurance Company By:____________________________ Name: Title: Address for notices: PPM America, Inc. 225 W. Wacker, Suite 1200 Chicago, IL 60606 Attention: John Waldings Telephone: (312) 634-1230 Facsimile: (312) 634-0054 CYPRESSTREE INVESTMENT PARTNERS I., Ltd. By: CypressTree Investment Management Company, Inc., as Portfolio Manager By:____________________________ Name: Title: Address for notices: CypressTree Investment Partners I, Ltd. 125 High Street Boston, MA 02110 Attention: Phil Robbins Telephone: (617) 946-0600 Facsimile: (617) 946-5681 INDOSUEZ CAPITAL FUNDING III, LIMITED By: Indosuez Capital, as Portfolio Advisor By:____________________________ Name: Title: Address for notices: Indosuez Capital Funding III, Limited 1211 Avenue of the Americas, 8th Floor New York, NY 10036-8701 Attention: Melissa Marano Telephone: (212) 278-2231 Facsimile: (212) 278-2250 THE ROYAL BANK OF SCOTLAND plc By:____________________________ Name: Title: Address for notices: The Royal Bank of Scotland plc Wall Street Plaza 88 Pine Street, 26th Floor New York, NY 10005 Attention: Derek Bonner Telephone: (212) 269-0938 Facsimile: (212) 269-8929 ML CLO XX PILGRIM AMERICA (CAYMAN) LTD. By: Pilgrim Investments, Inc. As its Investment Manager By:____________________________ Name: Title: Address for notices: ML CLO XX Pilgrim America (Cayman) Ltd. c/o Pilgrim Investments, Inc. Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, AZ 85004-3444 Attention: Chuck Lemieux Telephone: (602) 417-8214 Facsimile: (602) 417-8327 STEIN ROE & FARNHAM INCORPORATED As Agent For KEYPORT LIFE INSURANCE COMPANY By:__________________________________ Name: Title: Address for notices: Keyport Life Insurance Company c/o Stein Roe & Farnham One South Wacker Drive, 33rd Floor Chicago, IL 60606 Attention: Brian W. Good Telephone: (312) 368-7644 Facsimile: (312) 368-7857 CHASE SECURITIES INC., as Agent For The Chase Manhattan Bank, as Assignee By:__________________________________ Name: Title: Address for notices: Chase Securities, Inc. 270 Park Avenue, 4th Floor New York, NY 10017 Attention: William Bokos Telephone: (212) 270-3142 Facsimile: (212) 270-7968 ALLIANCE CAPITAL MANAGEMENT L.P., As Manager on behalf of ALLIANCE CAPITAL FUNDING, L.L.C. By: ALLIANCE CAPITAL MANAGEMENT CORPORATION, General Partner of Alliance Capital Management L.P. By:__________________________________ Name: Title: Address for notices: Alliance Capital Funding, L.L.C. Alliance Capital Management L.P. 1345 Avenue of the Americas, 38th Floor New York, NY 10105 Attention: Savitri Alex Telephone: (212) 969-1350 Facsimile: (212) 969-1466 ALLIANCE INVESTMENTS, LIMITED, As Assignee By: Alliance Capital Management Corp. By:__________________________________ Name: Title: Address for notices: Alliance Capital Management L.P. 1345 Avenue of the Americas New York, NY 10105 Attention: Savitri Alex Alliance Investments, Ltd. Telephone: (212) 969-1350 Facsimile: (212) 969-1466 ML CLO XII PILGRIM AMERICA (CAYMAN) LTD. By: Pilgrim Investments, Inc. As its Investment Manager By:_______________________________ Name: Title: Address for notices: ML CLO XII PILGRIM AMERICA (CAYMAN) LTD. c/o Pilgrim Investments, Inc. Two Renaissance Square, Suite 1200 40 North Central Avenue Phoenix, AZ 85004-3444 Attention: Chuck Lemieux Telephone: (602) 417-8214 Facsimile: (602) 417-8327 INTEGRITY LIFE INSURANCE COMPANY By:__________________________________ Name: Title: Address for notices: Integrity Life Insurance Company 515 W. Market Street Louisville, KY 40202-3319 Attention: James Myjak Telephone: (502) 582-7921 Facsimile: (502) 582-7903 CAPTIVA III FINANCE, LTD., as advised by Pacific Investment Management Company By:________________________________ Name: Title: CAPTIVA IV FINANCE LTD., as advised by Pacific Investment Management Company By:________________________________ Name: Title: Address for notices: Pacific Investment Management Co. 840 Newport Center Drive Newport Beach, CA 92660 Attention: Melissa Fejdasz Telephone: (949) 721-5169 Facsimile: (949) 718-2623 ML CLO XIX STERLING (CAYMAN) LTD. By: Sterling Asset Manager, L.L.C., as its Investment Advisor By:______________________________________ Name: Title: Address for notices: Sterling Asset Management, LLC 40 Fulton Street, 10th Floor New York, NY 10038 Attention: Rafael Scolari Telephone: (212) 406-3580 Facsimile: (212) 406-3710 DLJ CAPITAL FUNDING, INC. By:__________________________________ Name: Title: Address for notices: DLJ Capital Funding, Inc. 277 Park Avenue, 10th Floor New York, NY 10172 Attention: Mary McCormack Telephone: (212) 892-6675 Facsimile: (212) 892-6031 GALAXY CLO 1999-1, LTD. By:_________________________________ Name: Title: Address for notices: SAI Investment Adviser, Inc. 1 SunAmerica Center, 34th Floor Los Angeles, CA 90067 Attention: Sabur Moini Telephone: (310) 772-6256 Facsimile: (310) 772-6078 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By:__________________________________ Name: Title: Address for notices: Merrill Lynch, Pierce, Fenner & Smith Incorporated 250 Vesey Street North Tower, 16th Floor New York, NY 10281-1316 Attention: Sandra P. Anton Telephone: (212) 449-3719 Facsimile: (212) 449-9435 STANFIELD CLO, LTD. By: Stanfield Capital Partners LLC as its Collateral Manager By:_____________________________________ Name: Title: Address for notices: Stanfield CLO, Ltd. c/o Stanfield Capital Partners LLC 330 Madison Avenue, 27th Floor New York, NY 10017 Attention: Gregory L. Smith Telephone: (212) 284-4303 Facsimile: (212) 284-4320 KZH STERLING LLC By:____________________________________ Name: Title: Address for notices: KZH Sterling LLC c/o The Chase Manhattan Bank 450 West 33rd Street - 15th Floor New York, NY 10001 Attention: Virginia Conway Telephone: (212) 946-7575 Facsimile: (212) 946-7776 KZH PAMCO LLC By:_________________________________ Name: Title: Address for notices: KZH Pamco LLC c/o The Chase Manhattan Bank 450 West 33rd Street - 15th Floor New York, NY 10001 Attention: Virginia Conway Telephone: (212) 946-7575 Facsimile: (212) 946-7776 SRV-HIGHLAND, INC. By:____________________________________ Name: Title: Address for notices: SRV-Highland, Inc. c/o Bank of America Securities 100 North Tryon Street NC1-007-06-07 Charlotte, NC 28255 Attention: Kelly Walker Telephone: (704) 388-8943 Facsimile: (704) 388-0648 EX-27 4 FINANCIAL DATA SCHEDULE
5 0000890925 MULTICARE U.S. DOLLARS 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 1 3,967 0 123,131 0 0 142,255 663,527 42,156 1,302,364 131,905 741,256 0 0 0 325,911 1,302,364 640,414 640,414 964,384 964,384 45,702 0 66,671 (436,343) (29,016) (407,327) 0 0 0 (407,327) 0 0
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