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