<PAGE>
As filed with the Securities and Exchange Commission on March 2, 1998
Registration No. 333-44479
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE MULTICARE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8051 22-3152527
- --------------------------------- ------------------------------ --------------------
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
</TABLE>
433 HACKENSACK AVENUE
HACKENSACK, NJ 07601
(201) 488-8818
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
Michael R. Walker
Chief Executive Officer
THE MULTICARE COMPANIES, INC.
148 West State Street
Kennett Square, PA 19348
(610) 444-6350
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copy to:
Richard J. McMahon, Esquire
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103
(215) 569-5500
---------------------
===============================================================================
<PAGE>
PROSPECTUS
THE MULTICARE COMPANIES, INC.
Offer to Exchange its 9% Senior Subordinated Notes due 2007,
which have been registered under the Securities Act
of 1933, as amended, for any and all of its outstanding
9% Senior Subordinated Notes due 2007.
The Exchange Offer will expire at 5:00 p.m., New York
City time, on March 30, 1998, unless extended.
The Multicare Companies, Inc. a Delaware corporation ("Multicare" or the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and
conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange
$1,000 principal amount of its 9% Senior Subordinated Notes due 2007 (the
"Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which this Prospectus is a part, for each $1,000 principal amount of its
outstanding 9% Senior Subordinated Notes due 2007 (the "Existing Notes"), of
which $250,000,000 principal amount is outstanding. The form and terms of the
Exchange Notes are the same as the form and terms of the Existing Notes (which
they replace), except that as of the date hereof the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and will not contain certain provisions included in
the terms of the Existing Notes relating to an increase in the interest rate
in certain circumstances relating to the timing of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Existing Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indenture, dated as of August 11, 1997 (the "Indenture"), between the Company
and PNC Bank, National Association, as trustee (the "Trustee"), which also
governs the Existing Notes. The Exchange Notes and the Existing Notes are
sometimes referred to herein collectively as the "Notes." See "Exchange Offer"
and "Description of Exchange Notes."
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") with
Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp. ("Acquisition
Corp."), on October 10, 1997 (the "Merger Closing Date"), Acquisition Corp. was
merged with and into the Company (the "Merger") and the Company continued as
the surviving corporation and became a subsidiary of Genesis ElderCare Corp.
The Existing Notes were issued by Acquisition Corp. as part of the financings
to consummate the Merger and, thereupon, became obligations of the Company.
The Company will accept for exchange any and all Existing Notes duly
tendered and not validly withdrawn prior to 5:00 p.m., New York City time, on
March 30, 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Existing Notes may be withdrawn at any time
prior to 5:00 p.m. New York City time on the Expiration Date. The Exchange
Offer is subject to certain customary conditions. The Existing Notes were sold
by the Company's predecessor on August 11, 1997 to the Placement Agents (as
defined herein) in transactions not registered under the Securities Act in
reliance upon an exemption from registration under the Securities Act (the
"Offering"). The Placement Agents subsequently resold the Existing Notes to
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act. Accordingly, the Existing Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereunder in
order to satisfy the obligations of the Company under the Registration Rights
Agreement (as defined herein) entered into by the Company in connection with
the Offering. See "Exchange Offer."
Under existing interpretations of the staff of the Securities and
Exchange Commission (the "Commission") contained in several no-action letters
to third parties, the Exchange Notes will in general be freely tradeable after
the Exchange Offer without further registration under the Securities Act.
However, any purchaser of Existing Notes who is an "affiliate" of the Company
or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able to rely on such
interpretations of the staff of the Commission, (ii) will not be able to
tender its Existing Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Existing Notes, unless such sale
or transfer is made pursuant to an exemption from such requirements. See
"Exchange Offer" and "--Resale of the Exchange Notes." Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer (a
"Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Existing Notes where such Existing Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities.
Holders of Existing Notes not tendered and accepted in the Exchange Offer
will continue to hold such Existing Notes and will be entitled to all the
rights and benefits and will be subject to the limitations applicable thereto
under the Indenture and with respect to transfer under the Securities Act.
Holders of Existing Notes not tendered in the Exchange Offer will not retain
any rights under the Registration Rights Agreement, except in limited
circumstances. The Company will pay all the expenses incurred by it incident
to the Exchange Offer. See "Exchange Offer."
<PAGE>
The Existing Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") Market. There has
not previously been any public market for the Exchange Notes. The Company does
not intend to list the Exchange Notes on any securities exchange or to seek
approval for quotation through any automated quotation system other than the
Luxembourg Stock Exchange. There can be no assurance that an active market for
the Exchange Notes will develop. Morgan Stanley Dean Witter, Montgomery
Securities and First Union Capital Markets Corp. (the "Placement Agents") have
informed the Company that they currently intend to make a market in the
Exchange Notes, but are not obligated to do so and any such market making may
be discontinued at any time without notice. The Placement Agents may act as
principal or as agent in such transactions. If a market for the Exchange Notes
should develop, the Exchange Notes could trade at a discount from their
principal amount. See "Risk Factors -- Absence of Public Market." Moreover, to
the extent that Existing Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Existing
Notes could be adversely affected.
--------------
See "Risk Factors" on page 14 herein for a description of certain risks to be
considered by holders who tender their Existing Notes in the Exchange Offer.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSIONER OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is March 2, 1998.
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain statements contained 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 and expected future capital expenditure requirements;
expected effects of the Transactions; certain statements contained in
"Business" such as statements concerning strategy, government regulation and
Medicare and Medicaid programs; certain statements in the Pro Forma Condensed
Consolidated Financial Information, such as certain of the pro forma
adjustments; and other statements contained herein regarding matters that are
not historical facts are forward looking statements within the meaning of the
Securities Act. 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 herein under "Risk
Factors", including the following: the occurrence of changes in the mix of
payment sources utilized by the Company's patients to pay for the Company's
services; the adoption of cost containment measures by private pay sources and
efforts by governmental reimbursement sources to impose cost containment
measures; changes in the United States healthcare system and other changes in
applicable government regulations that might affect the Company's
profitability; the Company's continued ability to operate in a heavily
regulated environment and to satisfy regulatory authorities; the Company's
ability to staff its facilities appropriately with qualified healthcare
personnel and to maintain a satisfactory relationship with labor unions; the
level of competition in the Company's industry; the continued availability of
insurance for the inherent risks of liability in the healthcare industry;
price increases in pharmaceuticals, durable medical equipment and other items;
the Company's reputation for delivering high-quality care and its ability to
attract and retain patients; the ability of Genesis Health Ventures, Inc.
("Genesis") to develop the clinical and healthcare management information
system to be used by the Company; and changes in general economic conditions.
2
<PAGE>
SUMMARY
The following summary information is qualified in its entirety by
reference to, and should be read in conjunction with, the more detailed
information and Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus. As used herein, unless the
context otherwise requires, "Multicare" or the "Company" refers to The
Multicare Companies, Inc. and its subsidiaries.
THE COMPANY
Multicare 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.
As of September 30, 1997, Multicare operated 155 eldercare facilities, 11
assisted living facilities and two 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.
THE TRANSACTIONS
The Tender Offer and Merger
On June 16, 1997, Genesis ElderCare Corp., Acquisition Corp. and Multicare
entered into the Merger Agreement whereby Acquisition Corp. agreed to make a
tender offer (the "Tender Offer") to purchase all of the outstanding shares of
common stock, par value $.01 per share (the "Shares"), of Multicare at a
purchase price of $28.00 per Share. The Tender Offer was consummated on October
9, 1997. Acquisition Corp. was merged with and into the Company on the Merger
Closing Date. Following the Merger, the Company continued as the surviving
corporation and became a subsidiary of Genesis ElderCare Corp. Genesis
ElderCare Corp. is owned 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"). The
Company and Genesis also entered into a management agreement (the "Management
Agreement") pursuant to which Genesis manages the Company's operations.
Therapy and Pharmacy Sale
Concurrently with the consummation of the Merger, the Company sold its
contract therapy business (the "Therapy Sale") to Genesis for approximately
$20.0 million in after-tax proceeds. Concurrently with the consummation of the
Merger, the Company entered into a contract to sell its pharmacy business to
Genesis for approximately $50.0 million in after-tax proceeds (the "Pharmacy
Sale"). The Company expects the Pharmacy Sale to close in the first calendar
quarter of 1998.
The Financings
The Notes were issued by Acquisition Corp. as part of the financings to
consummate the Tender Offer and the Merger and, upon consummation of the
Merger, became direct obligations of the Company. The balance of the proceeds
necessary to consummate the Tender Offer and the Merger were obtained from (i)
borrowings under certain credit facilities (collectively, the "Credit
Facility") provided by a group of banks simultaneously with the consummation
of the Tender Offer, (ii) equity contributions by Genesis ElderCare Corp. from
the sale by Genesis ElderCare Corp. of its common stock to each of Genesis,
Cypress, TPG and Nazem (the "Equity Contributions") and (iii) proceeds from
the Therapy Sale and Pharmacy Sale.
3
<PAGE>
The Tender Offer, the Merger (including the Debt Conversion (as
defined)), the Offering and the use of proceeds therefrom, the borrowings
under the Credit Facility and the use of proceeds therefrom, the Equity
Contributions and the use of proceeds therefrom, the Management Agreement, the
Therapy Sale and the Pharmacy Sale and the use of proceeds therefrom are
hereinafter collectively referred to as the "Transactions."
The following table sets forth the estimated sources and uses of funds in
connection with the Transactions:
<TABLE>
<CAPTION>
Amount Amount
Sources of Funds (in millions) Uses of Funds (in millions)
- ---------------------------------------- --------------- ----------------------------------- --------------
<S> <C> <C> <C>
Credit Facility (1)(2)(3) .............. $ 424.4 Tender Offer and Merger
Notes (4) .............................. 248.6 Consideration .................... $1,037.0
Equity Contributions ................... 745.0 Refinance Debt (3)(5) ............. 381.0
Therapy Sale Proceeds .................. 24.0 Severance/Other Payments .......... 19.0
Pharmacy Sale Proceeds (2) ............. 50.0 Transaction Fees and Expenses (6).. 55.0
--------- ---------
Total ................................ $1,492.0 Total ........................... $1,492.0
========= =========
</TABLE>
- -------------
(1) Excludes approximately $106.0 million that will be available to the
Company under a revolving credit facility upon the consummation of the
Transactions.
(2) Because the Pharmacy Sale was not consummated concurrently with the Merger,
the Company borrowed an additional $50.0 million under the Credit Facility
until the consummation of the Pharmacy Sale. The Company expects the
Pharmacy Sale to close in the first calendar quarter of 1998.
(3) As of October 9, 1997, the Company had $309.3 million outstanding under its
bank credit facility.
(4) Notes are net of original debt discount of $1.4 million.
(5) Includes repayment of a $54.0 million lease financing facility.
(6) Includes underwriting discounts and commissions in connection with the
Offering and fees and expenses of approximately $12 million payable
equally to Genesis, Cypress and TPG in connection with the Transactions.
Put/Call Agreement
Pursuant to an agreement (the "Put/Call Agreement") entered into by
Genesis, Cypress, TPG and Nazem in connection with the Tender Offer and Merger,
among other things, (i) Genesis has an option (the "Call"), exercisable from
and after the fourth anniversary of the Merger Closing Date for a period of 270
days, to purchase the shares of common stock of Genesis ElderCare Corp. held by
Cypress, TPG and Nazem and (ii) Cypress, TPG and Nazem have an option (the
"Put"), exercisable from and after the fifth anniversary of the Merger Closing
Date until the sixth anniversary of the Merger Closing Date, to sell their
shares of common stock of Genesis ElderCare Corp. to Genesis. The option price
in either case will be derived from a formula that calculates the equity value
attributable to Cypress' and TPG's Genesis ElderCare Corp. common stock based
upon a multiple of Genesis ElderCare Corp.'s EBITDAR. The multiple to be
applied to EBITDAR will depend on whether the Call or the Put is being
exercised. See "Management -- Certain Agreements."
Put/Call Agreement
Pursuant to an agreement (the "Put/Call Agreement") entered into by
Genesis, Cypress, TPG and Nazem in connection with the Tender Offer and
Merger, among other things, (i) Genesis has an option (the "Call"),
exercisable from and after the fourth anniversary of the Merger Closing Date
for a period of 270 days, to purchase the shares of common stock of Genesis
ElderCare Corp. held by Cypress, TPG and Nazem and (ii) Cypress, TPG and Nazem
have an option (the "Put"), exercisable from and after the fifth anniversary
of the Merger Closing Date until the sixth anniversary of the Merger Closing
Date, to sell their shares of common stock of Genesis ElderCare Corp. to
Genesis. The option price in either case will be derived from a formula that
calculates the equity value attributable to Cypress' and TPG's Genesis
ElderCare Corp. common stock based upon a multiple of Genesis ElderCare
Corp.'s EBITDAR. The multiple to be applied to EBITDAR will depend on whether
the Call or the Put is being exercised. See "Management -- Certain
Agreements."
4
<PAGE>
THE OFFERING
Notes.................... The Existing Notes were sold by Acquisition Corp.
on August 11, 1997 to the Placement Agents pursuant
to a Placement Agreement, dated as of August 4, 1997
(the "Placement Agreement"). The Placement Agents
subsequently resold the Existing Notes in the United
States to qualified institutional buyers pursuant to
Rule 144A under the Securities Act.
Registration Rights
Agreement................ Pursuant to the Placement Agreement, the Company and
the Placement Agents entered into a Registration
Rights Agreement, dated August 11, 1997 (the
"Registration Rights Agreement"), which grants the
holders of the Existing Notes certain exchange and
registration rights. The Exchange Offer is being
made pursuant to the Registration Rights Agreement
and such exchange rights terminate upon the
consummation of the Exchange Offer.
The Exchange Offer
Securities Offered....... $250,000,000 aggregate principal amount of 9%
Senior Notes due 2007 (the "Exchange Notes").
The Exchange Offer....... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of
Existing Notes. As of the date hereof, $250,000,000
aggregate principal amount of Existing Notes are
outstanding. The Company will issue the Exchange
Notes on or promptly after the Expiration Date.
Under existing interpretations of the staff of the
Commission contained in several no-action letters
to third parties, the Exchange Notes will in
general be freely tradeable after the Exchange
Offer without further registration under the
Securities Act. However, any purchaser of Existing
Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for
the purpose of distributing the Exchange Notes (i)
will not be able to rely on such interpretations
of the staff of the Commission, (ii) will not be
able to tender its Existing Notes in the Exchange
Offer and (iii) must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any sale or
transfer of the Existing Notes, unless such sale
or transfer is made pursuant to an exemption from
such requirements.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering
a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating
Broker-Dealer in connection with resales of
Exchange Notes received in exchange for Existing
Notes where such Existing Notes were acquired by
such Participating Broker-Dealer as a result of
market-making activities or other trading
activities.
Any holder who tenders in the Exchange Offer with
the intention to participate or for the purpose of
participating in a distribution of the Exchange
Notes cannot rely on the position of the staff of
the Commission enunciated in no-action letters
and, in the absence of
5
<PAGE>
an exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by the
Company.
Expiration Date.......... 5:00 p.m., New York City time, on March 30, 1998,
unless the Exchange Offer is extended by the Company
in its sole discretion, in which case the term
"Expiration Date" means that latest date and time to
which the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and
Existing Notes.......... Interest on each Exchange Note will accrue from
the latest date on which interest was paid on the
Existing Notes surrendered in exchange therefor
or, if no interest has been paid on the Existing
Notes, from the date of original issuance of such
Note. No interest will be paid on the Existing
Notes accepted for exchange, and holders of
Existing Notes whose Existing Notes are accepted
for exchange will be deemed to have waived the
right to receive any payment in respect of
interest on the Existing Notes accrued up to the
date of the issuance of the Exchange Notes. See
"Exchange Offer -- Interest on the Exchange
Notes."
Conditions to the Exchange
Offer................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"Exchange Offer -- Conditions."
Procedures for Tendering
Existing Notes.......... Each holder of Existing Notes wishing to accept
the Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile thereof, together with the Existing Notes
to be exchanged and any other required documentation
to the Exchange Agent (as defined herein) at the
address set forth herein or effect a tender of such
Existing Notes pursuant to the procedures for book-
entry transfer as provided herein. By executing the
Letter of Transmittal, each holder will represent to
the Company that, among other things, the Exchange
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of
the person receiving such Exchange Notes, whether or
not such person is the holder, that neither the
holder nor any such other person has any arrangement
or understanding with any person to participate in
the distribution of such Exchange Notes and that
neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company. See "Exchange Offer
-- Purpose and Effect of the Exchange Offer" and "--
Procedures for Tending." Each broker-dealer that
receives Exchange Notes for its own account in
exchange for Existing Notes, where such Existing
Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. See "Exchange Offer -- Procedures
for Tendering" and "Plan of Distribution."
6
<PAGE>
Untendered Notes......... Following the consummation of the Exchange Offer,
holders of Existing Notes eligible to participate
but who do not tender their Existing Notes will not
have any further registration rights and such
Existing Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the
liquidity of the market for such Existing Notes
could be adversely affected.
Consequences of Failure to
Exchange................ The Existing Notes that are not exchanged pursuant
to the Exchange Offer will remain outstanding and
continue to accrue interest and will also remain
restricted securities. Accordingly, such Existing
Notes may be resold only (i) to the Company, (ii)
pursuant to Rule 144A or Rule 144 under the
Securities Act or pursuant to some other exemption
from registration under the Securities Act, (iii)
outside the United States to a foreign person
pursuant to the requirements of Regulation S under
the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act. See
"Exchange Offer -- Consequences of Failure to
Exchange."
Shelf Registration
Statement................ In the event that any changes in law or the
applicable interpretations of the staff of the
Commission do not permit the Company to effect the
Exchange Offer, or if for any reason the Exchange
Offer is not consummated by March 31, 1998, or if
any holder of the Existing Notes (other than the
Placement Agents) is not eligible to participate in
the Exchange Offer, the Company will, at its cost,
use its best efforts to (a) as promptly as
practicable, file the Shelf Registration Statement
covering resales of the Existing Notes, (b) cause
the Shelf Registration Statement to be declared
effective under the Securities Act and (c) keep
continuously effective the Shelf Registration
Statement until the second anniversary of the
Closing Date (as defined in the Placement Agreement)
or until such shorter period when all the Existing
Notes covered by the Shelf Registration Statement
have been sold pursuant to the Shelf Registration
Statement or are eligible for resale pursuant to
Rule 144 under the Securities Act without volume
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Existing Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering
its Existing Notes, either make appropriate
arrangements to register ownership of the Existing
Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures............... Holders of Existing Notes who wish to tender their
Existing Notes and whose Existing Notes are not
immediately available or who cannot deliver their
Existing Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry
7
<PAGE>
transfer) prior to the Expiration Date must tender
their Existing Notes according to the guaranteed
delivered procedures set forth in "Exchange Offer
-- Guaranteed Delivery Procedures."
Withdrawal Rights........ Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "Exchange Offer -- Withdrawal of Tenders"
Acceptance of Notes and
Delivery of
Exchange Notes.......... The Company will accept for exchange any and all
Existing Notes which are duly tendered in the
Exchange Offer and not validly withdrawn prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly following
the Expiration Date. See "Exchange Offer -- Terms of
the Exchange Offer.
Certain Tax
Consequences............. The exchange pursuant to the Exchange Offer should
not be a taxable event for Federal income tax
purposes. See "Tax Considerations."
Use of Proceeds.......... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer. See
"Use of Proceeds."
Exchange Agent........... PNC Bank, National Association.
The Exchange Notes
General.................. The form and terms of the Exchange Notes are the
same as the form and terms of the Existing Notes
(which they replace) except that (i) the Exchange
Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting
the transfer thereof, (ii) the Exchange Notes do not
include provisions providing for an increase in the
interest rate in certain circumstances relating to
the timing of the Exchange Offer and (iii) the
holders of Exchange Notes will not be entitled to
certain rights under the Registration Rights
Agreement, which rights will terminate when the
Exchange Offer is consummated. The Exchange Notes
will evidence the same debt as the Existing Notes
and will be entitled to the benefits of the
Indenture. See "Description of Notes."
Issuer................... The Multicare Companies, Inc.
Maturity................. August 1, 2007.
Interest................. Payable semi-annually in cash, on February 1 and
August 1, commencing on August 1, 1998.
Optional Redemption...... The Notes are redeemable at the option of the
Company, 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. See
"Description of the Notes -- Optional Redemption."
Change in Control........ Upon a Change in Control (as defined herein), the
Company will be required to make an offer to
purchase the Notes at a purchase price equal to 101%
of their principal amount, plus accrued
8
<PAGE>
interest. Consummation of a transaction pursuant to
the Put/Call Agreement will not constitute a Change
in Control. See "Description of the Notes --
Repurchase of Notes upon a Change in Control."
Ranking.................. The Notes are unsecured, general obligations of
the Company, subordinated in right of payment to all
existing and future Senior Indebtedness of the
Company, including indebtedness under the Credit
Facility. The Notes rank pari passu in right of
payment with any future senior subordinated
indebtedness of the Company and will be senior in
right of payment to all future subordinated
indebtedness of the Company. In addition, the Notes
are effectively subordinated to all liabilities of
the Company's subsidiaries, including trade
payables. At December 31, 1997, on a pro forma basis
after giving effect to the Pharmacy Sale, the
Company (excluding its subsidiaries) would have had
approximately $721.4 million of indebtedness
outstanding, of which $472.8 million would have been
Senior Indebtedness, and the Company's subsidiaries,
on the same pro forma basis, would have had
approximately $111.7 million of liabilities
(excluding guarantees of the Company's
indebtedness). See "Risk Factors -- Substantial
Leverage" and "--Subordination of the Notes" and
"Description of the Notes -- Subordination."
Certain Covenants........ The Indenture contains certain covenants,
including, among others, covenants limiting the
incurrence of additional indebtedness, the payment
of dividends, the redemption of capital stock, the
making of certain investments, the issuance of
capital stock of subsidiaries, the creation of
dividend and other restrictions affecting
subsidiaries, transactions with affiliates, asset
sales and certain mergers and consolidations.
However, these limitations will be subject to a
number of important qualifications and exceptions.
See "Description of the Notes -- Certain Covenants."
Use of Proceeds.......... The net proceeds of the Offering, together with
the Equity Contributions, borrowings under the
Credit Facility and the proceeds of the Therapy Sale
and Pharmacy Sale, were used to purchase the Shares
pursuant to the Tender Offer and the Merger; to
refinance certain indebtedness of the Company; to
make certain cash payments to employees of the
Company in accordance with the Merger Agreement and
certain noncompetition and consulting agreements;
and to pay fees and expenses related to the
Transactions.
Book-Entry; Delivery
and Form................ Notes will be represented by one or more permanent
global Notes in definitive, fully registered form,
deposited with the Trustee as custodian for, and
registered in the name of a nominee of, DTC.
Listings and Trading..... Application has been made to list the Notes on the
Luxembourg Stock Exchange. The Notes have been
designated eligible for trading in the PORTAL
market. The Notes are a new issue of securities for
which there is no existing trading market. There can
be no assurance regarding the future development of
a market for the Notes or the liquidity of any such
market. See "Risk Factors -- Absence of a Public
Market for the Notes; Volatility" and "Transfer
Restrictions."
Governing Law............ The Indenture and the Notes are governed by, and
construed in accordance with, the laws of the State
of New York.
9
<PAGE>
Trustee, Paying Agent and
Registrar............... PNC Bank, National Association.
Paying Agent, Transfer
Agent and Listing Agent
in Luxembourg........... Banque Internationale a Luxembourg S.A.
Exchange Offer Procedures
Issuance of Exchange Notes in exchange for Existing Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Existing Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Existing Notes
desiring to tender such Existing Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty
to give notification of defects or irregularities with respect to the tenders
of Notes for exchange. Existing Notes that are not tendered or are tendered
but not accepted will, following the consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof and,
upon consummation of the Exchange Offer, the registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of
Existing Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Existing Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Existing Notes could be adversely affected. See
"-- Consequences of the Exchange Offer on Non-Tendering Holders of the
Existing Notes."
Consequences of the Exchange Offer on Non-Tendering Holders of the
Existing Notes
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Rights Agreement. If the Exchange Offer is
consummated, the Company does not intend to file further registration
statements for the sale or other disposition of Existing Notes. Consequently,
following completion of the Exchange Offer, holders of Existing Notes seeking
liquidity in their investment would have to rely on an exemption to the
registration requirements under applicable securities laws, including the
Securities Act, with respect to any sale or other disposition of the Existing
Notes.
RISK FACTORS
Prospective investors should consider carefully certain matters relating
to the Company, its business and an investment in the Notes. See "Risk
Factors."
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary of historical operations and balance sheet data presented below
for, and as of, each of the calendar years in the four-year period ended
December 31, 1996 and the fiscal year ended September 30, 1997 have been derived
from the Consolidated Financial Statements of Multicare, including the notes
thereto. The summary of historical operations and balance sheet data for, and as
of, the nine month period ended September 30, 1996 and the three month period
ended December 31, 1996 and 1997 have been derived from unaudited consolidated
financial statements of Multicare which, in the opinion of management, include
all adjustments (consisting only of normal recurring items) necessary for a fair
and consistent presentation of such data. The results for the three month period
ended December 31, 1997 are not necessarily indicative of results to be expected
for the full fiscal year. The information set forth below should be read in
conjunction with "Pro Forma Condensed Consolidated Financial Information,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of Multicare, including the notes thereto, appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- ------------- -------------
Predecessor Company
----------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations Data:
Net revenues .............................. $ 162,384 $ 262,416 $ 353,048 $ 532,230
Management fee expense .................... -- -- -- --
Income from operations before
depreciation, amortization, lease
expense, interest, taxes and
extraordinary items ("EBITDAR")
(1) ...................................... 32,227 52,543 70,220 105,925
Depreciation and amortization ............. 6,292 9,358 13,171 22,344
Lease expense ............................. 862 2,823 5,039 12,110
Interest expense, net ..................... 13,229 12,866 16,065 25,164
Income before extraordinary item (2)....... 7,117 17,042 22,147 28,737
Net income ................................ $ 3,254 $ 15,422 $ 18,425 $ 25,910
========= ========= ========= =========
Other Financial Data
EBITDA (3) ................................ $ 31,365 $ 49,720 $ 65,181 $ 93,815
Ratio of EBITDA to interest expense,
net ...................................... 2.4x 3.9x 4.1x 3.7x
Ratio of EBITDAR to interest
expense, net, plus lease expense ......... 2.3x 3.3x 3.3x 2.8x
Ratio of earnings to fixed charges (4)..... 1.9x 2.9x 2.9x 2.5x
Capital expenditures ...................... $ 18,730 $ 31,785 $ 39,917 $ 64,215
Operating Data:
Average number of licensed beds ........... 4,241 6,006 6,861 11,620
Occupancy ................................. 90.4% 92.2% 91.7% 91.3%
Payor mix:
Quality mix (5) .......................... 56.0% 62.5% 66.3% 64.5%
Medicaid ................................. 44.0% 37.5% 33.7% 35.5%
Balance Sheet Data (at period end):
Working capital ........................... $ 15,158 $ 34,005 $ 55,542 $ 39,327
Total assets .............................. 162,255 308,755 470,958 761,667
Long-term debt, including current por-
tion ..................................... 106,137 156,878 283,082 429,168
Stockholders' equity ...................... $ 32,591 $ 100,105 $ 113,895 $ 207,935
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, December 31,
---------------------------- ---------------------------
1996 1997 1996 1997
------------- ------------- ------------ -------------
Predecessor Company
------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations Data:
Net revenues .............................. $ 386,890 $ 533,952 $ 145,340 $ 185,778
Management fee expense .................... -- -- -- 11,645
Income from operations before
depreciation, amortization, lease
expense, interest, taxes and
extraordinary items ("EBITDAR")
(1) ...................................... 76,769 102,576 29,156 32,790
Depreciation and amortization ............. 16,048 21,620 6,296 11,784
Lease expense ............................. 8,874 12,693 3,236 3,443
Interest expense, net ..................... 18,947 21,640 6,217 14,718
Income before extraordinary item (2)....... 20,395 28,751 8,342 1,358
Net income ................................ $ 18,914 $ 27,878 $ 6,996 $ 1,358
========= ========= ========= ===========
Other Financial Data
EBITDA (3) ................................ $ 67,895 $ 89,883 $ 25,920 $ 29,347
Ratio of EBITDA to interest expense,
net ...................................... 3.6x 4.1x 4.2x 2.0x
Ratio of EBITDAR to interest
expense, net, plus lease expense ......... 2.8x 3.0x 3.1x 1.8x
Ratio of earnings to fixed charges (4)..... 2.8x 2.8x 2.8x 1.2x
Capital expenditures ...................... $ 49,510 $ 39,301 $ 14,925 $ 11,391
Operating Data:
Average number of licensed beds ........... 11,168 16,224 12,961 17,621
Occupancy ................................. 91.7% 90.4% 90.3% 92.1%
Payor mix:
Quality mix (5) .......................... 64.3% 67.3% 65.3% 66.7%
Medicaid ................................. 35.7% 32.7% 34.7% 33.3%
Balance Sheet Data (at period end):
Working capital ........................... $ 69,135 $ 51,822 $ 39,327 $ 38,724
Total assets .............................. 659,096 823,133 761,667 1,721,848
Long-term debt, including current por-
tion ..................................... 427,983 424,046 429,168 771,407
Stockholders' equity ...................... $ 138,632 $ 263,174 $ 207,935 $ 746,358
</TABLE>
- -------------
(1) 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.
(2) Multicare incurred extraordinary charges relating to early extinguishment
of debt.
11
<PAGE>
(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. The Indenture governing
the Notes contains certain covenants that utilize a Consolidated Fixed
Charge Coverage Ratio calculation that is the ratio of the sum of EBITDA
plus one-third of rental payments to the sum of interest expense and one-
third of rental payments. See "Description of the Notes" for a description
of such covenants.
(4) For the purpose of computing the ratio of earnings 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.
(5) Quality mix is defined as non-Medicaid patient revenues.
12
<PAGE>
SUMMARY PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The Summary Pro Forma Condensed Consolidated Financial Information
presented below gives effect to the Transactions (as defined). See "Pro Forma
Condensed Consolidated Financial Information."
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1997 December 31, 1997
----------------------------- ---------------------------
Historical Pro Forma Historical Pro Forma
-------------- ------------- ------------ -------------
Predecessor
Company
(in thousands, except for ratio data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues ....................................................... $ 533,952 $ 479,885 $ 185,778 $ 168,734
Expenses:
Operating expenses ................................................ 406,173 362,058 141,343 127,066
Corporate, general and administrative ............................. 25,203 -- -- --
Management fee expense ............................................ -- 33,451 11,645 10,124
Depreciation and amortization ..................................... 21,620 37,165 11,784 11,404
Lease expense ..................................................... 12,693 9,110 3,443 3,264
Interest expense, net ............................................. 21,640 45,476 14,718 15,781
Debenture conversion expense ...................................... 785 -- -- --
---------- ---------- --------- ---------
Total expense .................................................... 488,114 487,260 182,933 167,639
Income (loss) before income taxes and extraordinary item ......... 45,838 (7,375) 2,845 1,095
Income tax expense ................................................. 17,087 2,657 1,487 572
---------- ---------- --------- ---------
Income (loss) before extraordinary item ........................... $ 28,751 $ (10,032) 1,358 523
========== ========== ========= =========
Other Data:
Adjusted EBITDA ................................................... $ 89,883 $ 84,864 $ 29,347 $ 31,655
Adjusted EBITDAR .................................................. $ 102,576 $ 93,974 $ 32,790 $ 34,914
Ratio of Adjusted EBITDA to interest expense, net (1) ............. 4.1x 1.9x 2.0x 2.0x
Ratio of Adjusted EBITDAR to interest expense, net, plus rent
expense (2) ...................................................... 3.0x 1.7x 1.8x 1.8x
Ratio of earnings to fixed charges (3) ............................ 2.8x -- 1.2x 1.1x
</TABLE>
- -------------
(1) See Note 6 to Unaudited Pro Forma Condensed Consolidated Statement of
Operations.
(2) See Note 7 to Unaudited Pro Forma Condensed Consolidated Statement of
Operations.
(3) See Note 8 to Unaudited Pro Forma Condensed Consolidated Statement of
Operations.
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1997
----------------------------
Historical Pro Forma
------------ -------------
(in thousands)
<S> <C> <C>
Assets:
Cash and equivalents ...................................... $ 1,564 $ 1,460
Accounts receivable, net................................... 129,472 110,097
Prepaid expenses and other current assets ................. 42,000 33,562
---------- ----------
Current assets ........................................... 173,036 145,119
Property and equipment .................................... 717,685 712,609
Goodwill, net ............................................. 768,026 757,596
Other assets .............................................. 63,101 62,751
---------- ----------
Total assets ............................................. $1,721,848 $1,678,075
========== ==========
Liabilities and Stockholders' Equity
Accounts payable .......................................... $ 31,202 $ 28,222
Accrued liabilities and other current liabilities ......... 82,890 92,097
Current portion of long-term debt ......................... 20,220 637
---------- ----------
Current liabilities ...................................... 134,312 120,596
Long-term debt, excluding current maturities .............. 751,187 720,770
Deferred taxes ............................................ 85,756 85,756
Other ..................................................... 4,235 4,235
Stockholders' equity ...................................... 746,358 746,358
---------- ----------
Total liabilities and stockholders' equity ............... $1,721,848 $1,678,075
========== ==========
</TABLE>
13
<PAGE>
RISK FACTORS
An investment in the Notes involves a significant degree of risk. In
addition to the other information contained in this Prospectus, prospective
investors should carefully consider the following risk factors before
purchasing the Notes offered hereby.
Substantial Leverage
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of December 31, 1997, after giving pro forma effect to
the Pharmacy Sale, the Company would have had approximately $721.4 million of
indebtedness outstanding which would have represented 49% of its total
capitalization. See "Capitalization." In addition, as of December 31, 1997,
after giving pro forma effect to the Pharmacy Sale, the Company would have
approximately $77.6 million of availability under its Credit Facility. The
Company also has significant long-term operating lease obligations with respect
to certain of its eldercare centers. On a pro forma basis after giving effect to
the Pharmacy Sale, the Company's earnings would have been insufficient to cover
its fixed charges for the nine-month period ended September 30, 1997 by $7.0
million. The degree to which the Company is leveraged could have important
consequences to holders of the Notes, 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)
all of the indebtedness incurred under the Credit Facility is scheduled to
become due, prior to the time any principal payments are required on the Notes;
(iv) 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 (v) certain of the Company's indebtedness contains financial
and other restrictive covenants which, if breached, could result in an event of
default under such indebtedness.
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.
There can be no assurance that the Company's operating results will be
sufficient for payment of the Company's indebtedness.
Restrictive Debt Covenants
The terms of the Credit Facility and the Indenture contain certain
restrictive covenants, including, among others, covenants significantly
limiting or prohibiting the ability of the Company and certain of its
subsidiaries to incur indebtedness, make investments, engage in transactions
with shareholders and affiliates, incur liens, create restrictions on the
ability of certain subsidiaries to pay dividends or make certain payments to
the Company, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
assets of the Company. In addition, the Company will be required under the
Credit Facility to maintain certain specified financial ratios. See
"Description of the Credit Facility." There can be no assurance that the
Company will be able to maintain such ratios or that such covenants will not
adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the
interest of the Company. The breach of any of these covenants or the inability
of the Company to comply with the required financial ratios could result in a
default under the Credit Facility or the Indenture. In the event of any such
default, depending on the actions taken by the lenders under the Credit
Facility, the Company could be prohibited from making any payments of principal
or interest on the Notes. In addition, such lenders could elect to declare all
amounts borrowed under the Credit Facility, together with accrued interest, to
be due and payable. If the Company were unable to repay such borrowings, the
lenders under the Credit Facility could proceed against their collateral. If
the indebtedness under the Credit Facility were to be accelerated, there can be
no assurance that the assets of the Company would be sufficient to repay such
indebtedness and the Notes in full. See " -- Subordination of the Notes,"
"Description of the Credit Facility" and "Description of the Notes --
Subordination."
14
<PAGE>
Subordination of the Notes
The Notes will be subordinated to all existing and future Senior
Indebtedness of the Company and will rank pari passu in right of payment with
all of the Company's existing and future senior subordinated indebtedness. The
Notes will also be effectively subordinated to the indebtedness and other
liabilities of the Company's subsidiaries. As of December 31, 1997, on a pro
forma basis after giving effect to the Pharmacy Sale, the Company (excluding
its subsidiaries) would have had approximately $721.4 million of indebtedness
outstanding, of which $472.8 million would have been Senior Indebtedness, $13.1
million of indebtedness of other persons which are guaranteed by the Company,
and approximately $1.7 million of letters of credit issued under the Credit
Facility and, as of such date, the aggregate amount of liabilities of the
subsidiaries of the Company, which consist primarily of trade payables and
accrued compensation, that will effectively rank senior to the Notes, would
have been approximately $111.7 million. Upon any payment or distribution of
assets of the Company in a total or partial liquidation, dissolution,
reorganization or similar proceeding, the holders of Senior Indebtedness will
be entitled to receive payment in full before the holders of the Notes are
entitled to receive any payment. In addition, under certain circumstances, no
payment may be made with respect to the principal of or interest on the Notes
if a payment default or certain other defaults exist with respect to certain
Senior Indebtedness. See "Description of the Notes -- Subordination."
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. See "Business -- Government Regulation."
Regulation
The federal government and all states in which the Company operates
regulate various aspects of the Company's business. In particular, the
provision of eldercare and specialty medical 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 compliance with building and safety 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 Company is also subject to inspection regarding record keeping
and inventory control. 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 or that regulatory authorities will not adopt
changes or new interpretations of existing regulations that would adversely
affect the Company.
15
<PAGE>
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 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.
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 legislation" which prohibits, 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 or Medicaid, or in 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 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 --Government
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. 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 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.
In its role as owner and/or operator of properties, 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.
16
<PAGE>
Payment by Third Party Payors
The Company derives a substantial percentage of its total revenues from
private pay sources, state Medicaid programs for indigent patients and the
federal Medicare program for certain elderly and disabled patients. 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 third-party payor
balances are settled within two to 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.
For the years ended December 31, 1995 and 1996, the nine months ended
September 30, 1997, and the three months ended December 31, 1997,
respectively, the Company derived approximately 41%, 40%, 43% and 43% of its
patient service revenue from private pay sources, 25%, 25%, 24% and 24% from
Medicare and 34%, 35%, 33% and 33% from various state Medicaid agencies. The
Company typically receives a higher rate for services to private pay and
Medicare patients than for services to patients eligible for assistance under
Medicaid programs. Changes in the number of private pay patients and changes
among different pay sources could significantly affect the profitability and
cash flows of the Company. Both governmental and private third party payors
(such as commercial insurers, managed care organizations, health maintenance
organizations ("HMOs") and preferred providers organizations ("PPOs")) have
employed cost containment measures designed to limit payments made to
eldercare 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 may
limit the services which will be reimbursed and the establishment of payment
ceilings which may 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, in the future, will be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs. 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 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 reduce or limit the amount of
reimbursement for healthcare services. In an attempt to reduce 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.
17
<PAGE>
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 would 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 payment agencies could seek to require the
Company to repay any overcharges or amounts billed in violation 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 New Jersey, Pennsylvania, West Virginia and Massachusetts
(in each of which the Company derived more than 10% of its total net revenues
in the nine months ended September 30, 1997 and the three months ended
December 31, 1997), 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 and specialty medical
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. See "Business -- Competition.
Risks Associated with the Multicare Acquisition
As a result of the Merger, 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
18
<PAGE>
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. Under the Stockholders' Agreement, certain transactions with
Genesis will require the approval of the non-affiliated members of the Board
of Directors. In addition, certain decisions concerning the operations or
financial structure of the Company may present conflicts of interest between
Genesis and the other indirect owners of the Company's equity and the holders
of the Notes. Genesis may have an interest in pursuing acquisitions,
divestitures, financings or other transactions which, in its judgment, could
enhance the value of its equity, even though such transactions might involve
risk to the holders of the Notes. See "Management -- Certain Agreements --
Put/Call Agreement."
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 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.
Limitations on Change in Control
The Indenture requires the Company, in the event of a Change in Control,
to make an offer to purchase the Notes at 101% of the principal amount
thereof, plus accrued interest to the purchase date. Certain events involving
a Change in Control may be an event of default under the Credit Facility or
indebtedness of the Company that may be incurred in the future. Moreover, the
exercise by the holders of the Notes of their right to require the Company to
purchase the Notes may cause a default under the Credit Facility or such other
indebtedness, even if the Change in Control does not. There can be no
assurance that the Company will have the financial resources necessary to
repurchase the Notes upon a Change in Control. See "Description of the Notes
- -- Certain Covenants -- Repurchase of Notes upon a Change in Control."
Risk of Fraudulent Transfer Liability
If a court of competent jurisdiction in a suit by an unpaid creditor or a
representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that either the Company did not receive
fair consideration or reasonably equivalent value for issuing the Notes at the
time of the incurrence of indebtedness represented by the Notes, the Company
was insolvent, was rendered insolvent by reason of such incurrence, was
engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, intended to incur, or believed that it
would incur, debts beyond its ability to pay as such debts matured, or
intended to hinder, delay or defraud its creditors, such court could avoid
such indebtedness or subordinate such indebtedness to other existing and
future indebtedness of the Company. The measure of insolvency for purposes of
the foregoing will vary depending upon the law of the relevant jurisdiction.
Generally, however, a company would be considered insolvent for purposes of
the foregoing if the sum of the company's debts is greater than all the
company's property at a fair valuation, or if the present fair saleable value
of the company's assets is less than the amount that will be required to pay
its probable liability on its existing debts as they become absolute and
matured.
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.
19
<PAGE>
Absence of a Public Market for the Notes; Volatility
The Notes are new securities for which there currently is no trading
market, and there can be no assurance as to the liquidity of any market for
the Notes that may develop, the ability of holders of the Notes to sell their
Notes, or the prices at which holders of the Notes would be able to sell their
Notes. If the Notes are traded after their initial issuance, they may trade at
a discount from their initial offering price depending on many factors,
including prevailing interest rates, the Company's operating results, the
market for similar securities and other factors beyond the control of the
Company, including general economic conditions. Although the Placement Agents
have informed the Company that they currently intend to make a market in the
Notes, the Placement Agents are not obligated to do so, and any such market
making may be discontinued at any time without notice. Accordingly, there can
be no assurance as to the development or liquidity of any market for the
Notes, even following the consummation of the exchange offer or registration
of the Notes. In addition, the market prices of the Notes may be volatile.
Factors such as concern about the potential effect of proposed healthcare
reform measures, the Company's earnings and cash flow and the differences
between the Company's actual results and results expected by investors and
analysts could cause the market prices of the Notes to fluctuate
substantially.
20
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering, together with borrowings under the
Credit Facility, the proceeds from the Therapy Sale, the Pharmacy Sale and the
Equity Contributions were used to purchase the Shares pursuant to the Tender
Offer and the Merger; to refinance certain indebtedness of the Company; to
make certain cash payments to employees of the Company in accordance with the
Merger Agreement and certain noncompetition and consulting agreements; and to
pay fees and expenses related to the Transactions. The indebtedness to be
refinanced was due from 2000 to 2002 and had an average interest rate of 7.1%
per annum. See "The Tender Offer and Merger," "Pro Forma Condensed
Consolidated Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of the Credit
Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Transactions:
<TABLE>
<CAPTION>
Amount Amount
Sources of Funds (in millions) Uses of Funds (in millions)
- ---------------- ------------- ------------- -------------
<S> <C> <C> <C>
Credit Facility (1)(2)(3) .............. $ 424.4 Tender Offer and Merger
Notes (4) .............................. 248.6 Consideration .............................. $1,037.0
Equity Contributions ................... 745.0 Refinance Debt (3)(5) ...................... 381.0
Therapy Sale Proceeds .................. 24.0 Severance/Other Payments ................... 19.0
Pharmacy Sale Proceeds (2) ............. 50.0 Transaction Fees and Expenses (6) .......... 55.0
--------- ---------
Total ................................. $1,492.0 Total ...................................... $1,492.0
========= =========
</TABLE>
- ------------
(1) Excludes approximately $106.0 million that will be available to the
Company under a revolving credit facility upon the consummation of the
Transactions.
(2) Because the Pharmacy Sale was not consummated concurrently with the
Merger, the Company borrowed an additional $50.0 million under the Credit
Facility until the consummation of the Pharmacy Sale. The Company expects
the Pharmacy Sale to close in the first calendar quarter of 1998.
(3) As of October 9, 1997, the Company had $309.3 million outstanding under
its bank credit facility.
(4) Notes are net of original debt discount of $1.4 million.
(5) Includes repayment of a $54.0 million lease financing facility.
(6) Includes underwriting discounts and commissions in connection with the
Offering and fees and expenses of approximately $12 million payable equally
to Genesis, Cypress and TPG in connection with the Transactions.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual historical basis and (ii) on a pro forma
basis after giving effect to the Pharmacy Sale as if the Pharmacy Sale had
occurred on December 31, 1997. The following table should be read in
conjunction with "Use of Proceeds," "Pro Forma Condensed Consolidated
Financial Information," "Selected Consolidated Financial Data" and the
Consolidated Financial Statements of Multicare, and the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------------
Pro Forma
Pharmacy
Actual Sale
------------- -------------
(in thousands)
<S> <C> <C>
Cash and cash equivalents .................................. $ 1,564 $ 1,460
========== ==========
Current portion of long-term debt .......................... $ 20,220 $ 637
Long-term debt, excluding current portion:
Bank Debt ................................................. $ 462,935 $ 432,518
7% Convertible Debentures ................................. 4,290 4,290
Other long term debt ...................................... 35,308 35,308
9% Senior Subordinated Notes (1) .......................... 248,654 248,654
---------- ----------
Total long-term debt, excluding current portion ......... 751,187 720,770
Total stockholders' equity .............................. 746,358 746,358
---------- ----------
Total capitalization ................................. $1,497,545 $1,467,128
========== ==========
</TABLE>
- ---------------------
(1) Notes are net of debt discount of $1.3 million.
22
<PAGE>
EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Existing Notes were originally sold by Acquisition Corp. on August
11, 1997 to the Placement Agents pursuant to the Placement Agreement. The
Placement Agents subsequently resold the Existing Notes to qualified
institutional buyers in reliance on Rule 144A under the Securities Act. As a
condition to the closing under the Purchase Agreement, the Company entered
into the Registration Rights Agreement with the Placement Agents pursuant to
which the Company agreed, for the benefit of the holders of the Existing
Notes, at the Company's cost, among other things, to cause the Exchange Offer
to be consummated by the earlier of (i) March 31, 1998 and (ii) six months
after the Merger Closing Date. Promptly after the Exchange Offer Registration
Statement has been declared effective, the Company will offer the Exchange
Notes in exchange for the Existing Notes.
The Company will keep the Exchange Offer open until the Expiration Date.
For each Existing Note validly tendered to the Company pursuant to the
Exchange Offer and not withdrawn by the holder thereof, the holder of such
Existing Note will receive an Exchange Note having a principal amount equal to
that of the tendered Existing Note. Interest on each Exchange Note will accrue
from the last interest payment date on which interest was paid on the tendered
Existing Note in exchange therefor or, if no interest has been paid on such
Existing Note, from the date of the original issuance of the Existing Note.
Under existing interpretations of the staff of the Commission contained
in several no-action letters to third parties and subject to the immediately
following sentence, the Company believes that the Exchange Notes would in
general be freely tradeable after the Exchange Offer without further
compliance with the registration and prospectus delivery requirements of the
Securities Act. However, any purchaser of Existing Notes who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the Exchange Notes (i) will not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to tender
its Existing Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Existing Notes unless such sale or
transfer is made pursuant to an exemption from such requirements.
Each holder of the Existing Notes (other than certain specified holders)
who wishes to exchange Existing Notes for Exchange Notes in the Exchange Offer
will be required to represent that (i) it is not an "affiliate" of the
Company, (ii) it is not a broker-dealer tendering Existing Notes acquired
directly from the Company or if it is such a broker-dealer, it will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable, (iii) any Exchange Notes to be received by it
were acquired in the ordinary course of its business and (iv) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. In addition, in connection with any resales of Exchange
Notes, any broker-dealer who acquired the Existing Notes for its own account
as a result of market-making or other trading activities (a "Participating
Broker-Dealer") may be deemed to be an "underwriter" within the meaning of the
Securities Act and must deliver a prospectus meeting the requirements of the
Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Existing Notes), with the prospectus contained in the
Exchange Offer Registration Statement so long as the prospectus otherwise
meets the requirements of the Securities Act. Under the Registration Rights
Agreement, the Company is required to allow Participating Broker-Dealers and
other persons subject to similar prospectus delivery requirements, if any, to
use the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such Exchange Notes; provided however that the
Company is not required to amend or supplement the prospectus contained in the
Exchange Offer Registration Statement for a period exceeding 180 days after
the last Exchange Date (as such period may be extended pursuant to the
Registration Rights Agreement) and Participating Broker-Dealers are not
authorized to deliver and will not deliver such prospectuses after such period
in connection with the resale of such Exchange Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer is not
23
<PAGE>
consummated by March 31, 1998, or if any holder of the Existing Notes (other
than the Placement Agents) is not eligible to participate in the Exchange
Offer, the Company will, at its cost, use its best efforts to (a) as promptly
as practicable, file the Shelf Registration Statement covering resales of the
Existing Notes, (b) cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) keep continuously effective the
Shelf Registration Statement until the second anniversary of the Closing Date
(as defined in the Placement Agreement) or until such shorter period when all
the Existing Notes covered by the Shelf Registration Statement have been sold
pursuant to the Shelf Registration Statement or are eligible for resale
pursuant to Rule 144 under the Securities Act without volume limitations. The
Company will, in the event of the filing of a Shelf Registration Statement,
provide to each holder of the Existing Notes copies of the prospectus which is
a part of the Shelf Registration Statement, notify each such holder when the
Shelf Registration Statement for the Existing Notes has become effective and
take certain other actions as are required to permit unrestricted resales of
the Existing Notes. A holder of Existing Notes that sells such Existing Notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
In addition, each holder of the Existing Notes will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Existing Notes included in the Shelf Registration Statement and to benefit
from the provisions regarding liquidated damages set forth in the following
paragraph.
In the event that the Exchange Offer is not consummated or a Shelf
Registration Statement with respect to the Existing Notes is not declared
effective on or prior to March 31, 1998, the interest rate borne by the
Existing Notes shall be increased by one-half of one percent per annum. Upon
the consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, the interest rate borne by the
Existing Notes from the date of such effectiveness or the day before the date
of consummation, as the case may be, will be reduced to the original interest
rate.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Existing
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Existing Notes accepted in the Exchange Offer. Holders may tender some or all
of their Existing Notes pursuant to the Exchange Offer. However, Existing
Notes may be tendered only in integral multiples of $1,000. The Company has
fixed the close of business on February 26, 1998 record date for the Exchange
Offer for purposes of determining the persons to whom this Prospectus and the
Letter of Transmittal will be mailed initially.
The form and terms of the Exchange Notes are the same as the form and
terms of the Existing Notes (which they replace), except that as of the date
hereof the Exchange Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not
contain certain provisions included in the terms of the Existing Notes
relating to an increase in the interest rate in certain circumstances relating
to the timing of the Exchange Offer. The holders of the Exchange Notes will
not be entitled to certain rights under the Registration Rights Agreement,
which rights will terminate when the Exchange Offer is consummated. The
Exchange Notes will evidence the same debt as the Existing Notes and will be
entitled to the benefits to the Indenture.
Holders of the Existing Notes do not have any appraisal or dissenters'
rights under the Delaware General Corporation Law or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Existing
Notes when, as and if the Company has given written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
24
<PAGE>
If any tendered Existing Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Existing Notes will be
returned to the tendering holder thereof, at the Company's expense, as
promptly as practicable after the Expiration Date.
Holders who tender Existing Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Existing Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses."
Expiration Date; Extension; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 30, 1998, unless the Company in its sole discretion extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Existing Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions"
shall not have been satisfied, by giving written notice of such delay,
extension or termination to the Exchange Agent, or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by
written notice thereof to the registered holders.
Interest on the Exchange Notes
Interest on each Exchange Note will accrue from the last date on which
interest was paid on the Existing Note surrendered in exchange therefor or, if
no interest has been paid on the Existing Note, from the date of original
issuance of such Existing Note. No interest will be paid on the Existing Notes
accepted for exchange, and holders of Existing Notes whose Existing Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Existing Notes accrued up to the date of
the issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each February
1 and August 1, commencing on August 1, 1998.
Procedures for Tendering
Only a holder of Existing Notes may tender such Existing Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile thereof,
together with the Existing Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Existing Notes, the Letter of Transmittal and
other required documents must be completed and received by the Exchange Agent
at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. Delivery of the Existing Notes may be
made by book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the fourth paragraph under
"Purpose and Effect of the Exchange Offer."
25
<PAGE>
The tender by a holder and the acceptance thereof by the Company will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY
WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO
THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the Letter of Transmittal.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or any other "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange, Inc. Medallion Program or the Stock Exchange
Medallion Program (an "Eligible Institution"), unless the Existing Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on the Letter of
Transmittal or the notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Existing Notes listed therein, such Existing Notes
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such
Existing Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and (except when
Exchange Notes are being issued to replace Existing Notes registered in the
same name) evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect
to the Existing Notes at the book-entry transfer facility, The Depository
Trust Company (the "Book-Entry Transfer Facility"), for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Existing Notes by causing
such Book-Entry Transfer Facility to transfer such Existing Notes into the
Exchange Agent's account with respect to the Existing Notes in accordance with
the Book-Entry Transfer Facility's procedures for such transfer. Although
delivery of the Existing Notes may be effected through book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility, an
appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are compiled with, within the
time period provided under such procedures. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
26
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Existing Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Existing Notes not properly tendered or any Existing Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Existing
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Existing Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of
Existing Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Existing Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Existing Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
Guaranteed Delivery Procedures
Holders who wish to tender their Existing Notes and (i) whose Existing
Notes are not immediately available, (ii) who cannot deliver their Existing
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number(s) of such Existing Notes and principal amount of Existing Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Existing Notes (or a confirmation
of book-entry transfer of such Existing Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal or
facsimile thereof, as well as the certificate(s) representing all tendered
Existing Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Existing Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
upon three New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to holders who wish to tender their Existing Notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Existing Notes in the Exchange Offer, a telegram,
telex, facsimile transmission or letter must be received by the Exchange Agent
at its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Existing Notes to be withdrawn (the
"Depositor"), (ii) identify the Existing Notes to be withdrawn (including the
certificate number(s) and principal amount of such delivered Existing Notes,
or, in the case of Existing Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited
and the transaction code number), (iii) state that such Depositor is
withdrawing its election to have the Existing Notes exchanged and specify the
name in which any such Existing Notes are to be registered, if different from
that of the Depositor and (iv) be signed by the holder in
27
<PAGE>
the same manner as the original signature on the Letter of Transmittal by
which such Existing Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Existing Notes register the transfer of such
Existing Notes into the name of the person withdrawing the tender. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall
be final and binding on all parties. Any Existing Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Existing
Notes so withdrawn are validly retendered. Any Existing Notes which have been
tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Existing Notes may be retendered by following one of the procedures
described above under "Procedures for Tendering" at any time prior to the
Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange Exchange Notes for, any
Existing Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Existing Notes, if:
(a) the Exchange Offer or the making of any exchange by a holder of
Existing Notes violates applicable law or any applicable interpretation by
the staff of the Commission; or
(b) the tendering of the Existing Notes is not in accordance with the
Exchange Offer;
(c) each holder of Existing Notes to be exchanged in the Exchange Offer
shall not have represented that all Exchange Notes to be received by it
shall be acquired in the ordinary course of business and that at the time
of the consummation of the Exchange Offer it shall have no arrangement of
understanding with any person to participate in the distribution (within
the meaning of the Securities Act) of the Exchange Notes and shall have
made such other representations as may be reasonably necessary under
applicable Commission rules, regulations or interpretations to render the
use of the Exchange Offer Registration Statement or other appropriate form
under the Securities Act available; or
(d) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the judgment of the Company, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any
Existing Notes and return all tendered Existing Notes to the tendering
holders, (ii) extend the Exchange Offer and retain all Existing Notes
theretofore tendered in the Exchange Offer, subject, however, to the rights of
holders to withdraw such Existing Notes (see "Withdrawal of Tenders") or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Existing Notes which have not been withdrawn.
Exchange Agent
PNC Bank, National Association has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered, Certified or Overnight Mail or Hand:
PNC Bank, National Association
1600 Market Street
30th Floor
Philadelphia, Pennsylvania 19103
Attention: Sheila Wallbridge
By Facsimile: 215-585-8872
Confirm: 215-585-6938
28
<PAGE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF
INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the
Existing Notes, which is face value less original discount of 1.4 million, as
reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The expenses of the Exchange Offer will be expensed over the term of
the Exchange Notes.
Consequences of Failure to Exchange
The Existing Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain outstanding and continue to accrue interest and
will also remain restricted securities. Accordingly, such Existing Notes may
be resold only (i) to the Company, (ii) pursuant to a registration statement
which has been declared effective under the Securities Act, (iii) for so long
as the Existing Notes are eligible for resale pursuant to Rule 144A under the
Securities Act, to a person the seller reasonably believes is a "qualified
institutional buyer" within the meaning of Rule 144A that purchases for its
own account or for the account of a qualified institutional buyer and to whom
notice is given that the transfer is being made in reliance on Rule 144A, (iv)
pursuant to offer and sale to non-U.S. persons that occur outside the United
States within the meaning of Regulation S under the Securities Act, (v) to an
institutional "accredited investor" within the meaning of subparagraphs
(a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act that is
acquiring the Existing Notes for its own account or for the account of such an
institutional "accredited investor" for investment purposes and not with a
view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act or (vi) pursuant to any other available
exemption from the registration requirements of the Securities Act, in each
case in accordance with any applicable securities laws of any state of the
United States and in accordance with the Indenture. Holders of Existing Notes
not tendered in the Exchange Offer will not retain any rights under the
Registration Rights Agreement, except in limited circumstances.
Resale of the Exchange Notes
With respect to resales of Exchange Notes, based on an interpretation by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), who receives Exchange Notes in exchange for Existing Notes in
the ordinary course of business and who is not participating, does not intend
to participate, and has no arrangement or understanding with a person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies
29
<PAGE>
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing
or participating in a distribution of the Exchange Notes, such holder cannot
rely on the position of the staff of the Commission enunciated in such
no-action letters or any similar interpretive letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Existing Notes,
where such Existing Notes were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
30
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Financial
Information is based on the historical financial statements appearing elsewhere
in this Prospectus. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the three month period ended December 31, 1997 gives effect to
the Pharmacy Sale as though the transaction had occurred as of October 1, 1997.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
nine month period ended September 30, 1997 gives effect to the following
transactions (i) the Tender Offer, (ii) the Merger (including the Debt
Conversion), (iii) the Offering and the application of proceeds therefrom, (iv)
the Equity Contributions and the application of proceeds therefrom, (v) the
closing of the Credit Facility and the application of the proceeds therefrom,
and (vi) the Pharmacy Sale and Therapy Sale, as though each transaction had
occurred as of January 1, 1997. In connection with the Merger, the Company and
Genesis entered into the Management Agreement pursuant to which Genesis manages
the Company's operations. The Unaudited Pro Forma Condensed Consolidated
Statements of Operations include the management fees payable to Genesis under
the Management Agreement and the elimination of corporate, general and
administrative expenses at the Company pursuant to the Management Agreement.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable and are described in the
notes accompanying the Unaudited Pro Forma Condensed Consolidated Statements of
Operations and the Unaudited Pro Forma Condensed Consolidated Balance Sheet.
The Unaudited Pro Forma Condensed Consolidated Financial Information is
provided for informational purposes only and does not purport to represent what
the Company's results of operations or financial position would actually have
been had the transactions in fact occurred at such dates or to project the
Company's results of operations or financial position at or for any future date
or period. The Unaudited Pro Forma Condensed Consolidated Financial Information
has been prepared using the purchase method of accounting, whereby the total
cost of the Tender Offer and Merger are allocated to the tangible and
intangible assets acquired and liabilities assumed based upon their respective
fair values at the effective date of the Merger. The allocations and estimated
lives reflected in the Unaudited Pro Forma Condensed Consolidated Financial
Information are preliminary and subject to revision. However, the Company does
not expect material changes to the allocation of the purchase price.
The Unaudited Pro Forma Condensed Consolidated Financial Information
should be read in conjunction with "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of Multicare, and notes thereto, appearing
elsewhere in this Prospectus.
31
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period Ended September 30, 1997
--------------------------------------------------------
Multicare
Adjusted for
Multicare Transactions Transactions
Historical Adjustments Pro Forma
-------------- ----------------------- -------------
Predecessor
Company
<S> <C> <C> <C>
Statement of Operations
Net Revenues ................................................ $ 533,952 $ (54,067)(1) $ 479,885
Expenses:
Operating expenses ......................................... 406,173 (44,115)(1) 362,058
Corporate, general and administrative ...................... 25,203 (25,203)(2) --
Management fee expense ..................................... -- 33,451 (2) 33,451
Depreciation and amortization .............................. 21,620 15,545 (1)(3) 37,165
Lease expense .............................................. 12,693 (3,583)(1)(4) 9,110
Interest expense, net ...................................... 21,640 23,836 (4) 45,476
Debenture conversion expense ............................... 785 (785)(9) --
---------- ------------- ----------
Total expenses ............................................ 488,114 (854) 487,260
Income (loss) before income taxes and extraordinary item..... 45,838 (53,213) (7,375)
Income tax expense (benefit) ............................... 17,087 (19,744)(5) 2,657
---------- ------------- ----------
Income (loss) before extraordinary item ..................... $ 28,751 $ (33,469) $ (10,032)
========== ============= ==========
Other Data:
Adjusted EBITDA(6) .......................................... $ 89,883 $ 84,864
Adjusted EBITDAR(7) ......................................... $ 102,576 $ 93,974
Ratio of Adjusted EBITDA to interest expense, net(6) ........ 4.1x 1.9x
Ratio of Adjusted EBITDAR to interest expense, net, plus
rent expense(7) ............................................ 3.0x 1.7x
Ratio of earnings to fixed charges(8) ....................... 2.8x --
</TABLE>
<TABLE>
<CAPTION>
Three Month Period Ended December 31, 1997
---------------------------------------------------
Multicare
Adjusted for
Multicare Pharmacy Pharmacy Sale
Historical Adjustments Pro Forma
------------ ------------------- --------------
<S> <C> <C> <C>
Statement of Operations
Net Revenues ................................................. $ 185,778 $ (17,044)(1) $ 168,734
Expenses:
Operating expenses .......................................... 141,343 (14,277)(1) 127,066
Management fee expense ...................................... 11,645 (1,521)(2) 10,124
Depreciation and amortization ............................... 11,784 (380)(1) 11,404
Lease expense ............................................... 3,443 (179)(1) 3,264
Interest expense, net ....................................... 14,718 1,063(4) 15,781
--------- ------------ ---------
Total expenses ............................................. 182,933 (15,294) 167,639
Income (loss) before income taxes ............................ 2,845 (1,750) 1,095
Income tax expense (benefit) ................................ 1,487 (915)(5) 572
--------- ------------ ---------
Income (loss) ................................................ $ 1,358 $ (835) $ 523
========= ============ =========
Other Data:
Adjusted EBITDA(6) ........................................... 29,347 31,655
Adjusted EBITDAR(7) .......................................... 32,790 34,914
Ratio of Adjusted EBITDA to interest expense, net(6) ......... 2.0x 2.0x
Ratio of Adjusted EBITDAR to interest expense, net, plus
rent expense(7) ............................................. 1.8x 1.8x
Ratio of earnings to fixed charges(8) ........................ 1.2x 1.1x
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(1) Represents the elimination of the operating results relating to the
Company's pharmacy business pursuant to the Pharmacy Sale as follows:
<TABLE>
<CAPTION>
Nine Month Period Ended Three Month Period Ended
September 30, 1997 December 31, 1997
------------------------- -------------------------
<S> <C> <C>
Revenues, net ......................... $ (43,419) $ (17,044)
Operating expenses .................... (34,884) (14,277)
Depreciation and amortization ......... (400) (380)
Lease expense ......................... (777) (179)
</TABLE>
Represents the elimination of the operating results of the Company's therapy
business pursuant to the Therapy Sale. The therapy business was primarily
acquired by the Company in April 1997.
Nine Month Period Ended
September 30, 1997
------------------------
Revenues, net ......................... $ (10,648)
Operating expenses .................... (9,231)
Depreciation and amortization ......... (226)
Lease expense ......................... (58)
(2) Represents net changes in corporate, general and administrative expense due
to the elimination of Multicare corporate, general and administrative
expense and the incurrence of management fees in connection with the
Management Agreement.
<TABLE>
<CAPTION>
Nine Month Period Ended Three Month Period Ended
September 30, 1997 December 31, 1997
------------------------- -------------------------
<S> <C> <C>
Corporate, general and administrative ......... $ (25,203) $ --
Management fee ................................ 33,451 (1,521)
---------- --------
Total ....................................... $ 8,248 $ (1,521)
========== ========
</TABLE>
(3) Depreciation and amortization have been increased by the amortization of
goodwill and depreciation resulting from the allocation of the purchase
price for the acquisition to property and equipment. The allocation of the
purchase price has resulted in an increase to property and equipment
($253,077) and goodwill ($785,053) which are amortized over 30 years and
35 years, respectively, as follows:
Nine Month Period Ended
September 30, 1997
-------------------------
Depreciation and amortization ......... $16,171
(4) Interest and lease expense has been adjusted to reflect the indebtedness
incurred in connection with the Tender Offer and Merger and the repayment
of indebtedness (including the repayment of $54,000 under the lease
financing facility) from the proceeds of the Credit Facility, Notes and
Pharmacy Sale. The average interest rate for the Credit Facility and for
the Notes is 8.5% and 9.0%, respectively.
<TABLE>
<CAPTION>
Nine Month Period Ended Three Month Period Ended
September 30, 1997 December 31, 1997
------------------------- -------------------------
<S> <C> <C>
Credit Facility .......... $ 26,250 $1,063
Notes .................... 16,875 --
Other debt ............... 2,351 --
Interest expense ......... (21,640) --
--------- ------
Total .................. $ 23,836 $1,063
========= ======
Lease expense ............ $ (2,748) --
</TABLE>
33
<PAGE>
Each .25% change in the interest rate on the Credit Facility would change the
Company's pro forma interest expense as follows:
<TABLE>
<CAPTION>
Nine Month Period Ended Three Month Period Ended
September 30, 1997 December 31, 1997
------------------------- -------------------------
(in thousands)
<S> <C> <C>
Credit Facility ......... $1,310 $31
</TABLE>
(5) Represents income tax expense at an effective rate of 37% excluding the
amortization of any non-deductible goodwill. The primary difference
between the expense calculated at statutory rates and the amount reflected
in the pro forma statements is attributable to non-deductible goodwill and
the provision for state income taxes.
(6) Adjusted EBITDA represents EBITDA plus the portion of the management fee
that is accrued but not paid under the Management Agreement. Under the
Management Agreement, for the nine month period ended September 30, 1997
and for the three month period ended December 31, 1997, the Company would
have been prohibited from paying management fees of $9,598 and $3,375,
respectively. EBITDA or Adjusted EBITDA should not be considered an
alternative measure of the Company's net income, operating performance,
cash flow or liquidity. Each is included herein to provide additional
information related to the Company's ability to service debt. The
Indenture governing the Notes contains certain covenants that utilize a
Consolidated Fixed Charge Coverage Ratio calculation that is based upon
Adjusted EBITDA. See "Description of the Notes" for a description of such
covenants. On a pro forma basis, for the nine month period ended September
30, 1997 and for the three month period ended December 31, 1997, EBITDA
would have been $75,266 and $28,280, respectively, and the ratio of EBITDA
to interest expense would have been 1.7x and 1.8x, respectively.
(7) Adjusted EBITDAR represents EBITDAR plus the portion of the management fee
that is accrued but not paid under the Management Agreement. Under the
Management Agreement, for the nine month period ended September 30, 1997
and for the three month period ended December 31, 1997, the Company would
have been prohibited from paying management fees of $9,598 and $3,375,
respectively. EBITDAR or Adjusted EBITDAR should not be considered an
alternative measure of the Company's net income, operating performance,
cash flow or liquidity. Each is included herein to provide additional
information related to the Company's ability to service debt. On a pro
forma basis, for the nine month period ended September 30, 1997 and for
the three month period ended December 31, 1997, EBITDAR would have been
$84,376 and $31,544, respectively, and the ratio of EBITDAR to interest
expense plus rent expense would have been 1.5x and 1.7x, respectively.
(8) For the purpose of computing the ratio of earnings 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 discount and
one-third of rental expense which the Company believes to be
representative of the interest factor. For the nine month period ended
September 30, 1997, on a pro forma basis, the Company's earnings would
have been insufficient to cover its fixed charges by $7,375. The definition
of fixed charges used in this calculation differs from that used in the
Consolidated Fixed Charge Coverage Ratio contained in the Indenture.
(9) Represents the elimination of the debenture conversion expense resulting
from the premium paid by the Company to convert $11,000 of the Company's
Convertible Debentures into common stock.
34
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Pro Forma
Pharmacy Multicare
Multicare Sale Adjusted for
Historical Adjustments(1) Pharmacy Sale
------------ ---------------- --------------
<S> <C> <C> <C>
Assets
Cash and equivalents ...................................... $ 1,564 $ (104) $ 1,460
Accounts receivable, net .................................. 129,472 (19,375) 111,097
Prepaid expenses and other current assets ................. 42,000 (8,438) 33,562
---------- --------- ----------
Current assets ........................................... 173,036 (27,917) 145,119
Property and equipment .................................... 717,685 (5,076) 712,609
Goodwill, net ............................................. 768,026 (10,430) 757,596
Other assets .............................................. 63,101 (350) 62,751
---------- --------- ----------
Total assets ............................................. $1,721,848 (43,773) $1,678,075
========== ========= ==========
Liabilities and Stockholders' Equity
Accounts payable .......................................... $ 31,202 $ (2,980) $ 28,222
Accrued liabilities and other current liabilities ......... 82,890 9,207 92,097
Current portion of long-term debt ......................... 20,220 (19,583) 637
---------- --------- ----------
Current liabilities ...................................... 134,312 (13,356) 120,596
Long-term debt, excluding current maturities .............. 751,187 (30,417) 720,770
Deferred taxes ............................................ 85,756 -- 85,756
Other ..................................................... 4,235 4,235
Stockholders' equity ...................................... 746,358 -- 746,358
---------- --------- ----------
Total liabilities and stockholders' equity ............... $1,721,848 $ (43,773) $1,678,075
========== ========= ==========
</TABLE>
- ------------
(1) Reflects the balance sheet of the Pharmacy Sale as of December 31, 1997.
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations and balance sheet data presented
below for, and as of, each of the calendar years in the four-year period ended
December 31, 1996 and the fiscal year ended September 30, 1997 have been
derived from the Consolidated Financial Statements of Multicare, including the
notes thereto. The selected statement of operations and balance sheet data for,
and as of the nine month period ended September 30, 1996 and the three month
period ended December 31, 1996 and 1997 have been derived from unaudited
consolidated financial statements of Multicare which, in the opinion of
management, include all adjustments (consisting only of normal recurring items)
necessary for a fair and consistent presentation of such data. The results of
the three months ended December 31, 1997 are not necessarily indicative of
results to be expected for the full fiscal year. The information set forth
below should be read in conjunction with "Pro Forma Condensed Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
of Multicare including the notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- -------------- ------------- -------------
Predecessor Company
-----------------------------------------------------------
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net revenues ........................ $ 162,384 $ 262,416 $ 353,048 $ 532,230
Expenses:
Operating expenses ................. 123,819 198,427 265,185 400,897
Corporate, general and
administrative .................... 6,338 11,446 17,643 25,408
Management fee expense ............. -- -- -- --
Depreciation and amortization ...... 6,292 9,358 13,171 22,344
Lease expense ...................... 862 2,823 5,039 12,110
Interest expense, net .............. 13,229 12,866 16,065 25,164
Debenture conversion expense ....... -- -- -- --
--------- ---------- --------- ---------
Total expenses ...................... 150,540 234,920 317,103 485,923
Income before income taxes and
extraordinary item ................. 11,844 27,496 35,945 46,307
Income tax expense .................. 4,727 10,454 13,798 17,570
Income before extraordinary item..... 7,117 17,042 22,147 28,737
Extraordinary item, net of tax
benefit (2) ........................ 3,863 1,620 3,722 2,827
--------- ---------- --------- ---------
Net income .......................... $ 3,254 $ 15,422 $ 18,425 $ 25,910
========= ========== ========= =========
Other Financial Data:
EBITDA(3) .......................... $ 31,365 $ 49,720 $ 65,181 $ 93,815
EBITDAR(4) ......................... 32,227 52,543 70,220 105,925
Ratio of EBITDA to interest
expense, net ...................... 2.4x 3.9x 4.1x 3.7x
Ratio of EBITDAR to interest
expense, net, plus lease
expense ........................... 2.3x 3.3x 3.3x 2.8x
Ratio of earnings to fixed
charges(5) ........................ 1.9x 2.9x 2.9x 2.5x
Capital expenditures ............... $ 18,730 $ 31,785 $ 39,917 $ 64,215
Operating Data:
Average number of licensed
beds .............................. 4,241 6,006 6,861 11,620
Occupancy .......................... 90.4% 92.2% 91.7% 91.3%
Payor mix:
Quality mix(6) .................... 56.0% 62.5% 66.3% 64.5%
Medicaid .......................... 44.0% 37.5% 33.7% 35.5%
Balance Sheet Data (at period
end):
Working capital .................... $ 15,158 $ 34,005 $ 55,542 $ 39,327
Total assets ....................... 162,255 308,755 470,958 761,667
Long-term debt, including
current portion ................... 106,137 156,878 283,082 429,168
Stockholders' equity ............... $ 32,591 $ 100,105 $ 113,895 $ 207,935
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, December 31,
------------------------------ ----------------------------
1996 1997 1996 1997
------------- --------------- ------------- -------------
Predecessor Company
---------------------------------------------
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net revenues ........................ $ 386,890 $ 533,952 $ 145,340 $ 185,778
Expenses:
Operating expenses ................. 291,494 406,173 109,403 141,343
Corporate, general and
administrative .................... 18,627 25,203 6,781 --
Management fee expense ............. -- -- -- 11,645
Depreciation and amortization ...... 16,048 21,620 6,296 11,784
Lease expense ...................... 8,874 12,693 3,236 3,443
Interest expense, net .............. 18,947 21,640 6,217 14,718
Debenture conversion expense ....... -- 785(1) -- --
--------- ---------- --------- -----------
Total expenses ...................... 353,990 488,114 131,933 182,933
Income before income taxes and
extraordinary item ................. 32,900 45,838 13,407 2,845
Income tax expense .................. 12,505 17,087 5,065 1,487
Income before extraordinary item..... 20,395 28,751 8,342 1,358
Extraordinary item, net of tax
benefit (2) ........................ 1,481 873 1,346 --
--------- ---------- --------- -----------
Net income .......................... $ 18,914 $ 27,878 $ 6,996 $ 1,358
========= ========== ========= ===========
Other Financial Data:
EBITDA(3) .......................... $ 67,895 $ 89,883 $ 25,920 $ 29,347
EBITDAR(4) ......................... 76,769 102,576 29,156 32,790
Ratio of EBITDA to interest
expense, net ...................... 3.6x 4.1x 4.2x 2.0x
Ratio of EBITDAR to interest
expense, net, plus lease
expense ........................... 2.8x 3.0x 3.1x 1.8x
Ratio of earnings to fixed
charges(5) ........................ 2.8x 2.8x 2.8x 1.2x
Capital expenditures ............... $ 49,510 $ 39,301 $ 14,925 $ 11,391
Operating Data:
Average number of licensed
beds .............................. 11,168 16,224 12,961 17,621
Occupancy .......................... 91.7% 90.4% 90.3% 92.1%
Payor mix:
Quality mix(6) .................... 64.3% 67.3% 65.3% 66.7%
Medicaid .......................... 35.7% 32.7% 34.7% 33.3%
Balance Sheet Data (at period
end):
Working capital .................... $ 69,135 $ 51,882 $ 39,327 $ 38,724
Total assets ....................... 659,096 823,133 761,667 1,721,848
Long-term debt, including
current portion ................... 427,983 424,046 429,168 771,407
Stockholders' equity ............... $ 138,632 $ 263,174 $ 207,935 $ 746,358
</TABLE>
36
<PAGE>
- ------------
(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 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. The Indenture governing
the Notes contains certain covenants that utilize a Consolidated Fixed
Charge Coverage Ratio calculation that is the ratio of the sum of EBITDA
plus one-third of rental payments to the sum of interest expense and
one-third of rental payments. See "Description of the Notes" for a
description of such covenants.
(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 of earnings 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.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial
Statements of Multicare, including the notes thereto, appearing elsewhere in
this Prospectus.
Overview
Multicare has experienced significant revenue growth, 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. See "-- Acquisitions and Development." 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.
Acquisitions and Development
Multicare historically has grown through acquisition, construction, lease
and management agreements. Summarized below are the recent acquisitions and
development projects:
In 1994, Multicare acquired the outstanding capital stock of Providence
Health Care, Inc., an Ohio-based provider of eldercare and specialized
healthcare services through 15 facilities with over 1,200 beds, located
principally in Ohio.
In January 1995, Multicare acquired the assets and operations of an
institutional pharmacy business located in New Jersey.
In December 1995, Multicare acquired the outstanding capital stock of
Glenmark Associates, Inc., an eldercare provider through 21 facilities and
several ancillary businesses with approximately 1,700 beds, located principally
in West Virginia.
In February 1996, Multicare acquired the outstanding capital stock of
Concord, a provider of eldercare, assisted living, and specialty medical
services through 11 facilities with over 1,600 licensed beds and several
ancillary businesses in Pennsylvania.
In December 1996, Multicare acquired A.D.S which owned, operated or
managed over 50 eldercare and assisted living facilities with over 4,200
licensed beds, principally in Massachusetts.
Between 1994 and 1996, Multicare further expanded its regional bases by
adding over 2,500 licensed beds through smaller acquisitions, construction of
new facilities, expansion of existing facilities, leasing arrangements and
management agreements.
The Tender Offer and Merger
On October 9, 1997, Acquisition Corp., Cypress, TPG and Nazem acquired
99.65% of the shares of common stock of Multicare, pursuant to the Tender Offer
commenced on June 20, 1997. On October 10,
38
<PAGE>
1997, Genesis ElderCare Corp. completed the Merger. Upon consummation of the
Merger, Multicare became a wholly-owned subsidiary of Genesis ElderCare Corp.
Multicare is in the business of providing eldercare and specialty medical
services in selected geographic regions.
In connection with the Merger, Multicare and Genesis entered into the
Management Agreement pursuant to which Genesis manages Multicare's operations.
The Management Agreement has a term of five years with automatic renewals for
two years unless either party terminates the Management Agreement. Genesis 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 the
Therapy Sale pursuant to which Genesis acquired all of the assets used in
Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 subject to adjustment and the Pharmacy Sale 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 Company expects to complete the
Pharmacy Sale in the first calendar quarter of 1998.
Genesis ElderCare Corp. 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
Genesis ElderCare Corp. 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 Genesis ElderCare Corp. 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 the Notes.
Results of Operations
The Company has changed its fiscal year end to September 30 from December
31.
Three Months ended December 31, 1997 compared to Three Months ended
December 31, 1996
Net Revenues. Net revenues for the three months ended December 31, 1997
increased 28% or $40.4 million from the same period last year to $185.8
million.
The internal growth rate of revenues amounted to 15% in the three months
ended December 31, 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. Inclusion of results for the Company's
recent acquisitions accounted for 13% of the net revenues increase.
The Company's quality mix of private, Medicare and insurance revenues was
67% of net revenues for the three months ended December 31, 1997 compared to
65% in the similar period of last year. Occupancy rates were 92% for the three
months ended December 31, 1997 compared to 91% in the similar period of last
year.
Operating Expense. Operating expenses for the three months ended December
31, 1997 increased 29% or $31.9 million from the comparable period last year to
$141.3 million. Inclusion of results for the Company's
39
<PAGE>
recent acquisitions accounted for 11% of the increase in operating expenses.
The remaining 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.
Management Fee and Corporate, General and Administrative Expense. In
connection with the Management Agreement, Genesis manages Multicare's
operations for a fee of approximately six percent of Multicare's revenues and
is responsible for Multicare's general and administrative expenses. The 1996
corporate, general and administrative expenses include resources devoted to
operations, finance, legal, risk management, and information systems.
Lease Expense. Lease expense for the three months ended December 31, 1997
increased 6% to $3.4 million. In connection with the Merger, the Company paid
off its synthetic lease facility with proceeds from the Senior Facilities.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended December 31, 1997 increased 87% from the
same period in 1996 to $11.8 million. The increase is due to depreciation on
the allocation of the purchase price to property, plant and equipment and to
amortization of goodwill relating to the Merger.
Interest Expense, net. Net interest expense for the three months ended
December 31, 1997 increased $8.5 million from the same period in 1996 to $14.7
million. This is a result of incremental borrowings under the Company's Senior
Facilities and 9% Notes incurred to finance the Merger.
Income Tax Expense. The provision for income taxes increased to 52% of
pre-tax income in the three months ended December 31, 1997 from 38% of pre-tax
income from the similar period last year. The increase relates to higher
non-deductible goodwill amortization resulting from the Merger.
Nine Months ended September 30, 1997 compared to Nine Months 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.
40
<PAGE>
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.
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").
41
<PAGE>
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 December 31, 1997, the Company had working capital of
$38.7 million, compared to $51.8 million at September 30, 1997 and $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.
Cash flow from operations was $12.4 million for the three months ended
December 31, 1997 compared to cash flow from operations of $31.2 million in the
comparable period of 1996. The decrease in operating cash flows results
primarily from the decline in earnings which is attributable to increased
interest expense and the Genesis management fee, offset by the elimination of
corporate, general and administrative expenses. Net accounts receivable were
$129.5 million at December 31, 1997 compared to $119.5 million at September 30,
1997. The increase in net accounts receivable is attributable to the timing of
third-party interim and settlement payments and the utilization of specialty
medical services for higher acuity level patients. Legislative and regulatory
action and government budgetary constraints 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.
Capital expenditures were $39.3 million, $64.2 million, $39.9 million and
$31.8 million in the nine months ended September 30, 1997 and year ended
December 31, 1996, 1995 and 1994, respectively. These expenditures related
primarily to new construction, existing facility expansion, further development
of specialty medical services and capital improvements. As a result of the
Merger, it is contemplated that the Company will do little, if any, further new
acquisitions or new construction. Accordingly, capital expenditures after the
Merger are expected to decrease significantly to approximately $30.0 million
for 1998.
In January 1997 the Company purchased $6.5 million of its 12.5% 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.
On June 16, 1997, Multicare entered into the Merger Agreement with Genesis
ElderCare Corp. and Acquisition Corp. pursuant to which Acquisition Corp.
offered to make the Tender Offer. The Tender Offer expired on Wednesday,
October 8, 1997 and Acquisition Corp. accepted for purchase 32,790,495 Shares
that had been validly tendered and not withdrawn. The Shares accepted pursuant
to the Tender Offer constitute approximately 99.65% of Multicare's issued and
outstanding Shares. On October 10, 1997, pursuant to the Merger Agreement,
Acquisition Corp. was merged with and into Multicare (the "Surviving
Corporation") and the remaining Shares not previously purchased in the Tender
Offer were canceled, extinguished and converted into the right to receive
$28.00 in cash. As a result of the Merger, Parent is the record and beneficial
owner of all Shares of the Surviving Corporation. Parent is owned by Genesis,
Cypress, TPG and Nazem and their affiliates.
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 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
42
<PAGE>
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 sale of Multicare's rehabilitation therapy
business) 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 2.5%; loans under the
Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus 2.75%;
loans under the Tranche C Term Facility bear interest at a rate equal to LIBO
Rate plus 3.0%; loans under the Revolving Credit Facility bear interest at a
rate equal to LIBO Rate plus 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 defined below) as well as
comply with certain financial covenants.
On August 11, 1997, Acquisition Corp. sold to the Placement Agents $250
million principal amount of the Existing Notes which were issued pursuant to
the Indenture. The Existing 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.
Under the terms of the Indenture, the issuer of the 9% Notes is obligated
to consummate the Exchange Offer pursuant to an effective registration
statement or to cause resales of the Existing Notes to be registered under the
Securities Act pursuant to an effective shelf registration statement. In the
event that the Exchange Offer is not consummated and a shelf registration
statement is not declared effective on or prior to March 31, 1998, the per
annum interest rate on the Existing Notes will be increased by .5% until the
Exchange Offer is consummated or the shelf registration statement is declared
effective.
The Existing 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 Existing 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 Existing Notes are redeemable at the option of the issuer, in
whole or in part,
43
<PAGE>
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 Existing 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 Existing 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 Existing 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 Existing 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 the
Management Agreement pursuant to which Genesis will manage 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 $23.9 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 will be paid by Multicare.
On October 10, 1997, Genesis entered into the Therapy Sale pursuant to
which Genesis acquired all of the assets used in Multicare's outpatient and
inpatient rehabilitation therapy business for $24 million, subject to
adjustment.
On October 10, 1997, Genesis and one of its wholly-owned subsidiaries
entered into the Pharmacy Sale pursuant to which Genesis 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.
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
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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. 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
"Risk Factors -- Regulation" and "-- Payment By Third Party Payors."
Seasonality
Multicare'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.
Inflation
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.
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BUSINESS
General
Multicare 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 44 facilities and consulting services to 14
facilities.
Multicare is well-positioned in its markets because it provides high
quality care in concentrated geographic regions. As a result, Multicare 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%, 92% and 91% for the years ended December
31, 1994, 1995 and 1996, respectively, 90% for the nine months ended September
30, 1997, and 92% for the three months ended December 31, 1997. Multicare
achieved a quality mix (defined as non-Medicaid revenues) of 63%, 66% and 65%
of net revenues for the years ended December 31, 1994, 1995 and 1996,
respectively, 67% for the nine months ended September 30, 1997, and 67% for the
three months ended December 31, 1997.
As of September 30, 1997, Multicare operated 155 eldercare facilities, 11
assisted living facilities and two 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 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. In addition, 75%
of the Company's facilities are owned rather than leased. The Company believes
that significant ownership of its assets enhances the Company's credit quality
and financial flexibility.
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.
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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. Concurrently
with the consummation of the Merger, the Company entered into a contract to
sell its pharmacy business to Genesis. See "The Tender Offer and Merger."
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 "Management -- Certain Agreements -- Management
Agreement."
Marketing. As a result of the Merger, Genesis manages the Company's
marketing program. Marketing for eldercare centers is focused at the local
level and is conducted primarily by the center administrator and its
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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
attempts to 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, markets the Company's sub-acute program directly to insurance,
managed care organizations and other third party payors. In addition, the
Genesis marketing department, supports 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 is in the process of
consolidating 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. Blue Cross and Veterans Administration payments are included
in private pay and other revenue and are made pursuant to renewable contracts
negotiated with these payors. 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 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. 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
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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.
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.
The following table identifies Multicare's net revenues attributable to
each of its revenue sources for the periods indicated below.
<TABLE>
<CAPTION>
Net Revenues
--------------------------------------------------------------------------
Nine Months Ended Three Months Ended
Year Ended December 31, September 30, December 31,
------------------------------ ------------------- -------------------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Private and other ......... 39% 41% 40% 40% 43% 42% 43%
Medicaid .................. 38 34 35 36 33 35 33
Medicare .................. 23 25 25 24 24 23 24
-- -- -- -- -- -- --
Total ........ .......... 100% 100% 100% 100% 100% 100% 100%
=== === === === === === ===
</TABLE>
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
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sub-acute patients is intense among hospitals with long-term care capability,
rehabilitation hospitals and other speciality 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 speciality
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. See "Risk Factors -- Risks
Associated with Multicare Transaction."
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 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 a eldercare facility to
participate in the Medicare and Medicaid programs depend upon many factors
including accommodations, equipment, services, patient care,
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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.
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
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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 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. Multicare 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.
Legal Proceedings
Multicare is a party to claims and legal actions arising in the ordinary
course of business. Multicare 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.
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Significant Acquisitions
In December 1996, Multicare acquired A.D.S, an affiliated group of
eldercare companies operating 22 eldercare facilities with 2,930 beds, 20
hospital based sub-acute units with 514 beds and eight assisted living
facilities with 821 beds, all but one of which are located in Massachusetts.
A.D.S also provided consulting services to an additional 14 facilities with
1,668 beds and operated several ancillary businesses. In December 1996,
Multicare completed the acquisition of the assets and operations of three
eldercare facilities in Rhode Island with 373 beds which Multicare had been
managing since December 1995 when Multicare acquired the assets and operations
of two related eldercare facilities with 356 beds in Connecticut. In February
1996, Multicare acquired the outstanding capital stock of Concord which
operated 11 eldercare facilities with approximately 1,600 beds, including
assisted living facilities, and several ancillary businesses in Pennsylvania.
In December 1995, Multicare acquired the outstanding capital stock of Glenmark
Associates, Inc., an eldercare service provider that operated 21 facilities and
several ancillary businesses with approximately 1,700 beds located principally
in West Virginia. In 1996 and 1997, Multicare completed the construction of
four new skilled nursing facilities which are currently managed by the Company.
In addition, Multicare opened its first three newly constructed assisted living
facilities during 1996 and 1997.
Properties
As of September 30, 1997, Multicare operated 155 eldercare facilities, 11
assisted living facilities and two outpatient rehabilitation centers (90 owned,
27 leased and 51 managed). Multicare has sought to retain ownership of a
significant portion of its real estate and it believes this provides it with
substantial financing flexibility. 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
----------------------- ----------------------- ---------------------- -----------------------
Facilities Beds Facilities Beds Facilities Beds Facilities Beds
------------ -------- ------------ -------- ------------ ------- ------------ --------
<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
-- ----- -- ----- -- ----- -- -----
Total ............... 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 faciltiy.
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MANAGEMENT
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 appointed to his
position with the Company at or about the time of the Tender Offer.
<TABLE>
<CAPTION>
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 ............ 32 Director
Richard R. Howard ............. 48 Director
Karl I. Peterson .............. 26 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.
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<PAGE>
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.
Certain Agreements
Management Agreement. In connection with the Merger, the Company and
Genesis entered into the Management Agreement pursuant to which Genesis manages
the Company's operations. The Management Agreement is for a term of five years
with automatic renewals for two years unless either party terminates the
agreement. Genesis is entitled to receive a fee of six percent of the Company's
consolidated 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 the Company's consolidated
net revenues for such month shall be subordinate to the satisfaction of the
Company's senior and subordinate debt covenants and that payment of the
management fee shall be no less than $23.9 million in any year. Under the
Management Agreement, Genesis will be responsible for the Company's
non-extraordinary sales, general and administrative expenses (other than
certain specified third-party expenses), and all other expenses of the Company
will be paid by the Company.
Stockholders' Agreement. In connection with their investments in Genesis
ElderCare Corp., Genesis, Cypress and TPG have entered into a Stockholders'
Agreement (the "Stockholders' Agreement"). Pursuant to the Stockholders'
Agreement, among other things, each of Genesis, Cypress and TPG, as holders of
Genesis ElderCare Corp. common stock, will at all times have the right to
designate one-third of the members to Genesis ElderCare Corp.'s Board of
Directors. The following actions by Genesis ElderCare Corp. require the consent
of a member of the Board designated by Cypress, TPG and Genesis: sales of
capital stock, mergers,
55
<PAGE>
dissolution, acquisitions in excess of specified thresholds, transactions with
affiliates, dividends and redemptions, loans and investments in excess of
specified thresholds, amendments of articles, by-laws and loan documents,
change in business, fundamental changes and material contracts (other than
termination of the Management Agreement in accordance with its terms). The
Stockholders' Agreement also provides that sales of Genesis ElderCare Corp.
common stock by a stockholder to a party other than an affiliate of such
stockholder (including partners) and, in the case of Cypress, other than TPG,
and in the case of TPG, other than Cypress, will require approval of the other
stockholders, and shall be subject to a right of first offer on the part of
each such stockholder.
Put/Call Agreement. In connection with the funding pursuant to their
respective equity commitments, Genesis, Cypress, TPG and Nazem entered into an
agreement dated as of October 9, 1997 pursuant to which, among other things,
Genesis has the option, on the terms and conditions set forth in the Put/Call
Agreement, to purchase (the "Call") the common stock of Parent 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 have the option, on the terms and conditions
set forth in the Put/Call Agreement, to require Genesis to purchase (the "Put")
such common stock of Parent 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 the common stock of Parent held by
Cypress, TPG and Nazem plus a portion of the Genesis pharmacy business (the
"Calculated Equity Value"). The Calculated Equity Value is 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 depends 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 to be divided based
upon the proportionate share of the capital contributions of the stockholders
to Parent. Upon exercise of the Put by Cypress, TPG or Nazem, there will be no
minimum return to Cypress, TPG or Nazem; any payment to Cypress, TPG or Nazem
will be limited to Cypress', TPG's or Nazem's share of the Calculated Equity
Value based upon a formula set forth in the terms of the Put/Call Agreement
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 Parent.
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 have the right, inter alia, to terminate the Stockholders' Agreement and
Management Agreement and to control the sale or liquidation of Parent. 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
the event of a bankruptcy or change of control of Genesis, the option price
shall be payable solely in cash provided any such payment will be subordinated
to the payment of principal and interest under the Genesis Bank Financing.
Commencing on October 10, 2003, if the Put option has not been exercised,
subject to Genesis' right of first offer, Cypress and TPG have the right to
sell their stock of Genesis ElderCare Corp. Genesis shall have the right to
participate in such sale and Cypress and TPG will have the right to require
Genesis to participate in such sale. Upon such sale, Genesis shall pay to
Cypress and TPG (in cash or Genesis common stock at Genesis' option) the
difference between the proceeds received by them and the amount they would have
received had they exercised the Put on October 9, 2003.
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<PAGE>
The Put/Call Agreement also contains certain restriction on Genesis' right
to take certain corporate actions including its ability to sell all or a
portion of its pharmacy business.
Therapy and Pharmacy Sale. Concurrently with the consummation of the
Merger, the Company sold all of the assets used in its outpatient and inpatient
rehabilitation therapy business to Genesis for approximately $24.0 million and
entered into an agreement to sell all of the outstanding capital stock and
limited partnership interests of certain subsidiaries of the Company that are
engaged in the business of providing institutional pharmacy services to third
parties to Genesis for approximately $50.0 million, subject to adjustment,
which sale is expected to close in the first calendar quarter of 1998.
57
<PAGE>
DESCRIPTION OF THE NOTES
The Existing Notes will be issued under an Indenture to be dated as of
August 1, 1997 (the "Indenture") between the Issuer and PNC Bank, National
Association, trustee (the "Trustee"). A copy of the Indenture is available upon
request from the Issuer. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part thereof by
the Trust Indenture Act of 1939, as amended. Whenever particular defined terms
of the Indenture not otherwise defined herein are referred to, such defined
terms are incorporated herein by reference. For definitions of certain
capitalized terms used in the following summary, see "Certain Definitions."
General
The Notes will mature on August 1, 2007, will be initially limited to
$250,000,000 aggregate principal amount, and will be unsecured senior
subordinated obligations of the Issuer. The Notes bear interest at 9% per annum
from August 11, 1997 or from the most recent interest payment date to which
interest has been paid, payable semiannually on February 1 and August 1 of each
year, commencing February 1, 1998, to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the January 15 or
July 15 next preceding such interest payment date.
If, by March 31, 1998, the Issuer has not consummated a registered
exchange offer for the Notes or caused a shelf registration statement with
respect to resales of the Notes to be declared effective, the interest rate per
annum on the Notes will increase by .5% until the consummation of a registered
exchange offer or the effectiveness of a shelf registration statement. See "--
Registration Rights."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Issuer in the City of New York maintained for such purposes; provided,
however, that payment of interest may be made at the option of the Issuer by
check mailed to the Person entitled thereto as shown on the Security Register.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. See "-- Book-Entry;
Delivery and Form." No service charge will be made for any registration of
transfer, exchange or redemption of Notes, except in certain circumstances for
any documentary, stamp or similar issue or transfer taxes or other tax or other
governmental charge that may be imposed in connection therewith.
Subject to the covenants described below under "-- Certain Covenants" and
applicable law, the Issuer may issue additional Notes under the Indenture. The
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
Optional Redemption
The Notes will be redeemable, at the Issuer's option, in whole or in part,
at any time or from time to time, on or after August 1, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of Holders of record on the relevant regular record
date that is on or prior to the redemption date to receive interest due on an
interest payment date), if redeemed during the 12-month period commencing
August 1, of the years set forth below:
Year Redemption Price
- -------------------------------- -----------------
2002 ......................... 104.500%
2003 ......................... 102.250
2004 and thereafter .......... 100.000
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, by
lot or by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate; provided that no Note of $1,000 in
58
<PAGE>
principal amount or less shall be redeemed in part. If any Note is to be
redeemed in part only, the notice of redemption relating to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
Sinking Fund
The Notes will not be subject to the benefit of any sinking fund.
Registration Rights
The Issuer has agreed with the Placement Agents, for the benefit of the
Holders, that the Issuer will use its best efforts, at its cost, to file and
cause to become effective a registration statement with respect to a registered
offer (the "Exchange Offer") to exchange the Existing Notes for the Exchange
Notes with terms identical to the Existing Notes (except that the Exchange
Notes will not bear legends restricting the transfer thereof nor contain terms
concerning interest rate increases). Upon such registration statement being
declared effective, the Issuer shall offer the Exchange Notes in return for
surrender of the Existing Notes. Such offer shall remain open for not less than
20 business days after the date notice of the Exchange Offer is mailed to
Holders. For each Existing Note surrendered to the Issuer under the Exchange
Offer, the Holder will receive an Exchange Note of equal principal amount.
Interest on each Exchange Note shall accrue from the last Interest Payment Date
on which interest was paid on the Existing Notes so surrendered or, if no
interest has been paid on such Existing Notes, from the Closing Date. In the
event that applicable interpretations of the staff of the Securities and
Exchange Commission (the "Commission") do not permit the Issuer to effect the
Exchange Offer, or under certain other circumstances, the Issuer shall, at its
cost, use its best efforts to cause to become effective a shelf registration
statement (the "Shelf Registration Statement") with respect to resales of the
Existing Notes and to keep such Shelf Registration Statement effective until
two years after the Closing Date, or such shorter period that will terminate
when all Existing Notes covered by the Shelf Registration Statement have been
sold pursuant to the Shelf Registration Statement. The Issuer shall, in the
event of such a shelf registration, provide to each Holder copies of the
prospectus, notify each Holder when the Shelf Registration Statement for the
Existing Notes has become effective and take certain other actions as are
required to permit resales of the Existing Notes. A Holder that sells its
Existing Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to March 31, 1998,
the per annum interest rate borne by the Notes will be increased by .5% until
the Exchange Offer is consummated or the Shelf Registration Statement is
declared effective.
If the Issuer effects the Exchange Offer, the Issuer will be entitled to
close the Exchange Offer 20 business days after the commencement thereof,
provided that it has accepted all Existing Notes theretofore validly
surrendered in accordance with the terms of the Exchange Offer. Existing Notes
not tendered in the Exchange Offer shall bear interest at the rate set forth on
the cover page of this Prospectus and be subject to all of the terms and
conditions specified in the Indenture and to certain transfer restrictions.
Subordination
The payment of the principal of, premium, if any, and interest on, the
Notes will be subordinated, as described below, in right of payment to the
prior payment in full in cash or Cash Equivalents of all Senior Indebtedness.
The Notes will be senior subordinated indebtedness of the Issuer ranking pari
passu with all other existing and future senior subordinated indebtedness of
the Issuer and senior to all existing and future Subordinated Indebtedness of
the Issuer. As of December 31, 1997, on a pro forma basis after giving effect
to the Pharmacy Sale, the Company (excluding its subsidiaries) would have had
approximately $721.4 million of indebtedness outstanding, of which $472.8
million would have been Senior Indebtedness. See "Risk Factors
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<PAGE>
- -- Substantial Leverage" and "Capitalization." Notwithstanding the foregoing,
payment from (x) the money or the proceeds of U.S. Government Obligations held
in any defeasance trust described under "-- Defeasance" below and (y) the money
or the proceeds of U.S. Government Securities held under the Escrow Agreement,
will not be contractually subordinated in right of payment to any Senior
Indebtedness or subject to the restrictions described herein.
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness no payment or distribution of any assets of the Issuer or any
Subsidiary of any kind or character (excluding certain permitted equity or
subordinated securities) shall be made by the Issuer or any Subsidiary or on
behalf of, or out of the property of, the Issuer, or received by the Trustee or
any Noteholder on account of the principal of, premium, if any, or interest on,
the Notes or on account of the purchase, redemption, defeasance or other
acquisition of or in respect of the Notes unless and until such default has
been cured, waived or has ceased to exist or such Designated Senior
Indebtedness shall have been paid in full in cash or Cash Equivalents.
Upon the occurrence of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated (a "Non-payment Default") and after the receipt by the Trustee and
the Issuer from a representative or the holder of any Designated Senior
Indebtedness of written notice of such Non-payment Default, no payment (other
than any payments made from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under "-- Defeasance" or
distribution of any assets of the Issuer or any Subsidiary of any kind or
character (excluding certain permitted equity or subordinated securities) may
be made by the Issuer or any Subsidiary or on behalf of, or out of the property
of, the Issuer or any Subsidiary or received by the Trustee or any Noteholder
on account of any principal of, premium, if any, or interest on, the Notes
(including payments under any guaranty thereof) or on account of the purchase,
redemption or other acquisition of or in respect of the Notes (or any guaranty
thereof) for the period specified below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of
the Non-payment Default by the Trustee and the Issuer from a representative or
the holder of any Designated Senior Indebtedness and shall end on the earliest
of (i) 179 days after receipt of such notice by the Trustee (provided any
Designated Senior Indebtedness as to which notice was given shall not
theretofore have been accelerated), (ii) the date such Non-payment Default and
all other Non-payment Defaults as to which notice is also given after such
period is initiated shall have been cured or waived or shall have ceased to
exist or the Senior Indebtedness related thereto shall have been paid in full
or (iii) the date such Payment Blockage Period and any Payment Blockage Periods
initiated during such period shall have been terminated by written notice to
the Issuer or the Trustee from the senior representative and the holders of the
Designated Senior Indebtedness that have given notice of a Non-payment Default
at or after the initiation of such Payment Blockage Period, after which, in the
case of clause (i), (ii) or (iii), the Issuer shall resume making any and all
required payments in respect of the Notes, including any missed payments. In no
event will a Payment Blockage Period extend beyond 179 days from the date of
the receipt by the Trustee of the notice initiating the first such Payment
Blockage Period (such 179-day period referred to as the "Initial Period"). Not
more than one Payment Blockage Period may be commenced with respect to the
Notes during any period of 360 consecutive days; provided that, subject to the
limitations set forth in the next sentence, the commencement of a Payment
Blockage Period by the representative of Designated Senior Indebtedness other
than the Credit Facility shall not bar the commencement of another Payment
Blockage Period by the representative for the Credit Facility within such
period of 360 consecutive days. Notwithstanding anything in the Indenture to
the contrary, there must be 180 days in any 360-day period in which no Payment
Blockage Period is in effect. No event of default (other than an event of
default pursuant to the financial maintenance covenants under the Credit
Facility) that existed or was continuing (it being acknowledged that any
subsequent action that would give rise to an event of default pursuant to any
provision under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose) on the date of
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period shall be, or shall
be made, the basis for the commencement of a second Payment Blockage Period by
the representative for, or the holders of, such Designated Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
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If the Issuer fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "Events of Default."
The Indenture will provide that in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relative to the
Issuer or its assets, or any liquidation, dissolution or other winding up of
the Issuer, whether voluntary or involuntary, or any assignment for the benefit
of creditors or other marshaling of assets or liabilities of the Issuer, all
Senior Indebtedness must be paid in full in cash or Cash Equivalents before any
payment or distribution (excluding certain permitted equity or subordinated
securities) is made on account of the principal of, premium, if any, or
interest on the Notes.
By reason of such subordination, in the event of liquidation or
insolvency, creditors of the Issuer who are holders of Senior Indebtedness may
recover more, ratably, than the holders of the Notes and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness
in full in cash or Cash Equivalents, and the Issuer may be unable to meet its
obligations fully with respect to the Notes.
"Senior Indebtedness" means the following obligations, whether outstanding
on the Closing Date or thereafter Incurred: (a) all Indebtedness and other
monetary obligations of the Issuer or any Subsidiary of the Issuer under or in
respect of the Credit Facility (including obligations in respect of any lease
financing facility of the Credit Facility) or any Interest Rate Contract or
Currency Agreement related to Indebtedness under the Credit Facility, whether
for principal, interest (including interest accruing after the filing of a
petition by or against the Issuer or any Subsidiary of the Issuer under any
state or federal Bankruptcy Laws, whether or not such interest is allowed as a
claim after such filing in any proceeding under such law), fees, expenses,
indemnification or otherwise, and (b) the principal of, premium, if any, and
interest on all other Indebtedness of the Issuer (other than the Notes) unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall be pari passu with or subordinated in
right of payment to the Notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) Indebtedness that is by its terms
subordinate in right of payment to any Indebtedness of the Issuer, (ii)
Indebtedness which when incurred and without respect to any election under
Section 1111(b) of the Bankruptcy Law is without recourse to the Issuer, (iii)
any repurchase, redemption or other obligation in respect of Redeemable Capital
Stock, (iv) Indebtedness for goods, materials or services purchased in the
ordinary course of business or indebtedness consisting of trade payables or
other current liabilities, (v) Indebtedness of or amounts owed by the Issuer to
employees, officers or directors, (vi) any liability for federal, state, local
or other taxes owed or owing by the Issuer, (vii) Indebtedness of the Issuer to
a Subsidiary of the Issuer or any other Affiliate of the Issuer or any of such
Affiliate's subsidiaries, (viii) that portion of any Indebtedness which at the
time of issuance is issued in violation of the Indenture and (ix) amounts owing
under leases (other than Capital Lease Obligations).
"Designated Senior Indebtedness" is defined as (i) all Senior Indebtedness
under, or in respect of, the Credit Facility and any Interest Rate Contract or
Currency Agreement related to Indebtedness under the Credit Facility and (ii)
any other Senior Indebtedness which, at the time of determination, has an
aggregate principal amount outstanding, together with any commitments to lend
additional amounts, of at least $30,000,000 and is specifically designated in
the instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
Certain Covenants
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness. The Issuer will not, and will not permit any
of its Restricted Subsidiaries to, Incur any Indebtedness (including any
Acquired Indebtedness but excluding Permitted Indebtedness) unless at the time
of such event and after giving effect thereto on a pro forma basis the Issuer's
Fixed Charge Coverage Ratio for the four full fiscal quarters immediately
preceding such event taken as one period,
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calculated on the assumption that (i) such Indebtedness, and any Indebtedness
Incurred or repaid after the first day of such four-quarter period and on or
prior to the date of such event (other than Indebtedness Incurred or repaid
under a revolving credit or similar arrangement to the extent of the commitment
thereunder (or under any predecessor revolving credit or similar arrangement)
in effect on the last day of such four quarter period unless any portion of
such Indebtedness is projected, in the reasonable judgment of the senior
management of the Issuer, to remain outstanding for a period in excess of 12
months from the date of the Incurrence thereof), had been Incurred or repaid on
the first day of such four-quarter period and (ii) any acquisition or
disposition by the Issuer and its Restricted Subsidiaries out of the ordinary
course of business of any assets constituting a company, division, line of
business or business facility, in each case after the first day of such
four-quarter period, and on or prior to the date of such event, had been
consummated on the first day of such four-quarter period (including giving pro
forma effect to the application of the proceeds of any such disposition), would
have been at least equal to 2:00:1.00.
Limitation on Restricted Payments. The Issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, its Capital Stock (other than (x) dividends or distributions payable
solely in shares of its Qualified Capital Stock or in options, warrants or
other rights to acquire such Qualified Capital Stock and (y) pro rata
dividends or distributions on Common Stock of Restricted Subsidiaries held
by minority stockholders);
(ii) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock (or any option, warrant or other right to acquire such
Capital Stock) of (A) the Issuer or an Unrestricted Subsidiary held by any
Person or (B) a Restricted Subsidiary held by an Affiliate of the Issuer
(other than any Wholly Owned Restricted Subsidiary) or any holder (or any
Affiliate of such holder) of 5% or more of the Capital Stock of the Issuer;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, in each case, prior to any scheduled
repayment, or maturity, any Subordinated Indebtedness; or
(iv) make any Investment in any Person (other than a Permitted
Investment)
(such payments described in (i) through (iv) collectively, "Restricted
Payments"), unless at the time of and after giving effect to the proposed
Restricted Payment (the amount of any such Restricted Payment, if other than
cash, as determined by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution), (x) no Default or Event of
Default shall have occurred and be continuing and such Restricted Payment shall
not be an event which is, or after notice or lapse of time or both, would be,
an "event of default" under the terms of any Indebtedness of the Issuer or any
Restricted Subsidiary; (y) the Issuer could Incur $1.00 of additional
Indebtedness under the "Limitation on Indebtedness" covenant (other than
Permitted Indebtedness); and (z) the aggregate amount of all Restricted
Payments, including any Restricted Payments made pursuant to clauses (i) and
(iv) of the succeeding paragraph, declared or made after the Closing Date shall
not exceed the sum of:
(A) 50% of the Consolidated Net Income of the Issuer accrued on a
cumulative basis during the period beginning on the first day of the fiscal
quarter beginning immediately following the Closing Date and ending on the
last day of the fiscal quarter ending prior to the date of such proposed
Restricted Payment for which reports have been filed with the Commission or
provided to the Trustee pursuant to the "Reporting Requirements" covenant
(or, if such aggregate cumulative Consolidated Net Income shall be a loss,
minus 100% of the amount of such loss);
(B) the aggregate Net Cash Proceeds received after the Closing Date by
the Issuer as capital contributions to the Issuer;
(C) the aggregate Net Cash Proceeds received after the Closing Date by
the Issuer from the issuance and sale (other than to any of its
Subsidiaries) of shares of Qualified Capital Stock of the Issuer or any
options or warrants to purchase such shares (other than issuances to the
extent used to make a Restricted Payment under clause (ii) of the
subsequent paragraph) of Qualified Capital Stock of the Issuer;
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(D) the aggregate Net Cash Proceeds received after the Closing Date by
the Issuer for debt securities that have been converted into or exchanged
for Qualified Capital Stock of the Issuer to the extent such debt
securities were originally sold for cash plus the aggregate cash received
by the Issuer at the time of such conversion or exchange; and
(E) $10 million.
None of the foregoing provisions shall be deemed to prohibit the following
Restricted Payments so long as in the case of clauses (ii), (iii) and (iv) at
the time of and after giving effect to the proposed Restricted Payment no
Default or Event of Default shall have occurred and be continuing:
(i) dividends paid within 60 days after the date of declaration if at
the date of declaration, such payment would be permitted by the provisions
of the preceding paragraph;
(ii) the redemption, repurchase or other acquisition or retirement of
Capital Stock of the Issuer or Subordinated Indebtedness in exchange for,
or out of the net proceeds of, a substantially concurrent issue and sale
(other than to a Subsidiary) of shares of Qualified Capital Stock of the
Issuer;
(iii) the redemption, repurchase, or other acquisition or retirement of
Subordinated Indebtedness of the Issuer, including premium, if any, and
accrued and unpaid interest, made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Indebtedness of the Issuer
permitted to be Incurred under clause (k) of the definition of "Permitted
Indebtedness"; and
(iv) Investments in an aggregate amount not to exceed $25 million in any
Person which owns, operates or services Healthcare Related Businesses.
Restrictions on Preferred Stock of Restricted Subsidiaries. The Issuer
will not sell, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell, any Preferred Stock of a Restricted Subsidiary
other than to the Issuer or a Wholly Owned Restricted Subsidiary, or permit any
Person (other than the Issuer or a Wholly Owned Restricted Subsidiary) to own
or hold any Preferred Stock of any Restricted Subsidiary, unless such
Restricted Subsidiary would be entitled to Incur Indebtedness pursuant to the
"Limitation on Indebtedness" covenant in an aggregate principal amount equal to
the aggregate liquidation value of the Preferred Stock to be issued.
Limitation on Transactions with Affiliates. The Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into, renew or extend any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of
assets, property or services) with any Affiliate of the Issuer (other than a
Wholly Owned Restricted Subsidiary) unless (i) such transaction or series of
related transactions is on terms that are no less favorable to the Issuer or
such Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction in arm's-length dealings with an unrelated third party
and (ii) with respect to a transaction or series of related transactions
involving payments in excess of $10 million in the aggregate, the Issuer
delivers an Officers' Certificate to the Trustee certifying that (A) such
transaction complies with clause (i) above and (B) such transaction or series
of related transactions shall have been approved by a majority of the
independent directors of the Board of Directors of the Issuer or for which the
Issuer or a Restricted Subsidiary has received a written opinion of a
nationally recognized investment banking firm stating that the transaction is
fair to the Issuer or such Restricted Subsidiary from a financial point of view
(a copy of which opinion shall be attached to such Officers' Certificate);
provided, however, that the foregoing restriction shall not apply to (a) the
payment of reasonable and customary regular fees to directors of the Issuer or
any of its Restricted Subsidiaries who are not employees of the Issuer or any
Affiliate, (b) the payment of monthly fees in accordance with the "Limitation
on Management Fees" covenant described below and the reimbursement of expenses
pursuant to the terms of management agreements with Genesis or any of its
affiliates, (c) any payments or other transactions pursuant to any tax-sharing
agreement between the Issuer and any other Person with which the Issuer files a
consolidated tax return or with which the Issuer is part of a consolidated
group for tax purposes, (d) the Therapy Sale, provided the Issuer or its
Restricted Subsidiaries receives at least $20 million from the Therapy Sale,
(e) the Pharmacy Sale, provided the Issuer or its Restricted Subsidiaries
receives at least $50 million from the Pharmacy Sale, (f) transactions in the
ordinary course of business with Genesis or any of its
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Affiliates, related to the Issuer's healthcare businesses or facilities;
provided that the aggregate amount of any such transactions in any twelve month
period does not exceed $10 million, (g) any Restricted Payments not prohibited
by the "Limitation on Restricted Payments" covenant or (h) the payment of fees
and expenses in connection with the Transactions to Genesis, Cypress and TPG.
Limitation on Asset Sales. The Issuer will not, and will not permit any
Restricted Subsidiary to, consummate any Asset Sale, unless (i) the
consideration received by the Issuer or such Restricted Subsidiary is at least
equal to the fair market value of the assets sold or disposed of and (ii) at
least 75% of the consideration received consists of cash or Temporary Cash
Investments. In the event and to the extent that the Net Cash Proceeds received
by the Issuer or any of its Restricted Subsidiaries from one or more Asset
Sales occurring on or after the Closing Date in any period of 12 consecutive
months exceed $10 million, then the Issuer shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed $10 million (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay Senior Indebtedness of the Issuer or any
Subsidiary Guarantor or Indebtedness of any other Restricted Subsidiary, in
each case owing to a Person other than the Issuer or any of its Restricted
Subsidiaries or (B) invest an equal amount, or the amount not so applied
pursuant to clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement; provided that if any
such agreement is terminated, the Issuer may invest such Net Cash Proceeds
prior to the end of the 12-month period referred to in clause (i) or six months
after the termination of such agreement, whichever is later), in property or
assets (other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Issuer and its Restricted Subsidiaries
existing on the date of such investment and (ii) apply (no later than the end
of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds
(to the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $10 million, the
Issuer must commence, not later than the fifteenth Business Day of such month,
and consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes, plus,
in each case, accrued interest (if any) to the Payment Date.
Repurchase of Notes upon a Change in Control. The Issuer must commence,
within 30 days of the occurrence of a Change in Control, and consummate an
Offer to Purchase for all Notes then outstanding, at a purchase price equal to
101% of the principal amount thereof, plus accrued interest (if any) to the
Payment Date.
There can be no assurance that the Issuer will have sufficient funds
available at the time of any Change in Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Issuer which might be outstanding
at the time). The above covenant requiring the Issuer to repurchase the Notes
will, unless consents are obtained, require the Issuer to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
Limitation on Liens. The Issuer will not, and will not permit any
Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of
any kind upon any of its respective properties now owned or acquired after the
Closing Date or any income or profits therefrom securing (i) any Indebtedness
of the Issuer which is expressly subordinate in right of payment to any other
Indebtedness of the Issuer, unless the Notes are equally and ratably secured;
provided that, if such Indebtedness is subordinate in right of payment to the
Notes, the Lien securing such Indebtedness shall be subordinate to the Lien
securing the Notes with the same relative priority as such subordinated
Indebtedness shall have with respect to the Notes; provided further that this
clause (i) shall not be applicable to any Liens securing any such Indebtedness
which became Indebtedness of
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the Issuer pursuant to a transaction permitted under "-- Merger, Sales of
Assets, etc." or Liens securing Acquired Indebtedness and, in each case, which
Liens were in existence at the time of such transaction or Incurrence of such
Acquired Indebtedness and not Incurred in connection with or in contemplation
of such transaction or Incurrence, so long as such Liens do not extend to or
cover any property or assets of the Issuer or any Restricted Subsidiary other
than property or assets acquired in such transaction, or (ii) any assumption,
guarantee or other liability of any Restricted Subsidiary in respect of any
Indebtedness of the Issuer which is expressly subordinate in right of payment
to any other Indebtedness of the Issuer, unless the substantially similar
assumption, guarantee or other liability of such Restricted Subsidiary in
respect of the Notes is equally and ratably secured; provided that, if such
subordinated Indebtedness is subordinate in right of payment to the Notes, the
Lien securing the assumption, guarantee or other liability of such Restricted
Subsidiary in respect of such Indebtedness shall be subordinate to the Lien
securing the assumption, guarantee or other liability of such Restricted
Subsidiary with respect to the Notes with the same relative priority as such
subordinated Indebtedness shall have with respect to the Notes; provided
further that this clause (ii) shall not be applicable to Liens securing any
such assumption, guarantee or other liability which existed at the time such
Restricted Subsidiary became a Restricted Subsidiary and which Liens were in
existence at the time of such transaction (unless such assumption, guarantee or
other liability was Incurred in connection with or in contemplation of such
Person becoming a Restricted Subsidiary), so long as such Liens do not extend
to or cover any property or assets of the Issuer or any other Restricted
Subsidiary.
Limitation on Senior Subordinated Indebtedness. The Issuer will not Incur
any Indebtedness, other than the Notes, that is subordinate in right of payment
to any Senior Indebtedness, unless such Indebtedness is also pari passu with,
or subordinate in right of payment to, the Notes pursuant to subordination
provisions substantially similar to those contained in the Indenture; provided
that the foregoing limitation shall not apply to distinctions between
categories of Senior Indebtedness of the Issuer that exist by reason of any
Liens or Guarantees arising or created in respect of some but not all of such
Senior Indebtedness.
Limitation on Issuance of Guarantees by Restricted Subsidiaries. (a) The
Issuer will not permit any Restricted Subsidiary, directly or indirectly, to
assume, guarantee or in any other manner become liable with respect to any
Indebtedness of the Issuer which is expressly by its terms pari passu with or
subordinate in right of payment to the Notes ("Guaranteed Indebtedness") unless
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a guarantee of payment of
the Notes by such Restricted Subsidiary and (ii) such Subsidiary waives and
will not in any manner whatsoever claim or take the benefit or advantage of,
any rights of reimbursement, indemnity or subrogation or any other rights
against the Issuer or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee. If the
Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinate in right
of payment to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated in right of
payment to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated in right of payment to the Notes.
(b) Each guarantee created pursuant to the provisions described in the
foregoing paragraph is referred to as a "Subsidiary Guarantee" and the issuer
of each such Guarantee is referred to as a "Subsidiary Guarantor."
Notwithstanding the foregoing, any Subsidiary Guarantee may provide by its
terms that it (together with any Liens arising from such Subsidiary Guarantee)
shall be automatically and unconditionally released and discharged upon (i) any
sale, exchange or transfer, to any Person not an Affiliate of the Issuer, of
all of the Issuer's Capital Stock in, or all or substantially all the assets
of, such Subsidiary Guarantor, which is in compliance with the Indenture or
(ii) the release or discharge of the assumption, guarantee or other liability
which resulted in the creation of such Subsidiary Guarantee, except a release
or discharge by or as a result of payment under such Subsidiary Guarantee.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Issuer will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any restriction of any kind, on the ability of any Restricted
Subsidiary to (i) pay dividends
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or make any other distribution on its Capital Stock to the Issuer or any other
Restricted Subsidiary, (ii) pay any Indebtedness owed to the Issuer or any
other Restricted Subsidiary, (iii) make any Investment in the Issuer or any
other Restricted Subsidiary or (iv) transfer any of its property or assets to
the Issuer or any other Restricted Subsidiary, except (a) any encumbrance or
restriction existing under or by reason of applicable law; (b) any encumbrance
or restriction existing under or by reason of customary non-assignment
provisions of any lease governing a leasehold interest of the Issuer, or any
Restricted Subsidiary; (c) any restriction pursuant to an agreement in effect
at or entered into on the Closing Date; (d) any restriction, with respect to a
Restricted Subsidiary that is not a Subsidiary on the Closing Date, in
existence at the time such Person becomes a Restricted Subsidiary and not
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary; (e) any restriction existing under any agreement that
extends, renews, refinances or replaces the agreements containing the
restrictions in the foregoing clauses (c) and (d), provided that the terms and
conditions of any such restrictions are not materially less favorable to the
holders of the Notes than those under or pursuant to the agreement so extended,
renewed, refinanced or replaced (in the opinion of the Board of Directors of
the Issuer whose determination shall be conclusive); (f) arising or agreed to
in the ordinary course of business, not relating to any Indebtedness, and that
do not, individually or in the aggregate, detract from the value of property or
assets of the Issuer or any Restricted Subsidiary in any manner material to the
Issuer or any Restricted Subsidiary; (g) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary or (h) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary
in comparable financings (as determined by the Issuer) and (C) the Issuer
determines that any such encumbrance or restriction will not materially affect
the Issuer's ability to make principal or interest payments on the Notes.
Limitation on Management Fees. The Issuer will not, and will not permit
any of its Restricted Subsidiaries to pay any management fees in any month to
the extent such fees would exceed the greater of (i) $1,991,666 and (ii) 4% of
the Issuer's consolidated net revenues for such month; provided that the Issuer
may pay management fees in excess of such amount (including accrued fees) to
the extent that (A) both before and after giving effect to the proposed payment
(x) no Default or Event of Default shall have occurred and be continuing and
(y) the Issuer's Fixed Charge Coverage Ratio for the four full fiscal quarters
immediately preceding such event, taken as one period and calculated on the
assumption that (I) any Indebtedness Incurred or repaid after the first day of
such four-quarter period and on or prior to the date of such payment (other
than Indebtedness Incurred or repaid under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any
predecessor revolving credit or similar arrangement) in effect on the last day
of such four quarter period unless any portion of such Indebtedness is
projected, in the reasonable judgment of the senior management of the Issuer,
to remain outstanding for a period in excess of 12 months from the date of the
Incurrence thereof), had been Incurred or repaid on the first day of such
four-quarter period, (II) any acquisition or disposition by the Issuer and its
Restricted Subsidiaries out of the ordinary course of business of any assets
constituting a company, division, line of business or business facility, in
each case after the first day of such four-quarter period, and on or prior to
the date of such payment, had been consummated on the first day of such
four-quarter period (including giving pro forma effect to the application of
the proceeds of any such disposition) and (III) the proposed management fees
were paid during such period, would have been at least equal to 2:00:1.00; and
(B) the aggregate amount of management fees paid with respect to any month do
not exceed 6% of the Issuer's consolidated net revenues for such month. To the
extent the Issuer is prohibited from paying any management fees as a result of
clause (y) of the proviso to the preceding sentence, the Issuer may accrue such
fees until they may be paid in accordance with this "Limitation on Management
Fees" covenant provided the payment of such fees is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all of the
Issuer's obligations under the Notes and the Indenture.
Reporting Requirements. At all times from and after the earlier of (i) the
date of the commencement of an Exchange Offer or the effectiveness of the Shelf
Registration Statement (the "Registration") and (ii) the date that is six
months after the Closing Date, in either case, whether or not the Issuer is
then required to file
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reports with the Commission, the Issuer shall file with the Commission all such
reports and other information as it would be required to file with the
Commission by Section 13(a) or 15(d) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") if it were subject thereto. The Issuer shall
supply the Trustee and each Holder or shall supply to the Trustee for
forwarding to each such Holder, without cost to such Holder, copies of such
reports and other information. In addition, at all times prior to the earlier
of the date of the Registration and the date that is six months after the
Closing Date, the Issuer shall, at its cost, deliver to each Holder of the
Notes quarterly and annual reports substantially equivalent to those which
would be required by the Exchange Act. In addition, at all times prior to the
Registration, upon the request of any Holder or any prospective purchaser of
the Notes designated by a Holder, the Issuer shall supply to such Holder or
such prospective purchaser the information required under Rule 144A under the
Securities Act.
Merger, Sale of Assets, etc.
The Issuer shall not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer or lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety to any Person or
group of affiliated Persons, or permit any of its Restricted Subsidiaries to
enter into any such transaction or transactions if such transaction or
transactions, in the aggregate, would result in a sale, assignment, transfer,
lease or disposal of all or substantially all of the properties and assets of
the Issuer and its Restricted Subsidiaries on a consolidated basis to any other
Person or group of affiliated Persons, unless at the time and after giving
effect thereto (i) either (A) the Issuer shall be the continuing corporation,
or (B) the Person (if other than the Issuer) formed by such consolidation or
into which the Issuer is merged or the Person which acquires by conveyance,
transfer, lease or disposition the properties and assets of the Issuer,
substantially as an entirety (the "Surviving Entity") shall be a corporation
duly organized and validly existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall, in either
case, expressly assume, by an indenture supplemental to the Indenture, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Issuer under the Notes and the Indenture, and the Indenture
shall remain in full force and effect; (ii) immediately before and immediately
after giving effect to such transaction on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Issuer or a Restricted
Subsidiary which becomes the obligation of the Issuer or any of its Restricted
Subsidiaries in connection with or as a result of such transaction as having
been incurred at the time of such transaction), no Default or Event of Default
shall have occurred and be continuing; (iii) immediately after giving effect to
such transaction on a pro forma basis, the Consolidated Net Worth of the Issuer
(or the Surviving Entity if the Issuer is not the continuing obligor under the
Indenture) is at least equal to the Consolidated Net Worth of the Issuer
immediately before such transaction; (iv) immediately before and immediately
after giving effect to such transaction on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Issuer or a Restricted
Subsidiary which becomes the obligation of the Issuer or any of its Restricted
Subsidiaries in connection with or as a result of such transaction as having
been incurred at the time of such transaction), the Issuer (or the Surviving
Entity if the Issuer is not the continuing obligor under the Indenture) could
incur $1.00 of additional Indebtedness under the "Limitation on Indebtedness"
covenant (other than Permitted Indebtedness); provided that this clause (iv)
shall not apply to a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth; provided that, in connection
with any such merger or consolidation, no consideration (other than Qualified
Capital Stock in the Surviving Entity or the Issuer) shall be issued or
distributed to the stockholders of the Issuer; and (v) the Issuer or the
Surviving Entity shall have delivered to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that such consolidation, merger,
transfer, lease or disposition and such supplemental indenture comply with the
terms of the Indenture.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties
and assets of the Issuer in accordance with the immediately preceding
paragraph, the successor Person formed by such consolidation or into which the
Issuer is merged or the successor Person to which such sale, assignment,
conveyance, transfer, lease or disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer under
the Indenture with the same effect as if such successor had been named as the
Issuer herein. When a successor assumes all the obligations of its predecessor
under the Indenture and the Notes, the predecessor shall be released from those
obligations; provided that in the case of a transfer by lease, the predecessor
shall not be released from the payment of principal and interest on the Notes.
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Events of Default
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise, whether or not such payment is prohibited by the
subordination provisions described under "Subordination"; (b) default in the
payment of interest on any Note when the same becomes due and payable, and such
default continues for a period of 30 days, whether or not such payment is
prohibited by the subordination provisions described under "--Subordination";
(c) default in the performance or breach of the "Merger, Sale of Assets, etc."
provisions contained in the Indenture or the failure to make or consummate an
Offer to Purchase in accordance with the "Limitation on Asset Sales" or
"Repurchase of Notes upon a Change in Control" covenant; (d) the Issuer
defaults in the performance of or breaches any other covenant or agreement of
the Issuer in the Indenture or under the Notes (other than a default specified
in clause (a), (b) or (c) above) and such default or breach continues for a
period of 30 consecutive days after written notice by the Trustee or the
Holders of 25% or more in aggregate principal amount of the Notes; (e) there
occurs with respect to any issue or issues of Indebtedness of the Issuer or any
Significant Subsidiary having an outstanding principal amount of $10 million or
more in the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $10 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Issuer or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $10 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (g)
a court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Issuer or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Issuer or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Issuer or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a
period of 30 consecutive days; or (h) the Issuer or any Significant Subsidiary
(A) commences a voluntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Issuer or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Issuer) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Issuer (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if
any, and accrued interest shall be immediately due and payable. In the event of
a declaration of acceleration because an Event of Default set forth in clause
(e) above has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled if the event of default
triggering such Event of Default pursuant to clause (e) shall be remedied or
cured by the Issuer or the relevant Significant Subsidiary or waived by the
holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to the Issuer, the principal of, premium,
if any, and accrued interest on the Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
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The Holders of at least a majority in principal amount of the outstanding Notes
by written notice to the Issuer and to the Trustee, may waive all past defaults
and rescind and annul a declaration of acceleration and its consequences if (i)
all existing Events of Default, other than the nonpayment of the principal of,
premium, if any, and interest on the Notes that have become due solely by such
declaration of acceleration, have been cured or waived and (ii) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see "--
Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith may
be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a
majority in aggregate principal amount of the outstanding Notes do not give the
Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any Holder of a Note to receive
payment of the principal of, premium, if any, or interest on such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the Holder.
The Indenture will require certain officers of the Issuer to certify, on
or before a date not more than 90 days after the end of each fiscal year, that
a review has been conducted of the activities of the Issuer and its Restricted
Subsidiaries and the Issuer's and its Restricted Subsidiaries' performance
under the Indenture and that the Issuer has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Issuer will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
Defeasance
Defeasance and Discharge. The Indenture will provide that the Issuer will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Issuer has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance
with the terms of the Indenture and the Notes, (B) the Issuer has delivered to
the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of the Issuer's exercise of its option under this "Defeasance" provision
and will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the Internal Revenue
Service to the same effect unless there has been a change in applicable federal
income tax law after the Closing Date such that a ruling is no longer required
or (y) a ruling directed to the Trustee received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of Counsel and (ii) an
Opinion of Counsel to the effect that the creation of the defeasance trust does
not violate the Investment Company Act of 1940 and after the passage of 123
days following the deposit, the trust fund will not be subject to the effect of
Section 547 of the Bankruptcy Law or
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Section 15 of the New York Debtor and Creditor Law, (C) immediately after
giving effect to such deposit on a pro forma basis, no Event of Default, or
event that after the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Issuer or any of its Subsidiaries is a party or by which the Issuer or any of
its Subsidiaries is bound, (D) the Issuer is not prohibited from making
payments in respect of the Notes by the provisions described under
"-- Subordination" above and (E) if at such time the Notes are listed on a
national securities exchange, the Issuer has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a
result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under
"-- Merger, Sale of Assets, etc." and all the covenants described herein under
"--Covenants," clause (c) under "-- Events of Default" with respect to such
clauses (iii) and (iv) under "-- Merger, Sale of Assets, etc.," clause (d) with
respect to such other covenants and clauses (e) and (f) under "-- Events of
Default" shall be deemed not to be Events of Default, and the provisions
described herein under "Subordination" with respect to the assets held by the
Trustee referred to below shall not apply, upon, among other things, the
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Notes on the
Stated Maturity of such payments in accordance with the terms of the Indenture
and the Notes, the satisfaction of the provisions described in clauses (B)(ii),
(C), (D) and (E) of the preceding paragraph and the delivery by the Issuer to
the Trustee of an Opinion of Counsel to the effect that, among other things,
the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Issuer
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Issuer will
remain liable for such payments.
Modification and Waiver
Modifications and amendments of the Indenture may be made by the Issuer
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture,
(vi) waive a default in the payment of principal of, premium, if any, or
interest on the Notes, (vii) modify the subordination provisions or the Escrow
Agreement in a manner adverse to the Holders or (viii) reduce the percentage or
aggregate principal amount of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults. Any amendment to the subordination provisions
under the Indenture that is adverse to the holders of Senior Indebtedness will
require the consent of such holders.
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) existing at the time
and assumed in connection with the acquisition of assets by a
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Restricted Subsidiary from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary or such acquisition; provided that Indebtedness of a
Person which is redeemed, defeased, retired or otherwise repaid at the time of
or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such asset acquisition shall not be Acquired
Indebtedness. Acquired Indebtedness shall be deemed to be incurred on the date
of the related acquisition of assets from any Person or the date the acquired
Person becomes a Restricted Subsidiary.
"Affiliate" means with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person, (ii) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Capital
Stock, (iii) any officer or director of (A) any such specified Person, (B) any
Subsidiary of such specified Person or (C) any Person described in clauses (i)
or (ii) above or (iv) any other Person having a relationship with any natural
Person described in clauses (i), (ii) or (iii) above by blood, marriage or
adoption not more remote than first cousin or any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such other Person described in this clause (iv). For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of (i) any
Capital Stock of any Restricted Subsidiary; (ii) all or substantially all of
the properties and assets of any division or line of business of the Issuer or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Issuer or any Restricted Subsidiary, other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include (a) any transfer of properties and assets that is governed by the
provisions described under "-- Merger, Sale of Assets, etc.," (b) any transfer
of properties or assets of the Issuer to a Restricted Subsidiary, or of a
Restricted Subsidiary to the Issuer or another Restricted Subsidiary, (c) any
transfer of inventory, receivables and other current assets, (d) any transfer
of assets for consideration at least equal to the Fair Market Value of the
assets transferred, to the extent that the consideration received would satisfy
clause (B) of the "Limitation on Asset Sales" covenant, (e) the Therapy Sale,
(f) the Pharmacy Sale, or (g) any transfer of property or assets with a Fair
Market Value not in excess of $1 million in any transaction or series of
related transactions.
"Attributable Debt" in respect of a sale-leaseback transaction or an
operating lease in respect of a healthcare facility means, at the time of
determination, the present value (discounted at the interest rate implicit in
the lease, compounded semiannually) of the obligation of the lessee of the
property subject to such sale-leaseback transaction or operating lease in
respect of a healthcare facility for rental payments during the remaining term
of the lease included in such transaction including any period for which such
lease has been extended or may, at the option of the lessor, be extended or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of penalty (in which case the rental payments shall
include such penalty), after excluding all amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
(A) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment of such Indebtedness multiplied by
(B) the amount of each such principal payment by (ii) the sum of all such
principal payments.
"Bankruptcy Law" means Title 11, United States Code, as amended, or any
similar United States Federal or State law relating to bankruptcy, insolvency,
receivership, winding-up, liquidation, reorganization or relief of debtors or
any amendment to, succession to or change in any such law.
"Capital Lease Obligation" means the discounted present value of the
rental obligations under any lease of real or personal property which, in
accordance with GAAP, is required to be recorded on the balance sheet of such
Person as a capitalized lease obligation.
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"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated, whether voting or
non-voting) of such Person's capital stock or equity interests.
"Cash Equivalent" means (i) any security, maturing not more than six
months after the date of acquisition, issued by the United States of America,
or an instrumentality or agency thereof and guaranteed fully as to principal,
premium, if any, and interest by the United States of America, (ii) any
certificate of deposit, time deposit, money market account or bankers'
acceptance, maturing not more than six months after the date of acquisition,
issued by any commercial banking institution that is a member of the Federal
Reserve System and that has combined capital and surplus and undivided profits
of not less than $500,000,000, whose debt has a rating, at the time as of which
any investment therein is made, of "P-1" (or higher) according to Moody's
Investors Service, Inc. or any successor rating agency, or "A-1" (or higher)
according to Standard & Poor's Ratings Services or any successor rating agency
and (iii) commercial paper, maturing not more than three months after the date
of acquisition, issued by any corporation (other than an Affiliate or
Subsidiary of the Issuer) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or
any successor rating agency, or "A-1" (or higher) according to Standard &
Poor's Ratings Services or any successor rating agency.
"Change in Control" means any time that (i) any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other
than an Existing Stockholder or Genesis ElderCare Corp., in a single
transaction or through a series of related transactions, is or becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of more than 35% of the total voting power of the
Voting Stock of the Issuer on a fully diluted basis and such ownership is
greater than the amount of voting power of the Voting Stock of the Issuer, on a
fully diluted basis, held by Genesis and its Affiliates on such date; (ii) the
Issuer consolidates or merges with or into another corporation or conveys,
transfers or leases all or substantially all of its assets to any Person, or
any corporation consolidates or merges with or into the Issuer, in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Issuer is changed into or exchanged for cash, securities or other property,
other than any such transaction where (A) the outstanding Voting Stock of the
Issuer is changed into or exchanged for (x) Voting Stock of the surviving
corporation which is not Redeemable Capital Stock or (y) cash, securities or
other property in an amount which could be paid by the Issuer as a Restricted
Payment under the "Limitation on Restricted Payments" covenant (and such amount
shall be treated as a Restricted Payment), and (B) the holders of the Voting
Stock of the Issuer immediately prior to such transaction own, directly or
indirectly, not less than 50% of the Voting Stock of the surviving corporation
immediately after such transaction; (iii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of the Issuer (together with any new directors whose election by such
Board of Directors or whose nomination for election by the stockholders of the
Issuer was (a) approved by a vote of at least 66 % of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved or (b) approved
by Genesis in connection with its acquisition of the Common Stock of the Issuer
held by Cypress or TPG) cease for any reason to constitute a majority of the
Board of Directors of the Issuer then in office; or (iv) the Issuer is
liquidated or dissolved or adopts a plan of liquidation.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
date of the Indenture such Commission is not existing and performing the duties
now assigned to it under the Trust Indenture Act, then the body performing such
duties at such time.
"Consolidated EBITDA" of any Person means, with respect to any period, the
Consolidated Net Income of such Person for such period, plus, to the extent
such amount was deducted in calculating such Consolidated Net Income (i)
Consolidated Income Tax Expense, (ii) depreciation expense, (iii) amortization
expense, (iv) Consolidated Interest Expense, (v) all other non-cash items
reducing Consolidated Net Income (other than items that will require cash
payments and for which an accrual or reserve is, or is required by GAAP to be,
made), less all non-cash items increasing Consolidated Net Income and (vi) all
management fees, and minus all management fees paid during such period (whether
or not such fees were deducted in calculating
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Consolidated Net Income for such period), all as determined on a consolidated
basis in accordance with GAAP; provided that, if any Restricted Subsidiary is
not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA of the Issuer
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the percentage
ownership interest in the income of such Restricted Subsidiary not owned on the
last day of such period by the Issuer or any of its Restricted Subsidiaries.
"Consolidated Income Tax Expense" means for any period, as applied to any
Person, the provision for federal, state, local and foreign income taxes of
such Person and its Consolidated Subsidiaries for such period (other than
income taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets) as determined in accordance
with GAAP.
"Consolidated Interest Expense" means, without duplication, for any
period, as applied to any Person, the sum of (i) the interest expense of such
Person and its Consolidated Subsidiaries for such period, including, without
limitation, (A) amortization of debt discount, (B) the net cost under interest
rate contracts (including amortization of discounts), (C) the interest portion
of any deferred payment obligation calculated in accordance with the effective
interest method of accounting and (D) accrued interest, plus (ii) the interest
component of the Capital Lease Obligations paid, accrued and/or scheduled to be
paid, or accrued by such Person during such period, in each case as determined
in accordance with GAAP, plus (iii) Preferred Stock dividends in respect of
Preferred Stock of the Issuer or any Restricted Subsidiary held by Persons
other than the Issuer or a Wholly Owned Restricted Subsidiary. For purposes of
clause (c) of the preceding sentence, dividends shall be deemed to be an amount
equal to the actual dividends paid divided by one minus the applicable actual
combined federal, state, local and foreign income tax rate of the Issuer and
its Consolidated Subsidiaries (expressed as a decimal).
"Consolidated Net Income" of any Person means, for any period, as applied
to any Person, the net income (or loss) of such Person and its Consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (loss), by excluding
(without duplication) (i) all extraordinary gains or losses (less all fees and
expenses relating thereto), (ii) the portion of net income of such Person and
its Consolidated Subsidiaries allocable to investments in Persons other than
Consolidated Subsidiaries to the extent that cash dividends or distributions
have not actually been received by such Person or one of its Consolidated
Subsidiaries, (iii) net income (or loss) of any Person combined with such
Person or any of its Consolidated Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any
gain or loss, net of taxes, realized upon the termination of any employee
pension benefit plan, (v) any gains or losses (less all fees and expenses
relating thereto) in respect of dispositions of assets other than in the
ordinary course of business, or (vi) the net income of any Consolidated
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by that Consolidated Subsidiary of that income is not at
the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that ConsolidatedSubsidiary.
"Consolidated Net Worth" of any Person means the Consolidated
stockholders' equity (excluding Redeemable Capital Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable for the sale of
Capital Stock) of such Person and its Consolidated Subsidiaries, as set forth
on the most recent consolidated balance sheet of such Person and its
Consolidated Subsidiaries (which shall be as of a date not more than 90 days
prior to the date of such computation determined in accordance with GAAP).
"Consolidated Rental Payments" of any Person means, for any period, the
aggregate rental obligations of such Person and its Consolidated Subsidiaries
(not including taxes, insurance, maintenance and similar expenses that the
lessee is obligated to pay under the terms of the relevant leases), determined
on a consolidated basis in conformity with GAAP, payable in respect of such
period under Attributable Debt or leases of real or personal property not
constituting Attributable Debt (net of income from subleases thereof, not
including taxes, insurance, maintenance and similar expenses that the sublessee
is obligated to pay under the terms of such sublease), whether or not such
obligations are reflected as liabilities or commitments on a consolidated
balance sheet of such Person and its Subsidiaries or in the notes thereto,
excluding, however, in
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any event, (i) that portion of Consolidated Interest Expense of such Person
representing payments by such Person or any of its Consolidated Subsidiaries in
respect of Capital Lease Obligations (net of payments to such Person or any of
its Consolidated Subsidiaries under subleases qualifying as capitalized lease
subleases to the extent that such payments would be deducted in determining
Consolidated Interest Expense) and (ii) the aggregate amount of amortization of
obligations of such Person and its Consolidated Subsidiaries in respect of such
Capital Lease Obligations for such period (net of payments to such Person or
any of its Consolidated Subsidiaries and subleases qualifying as capitalized
lease subleases to the extent that such payments would be deducted in
determining such amortization amount).
"Consolidation" means, (i) with respect to the Issuer, the consolidation
of the accounts of the Issuer and each of its Restricted Subsidiaries and (ii)
with respect to any other Person, the consolidation of the accounts of such
Person and each of its Subsidiaries, in each case if and to the extent the
accounts of such Person and such Subsidiaries would normally be consolidated
with those of such Person, all in accordance with GAAP. The term "Consolidated"
shall have a similar meaning.
"Credit Facility" means (i) any and all credit agreements (whether of the
Issuer or any Subsidiary) contemplated by the Amended and Restated Commitment
Letter dated June 14, 1997 between the Issuer and Mellon Bank, N.A., Citicorp
Securities, Inc., Citibank, N.A., First Union Capital Markets Corp., First
Union National Bank and NationsBank, N.A. as the same may be amended, restated,
renewed, extended, restructured, supplemented or otherwise modified from time
to time; (ii) any agreements, instruments and documents executed or delivered
pursuant to or in connection with such credit agreement and (iii) any credit
agreement, loan agreement, note purchase agreement, indenture or other
agreement, document or instrument refinancing, refunding or otherwise replacing
the credit agreement or any other agreement deemed a Credit Facility under
clause (i), (ii) or (iii) hereof, whether or not with the same agent, trustee,
representative, lenders or holders, regardless of whether the Credit Facility
or any portion thereof was outstanding or in effect at the time of such
restatement, renewal, extension, restructuring, supplement or modification.
Without limiting the generality of the foregoing, the term "Credit Facility"
shall include any amendment, restatement, renewal extension, restructuring,
supplement or modification to any Credit Facility and all refundings,
refinancings and replacements of any Credit Facility, including any agreement
(a) extending the maturity of any Indebtedness Incurred thereunder or
contemplated thereby, (b) adding or deleting borrowers or guarantors
thereunder, provided that the addition of such borrower or guarantor would not
be prohibited by the "Limitation on Indebtedness," "Limitation on Liens" and
"Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenants,
(c) increasing the amount of Indebtedness Incurred thereunder or available to
be borrowed thereunder, provided such increase is permitted to be Incurred
under the "Limitation on Indebtedness" covenant, or (d) otherwise altering the
terms and conditions thereof in a manner not prohibited by the "Limitation on
Indebtedness," "Limitation on Liens," "Limitation on Issuance of Guarantees by
Restricted Subsidiaries" and "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenants. Notwithstanding the
foregoing, with respect to any agreement providing for the refinancing,
refunding or replacement of Indebtedness under the Credit Facility, such
agreement shall be the Credit Facility under the Indenture only if a notice to
that effect is delivered by the Issuer to the Trustee and there shall be at any
time only one instrument that is (together with the related agreements,
instruments and documents) the Credit Facility under the Indenture.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Escrow Agreement" means the Escrow and Security Agreement made and
entered into as of the Closing Date by and among the Issuer, Genesis and the
Placement Agents in favor of the Trustee for the Holders of the Notes.
"Existing Stockholders" means Genesis, The Cypress Group L.L.C. and TPG
Partners II, L.P. and their Affiliates.
"Expiration Date" means October 31, 1997, subject to an extension of up to
one month at the Issuer's option.
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"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer under no compulsion to buy as determined in good faith by the Board of
Directors, whose determination shall be conclusive if evidenced by a Board
Resolution.
"Fixed Charge Coverage Ratio" of any Person means, for any period, the
ratio of (i) the sum of Consolidated EBITDA plus one-third of Consolidated
Rental Payments, in each case for such period, of the Issuer and its
Consolidated Subsidiaries, as determined in accordance with GAAP to (ii) the
sum of Consolidated Interest Expense and one-third of Consolidated Rental
Payments, in each case, for such period of the Issuer and its Consolidated
Subsidiaries; provided that in making such computation, the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a pro
forma basis and bearing a floating interest rate shall be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, as
in effect on the Closing Date.
"Genesis" means Genesis Health Ventures, Inc.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
Person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Indebtedness or to assure the holder of such Indebtedness against loss,
(iii) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring that
such property be received or such services be rendered), (iv) to maintain
working capital or equity capital of the debtor, or otherwise to maintain the
net worth, solvency or other financial condition of the debtor or (v) otherwise
to assure a creditor against loss; provided that the term "Guaranteed Debt"
shall not include endorsements for collection or deposit, in either case in the
ordinary course of business.
"Healthcare Related Business" means a business, the majority of whose
revenues result from healthcare, long-term care, or managed care related
businesses or facilities, including businesses which provide insurance relating
to the costs of healthcare, long-term care or managed care services.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money, (ii) all obligations for
the payment of money of such Person for the deferred purchase price of property
or services, excluding any trade payables and other accrued current liabilities
arising in the ordinary course of business, but including, without limitation,
all obligations, contingent or otherwise, of such Person in connection with any
letters of credit or acceptances issued under letter of credit facilities,
acceptance facilities or other similar facilities and in connection with any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (iii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iv)
all obligations under Interest Rate Contracts and Currency Agreements of such
Person, (v) all Capital Lease Obligations of such Person, (vi) all Indebtedness
of other Persons the payment of which is secured by a Lien, upon any property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness; provided that the amount of such Indebtedness
shall be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Guaranteed
Debt of such Person, (viii) all Redeemable Capital Stock valued at the greater
of its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends, and (ix) all Attributable Debt of such Person. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and,
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with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided (A) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with GAAP, (B) that money
borrowed and set aside at the time of the Incurrence of any Indebtedness in
order to prefund the payment of the interest on such Indebtedness shall not be
deemed to be "Indebtedness" and (C) that Indebtedness shall not include any
liability for federal, state, local or other taxes. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to
be determined in good faith by the Board of Directors.
"Interest Rate Contracts" means interest rate swap agreements, interest
rate cap agreements, interest rate collar agreements, interest rate insurance,
and other similar agreements or arrangements.
"Investment" means, with respect to any Person, directly or indirectly,
any advance, loan or other extension of credit (including, without limitation,
any guarantee or similar arrangement but excluding advances in the ordinary
course of business that are, in conformity with generally accepted accounting
principles, recorded as accounts receivable on the balance sheet of the Issuer
or a Restricted Subsidiary) or capital contribution to (by means of any
transfer of cash or other property (tangible or intangible) to others, or any
payment for property or services for the account or use of others or
otherwise), or any purchase, acquisition or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities (including, without
limitation, any interests in any partnership or joint venture) issued or owned
by any other Person and shall include (i) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary and (ii) the issuance or sale of
Capital Stock of a Restricted Subsidiary if immediately after giving effect
thereto such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and the Issuer or another Restricted Subsidiary would have an
Investment in such Restricted Subsidiary after giving effect to such issuance
or sale. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant, (i) "Investment" shall include
the fair market value of the assets (net of liabilities (other than liabilities
to the Issuer or any of its Restricted Subsidiaries)) of any Restricted
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Issuer or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) "Investment" shall
include the fair market value of the Capital Stock (or any other remaining
Investment), held by the Issuer or any of its Restricted Subsidiaries, of (or
in) any Person that has ceased to be a Restricted Subsidiary; provided that the
fair market value of the Investment in an Unrestricted Subsidiary or any other
Person that has ceased to be a Restricted Subsidiary shall not exceed the
aggregate amount of Investments previously made in such Person valued at the
time such Investments were made less the net reduction of such Investments.
"Issuer" means Genesis ElderCare Acquisition Corp. and, following the
Merger, Multicare until a successor replaces it pursuant to the provisions
described under "-- Merger, Sale of Assets, etc." and thereafter means the
successor.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired.
"Merger" means the merger of Genesis ElderCare Acquisition Corp. with and
into Multicare which shall be the surviving corporation in the merger.
"Merger Closing Date" means the date the Merger is consummated.
"Multicare" means The Multicare Companies, Inc.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof in the form of cash or Cash Equivalents including
payments in respect of deferred payment obligations when
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received in the form of, or stock or other assets when disposed for, cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Issuer or any Restricted Subsidiary) net of (i)
brokerage commissions and other reasonable fees and expenses (including fees
and expenses of counsel and investment bankers) related to such Asset Sale,
(ii) provisions for all taxes payable as a result of such Asset Sale, (iii)
payments made to retire Indebtedness where payment of such Indebtedness either
(A) is secured by the assets or properties sold or (B) is required to be paid
as a result of such Asset Sale, (iv) amounts required to be paid to any Person
(other than the Issuer or any Subsidiary of the Issuer) owning a beneficial
interest in the assets subject to the Asset Sale and (v) appropriate amounts to
be provided by the Issuer or any Restricted Subsidiary, as the case may be, as
a reserve, in accordance with GAAP, against any liabilities associated with
such Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the
case may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or Cash Equivalents,
including payments in respect of deferred payment obligations when received in
the form of, or stock or other assets when disposed for, cash or Cash
Equivalents (except to the extent such obligations are financed or sold with
recourse to the Issuer or any Restricted Subsidiary), net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
"Offer to Purchase" means an offer to purchase Notes by the Issuer from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business Day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to
accrue interest pursuant to its terms; (iv) that, unless the Issuer defaults in
the payment of the purchase price, any Note accepted for payment pursuant to
the Offer to Purchase shall cease to accrue interest on and after the Payment
Date; (v) that Holders electing to have a Note purchased pursuant to the Offer
to Purchase will be required to surrender the Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of the
Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Payment Date; (vi) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal
amount of $1,000 or integral multiples thereof. On the Payment Date, the Issuer
shall (i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Issuer.
The Paying Agent shall promptly mail to the Holders of Notes so accepted
payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; provided that each
Note purchased and each new Note issued shall be in a principal amount of
$1,000 or integral multiples thereof. The Issuer will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the paying agent for an Offer to Purchase. The Issuer
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Issuer is required to repurchase Notes
pursuant to an Offer to Purchase.
"Permitted Indebtedness" means:
(a) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed $625 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales"
covenant;
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(b) Indebtedness of Multicare in existence on the Merger Closing Date;
provided that upon consummation of the Merger not more than $40 million of
such Indebtedness shall remain outstanding;
(c) Indebtedness of the Issuer pursuant to the Notes;
(d) Indebtedness evidenced by letters of credit issued in the ordinary
course of business consistent with past practice to support the Issuer's or
any Subsidiary's insurance or self-insurance obligations (including to
secure workers' compensation and other similar insurance coverages) to the
extent such letters of credit are not drawn upon or, if drawn upon, to the
extent such drawing is reimbursed no later than the third Business Day
following a demand for reimbursement;
(e) Interest Rate Contracts and Currency Agreements to the extent that
the notional principal amount of such obligations under Interest Rate
Contracts does not exceed the amount of Indebtedness outstanding or
committed to be incurred on the date such Interest Rate Contracts are
entered into;
(f) Indebtedness owed (A) to the Issuer evidenced by an unsubordinated
promissory note or (B) to any Restricted Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any other subsequent transfer of any such
Indebtedness (except to the Issuer or a Restricted Subsidiary) shall be
deemed, in each case to be an Incurrence of such Indebtedness not permitted
by this clause (f);
(g) any guarantees of Indebtedness by a Restricted Subsidiary entered
into in accordance with the "Limitation on Issuance of Guarantees by
Restricted Subsidiaries" covenant;
(h) Indebtedness incurred by the Issuer or any Restricted Subsidiary,
and any renewals, extensions, substitutions, refundings, refinancings or
replacements thereof, in an amount not to exceed $20 million at any one
time outstanding to finance the acquisition or construction of any property
or assets or any business, including Acquired Indebtedness and Indebtedness
incurred within 90 days after such acquisition or construction, less any
amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant;
(i) Capital Lease Obligations, and any renewals, extensions,
substitutions, refundings, refinancings or replacements thereof, in an
amount not to exceed $10 million at any time outstanding, less any amount
of such Indebtedness permanently repaid as provided under the "Limitation
on Asset Sales" covenant;
(j) Indebtedness in addition to that described in clauses (a) through
(i) of this definition of "Permitted Indebtedness," in an aggregate
principal amount outstanding at any time not to exceed $20 million, less
any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant; and
(k) any renewals, extensions, substitutions, refundings, refinancings or
replacements of any Indebtedness (other than Indebtedness Incurred under
clause (a), (d), (e), (f), (g), (h), (i) or (j) of this definition of
"Permitted Indebtedness"), including any successive renewals, extensions,
substitutions, refundings, refinancings or replacements, so long as (i) any
such new Indebtedness shall be in a principal amount that does not exceed
the principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of the
date of determination) so refinanced, plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness being refinanced or the amount of any premium reasonably
determined by the Issuer as necessary to accomplish such refinancing
through means of a tender offer or privately negotiated transactions and,
in each case, actually paid, plus the amount of expenses of the Issuer
incurred in connection with such refinancing; (ii) in case the Notes are
refinanced in part or the Indebtedness to be refinanced is pari passu with
the Notes, such new Indebtedness is expressly made pari passu with, or
subordinate in right of payment to, the remaining Notes; (iii) in the case
of any refinancing of Subordinated Indebtedness, such new Indebtedness is
made subordinate in right of payment to the Notes at least to the same
extent as the Indebtedness being refinanced; and (iv) such new
Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be
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refinanced or refunded, and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; provided that in no event may Indebtedness of the
Issuer be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (k).
For purposes of determining any particular amount of Indebtedness under the
"Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the
Credit Facility on or prior to the Merger Closing Date shall be treated as
Incurred pursuant to clause (a) of this "Permitted Indebtedness" definition,
(2) Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and (3) any Liens granted pursuant to
the equal and ratable provisions referred to in the "Limitation on Liens"
covenant described below shall not be treated as Indebtedness. For purposes of
determining compliance with the "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in this "Permitted Indebtedness" definition
(other than Indebtedness referred to in clause (1) of the preceding sentence),
the Issuer, in its sole discretion, shall classify such item of Indebtedness
and only be required to include the amount and type of such Indebtedness in one
of such clauses.
"Permitted Investment" means (i) Investments in the Issuer or a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to the Issuer or a Restricted
Subsidiary; provided that such Person's primary businesses are Healthcare
Related Businesses; (ii) Temporary Cash Investments; (iii) payroll, travel and
similar advances to cover matters that are expected at the time of such
advances ultimately to be treated as expenses in accordance with GAAP; and (iv)
Investments in existence on the Closing Date (including Investments held by
Multicare and its Subsidiaries).
"Person" means any individual, corporation, limited or general
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Pharmacy Sale" means the sale of Multicare's pharmacy business to Genesis
or any of its Affiliates in connection with the Merger.
"Preferred Stock," as applied to any Person, means Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Qualified Capital Stock" of any Person means any Capital Stock of such
Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock of
any Person that by its terms or otherwise is (i) required to be redeemed prior
to the Stated Maturity of the Notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that any
Capital Stock that would not constitute Redeemable Capital Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change in control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change in
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change in Control"
covenants described above and such Capital Stock specifically provides that
such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Issuer's repurchase of such Notes as are required to be
repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of
Notes upon a Change in Control" covenants described above.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Closing Date among the Issuer and the Placement Agents.
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"Restricted Subsidiary" means any Subsidiary of the Issuer other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Issuer, accounted for more than 10% of the
consolidated revenues of the Issuer and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Issuer and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Issuer for such fiscal year.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
"Subordinated Indebtedness" means any Indebtedness of the Issuer
subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such
Person and one or more other Subsidiaries of such Person.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof and
guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit and money market deposit,
maturing not more than one year after the date of acquisition, issued by, or
time deposit of, a commercial banking institution that is a member of the
Federal Reserve System and that has combined capital and surplus and undivided
profits of not less than $500,000,000, whose debt has a rating, at the time as
of which any investment therein is made, of "P-1" (or higher) according to
Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or
higher) according to Standard & Poor's Ratings Services or any successor rating
agency or any money market fund sponsored by a registered broker dealer or
mutual fund distributor, (iii) commercial paper, maturing not more than one
year after the date of acquisition, issued by a corporation (other than an
Affiliate or Subsidiary of the Issuer) organized and existing under the laws of
the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's Investors
Service, Inc. or any successor rating agency, or "A-1" (or higher) according to
Standard & Poor's Ratings Services or any successor rating agency and (iv)
securities with maturities of six months or less from the date of acquisition
issued or fully and unconditionally guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Services or Moody's Investors Service, Inc.
"Tender Offer" means the offer to purchase all of the issued and
outstanding shares of Common Stock of Multicare made by Genesis ElderCare
Acquisition Corp.
"Therapy Sale" means the sale of Multicare's contract therapy business to
Genesis or any of its Affiliates in connection with the Merger.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Issuer that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Issuer) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Issuer or
any Restricted Subsidiary; provided that (A) any guarantee by the Issuer or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Issuer or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on
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Indebtedness" and "Limitation on Restricted Payments" covenants described
below. The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such time,
have been permitted to be Incurred (and shall be deemed to have been Incurred)
for all purposes of the Indenture. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America (x) the payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America or (y) that are
rated at least "Aaa" (or the then equivalent grade) by Moody's Investors
Service, Inc. or "AAA" (or the then equivalent grade) by Standard & Poor's
Ratings Services.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which is owned by the Issuer or another Wholly Owned
Restricted Subsidiary.
Trustee
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as
are specifically set forth in such Indenture. If an Event of Default has
occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise of the rights and powers vested in it under the Indenture
as a prudent person would exercise under the circumstances in the conduct of
such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Issuer, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
No Personal Liability of Incorporators, Stockholders, Officers, Directors or
Employees
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Issuer in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Issuer or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
Book-Entry; Delivery and Form
The Notes will be represented by a permanent global Note in definitive,
fully registered form without interest coupons (the "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, DTC.
Ownership of beneficial interests in a Global Note is limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. Ownership of beneficial interests in a Global Note is
shown on, and the transfer of that ownership will be effected only through,
records maintained
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by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). Qualified institutional buyers may hold their interests in a
Restricted Global Note directly through DTC if they are participants in such
system, or indirectly through organizations which are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Issuer, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC or its nominee. The Issuer also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Issuer expects that DTC will take any action permitted to be taken by
a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Notes, DTC will exchange the applicable Global
Note for Certificated Notes, which it will distribute to its participants and
which may be legended as set forth under the heading "-- Transfer
Restrictions."
The Issuer understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among its participants, DTC
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Issuer nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of its obligations under the rules and
procedures governing its operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Issuer
within 90 days, the Issuer will issue Certificated Notes, which may bear the
legend referred to under "-- Transfer Restrictions," in exchange for the Global
Notes. Holders of an interest in a Global Note may receive Certificated Notes,
which may bear the legend referred to under "-- Transfer Restrictions," in
accordance with the DTC's rules and procedures, in addition to those provided
for under the Indenture.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of the ownership of the Notes as of the date hereof. Except where
noted, it deals only with Notes held as capital assets and does not deal with
special situations, such as those of dealers in securities or currencies, tax
exempt organizations, individual retirement accounts and other tax deferred
accounts, financial institutions, life insurance companies, persons holding
Notes as a part of a hedging or conversion transaction or a straddle, persons
subject to the alternative minimum tax or holders of Notes whose "functional
currency" is not the U.S. dollar. Furthermore, the discussion below is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed below.
In addition, except as otherwise indicated, the following does not consider the
effect of any applicable foreign, state, local or other tax laws or estate or
gift tax considerations. Persons considering the purchase, ownership or
disposition of Notes should consult their own tax advisors concerning the
federal income tax consequences in light of their particular situations, as
well as any consequences arising under the laws of any other taxing
jurisdiction.
Stated Interest on Notes
Except as set forth below, interest on a Note will generally be taxable to
a United States Holder as ordinary income from domestic sources at the time it
is paid or accrued in accordance with the United States Holder's method of
accounting for tax purposes. As used herein, a "United States Holder" of a Note
means a holder that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source, or a trust if (i) a U.S. court is able to exercise primary
supervision over the administration of the trust and (ii) one or more U.S.
trustees or fiduciaries have the authority to control all substantial decisions
of the trust. A "Non-United States Holder" is a holder that is not a United
States Holder.
Failure of the Company to consummate the Exchange Offer or to file or
cause to be declared effective the Shelf Registration Statement as described
under "Description of the Notes -- Registration Rights" will cause additional
interest to accrue on the Notes in the manner described therein. According to
Treasury regulations, the possibility of a change in the interest rate will not
affect the amount of interest income recognized by a United States Holder (or
the timing of such recognition) if the likelihood of the change, as of the date
the Notes are issued, is remote. The Company believes that the likelihood of a
change in the interest rate on the Notes is remote and does not intend to treat
the possibility of a change in the interest rate as affecting the yield to
maturity of any Note. In the unlikely event that the interest rate on the Notes
is increased, then such increased interest may be treated as original issue
discount, includible by a United States Holder in income as such interest
accrues, in advance of receipt of any cash payment thereof. If, as anticipated,
the issue price of the Notes will equal their stated principal amount, and
because the likelihood of a change in the interest rate is remote, the Notes
will not be issued with original issue discount.
Market Discount
If a United States Holder purchases a Note for an amount that is less than
its principal amount, the amount of the difference will be treated as "market
discount" for U.S. federal income tax purposes, unless such difference is less
than a specified de minimis amount. Under the market discount rules, a United
States Holder will be required to treat any partial principal payment on, or
any gain on the sale, exchange, retirement or other disposition of, a Note as
ordinary income to the extent of the market discount which has not previously
been included in income and is treated as having accrued on such Note at the
time of such payment or disposition. In addition, the United States Holder may
be required to defer, until the maturity of the Note or its earlier disposition
in a taxable transaction, the deduction of all or a portion of the interest
expense on any indebtedness incurred or continued to purchase or carry such
Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the
United States Holder elects to accrue on a constant interest
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method. A United States Holder of a Note may elect to include market discount
in income currently as it accrues (on either a ratable or constant interest
method), in which case the rule described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently once made applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service (the "IRS").
Amortizable Bond Premium
A United States Holder that purchases a Note for an amount in excess of
the principal amount will be considered to have purchased the Note at a
"premium." A United States Holder generally may elect to amortize the premium
over the remaining term of the Note on a constant yield method. However, if the
Note is purchased at a time when the Note may be optionally redeemed for an
amount that is in excess of its principal amount, special rules would apply
that could result in a deferral of the amortization of bond premium until later
in the term of the Note. The amount amortized in any year will be treated as a
reduction of the United States Holder's interest income from the Note. Bond
premium on a Note held by a United States Holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
disposition of the Note. The election to amortize premium on a constant yield
method, once made, applies to all debt obligations held or subsequently
acquired by the electing United States Holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
Sale, Exchange and Retirement of Notes
Upon the sale, exchange, redemption, retirement or other disposition of a
Note, a United States Holder generally will recognize gain or loss equal to the
difference between the amount realized upon the sale, exchange, redemption,
retirement or other disposition and such holder's adjusted tax basis of the
Note. A United States Holder's adjusted tax basis in a Note will, in general,
be the United States Holder's cost therefor, increased by market discount
previously included in income by the United States Holder and reduced by any
amortized premium previously deducted from income by the United States Holder.
Except as described above with respect to market discount or except to the
extent the gain or loss is attributable to accrued but unpaid stated interest,
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange, redemption, retirement or other
disposition the Note has been held for more than one year. Under current law,
net long-term capital gains of individuals are, under certain circumstances,
taxed at lower rates than items of ordinary income. The deductibility of
capital losses is subject to limitations.
The exchange of a Note by a United States Holder for an Exchange Note
should not constitute a taxable exchange. A United States Holder will have the
same tax basis and holding period in the Exchange Note as it did in the Note.
Non-United States Holders
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no United States federal withholding tax will be imposed with respect
to the payment by the Company or paying agent of principal or interest on a
Note owned by a Non-United States Holder (the "Portfolio Interest Exception"),
provided (i) that such Non-United States Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of section
871(h)(3) of the Code and the regulations thereunder, (ii) such Non-United
States Holder is not a controlled foreign corporation that is related, directly
or indirectly, to the Company through stock ownership, (iii) such Non-United
States Holder is not a bank whose receipt of interest on a Note is described in
section 881(c)(3)(A) of the Code and (iv) such Non-United States Holder
satisfies the statement requirement (described generally below) set forth in
section 871(h) and section 881(c) of the Code and the regulations thereunder;
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(b) no United States federal withholding tax will be imposed generally
with respect to any gain or income realized by a Non-United States Holder upon
the sale, exchange, redemption, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of death is
a Non-United States Holder will not be subject to United States federal estate
tax as a result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the company entitled to vote within the
meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such Note would not have been, if received at the time
of such individual's death, effectively connected with the conduct of a United
States trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner
is not a United States Holder. Pursuant to current temporary Treasury
regulations, these requirements will be met if (1) the beneficial owner
provides his name and address, and certifies, under penalties of perjury, that
he is not a United States Holder (which certification may be made on an
Internal Revenue Service Form W-8 (or successor form)) or (2) a financial
institution holding the Note on behalf of the beneficial owner certifies, under
penalties of perjury, that such statement has been received by it and furnishes
a paying agent with a copy thereof. The IRS has proposed regulations that, if
finalized, would modify certain of the certification requirements described
above.
If a Non-United States Holder cannot satisfy the requirements of the
Portfolio Interest Exception described in (a) above, payments on a Note made to
such Non-United States Holder will be subject to a 30% withholding tax unless
the beneficial owner of the Note provides the Company or its paying agent, as
the case may be, with a properly executed (1) Internal Revenue Service Form
1001 (or successor form) claiming an exemption from withholding under the
benefit of a tax treaty or (2) Internal Revenue Service Form 4224 (or successor
form) stating that interest paid on the Note is not subject to withholding tax
because it is effectively connected with the beneficial owner's conduct of a
trade or business in the United States.
If a Non-United States Holder is engaged in a trade or business in the
United States and payment on a Note is effectively connected with the conduct
of such trade or business, the Non-United States Holder, although exempt from
United States federal withholding tax as discussed above, will be subject to
United States federal income tax on such payment on a net income basis in the
same manner as if it were a United States Holder. In addition, if such holder
is a foreign corporation, it may be subject to a branch profits tax equal to
30% of its effectively connected earnings and profits for the taxable year,
subject to adjustments. For this purpose, such payment on a Note will be
included in such foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with a trade
or business in the United States of the Non-United States Holder or (ii) in the
case of a Non-United States Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to payments on a
Note and to the proceeds of the sale of a Note made to United States Holders
other than certain exempt recipients (such as corporations). A 31% backup
withholding tax will apply to such payments if the United States Holder fails
to provide a taxpayer identification number or certification of foreign or
other exempt status or fails to report in full dividend and interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-United
States Holders if a statement described in (a)(iv) under
"-- Non-United States Holders" has been received and the payor does not have
actual knowledge that the beneficial owner is a United States person.
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In addition, backup withholding and information reporting will not apply
if payments on a Note are paid or collected by a foreign office of a custodian,
nominee or other foreign agent on behalf of the beneficial owner of such Note,
or if a foreign office of a broker (as defined in applicable Treasury
regulations) pays the proceeds of the sale of a Note to the owner thereof. If,
however, such nominee, custodian, agent or broker is, for United States federal
income tax purposes, a United States person, a controlled foreign corporation
or a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, such
payments will be subject to information reporting (but not backup withholding),
unless (1) such custodian, nominee, agent or broker has documentary evidence in
its records that the beneficial owner is not a United States person and certain
other conditions are met or (2) the beneficial owner otherwise establishes an
exemption. Temporary Treasury regulations provide that the Treasury is
considering whether backup withholding will apply with respect to payments of
principal, interest or the proceeds of a sale that are not subject to backup
withholding under the current regulations.
Payments on a Note paid to the beneficial owner of a Note by a United
States office of a custodian, nominee or agent, or the payment by the United
States office of a broker of the proceeds of sale of a Note, will be subject to
both backup withholding and information reporting unless the beneficial owner
provides the statement referred to in (a)(iv) above and the payor does not have
actual knowledge that the beneficial owner is a United States person or
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Notes will be
passed upon for the Company by Blank Rome Comisky & McCauley LLP, Philadelphia,
Pennsylvania.
EXPERTS
The consolidated financial statements and schedule of the Company and its
subsidiaries for the years ended December 31, 1996 and September 30, 1997, and
for each of the years in the two-year period ended December 31, 1996 and the
nine-month period ended September 30, 1997 have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and in the
registration statement, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
Multicare is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commissioner's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60621 and 75 Park Place, 14 Floor, New York, New York
10007. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission also maintains a World Wide Web site that
contains registration statements, reports, proxy and information statements and
other materials that are filed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System. This Web site can be accessed at
http://www.sec.gov.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 ............... F-3
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 .................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and
1996 and the nine month period ended September 30, 1996 (unaudited) and 1997 ........... F-5
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 .................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
Unaudited Consolidated Balance Sheets as of September 30, 1997 and December 31, 1997 ..... F-20
Unaudited Consolidated Statements of Operations for the three month period ended December
31, 1996 and 1997 ...................................................................... F-21
Unaudited Consolidated Statements of Cash Flows for the three month period ended December
31, 1996 and 1997 ...................................................................... F-22
Notes to Unaudited Consolidated Financial Statements ..................................... F-23
</TABLE>
F-1
<PAGE>
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
F-2
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 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 assets .......................... 14,586 21,808
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 amortization ..................... 46,187 62,496
--------- -------
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.
F-3
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended Nine month 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 out-
standing assuming full dilution ................... 26,513 33,172 32,748 36,832
========== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
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)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-In Retained Stockholders'
Shares Amount 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 tax benefit) ......... 19 -- 304 -- 304
Proceeds from issuance of put options ..................... -- -- 373 -- 373
Contingent stock purchase commitment ...................... -- -- (5,312) -- (5,312)
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 tax benefit) ......... 21 -- 277 -- 277
Debt conversion ........................................... 1,530 15 26,087 -- 26,102
Shares issued under stock purchase plan ................... 45 1 773 -- 774
Contingent stock purchase commitment and other ............ 1 -- 208 -- 208
Net income ................................................ -- -- -- 27,878 27,878
------ ----- --------- -------- ---------
Balances, September 30, 1997 .............................. 31,731 $ 317 $ 170,858 $ 91,999 $ 263,174
====== ===== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years ended Nine month 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 accounts ...................... 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 of period ............... $ 3,921 $ 1,150 $ 1,893 $ 2,118
========== ========== ========== =========
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.
F-6
<PAGE>
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.
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.
F-7
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(2) Summary of Significant Accounting Policies -- (Continued)
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 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.
F-8
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(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
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
F-9
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(3) Tender Offer and Merger and Acquisitions -- (Continued)
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.
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.
F-10
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(3) Tender Offer and Merger and Acquisitions -- (Continued)
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 31, September 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:
December 31, September 30,
1995 1996 1997
---------- ---------- --------------
Federal:
Current .......... $11,092 $13,554 $15,029
Deferred ......... (35) 1,275 133
State:
Current .......... 2,876 2,695 1,908
Deferred ......... (135) 46 17
------- ------- -------
$13,798 $17,570 $17,087
======= ======= =======
The difference between the Company's effective tax rate and the Federal
statutory tax rate of 35% is primarily attributable to state taxes.
The tax effects of temporary differences giving rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable ................................ $ 1,642 $ 1,311
Employee benefits and compensated absences ......... 2,191 1,495
------- -------
$ 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.
F-11
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(5) Financing Obligations
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
<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%, convert-
ible 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, respec-
tively, 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%
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
F-12
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(5) Financing Obligations -- (Continued)
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.
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.
F-13
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(5) Financing Obligations -- (Continued)
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. (5) Financing Obligations,
Continued.
The aggregate maturities of long-term debt for the five years ending
September 30, 2002 and thereafter as adjusted for the borrowings and
repayments in connection with the Merger are as follows:
1998 ............... $ 20,220
1999 ............... 30,647
2000 ............... 34,699
2001 ............... 38,743
2002 ............... 42,811
--------
Thereafter ......... 601,824
--------
768,944
Discount ........... (1,345)
Premium ............ 3,808
--------
$771,407
========
Interest expense of $1,605, $2,773 and $1,816 was capitalized in the
years ended December 31, 1995 and 1996 and the nine month period ended
September 30, 1997, respectively, in connection with new construction and
facility renovations and expansions.
Cash paid for interest was $17,704, $25,762 and $22,817 in the years
ended December 31, 1995 and 1996 and the nine month period ended September 30,
1997, respectively.
F-14
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(6) Accrued Liabilities
At December 31, 1996 and September 30, 1997 accrued liabilities consist
of the following:
1996 1997
---------- ----------
Salaries and wages .............. $19,469 $26,291
Deposits from patients .......... 3,386 3,106
Interest ........................ 4,742 3,705
Insurance ....................... 7,079 10,456
Other ........................... 20,031 21,386
------- -------
$54,707 $64,944
======= =======
(7) Commitments and Contingencies
The Company has operating leases on certain of its facilities and
offices. Three of such leases are with entities that are owned wholly or in
part by certain stockholders of the Company. Minimum rental commitments under
all noncancelable leases at September 30, 1997 as adjusted for refinancing its
lease facility in connection with the Merger are as follows:
1998 ............... $ 13,505
1999 ............... 13,233
2000 ............... 12,827
2001 ............... 12,758
2002 ............... 12,688
Thereafter ......... 60,966
--------
$125,977
========
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).
F-15
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(7) Commitments and Contingencies -- (Continued)
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
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,
F-16
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(8) Capital Stock and Stock Plans -- (Continued)
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 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:
December 31, September 30,
1995 and 1996 1997
--------------- --------------
Dividend yield .................. 0% 0%
Expected volatility ............. 38.4% 36.8%
Risk-free interest rate ......... 6.5% 5.5%
Expected life ................... 9.9 years 9.8 years
F-17
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(8) Capital Stock and Stock Plans -- (Continued)
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>
Weighted Weighted Weighted
Avg. Avg. Avg.
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ------------- ------------- ---------- ------------- ---------
<S> <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>
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.
F-18
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
Years Ended December 31, 1995 and 1996
and the nine month period ended September 30, 1997
(In thousands, except share and per share data)
(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.
F-19
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
--------------- -------------
(Predecessor
Company)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................................................... $ 2,118 1,564
Accounts receivable, net ...................................................... 119,522 129,472
Prepaid expenses and other current assets ..................................... 21,808 19,536
Deferred taxes ................................................................ 2,806 22,464
-------- -------
Total current assets .......................................................... 146,254 173,036
-------- -------
Property, plant and equipment, net ............................................ 460,800 717,685
Goodwill, net ................................................................. 171,324 768,026
Other assets .................................................................. 44,755 63,101
-------- -------
$823,133 1,721,848
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .............................................................. $ 28,863 31,202
Accrued liabilities ........................................................... 64,944 82,890
Current portion of long-term debt ............................................. 625 20,220
-------- ---------
Total current liabilities ..................................................... 94,432 134,312
-------- ---------
Long-term debt ................................................................ 423,421 751,187
Deferred taxes ................................................................ 42,106 85,756
Other ......................................................................... -- 4,235
Stockholders' equity:
Preferred stock, par value $.01, at September 30, 1997, 7,000,000 shares autho-
rized, none issued .......................................................... -- --
Common stock, par value $.01, 70,000,000 and 100 shares authorized at Sep-
tember 30, 1997 and December 31, 1997, respectively; 31,731,963 and 100
issued and outstanding at September 30, 1997 and December 31, 1997,
respectively ................................................................ 317 --
Additional paid-in-capital .................................................... 170,858 745,000
Retained earnings ............................................................. 91,999 1,358
-------- ---------
Total stockholders' equity .................................................... 263,174 746,358
-------- ---------
$823,133 1,721,848
======== =========
</TABLE>
See accompanying notes to consolidated financia statements.
F-20
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
--------------------------
1996 1997
------------- ----------
(Predecessor
Company)
<S> <C> <C>
Net revenues ............................................................ $145,340 185,778
Expenses:
Operating expense ...................................................... 109,403 141,343
Corporate, general and administrative expense .......................... 6,781 --
Management fee ......................................................... -- 11,645
Depreciation and amortization expense .................................. 6,296 11,784
Lease expense .......................................................... 3,236 3,443
Interest expense, net .................................................. 6,217 14,718
-------- -------
Total expenses ......................................................... 131,933 182,933
Earnings before income taxes and extraordinary item .................... 13,407 2,845
Income taxes ........................................................... 5,065 1,487
-------- -------
Earnings before extraordinary item ..................................... 8,342 1,358
Extraordinary item - loss on extinguishment of debt, net of tax benefit 1,346 --
-------- -------
Net income ............................................................. $ 6,996 1,358
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------------
1996 1997
------------- ------------
(Predecessor
Company)
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities .................................... $ 31,165 12,423
Cash flows from investing activities:
Assets and operations acquired ............................................... (70,127) --
Capital expenditures ......................................................... (14,925) (11,391)
Other assets ................................................................. (2,559) (11,981)
---------- -------
Net cash used in investing activities ........................................ (87,611) (23,372)
Cash flows from financing actiities:
Proceeds from issuance of common stock ....................................... 51,942 --
Proceeds from exercise of stock options and stock purchase plan .............. 276 --
Equity contribution .......................................................... -- 745,000
Proceeds from sale of therapy business ....................................... -- 24,000
Purchase of shares in tender offer ........................................... -- (921,326)
Proceeds from long-term debt ................................................. 344,781 1,608,675
Payments of long-term debt ................................................... (340,408) (333,155)
Debt and other financing obligation repayments in connection with merger ..... -- (988,012)
Severance, option payouts and transaction fees in connection with merger ..... -- (103,205)
Debt issuance costs in connection with merger ................................ (888) (21,582)
---------- ---------
Net cash provided by financing activities .................................... 55,703 10,395
---------- ---------
Decrease in cash and cash equivalents ........................................ (743) (554)
Cash and cash equivalents at beginning of period ............................. 1,893 2,118
---------- ---------
Cash and cash equivalents at end of period ................................... $ 1,150 1,564
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
(Unaudited)
(In thousands, except share and per share data)
(1) Organization and Basis of Presentation
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, and other ancillary healthcare businesses.
The financial information as of December 31, 1997 and for the three
months ended December 31, 1996 and 1997, is unaudited and has been prepared in
conformity with the accounting principles and practices as reflected in the
Company's audited annual financial statements. The unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of December
31, 1997 and the operating results and cash flows for the three months ended
December 31, 1996 and 1997. Results for interim periods are not necessarily
indicative of those to be expected for the year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto incorporated in the Company's Annual
Report on Form 10-K for the nine month transition period ended September 30,
1997.
All purchase accounting entries have been pushed down from Genesis
ElderCare Corp. and recorded on the consolidated financial statements of
Multicare.
(2) Tender Offer and Merger and Recent Acquisitions
On October 9, 1997 Genesis ElderCare Acquisition Corp. ("Acquisition
Corp."), a wholly-owned subsidiary of Genesis ElderCare Corp., a Delaware
corporation formed by Genesis Health Ventures, Inc. ("Genesis"), The Cypress
Group L.L.C (together with its affiliates, "Cypress"), TPG Partners II, L.P.,
(together with its affiliates, "TPG") and Nazem, Inc. (together with its
affiliates "Nazem"), acquired 99.65% of the shares of common stock of
Multicare, pursuant to a tender offer commenced on June 20, 1997 (the "Tender
Offer"). On October 10, 1997, Genesis ElderCare Corp. completed the merger
(the "Merger") of Acquisition Corp. with and into Multicare in accordance with
the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 16,
1997 by and among Genesis ElderCare Corp., Acquisition Corp., Genesis and
Multicare. Upon consummation of the Merger, Multicare became a wholly-owned
subsidiary of Genesis ElderCare Corp.
In connection with the Merger, Multicare and Genesis entered into a
management agreement (the "Management Agreement") pursuant to which Genesis
manages Multicare's operations. The Management Agreement has a term of five
years with automatic renewals for two years unless either party terminates the
Management Agreement.
F-23
<PAGE>
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 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 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,
F-24
<PAGE>
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.
The following 1996 pro forma financial information has been prepared as
if the A.D.S acquisition, the Merger and the Pharmacy Sale had been
consummated on October 1, 1996. The following 1997 pro forma financial
information has been prepared as if the Pharmacy Sale had been completed on
October 1, 1997. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the
transactions occurred at the beginning of the respective periods presented and
is based upon preliminary allocations of the purchase prices to property,
plant and equipment and goodwill that are subject to change.
For the three months ended
December 31,
-------------------------
1996 1997
----------- -----------
Net revenues ............................... $147,305 $168,734
Earnings before extraordinary item ......... (7,387) 561
Net income ................................. $ (8,733) $ 268
(3) Commitments and Contingencies
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
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.
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.
F-25
<PAGE>
(4) Subsequent Events
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.
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).
F-26
<PAGE>
===============================================================================
No dealer, salesperson or other individual has been authorized to give
any information or make any representations other than those contained or
incorporated by reference in this Prospectus in connection with the offer made
by this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the Exchange Notes in any jurisdiction where, or to any person to
whom, it is unlawful to make such offer or solicitation. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has not been any change in the facts set
forth in this Prospectus or in the affairs of the Company since the date
hereof.
--------------------------------------------
TABLE OF CONTENTS
Page
---------
Summary ............................................. 3
Risk Factors ........................................ 14
Use of Proceeds ..................................... 21
Capitalization ...................................... 22
Exchange Offer ...................................... 23
Pro Forma Condensed Consolidated Financial
Information ...................................... 31
Selected Consolidated Financial Data ................ 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 38
Business ............................................ 46
Management .......................................... 54
Description of the Notes ............................ 58
Certain United States Federal Tax
Considerations.................................... 83
Legal Matters ....................................... 86
Experts ............................................. 86
Available Information ............................... 86
Index to Consolidated Financial Statements .......... F-1
===============================================================================
<PAGE>
===============================================================================
$250,000,000
The Multicare
Companies, Inc.
Offer to Exchange its
9% Senior Subordinated Notes due 2007,
which have been registered under the
Securities Act of 1933, as amended, for any
and all of its outstanding 9% Senior
Subordinated Notes due 2007
--------------
PROSPECTUS
--------------
March 2, 1998
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation in such capacity at another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe that such person's conduct was unlawful.
Section 145 of DGCL also provides that a corporation may indemnify any
person who was or is a party or threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such
person acted under similar standards, except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 145 of the DGCL also provides that to the extent that a director,
officer, employee or agent of a corporation is successful on the merits or
otherwise in the defense of any action referred to above, or in defense of any
claim, issue or matter therein, the corporation must indemnify such person
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection therewith.
In accordance with Section 145 of the DGCL, the Registrant's By-laws
provide that the Registrant will indemnify, to the maximum extent permitted by
applicable law, any person who was or is a party, or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, including, without
limitation, any action by or in the right of the Registrant to procure a
judgment in its favor, by reason of the fact that such person, or a person of
whom such person is the legal representative, is or was a director or officer
of the Registrant or is or was serving in any capacity at the request of the
Registrant for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against judgments, fines,
penalties, exercise taxes, amounts paid in settlement and costs, charges and
expenses (including attorneys' fees and disbursements).
The Registrant's By-laws also provide that expenses (including attorneys'
fees and disbursements) incurred by an officer or director in defending an
action, suit or proceeding will be paid by the Registrant in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person seeking indemnification to repay
such amount in the event that it shall be ultimately determined by final
judicial decision from which there is no further right of appeal that such
person is not entitled to be indemnified by the Registrant for such expenses.
Section 102(B)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of a corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (regarding certain
II-1
<PAGE>
illegal distributions) or (iv) for any transaction from which the director
derived an improper personal benefit. The Registrant's Certificate of
Incorporation provides that the personal liability of the Registrant's
directors to the Registrant or any of its stockholders for monetary damages
for breach of fiduciary duty by such director as a director is limited to the
fullest extent permitted by Delaware law.
The Registrant also maintains directors' and officers' liability
insurance covering certain liabilities that may be incurred by directors and
officers of the Registrant in the performance of their duties.
Item 21.
A. Financial Statement Schedules.
Report of Independent Auditors
Valuation and Qualifying Accounts
B. Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- -------------- -----------
<S> <C>
2.1* 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.
4.1 Form of 9% Senior Subordinated Note due 2007
4.2* Indenture, dated August 11, 1997 by and among Genesis
ElderCare Acquisition Corp., PNC Bank, National Association,
as trustee, and Banque Internationale a Luxembourg, S.A., as
paying agent.
5* Opinion of Blank Rome Comisky & McCauley LLP. 23.1 Consent of KPMG
Peat Marwick LLP .
23.2* Consent of Blank Rome Comisky & McCauley LLP included in the opinion filed as Exhibit 5
hereto).
24* Power of Attorney (included on page II-5). 25* Statement of
Eligibility of Trustee on Form T-1.
</TABLE>
- ------------
* Previously filed.
Item 22. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
II-2
<PAGE>
represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement:
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally promptly means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kennett Square,
Commonwealth of Pennsylvania, on February 26, 1998.
THE MULTICARE COMPANIES, INC.
/s/ George V. Hager, Jr.
By: -------------------------
George V. Hager, Jr.
Senior Vice President, Chief Financial
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman, Chief Executive Officer and February 26, 1998
----------------------- Director
Michael R. Walker
* Director February 26, 1998
-----------------------
Jonathan J. Coslet
* Vice President, Assistant Secretary and February 26, 1998
----------------------- Director
James G. Coulter
/s/ George V. Hager, Jr. Senior Vice President, Chief Financial February 26, 1998
----------------------- Officer and Director
George V. Hager, Jr.
*
----------------------- Director February 26, 1998
Richard R. Howard
*
----------------------- Vice President, Controller and Assistant February 26, 1998
James V. McKeon Secretary
*
----------------------- Director February 26, 1998
Karl I. Peterson
*
----------------------- Vice President, Assistant Secretary and February 26, 1998
James L. Singleton Director
*
----------------------- Director February 26, 1998
William L. Spiegel
*
----------------------- Director February 26, 1998
James A. Stern
*By: /s/ George V. Hager, Jr.
----------------------------
Attorney in Fact
</TABLE>
II-4
<PAGE>
SCHEDULE INDEX
Report of Independent Auditors ....................................... II-6
Valuation and Qualifying Accounts .................................... II-7
II-5
<PAGE>
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 ended December 31, 1995
and 1996 and the nine month period ended September 30, 1997, which are included
in the prospectus. 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 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
II-6
<PAGE>
SCHEDULE II
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1995, and 1996
and the nine month period ended September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance
beginning of costs and other at end
period expenses accounts(1) Deductions(2) of period
Classifications -------------- ------------ ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Nine month period 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.
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- -------- ----------- ----
<S> <C> <C>
2.1* 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.
4.1 Form of 9% Senior Subordinated Note due 2007
4.2* Indenture, dated August 11, 1997 by and among Genesis ElderCare Acquisition Corp.,
PNC Bank, National Association, as trustee, and Banque Internationale a Luxembourg, S.A.,
as paying agent.
5* Opinion of Blank Rome Comisky & McCauley LLP.
23.1 Consent of KPMG Peat Marwick LLP.
23.2* Consent of Blank Rome Comisky & McCauley LLP included in the opinion
filed as Exhibit 5 hereto).
24* Power of Attorney (included on page II-5).
25* Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- ------------
* Previously Filed.
II-8
<PAGE>
[FACE OF NOTE]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN
PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF
THE INDENTURE.
THE MULTICARE COMPANIES, INC.
9% Senior Subordinated Note due 2007
[CUSIP] [CINS] [__________]
No. $_________
THE MULTICARE COMPANIES, INC., a Delaware corporation (the "Issuer",
which term includes any successor under the Indenture hereinafter referred to),
for value received, promises to pay to _____________, or its registered assigns,
the principal sum of ____________ ($___ ) on August 1, 2007.
Interest Payment Dates: February 1 and August 1, commencing August 1,
1998.
Regular Record Dates: January 15 and July 15.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
Date: THE MULTICARE COMPANIES, INC.
By: ___________________________________
Name:
Title:
2
<PAGE>
(Trustee's Certificate of Authentication)
This is one of the 9% Senior Subordinated Notes due 2007 described in the
within-mentioned Indenture.
PNC BANK, NATIONAL ASSOCIATION
as Trustee
By: ___________________________________
Authorized Signatory
3
<PAGE>
[REVERSE SIDE OF NOTE]
THE MULTICARE COMPANIES, INC.
9% Senior Subordinated Note due 2007
1. Principal and Interest.
The Issuer will pay the principal of this Note on August 1, 2007.
The Issuer promises to pay interest on the principal amount of this
Note on each Interest Payment Date, as set forth below, at the rate per annum
shown above.
Interest will be payable semiannually (to the holders of record of the
Notes at the close of business on the January 15 or July 15 immediately
preceding the Interest Payment Date) on each Interest Payment Date, commencing
August 1, 1998.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from August 11, 1997;
provided that, if there is no existing default in the payment of interest and
this Note is authenticated between a Regular Record Date referred to on the face
hereof and the next succeeding Interest Payment Date, interest shall accrue from
such Interest Payment Date. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
The Issuer shall pay interest on overdue principal and premium, if any,
and interest on overdue installments of interest, to the extent lawful, at a
rate per annum that is 2% in excess of the rate otherwise payable.
2. Method of Payment.
The Issuer will pay interest (except defaulted interest) on the
principal amount of the Notes as provided above on each February 1 and August 1
commencing August 1, 1998 to the persons who are Holders (as reflected in the
Security Register at the close of business on the January 15 or July 15
immediately preceding the Interest Payment Date), in each case, even if the Note
is cancelled on registration of transfer or registration of exchange after such
record date; provided that, with respect to the payment of principal, the Issuer
will make payment to the Holder that surrenders this Note to a Paying Agent on
or after August 1, 2007.
The Issuer will pay principal, premium, if any, and as provided above,
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Issuer may pay
principal, premium, if any, and interest by its check payable in such money. It
may mail an interest check to a Holder's registered address (as reflected in the
4
<PAGE>
Security Register). If a payment date is a date other than a Business Day at a
place of payment, payment may be made at that place on the next succeeding day
that is a Business Day and no interest shall accrue for the intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent, Paying Agent
and Registrar. The Issuer may change any authenticating agent, Paying Agent or
Registrar without notice. The Issuer, any Subsidiary or any Affiliate of any of
them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Issuer issued the Notes under an Indenture dated as of August 11,
1997 (the "Indenture"), between the Issuer, PNC Bank, National Association,
trustee (the "Trustee") and Banque Internationale a Luxembourg S.A., a paying
agent. Capitalized terms herein are used as defined in the Indenture unless
otherwise indicated. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act. The Notes are subject to all such terms, and Holders are referred
to the Indenture and the Trust Indenture Act for a statement of all such terms.
To the extent permitted by applicable law, in the event of any inconsistency
between the terms of this Note and the terms of the Indenture, the terms of the
Indenture shall control.
The Notes are general obligations of the Issuer.
5. Optional Redemption.
The Notes will be redeemable, at the Issuer's option, in whole or in
part, at any time or from time to time, on or after August 1, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's last address, as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
that is prior to the Redemption Date to receive interest due on an Interest
Payment Date), if redeemed during the 12-month period commencing August 1 of the
years set forth below:
Redemption
Year Price
---- ----------
2002............................... 104.500%
2003............................... 102.250
2004 and thereafter................ 100.000
Notes in original denominations larger than $1,000 may be redeemed in
part. On and
5
<PAGE>
after the Redemption Date, interest ceases to accrue on Notes or portions of
Notes called for redemption, unless the Issuer defaults in the payment of the
Redemption Price.
6. Repurchase upon Change of Control.
Upon the occurrence of any Change of Control, each Holder shall have
the right to require the repurchase of its Notes by the Issuer in cash pursuant
to the offer described in the Indenture at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (the "Payment Date").
A notice of such Change of Control will be mailed within 30 days after
any Change of Control occurs to each Holder at its last address as it appears in
the Security Register. Notes in original denominations larger than $1,000 may be
sold to the Issuer in part. On and after the Payment Date, interest ceases to
accrue on Notes or portions of Notes surrendered for purchase by the Issuer,
unless the Issuer defaults in the payment of the purchase price.
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in denominations of
$1,000 of principal amount and multiples of $1,000 in excess thereof. A Holder
may register the transfer or exchange of Notes in accordance with the Indenture.
The Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not register the transfer
or exchange of any Notes selected for redemption. Also, it need not register the
transfer or exchange of any Notes for a period of 15 days before the day of
mailing of a notice of redemption of Notes selected for redemption.
8. Persons Deemed Owners.
A Holder shall be treated as the owner of a Note for all purposes.
9. Unclaimed Money.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Issuer at its request. After that, Holders entitled to the
money must look to the Issuer for payment, unless an abandoned property law
designates another Person, and all liability of the Trustee and such Paying
Agent with respect to such money shall cease.
6
<PAGE>
10. Discharge Prior to Redemption or Maturity.
If the Issuer deposits with the Trustee money or U.S. Government
Obligations sufficient to pay the then outstanding principal of, premium, if
any, and accrued interest on the Notes (a) to redemption or maturity, the Issuer
will be discharged from the Indenture and the Notes, except in certain
circumstances for certain sections thereof, and (b) to the Stated Maturity, the
Issuer will be discharged from certain covenants set forth in the Indenture.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture or the Notes may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the Notes then outstanding, and any existing default or
compliance with any provision may be waived with the consent of the Holders of
at least a majority in principal amount of the Notes then outstanding. Without
notice to or the consent of any Holder, the parties thereto may amend or
supplement the Indenture or the Notes to, among other things, cure any
ambiguity, defect or inconsistency and make any change that does not materially
and adversely affect the rights of any Holder.
12. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of the Issuer
and its Restricted Subsidiaries, among other things, to Incur additional
Indebtedness, make Restricted Payments, use the proceeds from Asset Sales,
engage in transactions with Affiliates or merge, consolidate or transfer
substantially all of its assets. Within 45 days after the end of each fiscal
quarter (90 days after the end of the last fiscal quarter of each year), the
Issuer must report to the Trustee on compliance with such limitations.
13. Subordination.
The payment of the Notes will, to the extent set forth in the
Indenture, be subordinated in right of payment to the prior payment in full, in
cash or Cash Equivalents, of all Senior Indebtedness.
14. Successor Persons.
When a successor person or other entity assumes all the obligations of
its predecessor under the Notes and the Indenture, the predecessor person will
be released from those obligations.
15. Defaults and Remedies.
The following events constitute "Events of Default" under the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise, whether or not such payment is
7
<PAGE>
prohibited by the subordination provisions set forth in Article Eleven; (b)
default in the payment of interest on any Note when the same becomes due and
payable, and such default continues for a period of 30 days, whether or not such
payment is prohibited by the subordination provisions set forth in Article
Eleven; (c) default in the performance or breach of Article Five or Section
3.01(b) of the Indenture or the failure to make or consummate an Offer to
Purchase in accordance with Section 4.10 or 4.11 of the Indenture; (d) default
in the performance of or breach of any covenant or agreement of the Issuer in
the Indenture or under the Notes (other than a default specified in clause (a),
(b) or (c) above), and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of at least
25% in aggregate principal amount of the Notes then outstanding; (e) there
occurs with respect to any issue or issues of Indebtedness of the Issuer or any
Significant Subsidiary having an outstanding principal amount of $10 million or
more in the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $10 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Issuer or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $10 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Issuer or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Issuer or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Issuer or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Issuer or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Issuer or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Guaranty Documents are not
executed and delivered within three Business Days after the consummation of the
Tender Offer (unless prior to or at the end of such three Business Days the
Merger shall have been consummated).
8
<PAGE>
If an Event of Default, as defined in the Indenture, occurs and is
continuing, the Trustee may, and at the direction of the Holders of at least 25%
in aggregate principal amount of the Notes then outstanding shall, declare all
the Notes to be due and payable. If a bankruptcy or insolvency default with
respect to the Issuer occurs and is continuing, the Notes automatically become
due and payable. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to it
before it enforces the Indenture or the Notes. Subject to certain limitations,
Holders of at least a majority in principal amount of the Notes then outstanding
may direct the Trustee in its exercise of any trust or power.
16. Trustee Dealings with Issuer.
The Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from and perform services for the
Issuer or its Affiliates and may otherwise deal with the Issuer or its
Affiliates as if it were not the Trustee.
17. No Recourse Against Others.
No incorporator or any past, present or future partner, stockholder,
other equity holder, officer, director, employee or controlling person as such,
of the Issuer or of any successor Person shall have any liability for any
obligations of the Issuer under the Escrow Agreement, the Notes or the Indenture
or for any claim based on, in respect of or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
18. Authentication.
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
19. Abbreviations.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Issuer will furnish a copy of the Indenture to any Holder upon
written request and without charge. Requests may be made to The Multicare
Companies, Inc., 148 West State Street, Kennett Square, Pennsylvania 19348;
Attention: George V. Hager, Jr.
9
<PAGE>
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
________________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
________________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing __________________________________________________ attorney to
transfer said Note on the books of the Issuer with full power of substitution
in the premises.
10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Issuer pursuant to
Section 4.10 or 4.11 of the Indenture, check the Box: |_|
If you wish to have a portion of this Note purchased by the Issuer
pursuant to Section 4.10 or 4.11 of the Indenture, state the amount:
$___________________.
Date:
Your Signature:
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: ________________________________
11
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
The Multicare Companies, Inc.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 2, 1998
