UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1997
________________________Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File No. 34-22090
THE MULTICARE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3152527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
433 Hackensack Avenue
Hackensack, New Jersey 07601
Address of principal executive offices Zip Code
Registrant's telephone number, including area code (201) 488-8818
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 13, 1998
Common Stock ($.01 Par Value) 100
THE MULTICARE COMPANIES, INC.
Index
Page
Cautionary statement regarding forward looking statements 1
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1997 and December 31, 1997 2
Consolidated Statements of Operations
Three months ended December 31, 1996 and 1997 3
Consolidated Statements of Cash Flows
Three months ended December 31, 1996 and 1997 4
Notes to Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Part II. Other Information 15
Signatures 16
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
such as statements concerning the Medicaid and Medicare program and the
Company's ability to meet its liquidity needs and control costs and expected
future capital expenditure requirements and other statements contained herein
regarding matters that are not historical facts are forward looking
statements within the meaning of the Securities Act of 1933. 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 and in the Company's
other periodic reports filed with the Securities and Exchange Commission,
including the following: the occurrence of changes in the mix of payment
sources utilized by the Company's customers to pay for the Company's
services; the adoption of cost containment measures by private pay sources
such as commercial insurers and managed care organizations, as well as
efforts by governmental reimbursement sources to impose cost containment
measures; changes in the United States healthcare system, including changes
in reimbursement levels under Medicaid and Medicare, 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, thereby avoiding
a number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and, in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees; 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 including, without limitation, increased competition
from acute care hospitals, providers of assisted and independent living and
providers of home health care and changes in the regulatory system, such as
changes in certificate of need laws in the states in which the Company
operates or anticipates operating in the future that facilitate such
competition; the continued availability of insurance for the inherent risks
of liability in the healthcare industry; the Company's reputation for
delivering high-quality care and its ability to attract and retain patients;
and the Company's ability to secure capital and the related cost of such
capital.
1
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
September December
30, 31,
1997 1997
(Predecessor
Company)
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 --- ---
authorized, none issued
Common stock, par value $.01, 70,000,000
and 100 shares authorized at September 30,
1997 and December 31, 1997, respectively;
31,731,963 and 100 issued and outstanding 317 ---
at September 30, 1997 and December 31,
1997, respectively
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
See accompanying notes to consolidated financial statements.
2
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands)
Three months ended
December 31,
1996 1997
(Predecessor
Company)
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
See accompanying notes to consolidated financial statements.
3
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three months
ended
December 31,
(Predecessor
Company)
1996 1997
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 activities:
Proceeds from issuance of common stock 51,942 ---
Proceeds from exercise of stock options and 276 ---
stock purchase plan
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
See accompanying notes to consolidated financial
statements.
<PAGE) 4
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.
5
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.
6
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.
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 December
31, 31,
1996 1997
Net revenues $ 147,305 $ 168,734
Earnings before extraordinary (7,387) 561
item
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
7
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.
(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.
8
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).
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company has experienced significant growth, primarily through
acquisitions of long-term care facilities and ancillary businesses and
increased utilization of specialty medical services. It has been the
Company's strategy to expand through construction and development of new
facilities and selective acquisitions with geographically concentrated
operations. In December 1996, the Company acquired The A.D.S Group, which
owns, operates or manages over 50 long-term care and assisted-living
facilities with over 4,200 licensed beds, principally in Massachusetts.
The Tender Offer and Merger
On June 16, 1997, Multicare entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Genesis ElderCare Corp. (the "Parent"), and Genesis
ElderCare Acquisition Corp., a wholly owned subsidiary of Parent (the
"Acquisition Corp.") pursuant to which Acquisition Corp. offered to acquire
all outstanding shares of common stock (the "Shares"), of Multicare at a
purchase price of $28.00 per Share, net to the seller in cash (the "Tender
Offer"). The Tender Offer expired on Wednesday, October 8, 1997 and
Acquisition Corp. accepted for purchase the 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 Health Ventures,
Inc., a Pennsylvania corporation ("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") 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.
On August 11, 1997, Acquisition Corp. sold to Morgan Stanley & Co.
Incorporated, Montgomery Securities, L.P. and First Union Capital Markets
Corp. (collectively, the "Placement Agents") $250 million principal amount of
its 9% Senior Subordinated Notes due 2007 (the "9% Notes") which were issued
pursuant to an Indenture, dated as of August 7, 1997 (the "Indenture") by and
between Acquisition Corp., as issuer, and PNC Bank, National Association, as
trustee. The 9% Notes bear interest at 9% per annum from August 11, 1997,
payable semiannually on February 1 and August 1 of each year, commencing on
February 1, 1998.
On October 9, 1997, Multicare, Genesis and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a
management agreement (the "Management Agreement") pursuant to which Genesis
manages Multicare's operations. The Management Agreement has a term of five
years with automatic renewals for two years unless either party terminates
the Management Agreement. Genesis will be paid a fee of six percent of
Multicare's net revenues for its services under the Management Agreement
provided that payment of such fee in respect of any month in excess of the
greater of (i) $1.9 million and (ii) four percent of Multicare's consolidated
net revenues for such month, shall be subordinate to the satisfaction of
Multicare's senior and subordinate debt covenants; and provided, further,
that payment of such fee shall be no less than $23.9 million in any given
year. Under the Management Agreement, Genesis is responsible for Multicare's
non-extraordinary sales, general and administrative expenses (other than
certain specified third-party expenses), and all other expenses of Multicare
are paid by Multicare.
On October 10, 1997, Genesis entered into an asset purchase 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 million, subject to adjustment (the "Therapy Sale").
On October 10, 1997, Genesis entered into a stock purchase agreement with
Multicare and certain of its subsidiaries pursuant to which Genesis will
acquire all of the outstanding capital stock and limited partnership
interests of certain subsidiaries of Multicare that are engaged in the
business of providing institutional pharmacy services to third parties for
$50 million, subject to adjustment (the "Pharmacy Sale"). The Company
expects to complete the Pharmacy Sale in the first calendar quarter of 1998.
10
Results of Operations
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 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.
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.
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.
11
On June 16, 1997, Multicare entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Genesis ElderCare Corp. (the "Parent"), and Genesis
ElderCare Acquisition Corp., a wholly owned subsidiary of Parent (the
"Acquisition Corp.") pursuant to which Acquisition Corp. offered to acquire
all outstanding shares of common stock (the "Shares"), of Multicare at a
purchase price of $28.00 per Share, net to the seller in cash (the "Tender
Offer"). The Tender Offer expired on Wednesday, October 8, 1997 and
Acquisition Corp. accepted for purchase the 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 Health Ventures,
Inc., a Pennsylvania corporation ("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") 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 (the "Long Term Credit Agreement") dated as of
October 14, 1997. The Senior Facilities are being used for the purpose of
(i) refinancing certain short term facilities in the aggregate principal
amount of $431.6 million which were funded on October 9, 1997 to acquire the
Shares in the Tender Offer, refinance certain indebtedness of Multicare and
pay fees and expenses related to the transactions, (ii) funding interest and
principal payments on such facilities and on certain remaining indebtedness
and (iii) funding working capital and general corporate purposes.
The Senior Facilities consist of: (1) a $200 million six year term loan (the
"Tranche A Term Facility"); (2) a $150 million seven year term loan (the
"Tranche B Term Facility"); (3) a $50 million term loan maturing on June 1,
2005 (the "Tranche C Term Facility"); (4) a $125 million six year revolving
credit facility (the "Revolving Credit Facility"); and (5) one or more Swing
Loans (collectively, the "Swing Loan Facility") in integral principal
multiples of $500,000 up to an aggregate unpaid principal amount of $10
million. The Tranche A Term Facility, Tranche B Term Facility and Tranche C
Term Facility are subject to amortization in quarterly installments,
commencing at the end of the first calendar quarter after the date of the
consummation of the Merger (the "Closing Date"). The Revolving Credit
Facility will mature six years after the Closing Date. All net proceeds
received by Multicare from (i) the sale of assets of Multicare or its
subsidiaries other than sales in the ordinary course of business (and other
than the sales of Multicare's rehabilitation therapy business and pharmacy
business to the extent that there are amounts outstanding under the Revolving
Credit Facility) and (ii) any sale of common stock or debt securities (other
than the 9% Notes and the Equity Contributions) 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.
12
On August 11, 1997, Acquisition Corp. sold to Morgan Stanley & Co.
Incorporated, Montgomery Securities, L.P. and First Union Capital Markets
Corp. (collectively, the "Placement Agents") $250 million principal amount of
its 9% Senior Subordinated Notes due 2007 (the "9% Notes") which were issued
pursuant to an Indenture, dated as of August 7, 1997 (the "Indenture") by and
between Acquisition Corp., as issuer, and PNC Bank, National Association, as
trustee. The 9% Notes bear interest at 9% per annum from August 11, 1997,
payable semiannually on February 1 and August 1 of each year, commencing on
February 1, 1998.
The 9% Notes are unsecured, general obligations of the issuer, subordinated
in right of payment to all existing and future Senior Indebtedness, as
defined in the Indenture, of the issuer, including indebtedness under the
Senior Facilities. The 9% Notes rank pari passu in right of payment with any
future senior subordinated indebtedness of the issuer and are senior in right
of payment to all future subordinated indebtedness of the issuer. The 9%
Notes are redeemable at the option of the issuer, in whole or in part, at any
time on or after August 1, 2002, initially at 104.5% of their principal
amount, plus accrued interest, declining ratably to 100% of their principal
amount, plus accrued interest, on or after August 1, 2004. The 9% Notes are
subject to mandatory redemption at 101%. Upon a Change in Control, as defined
in the Indenture, the issuer is required to make an offer to purchase the 9%
Notes at a purchase price equal to 101% of their principal amount, plus
accrued interest. The Indenture contains a number of covenants that, among
other things, restrict the ability of the issuer of the 9% Notes to incur
additional indebtedness, pay dividends, redeem capital stock, make certain
investments, issue the capital stock of its subsidiaries, engage in mergers
or consolidations or asset sales, engage in certain transactions with
affiliates, and create dividend and other restrictions affecting its
subsidiaries.
Upon the consummation of the Merger, Multicare assumed all obligations of
Acquisition Corp. with respect to and under the 9% Notes and the related
Indenture.
At February 13, 1998, there is approximately $489 million outstanding under
the Senior Facilities and approximately $27.6 million available under the
Senior Facilities after giving effect to approximately $1.7 million
outstanding letters of credit.
On October 9, 1997, Multicare, Genesis and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a
management agreement (the "Management Agreement") pursuant to which Genesis
manages Multicare's operations. The Management Agreement has a term of five
years with automatic renewals for two years unless either party terminates
the Management Agreement. Genesis will be paid a fee of six percent of
Multicare's net revenues for its services under the Management Agreement
provided that payment of such fee in respect of any month in excess of the
greater of (i) $1.9 million and (ii) four percent of Multicare's consolidated
net revenues for such month, shall be subordinate to the satisfaction of
Multicare's senior and subordinate debt covenants; and provided, further,
that payment of such fee shall be no less than $23.9 million in any given
year. Under the Management Agreement, Genesis is responsible for Multicare's
non-extraordinary sales, general and administrative expenses (other than
certain specified third-party expenses), and all other expenses of Multicare
are paid by Multicare.
On October 10, 1997, Genesis entered into an asset purchase 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 million, subject to adjustment (the "Therapy Sale").
On October 10, 1997, Genesis and one of its wholly-owned subsidiaries entered
into a stock purchase agreement with Multicare and certain of its
subsidiaries pursuant to which Genesis will acquire all of the outstanding
capital stock and limited partnership interests of certain subsidiaries of
Multicare that are engaged in the business of providing institutional
pharmacy services to third parties for $50 million, subject to adjustment
(the "Pharmacy Sale"). The Company expects to complete the Pharmacy Sale in
the first calendar quarter of 1998.
In February 1998 ElderTrust ("ETT"), a Maryland real estate investment trust
sponsored by Genesis, made term loans to subsidiaries of the Company with
respect to the lease-up of two assisted living facilities. The loans have a
fixed annual rate of interest of 10.5% and mature three years from the date
of the loans, subject to the right of the Company to extend the term for up
to three one-year extension periods in the event the facility has not
reached "stabilized occupancy" (as defined) as of the third anniversary of
the loan (or at the end of any extension period, if applicable).
In February 1998 ETT also made one construction loan 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
13
periods in the event the facility has not reached "stabilized occupancy"
as of such third anniversary (or at the end of any extension period, if
applicable).
ETT is obligated to purchase and leaseback the three facilities that secure
the term and construction loans being made to the Company upon the earlier of
the facility reaching stabilized occupancy or the maturity of the loan
secured by the facility provided, however, that the Company will not be
obligated to sell any facility if the purchase price for the facility would
be less than the applicable loan amount. The purchase agreements provide for
a cash purchase price in an amount which will result in an annual yield of
10.5% to ETT. If acquired by ETT, these facilities would be leased to the
Company under minimum rent leases. The initial term of any minimum rent
lease will be ten years, and the Company will have the option to extend the
term for up to two five-year extension periods upon 12 months notice to ETT.
Minimum rent for the first lease year under any minimum rent lease will be
established by multiplying the purchase price for the applicable facility
times 10.5%, and the increase each year by an amount equal to the lesser of
(i) 5% of the increase in the gross revenues for such facility (excluding any
revenues derived from ancillary healthcare services provided by Genesis or
its affiliates to residents of the applicable facility) during the
immediately preceding year or (ii) one-half of the increase in the Consumer
Price Index during the immediately preceding year. During the last four
years of the term (as extended, if applicable), the Company is required to
make minimum capital expenditures equal to $3,000 per residential unit in
each assisted living facility covered by a minimum rent lease.
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 anticipates its capital requirements for the construction of new
facilities and the expansion and renovation of existing facilities to
approximate $30 million over the next twelve months based on existing
construction commitments and plans.
14
Part II-Other Information
Item 1.Legal Proceedings. None.
Item 2.Changes in Securities. None.
Item 3.Defaults Upon Senior Securities. None.
Item 4.Submission of Matters to a Vote of Security Holders. None.
Item 5.Other Information. None.
Item 6.Exhibits and Reports on Form 8-K.
a)Exhibits
Exhibit
No. Description
(1) 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.
(2) 10.1 Third Amended and Restated Credit Agreement dated October 9, 1997
to Genesis Health Ventures, Inc. from Mellon Bank, N.A., Citicorp USA, Inc.,
First Union National Bank and NationsBank, N.A.
(3) 10.2 Credit Agreement dated October 14, 1997 to The Multicare
Companies, Inc. from Mellon Bank, N.A., Citicorp USA, Inc., First Union
National Bank and NationsBank, N.A.
(3) 10.3 Management Agreement dated October 9, 1997 among The Multicare
Companies, Inc., Genesis Health Ventures, Inc. and Genesis ElderCare Network
Services, Inc.
(2) 10.4 Stockholders' Agreement dated October 9, 1997 among Genesis
ElderCare Corp., The Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc.
and Genesis Health Ventures, Inc.
(3) 10.5 Stock Purchase Agreement dated October 10, 1997 among Genesis
Health Ventures, Inc., The Multicare Companies, Inc., Concord Health Group,
Inc., Horizon Associates, Inc., Horizon Medical Equipment and Supply, Inc.,
Institutional Health Care Services, Inc., Care4, L.P., Concord Pharmacy
Services, Inc., Compass Health Services, Inc. and Encare of Massachusetts,
Inc.
(3) 10.6 Asset Purchase Agreement dated October 10, 1997 among Genesis
Health Ventures, Inc., The Multicare Companies, Inc., Health Care Rehab
Systems, Inc., Horizon Rehabilitation, Inc., Progressive Rehabilitation
Centers, Inc. and Total Rehabilitation Center, L.L.C.
27 Financial Data Schedule
(b) Reports on Form 8-K.
On October 24, 1997, the Company filed a current report on Form 8-K reporting
consummation of the Tender Offer and Merger.
On December 31, 1997, the Company filed a current report on Form 8-K
reporting that the Company adopted a resolution which provided that the
fiscal year of the Company shall end on September 30 of each year.
(1) Incorporated by reference to the Tender Offer on Schedule 14D-1 filed by
Genesis ElderCare Acquisition Corp. on June 20, 1997.
(2) Incorporated by reference to Amendment No.7 to the Tender Offer Statement
on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare
Acquisition Corp. on June 20,1997.
(3) Incorporated by reference to Genesis Health Ventures, Inc.'s Current
Report on Form 8-K dated October 9, 1997.
15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The Multicare Companies, Inc.
/S/ GEORGE V. HAGER, JR.
By:
George V. Hager, Jr.
Senior Vice President
and Chief Financial Officer
February 13, 1998