UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended September 30, 1999
Commission File Number 34-22090
-------------------------
THE MULTICARE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3152527
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification no.)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 444-6350
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant: Not Applicable
Class Outstanding at December 23, 1999
---------------------------- --------------------------------
Common Stock $.01 Par Value 100 shares
Documents Incorporated By Reference
None.
INDEX
PAGE
Cautionary Statements Regarding Forward Looking Statements .....................................................2-6
ITEM 1: BUSINESS
General .................................................................................................7
Patient Services.........................................................................................8
Revenue Sources.......................................................................................9-12
Marketing...............................................................................................12
Personnel...............................................................................................12
Employee Training and Development.......................................................................12
Governmental Regulation..............................................................................13-14
Competition.............................................................................................15
Insurance...............................................................................................15
ITEM 2: PROPERTIES..............................................................................................16
ITEM 3: LEGAL PROCEEDINGS.......................................................................................16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................16
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.........................................................................17
ITEM 6: SELECTED FINANCIAL DATA.................................................................................18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................................19-29
ITEM 7A: QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................30
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................31-49
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................................50
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................50
ITEM 11: EXECUTIVE COMPENSATION.................................................................................51
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................................51
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................51-52
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K......................................53-57
Cautionary Statements Regarding Forward Looking Statements
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations", such as our
ability to meet our liquidity needs, scheduled debt and
interest payments and expected future capital expenditure
requirements, and to control costs; the expected effects of
government regulation on reimbursement for services provided
and on the costs of doing business; and the expected effects
of the "Year 2000" problem.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our substantial indebtedness and significant debt service
obligations;
o the affect of planned dispositions of assets;
o our ability or inability to secure the capital and the related
cost of the capital necessary to fund future operations;
o the impact of health care reform, including the Medicare
Prospective Payment System ("PPS"), and the adoption of cost
containment measures by the federal and state governments;
o the adoption of cost containment measures by other third party
payors;
o the impact of government regulation, including our ability to
operate in a heavily regulated environment and to satisfy
regulatory authorities;
o the occurrence of changes in the mix of payment sources
utilized by our patients to pay for our services;
o competition in our industry;
o our ability to consummate or complete development projects or
to profitably operate or successfully integrate enterprises
into our other operations;
o the "Year 2000" problem, including the possible failure of our
payors, suppliers and other third parties to adequately
remediate Year 2000 issues; and
o changes in general economic conditions.
2
There can be no assurances that the cash flow from our operations will be
sufficient to enable us to service our substantial indebtedness and meet our
other obligations. There can be no assurance that currently planned dispositions
of assets necessary to service our indebtedness will be consummated.
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 1999, we had approximately $741,256,000 of
long-term indebtedness (excluding current portion of $34,700,000) which
represented 69% of our total capitalization. We also have significant long-term
operating lease obligations with respect to certain of our eldercare centers.
The degree to which we are leveraged could have important consequences,
including, but not limited to the following:
o our ability to obtain additional financing in the future for
working capital, capital expenditures, or other purposes may
be limited or impaired;
o a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available to us for
our operations;
o our operating flexibility is limited by restrictions contained
in some of our debt agreements which set forth minimum net
worth requirements and/or limit our ability to incur
additional indebtedness, to enter into other financial
transactions, to pay dividends, or to sell assets;
o our degree of leverage may make us more vulnerable to economic
downturns and less competitive, may reduce our flexibility in
responding to changing business and economic conditions and
may limit our ability to pursue other business opportunities,
to finance our future operations or capital needs, and to
implement our business strategy; and
o certain of our borrowings are and will continue to be at
variable rates of interest, which exposes us to the risk of
greater interest rates.
We expect to finance required payments of principal and interest on our
indebtedness from our cash flow from operations and from the anticipated sale of
certain assets in Illinois, Wisconsin and Ohio in the second quarter of our
fiscal year 2000. Our ability to make scheduled payments of the principal or
interest thereon, or to refinance our indebtedness, depends on the future
performance of our business, which is in turn subject to financial, business,
economic and other factors affecting our business and operations, including
factors beyond our control, such as prevailing economic conditions. Our ability
to make scheduled payments of the principal or interest depends on our ability
to complete the sale of assets in Illinois, Wisconsin and Ohio. Management is
currently engaged in discussions for the asset sales, however, we have no firm
commitments from potential purchasers of these assets. There can be no
assurances the anticipated sales will be consummated and that cash flow from
operations will be sufficient to enable us to service our debt and meet our
other obligations. If such cash flow is insufficient, we may be required to
refinance and/or restructure all or a portion of our existing debt, to sell
additional assets or to obtain additional financing. There can be no assurance
that any such refinancing or restructuring would be possible or that any such
sales of additional assets or additional financing could be achieved. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Limitations on reimbursement including the implementation of the Medicare
Prospective Payment System and other health care reforms may adversely affect
our business.
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, and other third party payors. The health care industry is
experiencing a strong trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services to be provided by us.
3
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System
pursuant to the Balanced Budget Act of 1997, as modified by
the Medicare Balanced Budget Refinement Act; and
o the repeal of the "Boren Amendment" federal payment standard
for Medicaid payments to nursing facilities.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect our business. There can be no assurance that payments under governmental
and private third party payor programs will be timely, will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs. Our financial condition and results of operations may be affected by
the revenue reimbursement process, which in our industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled. See "Business-Revenue Sources" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Extensive regulation by the federal and state governments may adversely affect
our cost of doing business.
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. Compliance with such regulatory requirements, as interpreted
and amended from time to time, can increase operating costs and thereby
adversely affect the financial viability of our business. Failure to comply with
current or future regulatory requirements could also result in the imposition of
various remedies including fines, restrictions on admission, the revocation of
licensure, decertification, imposition of temporary management or the closure of
a facility.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. See "Business - Governmental Regulation."
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
Changes in applicable laws and regulations, or new interpretations of existing
laws and regulations, could have a material adverse effect on reimbursement,
certification or licensure of our nursing facilities or other aspects of our
business, including eligibility for participation in federal and state programs,
costs of doing business, or the levels of reimbursement from governmental or
private sources. We cannot predict the content or impact of future legislation
and regulations affecting us. There can be no assurance that regulatory
authorities will not adopt changes or new interpretations of existing
regulations that could adversely affect us. See "Business - Revenue Sources" and
"Business - Governmental Regulation."
We face intense competition in our business.
The healthcare industry is highly competitive. We compete with a variety of
other companies in providing eldercare services, many of which have greater
financial and other resources and may be more established in their respective
communities than us. Competing companies may offer newer or different centers or
services than us and may thereby attract our customers who are either presently
customers of our eldercare centers or are otherwise receiving our eldercare
services.
4
Because of the Multicare Merger and its Restructuring We Face Additional Risks.
As a result of the Merger of Genesis ElderCare Acquisition Corp. with us,
Genesis Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis
ElderCare Corp., which owns 100% of our outstanding capital stock. We and
Genesis have entered into a Management Agreement pursuant to which Genesis
manages our operations. We also use Genesis' clinical administration and
healthcare management information system to monitor and measure clinical and
patient outcome data. Certain problems may arise in implementing the Management
Agreement; for example, difficulties may be encountered by Genesis as a result
of the loss of our key personnel, the integration of our corporate, accounting,
financial reporting and management information systems with Genesis' systems and
strain on existing levels of its personnel managing both businesses. There can
be no assurance that Genesis will be able to successfully implement the
Management Agreement or manage our operations; failure to do so effectively and
on a timely basis could have a material adverse effect on our financial
condition and results of operations.
On October 8, 1999, Genesis entered into a restructuring agreement ("the
Restructuring Agreement") with The Cypress Group L.L.C. ("Cypress"), TPG
Partners II, L.P. ("TPG") and Nazem Inc. ("Nazem"), to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare. Genesis
has the right to purchase all of the common stock of Genesis ElderCare Corp. not
owned by Genesis for $2,000,000 in cash at any time prior to the 10th
anniversary of the closing date of the restructuring transaction. On November
15, 1999, the Multicare Stockholders Agreement was amended to provide among
other things, that all shareholders will grant to Genesis an irrevocable proxy
to vote their shares of common stock of Genesis ElderCare Corp. on all matters
to be voted on by shareholders, including the election of directors and omit
the requirement that specified significant actions receive the approval of at
least one designee of each of Cypress, TPG and Genesis.
We may in the future engage in transactions with Genesis and its affiliates. Mr.
Michael R. Walker, the Chairman of the Board and Chief Executive Officer of
Genesis, is our Chairman and Chief Executive Officer and Mr. George V. Hager,
Jr., the Chief Financial Officer of Genesis, is our Chief Financial Officer. In
addition, Mr. Walker, Mr. Hager and Mr. Richard R. Howard, President and a
member of the board of directors of Genesis, constitute our board of directors.
Based on the foregoing, Genesis and Messrs. Walker, Hager and Howard control
Multicare and the outcome of any matters submitted to our stockholders for
approval and are in positions that may result in conflicts of interest with
respect to transactions involving us and Genesis. Genesis and its affiliates
provide healthcare and related services to our customers and facilities either
directly or through contracts with us. Genesis is the principal supplier to our
customers of all pharmacy and rehabilitation services either directly or through
contracts with us. Conflicts of interest may arise in connection with the
negotiation of the terms of such arrangements.
Genesis is in the business of providing healthcare and support services to the
elderly, and substantially all of its markets are contiguous to or overlap with
our existing markets. Genesis may compete with us in certain of these markets or
in the provision of certain healthcare services. Although our directors who are
also directors or officers of Genesis have certain fiduciary obligations to us
under Delaware law, such directors and Genesis are in positions that may create
potential conflicts of interest with respect to certain business opportunities
available to and certain transactions involving us. Neither Genesis nor Messrs.
Walker, Hager and Howard are obligated to present to us any particular
investment opportunity which comes to their attention, even if such opportunity
is of a character which might be suitable for investment by us.
5
The "Year 2000 problem" may adversely affect us.
If our efforts to address Year 2000 compliance issues (as defined in the Year
2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000 Act"))were
not successful, or if the systems of our suppliers are not compliant, we may be
unable to engage in normal business activities for a period of time after
January 1, 2000. Our potential risks include:
o the inability to deliver patient care related services;
o the delayed receipt of reimbursement from the federal or state
governments, or other payors or intermediaries;
o the failure of security systems, elevators, heating systems or
other operational systems and equipment;
o the inability to obtain critical equipment and supplies from
vendors; and,
o the loss of existing or potential clients and damage to our
reputation in the industry.
Each of these events could have a material adverse effect on our business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."
6
Item 1. Business.
General
The Multicare Companies, Inc. is a leading provider of high quality eldercare
and specialty medical services in selected geographic regions. As used herein,
unless the context otherwise requires, "Multicare", the "Company", "we", "our",
or "us" refers to The Multicare Companies, Inc. Multicare's eldercare services
include skilled nursing care, assisted living, Alzheimer's care and related
support activities traditionally provided in eldercare facilities. We provide
sub-acute care such as ventilator care, intravenous therapy, and various forms
of coma, pain and wound management. We also provide management services to 30
facilities and consulting services to 14 facilities.
Multicare believes it is well-positioned in its markets because it provides high
quality care in concentrated geographic regions. Multicare's overall occupancy
rate was approximately 91%, 92%, and 90% for the years ended September 30, 1999
and 1998, and the nine month period ended September 30, 1997, respectively.
Multicare achieved a quality mix (defined as non-Medicaid revenues) of 55%, 62%
and 67% of net revenues for the years ended September 30, 1999 and 1998, and the
nine month period ended September 30, 1997, respectively.
As of September 30, 1999, Multicare operated 137 eldercare facilities and 14
assisted living facilities (91 wholly owned, 8 joint ventures, 22 leased and 30
managed) in Connecticut, Illinois, Massachusetts, New Jersey, Ohio,
Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin with
16,376 beds. In terms of beds, we are the largest provider of eldercare services
in Massachusetts, New Jersey and West Virginia. In addition, we are one of the
largest providers of eldercare services in Pennsylvania, Ohio and Wisconsin. We
anticipate selling 28 eldercare centers with approximately 2,700 beds in Ohio,
Illinois and Wisconsin in the second quarter of our fiscal year 2000.
The Tender Offer and Merger
On October 9, 1997, Genesis Eldercare Acquisition Corp., ("Acquisition Corp."),
The Cypress Group, (together with its affiliates, "Cypress"), TPG Partners II,
L.P., (together with its affiliates, "TPG"), and Nazem, Inc. ("Nazem"), acquired
99.65% of the shares of the common stock of Multicare, pursuant to a Tender
Offer commenced on June 20, 1997. On October 10, 1997, Genesis ElderCare Corp.
completed the merger (the "Merger") of Acquisition Corp. with and into Multicare
in accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and the Company. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages our
operations. The Management Agreement has a term of five years with automatic
renewals for two years unless either party terminates the Management Agreement.
Genesis is paid a fee of six percent of Multicare's net revenues for its
services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of (i) $1,991,666 and (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare will be paid by Multicare. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - The Tender Offer
and Merger and its Restructuring."
7
Patient Services
Basic Healthcare Services
Basic healthcare services are those traditionally provided to elderly patients
in eldercare facilities and assisted living residences with respect to daily
living activities and general medical needs. We provide 24-hour skilled nursing
care by registered nurses, licensed practical nurses and certified nursing aides
in all of our skilled nursing facilities. Each eldercare facility is managed by
an on-site licensed administrator who is responsible for the overall operations
of the facility, including quality of care. The medical needs of patients are
supervised by a medical director who is a licensed physician. While treatment of
patients is the responsibility of patients' attending physicians who are not
employed by us, the medical director monitors all aspects of patient treatment.
We also provide a broad range of support services including dietary services,
therapeutic recreational activities, social services, housekeeping and laundry
services, pharmaceutical and medical supplies and routine rehabilitation
therapy. Each eldercare facility offers a number of activities designed to
enhance the quality of life for patients. These activities include entertainment
events, arts and crafts and programs encouraging community interaction with
patients and visits to the facility. We provide housing, personal care and
support services as well as certain routine nursing services in our assisted
living residences.
We currently provide specialized care for Alzheimer's patients under the
supervision of specially trained skilled nursing, therapeutic recreation and
social services personnel. Our Alzheimer's programs include music therapy, gross
and fine motor activity, reality orientation and cognitive stimulation designed
to counter the hyperactivity, memory loss, confusion and reduced learning
ability experienced by Alzheimer's patients.
Specialty Medical Services
Specialty medical services are provided to patients with medically complex needs
who generally require more intensive treatment and a higher level of skilled
nursing care. These services typically generate higher profit margins than basic
healthcare services because the higher complexity of the patients' medical
conditions results in a need for increased levels of care and ancillary
services.
Sub-acute Care. Sub-acute care includes services provided to patients with
medically complex conditions who require ongoing nursing care, medical
supervision, access to specialized equipment and services, but do not require
many of the other services provided by an acute care hospital. Services in this
category include ventilator care, intravenous therapy, wound care management,
traumatic brain injury care, post-stroke CVA (cerebrovascular accident) care,
CAPD (continuous ambulatory peritoneal dialysis), pain management, hospice care,
and tracheotomy and other ostomy care. We provide a wide range of sub-acute care
services to patients at our facilities.
Operations
General. The day-to-day operations of each eldercare facility are managed by an
on-site state licensed administrator who is responsible for the overall
operation of the facility, including quality of care, marketing, and financial
performance. The administrator is assisted by an array of professional and
non-professional personnel (some of whom may be independent providers),
including a medical director, nurses and nursing assistants, social workers,
therapists, dietary personnel, therapeutic recreation staff, and housekeeping,
laundry and maintenance personnel. The business office staff at each facility
manage the day-to-day administrative functions, including data processing,
accounts payable, accounts receivable, billing and payroll.
8
Upon consummation of the Merger, Genesis and Multicare entered into the
Management Agreement pursuant to which Genesis manages our operations. We
believe that the integration of Genesis and Multicare management is facilitated
by the geographic concentration of Multicare's facilities, the proximity of
Multicare facilities to Genesis' existing markets, the quality of Multicare's
unit and regional management and Multicare's existing information systems which
will allow a rational phase-in of Genesis' systems.
Revenue Sources
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, and other third party payors. The health care industry is
experiencing the effects of the federal and state governments' trend toward cost
containment, as government and other third party payors seek to impose lower
reimbursement and utilization rates and negotiate reduced payment schedules with
providers. These cost containment measures, combined with the increasing
influence of managed care payors and competition for patients, generally have
resulted in reduced rates of reimbursement for services to be provided by us.
The sources and amounts of our patient revenues will be determined by a number
of factors, including licensed bed capacity and occupancy rates of our centers,
the mix of patients and the rates of reimbursement among payors. Changes in the
case mix of patients as well as payor mix among private pay, Medicare, and
Medicaid will significantly affect our profitability.
Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title
XVIII of the Social Security Act), known as "Medicare," has made available to
nearly every American 65 years of age and older a broad program of health
insurance designed to help the nation's elderly meet hospital and other health
care costs. Health insurance coverage has been extended to certain persons under
age 65 qualifying as disabled and those having end-stage renal disease. Medicare
includes three related health insurance programs: (i) hospital insurance ("Part
A"); and (ii) supplementary medical insurance ("Part B"); and (iii) a managed
care option for beneficiaries who are entitled to Part A and enrolled in Part B
("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently
administered by fiscal intermediaries (for Part A and some Part B services) and
carriers (for Part B) under the direction of the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS").
Medicaid (Title XIX of the Social Security Act) is a federal-state cooperative
program, whereby, the federal government supplements funds provided by the
participating states for medical assistance to "medically indigent" persons. The
programs are administered by the applicable state welfare or social service
agencies. Although Medicaid programs vary from state to state, traditionally
they have provided for the payment of certain expenses, up to established
limits, at rates determined in accordance with each state's regulations. Most
states pay prospective rates, and have some form of acuity adjustment.
Medicare and Medicaid are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially affect the timing and/or levels of
payments to us for our services.
We are subject to periodic audits by the Medicare and Medicaid programs, which
have various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements. Such
rights and remedies may include requiring the repayment of any amounts alleged
to be overpayments or in violation of program requirements, or making deductions
from future amounts due to us. Such programs may also impose fines, criminal
penalties or program exclusions. Other payor sources also reserve rights to
conduct audits and make monetary adjustments.
9
The Balanced Budget Act of 1997 (the "1997 Act"), signed into law on August 5,
1997, seeks to achieve a balanced federal budget, by, among other things,
reducing federal spending on the Medicare and Medicaid programs. Most
significantly, under the 1997 Act, nursing facilities are reimbursed under a
prospective payment system ("PPS") which commenced with a facility's first cost
reporting period beginning on or after July 1, 1998. PPS is being phased in over
a four-year period and has an adverse impact on the Medicare revenues of many
skilled nursing facilities. PPS reimbursement is based largely on a nursing
facility's costs for the services it provided to Medicare beneficiaries in the
1994-1995 base year. Under the new system, nursing facilities are paid a
predetermined amount per patient, per day (per diem) based on the anticipated
costs of treating patients. The per diem rate is determined by classifying each
patient into a resource utilization group ("RUG") using the information gathered
during the minimum data set ("MDS") assessment. There is a separate per diem
rate for each of the RUG classifications. The per diem rate also covers
rehabilitation and non-rehabilitation ancillary services.
Facilities that did not receive any Medicare payments prior to October 1, 1995
are reimbursed one hundred percent (100%) based on the federal per diem rates
beginning with their first cost reporting period on or after July 1, 1998. For
nursing facilities that received Medicare payments before October 1, 1995, there
is a three-year transition period. During the transition period, the per diem
rates are comprised of a blend between a "facility-specific" rate and a
"federal" (prospective) rate, as follows: (a) for the first cost reporting
period, the "facility specific" percentage is seventy-five percent (75%) and the
federal per diem percentage is 25%. These percentages change to fifty/fifty
(50%-50%) and to twenty-five/seventy-five (25%-75%) for the second and third
cost reporting periods. The facility-specific rate is based on the costs for
certain Medicare-covered services that the facility provided during its base
year, which is the facility's first cost reporting period beginning after
September 30, 1994. The facility specific rate is updated by the "nursing
facility market basket increase", minus one percent, through federal fiscal year
1999, and by the full market basket increase thereafter. The federal rate is
wage and case mix adjusted, and within each metropolitan statistical area and
rural area within each state, there is a federal rate for each RUG
classification.
Also, Congress included provisions in the 1997 Act that would require nursing
facilities to submit all claims for all Medicare-covered services that their
residents receive, both Medicare Part A and Part B, even if such services are
provided by outside suppliers, including but not limited to pharmacy and therapy
providers, except for certain excluded services ("Consolidated Billing"). The
1997 Act initially required Consolidated Billing to be effective on July 1,
1998, with a transition period through December 31, 1998 for those nursing
facilities lacking the systems and billing capability to comply. However, in a
final rule issued in July 1999, HCFA announced that all skilled nursing
facilities must begin Consolidated Billing as of the date the facility shifts to
PPS, for those residents who are in a covered Part A stay. Outside suppliers of
services to residents of the facility must collect payment from the facility.
For those skilled nursing facility residents who are not in a covered Part A
stay (for example, residents who have exhausted their available days of coverage
under the Part A nursing facility benefit), the final rule postponed
Consolidated Billing indefinitely.
In November 1999, the Medicare Balanced Budget Refinement Act ("Refinement Act")
was passed in Congress. The Refinement Act addresses certain reductions in
Medicare reimbursement caused by the 1997 Act, including:
o For covered skilled nursing facility services furnished on or
after April 1, 2000, and before October 1, 2000 (or a later
date if HCFA does not complete certain mandated reviews of
current RUG weightings), for 15 RUG categories, the federal
per diem rate will be increased by 20%;
o For fiscal years 2001 and 2002, the federal per diem rates
shall be increased by an additional 4%;
10
o For cost report years beginning on or after January 1, 2000,
skilled nursing facilities may waive the PPS transition period
and elect to receive 100% of the federal per diem rate;
o Through the cost reporting period beginning in October, 2000,
certain specific services (such as prostheses and chemotherapy
drugs) may be reimbursed separately from, and in addition to,
the federal per diem rate.
The 1997 Act repealed the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities effective October 1, 1997. The Boren
Amendment required that Medicaid payments to certain health care providers be
reasonable and adequate in order to cover the costs of efficiently and
economically operated healthcare facilities. States must now use a public notice
and comment period in order to determine rates and provide interested parties a
reasonable opportunity to comment on proposed rates and the justification for
and the methodology used in calculating such rates. There can be no assurances
that budget constraints or other factors will not cause states to reduce
Medicaid reimbursement to nursing facilities and pharmacies or that payments to
nursing facilities and pharmacies will be made on timely basis. The 1997 Act
also grants greater flexibility to states to establish Medicaid managed care
projects without the need to obtain a federal waiver. Although these projects
generally exempt institutional care, including nursing facilities and
institutional pharmacy services, no assurances can be given that these projects
ultimately will not change the reimbursement methodology for nursing facility
services or pharmacy services from fee-for-service to managed care negotiated or
capitated rates. We anticipate that federal and state governments will continue
to review and assess alternative health care delivery systems and payment
methodologies.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of the 1997 Law, the Refinement
Act, the interpretation or administration of such legislation or other
legislation which affects our business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that
these changes will not adversely affect our business.
In addition, Congress and state governments continue to focus on efforts to curb
spending on health care programs such as Medicare and Medicaid. Such efforts
have not been limited to skilled nursing facilities, but have and will most
likely include other services, including pharmacy and therapy services. We
cannot at this time predict the extent to which these proposals will be adopted
or, if adopted and implemented, what effect, if any, such proposals will have on
us. Efforts to impose reduced allowances, greater discounts and more stringent
cost controls by government and other payors are expected to continue.
Managed care organizations and other third party payors have continued to
increase their influence over the delivery of healthcare services. Consequently,
the healthcare needs of a large percentage of the United States population are
increasingly served by a relatively small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate us or choose not to utilize us as a provider,
and/or engage our competitors as a preferred or exclusive provider, our business
could be materially adversely affected. In addition, private payors, including
managed care payors increasingly are demanding discounted fee structures or the
assumption by healthcare providers of all or a portion of the financial risk
through prepaid capitation arrangements.
11
The following table identifies Multicare's net revenues attributable to each of
its revenue sources for the years ended September 30, 1999 and 1998, and the
nine months ended September 30, 1997.
1999 1998 1997
---- ---- ----
Private and other 33% 37% 43%
Medicaid 45% 38% 33%
Medicare 22% 25% 24%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
See "Cautionary Statements Regarding Forward Looking Statements" and "Business -
Governmental Regulation."
Marketing
Genesis manages our marketing program. Marketing for eldercare centers is
focused at the local level and is conducted primarily by the center
administrator and its admissions director who call on referral sources such as
doctors, hospitals, hospital discharge planners, churches and various
organizations. Genesis management's marketing objective is to maintain public
awareness of the eldercare center and its capabilities. Genesis' management also
takes advantage of our regional concentrations in its marketing efforts, and
where appropriate, through consolidated marketing programs which benefit more
than one center.
Genesis has consolidated our core business under the name Genesis ElderCare
(SM). The Genesis ElderCare logo and trademark have been featured in a series of
print advertisements and publications serving many of the regional markets in
which we operate. The marketing of Genesis ElderCare is aimed at increasing
awareness among decision makers in key professional and business audiences.
Genesis is using and will continue to use advertising to promote the Genesis
ElderCare brand name in trade, professional and business publications and to
promote services directly to consumers.
Personnel
As of September 30, 1999, Multicare employed approximately 15,100 persons.
Approximately 2,300 employees at 31 of Multicare's facilities are covered by
collective bargaining agreements. In addition, certain of our facilities have
been subject to an aggressive union organizing campaign. We believe that our
relationship with our employees is generally good.
The healthcare industry has at times experienced a shortage of qualified
healthcare personnel. We compete with other healthcare providers and with
non-healthcare providers for both professional and non-professional employees.
While we have been able to retain the services of an adequate number of
qualified personnel to staff our facilities appropriately and maintain our
standards of quality care, there can be no assurance that continued shortages
will not in the future affect our ability to attract and maintain an adequate
staff of qualified healthcare personnel. A lack of qualified personnel at a
facility could result in significant increases in labor costs at such facility
or otherwise adversely affect operations at such facility. Any of these
developments could adversely affect our operating results.
Employee Training and Development
We believe that nursing and professional staff retention and development has
been and continues to be a critical factor in the successful operation of
Multicare. In response to this challenge, a compensation program which provides
for annual merit reviews as well as financial and quality of care incentives has
been implemented to promote center staff motivation and productivity and to
reduce turnover rates. Management believes that our wage rates for professional
nursing staff are commensurate with market rates. We also provide employee
benefit programs which management believes, as a package, exceed industry
standards.
12
Governmental Regulation
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. This regulation relates, among other things, to the adequacy of
physical plant and equipment, qualifications of personnel, standards of care and
operational requirements. Compliance with such regulatory requirements, as
interpreted and amended from time to time, can increase operating costs and
thereby adversely affect the financial viability of our business. Failure to
comply with current or future regulatory requirements could also result in the
imposition of various remedies including fines, restrictions on admission, the
revocation of licensure, decertification, imposition of temporary management or
the closure of the facility.
In July 1998, the Clinton Administration issued a new initiative to promote the
quality of care in nursing homes. This initiative includes, but is not limited
to
o increased enforcement of nursing home safety and quality
regulations;
o increased federal oversight of state inspections of nursing
homes;
o prosecution of egregious violations of regulations governing
nursing homes;
o the publication of nursing home survey results on the
Internet;
o in certain cases, immediate imposition of sanctions without
any grace period to correct problems;
o imposition of civil monetary penalties for each instance of
"serious or chronic violation;" and
o federal and state official focused enforcement on nursing
homes within chains that have a record of non-compliance with
federal rules.
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
All of our eldercare centers and healthcare services, to the extent required,
are licensed under applicable law. All skilled nursing centers and healthcare
services, or practitioners providing the services therein, are certified or
approved as providers under one or more of the Medicaid and Medicare programs.
Generally, assisted living centers are not eligible to be certified under
Medicare or Medicaid. Licensing, certification and other applicable standards
vary from jurisdiction to jurisdiction and are revised periodically. State and
local agencies survey all skilled nursing centers on a regular basis to
determine whether such centers are in compliance with governmental operating and
health standards and conditions for participation in government sponsored third
party payor programs. We believe that our centers are in substantial compliance
with the various Medicare, Medicaid and state regulatory requirements applicable
to them. However, in the ordinary course of our business, we receive notices of
deficiencies for failure to comply with various regulatory requirements.
Multicare reviews such notices and takes appropriate corrective action. In most
cases, Multicare and the reviewing agency will agree upon the measures to be
taken to bring the center into compliance with regulatory requirements. In some
cases or upon repeat violations, the reviewing agency may take various adverse
actions against a provider, including:
o the imposition of fines;
o suspension of payments for new admissions to the center; and
o in extreme circumstances, decertification from participation in
the Medicare or Medicaid programs and revocation of a center's
license.
13
These actions may adversely affect a centers' ability to continue to operate,
the ability for us to provide certain services, and/or eligibility to
participate in the Medicare or Medicaid programs or to receive payments from
other payors. Additionally, actions taken against one center may subject other
centers under common control or ownership to adverse measures, including loss of
licensure or eligibility to participate in Medicare and Medicaid programs.
All Multicare eldercare centers are currently certified to receive benefits
under Medicaid. Both initial and continuing qualifications of an eldercare
center to participate in such programs depend upon many factors including
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls. Assisted living
facilities are not eligible to be certified under Medicare or Medicaid.
Many states in which Multicare operates have adopted Certificate of Need or
similar laws which generally require that a state agency approve certain
acquisitions and determine that the need for certain bed additions, new
services, and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other
changes, or the expenditure of capital. State approvals are generally issued for
a specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
centers, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the center's license
and adverse reimbursement action.
We are also subject to federal and state laws which govern financial and other
arrangements between healthcare providers. These laws often prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. These laws include
o the "anti-kickback" provisions of the federal Medicare and
Medicaid programs, which prohibit, among other things,
knowingly and willfully soliciting, receiving, offering or
paying any remuneration (including any kickback, bribe or
rebate) directly or indirectly in return for or to induce the
referral of an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or
Medicaid; and
o the "Stark laws" which prohibit, with limited exceptions, the
referral of patients by physicians for certain services,
including home health services, physical therapy and
occupational therapy, to an entity in which the physician has
a financial interest.
In addition, some states restrict certain business relationships between
physicians and other providers of healthcare services. Many states prohibit
business corporations from providing, or holding themselves out as a provider of
medical care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. From time to time, we have sought guidance as to the
interpretation of these laws; however, there can be no assurance that such laws
will ultimately be interpreted in a manner consistent with our practices.
Although we have contractual arrangements with some healthcare providers to
which we pay fees for services rendered or products provided, we believe that
our practices are not in violation of these laws. We cannot accurately predict
whether enforcement activities will increase or the effect of any such increase
on our business. There have also been a number of recent federal and state
legislative and regulatory initiatives concerning reimbursement under the
Medicare and Medicaid programs. In particular, the federal government has issued
recent fraud alerts concerning double billing, home health services and the
provision of medical supplies to nursing facilities. Accordingly, it is
anticipated that these areas may come under closer scrutiny by the government.
We cannot accurately predict the impact of any such initiatives. See "Cautionary
Statements Regarding Forward Looking Statements" and "Business - Revenue
Sources."
14
Competition in the Healthcare Services Industry
We compete with a variety of other companies in providing healthcare services.
Certain competing companies have greater financial and other resources and may
be more established in their respective communities than us. Competing companies
may offer newer or different centers or services than us and may thereby attract
our customers who are either presently residents of our eldercare centers or are
otherwise receiving our healthcare services.
We operate eldercare centers in 11 states. In each market, our
eldercare centers may compete for customers with:
o rehabilitation hospitals;
o subacute units of hospitals;
o skilled or intermediate nursing centers; and
o personal care or residential centers which offer comparable
services to those offered by our centers.
Certain of these providers are operated by not-for-profit organizations and
similar businesses which can finance capital expenditures on a tax-exempt basis
or receive charitable contributions unavailable to us. In competing for
customers, a center's local reputation is of paramount importance. Referrals
typically come from acute care hospitals, physicians, religious groups, health
maintenance organizations, the customer's families and friends, and other
community organizations.
Members of a customer's family generally actively participate in selecting an
eldercare center. Competition for subacute patients is intense among hospitals
with long-term care capability, rehabilitation hospitals and other specialty
providers and is expected to remain so in the future. Important competitive
factors include the reputation in the community, services offered, the
appearance of a center; and the cost of services.
Multicare competes in providing specialty medical services with a variety of
different companies. Generally, this competition is national, regional and local
in nature. The primary competitive factors in the specialty medical services
business are similar to those in the eldercare center business and include:
reputation, the cost of services, the quality of clinical services,
responsiveness to patient needs, and the ability to provide support in other
areas such as third party reimbursement, information management and patient
record-keeping.
Insurance
Multicare carries property and general liability insurance, professional
liability insurance, and medical malpractice insurance coverage in amounts
deemed adequate by management. However, there can be no assurance that any
current or future claims will not exceed applicable insurance coverage.
Multicare also requires that physicians practicing at its eldercare centers
carry medical malpractice insurance to cover their individual practices.
15
Item 2. Properties.
As of November 30, 1999, Multicare operated 137 eldercare facilities and 14
assisted living facilities (91 wholly owned, 8 joint ventures, 22 leased and 30
managed). Twenty-two of Multicare's facilities are leased from third parties.
Our inability to make rental payments under these leases could result in loss of
the leased property through eviction or other proceedings. Certain facility
leases do not provide for non-disturbance from the mortgagee of the fee interest
in the property and consequently each such lease is subject to termination in
the event that the mortgage is foreclosed following a default by the owner.
We believe our physical properties are well maintained and suitable for the
purposes for which they are being used.
The following table summarizes by state certain information regarding
Multicare's eldercare centers at November 30, 1999 (excluding 14 facilities with
1,668 beds at which Multicare provides quality assurance consulting services):
Owned Joint Venture Leased Managed Total
----------------- ----------------- ----------------- ----------------- ---------------
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Massachusetts 8 1,107 5 753 --- --- 25 2,067 38 3,927
New Jersey 14 1,674 --- --- 8 1,294 2 410 24 3,378
Pennsylvania 18 1,969 --- --- --- --- 1 360 19 2,329
West Virginia 15 1,387 3 208 4 326 1 62 23 1,983
Ohio 10 878 --- --- 4 250 --- --- 14 1,128
Connecticut 6 766 --- --- 2 250 1 90 9 1,106
Illinois 9 876 --- --- 1 92 --- --- 10 968
Wisconsin 6 720 --- --- 2 231 --- --- 8 951
Rhode Island 3 373 --- --- --- --- --- --- 3 373
Virginia 1 90 --- --- 1 85 --- --- 2 175
Vermont 1 58 --- --- --- --- --- --- 1 58
--- ----- --- --- --- ----- --- ----- --- ------
91 9,898 8 961 22 2,528 30 2,989 151 16,376
=== ===== === === === ===== === ===== === ======
We anticipate selling 28 eldercare centers with approximately 2,700 beds in
Ohio, Illinois and Wisconsin in the second quarter of our fiscal year 2000. We
may manage these facilities subsequent to the sale. Management is currently
engaged in discussions for the asset sales, however, we have no firm commitments
from potential purchasers for these assets. There can be no assurance that any
such sales of assets will be achieved. See "Cautionary Statements Regarding
Forward Looking Statements."
Item 3. Legal Proceedings.
We are a party to claims and legal actions arising in the ordinary course of
business. We do not believe that any litigation to which Multicare is currently
a party, alone or in the aggregate, will have a material adverse effect on us.
See "Cautionary Statements Regarding Forward Looking Statements."
Item 4. Submission of Matters to a Vote of Security Holders. None.
16
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Upon completion of the merger our shares are no longer traded. See "The Tender
Offer and Merger and its Restructuring."
17
Item 6. Selected Consolidated Financial Data.
Nine Months
Fiscal Year Ended Twelve Months
Ended September 30, September 30, Ended December 31,
--------------------------------- -------------- -------------------
1999 1998 1997(8) 1997(8) 1996(8) 1995(8)
---- ---- ----- ----- ----- -----
Statement of Operations Data: (unaudited)
Net revenues $ 640,414 $ 695,633 $ 679,292 $ 533,952 $ 532,230 $ 353,048
Expenses:
Operating expenses 515,800 524,542 515,576 406,173 400,897 265,185
Corporate, general and administrative --- --- 31,984 25,203 25,408 17,643
Management fee 38,360 42,235 --- --- --- ---
Depreciation and amortization 45,702 44,875 27,916 21,620 22,344 13,171
Lease expense 12,955 13,194 15,929 12,693 12,110 5,039
Interest expense, net 66,671 61,728 27,857 21,640 25,164 16,065
Debenture conversion expense (1) --- --- 785 785 --- ---
Impairment charges (2) 397,269 --- --- --- --- ---
----------- ----------- --------- ---------- ---------- ----------
Total expenses 1,076,757 686,574 620,047 488,114 485,923 317,103
----------- ----------- --------- ---------- ---------- ----------
Income (loss) before income taxes &
extraordinary item (436,343) 9,059 59,245 45,838 46,307 35,945
Income tax provision (benefit) (29,016) 8,821 22,152 17,087 17,570 13,798
----------- ----------- --------- ---------- ---------- ----------
Income (loss) before extraordinary item (407,327) 238 37,093 28,751 28,737 22,147
Extraordinary item, net of tax benefit (3) --- --- 2,219 873 2,827 3,722
----------- ----------- --------- ---------- ---------- ----------
Net income (loss) $ (407,327) $ 238 $ 34,874 $ 27,878 $ 25,910 $ 18,425
=========== =========== ========= ========== ========== ==========
Other Financial Data:
EBITDA (4) $ 73,299 $ 115,662 $ 115,803 $ 89,883 $ 93,815 $ 65,181
EBITDAR(5) 86,254 128,856 131,732 102,576 105,925 70,220
Ratio of EBITDA to interest expense, net 1.1x 1.9x 4.2x 4.1x 3.7x 4.1x
Ratio of EBITDAR to interest expense, net, 1.1x 1.7x 3.0x 3.0x 2.8x 3.3x
plus lease expense
Ratio of earnings to fixed charges (6) 0.5x 1.1x 2.7x 2.8x 2.5x 2.9x
Capital expenditures $ 15,307 $ 25,803 $ 54,226 $ 39,301 $ 64,215 $ 39,917
Operating Data:
Average number of licensed beds 17,524 17,355 15,222 15,934 11,620 6,861
Occupancy 90.5% 91.6% 91.1% 90.4% 91.0% 91.7%
Payor mix:
Quality mix (7) 55.4% 62.1% 66.8% 67.3% 64.5% 66.3%
Medicaid 44.6% 37.9% 33.2% 32.7% 35.5% 33.7%
Balance Sheet Data:
Working capital $ 10,350 $ 22,818 $ 51,822 $ 51,822 $ 39,327 $ 55,542
Total assets 1,302,364 1,698,955 823,133 823,133 761,667 470,958
Long-term debt, including current portion 775,956 755,841 424,046 424,046 429,168 283,082
Stockholders' equity $ 325,911 $ 733,238 $ 263,174 $ 263,174 $ 207,935 $ 113,895
- ------------------------------------------------------
(1) Represents a non-recurring charge relating to the early conversion of $11.0
million of Multicare's 7% Convertible Debentures.
(2) Represents non-cash impairment charges relating to the write-down of
long-lived assets.
(3) Multicare incurred extraordinary charges relating to early extinguishment
of debt.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, extraordinary items (net of tax benefit),
debenture conversion expense and impairment charges. EBITDA should not be
considered an alternative measure of Multicare's net income (loss),
operating performance, cash flow or liquidity. It is included herein to
provide additional information related to Multicare's ability to service
debt.
(5) EBITDAR represents earnings before interest expense, income taxes,
depreciation and amortization, extraordinary items (net of tax benefit),
debenture conversion expense, impairment charges, and lease expense.
EBITDAR should not be considered an alternative measure of Multicare's net
income, operating performance, cash flow or liquidity. It is included
herein to provide additional information related to Multicare's ability to
service debt.
(6) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of the sum of earnings before income taxes impairment
charges, and extraordinary items (net of tax benefit) plus fixed charges.
Fixed charges consist of interest on all indebtedness, amortization of debt
issuance costs and one-third of rental expense, which Multicare believes to
be representative of the interest factor. The definition of fixed charges
used in this calculation differs from that used in the Consolidated Fixed
Charge Coverage Ratio contained in the Indenture.
(7) Quality mix is defined as non-Medicaid patient revenues.
(8) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - The Tender Offer and Merger and its Restructuring."
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Upon consummation of the Merger in October 1997, Multicare and Genesis entered
into the Management Agreement pursuant to which Genesis manages our operations.
Under Genesis' management, our strategy is to integrate the talents of case
managers, comprehensive discharge planning and, to provide cost effective care
management to achieve superior outcomes and return our customers to the
community. Genesis' management believes that achieving improved customer
outcomes will result in increased utilization of specialty medical services and
a broader base of repeat customers in our network. Moreover, we believe that
this strategy will lead to a high quality payor mix and continued high levels of
occupancy. Genesis' management also focuses on the revenue and cost
opportunities presented through the further integration of our acquisitions. We
have completed no new acquisitions and little new construction since the Merger;
accordingly, capital expenditures since the Merger have decreased significantly
from historical levels.
In December 1996, we acquired The AoDoS Group, which owned, operated or managed
over 50 long-term care and assisted-living facilities with over 4,200 licensed
beds, principally in Massachusetts.
The Tender Offer and Merger and its Restructuring
In October 1997, Genesis, affiliates of Cypress, TPG and certain of its
affiliates and an affiliate of Nazem, acquired all of the issued and outstanding
common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG
and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare
Corp. common stock, respectively, representing in the aggregate approximately
56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for
an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of
Genesis ElderCare Corp. common stock, representing approximately 43.6% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes
collectively referred to herein as the "Sponsors."
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
In connection with their investments in the common stock of Genesis ElderCare
Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement
dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and
Genesis, Cypress, TPG and Nazem entered into a put / call agreement, dated as of
October 9, 1997 (the "Put/Call Agreement") relating to their respective
ownership interests in Genesis ElderCare Corp.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations. Genesis also entered into an
asset purchase agreement (the "Therapy Sale Agreement") with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 (the "Therapy Sale") and a stock purchase agreement (the "Pharmacy
Sale Agreement") with Multicare and certain subsidiaries pursuant to which
Genesis acquired all of the outstanding capital stock and limited partnership
interests of certain subsidiaries of Multicare that are engaged in the business
of providing institutional pharmacy services to third parties for $50,000,000
(the "Pharmacy Sale"). The Company completed the Pharmacy Sale effective January
1, 1998. The Company completed the Therapy Sale in October 1997.
19
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for shares of Genesis preferred stock. In addition,
the Call under the Put/Call Agreement was amended to provide Genesis with the
right to purchase all of the shares of common stock of Genesis ElderCare Corp.
not owned by Genesis for $2,000,000 in cash at any time prior to the 10th
anniversary of the closing date of the restructuring transaction.
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an
irrevocable proxy to vote their shares of common stock of Genesis
ElderCare Corp. on all matters to be voted on by shareholders,
including the election of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions receive
the approval of at least one designee of each of Cypress, TPG and
Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
o provide that Genesis may appoint 100% of the members of the
operating committee of the board of directors of Genesis
ElderCare Corp.; and
o eliminate all pre-emptive rights.
Results of Operations
Effective September 30, 1997, we changed our fiscal year end to September 30
from December 31.
Fiscal 1999 Compared to Fiscal 1998
Net Revenues. Net revenues decreased 7.9% or $55.2 million to $640.4 million
in 1999 from the prior year ended September 30, 1998.
Of the net revenues decrease for the year ended September 30, 1999, $31.7
million or 4.6% is attributable to Medicare rate dilution as a result of the
Medicare Prospective Pay System implemented on January 1, 1999. Effective
January 1, 1998, the Company sold its institutional pharmacy business to
Genesis. A decrease in net revenues of $19.7 million or 2.8% relates the impact
of the Pharmacy Sale. The remaining decrease is primarily attributable to an
overall decrease in census and quality mix in our eldercare centers.
Our quality mix of non-Medicaid patient revenues was 55% and 62% for the years
ended September 30, 1999 and 1998, respectively. The decrease is primarily due
to the exclusion of pharmacy revenues effective January 1998. Occupancy rates
were 91% and 92% for the years ended September 30, 1999 and 1998, respectively.
20
Operating Expense and Margins. Operating expenses for the year ended September
30, 1999 decreased $8.7 million or 2% from the prior year to $515.8 million. The
decrease in operating expenses reflects the impact of the Pharmacy Sale of $16.3
million ($5.2 million of salaries, wages and benefits and $11.1 million of other
operating expenses). The offsetting increase of $7.6 million resulted primarily
from $10.8 million in higher salaries, wages and benefits offset by a decline in
ancillary expenses of $3.2 million.
Facility operating margins (net revenues less operating expense) were 19.5% and
24.6% for the years ended September 30, 1999 and 1998, respectively. Income
before interest expense, income taxes, depreciation and amortization, debenture
conversion expense, impairment charges, and lease expense (EBITDAR) was 13.5%
and 18.5% of net revenues for the years ended September 30, 1999 and 1998,
respectively. The dilution in margins is principally due to Medicare Rate
dilution as a result of PPS.
Management Fee Expense. In connection with the Management Agreement, Genesis
manages Multicare's operations for a fee of six percent of Multicare's
non-extraordinary sales (as defined by the Management Agreement) and is
responsible for Multicare's corporate general and administrative expenses other
than certain specified third party expenses. Management fees decreased by $3.9
million or 9% to $38.4 million due to the decline in net revenues.
Lease Expense. Lease expense of $13.0 million and $13.2 million for the year
ended September 30, 1999 and 1998, respectively was relatively unchanged as the
same number of eldercare centers were leased in 1999 as in 1998.
Depreciation and Amortization. Depreciation and amortization expense for the
year ended September 30, 1999 increased $0.8 million or 2% from the prior year
to $45.7 million. The increase is due to capital expenditures for routine
maintenance and renovation. The Company has not completed any acquisitions and
has begun little new construction since the Merger.
Interest Expense, net. Net interest expense for the year ended September 30,
1999 increased $4.9 million from the prior year to $66.7 million. The increase
is principally due to an increase in the effective borrowing rate of
approximately 0.7% to 8.6% for the year ended September 30, 1999.
Impairment Charges. The impairment charges of $397.3 million for the year ended
September 30, 1999 relate to the write-down of long-lived assets pursuant to
SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, ("SFAS 121"). The Company evaluated the
recoverability of its long-lived assets, including goodwill. In part, changes in
government regulations since the Merger has precluded the Company from achieving
operating profits from levels that existed prior to the Merger. In the fourth
quarter of fiscal 1999, the Company determined that estimated undiscounted
future cash flows were below the carrying value of long-lived assets for 21
centers. The fair market value of the impaired eldercare centers was estimated
based on a multiple of projected cash flows resulting in a write-down of $167.4
million of primarily goodwill. In addition, the Company anticipates the sale of
28 centers in Ohio, Illinois and Wisconsin, in the second quarter of fiscal
2000. These centers were evaluated based on the anticipated sales price.
Long-lived asset values of all centers anticipated to be sold were compared to
the anticipated sales price resulting in a write-down of $229.9 million of
primarily goodwill.
Income Tax Provision (Benefit). The provision for income taxes for the year
ended September 30, 1999 decreased by $37.8 million to a benefit of $29.0
million. Of the decrease $20.8 million relates to the tax effect of the
impairment charge. The remainder of the decrease, $17.0 million, relates to the
decrease in operating income before impairment charges of $48.1 million at an
effective rate of 35%.
21
Fiscal 1998 Compared to Fiscal 1997
Net Revenues. Net revenues increased 2.4% or $16.3 million to $695.6 million
in 1998 from the prior year ended September 30, 1997.
Of the net revenues increase for the year ended September 30, 1998, $64.7
million or 9.5% is attributable to internal growth, resulting mainly from
increases in payor rates and development and opening of additional beds. This
growth is offset by a decrease in net revenues of $59.6 million or 8.8% relating
to the impact of the Pharmacy Sale and the Therapy Sale. The remaining growth is
due to the inclusion of results for the acquisition of the AoDoS Group for a
full year in fiscal 1998 as compared to nine months in fiscal 1997.
Our quality mix of non-Medicaid patient revenues was 62% and 67% for the years
ended September 30, 1998 and 1997, respectively. The 1997 percentage reflects
the inclusion of the Pharmacy and Therapy revenue included in non-Medicaid
patient revenues. Occupancy rates were 92% and 91% for the years ended September
30, 1998 and 1997, respectively.
Operating Expense and Margins. Operating expenses for the year ended September
30, 1998 increased $9.0 million or 2% from the prior year to $524.5 million. An
increase of $56.7 million resulted primarily from higher salaries, wages and
benefits and the expanded utilization of salaried therapists and nursing
staffing levels to support higher patient acuities and more complex product
lines such as subacute and Alzheimers care. The offsetting decreases in
operating expenses reflect the impact of the Pharmacy Sale and the Therapy Sale
of $47.7 million ($21.9 million of salaries, wages and benefits and $25.8 of
other operating expenses).
Facility operating margins (net revenues less operating expenses) were 24.6% and
24.1% for the years ended September 30, 1998 and 1997, respectively. Income
before interest expense, income taxes, depreciation and amortization, debenture
conversion expense, and lease expense (EBITDAR) was 18.5% and 19.4% of net
revenues for the years ended September 30, 1998 and 1997, respectively.
Management Fee and Corporate, General and Administrative Expense. In connection
with the Management Agreement, beginning with fiscal 1998, Genesis manages
Multicare's operations for a fee of six percent of Multicare's revenues and is
responsible for Multicare's corporate general and administrative expenses. The
corporate, general and administrative expenses for the year ended September 30,
1997 included Multicare's resources devoted to operations, finance, legal, risk
management and information systems.
Lease Expense. Lease expense for the year ended September 30, 1998 decreased
$2.7 million or 17% to $13.2 million. Included in the prior year, was lease
expense of $2.9 million for six eldercare centers that were leased in the prior
year but acquired in connection with the Merger.
Depreciation and Amortization. Depreciation and amortization expense for the
year ended September 30, 1998 increased $17.0 million or 61% from the prior year
to $44.9 million. The increase is due to depreciation on the allocation of the
purchase price to property, plant and equipment and to amortization of goodwill
relating to the Merger.
Interest Expense, net. Net interest expense for the year ended September 30,
1998 increased $33.9 million from the prior year to $61.7 million. This increase
is a result of incremental borrowings under the Company's Senior Facilities and
9% Notes incurred to finance the Merger.
Debenture Conversion Expense. Debenture conversion expense for the year ended
September 30, 1997 relates to the premium paid in January 1997 to convert $11
million of convertible debentures into common stock.
22
Income Tax Expense. The provision for income taxes increased to 97% of pre-tax
income for the year ended September 30, 1998 from 37% of pre-tax income in the
prior year. The increase relates to non-deductible goodwill amortization
resulting from the Merger.
Liquidity and Capital Resources
General
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 1999, we had approximately $741,256,000
(excluding current portion of $34,700,000) of long-term indebtedness which
represented 69% of our total capitalization. We also have significant long-term
operating lease obligations with respect to certain of our eldercare centers.
The degree to which we are leveraged could have important consequences,
including, but not limited to the following:
o our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or other
purposes may be limited or impaired;
o a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on
indebtedness, thereby reducing the funds available to us for our
operations;
o our operating flexibility is limited by restrictions contained in
some of our debt agreements which limit our ability to incur
additional indebtedness and enter into other financial
transactions, to pay dividends, or sell assets and set forth
minimum net worth requirements;
o our degree of leverage may make us more vulnerable to economic
downturns and less competitive, may reduce our flexibility in
responding to changing business and economic conditions and may
limit our ability to pursue other business opportunities, to
finance our future operations or capital needs, and to implement
our business strategy; and
o certain of our borrowings are and will continue to be at variable
rates of interest, which exposes us to the risk of higher
interest rates.
Required payments of principal and interest on our indebtedness is expected to
be financed from our cash flow from operations and from the anticipated sale of
certain assets in Illinois, Wisconsin and Ohio in the second quarter of our
fiscal year 2000. Our ability to make scheduled payments of the principal of, to
pay interest thereon, or to refinance our indebtedness, depends on the future
performance of our business, which will in turn be subject to financial,
business, economic and other factors affecting our business and operations,
including factors beyond our control, such as prevailing economic conditions.
Our ability to make scheduled payments of the principal or interest depends on
our ability to complete the sale of assets in Illinois, Wisconsin and Ohio.
Management is currently engaged in discussions for the asset sales, however, we
have no firm commitments from potential purchases for these assets. There can be
no assurances that the anticipated sales will be consummated and that cash flow
from operations will be sufficient to enable us to service our debt and meet our
other obligations. If such cash flow is insufficient, we may be required to
refinance and/or restructure all or a portion of our existing debt, to sell
additional assets or to obtain additional financing. There can be no assurance
that any such refinancing or restructuring would be possible or that any such
additional sales of assets or additional financing could be achieved. We also
have significant long-term operating lease obligations with respect to certain
of our sites of service, including eldercare centers.
Operating cash flow will depend upon our ability to effect cost reduction
initiatives and to continue to reduce our investment in working capital. We
believe that operating cash flow which is expected to be augmented by planned
asset sales and refinancing transactions, will be sufficient to meet our future
obligations. However, there can be no assurances that the cash flow from our
operations will be sufficient to enable us to service our substantial
indebtedness and meet our other obligations. At September 30, 1999 and 1998, we
had working capital of $10.3 million and $22.8 million, respectively.
23
Cash flow used in operations was $19.9 million for the year ended September 30,
1999 compared to cash flow provided by operations of $23.1 million in the
comparable period of 1998. The decrease in operating cash flows results
primarily from the decline in earnings before impairment charges of $30.0
million which is attributable to decreased revenue as a result of the
implementation of PPS. Net accounts receivable were $123.1 and $114.2 million at
September 30, 1999 and 1998, respectively. Legislative and regulatory action and
government budgetary constraints could change the timing of payments and
reimbursement rates of the Medicare and Medicaid programs in the future. These
changes have had a material adverse effect on the Company's future operating
results and cash flows.
Cash flows from investing in fiscal year 1999 includes the deferred management
fees due to Genesis of $12.8 million as a source of cash. Capital expenditures
of $15.3 million are principally for routine maintenance and renovation. The
Company has not completed any new acquisitions and has begun little new
construction since the Merger.
Credit Facility and Other Debt
In connection with the Merger, Multicare entered into three term loans and a
revolving credit facility of up to $525 million, in the aggregate (collectively,
the "Credit Facility"), provided by a syndicate of banks and other financial
institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as
administrative agents (the "Administrative Agent"), pursuant to a certain credit
agreement (the "Long Term Credit Agreement") dated as of October 14, 1997, as
amended from time to time.
Multicare entered into a fourth amended and restated credit agreement on August
20, 1999 which made the financial covenants for certain periods less
restrictive, permitted a portion of the proceeds of assets sales to repay
indebtedness under the Tranche A Term Facility and Revolving Facility (defined
below), permitted the restructuring of the Put / Call Agreement, as defined, and
increased the interest rates applying to the Term Loans (defined below) and the
Revolving Facility.
The Credit Facilities consist of three term loans with an aggregate original
balance of $400 million (collectively, the "Term Loans"), and a $125 million
revolving credit loan (the "Revolving Facility"). The Term Loans amortize in
quarterly installments through 2005, of which $34 million is payable in Fiscal
2000. The loans consist of:
o an original six year term loan maturing in September 2003 with an
outstanding balance of $148 million at September 30, 1999 (the
"Tranche A Term Facility");
o an original seven year term loan maturing in September 2004 with
an outstanding balance of $147 million at September 30, 1999 (the
"Tranche B Term Facility"); and
o an original eight year term loan maturing in June 2005 with an
outstanding balance of $49 million at September 30, 1999 (the
"Tranche C Term Facility").
o The Revolving Facility, with an outstanding balance of $116
million at September 30, 1999, becomes payable in full on
September 30, 2003.
The Credit Facility (as amended) is secured by first priority security interests
(subject to certain exceptions) in all personal property, including inventory,
accounts receivable, equipment and general intangibles. Mortgages on certain of
Multicare's subsidiaries' real property were also granted. Loans under the
Credit Facility bear, at Multicare's option, interest at the per annum Prime
Rate as announced by the administrative agent, or the applicable Adjusted LIBO
Rate plus, in either event, a margin (the "Annual Applicable Margin") that is
dependent upon a certain financial ratio test.
24
Effective with the Amendment on August 20, 1999, loans under the Tranche A Term
Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%;
loans under the Tranche B Term Facility bear interest at a rate equal to LIBO
Rate plus a margin up to 4.0%; loans under the Tranche C Term Facility bear
interest at a rate equal to LIBO Rate plus a margin up to 4.25%; loans under the
Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a
margin up to 3.75%. Subject to meeting certain financial covenants, the
above-referenced interest rates will be reduced.
All net proceeds of the disposition of certain assets located in Ohio not in
excess of $55 million shall be applied against the Revolving Facility at the
time outstanding on a pro rata basis in accordance with the relative aggregate
principal amount thereof held be each applicable lender.
All net proceeds of the disposition of certain assets located in Illinois and
Wisconsin shall be applied first against the Tranche A Term Loan, on a pro rata
basis in accordance with the relative aggregate principal amounts held by each
applicable lender.
The Company anticipates selling 28 eldercare centers with approximately 2,700
beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year
2000. The Company may manage these centers subsequent to the sale. Based on the
anticipated sales, debt amortization on Tranche A is expected to be reduced by
approximately $12.9 million in the fiscal year 2000, $19.3 million in fiscal
year 2001, $21.4 million in fiscal year 2002, and $21.4 million in fiscal year
2003. There can be no assurance that any such sales of assets will be achieved.
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of Multicare and its subsidiaries to dispose of assets,
incur additional indebtedness, make loans and investments, pay dividends, engage
in mergers or consolidations, engage in certain transactions with affiliates and
change control of capital stock, and to make capital expenditures; prohibit the
ability of Multicare and its subsidiaries to prepay debt to other persons, make
material changes in accounting and reporting practices, create liens on assets,
give a negative pledge on assets, make acquisitions and amend or modify
documents; causes Multicare and its affiliates to maintain certain agreements
including the Management Agreement and the Put/Call Agreement (as amended), as
defined, and corporate separateness; and will cause Multicare to comply with the
terms of other material agreements, as well as comply with usual and customary
covenants for transactions of this nature.
On August 11, 1997, Genesis ElderCare Acquisition Corp. sold $250 million
principal amount of 9% Senior Subordinated Notes due 2007 ("the 9% Notes").
Interest on the 9% Notes is payable semiannually on February 1 and August 1 of
each year.
The 9% Notes are unsecured, general obligations of the issuer, subordinated in
right of payment to all existing and future Senior Indebtedness, as defined in
the Indenture, of the issuer, including indebtedness under the Senior
Facilities. The 9% Notes rank pari passu in right of payment with any future
senior subordinated indebtedness of the issuer and are senior in right of
payment to all future subordinated indebtedness of the issuer. The 9% Notes are
redeemable at the option of the issuer, in whole or in part, at any time on or
after August 1, 2002, initially at 104.5% of their principal amount, plus
accrued interest, declining ratably to 100% of their principal amount, plus
accrued interest, on or after August 1, 2004. The 9% Notes are subject to
mandatory redemption at 101%. Upon a Change in Control, as defined in the
Indenture, the issuer is required to make an offer to purchase the 9% Notes at a
purchase price equal to 101% of their principal amount, plus accrued interest.
The Indenture contains a number of covenants that, among other things, restrict
the ability of the issuer of the 9% Notes to incur additional indebtedness, pay
dividends, redeem capital stock, make certain investments, issue the capital
stock of its subsidiaries, engage in mergers or consolidations or asset sales,
engage in certain transactions with affiliates, and other restrictions affecting
its subsidiaries.
25
Merger and Other Transactions
Upon the consummation of the Merger, Multicare assumed all obligations of
Acquisition Corp. with respect to and under the 9% Notes and the related
Indenture.
On October 9, 1997, Multicare, Genesis and Genesis ElderCare Network Services,
Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement
(the "Management Agreement") pursuant to which Genesis manages Multicare's
operations. The Management Agreement has a term of five years with automatic
renewals for two years unless either party terminates the Management Agreement.
Genesis will be paid a fee of six percent of Multicare's net revenues for its
services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of (i) $1.9 million and (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23.9 million in any given year. At September 30, 1999 $26.9 million is
subordinated and due to Genesis Health Ventures, Inc. Under the Management
Agreement, Genesis is responsible for Multicare's non-extraordinary sales,
general and administrative expenses (other than certain specified third-party
expenses), and all other expenses of Multicare are paid by Multicare.
On October 10, 1997, Genesis entered into the Therapy Sale pursuant to which
Genesis acquired all of the assets used in Multicare's outpatient and inpatient
rehabilitation therapy business for $24.0 million, subject to adjustment.
On October 10, 1997, Genesis and one of its wholly-owned subsidiaries entered
into the Pharmacy Sale pursuant to which Genesis acquired all of the outstanding
capital stock and limited partnership interests of certain subsidiaries of
Multicare that are engaged in the business of providing institutional pharmacy
services to third parties for $50.0 million, subject to adjustment (the
"Pharmacy Sale"). We completed the Pharmacy Sale effective January 1, 1998.
In February 1998 ElderTrust ("ETT"), a Maryland real estate investment trust
sponsored by Genesis, made term loans to our subsidiaries with respect to the
lease-up of three assisted living facilities. The loans have a fixed annual rate
of interest of 10.5% and mature three years from the date of the loans, subject
to our right to extend the term for up to three one-year extension periods in
the event the facility has not reached "stabilized occupancy" (as defined) as of
the third anniversary of the loan (or at the end of any extension period, if
applicable).
ETT is obligated to purchase and leaseback the three facilities that secure the
term and construction loans being made to us, upon the earlier of the facility
reaching stabilized occupancy or the maturity of the loan secured by the
facility provided, however, that we will not be obligated to sell any facility
if the purchase price for the facility would be less than the applicable loan
amount. The purchase agreements provide for a cash purchase price in an amount
which will result in an annual yield of 10.5% to ETT. If acquired by ETT, these
facilities would be leased to us under minimum rent leases. The initial term of
any minimum rent lease will be ten years, and then we will have the option to
extend the term for up to two five-year extension periods upon 12 months notice
to ETT. Minimum rent for the first lease year under any minimum rent lease will
be established by multiplying the purchase price for the applicable facility
times 10.5%, and the increase each year by an amount equal to the lesser of:
o 5% of the increase in the gross revenues for such facility
(excluding any revenues derived from ancillary healthcare
services provided by Genesis or its affiliates to residents of
the applicable facility) during the immediately preceding year or
o one-half of the increase in the Consumer Price Index during the
immediately preceding year.
26
During the last four years of the term (as extended, if applicable), the Company
is required to make minimum capital expenditures equal to $3,000 per residential
unit in each assisted living facility covered by a minimum rent lease.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997 Act and
the Refinement Act, has resulted in continuing change in the Medicare and
Medicaid reimbursement programs which has adversely impacted us. The changes
have limited, and are expected to continue to limit, payments increases under
these programs. Also, the timing of payments made under the Medicare and
Medicaid programs is subject to regulatory action and governmental budgetary
constraints; in recent years, the time period between submission of claims and
payment has increased. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative rulings
and interpretations which may further affect payments made under those programs.
Further, the federal and state governments may reduce the funds available under
those programs in the future or require more stringent utilization and quality
reviews of eldercare centers or other providers. There can be no assurances that
adjustments from Medicare or Medicaid audits will not have a material adverse
effect on us.
See "Cautionary Statements Regarding Forward Looking Statements," "Business -
Revenue Sources" and "Business-Government Regulation."
Anticipated Impact of Healthcare Reform
The majority of the Multicare eldercare centers began implementation of PPS on
January 1, 1999. The actual impact of PPS on our earnings in future periods will
depend on many variables which can not be quantified at this time, including the
effect of the Refinement Act, regulatory changes, patient acuity, patient length
of stay, Medicare census, referral patterns, and our ability to reduce costs.
See "Cautionary Statements Regarding Forward Looking Statements," "Business -
Revenue Sources" and "Business Governmental Regulation."
Seasonality
Our earnings generally fluctuate from quarter to quarter. This seasonality is
related to a combination of factors which include the timing of Medicaid rate
increases, seasonal census cycles, and the number of calendar days in a given
quarter.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation and marketplace labor shortages. To date, we
have offset our increased operating costs by increasing charges for our
services. We have also implemented cost control measures to limit increases in
operating costs and expenses but cannot predict our ability to control such
operating cost increases in the future. See "Cautionary Statements Regarding
Forward Looking Statements."
27
Year 2000 Compliance
We have implemented a process to address our Year 2000 compliance issues. The
process includes:
o an inventory and assessment of the compliance of the essential systems
and equipment of the Company and of Year 2000 mission critical
suppliers, customers, and other third parties,
o the remediation of non-compliant systems and equipment, and
o contingency planning.
Our Year 2000 work is being performed and paid for by Genesis Health Ventures ,
Inc., manager of our operations under the terms of a long-term management
agreement. Our manager has concluded its inventory and assessment work and has
concluded its remediation of information technology ("IT") systems and equipment
and non-IT systems and equipment (embedded technology). Our manager has
substantially completed its review of the systems and equipment of critical
suppliers, customers and other third parties.
With respect to the Year 2000 compliance of critical third parties, we derive a
substantial portion of our revenues from the Medicare and Medicaid programs. In
1998, the HCFA Administrator asserted that all systems necessary to make
payments to fiscal intermediaries would be compliant. The Administrator provided
further assurance that intermediary systems would also be compliant well in
advance of the deadline. All Medicare and most Medicaid intermediaries have
reported to our manager that they are either already compliant or will be prior
to the end of 1999. Our manager has worked actively to confirm the Year 2000
readiness status for each intermediary and continues to work cooperatively with
a few remaining Medicaid plans to ensure appropriate continuing payments for
services rendered to all government-insured patients.
We have remediated our critical IT and non-IT systems and equipment. We have
also prepared contingency plans in the event that essential systems and
equipment fail to be Year 2000 compliant. We believe we have achieved Year 2000
compliance for all our essential systems and equipment; although there can be no
assurance that potential non-compliance will not have a material adverse effect
on our business, financial condition or results of operations. In addition there
can be no assurance that all of our critical suppliers and other third parties
will be Year 2000 compliant by January 1, 2000, or that such potential
non-compliance will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Our manager's aggregate costs directly related to Year 2000 compliance efforts
is approximately $2,100,000. Our analysis of our Year 2000 issues is based in
part on information from third party suppliers; there can be no assurance that
such information is accurate or complete.
Our failure or the failure of third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in interruptions
of normal business operations. Our potential risks include:
o the inability to deliver patient care related services in the
Company's facilities and / or in non- affiliated facilities,
o the delayed receipt of reimbursement from the Federal or State
governments, private payors, or intermediaries,
o the failure of security systems, elevators, heating systems or
other operational systems and equipment of the Company's
facilities and
28
o the inability to receive critical equipment and supplies from
vendors.
Each of these events could have a material adverse affect on the Company's
business, results of operations and financial condition.
Contingency plans for our Year 2000-related issues have been developed and
include, but are not limited to, identification of alternate suppliers,
alternate technologies and alternate manual systems.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
Statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Company or to products or services
offered by the Company, is also intended to be "Year 2000 Readiness Disclosure"
as such term is defined in the Year 2000 Act.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-up Activities ("the Statement").
This statement requires costs of start-up activities, including organizational
costs, to be expensed as incurred. Start-up activities are defined as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new process in an existing facility, or commencing a new operation. This
Statement is effective for fiscal years beginning after December 15, 1998 or our
fiscal year ending September 30, 2000. We expect the cumulative effect of the
accounting change to be approximately $3.1 million, net of tax, which will be
recorded in the Company's quarter ending December 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters beginning after June 15, 2000. We intend to adopt this
accounting standard as required. The adoption of this standard is not expected
to have a material impact on our earnings or financial position.
29
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes. In the normal course of
business, we employ established policies and procedures to manage our exposure
to changes in interest rates. Our objective in managing our exposure to interest
rate changes is to limit the impact of such changes on earnings and cash flows
and to lower our overall borrowing costs. To achieve our objectives, we
primarily use interest rate swaps to manage net exposure to interest rate
changes related to our portfolio of borrowings. Notional amounts of interest
rate swap agreements are used to measure interest to be paid or received
relating to such agreements and do not represent an amount of exposure to credit
loss. The fair value of interest rate swap agreements is the estimated amount we
would receive or pay to terminate the swap agreement at the reporting date,
taking into account current interest rates. The three-month LIBO rate is
approximately 5.51% at September 30, 1999. The estimated amount we would pay to
terminate our interest rate swap agreements outstanding at September 30, 1999 is
approximately $1.0 million. The fair value of our debt, based on quoted market
prices or current rates for similar instruments with same maturities was
approximately $408,257,000 and $743,332,000 September 30, 1999 and September 30,
1998, respectively. The table below represents the contractual or notional
balances of our fixed rate and market sensitive instruments at expected maturity
dates and the weighted average interest rates.
($ in thousands)
Liabilities
------------------------------------------------------------------------------------------------------------------
Expected Maturity
2000 2001 2002 2003 2004 Thereafter Total
------------------------------------------------------------------------------------------------------------------
Long Term Debt:
Fixed Rate $700 $20,394 $15,103 $710 $773 $278,401 $316,081
Average Interest 9.1% 9.1% 9.1% 9.0% 9.0% 9.4% 9.1%
Rate
Variable Rate $34,000 $38,000 $42,000 $158,000 $153,000 $34,875 $459,875
Average Interest
Rate Libor +3.9% Libor +3.9% Libor +3.9% Libor +3.9% Libor +4.1 Libor +4.3 Libor + 3.9
------------------------------------------------------------------------------------------------------------------
Interest Rate Derivatives
------------------------------------------------------------------------------------------------------------------
Expected Maturity
2000 2001 2002 2003 2004 Thereafter Total
------------------------------------------------------------------------------------------------------------------
Interest Rate Swaps:
Variable to Fixed $100,000 $100,000
Average Fixed 5.6% 5.6%
Pay Rate
Average Variable
Rate Libor Libor
------------------------------------------------------------------------------------------------------------------
30
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ..................................................................... 32
Consolidated Balance Sheets as of September 30, 1999 and 1998 .................................... 33
Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997
(unaudited) and the nine month period ended September 30, 1997 .............................. 34
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999 and 1998,
and the nine month period ended September 30, 1997 ........................................... 35
Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997,
(unaudited) and the nine month period ended September 30, 1997 ............................... 36
Notes to Consolidated Financial Statements .......................................................37-49
31
The Board of Directors
The Multicare Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Multicare
Companies, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 1999 and 1998, and the nine month period
ended September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Multicare
Companies, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for the years ended September
30, 1999 and 1998, and the nine month period ended September 30, 1997 in
conformity with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
December 1, 1999
32
The Multicare Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30,
------------------------------
1999 1998
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,967 $ 11,344
Accounts receivable, net of allowance for doubtful accounts
of $18,494 and $10,080 in 1999 and 1998, respectively 123,131 114,210
Prepaid expenses and other current assets 13,130 16,208
Deferred taxes 2,027 2,117
------------ -------------
Total current assets 142,255 143,879
Property, plant and equipment:
Land, buildings and improvements 590,334 678,748
Equipment, furniture and fixtures 57,996 51,013
Construction in progress 15,197 9,627
------------ -------------
663,527 739,388
Less: accumulated depreciation and amortization 42,156 20,276
------------ -------------
621,371 719,112
Goodwill, net 480,809 778,231
Debt issuance costs, net 17,444 18,956
Other assets 40,485 38,777
------------ -------------
$ 1,302,364 $ 1,698,955
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,062 $ 30,188
Accrued liabilities 53,143 60,226
Current portion of long-term debt 34,700 30,647
------------ -------------
Total current liabilities 131,905 121,061
Long-term debt 741,256 725,194
Deferred taxes 76,007 105,023
Due to Genesis Health Ventures, Inc. and Other Liabilities 27,285 14,439
Stockholders' equity:
Common stock, par value $.01, 100 shares authorized,
100 issued and outstanding in 1999 and 1998 --- ---
Additional paid-in capital 733,000 733,000
Retained earnings (deficit) (407,089) 238
------------ -------------
Total stockholders' equity 325,911 733,238
------------ -------------
$ 1,302,364 $ 1,698,955
============ =============
See accompanying notes to consolidated financial statements.
33
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
Nine month
Year ended period ended
September 30, September 30,
--------------------------------------- -------------
1999 1998 1997 1997
--------- ------- ------- -------------
(unaudited)
Net revenues $ 640,414 695,633 679,292 $533,952
Expenses:
Operating expenses:
Salaries, wages and benefits 330,254 341,859 325,020 255,762
Other operating expenses 185,546 182,683 190,556 150,411
Corporate, general and administrative expense --- --- 31,984 25,203
Management fee 38,360 42,235 --- ---
Lease expense 12,955 13,194 15,929 12,693
Depreciation and amortization expense 45,702 44,875 27,916 21,620
Interest expense, net 66,671 61,728 27,857 21,640
Debenture conversion expense --- --- 785 785
Impairment charges 397,269 --- --- ---
--------- ------- ------- -------
Total expenses 1,076,757 686,574 620,047 488,114
Income (loss) before income taxes and
extraordinary item (436,343) 9,059 59,245 45,838
Income tax provision (benefit) (29,016) 8,821 22,152 17,087
--------- ------- ------- -------
Income (loss) before extraordinary item (407,327) 238 37,093 28,751
Extraordinary item - loss on extinguishment
of debt, net of tax benefit --- --- 2,219 873
--------- ------- ------- -------
Net income (loss) $(407,327) 238 34,874 $27,878
========= ======= ======= =======
See accompanying notes to consolidated financial statements.
34
The Multicare Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1999 and 1998
and the Nine Month Period Ended September 30, 1997
(In thousands)
Common Stock Additional Retained Total
------------ Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
--------- --------- ----------- ----------- ----------
Balances, December 31, 1996 30,134 $ 301 $ 143,513 $ 64,121 $ 207,935
Exercise of stock options
(including tax benefit) 21 --- 277 --- 277
Debt conversion 1,530 15 26,087 --- 26,102
Shares issued under stock purchase
plan 45 1 773 --- 774
Contingent stock purchase
commitment and other 1 --- 208 --- 208
Net income --- --- --- 27,878 27,878
--------- --------- ----------- ----------- ----------
Balances, September 30, 1997 31,731 $ 317 $ 170,858 $ 91,999 $ 263,174
Merger with Genesis Eldercare
Acquisition Corp. (31,731) (317) (170,858) (91,999) (263,174)
Equity Contribution, net --- --- 733,000 --- 733,000
Net income --- --- --- 238 238
--------- --------- ----------- ----------- ----------
Balances, September 30, 1998 --- $ --- $ 733,000 $ 238 $ 733,238
Net loss --- --- --- (407,327) (407,327)
--------- --------- ----------- ----------- ----------
Balances, September 30, 1999 --- $ --- $ 733,000 $ (407,089) $ 325,911
========= ========= =========== =========== ==========
See accompanying notes to consolidated financial statements.
35
THE MULTICARE COMPANIES, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Nine Month
Fiscal Years Ended September 30, Period Ended
--------------------------------------------- September 30,
1999 1998 1997 1997
---------- ----------- -------------- --------------
Cash flows from operating activities: (Unaudited)
Net income (loss) $(407,327) $ 238 $ 34,874 $ 27,878
Adjustments to reconcile net income to net
cash provided by operating activities:
Impairment charges 397,269 --- --- ---
Extraordinary item --- --- 3,698 1,456
Depreciation and amortization 45,702 44,722 27,706 21,332
Changes in assets and liabilities:
Deferred taxes (29,016) 28,724 (2,953) ---
Accounts receivable (35,704) (42,734) (14,080) (16,196)
Prepaid expenses and other current assets 3,077 (4,402) (6,185) (7,001)
Accounts payable and accrued liabilities 6,108 (3,433) 25,153 9,579
---------- ----------- -------------- ------
Net cash provided by (used in) operating
activities (19,891) 23,115 68,213 37,048
---------- ----------- -------------- ------
Cash flows from investing activities:
Assets and operations acquired --- (1,563) (92,695) (22,568)
Capital expenditures (15,307) (25,803) (54,226) (39,301)
Purchase of shares in tender offer --- (921,326) --- ---
Costs in connection with merger --- (102,733) --- ---
Proceeds from repayment of construction
advances --- --- 13,100 13,100
Proceeds from sale of pharmacy business --- 50,000 --- ---
Proceeds from sale of therapy business --- 24,000 --- ---
Other 10,653 (4,212) (12,024) (9,465)
---------- ----------- -------------- ------
Net cash used in investing activities (4,654) (981,637) (145,845) (58,234)
---------- ----------- -------------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock --- --- 51,942 ---
Proceeds from exercise of stock options and
stock purchase plan --- --- 1,351 1,075
Proceeds from issuance of put options --- --- 184 184
Equity contribution --- 733,000 --- ---
Debt and other financing obligation
repayments in connection with merger --- (453,725) --- ---
Proceeds from long-term debt 320,911 2,306,947 457,181 112,400
Payments of long-term debt (300,796) (1,596,892) (431,718) (91,310)
Debt issuance costs (2,947) (21,582) (1,083) (195)
---------- ----------- -------------- ------
Net cash provided by financing activities 17,168 967,748 77,857 22,154
---------- ----------- -------------- ------
Increase (decrease) in cash and cash equivalents (7,377) 9,226 225 968
Cash and cash equivalents at beginning of period 11,344 2,118 1,893 1,150
---------- ----------- -------------- ------
Cash and cash equivalents at end of period $ 3,967 $ 11,344 $ 2,118 $ 2,118
========== =========== ============== ======
Supplemental disclosure of non cash investing
and financing activities:
Fair value of assets and operations acquired $ --- $ 16,622 $ 121,026 $ 24,937
Debt and liabilities assumed in connection with
assets and operations acquired --- 15,059 18,314 2,369
Stock issued in connection with assets and
operations acquired --- --- 10,017 ---
---------- ----------- -------------- ------
$ --- $ 1,563 $ 92,695 $ 22,568
========== =========== ============== ======
See accompanying notes to consolidated financial statements.
36
The Multicare Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended September 30, 1999 and
1998, and the Nine Month Period Ended
September 30, 1997
(In thousands, except share data)
The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the
"Company") own, operate and manage skilled eldercare and assisted living
facilities which provide long-term care and specialty medical services in
selected geographic regions within the eastern and midwestern United
States. In addition, the Company operated institutional pharmacies, medical
supply companies, outpatient rehabilitation centers and other ancillary
healthcare businesses before the Merger (as defined below). As a result of
the Merger of Genesis ElderCare Acquisition Corp. with the Company, Genesis
Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis
ElderCare Corp., which owns 100% of the outstanding capital stock of the
Company. The Company and Genesis have entered into a management agreement
pursuant to which Genesis manages the Company's operations.
(1) Organization and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its majority owned and controlled subsidiaries. Investments in
affiliates in which the Company has a 20% to 50% equity interest are
reported using the equity method.
The operations of Multicare before the Merger (as defined below) are
referred to as the Predecessor Company. Effective September 30, 1997,
Multicare changed its fiscal year end to September 30 from December 31.
All significant intercompany transactions and accounts of the Company have
been eliminated.
Multicare operates predominantly in one industry segment, operating skilled
eldercare centers, which represents over 95% of consolidated revenues.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(2) Summary of Significant Accounting Policies
(a) Cash Equivalents
Cash equivalents consist of highly liquid instruments with original
maturities of three months or less.
(b) Financial Instruments
37
The carrying amounts of cash and cash equivalents, and other current assets
and current liabilities approximate fair value due to the short term
maturity of these instruments. The fair value of the Company's long term
debt is estimated based on quoted market prices or current rates offered to
the Company for similar instruments with the same remaining maturities.
(c) Property, Plant and Equipment
Land, buildings and improvements, equipment, furniture and fixtures are
stated at fair market value at the date of the Merger (as defined below).
Subsequent additions are stated at cost. Depreciation of buildings and
improvements is calculated using the straight-line method over their
estimated useful lives that range from twenty to thirty-five years.
Depreciation of equipment and furniture and fixtures is calculated using
the straight-line method over their estimated useful lives of seven years.
Depreciation expense was $22,197, $22,227 and $15,969, respectively for the
years ended September 30, 1999 and 1998, and the nine month period ended
September 30, 1997.
The Company records impairment losses on long-lived assets including
property, plant and equipment used in operations when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
(d) Goodwill
Goodwill resulting from acquisitions accounted for as purchases of $520,109
and $797,411 at September 30, 1999 and 1998 is amortized on a straight-line
basis over periods of five to forty years. As of September 30, 1999 and
1998 accumulated amortization of goodwill was $39,300 and $19,180,
respectively.
Goodwill is reviewed for impairment whenever events or circumstances
provide evidence that support that the carrying amount of goodwill may not
be recoverable. The Company assesses the recoverability of goodwill by
determining whether the amortization of the goodwill balance will be
recovered through projected undiscounted future cash flows. See Note 6.
(e) Debt Issuance Costs
Debt issuance costs are amortized on a straight-line basis which
approximates the effective interest method over periods of seven to ten
years.
(f) Other Assets
Direct costs of $4,946 and $2,041 at September 30, 1999 and 1998 were
incurred to develop certain facilities and were deferred during the
start-up period and amortized on a straight-line basis over five years.
At September 30, 1999 and 1998, investments in non-consolidated affiliates
included in other assets amounted to $16,684 and $18,792, respectively.
Results of operations relating to the non-consolidated affiliates were
insignificant to the Company's consolidated financial statements the years
ended September 30, 1999 and 1998.
(g) Net Revenues
Net revenues primarily consist of services paid for by patients and amounts
for services provided that are reimbursable by certain third-party payors.
Medicare and Medicaid revenues are determined by various rate setting
formulas and regulations. Net revenues are recorded net of contractual
allowances. Final determinations of amounts paid by Medicaid and Medicare
are subject to review or audit. In the opinion of management, adequate
provision has been made for any adjustment that may result from these
reviews or audits. To the extent that final determination may result in
amounts which vary from management estimates, future earnings will be
charged or credited. Net revenues also include management fees revenue of
$10,978, $13,306 and $9,995 for the years ended September 30, 1999 and
1998, and the nine month period ended September 30, 1997, respectively.
38
The distribution of net patient service revenue by class of payor was as
follows:
Year Ended Year Ended Nine Months Ended
Class of Payor September 30, 1999 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------
Private pay and other $211,558 256,699 232,260
Medicaid 285,559 263,507 174,651
Medicare 143,297 175,427 127,041
------- ------- -------
$640,414 695,633 533,952
======= ======= =======
(h) Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
(i) New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities
("the Statement"). This statement requires costs of start-up activities,
including organizational costs, to be expensed as incurred. Start-up
activities are defined as those one-time activities related to opening a
new facility, introducing a new product or service, conducting business in
a new territory, conducting business with a new process in an existing
facility, or commencing a new operations. The Company expects the
cumulative effect of the accounting change to be approximately $3.1
million, net of tax which will be recorded in the Company's quarter ending
December 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Statement 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
the instrument at fair value. The accounting changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This Statement is effective for all fiscal quarters beginning
after June 15, 2000. We intend to adopt this accounting standard as
required. The adoption of this standard is not expected to have a material
impact on our earnings or financial position.
(3) Certain Significant Risks and Uncertainties
The following information is provided in accordance with the AICPA Statement of
Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 1999, we had approximately $741,256 of
long-term indebtedness (excluding current portion of $34,700) which represented
69% of our total capitalization. We also have significant long-term operating
lease obligations with respect to certain of our eldercare centers. The degree
to which we are leveraged could have important consequences, including, but not
limited to the following:
39
o the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, or other
purposes may be limited or impaired;
o a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of principal and interest on the
Company's indebtedness, thereby reducing the funds available to
us for our operations;
o the Company's operating flexibility is limited by restrictions
contained in some of the Company's debt agreements which set
forth minimum net worth requirements and/or limit the Company's
ability to incur additional indebtedness, to enter into other
financial transactions, to pay dividends, or to sell assets;
o the Company's degree of leverage may make it more vulnerable to
economic downturns and less competitive, may reduce the Company's
flexibility in responding to changing business and economic
conditions and may limit the Company's ability to pursue other
business opportunities, to finance the Company's future
operations or capital needs, and to implement its business
strategy; and
o certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company's to the
risk of greater interest rates.
The Company expects to finance required payments of principal and interest on
our indebtedness from its cash flow from operations and from the anticipated
sale of certain assets in Illinois, Wisconsin and Ohio in the second quarter of
our fiscal year 2000. Management is currently engaged in discussions for the
asset sales, however, the Company has no firm commitments from potential
purchasers for these assets. The Company's ability to make scheduled payments of
the principal or interest on, or to refinance indebtedness, depends on the
future performance of the Company's business, which is in turn subject to
financial, business, economic and other factors affecting the Company's business
and operations, including factors beyond its control, such as prevailing
economic conditions. There can be no assurances that the anticipated sales will
be consummated and that cash flow from operations will be sufficient to enable
the Company's to service its debt and meet other obligations. If such cash flow
is insufficient, the Company may be required to refinance and/or restructure all
or a portion of its existing debt, to sell additional assets or to obtain
additional financing. There can be no assurance that any such refinancing or
restructuring would be possible or that any such additional sales of assets or
additional financing could be achieved.
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, and other third party payors. The health care industry is
experiencing a strong trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services to be provided by the Company.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System ("PPS")
pursuant to the Balanced Budget Act of 1997, as modified by the
Medicare Balanced Budget Refinement Act; and
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
40
While the Company has prepared certain estimates of the impact of the above
changes, it is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on its business. Accordingly, there can be no assurance
that the impact of these changes will not be greater than estimated or that
these legislative changes or any future healthcare legislation will not
adversely affect the Company's business. There can be no assurance that payments
under governmental and private third party payor programs will be timely, will
remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. The Company's financial condition and results of
operations may be affected by the revenue reimbursement process, which in the
Company's industry is complex and can involve lengthy delays between the time
that revenue is recognized and the time that reimbursement amounts are settled.
(4) Tender Offer and Merger and its Restructuring
In October 1997, Genesis, affiliates of Cypress, TPG and certain of its
affiliates and an affiliate of Nazem, acquired all of the issued and outstanding
common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG
and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare
Corp. common stock, respectively, representing in the aggregate approximately
56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for
an aggregate purchase price of $420,000. Genesis purchased 325,000 shares of
Genesis ElderCare Corp. common stock, representing approximately 43.6% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $325,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors." Genesis also entered into an asset sale
agreement (the "Therapy Sale Agreement") with Multicare and certain of its
subsidiaries pursuant to which Genesis acquired all of the assets used in
Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000 (the "Therapy Sale") and a stock purchase agreement (the "Pharmacy
Sale Agreement") with Multicare and certain subsidiaries pursuant to which
Genesis acquired all of the outstanding capital stock and limited partnership
interests of certain subsidiaries of Multicare that are engaged in the business
of providing institutional pharmacy services to third parties for $50,000 (the
"Pharmacy Sale"). The Company completed the Pharmacy Sale effective January 1,
1998. The Company completed the Therapy Sale in October 1997.
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
In connection with their investments in the common stock of Genesis ElderCare
Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement
dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and
Genesis, Cypress, TPG and Nazem entered into a put / call agreement, dated as of
October 9, 1997 (the "Put/Call Agreement") relating to their respective
ownership interests in Genesis ElderCare Corp.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for shares of Genesis preferred stock. In addition,
the Call under the Put/Call Agreement was amended to provide Genesis with the
right to purchase all of the shares of common stock of Genesis ElderCare Corp.
not owned by Genesis for $2,000,000 in cash at any time prior to the 10th
anniversary of the closing date of the restructuring transaction.
41
Amendment to Stockholders Agreement
On November 15, 1999, the Multicare Stockholders Agreement was amended to:
o provide that all shareholders will grant to Genesis an
irrevocable proxy to vote their shares of common stock of Genesis
ElderCare Corp. on all matters to be voted on by shareholders,
including the election of directors;
o provide that Genesis may appoint two-thirds of the members of the
Genesis ElderCare Corp. board of directors;
o omit the requirement that specified significant actions receive
the approval of at least one designee of each of Cypress, TPG and
Genesis;
o permit Cypress, TPG and Nazem and their affiliates to sell their
Genesis ElderCare Corp. stock, subject to certain limitations;
o provide that Genesis may appoint 100% of the members of the
operating committee of the board of directors of Genesis
ElderCare Corp.; and
o eliminate all pre-emptive rights.
(5) Acquisitions/Dispositions
In December 1996, the Company completed the acquisition of The AoDoS Group
(AoDoS). The Company paid approximately $10,000, repaid or assumed
approximately $29,800 in debt, financed $51,000 through a lease facility,
and issued 554,973 shares of its common stock for AoDoS. Total goodwill
approximated $30,700 which was amortized over period of twenty-five to
forty years.
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements reflect
the results of operations of each facility from the date of acquisition.
The following 1998 unaudited pro forma information has been prepared as if
the Pharmacy Sale had been completed on October 1, 1997. The pro forma
financial information does not necessarily reflect the results of
operations that would have occurred had the transactions occurred at the
beginning of the respective periods presented.
September 30,
1998
-------------
(Unaudited)
Net revenues $678,589
Income (loss) before extraordinary item 474
Net income (loss) $ 474
42
(6) Asset Impairment
Pursuant to SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The Company evaluated
the recoverability of its long-lived assets, including goodwill. In part,
changes in government regulations since the Merger have precluded the
Company from achieving operating profits from levels that existed prior to
the Merger. In the fourth quarter of fiscal 1999, the Company determined
that estimated undiscounted future cash flows for 21 centers were below the
carrying value of long-lived assets. The fair market value of the impaired
eldercare centers was estimated based on a multiple of projected cash flows
resulting in a write-down, primarily of goodwill of $167.4 million. In
addition, the Company anticipates the sale of 28 centers in Ohio, Illinois
and Wisconsin, in the second quarter of fiscal 2000. Management is
currently engaged in discussions for the asset sales, however, the Company
has no firm commitments from potential purchasers for these assets. These
centers were evaluated based on the anticipated sales price. Long-lived
asset values of all centers anticipated to be sold were compared to the
expected sales price resulting in a write-down, primarily of goodwill, of
$229.9 million.
(7) Income Taxes
The provision for income taxes, exclusive of income taxes related to the
extraordinary items, consists of the following:
September 30,
1999 1998 1997
----------- -------- ---------
Federal:
Current $ --- $ 8,647 $ 15,029
Deferred 29,016 79 133
State:
Current --- 87 1,908
Deferred --- 8 17
----------- -------- ---------
$ 29,016 $ 8,821 $ 17,087
=========== ======== =========
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% to net income before income taxes and
extraordinary items as a result of the following:
Year Ended Year Ended Nine Months Ended
September 30, 1999 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------
Computed "expected" tax expense $(152,720) 3,170 $16,043
Increase in income taxes resulting from:
State and local income taxes, net of
federal tax benefits --- 95 169
Amortization of goodwill 123,704 6,280 875
Work opportunity tax credits --- (724) ---
--------- ------ -------
$ (29,016) 8,821 $17,087
========= ====== =======
43
The tax effects of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
September 30,
1999 1998
------- --------
Deferred tax assets:
Accounts receivable $ 1,325 $ 1,325
Employee benefits and compensated
absences 702 792
------- --------
$ 2,027 $ 2,117
======= ========
Deferred tax liabilities:
Property, plant and equipment $75,491 $104,179
Other 516 844
------- --------
$76,007 $105,023
======= ========
Cash paid for income taxes was $0, $1,542, and $6,580 in the years ended
September 30, 1999 and 1998, and the nine month period ended September 30,
1997, respectively.
(8) Financing Obligations
A summary of long-term debt follows:
September 30,
1999 1998
--------- ---------
Bank credit facility, with interest at approximately 8.3% and 8.2% in
1999 and 1998 ("Senior Facilities") $ 459,875 $ 438,875
Senior subordinated notes, due 2007, net of unamortized original
issue discount of $1,101 and $1,241 in 1999 and 1998, respectively
with interest at 9.0% 248,899 248,759
Term Loans with ElderTrust with interest at 10.5% 19,650 19,650
Mortgages and other debt, including unamortized premium of $3,259 and
$3,573 in 1999 and 1998, respectively, payable in varying monthly or
quarterly installments with interest at rates between 6.0% and 11.5%.
These loans mature between 2002 and 2033 47,532 48,557
--------- ---------
775,956 755,841
Less current portion 34,700 30,647
--------- ---------
Long-term debt, less current portion $ 741,256 $ 725,194
========= =========
In connection with the Merger, Multicare entered into three term loans and a
revolving credit facility of up to $525 million, in the aggregate (collectively,
the "Credit Facility"), provided by a syndicate of banks and other financial
institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as
administrative agents (the "Administrative Agent"), pursuant to a certain credit
agreement (the "Long Term Credit Agreement") dated as of October 14, 1997, as
amended form time to time.
On August 20, 1999 Multicare entered into a certain Amendment No. 4 and Waiver
to Credit Agreement ("Amendment") which made the financial covenants for certain
periods less restrictive, permitted a portion of the proceeds of assets sales to
repay indebtedness under the Tranche A Term Facility and Revolving Facility
(defined below), permitted the restructuring of the Put / Call Agreement, as
defined, and increased the interest rates applying to the Term Loans (defined
below) and the Revolving Facility.
44
The Credit Facilities consist of three term loans with an aggregate original
balances of $400 million (collectively, the "Term Loans"), and a $125 million
revolving credit loan (the "Revolving Facility"). The Term Loans amortize in
quarterly installments through 2005, of which $34 million is payable in Fiscal
2000. The loans consist of:
o an original six year term loan maturing in September 2003 with an
outstanding balance of $148 million at September 30, 1999 (the
"Tranche A Term Facility");
o an original seven year term loan maturing in September 2004 with
an outstanding balance of $147 million at September 30, 1999 (the
"Tranche B Term Facility"); and
o an original eight year term loan maturing in June 2005 with an
outstanding balance of $49 million at September 30, 1999 (the
"Tranche C Term Facility").
o The Revolving Facility, with an outstanding balance of $116
million at September 30, 1999, becomes payable in full on
September 30, 2003.
The Credit Facility (as amended) is secured by first priority security interests
(subject to certain exceptions) in all personal property, including inventory,
accounts receivable, equipment and general intangibles. Mortgages on certain of
Multicare's subsidiaries' real property were also granted. Loans under the
Credit Facility bear, at Multicare's option, interest at the per annum Prime
Rate as announced by the administrative agent, or the applicable Adjusted LIBO
Rate plus, in either event, a margin (the "Annual Applicable Margin") that is
dependent upon a certain financial ratio test.
Effective with the Amendment on August 20, 1999, loans under the Tranche A Term
Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%;
loans under the Tranche B Term Facility bear interest at a rate equal to LIBO
Rate plus a margin up to 4.0%; loans under the Tranche C Term Facility bear
interest at a rate equal to LIBO Rate plus a margin up to 4.25%; loans under the
Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a
margin up to 3.75%. Subject to meeting certain financial covenants, the
above-referenced interest rates will be reduced.
All net proceeds of the disposition of certain assets located in Illinois and
Wisconsin shall be applied first against the Tranche A Term Loan, on a pro rata
basis in accordance with the relative aggregate principal amounts held by each
applicable lender.
All net proceeds of the anticipated disposition of certain assets located in
Ohio not in excess of $55 million shall be applied against the Revolving
Facility at the time outstanding on a pro rata basis in accordance with the
relative aggregate principal amount thereof held be each applicable lender.
The Company anticipates selling 28 eldercare centers with approximately 2,700
beds in Ohio, Illinois and Wisconsin in the second quarter of our fiscal year
2000. The Company anticipates managing these centers subsequent to the sale.
Based on the anticipated sales, debt amortization on Tranche A is expected to be
reduced by approximately $12.9 million in the fiscal year 2000, $19.3 million in
fiscal year 2001, $21.4 million in fiscal year 2002, and $21.4 million in fiscal
year 2003. There can be no assurance that any such sales of assets will be
achieved.
The Credit Facility (as amended) contains a number of covenants that, among
other things, restrict the ability of Multicare and its subsidiaries to dispose
of assets, incur additional indebtedness, make loans and investments, pay
dividends, engage in mergers or consolidations, engage in certain transactions
with affiliates and change control of capital stock, and to make capital
expenditures; prohibit the ability of Multicare and its subsidiaries to prepay
debt to other persons, make material changes in accounting and reporting
practices, create liens on assets, give a negative pledge on assets, make
acquisitions and amend or modify documents; causes Multicare and its affiliates
to maintain certain agreements including the Management Agreement and the
Put/Call Agreement (as amended), as defined, and corporate separateness; and
will cause Multicare to comply with the terms of other material agreements, as
well as comply with usual and customary covenants for transactions of this
nature.
45
On August 11, 1997, Genesis ElderCare Acquisition Corp. sold $250 million
principal amount of Senior Subordinated Notes due 2007 (the "9% Notes") which
were issued pursuant to the Indenture. Interest on the 9% Notes is payable
semiannually on February 1 and August 1 of each year.
The 9% Notes are unsecured, general obligations of the issuer, subordinated in
right of payment to all existing and future Senior Indebtedness, as defined in
the Indenture, of the issuer, including indebtedness under the Senior
Facilities. The 9% Notes rank pari passu in right of payment with any future
senior subordinated indebtedness of the issuer and are senior in right of
payment to all future subordinated indebtedness of the issuer. The 9% Notes are
redeemable at the option of the issuer, in whole or in part, at any time on or
after August 1, 2002, initially at 104.5% of their principal amount, plus
accrued interest, declining ratably to 100% of their principal amount, plus
accrued interest, on or after August 1, 2004. The 9% Notes are subject to
mandatory redemption at 101%. Upon a Change in Control, as defined in the
Indenture, the issuer is required to make an offer to purchase the 9% Notes at a
purchase price equal to 101% of their principal amount, plus accrued interest.
The Indenture contains a number of covenants that, among other things, restrict
the ability of the issuer of the 9% Notes to incur additional indebtedness, pay
dividends, redeem capital stock, make certain investments, issue the capital
stock of its subsidiaries, engage in mergers or consolidations or asset sales,
engage in certain transactions with affiliates, and create dividend and other
restrictions affecting its subsidiaries.
Upon the consummation of the Merger, the Company assumed all obligations of
Acquisition Corp. with respect to and under the 9% Notes and the related
Indenture.
In the nine month period ended September 30, 1997 the Company recorded
extraordinary charges of $873 net of tax benefits of $583 relating to the
restructuring of its credit agreements and the purchase of its 12.5% Notes. The
charges are comprised of the write-off of debt issuance costs and original issue
discounts, prepayment penalties, and premiums paid above recorded values.
In 1997, $26,506 of Convertible Debentures were converted into common stock. In
connection with the early conversion of a portion of the Convertible Debentures,
the Company recorded a charge of $785 relating to premiums paid upon conversion.
The Company is subject to various financial and restrictive covenants under its
Senior Facilities, the 9% Notes and other indebtedness and is in compliance with
such covenants at September 30, 1999.
The aggregate maturities of long-term debt for the five years ending September
30, 2004 and thereafter are as follows:
Year Maturities
----------
2000 $ 34,700
2001 58,394
2002 57,103
2003 158,710
2004 153,773
Thereafter 311,118
----------
773,798
Discount (1,101)
Premium 3,259
----------
$ 775,956
==========
46
The Company enters into interest rate swap agreements to manage interest costs
and risks associated with changing interest rates. These agreements generally
convert underlying variable-rate debt based on three month LIBO Rates into
fixed-rate debt. At September 30, 1999, the notional principal amount of these
agreements totaled $100,000. At September 30, 1999, the notional principal
amount the Company made quarterly payments at a weighted average fixed rate of
5.6% and received payments at a floating rate based on three month LIBO Rate.
Interest expense of $967, $2,136 and $1,816 was capitalized in the years ended
September 30, 1999 and 1998, and in the nine month period ended September 30,
1997, respectively, in connection with new construction and facility renovations
and expansions.
Cash paid for interest was $67,619, $60,498 and $22,817 in the years ended
September 30, 1999 and 1998, and in the nine month period ended September 30,
1997, respectively.
(9) Accrued Liabilities
At September 30, 1999 and 1998 accrued liabilities consist of the
following:
1999 1998
------- -------
Salaries and wages $15,898 $24,924
Interest 7,165 7,071
Insurance 9,682 10,849
Other 20,398 17,382
------- -------
$53,143 $60,226
======= =======
(10) Other Long Term Liabilities
At September 30, 1999 and 1998 other long term liabilities include $26,868
and $14,079 of accrued management fees under the terms of the Management
Agreement (See Note (4) - Tender Offer and Merger and its Restructuring).
Since inception of the Management Agreement, 2% of Multicare's net revenue
payable as a management fee to Genesis has been deferred. Genesis earns a
fee of six percent of Multicare's net revenues for its services under the
Management Agreement provided that payment of such fee in respect of any
month in excess of the greater of (i) $1,992 and (ii) four percent of
Multicare's consolidated net revenues for such month, shall be subordinate
to the satisfaction of Multicare's senior and subordinate debt covenants;
and provided, further, that payment of such fee shall be no less than
$23,900 in any given year.
(11) Commitments and Contingencies
The Company has operating leases on certain of its facilities and offices.
Minimum rental commitments under all noncancelable leases at September 30,
1999 are as follows:
Year
2000 $12,610
2001 12,711
2002 12,754
2003 11,699
2004 10,518
Thereafter 35,577
-------
$95,869
=======
Letters of credit ensure the Company's performance or payment to third
parties in accordance with specified terms and conditions. At September 30,
1999 letters of credit outstanding amounted to $1.7 million.
47
The Company has guaranteed $7.7 million of indebtedness to others. The
Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for guarantees, loan commitments
and letters of credit is represented by the dollar amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
financial instruments. The Company does not anticipate any material losses
as a result of these commitments.
In February 1998 ElderTrust ("ETT"), a Maryland real estate investment
trust sponsored by Genesis, made term loans to subsidiaries of the Company
with respect to the lease-up of three assisted living facilities. The loans
have a fixed annual rate of interest of 10.5% and mature three years from
the date of the loans, subject to the right of the Company to extend the
term for up to three one-year extension periods in the event the facility
has not reached "stabilized occupancy" (as defined) as of the third
anniversary of the loan (or at the end of any extension period, if
applicable).
ETT is obligated to purchase and leaseback the three facilities that secure
the term and construction loans being made to the Company, upon the earlier
of the facility reaching stabilized occupancy or the maturity of the loan
secured by the facility provided, however, that the Company will not be
obligated to sell any facility if the purchase price for the facility would
be less than the applicable loan amount. The purchase agreements provide
for a cash purchase price in an amount which will result in an annual yield
of 10.5% to ETT. If acquired by ETT, these facilities would be leased to
the Company under minimum rent leases. The initial term of any minimum rent
lease will be ten years, and the Company will have the option to extend the
term for up to two five-year extension periods upon 12 months notice to
ETT. Minimum rent for the first lease year under any minimum rent lease
will be established by multiplying the purchase price for the applicable
facility times 10.5%, and the increase each year by an amount equal to the
lesser of (i) 5% of the increase in the gross revenues for such facility
(excluding any revenues derived from ancillary healthcare services provided
by Genesis or its affiliates to residents of the applicable facility)
during the immediately preceding year or (ii) one-half of the increase in
the Consumer Price Index during the immediately preceding year. During the
last four years of the term (as extended, if applicable), the Company is
required to make minimum capital expenditures equal to $3 per residential
unit in each assisted living facility covered by a minimum rent lease.
The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. In addition, suppliers pass
along rising costs to the Company in the form of higher prices. When faced
with increases in operating costs, the Company has increased its charges
for services. The Company's operations could be adversely affected if it is
unable to recover future cost increases or experiences significant delays
in increasing rates of reimbursement of its labor and other costs from
Medicaid and Medicare revenue sources.
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of pending legal proceedings will not have a material effect on
the Company's consolidated financial statements.
(12) Fair Value of Financial Instruments
The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), cost report
receivables, prepaid expenses and other current assets, accounts payable,
accrued expenses, accrued compensation, accrued interest and income taxes
payable approximates fair value because of the short-term maturity of these
instruments.
The Company also believes the carrying value of mortgage notes and other
notes receivable, and non marketable debt securities approximate fair value
based upon the discounted value of expected future cash flows using
interest rates at which similar investments would be made to borrowers with
similar credit quality and for the same remaining maturities.
48
The Company's investments in joint ventures are stated at original
appraised values which approximates fair value.
The fair value of interest rate swap agreements is the estimated amount the
Company would receive or pay to terminate the swap agreement at the
reporting date, taking into account current interest rates. The estimated
amount the Company would pay to terminate it's interest rate swap
agreements outstanding at September 30, 1999 is approximately $1 million.
The fair value of the Company's commitments to provide certain financial
guarantees is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. Since
the Company has not charged fees for currently outstanding commitments
there is no fair value of such financial instruments.
The fair value of the Company's debt, based on quoted market prices or
current rates for similar instruments with the same maturities was
approximately $408,257 and $743,332 at September 30, 1999 and 1998,
respectively.
(13) Quarterly Results of Operations (Unaudited)
Fiscal Year Ended September 30, 1999
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(1)
------- ------- ------- ----------
Net revenues $168,484 $154,725 $157,295 $159,910
Net (loss) (2,578) (10,157) (8,509) (386,083)
Fiscal Year Ended September 30, 1998
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net revenues $185,778 $170,164 $170,703 $168,988
Net income (loss) 1,358 1,367 1,511 (3,998)
In the fourth quarter of the year ended September 30, 1998, the Company changed
its estimate of the effective tax rate for the year from 52% to 97% due to
revised estimates of non-deductible goodwill and earnings.
- ---------
(1) The Company incurred non-cash impairment charges related to the impairment
of long-lived assets. See Note 6
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 10. Directors and Executive Officers of the Company.
The following table sets forth certain information regarding each of our
directors and executive officers. Each was elected in connection with the
restructuring of the Merger:
Name Age Position
- ---- --- --------
Michael R. Walker 51 Chairman, Chief Executive Officer and Director
George V. Hager, Jr. 43 Executive Vice President, Chief Financial Officer
and Director
Richard R. Howard 50 Director
Michael R. Walker is the Chairman of the Board, Chief Executive Officer and
a director of Genesis. Mr. Walker is the founder of Genesis and has served as
Chairman and Chief Executive Officer of Genesis since its inception. In 1981,
Mr. Walker co-founded Health Group Care Centers ("HGCC"). At HGCC, he served as
Chief Financial Officer and, later, as President and Chief Operating Officer.
Prior to its sale in 1985, HGCC operated nursing homes with 4,500 nursing beds
in 12 states. From 1978 to 1981, Mr. Walker was the Vice President and Treasurer
of AID Healthcare Centers, Inc. ("AID"). AID, which owned and operated 20
nursing centers, was co-founded in 1977 by Mr. Walker as the nursing home
division of Hospital Affiliates International. Mr. Walker holds a Master of
Business Administration degree from Temple University and a Bachelor of Arts in
Business Administration from Franklin and Marshall College. Mr. Walker has
served as Chairman of the Board of Trustees of ElderTrust since its inception in
January 1998.
George V. Hager, Jr. is our Executive Vice President, Chief Financial
Officer and a director. Mr. Hager has served as Executive Vice President and
Chief Financial Officer of Genesis since February 1994. Mr. Hager joined Genesis
in July 1992 as Vice President and Chief Financial Officer. Mr. Hager was
previously partner in charge of the healthcare practice for KPMG LLP in the
Philadelphia office. Mr. Hager began his career at KPMG LLP in 1979 and has over
15 years of experience in the healthcare industry. Mr. Hager received a Bachelor
of Arts degree in Economics from Dickinson College in 1978 and a Master of
Business Administration degree from Rutgers Graduate School of Management. He is
a certified public accountant and a member of the AICPA and PICPA.
Richard R. Howard is a director of Multicare. Mr. Howard has served as a
director of Genesis since its inception, as Vice President of Development from
September 1985 to June 1986, as President and Chief Operating Officer from June
1986 to April 1997, as President from April 1997 to November 1998 and as Vice
Chairman since November 1998. Mr. Howard's background in healthcare includes two
years as the Chief Financial Officer of HGCC. Mr. Howard's experience also
includes over ten years with Fidelity Bank, Philadelphia, Pennsylvania and one
year with Equibank, Pittsburgh, Pennsylvania. Mr. Howard is a graduate of the
Wharton School, University of Pennsylvania, where he received a Bachelor of
Science degree in Economics in 1971.
50
Item 11. Executive Compensation.
In connection with the Merger, the Company's Directors and Officers are not
employees of the Company and are compensated by other sources.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the common stock on February 12, 1998, with respect to
o each person known to the Company to be the beneficial owner of more than
5% of the outstanding Common Stock;
o each person who is currently a director or nominee to be a director of
the Company;
o all current directors and executive officers of the Company as a group;
and
o those persons named in the Summary Compensation Table.
To the best of our knowledge, except as otherwise noted, the holder listed
below has sole voting power and investment power over the Common Stock owned
beneficially own.
Name of Beneficial Owner(1)(2) Number of Shares Percent of Class
- ------------------------ ---------------- ----------------
Genesis ElderCare Corp. 100 100%
- ----------
(1) None of the current directors or executive officers of the Company
beneficially own stock of the Company.
(2) None of the persons named in the Summary Compensation beneficially own stock
of the Company.
Item 13. Certain Relationships and Related Transactions.
In connection with the Merger, Multicare and Genesis entered into the
Management Agreement pursuant to which Genesis manages our operations. The
Management Agreement has a term of five years with automatic renewals for two
years unless either party terminates the Management Agreement. Genesis will be
paid a fee of six percent of Multicare's net revenues for its services under the
Management Agreement provided that payment of such fee in respect of any month
in excess of the greater of (i) $1,991,666 and (ii) four percent of Multicare's
consolidated net revenues for such month, shall be subordinate to the
satisfaction of Multicare's senior and subordinate debt covenants; and provided,
further, that payment of such fee shall be no less than $23,900,000 in any given
year. Under the Management Agreement, Genesis is responsible for Multicare's
non-extraordinary sales, general and administrative expenses (other than certain
specified third-party expenses), and all other expenses of Multicare are paid by
Multicare. Genesis also entered into the Therapy Sale Agreement with Multicare
and certain of its subsidiaries pursuant to which Genesis acquired all of the
assets used in Multicare's outpatient and inpatient rehabilitation therapy
business for $24,000,000 subject to adjustment and the Pharmacy Sale Agreement
with Multicare and certain subsidiaries pursuant to which Genesis acquired all
of the outstanding capital stock and limited partnership interest of certain
subsidiaries of Multicare that are engaged in the business of providing
institutional pharmacy services to third parties for $50,000,000, subject to
adjustment.
In connection with the Merger, Genesis acquired from certain former
stockholders of Multicare the land and buildings of an eldercare facility
located in New London, Connecticut, for a purchase price of $8.4 million. Our
operating subsidiary that leases the facility pays annual rent to Genesis of
$725,000.
51
Genesis sponsored the formation of ElderTrust ("ETT"), a Maryland real
estate investment trust. Michael R. Walker, our Chairman and Chief Executive
Officer and Genesis is Chairman of ETT. In February 1998 ETT made term loans to
Multicare with respect to the lease-up of two assisted living facilities. The
loans have a fixed annual rate of interest of 10.5% and mature three years from
the date of the loans, subject to our right to extend the term for up to three
one-year extension periods in the event the facility has not reached "stabilized
occupancy" (as defined) as of the third anniversary of the loan (or at the end
of any extension period, if applicable).
In February 1998 ElderTrust ("ETT") made term loans to our subsidiaries
with respect to the lease up of three assisted living facilities. The loans have
a fixed annual rate of interest of 10.5% and mature three years from the date of
the loans, subject to our right to extend the term for up to three one-year
extension periods in the event the facility has not reached "stabilized
occupancy" (as defined) as of the third anniversary of the loan (or at the end
of any extension period, if applicable).
ETT is obligated to purchase and leaseback the three facilities that secure
the term and construction loans being made to the Company, upon the earlier of
the facility reaching stabilized occupancy or the maturity of the loan secured
by the facility provided, however, that we will not be obligated to sell any
facility if the purchase price for the facility would be less than the
applicable loan amount. The purchase agreements provide for a cash purchase
price in an amount which will result in an annual yield of 10.5% to ETT. If
acquired by ETT, these facilities would be leased to us under minimum rent
leases. The initial term of any minimum rent lease will be ten years, and we
will have the option to extend the term for up to two five-year extension
periods upon 12 months notice to ETT. Minimum rent for the first lease year
under any minimum rent lease will be established by multiplying the purchase
price for the applicable facility times 10.5%, and the increase each year by an
amount equal to the lesser of
o 5% of the increase in the gross revenues for such facility (excluding
any revenues derived from ancillary healthcare services provided by
Genesis or its affiliates to residents of the applicable facility)
during the immediately preceding year or
o one-half of the increase in the Consumer Price Index during the
immediately preceding year.
During the last four years of the term (as extended, if applicable), we are
required to make minimum capital expenditures equal to $3,000 per residential
unit in each assisted living facility covered by a minimum rent lease.
52
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a.) 1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1999 and 1998
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998, and 1997 (unaudited), and the
nine months ended September 30, 1997
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1999 and 1998, and the nine
months ended September 30, 1997
Consolidated Statements of Cash Flows for the years ended September 30, 1999
1998 and 1997 (unaudited), and the nine months ended September 30, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 1999
and 1998, and the nine months ended September 30, 1997
3. Exhibits
Exhibit
No. Description
-------- -----------
(1) 2 Reorganization and Subscription Agreement, dated as of August 21, 1992, among The
Multicare Companies, Inc., Daniel E. Straus, Moshael J. Straus, Adina S. Rubin and
Bethia S. Quintas
(2) 3.1 Restated Certificate of Incorporation of The Multicare Companies, Inc.
(3) 3.2 Certificate of Amendment of Restated Certificate of Incorporation of The Multicare
Companies, Inc.
(2) 3.3 By-laws of The Multicare Companies, Inc.
(1) 4.1 Indenture for Senior Subordinated Notes
(4) 4.2 Fiscal Agency Agreement for Subordinated Convertible Debentures among The Multicare
Companies, Inc., Subsidiary Co-Borrowers, Subsidiary Guarantors and The Chase
Manhattan Bank, N.A.
(4) 10.1 Loan Agreement dated October 13, 1992 between Meditrust Mortgage Investments, Inc. and
various Glenmark entities
(4) 10.2 Intercreditor Agreement dated December 1, 1995 between The Chase Manhattan Bank, N.A.,
Meditrust Mortgage Investments, Inc. and Meditrust of West Virginia, Inc.
(4) 10.3 Second Amendment to Loan Agreement entered into effective as of November 30, 1995
(4) 10.4 Second Amendment Agreement dated as of February 22, 1996 among The Multicare
Companies, Inc. Subsidiary Co-Borrowers, Subsidiary Guarantors, the Banks Signatory
hereto, and The Chase Manhattan Bank, N.A., as Agent
(5) 10.5 Acquisition Agreement, dated as of June 17, 1996, by and among AoDoS/Multicare, Inc.
and Alan D. Solomont, David Solomont, Ahron M. Solomont, Jay H. Solomont, David
Solomont, Susan S. Bailis and the Seller Entities signatory thereto (the "AoDoS
Acquisition Agreement")
53
(5) 10.6 Amendment No. 1, dated August 12, 1996, to the AoDoS Acquisition Agreement.
(6) 10.7 Amendment No. 2, dated as of September 25, 1996 to the AoDoS Acquisition Agreement.
(6) 10.8 Amendment No. 3, dated as of October 29, 1996 to the AoDoS Acquisition Agreement.
(6) 10.9 Amendment No. 4, dated as of December 11, 1996 to the AoDoS Acquisition Agreement.
(6) 10.10 Appendix A to Participation Agreement, Master Lease, Supplements, Loan Agreement, and
Lease Facility Mortgages.
(7) 10.11 Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare
Corp., Genesis ElderCare Acquisition Corp., Genesis Health Ventures, Inc.
and The Multicare Companies, Inc.
(8) 10.12 Third Amended and Restated Credit Agreement dated October 9, 1997 to Genesis Health
Ventures, Inc. from Mellon Bank, N.A., Citicorp USA, Inc., First Union National Bank
and NationsBank, N.A.
(9) 10.13 Credit Agreement dated October 14, 1997 to The Multicare Companies, Inc. from Mellon
Bank, N.A., Citicorp USA, Inc., First Union National Bank and NationsBank, N.A.
(9) 10.14 Management Agreement dated October 9, 1997 among The Multicare Companies, Inc.,
Genesis Health Ventures, Inc. and Genesis ElderCare Network Services, Inc.
(8) 10.15 Stockholders' Agreement dated October 9, 1997 among Genesis ElderCare Corp., The
Cypress Group L.L.C., TPG Partners II, L.P., Nazem, Inc. and Genesis Health Ventures,
Inc.
(8) 10.16 Put/Call Agreement dated October 9, 1997 among The Cypress Group L.L.C., TPG Partners
II, L.P., Nazem, Inc. and Genesis Health Ventures, Inc.
(9) 10.17 Stock Purchase Agreement dated October 10, 1997 among Genesis Health Ventures, Inc.,
The Multicare Companies, Inc., Concord Health Group, Inc., Horizon Associates, Inc.,
Horizon Medical Equipment and Supply, Inc., Institutional Health Care Services, Inc.,
Care4, L.P., Concord Pharmacy Services, Inc., Compass Health Services, Inc. and Encare
of Massachusetts, Inc.
(9) 10.18 Asset Purchase Agreement dated October 10, 1997 among Genesis Health Ventures, Inc.,
The Multicare Companies, Inc., Health Care Rehab Systems, Inc., Horizon
Rehabilitation, Inc., Progressive Rehabilitation Centers, Inc. and Total
Rehabilitation Center, L.L.C.
(10) 10.19 Amendment No. 1 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A. (10)10.19
Amendment No. 1 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A.
(10) 10.20 Amendment No. 2 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A.
(10) 10.21 Amendment No. 3 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A.
54
10.22 Amendment No. 4 to Credit Agreement, October 14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and NationsBank, N.A.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- ----------------------------------------------------
(1) Incorporated by reference from Registration Statement No. 33-51176 on Form S-1 effective November 18, 1992.
(2) Incorporated by reference from Registration Statement No. 33-65444 on Form S-1 effective August 18, 1993.
(3) Incorporated by reference from Registration Statement No. 33-79298 effective June 22, 1994.
(4) Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1995.
(5) Incorporated by reference from Registration Statement No. 333-12819 on Form S-3 effective October 24, 1996.
(6) Incorporated by reference from Current Report on Form 8-K, dated December 26, 1996.
(7) Incorporated by reference to the Tender Offer on Schedule 14D-1 filed by Genesis ElderCare Acquisition Corp. on
June 20, 1997.
(8) Incorporated by reference to Amendment No.7 to the Tender Offer Statement on Schedule 14D-1 filed by Genesis
ElderCare Corp. and Genesis ElderCare Acquisition Corp. on June 20,1997.
(9) Incorporated by reference to Genesis Health Ventures, Inc.'s Current Report on Form 8-K dated October 9, 1997.
(10) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly period ended December 31, 1998.
55
Independent Auditors' Report
The Board of Directors
The Multicare Companies, Inc.:
Under date of December 1, 1999, we reported on the consolidated balance sheets
of The Multicare Companies, Inc. and subsidiaries as of September 30, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended September 30, 1999 and 1998, and the
nine month period ended September 30, 1997 as contained in the annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
December 1, 1999
56
SCHEDULE II
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
.
Valuation and Qualifying Accounts
Years ended September 30, 1999 and 1998, and
the nine month period ended September 30, 1997
(In thousands)
Balance at Charged to Charged to Disposition Balance
beginning of costs and other Deductions of at end
Classifications period expenses accounts(1) (2) Business of period
--------------- ------------ ---------- ----------- ---------- ----------- ---------
Year ended September 30, 1999:
Allowance for doubtful accounts $ 10,080 11,406 --- 2,992 --- 18,494
====== ====== === ===== === ======
Year ended September 30, 1998:
Allowance for doubtful accounts $ 11,069 4,702 533 5,100 1,124 10,080
====== ===== === ===== ===== ======
Nine Months ended September 30, 1997
Allowance for doubtful accounts $ 11,531 3,521 125 4,108 --- 11,069
====== ===== === ===== === ======
- ---------
(1) Represents amounts related to acquisitions
(2) Represents amounts written off as uncollectible
57
Signature Page
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Multicare Companies, Inc.
By: /s/ MICHAEL R. WALKER
------------------------------------
Chairman and Chief Executive Officer
December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL R. WALKER Chairman of the Board, December 29, 1999
- ------------------------------------------ Chief Executive Officer
Michael R. Walker and Director (Principal
Executive Officer)
/s/ GEORGE V. HAGER, JR. Executive Vice President, December 29, 1999
- ------------------------------------------ Chief Financial Officer
George V. Hager, Jr. (Principal Accounting
Officer)
/s/ RICHARD. R. HOWARD Director December 29, 1999
- ------------------------------------------
Richard. R. Howard