<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________,
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, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at August 14, 2000
----------------------------------------- ------------------------------
Common Stock ($.01 Par Value) 100
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Table of Contents
Page
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.................. 1-2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 (Unaudited) and September 30, 1999............................. 3
Consolidated Statements of Operations
Three and nine months ended June 30, 2000 and 1999 (Unaudited)............... 4
Consolidated Statements of Cash Flows
Nine months ended June 30, 2000 and 1999 (Unaudited)......................... 5
Notes to Consolidated Financial Statements ............................... 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................................ 21
Part II: OTHER
INFORMATION................................................................. 22
SIGNATURES.................................................................. 23
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CAUTIONARY STATEMENT 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 or inability to meet our liquidity needs, scheduled debt
and interest payments and expected future capital expenditure
requirements, to control costs; to consummate asset sales and the
expected effects of government regulation on reimbursement for
services provided and on the costs of doing business.
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 bankruptcy cases;
o defaults under our debt agreements;
o confirmation of a restructuring plan;
o our substantial indebtedness and significant debt service
obligations;
o the effect 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"), the Balanced Budget
Refinement Act ("BBRA"), 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; and
o changes in general economic conditions.
1
<PAGE>
On June 22, 2000, The Multicare Companies, Inc. and certain of its affiliates
filed voluntary petitions with the United States Bankruptcy Court for the
District of Delaware to reorganize their capital structure under Chapter 11 of
the United States Bankruptcy Code. On the same date, Genesis Health Ventures
Inc. (Multicare's principal owner and manager) and certain of Genesis' direct
and indirect affiliates also filed voluntary petitions with the United States
Bankruptcy Court for the District of Delaware to reorganize its capital
structure under Chapter 11 of the United States Bankruptcy Code. These
bankruptcy cases, among other factors such as the Company's recurring losses,
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying unaudited financial statements have been prepared
assuming that the Company will continue as a going concern with the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. However, as a result of the bankruptcy cases and circumstances
relating to this event, including the Company's leveraged financial structure
and losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the protection of
Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate
or settle liabilities, for amounts other than those reflected in the financial
statements. Further, a plan of reorganization could materially change the
amounts reported in the financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. Additionally, a deadline
will be established for the assertion of pre-bankruptcy claims against the
Company (commonly referred to as a bar date); including contingent, unliquidated
or disputed claims, which claims could result in an increase in liabilities
subject to compromise as reported in the financial statements. The Company's
ability to continue as a going concern is dependent upon, among other things,
confirmation of a plan of reorganization, future profitable operations, the
ability to comply with the terms of the Company's debtor-in-possession financing
agreement and the ability to generate sufficient cash from operations and
financing arrangements to meet obligations.
These and other factors have been discussed in more detail in the Company's
periodic reports.
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- -----------
(Unaudited)
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 12,429 $ 3,967
Accounts receivable, net 109,341 113,586
Prepaid expenses and other current assets 12,604 13,130
Deferred taxes - current portion 2,027 2,027
----------- -----------
Total current assets 136,401 132,710
----------- -----------
Property, plant and equipment, net 571,071 621,371
Goodwill, net 470,857 480,809
Other assets 61,678 67,474
----------- -----------
$ 1,240,007 $ 1,302,364
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities not subject to compromise:
Accounts payable and accrued liabilities $ 33,312 $ 97,205
Current portion of long-term debt -- 34,700
----------- -----------
Total current liabilities 33,312 131,905
----------- -----------
Long-term debt not subject to compromise 10,440 741,256
Deferred taxes 55,677 76,007
Due to Genesis Health Ventures, Inc. and other liabilities 442 27,285
Liabilities subject to compromise 859,688 --
Stockholders' Equity:
Common stock, par value $.01, 100 shares authorized
100 shares issued and outstanding -- --
Additional paid-in-capital 733,000 733,000
Accumulated deficit (452,552) (407,089)
----------- -----------
Total stockholders' equity 280,448 325,911
----------- -----------
$ 1,240,007 $ 1,302,364
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 161,846 157,295 485,448 $ 480,504
Expenses:
Operating expense 136,059 127,792 405,996 385,145
Management fee 9,711 9,437 29,133 28,766
Depreciation and amortization expense 9,435 11,412 28,490 34,003
Lease expense 3,227 3,281 9,762 9,735
Interest expense, net 19,562 16,554 56,525 48,966
Debt restructuring, reorganization and other expense 12,386 -- 14,529 --
--------- --------- --------- ---------
Total expenses 190,380 168,476 544,435 506,615
--------- --------- --------- ---------
Loss before income tax benefit, share in loss of
unconsolidated affiliates, and cumulative effect of
accounting change (28,534) (11,181) (58,987) (26,111)
Income tax benefit (9,325) (2,672) (18,378) (4,867)
--------- --------- --------- ---------
Loss before share in loss of unconsolidated affiliates and
cumulative effect of accounting change (19,209) (8,509) (40,609) (21,244)
--------- --------- --------- ---------
Share in loss of unconsolidated affiliates 444 -- 1,231 --
--------- --------- --------- ---------
Loss before cumulative effect of accounting change (19,653) (8,509) (41,840) (21,244)
--------- --------- --------- ---------
Cumulative effect of accounting change, net of tax -- -- 3,623 --
--------- --------- --------- ---------
Net loss $ (19,653) (8,509) (45,463) $ (21,244)
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
2000 1999
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (45,463) $ (21,244)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of accounting change, net of tax 3,623 --
Loss on sale of Ohio assets 7,922 --
Depreciation and amortization 28,490 34,003
Deferred tax benefit (18,379) 229
Changes in assets and liabilities:
Accounts receivable 4,245 (26,552)
Prepaid expenses and other current assets 528 1,267
Accounts payable and accrued liabilities 32,998 (10,836)
--------- ---------
Net cash provided by (used in) operating activities 13,964 (23,133)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of Ohio assets 33,000 --
Capital expenditures (6,777) (11,591)
Other assets and liabilities 7,574 6,672
--------- ---------
Net cash provided by (used in) investing activities 33,797 (4,919)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 17,534 298,730
Repayments of long-term debt (56,833) (277,095)
Debt issuance costs -- (1,387)
--------- ---------
Net cash (used in) provided by financing activities (39,299) 20,248
--------- ---------
Increase (Decrease) in cash and cash equivalents 8,462 (7,804)
Cash and cash equivalents at beginning of period 3,967 11,344
--------- ---------
Cash and cash equivalents at end of period $ 12,429 $ 3,540
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(In thousands except share and per share data)
(1) Organization and Basis of Presentation
The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the
"Company") own, operate and manage skilled 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. As a result of the Merger (as defined below)
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.
Multicare operates predominantly in one industry segment, operating
skilled eldercare centers, which represents over 95% of consolidated
revenues.
The accompanying unaudited consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. On
June 22, 2000, The Multicare Companies, Inc. and certain of its
affiliates filed voluntary petitions with the United States Bankruptcy
Court for the District of Delaware to reorganize their capital
structure under Chapter 11 of the United States Bankruptcy Code. On the
same date, Genesis Health Ventures Inc. (Multicare's indirect principal
shareholder and manager) and certain of Genesis' direct and indirect
affiliates also filed voluntary petitions with the United States
Bankruptcy Court for the District of Delaware to reorganize its capital
structure under Chapter 11 of the United States Bankruptcy Code. These
cases, among other factors such as the Company's recurring losses,
raise substantial doubt about the Company's ability to continue as a
going concern.
The financial information as of June 30, 2000, and for the three and
nine months ended June 30, 2000 and 1999, is unaudited and has been
prepared in conformity with the accounting principles and practices as
reflected in the Company's audited annual financial statements. In the
opinion of management, the consolidated financial statements include
all necessary adjustments (consisting of normal recurring accruals and
all adjustments pursuant to the adoption of the American Institute of
Certified Public Accountants' ("AICPA') Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7")) for a fair presentation of the financial position
and results of operations for the interim periods presented. Results
for interim periods are not necessarily indicative of those to be
expected for the year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto
incorporated in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1999.
Certain prior year balances have been reclassified to conform with
current year presentation.
6
<PAGE>
(2) Voluntary Petition for Relief Under Chapter 11 of the
United States Bankruptcy Code
-----------------------------------------------------------------------
On June 22, 2000, The Multicare Companies, Inc. and 196 of its affiliates
("the Debtors") filed voluntary petitions with the United States Bankruptcy
Court for the District of Delaware to reorganize their capital structure
under Chapter 11 of the United States Bankruptcy Code. On the same date,
Genesis Health Ventures Inc. (Multicare's principal owner and manager) and
certain of Genesis' direct and indirect affiliates also filed voluntary
petitions with the United States Bankruptcy Court for the District of
Delaware to reorganize its capital structure under Chapter 11 of the United
States Bankruptcy Code. These cases, among other factors such as the
Company's recurring losses raise substantial doubt about the Company's
ability to continue as a going concern.
Except for relief that might otherwise be granted by the Bankruptcy Court
overseeing the Chapter 11 cases, and further subject to certain statutory
exceptions, the automatic stay protection afforded by Chapter 11 of the
Bankruptcy Code cases prevents any creditor or other third parties from
taking any action in connection with any defaults under pre-petition debt
obligations or agreements of the Company and those of its affiliates which
are debtors in the Chapter 11 cases. In connection with the Chapter 11
cases, the Company expects to develop a plan of reorganization that will be
approved by its creditors and confirmed by the Bankruptcy Court overseeing
the Company's Chapter 11 cases. In the event the plan of reorganization is
accepted, continuation of the business thereafter is dependent on the
Company's ability to achieve successful future operations.
The Bankruptcy Court approved, on a final basis, borrowings of up to $50
million in respect of the debtor in possession financing facility (the "DIP
Facility") with Mellon Bank, N.A. as Agent and a syndicate of lenders. The
Bankruptcy Court also authorized, on a final basis, the Debtors to use the
cash collateral of certain third party lenders. The Debtors intend to
utilize the DIP Facility and existing cash flow to fund ongoing operations
during the Chapter 11 proceedings. As of June 30, 2000, no amounts are
outstanding under the DIP Facility.
Since the Company filed for protection under the Bankruptcy Code, the
accompanying consolidated financial statements as of and for the three and
nine months ended June 30, 2000 have been prepared in accordance with SOP
90-7. Pursuant to SOP 90-7, the Company has segregated liabilities subject
to compromise at June 30, 2000.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the
Debtors to pay certain pre-petition wages, salaries, benefits and other
employee obligations, as well as to continue in place the Debtors' various
employee compensation programs and procedures. On that date, the Bankruptcy
Court also authorized the Debtors to pay, among other claims, the
pre-petition claims of certain critical vendors and patients. All other
unsecured pre-petition liabilities are classified in the consolidated
balance sheet as liabilities subject to compromise. The Debtors intend to
remain in possession of their assets and continue in the management and
operation of their properties and businesses, and to pay the post-petition
claims of their various vendors and providers in the ordinary course of
business.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases follows (in thousands):
As of June 30,
2000
--------------
Liabilities Subject to Compromise
Revolving credit and term loans $424,110
Senior subordinated notes 249,004
Revenue Bonds and Other Debt 53,103
Deferred Management Fee Due to Genesis 36,577
Accrued interest 30,179
Accounts payable and accrued liabilities 66,715
--------
$859,688
7
<PAGE>
A summary of the principal categories of reorganization items follows
(in thousands):
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
June 30, 2000 June 30, 2000
------------------ -----------------
Reorganization Items
<S> <C> <C>
Legal, accounting and consulting fees $3,514 $5,324
Bank fees 950 1,283
------ ------
$4,464 $6,607
</TABLE>
(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."
Reimbursement Risk
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.
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.
8
<PAGE>
(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."
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
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.
9
<PAGE>
(5) Disposition of Assets
Effective May 31, 2000, Multicare sold all of its Ohio operations which
included 14 eldercare centers with 1,128 beds, to Trans Healthcare,
Inc. for $33.0 million in cash. Included in debt restructuring,
reorganization and other expense for the three months ended June 30,
2000 was a $7.9 million loss on the sale of the Ohio assets. The net
proceeds of the disposition of assets located in Ohio were applied
against the Company's term loans and revolving credit facility on a pro
rata basis in accordance with the relative aggregate principal amount
thereof held by each applicable lender.
During the quarter ended March 31, 2000, Multicare did not renew an
operating lease which expired on an eldercare center with 85 beds in
Virginia. No gain or loss was recorded in connection with the
expiration of this lease.
(6) Debtor-in-Possession Financing
On June 22, 2000, (the "Petition Date"), the Company, the Company's
immediate parent and substantially all of the Company's affiliates,
filed voluntary petitions in the United States Bankruptcy Court for the
District of Delaware under Title 11 of the United States Code, 11
U.S.C. (S) (S) 101, et seq. (the "Bankruptcy Code"). While this action
constituted a default under the Company's and such affiliate's various
financing arrangements, Section 362(a) of the Bankruptcy Code imposes
an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial
action in response to any such resulting default without prior
Bankruptcy Court approval. Among the orders entered by the Bankruptcy
Court on June 23, 2000 were orders approving on an interim basis (a)
the use of cash collateral by the Company and those of its affiliates
which had filed petitions for reorganization under Chapter 11 of the
Bankruptcy Code and (b) authorization for the Company to enter into an
interim secured debtor-in-possession revolving credit facility with a
group of banks led by Mellon Bank, N. A. and authorization for advances
in the interim period of up to $30 million out of a possible $50
million facility. On July 18, 2000, the Bankruptcy Court entered the
final order approving the $50 million DIP Facility and permitting full
usage thereunder. Usage under the DIP Facility is subject to a
borrowing base which provides for maximum borrowings (subject to the
$50 million commitment limit) by the Company of up to 90% of
outstanding eligible accounts receivable and a real estate component.
The DIP Facility matures on December 21, 2001 and advances thereunder
accrue interest at either Prime plus 2.25% or the Eurodollar Rate plus
3.75%. Proceeds of the DIP Facility are available for general working
capital purposes. Through July 31, 2000, there has been no usage under
the DIP Facility. The DIP Facility also provides for the issuance of up
to $20 million in standby letters of credit. As of July 31, 2000 there
was $3.7 million in letters of credit issued thereunder.
The obligations of the Company under the DIP Facility are jointly and
severally guaranteed by each of the Company's filing affiliates (the
"Filing Affiliates"). Pursuant to the agreement, the Company and each
of its Filing Affiliates have granted to the lenders first priority
liens and security interests (subject to valid, perfected, enforceable
and nonavoidable liens of record existing immediately prior to the
petition date and other carve-outs and exceptions as fully described in
the DIP Facility) in all unencumbered pre- and post- petition property
of the Company. The DIP Facility also has priority over the liens on
all collateral pledged under the Pre-petition Senior Credit Facility
dated as of October 9, 1997 as amended, which collateral includes, but
is not limited to, all personal property, including bank accounts and
investment property, accounts receivable, inventory, equipment, and
general intangibles, substantially all fee owned real property, and the
capital stock of Multicare and its borrower and guarantor affiliates.
The DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to
permit additional liens, to make additional acquisitions, to sell or
dispose of assets, to create or incur liens on assets, to pay dividends
and to merge or consolidate with any other person. The DIP Facility
contains customary representations, warranties and covenants, including
certain financial covenants relating to minimum EBITDA, occupancy and
DIP facility usage amounts and maximum capital expenditures. The breach
of any such provisions, to the extent not waived or cured within any
applicable grace or cure periods, could result in the Company's
inability to obtain further advances under the DIP Facility and the
potential exercise of remedies by the DIP Facility lenders (without
regard to the automatic stay unless reimposed by the Bankruptcy Court)
which could materially impair the ability of the Company to
successfully reorganize under Chapter 11.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Upon consummation of the Merger, the Company and Genesis entered into
the Management Agreement pursuant to which Genesis manages the
Company's operations. Under Genesis' management, the Company's strategy
is to integrate the talents of case managers, comprehensive discharge
planning, and to provide cost effective care management to achieve
superior outcomes and return the Company's customers to the community.
Genesis' management believes that achieving improved customer outcomes
will result in an increased broader base of repeat customers in the
Company's network. Moreover, Genesis' management believes that this
strategy will lead to a high quality payor mix and continued high
levels of occupancy.
Liquidity and Going Concern Assumption
The accompanying unaudited financial statements have been prepared
assuming that the Company will continue as a going concern with the
realization of assets and the settlement of liabilities and commitments
in the normal course of business. However, as a result of the
Bankruptcy cases and circumstances relating to this event, including
the Company's leveraged financial structure and losses from operations,
such realization of assets and liquidation of liabilities is subject to
significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or
settle liabilities, for amounts other than those reflected in the
financial statements. Further, a plan of reorganization could
materially change the amounts reported in the financial statements,
which do not give effect to all adjustments of the carrying value of
assets or liabilities that might be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going
concern is dependent upon, among other things, confirmation of a plan
of reorganization, future profitable operations, the ability to comply
with the terms of the Company's debtor-in-possession financing
agreement and the ability to generate sufficient cash from operations
and financing arrangements to meet obligations.
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.
11
<PAGE>
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.
12
<PAGE>
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months ended
June 30, 1999
Net revenues. Net revenues for the three months ended June 30, 2000
increased $4.6 million or 2.9% from the same period last year to $161.8
million. In the quarter ended June 30, 2000, an increase in same store
average daily Medicare census resulted in an increase in revenue of
$6.3 million and an increase in Medicaid per diem rates which increased
net revenues by $2.3 million. Offsetting these increases was a $4.0
million decrease relating to the impact of the sale of Ohio assets
effective May 31, 2000. Since the Ohio assets were sold effective May
31, 2000, the consolidated results for the three months ended June 30,
2000 include the Ohio results for only two months compared to the prior
period where they were included for the entire period.
The Company's quality mix of private, Medicare and insurance patient
days was 41.0% of patient days for the three months ended June 30, 2000
compared to 40.6% in the corresponding period last year. Occupancy
rates were 91.5% for the three months ended June 30, 2000 compared to
90.1% in the corresponding period last year.
Operating Expense. Operating expenses for the three months ended June
30, 2000 increased $8.3 million or 6.5% from the comparable period last
year to $136.1 million. The increase resulted primarily from higher
salaries, wages and benefits and overtime due to more competitive labor
markets. In addition, for the three months ended June 30, 2000 the
Company recorded $1.0 million in expenses associated with the
transition of its incentive compensation program from stock-based to
cash-based. Offsetting these increases was a $2.9 million decrease
relating to the impact of the sale of Ohio assets effective May 31,
2000. Facility operating margins were 15.9% and 18.8% for the three
months ended June 30, 2000 and 1999, respectively.
Management Fee. In connection with the Management Agreement, Genesis
manages Multicare's operations for a fee of approximately 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 excluding certain specified third party
expenses. Management fees increased by $0.3 million or 2.9% to $9.7
million for the three months ended June 30, 2000 from the similar
period last year due to the increase in net revenues.
Lease Expense. Lease expense for the three months ended June 30, 2000
decreased $0.1 million from the same period last year to $3.2 million.
Lease expense decreased since three leased facilities in Ohio were
assigned to the buyer of the Ohio assets effective May 31, 2000.
Depreciation and Amortization. Depreciation and amortization expense
for the three months ended June 30, 2000 decreased $2.0 million or
17.3% from the corresponding period in the prior year to $9.7 million.
Effective September 30, 1999, the Company wrote-down impaired
long-lived assets by $397.3 million. As a result of this write-down
of long-lived assets, amortization of goodwill decreased by
approximately $1.8 million for the three months ended June 30, 2000.
Depreciation decreased by approximately $0.2 million due to the sale of
the Ohio assets effective May 31, 2000.
Interest Expense, net. Interest expense for the three months ended June
30, 2000 increased $3.0 million or 18.2% to $19.6 million from the same
period in the prior year. An increase of $3.7 million is due to an
increase in the effective borrowing rate to 10.4% for the three months
ended June 30, 2000 from 8.4% for the three months ended June 30, 1999.
The primary reason for the borrowing rate increase was due to
amendments to the Senior Credit Agreement prior to the Bankruptcy
filing and increases in market rates of interest. Offsetting the
increase was a $0.7 million reduction in interest due to a decrease in
the average debt balance outstanding primarily due to the sale of the
Ohio assets.
Debt Restructuring, Reorganization, and Other Expense. During the
quarter ended June 30, 2000, Multicare incurred and expensed fees of
$4.5 million for legal, accounting and consulting services as well as
bank and court fees in connection with debt restructuring negotiations
and subsequent costs of reorganization cases with the Bankruptcy Court.
Included in debt restructuring, reorganization and other expense was
$1.0 million in bank charges and $3.5 million in legal and financial
consultant expense. Also included in debt restructuring, reorganization
and other expense was a $7.9 million loss on the sale of the Ohio
assets.
Income Tax Benefit. The income tax benefit increased by $6.7 million
to $19.2 million for the three months ended June 30, 2000. The increase
relates to the increase in operating losses offset by lower
non-deductible goodwill amortization following the write-down
previously discussed.
13
<PAGE>
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999
Net revenues. Net revenues for the nine months ended June 30, 2000
increased $4.9 million from the same period last year to $485.4
million. In the nine months ended June 30, 2000, an increase in same
store average daily Medicare census resulted in an increase in revenue
of approximately $7.8 million. Offsetting this increase was a $2.9
million decrease relating to the impact of the sale of Ohio assets
effective May 31, 2000.
The Company's quality mix of private, Medicare and insurance patient
days was 40.3% of patient days for the nine months ended June 30, 2000
compared to 40.9% in the corresponding period last year. Occupancy
rates were 91.1% for the nine months ended June 30, 2000 compared to
90.5% in the corresponding period last year.
Operating Expense. Operating expenses for the nine months ended June
30, 2000 increased $20.9 million or 5.4% from the comparable period
last year to $406.0 million. The increase resulted primarily from
higher salaries, wages and benefits and overtime due to more
competitive labor markets. In addition, in the June 30, 2000 quarter
the Company recorded $1.0 million in expenses associated with the
transition of its incentive compensation program from stock-based to
cash-based. Offsetting these increases was a $2.4 million decrease
relating to the impact of the sale of Ohio assets effective May 31,
2000. Facility operating margins were 16.4% and 19.8% for the nine
months ended June 30, 2000 and 1999, respectively.
Management Fee. In connection with the Management Agreement, Genesis
manages Multicare's operations for a fee of approximately 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 increased by $0.4 million to $29.1 million
for the nine months ended June 30, 2000 due to the increase in net
revenues.
Lease Expense. Lease expense was $9.8 and $9.7 million for the nine
months ended June 30, 2000 and 1999, respectively, remaining relatively
unchanged as the same number of facilities were leased for the majority
of both periods.
Depreciation and Amortization. Depreciation and amortization expense
for the nine months ended June 30, 2000 decreased $5.5 million or 16.2%
from the corresponding period in the prior year to $28.5 million.
Effective September 30, 1999, the Company wrote-down impaired
long-lived assets by $397.3 million. As a result of this write-down of
long-lived assets, amortization of goodwill decreased by approximately
$5.2 million for the nine months ended June 30, 2000. Decreases in
depreciation due to the write-down of long lived assets were offset by
increases 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. Interest expense for the nine months ended June
30, 2000 increased $7.6 million or 15.4% to $56.5 million from the same
period in the prior year. The increase is due to an increase in the
effective borrowing rate to 9.8% for the nine months ended June 30,
2000 from 8.4% for the nine months ended June 30, 1999. The primary
reason for the borrowing rate increase was due to amendments to the
Senior Credit Agreement prior to the Bankruptcy filing and increases in
market rates of interest.
Debt Restructuring, Reorganization, and Other Expense. During the nine
months ended June 30, 2000, Multicare incurred and expensed fees of
$6.6 million for legal, accounting and consulting services as well as
bank and court fees in connection with debt restructuring negotiations
and subsequent costs of reorganization cases with the Bankruptcy Court.
Included in debt restructuring, reorganization and other expense was
$1.3 million in bank charges and $5.3 million in legal and financial
consultant expense. Also included in debt restructuring, reorganization
and other expense was a $7.9 million loss on the sale of the Ohio
assets.
Cumulative Effect of Accounting Change, Net of Tax. Effective October
1, 1999, the Company adopted the provisions of the AICPA's Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities,"
(SOP 98-5) which requires the costs of start-up activities to be
expensed as incurred. The initial application of SOP 98-5 resulted in a
charge of $3.6 million, net of tax for the cumulative effect of this
accounting change.
Income Tax Benefit. The income tax benefit increased by $13.5 million
to $18.4 million for the nine months ended June 30, 2000. Of the
increase $2.0 million relates to the tax benefit related to the
cumulative effect of accounting change and $2.9 million related to the
loss on sale of the Ohio assets. The remainder of the increase relates
to the increase in operating losses offset by lower non-deductible
goodwill amortization.
14
<PAGE>
Liquidity and Capital Resources
General
On June 22, 2000 (the "Petition Date"), the Company, the Company's
immediate parent and substantially all of the Company's affiliates,
filed voluntary petitions in the United States Bankruptcy Court for the
District of Delaware under Title 11 of the United States Code, 11
U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action
constituted a default under the Company's and such affiliates various
financing arrangements, Section 362(a) of the Bankruptcy Code imposes
an automatic stay that generally precludes creditors and other
interested parties under such arrangements from taking any remedial
action in response to any such resulting default without prior
Bankruptcy Court approval. Among the orders entered by the Bankruptcy
Court on June 23, 2000 were orders approving on an interim basis (a)
the use of cash collateral by the Company and those of its affiliates
which had filed petitions for reorganization under Chapter 11 of the
Bankruptcy Code and (b) authorization for the Company to enter into an
interim secured debtor-in-possession revolving credit facility with a
group of banks led by Mellon Bank, N. A. and authorization for advances
in the interim period of up to $30 million out of a possible $50
million facility. On July 18, 2000, the Bankruptcy Court entered the
Final Order approving the $50 million DIP Facility and permitting full
usage thereunder. Usage under the DIP Facility is subject to a
Borrowing Base which provides for maximum borrowings (subject to the
$50 million commitment limit) by the Company of up to 90% of
outstanding eligible accounts receivable and a real estate component.
The DIP Facility matures on December 21, 2001 and advances thereunder
accrue interest at either Prime plus 2.25% or the Eurodollar Rate plus
3.75%. Proceeds of the DIP Facility are available for general working
capital purposes. Through July 31, 2000, there has been no usage under
the DIP Facility. The DIP Facility also provides for the issuance of up
to $20 million in standby letters of credit. As of July 31, 2000 there
was $3.7 million in letters of credit issued thereunder.
Pursuant to the agreement, the Company and each of its affiliates named
as borrowers or guarantors under the DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing
immediately prior to the petition date and other carve-outs and
exceptions as fully described in the DIP Facility) in all unencumbered
pre- and post- petition property of the Company. The DIP Facility also
has priority over the liens on all collateral pledged under the
Pre-petition Senior Credit Facility dated as of October 9, 1997 as
amended, which collateral includes, but is not limited to, all personal
property, including bank accounts and investment property, accounts
receivable, inventory, equipment, and general intangibles,
substantially all fee owned real property, and the capital stock of
Multicare and its borrower and guarantor subsidiaries.
The DIP financing agreement limits, among other things, the Company's
ability to incur additional indebtedness or contingent obligations, to
permit additional liens, to make additional acquisitions, to sell or
dispose of assets, to create or incur liens on assets, to pay dividends
and to merge or consolidate with any other person. The DIP Facility
contains customary representations, warranties and covenants, including
certain financial covenants relating to minimum EBITDA, occupancy and
DIP facility usage amounts and maximum capital expenditures. The breach
of any such provisions, to the extent not waived or cured within any
applicable grace or cure periods, could result in the Company's
inability to obtain further advances under the DIP Facility and the
potential exercise of remedies by the DIP Facility lenders which could
materially impair the ability of the Company to successfully reorganize
under Chapter 11.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
are enjoined and other contractual obligations generally may not be
enforced against the Company. In addition, the Company may reject
executory contracts and lease obligations. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. If the Company is able to successfully
reorganize, substantially all unsecured liabilities as of the petition
date would be subject to modification under a plan of reorganization to
be voted upon by all impaired classes of creditors and equity security
holders and approved by the Bankruptcy Court.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the
Debtors to pay certain pre-petition wages, salaries, benefits and other
employee obligations, as well as to continue in place the Debtors'
various employee compensation programs and procedures. On that date,
the Bankruptcy Court also authorized the Debtors to pay, among other
claims, the pre-petition claims of certain critical vendors and
patients. All other unsecured pre-petition liabilities are classified
in the consolidated balance sheet as liabilities subject to compromise.
The Debtors intend to remain in possession of the management and
operation of their properties and businesses and to pay the
post-petition claims of their various vendors and providers in the
ordinary course of business.
15
<PAGE>
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases follows (in thousands):
As of June 30,
2000
--------------
Liabilities Subject to Compromise
Revolving credit and term loans $424,110
Senior subordinated notes 249,004
Revenue Bonds and Other Debt 53,103
Deferred Management Fee Due to Genesis 36,577
Accrued interest 30,179
Accounts payable and accrued liabilities 66,715
--------
$859,688
A summary of the principal categories of reorganization items follows
(in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
June 30, 2000 June 30, 2000
------------- -------------
Reorganization Items
<S> <C> <C>
Legal, accounting and consulting fees $3,514 $5,324
Bank Fees 950 1,283
------ ------
$4,464 $6,607
</TABLE>
At June 30, 2000, the Company had working capital of $103.1 million as
compared with net working capital of $0.8 million at September 30, 1999
primarily because most current liabilities at September 30, 1999 are
now classified as liabilities subject to compromise. There are no
material capital commitments for capital expenditures as of the date of
this filing.
Cash flow provided by operations was $14.0 million for the nine months
ended June 30, 2000 compared to cash flow used in operations of $23.1
million in the comparable period of 1999. Operating cash flows
increased as a result of the decline of receivable growth from the
prior period of $30.8 million. Net accounts receivable were $109.3
million and $113.6 million at June 30, 2000 and September 30, 1999,
respectively. Legislative and regulatory action and government
budgetary constraints have changed, and may in the future continue to
change the timing of payments and reimbursement rates of the Medicare
and Medicaid programs in the future. These changes have had and may in
the future have a material adverse effect on the Company's operating
results and cash flows and could have a further material adverse impact
in the future. In addition, growth of accounts payable and accrued
liabilities resulted in increased cash flow of $43.8 million primarily
as a result of increased accrued interest and amounts owed Genesis
which were not paid. Accrued interest was $30.2 million as of June 30,
2000. Genesis is Multicare's primary provider of pharmacy,
rehabilitation therapy and hospitality services.
16
<PAGE>
Cash flows provided by investing activities in fiscal year 2000 include
the proceeds from the sale of Ohio assets effective May 31, 2000.
Multicare sold all of its Ohio operations which included 14 eldercare
centers with 1,128 beds, for a $7.9 million loss. The net proceeds of
the disposition of $33.0 million are classified as cash flow provided
by investing and are applied against the Company's term loans and
revolving credit facility. Cash flows provided by investing activities
in fiscal year 2000 also include the deferred management fees due to
Genesis of $9.7 million as a source of cash. Capital expenditures of
$6.8 million for the nine months ended June 30, 2000 are principally
for routine maintenance and renovation.
The Company has experienced an adverse effect on operating cash flow
beginning in the third quarter of 2000 due to an increase in the cost
of certain of its insurance programs and the timing of funding new
policies. Rising costs of eldercare malpractice litigation involving
nursing care operators and losses stemming from these malpractice
lawsuits has caused many insurance providers to raise the cost of
insurance premiums or refuse to write insurance policies for nursing
homes. Accordingly, the costs of general and professional liability and
property insurance premiums have increased. In addition, as a result of
Genesis' current financial condition it is unable to continue certain
self insured programs and has replaced these programs with outside
insurance carriers.
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 "Senior Credit Facility"), provided by a syndicate
of banks and other financial institutions (collectively, the "Lenders")
led by Mellon Bank, N.A., as administrative agent (the "Administrative
Agent"), pursuant to a certain credit agreement (the "Senior 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 and the Revolving Facility (defined below).
The Senior Credit Facility consists 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. The Senior Credit Facility consists of:
o an original six year term loan maturing in September 2003 with
an outstanding balance of $132.2 million at June 30, 2000 (the
"Tranche A Term Facility");
o an original seven year term loan maturing in September 2004
with an outstanding balance of $138.3 million at June 30, 2000
(the "Tranche B Term Facility");
o an original eight year term loan maturing in June 2005 with an
outstanding balance of $45.9 million at June 30, 2000 (the
"Tranche C Term Facility") and;
o a Revolving Facility, with an outstanding balance of $107.7
million at June 30, 2000 becomes payable in full on September
30, 2003.
Effective May 31, 2000, the assets of 14 eldercare centers in Ohio were
sold for approximately $36 million in cash. The net proceeds of $33.0
million were applied against the Company's outstanding Senior Credit
Facility on a pro rata basis in accordance with the relative aggregate
principal amount thereof held by each applicable lender.
The Senior 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 Multicare subsidiaries' real
property were also granted. Loans under the Senior Credit Facility
bear, at Multicare's interest at the per annum Prime Rate as announced
by the administrative agent plus a margin (the "Annual Applicable
Margin") that is dependent upon a certain financial ratio test.
On March 29, 2000 the Company elected not to make interest payments due
under the Senior Credit Agreement. The Company's Senior Lenders granted
a forbearance period until May 19, 2000 while discussions on an overall
restructuring took place. The Company entered into a second forbearance
period which was to expire on June 30, 2000. Under the forbearance
agreement, the Senior Lenders, subject to certain conditions, refrained
from accelerating the Senior Loans or exercising other remedies against
the Company. During the forbearance periods, Multicare did not make
scheduled interest and principal payments under its Senior Credit
Agreement.
17
<PAGE>
The Senior Lenders agreed to waive the imposition of the Default Rate
during the forbearance period. However, effective with the default
under the Senior Credit Agreement, the Company is no longer entitled to
elect a LIBOR Rate. Effective March 20, 2000, loans under the Tranche A
Term Facility bear interest at a rate equal to Prime Rate plus a margin
up to 2.0%; loans under the Tranche B Term Facility bear interest at a
rate equal to Prime Rate plus a margin up to 2.25%; loans under the
Tranche C Term Facility bear interest at a rate equal to Prime Rate
plus a margin up to 2.5%; loans under the Revolving Credit Facility
bear interest at a rate equal to Prime Rate plus a margin up to 2.0%.
The Senior 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, change control of capital
stock, and 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. The Company is in default under the Senior
Credit Facility and has not made any scheduled interest payments since
March 29, 2000.
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. The Company is in
default under the Indenture.
Merger and Other Transactions
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 December
31, 1999 $30.1 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.
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).
18
<PAGE>
ETT is obligated to purchase and lease back the three facilities that
secure the term and construction loans being made to the Company, upon
the earlier of the facility reaching stabilized occupancy or the
maturity of the loan secured by the facility provided, however, that
the Company will not be obligated to sell any facility if the purchase
price for the facility would be less than the applicable loan amount.
The purchase agreements provide for a cash purchase price in an amount
which will result in an annual yield of 10.5% to ETT. If acquired by
ETT, these facilities would be leased to the Company under minimum rent
leases. The initial term of any minimum rent lease will be ten years,
and the Company will have the option to extend the term for up to two
five-year extension periods upon 12 months notice to ETT. Minimum rent
for the first lease year under any minimum rent lease will be
established by multiplying the purchase price for the applicable
facility times 10.5%, and the increase each year by an amount equal to
the lesser of (i) 5% of the increase in the gross revenues for such
facility (excluding any revenues derived from ancillary healthcare
services provided by Genesis or its affiliates to residents of the
applicable facility) during the immediately preceding year or (ii)
one-half of the increase in the Consumer Price Index during the
immediately preceding year. During the last four years of the term (as
extended, if applicable), the Company is required to make minimum
capital expenditures equal to $3,000 per residential unit in each
assisted living facility covered by a minimum rent lease.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the
1997 Balanced Budget Act and the Balanced Budget Refinement Act, has
resulted in continuing change in the Medicare and Medicaid
reimbursement programs which has adversely impacted the Company. The
changes have limited, and are expected to continue to limit, payment
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 these 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 the Company.
Anticipated Impact of Healthcare Reform
The majority of the Multicare eldercare centers began implementation of
PPS on January 1, 1999. On July 31, 2000, The Health Care Finance
Administration ("HCFA") issued final rules for PPS. The final rule
continues the current PPS methodology, as amended by the Balanced
Budget Refinement Act of 1999 ("BBRA"). Effective April 1, 2000, 15 of
the 44 RUG III (Resource Utilization Groups) payment categories were
increased by 20% until the later of October 1, 2000, or the
implementation of a refined RUG system. This final rule extends the 20%
add-on for the 15 RUG III categories until at least September 20, 2001.
Additionally, the final rule formalizes the BBRA requirement for a 4%
across the board increase in the Federal per diem payment rates,
exclusive of the 20% add-on. The final rule also announces the annual
update factor at 2.161%, which is equivalent to the market basket
increase less one percentage point, as mandated by current law. The
actual impact of the July 31, 2000 final rule on our earnings in
future periods will depend on many variables which can not be
quantified at this time, including the effect of regulatory changes,
patient acuity, patient length of stay, Medicare census, referral
patterns, ability to reduce costs and growth of ancillary business.
Year 2000 Compliance
The Company did not experience any material interruptions of business
as a result of the Year 2000 computer problem.
Seasonality
The Company's earnings generally fluctuate from quarter to quarter.
This seasonality is related to a combination of factors which include
the timing of Medicaid rate increases, seasonal census cycles, and the
number of calendar days in a given quarter.
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Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs
are especially sensitive to inflation and marketplace labor shortages.
The Company has implemented cost control measures to attempt to limit
increases in operating costs and expenses but cannot predict its
ability to control such operating cost increases in the future.
New Accounting Pronouncements
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 of fiscal years
beginning after June 15, 2000. The Company intends to adopt this
accounting standard as required. The adoption of this standard is not
expected to have a material impact on the Company's earnings or
financial position.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes. The
Company's objective in managing its exposure to interest rate changes
is to limit the impact of such changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the
Company primarily used interest rate swaps to manage net exposure to
interest rate changes related to its portfolio of borrowings. During
the forbearance period the Company was not required to maintain
interest rate hedging agreements. In the quarter ended June 30, 2000
the Company terminated all of its interest rate swap agreements for
$0.1 million.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings. Not Applicable.
Item 2. Changes in Securities and Use of Proceeds. Not Applicable.
Item 3. Defaults Upon Senior Securities.
On June 22, 2000, the Company and certain of its affiliates filed voluntary
petitions with the United States Bankruptcy Court for the District of Delaware
to reorganize their capital structure under Chapter 11 of the United States
Bankruptcy Code. As a result of the Chapter 11 cases, no principal or interest
payments will be made on certain indebtedness incurred by the Company prior to
June 22, 2000, including, among others, the Senior Credit Facility, and the
Senior Subordinated Notes, until a plan of reorganization defining the payment
terms has been approved by the Bankruptcy Court. Additional information
regarding the Chapter 11 cases is set forth elsewhere in this Form 10-Q,
including Note 2 to the Condensed Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable.
Item 5. Other Information. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule.
99.1 Revolving Credit and Guaranty Agreement, dated as of
June 22, 2000, among The Multicare Companies, Inc., a
debtor and a Debtor-in-Possession under Chapter 11 of
the bankruptcy code as borrower and Mellon Bank, N.A.
as Administrative Agent and Arranger, First Union
National Bank, as Syndication Agent; and Goldman
Sachs Credit Partners, L.P., as Documentation Agent.
(b) Reports on Form 8-K.
On July 7, 2000, the Company filed a Report on Form 8-K reporting
that the Multicare Companies, Inc. and certain affiliates filed
voluntary petitions for relief under chapter 11 of title 11 of the
United States Code with the United States Bankruptcy Court for the
District of Delaware and are being jointly administered for
procedural purposes in the Bankruptcy Court under Case Nos.
00-2494 through 00-2690. On the same date, Genesis Health
Ventures, Inc., 43.6% owner of Multicare, and certain of its
direct and indirect affiliates also filed voluntary petitions for
relief under chapter 11 of the Bankruptcy Code with the Bankruptcy
Court and are being jointly administered for procedural purposes
in the Bankruptcy Court under Case Nos. 00-2691 through 00-2842.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MULTICARE COMPANIES, INC.
Date: August 21, 2000 /S/ George V. Hager, Jr.
-------------------------------
George V. Hager, Jr.
Executive Vice President
and Chief Financial Officer
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