<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 March 31, 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 Identification No.)
incorporation or organization)
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 May 15, 2000
- ---------------------------------------- --------------------------------
Common Stock ($.01 Par Value) 100
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C>
Page
----
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS...........................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 (Unaudited) and September 30, 1999.................2
Consolidated Statements of Operations
Three and six months ended March 31, 2000 and 1999 (Unaudited)....3
Consolidated Statements of Cash Flows
Six months ended March 31, 2000 and 1999 (Unaudited)..............4
Notes to Consolidated Financial Statements......................5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......18
Part II: OTHER INFORMATION ........................................................19
SIGNATURES................................................................20
</TABLE>
<PAGE>
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
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, 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 default under our "Senior Credit Agreement";
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"), 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.
On March 29, 2000, we elected not to make interest payments due under
our Senior Credit Agreement. We are also in violation of certain
covenants under our Senior Credit Agreement. We have begun discussions
with our lenders under our Senior Credit Agreement to revise our
capital structure. We have been granted a forbearance period while
discussion on an overall restructuring take place. Under the
forbearance agreement the majority of the Senior Creditors agreed to
refrain from accelerating the Senior Loans or exercising other remedies
against us. During the forbearance period we have not made scheduled
interest and principal payments under our Senior Credit Agreement.
There can be no assurances that the senior lenders or holder of Senior
Subordinated Notes will approve any amendment or restructuring of the
Credit Agreement or the Senior Subordinated Notes. If Senior lenders
accelerate obligations under the agreements, such events would have a
material adverse effect on our liquidity and financial position. Under
such circumstances, our financial position would necessitate the
development of an alternative financial structure. Considering the
limited financial resources and the existence of certain defaults there
can be no assurance the we would succeed in formulating and
consummating an acceptable alternative financial structure. In light of
our current financial condition and default under our Senior Loans, the
Company may need to seek protection under federal bankruptcy law.
These and other factors have been discussed in more detail in the
Company's periodic reports, including its Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,198 $ 3,967
Accounts receivable, net 112,661 113,586
Prepaid expenses and other current assets 12,598 13,130
Deferred taxes - current portion 2,027 2,027
---------- ----------
Total current assets 130,484 132,710
---------- ----------
Property, plant and equipment, net 614,825 621,371
Goodwill, net 474,175 480,809
Other assets 60,860 67,474
---------- ----------
$1,280,344 $1,302,364
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 111,517 $ 97,205
Current portion of long-term debt 720,352 34,700
---------- ----------
Total current liabilities 831,869 131,905
---------- ----------
Long-term debt 49,619 741,256
Deferred taxes 65,003 76,007
Due to Genesis Health Ventures, Inc. and other liabilities 33,752 27,285
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 (432,899) (407,089)
---------- ----------
Total stockholders' equity 300,101 325,911
---------- ----------
$1,280,344 $1,302,364
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 163,241 154,725 323,602 $ 323,209
Expenses:
Operating expense 136,769 127,541 269,937 257,353
Management fee 9,798 9,278 19,422 19,329
Depreciation and amortization expense 9,497 11,310 19,055 22,591
Lease expense 3,284 3,330 6,535 6,454
Interest expense, net 18,634 16,227 36,963 32,412
Debt restructuring expense 2,143 --- 2,143 ---
--------- -------- -------- ---------
Total expenses 180,125 167,686 354,055 338,139
--------- -------- -------- ---------
Loss before income taxes, share in loss of
unconsolidated affiliates, and cumulative effect
of accounting change (16,884) (12,961) (30,453) (14,930)
Income tax benefit (5,068) (2,804) (9,053) (2,195)
--------- -------- -------- ---------
Loss before share in loss of unconsolidated affiliates
and cumulative effect of accounting change (11,816) (10,157) (21,400) (12,735)
--------- -------- -------- ---------
Share in loss of unconsolidated affiliates 336 --- 787 ---
--------- -------- -------- ---------
Loss before cumulative effect of accounting change (12,152) (10,157) (22,187) (12,735)
--------- -------- -------- ---------
Cumulative effect of accounting change, net of tax --- --- 3,623 ---
--------- -------- -------- ---------
Net loss $ (12,152) (10,157) (25,810) $ (12,735)
========= ======== ======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (25,810) $(12,735)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of accounting change, net of tax 3,623 ---
Depreciation and amortization 19,055 22,591
Deferred taxes (9,053) 229
Changes in assets and liabilities:
Accounts receivable 925 (18,078)
Prepaid expenses and other current assets 532 (437)
Accounts payable and accrued liabilities 14,311 (18,121)
--------- --------
Net cash provided by (used in) operating activities 3,583 (26,551)
--------- --------
Cash flows from investing activities:
Capital expenditures (4,274) (8,396)
Other assets and liabilities 5,907 4,548
--------- --------
Net cash provided by (used in) investing activities 1,633 (3,848)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt 17,534 229,900
Repayments of long-term debt (23,519) (205,367)
Debt issuance costs --- (1,387)
--------- --------
Net cash (used in) provided by financing activities (5,985) 23,146
--------- --------
(Decrease) in cash and cash equivalents (769) (7,253)
Cash and cash equivalents at beginning of period 3,967 11,344
--------- --------
Cash and cash equivalents at end of period $ 3,198 $ 4,091
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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.
The Company has experienced significant losses and has a working
capital deficit of $701.4 million at March 31, 2000. In addition the
Company has violated certain financial covenants (as described below)
under the Company's Senior Credit Agreement. In addition, the Company
has received default notices from Eldertrust alleging certain payment
and non-payment related defaults under certain mortgage loans.
The financial information as of March 31, 2000, and for the three and
six months ended March 31, 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. The
unaudited financial statements contain all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the
financial position as of March 31, 2000 and the operating results for
the three and six months ended March 31, 2000 and 1999 and the cash
flows for the six months ended March 31, 2000 and 1999. 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.
5
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(2) Certain Significant Risks and Uncertainties - Liquidity and Going
Concern Assumption
The following information is provided in accordance with the AICPA
Statement of Position No. 94-6, "Disclosure of Certain Significant
Risks and Uncertainties."
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. The Company has experienced
significant losses and has a working capital deficit of $701.4 million
as of March 31, 2000 due to the reclassification of the Senior Loans
and 9% Senior Subordinated Notes as currently due.
The Company is in violation of certain covenants under the Company's
Senior Credit Agreement. On March 29, 2000 the Company elected not to
make interest payments due under the Senior Credit Agreement.
Management has begun discussions with the Company's lenders under its
Senior Credit Agreement and advisors to certain holders of the
Company's 9% Senior Subordinated Notes to revise the Company's capital
structure. The Company's Senior Lenders have granted a forbearance
period while discussions on an overall restructuring take place. Under
the forbearance agreement, the majority of the Senior Lenders have,
subject to certain conditions, agreed to refrain from accelerating the
Senior Loans or exercising other remedies against the Company. During
the forbearance period, Multicare has not made scheduled interest and
principal payments under its Senior Credit Agreement. As a result of
the uncertainty related to the covenant defaults and corresponding
remedies, amounts outstanding under Multicare's Senior Credit Agreement
and its 9% Senior Subordinated Notes have been reclassified as a
current liability at March 31, 2000. The forbearance period expires on
May 19, 2000. The Company has requested that the forbearance period be
extended through June 30, 2000. There can be no assurance that the
Senior Lenders will agree to this request.
There can be no assurances that the Senior Lenders or holders of
Subordinated Notes will approve any amendment or restructuring of the
Senior Credit Agreement or the Subordinated Notes. The financial
statements do not include adjustments, if any, to reflect the possible
future effects on the recoverability and classification of recorded
assets or the amounts and classification of liabilities that may result
from the outcome of the uncertainty related to the covenant defaults
and corresponding remedies.
If the Senior Lenders accelerate the obligations under the agreement,
such events would have a material adverse effect on the Company's
liquidity and financial position and, if such acceleration were not
discharged, rescinded or annulled within thirty days, would result in a
default under the Indenture for the Company's 9% Senior Subordinated
Notes. Under such circumstances, the financial position of the Company
would necessitate the development of an alternative financial
structure. Considering the limited financial resources and the
existence of certain defaults there can be no assurance that the
Company would succeed in formulating and consummating an acceptable
alternative financial structure.
Debt Restructuring Expense
In connection with the debt restructuring discussions, the Company has
incurred legal, bank, and other professional costs of $2.1 million
which are recorded as expense in the quarter ended March 31, 2000.
Included in the debt restructuring expense was $0.3 million in bank
charges and $1.8 million in legal and financial consultant expense.
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, have resulted in reduced rates of reimbursement for
services provided by the Company.
6
<PAGE>
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.
(3) 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.
7
<PAGE>
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.
(4) Sale of Ohio Assets
The Company is actively involved in negotiations to sell the assets of
14 eldercare centers in Ohio for approximately $36 million in cash in
accordance with a signed letter of intent. The net proceeds of the
disposition of assets located in Ohio are expected to be applied
against the Company's Senior Credit facility at the time outstanding on
a pro rata basis in accordance with the relative aggregate principal
amount thereof held by each applicable lender. There can be no
assurance that any such sale of assets can be consummated.
8
<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 increased utilization of specialty medical services and
a broader base of repeat customers in the Company's network. Moreover,
the Company believes that this strategy will lead to a high quality
payor mix and continued high levels of occupancy. It is contemplated
that the Company will do little, if any, new acquisitions or new
construction after the Merger.
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. The Company has experienced
significant losses and has a working capital deficit of $701.4 million
as of March 31, 2000 due to the reclassification of the Senior Loans
and 9% Senior Subordinated Notes to currently due.
The Company is in violation of certain covenants under the Company's
Senior Credit Agreement. On March 29, 2000 the Company elected not to
make interest payments due under the Senior Credit Agreement.
Management has begun discussions with the Company's lenders under its
Senior Credit Agreement and advisors to certain holders of the
Company's 9% Senior Subordinated Notes to revise the Company's capital
structure. The Company's Senior Lenders have granted a forbearance
period while discussions on an overall restructuring take place. Under
the forbearance agreement, the majority of the Senior Lenders have,
subject to certain conditions, agreed to refrain from accelerating the
Senior Loans or exercising other remedies against the Company. During
the forbearance period, Multicare has not made scheduled interest and
principal payments under its Senior Credit Agreement. As a result of
the uncertainty related to the covenant defaults and corresponding
remedies, amounts outstanding under Multicare's Senior Credit Agreement
and its 9% Senior Subordinated Notes have been reclassified as a
current liability at March 31, 2000. The forbearance period expires on
May 19, 2000. The Company has requested that the forbearance period be
extended through June 30, 2000. There can be no assurance that the
Senior Lenders will agree to this request.
There can be no assurances that the Senior Lenders or holders of
Subordinated Notes will approve any amendment or restructuring of the
Senior Credit Agreement or the Subordinated Notes. The financial
statements do not include adjustments, if any, to reflect the possible
future effects on the recoverability and classification of recorded
assets or the amounts and classification of liabilities that may result
from the outcome of the uncertainty related to the covenant defaults
and corresponding remedies.
If the Senior Lenders accelerate the obligations under the agreement,
such events would have a material adverse effect on the Company's
liquidity and financial position and, if such acceleration were not
discharged, rescinded or annulled within thirty days, would result in a
default under the Indenture for the Company's 9% Senior Subordinated
Notes. Under such circumstances, the financial position of the Company
would necessitate the development of an alternative financial
structure. Considering the limited financial resources and the
existence of certain defaults there can be no assurance that the
Company would succeed in formulating and consummating an acceptable
alternative financial structure.
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
9
<PAGE>
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.
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.
10
<PAGE>
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months ended March
31, 1999
Net revenues. Net revenues for the three months ended March 31, 2000
increased $8.5 million or 5.5% from the same period last year to $163.2
million. In the quarter ended March 31, 2000, net revenues increased by
$1.7 million due to one more day in the quarter. In the quarter ended
March 31, 2000, an increase in average daily Medicare census resulted
in an increase in revenue of $7.8 million which was offset by a
decrease in private and other average daily census decline causing a
$1.0 million decline in revenue.
The Company's quality mix of private, Medicare and insurance patient
days was 40.4% of patient days for the three months ended March 31,
2000 compared to 40.6% in the similar period of last year. Occupancy
rates were 91.3% for the three months ended March 31, 2000 compared to
90.5% in the similar period of last year.
Operating Expense. Operating expenses for the three months ended March
31, 2000 increased $9.2 million or 7.2% from the comparable period last
year to $136.8 million. Of this increase, $1.4 million was due to one
more day in the March 31, 2000 quarter. The remaining increase resulted
primarily from higher salaries, wages and benefits and overtime due to
more competitive labor markets. Facility operating margins were 16.2%
and 17.6% for the three months ended March 31, 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 (as defined by the Management
Agreement) sales and is responsible for Multicare's corporate general
and administrative expenses other than certain specified third party
expenses. Management fees increased by $0.5 million or 5.6% to $9.8
million for the three months ended March 31, 2000 due to the increase
in net revenues.
Lease Expense. Lease expense of $3.3 million for the three months ended
March 31, 2000 and 1999 was unchanged as the same number of eldercare
centers were leased in 2000 and 1999.
Depreciation and Amortization. Depreciation and amortization expense
for the three months ended March 31, 2000 decreased $1.8 million or
16.0% from the prior period to $9.5 million. Effective September 30,
1999, the Company wrote-down impaired long-lived assets of $397.3
million. Due to this write-down of long-lived assets, amortization of
goodwill decreased by approximately $1.8 million for the three months
ended March 31, 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 three months ended
March 31, 2000 increased $2.4 million or 14.8% to $18.6 million from
the same period in the prior year. The increase is due to an increase
in the effective borrowing rate to 9.7% for the three months ended
March 31, 2000 from 8.4% for the three months ended March 31, 1999. The
primary reason for the borrowing rate increase was due to amendments to
the Senior Credit Agreement.
Debt Restructuring Expense. During the March 31, 2000 quarter, the
Company began discussions with its lenders under its Senior Credit
Agreement to revise its capital structure. In connection with the debt
restructuring, the Company has incurred legal, bank, and other
professional costs of $2.1 million. Included in the debt restructuring
expense was $0.3 million in bank charges and $1.8 million in legal and
financial consultant expense.
Income Tax Benefit. The income taxes benefit increased by $3.0 million
to $5.1 million for the three months ended March 31, 2000. The increase
relates to the increase in operating losses offset by lower
non-deductible goodwill amortization.
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Six Months Ended March 31, 2000 Compared to Six Months ended March 31,
1999
Net revenues. Net revenues for the six months ended March 31, 2000
increased $0.4 million from the same period last year to $323.6
million. In the six months ended March 31, 2000, net revenues decreased
$10.8 due to Medicare rate dilution as a result of the Medicare
Prospective Pay System implemented on January 1, 1999. Net revenues
increased by $1.7 million due to one more day in the March 31, 2000
period. In the six months ended March 31, 2000, an increase in average
daily Medicare census resulted in an increase in revenue of $15.5
million which was offset by private and other average daily census
decline causing approximately a $6.0 million decline in revenue.
The Company's quality mix of private, Medicare and insurance patient
days was 39.9% of patient days for the six months ended March 31, 2000
compared to 41.0% in the similar periods of last year. Occupancy rates
were 90.9% for the six months ended March 31, 2000 compared to 90.8% in
the similar periods of last year.
Operating Expense. Operating expenses for the six months ended March
31, 2000 increased $12.6 million or 4.9% from the comparable period
last year to $269.9 million. Of this increase, $1.4 million was due to
one more day in the March 31, 2000 quarter. The remaining increase
resulted primarily from higher salaries, wages and benefits and
overtime due to more competitive labor markets. Facility operating
margins were 16.6% and 20.4% for the six months ended March 31, 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 (as defined by the Management
Agreement) sales and is responsible for Multicare's corporate general
and administrative expenses other than certain specified third party
expenses. Management fees increased by $0.1 million to $19.4 million
for the six months ended March 31, 2000 due to the increase in net
revenues.
Lease Expense. Lease expense of $6.5 million for the six months ended
March 31, 2000 and 1999 was unchanged as the same number of eldercare
centers were leased in 2000 and 1999.
Depreciation and Amortization. Depreciation and amortization expense
for the six months ended March 31, 2000 decreased $3.5 million or 15.7%
from the prior period to $19.1 million. Effective September 30, 1999,
the Company wrote-down impaired long-lived assets of $397.3 million.
Due to this write-down of long-lived assets, amortization of goodwill
decreased by approximately $3.4 million for the six months ended March
31, 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 six months ended March
31, 2000 increased $4.6 million or 14.0% to $37.0 million from the same
period in the prior year. The increase is due to an increase in the
effective borrowing rate to 9.6% for the six months ended March 31,
2000 from 8.4% for the six months ended March 31, 1999. The primary
reason for the borrowing rate increase was due to amendments to the
Senior Credit Agreement.
Debt Restructuring Expense. During the March 31, 2000 quarter, the
Company began discussions with its lenders under its Senior Credit
Agreement to revise its capital structure. In connection with the debt
restructuring discussions, the Company has incurred legal, bank, and
other professional costs of $2.1 million. Included in the debt
restructuring expense was $0.3 million in bank charges and $1.8 million
in legal and financial consultant expense.
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 $6.9 million to
$9.1 million for the six months ended March 31, 2000. Of the increase
$2.0 million relates to the tax benefit related to the cumulative
effect of accounting change. The remainder of the increase relates to
the increase in operating losses offset by lower non-deductible
goodwill amortization.
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Liquidity and Capital Resources
General
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. The Company has experienced
significant losses and has a working capital deficit of $701.4 million
as of March 31, 2000 due to the reclassification of the Senior Loans
and 9% Senior Subordinated Notes to currently due.
The Company is in violation of certain covenants under the Company's
Senior Credit Agreement. On March 29, 2000 the Company elected not to
make interest payments due under the Senior Credit Agreement. In
addition, the Company has received default notices from Eldertrust
alleging certain payment related defaults under certain mortgage loans.
Management has begun discussions with the Company's lenders under its
Senior Credit Agreement and advisors to certain holders of the
Company's 9% Senior Subordinated Notes to revise the Company's capital
structure. The Company's Senior Lenders have granted a forbearance
period while discussions on an overall restructuring take place. Under
the forbearance agreement, the majority of the Senior Lenders have,
subject to certain conditions, agreed to refrain from accelerating the
Senior Loans or exercising other remedies against the Company. During
the forbearance period, Multicare has not made scheduled interest and
principal payments under its Senior Credit Agreement. As a result of
the uncertainty related to the covenant defaults and corresponding
remedies, amounts outstanding under Multicare's Senior Credit Agreement
and its 9% Senior Subordinated Notes have been reclassified as a
current liability at March 31, 2000. The forbearance period expires on
May 19, 2000. The Company has requested that the forbearance period be
extended through June 30, 2000. There can be no assurance that the
Senior Lenders will agree to this request.
There can be no assurances that the Senior Lenders or holders of
Subordinated Notes will approve any amendment or restructuring of the
Senior Credit Agreement or the Subordinated Notes. The financial
statements do not include adjustments, if any, to reflect the possible
future effects on the recoverability and classification of recorded
assets or the amounts and classification of liabilities that may result
from the outcome of the uncertainty related to the covenant defaults
and corresponding remedies.
If the Senior Lenders accelerate the obligations under the agreement,
such events would have a material adverse effect on the Company's
liquidity and financial position and, if such acceleration were not
discharged, rescinded or annulled within thirty days, would result in a
default under the Indenture for the Company's 9% Senior Subordinated
Notes. Under such circumstances, the financial position of the Company
would necessitate the development of an alternative financial
structure. Considering the limited financial resources and the
existence of certain defaults there can be no assurance that the
Company would succeed in formulating and consummating an acceptable
alternative financial structure. In light of the Company's current
financial condition and its default under the Senior Loans, the Company
may need to seek protection under federal bankruptcy law.
Cash flow provided by operations was $3.6 million for the six months
ended March 31, 2000 compared to cash flow used in operations of $26.6
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 $19.0 million. Operating cash flow decreased by $15.5
million which relates to the increase in net losses primarily as a
result of the implementation of PPS. Net accounts receivable were
$112.7 million and $113.6 million at March 31, 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 $32.4 million primarily
as a result of increased accrued interest and amounts owed Genesis.
Accrued interest was $12.3 million as of March 31, 2000. Trade payables
owed to Genesis were $54.3 million as of March 31, 2000. Genesis is the
primary provider of pharmacy, rehabilitation and hospitality services.
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Cash flows provided by investing activities in fiscal year 1999
includes the deferred management fees due to Genesis of $6.5 million as
a source of cash. Capital expenditures of $4.3 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.
Multicare anticipates 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 due to the timing of funding of
premiums for new policies. Specifically, the costs of general and
professional liability and property insurance premiums are expected to
increase due to the rising costs of elder care malpractice litigation
involving nursing care operators. In addition, as a result of the
Company's 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 "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, increased the interest rates applying
to the Term Loans (defined below) and the Revolving Facility, and
increased the level of management fees Multicare may defer from two
percent to four percent (on an annualized basis) in any fiscal year.
On March 20, 2000 the Company entered into a forbearance agreement with
the Senior Lenders. Under the forbearance agreement, the majority of
the Senior Lenders have, subject to certain conditions agreed to
refrain from accelerating the Senior Loans or exercising other remedies
against the Company through May 19, 2000. The Company has requested
that the forbearance period be extended through June 30, 2000. There
can be no assurance that the Senior Lenders will agree to this request.
The Senior 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. The loans consist of:
o an original six year term loan maturing in September 2003 with an
outstanding balance of $139.3 million at March 31, 2000 (the
"Tranche A Term Facility");
o an original seven year term loan maturing in September 2004 with
an outstanding balance of $145.9 million at March 31, 2000 (the
"Tranche B Term Facility"); and
o an original eight year term loan maturing in June 2005 with an
outstanding balance of $48.3 million at March 31, 2000 (the
"Tranche C Term Facility").
o The Revolving Facility, with an outstanding balance of $123.5
million at March 31, 2000 becomes payable in full on September 30,
2003.
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 substantially all of Multicare's
subsidiaries' real property were also granted. Loans under the Senior
Credit Facility bear, 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.
The Senior Lenders have 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 shall no longer be
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<PAGE>
entitled to elect a LIBO 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 Company is actively involved in negotiations to sell the assets of
14 eldercare centers in Ohio for approximately $36 million in cash in
accordance with a signed letter of intent. All net proceeds of the
disposition of assets located in Ohio are expected to be applied
against the Company's Senior Credit facility at the time outstanding on
a pro rata basis in accordance with the relative aggregate principal
amount thereof held by each applicable lender. There can be no
assurance that any such sale of assets can be consummated.
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 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.
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 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
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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 $3,000 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, 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 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."
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 Balanced Budget
Refinement Act, regulatory changes, patient acuity, patient length of
stay, Medicare census, referral patterns, ability to reduce costs and
growth of ancillary business.
As a result of the Balanced Budget Refinement Act, the Company
transitioned 23 eldercare centers to the full federal rate effective
January 1, 2000. The Company believes this transition will result in
incremental annualized revenue of approximately $2.2 million, which
will in part be offset by the continued phase in of PPS in other
facilities.
Year 2000 Compliance
The Company did not experience any material interruptions of business
as a result of the Year 2000 computer problem.
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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.
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 is not required to maintain interest
rate hedging agreements. During the quarter ended March 31, 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.
The Company has not made scheduled interest and principal payments in
the amount of $13.5 million as of March 31, 2000 under its Senior
Credit Facilities.
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 Forbearance Agreement, dated as of March 20,
2000, among The Multicare Companies, Inc., Mellon
Bank, N.A. as Administrative Agent, Issuer of
Letters of Credit, Collateral Agent and Synthetic
Lease Facility Agent, Citicorp USA, Inc. as
Syndication Agent, First Union National Bank as
Documentation Agent, Bank of America, N.A. as
Syndication Agent, and the Lenders and Secured
Parties
(b) Reports on Form 8-K.
On April 4, 2000, the Company filed a Report on Form 8-K dated
March 21, 2000 reporting that it had begun debt restructuring
discussions with its senior lenders and that it did not expect
to make scheduled debt payments during the discussion period.
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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: May 15, 2000 /S/ George V. Hager, Jr.
----------------------------
George V. Hager, Jr.
Executive Vice President and Chief
Financial Officer
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Exhibit 99.1
FORBEARANCE AGREEMENT
(THE MULTICARE COMPANIES, INC.)
FORBEARANCE AGREEMENT, dated as of March 20, 2000, (this
"Agreement") among The Multicare Companies, Inc., certain Subsidiaries thereof,
Mellon Bank, N.A. as Administrative Agent and Issuer of Letters of Credit,
Citicorp USA, Inc. as Syndication Agent, First Union National Bank as
Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders
and Secured Parties referred to below.
Reference is made to that certain Credit Agreement, dated as
of October 7, 1997, as amended, among The Multicare Companies, Inc., certain
Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent and Issuer of
Letters of Credit, First Union National Bank as Documentation Agent, Citicorp
USA, Inc. as Syndication Agent, Bank of America, N.A. as Syndication Agent and
the Lenders referred to therein (the "Credit Agreement") and to the other Loan
Documents entered into in connection therewith. Capitalized terms not otherwise
defined herein are used as defined in the Credit Agreement or in the other Loan
Documents referred to therein.
WHEREAS, a meeting was held on March 14, 2000 in which
Multicare presented certain information and plans (the "Presentation") to the
Lenders and other Secured Parties including, among other things, that it wishes
to restructure certain of its Indebtedness and that there is a possibility that
it will be unable to make certain payments on Indebtedness due to the Lenders
and other Secured Parties on a timely basis;
WHEREAS, the Borrowers have requested an opportunity to more
fully develop and effect certain proposals discussed at that meeting;
WHEREAS, the Lenders and other Secured Parties are willing to
accede to the request of the Borrowers under the circumstances referred to below
on the terms and conditions set forth below;
NOW THEREFORE, the undersigned hereby agree as follows:
1. Definitions. The following terms shall have the meanings
specified herein.
a. "Forbear" means to refrain from accelerating the Loans
or other Obligations or exercising remedies, whether arising by contract, at law
or in equity, under the Loan Documents or otherwise, against the Borrowers or
Collateral or Additional Security or withdrawing or freezing funds in deposit or
other accounts pursuant to set-off rights, rights to charge such accounts or
other similar rights, whether arising under the Loan Documents (including
Section 1.6(c)(Authorization to Charge Accounts) or 12.18 (Set-Off) of the
Credit Agreement) or otherwise or taking similar action or demanding that the
Borrowers comply with Section 9.2(a)(iii) of the Credit Agreement (but does not
preclude cash management functions and usual and customary payments made in
connection therewith).
<PAGE>
b. "Specified Defaults" means the occurrence or existence
of any Defaults or Events of Default (or similar terms under any Loan Documents)
arising out of any of the following events or conditions:
(i) the failure of the Borrowers to pay any
principal or interest on the Loans (as more fully set forth in Sections 9.1(a)
and (b) of the Credit Agreement);
(ii) the failure of the Borrowers to generally pay
debts as they mature, or pay any subordinated obligations or other Indebtedness
or otherwise default under any such Indebtedness (including, without limitation,
events referred to in Section 9.1(f)(i), (iii) or (iv) of the Credit Agreement
unless such events constitute a separate Event of Default under the Credit
Agreement by virtue of a provision other than Section 9.1(f)), in each case so
long as the holders of the subordinated obligations or other Indebtedness do not
take any action to enforce remedies against the Borrowers or collateral, if any;
(iii) any default in the financial covenants set forth
in Article 7 of the Credit Agreement;
(iv) any Event of Default solely by reason of
Section 9.1(j) of the Credit Agreement (Material Adverse Effect) already
disclosed to the Lenders in writing or in the Presentation;
(v) the failure of the Borrowers to provide cash
collateral in connection with Letters of Credit (i.e., as existing or extended)
pursuant to Section 3.1(h) and 9.2(a)(iii) of the Credit Agreement;
(vi) the failure to pay any commitment fees, Letter
of Credit fees, the Administrative Agent's regular fees and similar fees (but
not the failure to pay costs and expenses);
(vii) any Event of Default that has occurred or may
occur under either the Pledge Agreement or the Security Agreement solely as such
defined term relates to a Default or Event of Default under the Credit Agreement
or any other Loan Document that constitutes a Specified Default as set forth
above; and
(viii) any failure by any of the Loan Parties to
perform its obligations under the Loan Documents which failure constitutes a
Specified Default referred to in clauses (i) through (vii) above.
2. Forbearance and Waiver.
----------------------
a. Subject to the provisions of Section 5
(Conditions/Additional Undertakings) below, the undersigned in their capacity as
Lenders direct the Administrative Agent, and the Administrative Agent agrees to
accept and follow such direction, to Forebear through May 19, 2000,
notwithstanding any Specified Defaults.
b. Subject to the provisions of Section 5
(Conditions/Additional Undertakings) below, each of the undersigned in their
capacity as Lender, a Swap Party or other
2
<PAGE>
Secured Party, hereby agree to Forbear through May 19, 2000, notwithstanding any
Specified Defaults.
c. Subject to the provisions of Section 5
(Conditions/Additional Undertakings) below, each of the undersigned in their
capacity as a Lender, hereby agree to waive the imposition during the period
commencing on the date hereof and ending on May 19, 2000 of the Default Rate in
connection with any Specified Default.
d. Subject to the provisions of Section 5
(Conditions/Additional Undertakings) below, and notwithstanding the Borrowers'
failure to satisfy each of the conditions set forth in Section 4.2 (Conditions
to Each Loan and Issuance of Each Letter of Credit) of the Credit Agreement,
each of the undersigned in their capacity as a Lender, hereby agrees that the
Issuer of Letters of Credit may (but is not required to) issue extensions of
existing Letters of Credit (in a face amount no greater than the face amount of
the existing Letters of Credit) for the period commencing on the date hereof and
ending on May 19, 2000 notwithstanding any Specified Default.
e. Subject to the provisions of Section 5
(Conditions/Additional Undertakings) below, each of the undersigned in their
capacity as a Lender, hereby agrees that the Borrowers shall not be required to
maintain Interest Rate Hedging Agreements pursuant to Section 6.12 (Interest
Rate Hedging Agreements) of the Credit Agreement for the period commencing on
the date hereof and ending on May 19, 2000.
3. Certain Limitations. To eliminate any uncertainty, it is
expressly understood and agreed that the Administrative Agent may take any
action granted to it under law or contract (including, without limitation,
acceleration, foreclosure on Collateral and Additional Security and set-off),
a. a. after May 19, 2000,
b. in connection with any event or condition (including,
without limitation, a filing of a petition in bankruptcy as referred to in
section 9.1(m) of the Credit Agreement, a violation of the Indebtedness or Lien
covenants set forth in Sections 8.1 and 8.2 of the Credit Agreement or the entry
of a judgment referred to in Section 9.1(g) of the Credit Agreement) other than
a Specified Default or
c. if any of the events or conditions in Section 5
(Conditions/Additional Undertakings) below are not satisfied on a timely basis.
4. Not a Waiver. THIS AGREEMENT DOES NOT SERVE AS A WAIVER OF
ANY DEFAULTS OR EVENTS OF DEFAULT WHICH MAY NOW OR HEREAFTER EXIST and, except
as expressly provided above to the contrary for the period specified, the
Secured Parties reserve any and all rights and remedies under the Loan
Documents, at law or in equity, in connection with such Defaults or Events of
Default. Without limiting the generality of the foregoing, the Borrowers
acknowledge and agree that:
3
<PAGE>
a. from and after the date that the Borrowers default in
any payment obligations under the Loan Documents or there otherwise exists an
Event of Default, without limiting the generality of Section 1.8(b) of the
Credit Agreement, the Borrowers shall no longer be entitled to elect the LIBO
Rate option for Loans, such prohibition to take place automatically without
notice from the Administrative Agent which notice is hereby waived and
b. in connection with any default in payment of any of the
Obligations, Multicare will, and the Administrative Agent may, send notice to
any and all trustees under subordinated debt instruments of any of the Borrowers
stating that there has been a "Payment Default" or similar term and that the
trustee and bond holders may not accept any payment from the Borrowers.
No delay or failure on the part of the Secured Parties to exercise any right or
remedy hereunder or under the Loan Documents shall operate as a waiver thereof,
and no single or partial exercise of any right or remedy hereunder or thereunder
shall preclude other or further exercise thereof or the exercise of any other
right or remedy. No action or forbearance by the Secured Parties shall be
construed to constitute a waiver of any of the provisions hereof or thereof.
5. Conditions/Additional Undertakings.
----------------------------------
a. Attached hereto as Exhibit A are the conditions
precedent to the effectiveness of this Forbearance Agreement.
b. Attached hereto as Exhibit B are the conditions
subsequent to the continued effectiveness of this Forbearance Agreement through
May 19, 2000. If any of the conditions set forth on Exhibit B are not satisfied
by the dates specified on said Exhibit B, then the obligations set forth in
Section 2 (Forbearance and Waivers) above shall immediately terminate without
notice on May 20, 2000 or, if earlier for any reason, upon written notice to the
Borrowers given in accordance with the terms of the Credit Agreement.
c. If at any time the forbearance agreement with Genesis is
terminated, the obligations set forth in Section 2 (Forbearance and Waivers)
above shall immediately terminate without notice.
6. Release. As a material inducement to the Secured Parties to
enter into this Agreement, the Borrowers and each of them (A) do hereby remise,
release, acquit, satisfy and forever discharge the Secured Parties and all of
their past, present and future officers, directors, employees, agents,
attorneys, representatives, participants, heirs, successors and assigns, from
any and all manner of debts, accountings, bonds, warranties, representations,
covenants, promises, contracts, controversies, agreements, liabilities,
obligations, expenses, damages, judgments, executions, actions, claims, demands
and causes of action of any nature whatsoever, whether at law or in equity,
which any of the Borrowers has by reason of any matter, cause or thing, from the
beginning of the world to and including the date of this Agreement with respect
to any matters, transactions, occurrences, agreements, actions, or events
arising out of, in connection with or relating to the Loan Documents; and (B) do
hereby covenant and agree never to institute or cause to be instituted or
continue prosecution of any suit or other form of action or proceeding of any
kind or nature whatsoever against the Secured Parties, or any of their past,
4
<PAGE>
present or future officers, directors, employees, agents, attorneys,
representatives, participants, heirs, successors or assigns, by reason of or in
connection with any of the foregoing matters, claims or causes of action. The
Borrowers expressly acknowledge and agree that the waivers, estoppels and
releases contained in this Agreement shall not be construed as an admission of
wrongdoing, liability or culpability on the part of any of the Secured Parties
or the existence of any claims of the Borrowers against any of the Secured
Parties.
7. Governing Law. This Agreement shall for all purposes be
governed by and construed and enforced in accordance with the substantive law of
the Commonwealth of Pennsylvania without giving effect to the principles of
conflict of laws.
8. Future Negotiations. The parties hereto acknowledge and
agree that (A) the Secured Parties have not agreed to and have no future
obligation whatsoever to discuss, negotiate or agree to any restructuring of the
Borrowers' obligations with respect to the Loan Documents, or any of them, or
any modification, amendment, restructuring or reinstatement of the Loan
Documents or, except as expressly provided in this Agreement, to forbear from
exercising its rights and remedies under the Loan Documents, (B) if there are
any future discussions among the Secured Parties and the Borrowers concerning
any such restructuring, modification, amendment or reinstatement, then no
restructuring, modification, amendment, reinstatement, compromise, settlement,
agreement or understanding with respect to the Borrowers' obligations with
respect to the Loan Documents, or any of them, or any aspect thereof, shall
constitute a legally binding agreement or contract or have any force or effect
whatsoever unless and until reduced to writing and signed by authorized
representatives of all parties, and that none of the parties hereto shall assert
or claim in any legal proceedings or otherwise that any such agreement exists
except in accordance with the terms of this Section 8.
9. Ratification. Except to the extent and for the period
hereby waived or modified, the Credit Agreement and each of the Loan Documents
is hereby confirmed and ratified in all respects.
10. Counterpart Signatures. This Agreement may be executed in
any number of counterparts, each of which will constitute an original and all of
which together shall constitute one instrument. A faxed copy of a signature page
shall serve as the functional equivalent of a manually-executed copy for all
purposes.
11. Payment of Fees. The Administrative Agent shall allocate
the forbearance fee referred to in paragraph 2 of Exhibit A hereto among those
Secured Parties who sign and deliver a counterpart signature page in the manner
and time set forth in paragraph 1 of said Exhibit A on a pro rata basis, based
on the amount of the Obligations owing to them. The Administrative Agent's
records shall be conclusive for the purposes hereof.
12. Capacity of Signing Parties. Each of the undersigned
Secured Parties signs this in its capacity as a Lender and, if applicable, and
in any other capacity as a Secured Party.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, hereby signs as of the date first above written.
------------------------------------------
Name of Financial Institution(1)
------------------------------------------
By:
Name:
Title:
THE MULTICARE COMPANIES, INC.,
for itself and each of the Borrowers under
the Credit Agreement
------------------------------------------
By:
Name:
Title:
GENESIS ELDERCARE CORP., as Surety
------------------------------------------
By:
Name:
Title:
- -----------------
(1) Signing in all applicable capacities as Secured Parties, whether as
Administrative Agent, Lender or otherwise.
6
<PAGE>
Exhibit A
To Forbearance Agreement
Conditions Precedent
1. Execution of this Forbearance Agreement by (a) the Borrowers, or by
Multicare on behalf of the Borrowers, (b) the Required Lenders, and (c) the
Administrative Agent and return of counterpart signature pages by each to
Drinker Biddle & Reath LLP (to the attention of Jill Bronson) by actual
delivery at One Logan Square, 18th and Cherry Street, Philadelphia, PA
19103 or by facsimile transmission (facsimile number: 215-988-2757) no
later than 5:00 p.m. (Eastern Standard Time) on March 20, 2000.(2)
2. Upon satisfaction of the condition precedent contained in the immediately
preceding paragraph, payment of an irrevocable and nonrefundable fee to the
Administrative Agent in immediately available funds for the benefit of each
of the Secured Parties that signs and returns a counterpart to this
Forbearance Agreement in the time and manner specified in paragraph 1
above. Such fee shall be in an amount equal to $333,000.
3. Payment of costs and expenses of the Administrative Agent including,
without limitation, counsel and financial consultant fees.
4. Effectiveness of a forbearance agreement for Genesis.
- -----------------
(2) For purposes of paragraphs 1 and 2 of this Exhibit A, the Administrative
Agent, in its sole and absolute discretion, is authorized to extend the
deadline set forth in paragraph 1 above for a period not to exceed 2
Business Days and any such action on the part of the Administrative Agent
shall be conclusive and binding for all purposes.
7
<PAGE>
Exhibit B
To Forbearance Agreement
Conditions Subsequent
---------------------
1. A financial advisor (that is not the same as the Genesis financial
advisor), reasonably acceptable to the Agents (the "Multicare Financial
Advisor"), shall be retained by Multicare no later than March 24, 2000. The
Agents and Policano and Manzo, financial advisor to the Administrative
Agent, shall be given the opportunity to discuss (by phone or in person)
the affairs of the Borrowers with the Multicare Financial Advisor from time
to time upon reasonable request.
2. Policano and Manzo shall be given full access to the financial records and
to the management of the Borrowers and the Borrowers shall comply with the
requests made by Policano and Manzo in the letter attached hereto as Annex
1 to Exhibit B.
3. The Borrowers shall cooperate with the Administrative Agent in all
remaining aspects of obtaining and perfecting the Additional Security. Each
of the Borrowers agrees that this undertaking is a material inducement to
the forbearance provided herein and but for this undertaking the Secured
Parties would be unwilling to agree to the terms of this Forbearance
Agreement. Further, the Borrowers agree that the value to the Borrowers of
the undertakings of the Secured Parties herein is at least equal or greater
than the value of this undertaking.
4. No later than March 31, 2000, Multicare shall present to the Secured
Parties, a proposed plan of reorganization of its capital structure which
proposal shall be shared, in preliminary form, with the Agents at least one
Business Day prior thereto. The plan will have specific target dates by
which certain actions will be completed. Completion of the specified
actions by the specified target dates shall be additional conditions
incorporated herein by reference.
5. Concurrent with the actions specified in the preceding item #4, Multicare
shall develop a contingency plan. Multicare will provide information to the
Agents on a regular basis as to the development of such plan and, at the
request of the Agents, will present the same to the Secured Parties.
8
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000890925
<NAME> THE MULTICARE COMPANIES INC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,198
<SECURITIES> 0
<RECEIVABLES> 112,661
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 130,484
<PP&E> 614,825
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,280,344
<CURRENT-LIABILITIES> 831,869
<BONDS> 49,619
0
0
<COMMON> 0
<OTHER-SE> 300,101
<TOTAL-LIABILITY-AND-EQUITY> 1,280,344
<SALES> 163,241
<TOTAL-REVENUES> 163,241
<CGS> 136,769
<TOTAL-COSTS> 146,567
<OTHER-EXPENSES> 14,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,634
<INCOME-PRETAX> (16,884)
<INCOME-TAX> (5,068)
<INCOME-CONTINUING> (16,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,152)
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