UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 2000
Commission File Number 34-22090
----------------------
THE MULTICARE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3152527
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification no.)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 444-6350
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant: Not Applicable
Class Outstanding at January 31, 2001
- --------------------------- -------------------------------
Common Stock $.01 Par Value 100 shares
Documents Incorporated By Reference
None.
INDEX
PAGE
Cautionary Statements Regarding Forward Looking Statements...................2-6
PART I
ITEM 1: BUSINESS
General ............................................................7
Patient Services....................................................8-9
Revenue Sources....................................................9-11
Marketing.........................................................11-12
Personnel............................................................12
Employee Training and Development.................................12-13
Governmental Regulation...........................................13-14
Corporate Integrity Program.......................................14-15
Competition.......................................................15-16
Insurance............................................................16
ITEM 2: PROPERTIES...........................................................17
ITEM 3: LEGAL PROCEEDINGS....................................................17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................17
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..................................18
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA.................................19
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................20-31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........32
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................33-54
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................55
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............55-56
ITEM 11: EXECUTIVE COMPENSATION..............................................56
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......56
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................56-57
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K...58-69
DEBTOR-IN-POSSESSION
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to statements as to:
o certain statements in "Management's Discussion and Analysis of Financial
Condition and Results Of Operations," such as our ability to meet our
liquidity needs, scheduled debt and interest payments and expected future
capital expenditure requirements, and to control costs and the expected
effects of government regulation on reimbursement for services provided;
o certain statements contained in "Business" concerning strategy; corporate
integrity programs, government regulations and the Medicare and Medicaid
programs; and
o certain statements in "Legal Proceedings" regarding the effects of
litigation.
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 ability to continue as a going concern;
o certain covenant amendments to our debtor-in-possession financing that may
be terminated;
o our bankruptcy cases;
o our default under our senior credit agreement and our senior subordinated
and other notes;
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 Benefit Improvement and Protection Act of 2000 ("BIPA") 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; and
o changes in general economic conditions.
2
Our bankruptcy cases and recurring losses, among other things, raise substantial
doubt about the Multicare's ability to continue as a going concern.
On June 22, 2000, (the "Petition Date") 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 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 of December 19, 2000 was 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 ("DIP"), and the ability to
generate sufficient cash from operations and financing arrangements to meet
obligations.
There can be no assurances that the cash flow from our debtor-in-possession
financing and operations will be sufficient to enable us to meet our
obligations.
The Chapter 11 cases constituted a default under the Company's and such
affiliates' various pre-petition financing arrangements. 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.
The Bankruptcy Court approved borrowings of up to $50 million in respect of the
debtor-in-possession financing facility. Through January 31, 2001, there has
been no usage under the DIP Facility other than the issuance of letters of
credit. The DIP Facility also provides for the issuance of up to $20 million in
standby letters of credit. As of January 31, 2001 there were $3.7 million in
letters of credit issued thereunder.
The debtor-in-possession financing agreements limit, 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 debtor-in-possession financing agreements
contain customary representations, warranties and covenants, including certain
financial covenants relating to minimum EBITDA, occupancy and
debtor-in-possession borrowings 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 debtor-in-possession financing agreements and the potential
exercise of remedies by the related lenders (without regard to the automatic
stay unless re-imposed by the Bankruptcy Court) which could materially impair
the ability of the Company to successfully reorganize under Chapter 11.
3
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 or the Bankruptcy Court otherwise permits such
payments.
On February 14, 2001, Multicare received waivers from its respective lenders
(the "DIP Lenders") under the Multicare DIP Facility (the "DIP Facility") for
any event of default regarding certain financial covenants relating to minimum
earnings before interest, taxes, depreciation and amortization ("EBITDA") that
may have resulted from asset impairment and other non-recurring charges recorded
by the Company in the fourth quarter of Fiscal 2000. The waivers extend through
December 31, 2000. In addition, the Company received certain amendments to the
DIP Facilities, including an amendment that makes the minimum EBITDA covenant
less restrictive in future periods ("the EBITDA amendment"). The EBITDA
Amendment can be terminated by the DIP Lenders if on or before April 2, 2001,
the Bankruptcy Court has not approved payment by Multicare to the DIP Lenders
for amendment fees related thereto. There can be no assurances that Bankruptcy
Court approval for the amendment fee will be granted, and as a result, there can
be no assurances that the DIP Lenders will not exercise their rights under the
DIP Facilities, including but not limited to, precluding future borrowings under
the DIP Facilities.
There can be no assurances that cash flow from operations and the
debtor-in-possession financing will be sufficient to enable us to service our
debt and meet our other obligations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Limitations on reimbursement including the implementation of the Medicare
Prospective Payment System and other health care reforms may adversely affect
our business.
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, and other third party payors. The health care industry is
experiencing a strong trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services to be provided by us.
In recent years, several significant actions have been taken with respect to
Medicare and Medicaid reimbursement, including the following:
o the adoption of the Medicare Prospective Payment System pursuant to
the Balanced Budget Act of 1997, as modified by the Medicare
Balanced Budget Refinement Act and the Benefits Improvement
Protection Act of 2000; and
o the repeal of the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities.
While we have prepared certain estimates of the impact of the above changes, it
is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on our business. Accordingly, there can be no assurance that the
impact of these changes will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
affect our business. There can be no assurance that payments under governmental
and private third party payor programs will be timely, will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs. Our financial condition and results of operations may be affected by
the revenue reimbursement process, which in our industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled. See "Business - Revenue Sources" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
4
Extensive regulation by the federal and state governments may adversely affect
our cost of doing business.
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. Compliance with such regulatory requirements, as interpreted
and amended from time to time, can increase operating costs and thereby
adversely affect the financial viability of our business. Failure to comply with
current or future regulatory requirements could also result in the imposition of
various remedies including fines, restrictions on admission, the revocation of
licensure, decertification, imposition of temporary management or the closure of
a facility.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. See "Business - Governmental Regulation."
Following this pronouncement, it has become more difficult for nursing
facilities to maintain licensing and certification. We have experienced and
expect to continue to experience increased costs in connection with maintaining
our licenses and certifications as well as increased enforcement actions.
Changes in applicable laws and regulations, or new interpretations of existing
laws and regulations, could have a material adverse effect on reimbursement,
certification or licensure of our nursing facilities or other aspects of our
business, including eligibility for participation in federal and state programs,
costs of doing business, or the levels of reimbursement from governmental or
private sources. We cannot predict the content or impact of future legislation
and regulations affecting us. There can be no assurance that regulatory
authorities will not adopt changes or new interpretations of existing
regulations that could adversely affect us. See "Business - Revenue Sources" and
"Business -- Governmental Regulation."
We face intense competition in our business.
The healthcare industry is highly competitive. We compete with a variety of
other companies in providing eldercare services, many of which have greater
financial and other resources and may be more established in their respective
communities than us. Competing companies may offer newer or different centers or
services than us and may thereby attract our customers who are either presently
customers of our eldercare centers or are otherwise receiving our eldercare
services.
Because of the Multicare Merger and its restructuring we face additional risks.
As a result of the Merger of Genesis ElderCare Acquisition Corp. with us,
Genesis Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis
ElderCare Corp., which owns 100% of our outstanding capital stock. We and
Genesis have entered into a Management Agreement pursuant to which Genesis
manages our operations. We also use Genesis' clinical administration and
healthcare management information system to monitor and measure clinical and
patient outcome data. Certain problems may arise in implementing the Management
Agreement; for example, difficulties may be encountered by Genesis as a result
of the loss of our key personnel, the integration of our corporate, accounting,
financial reporting and management information systems with Genesis' systems and
strain on existing levels of its personnel managing both businesses. There can
be no assurance that Genesis will be able to successfully implement the
Management Agreement or manage our operations; failure to do so effectively and
on a timely basis could have a material adverse effect on our financial
condition and results of operations.
On October 8, 1999, Genesis entered into a restructuring agreement ("the
Restructuring Agreement") with The Cypress Group L.L.C. ("Cypress"), TPG
Partners II, L.P. ("TPG") and Nazem Inc. ("Nazem"), to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare. Genesis
has the right to purchase all of the common stock of Genesis ElderCare Corp. not
owned by Genesis for $2,000,000 in cash at any time prior to the 10th
anniversary of the closing date of the restructuring transaction. On November
15, 1999, the Multicare Stockholders agreement was amended, among other things,
to provide that all shareholders will grant to Genesis an irrevocable proxy to
5
vote their shares of common stock of Genesis ElderCare Corp. on all matters to
be voted on by shareholders, including the election of directors and omit the
requirement that specified significant actions receive the approval of at least
one designee of each of Cypress, TPG and Genesis.
Mr. Michael R. Walker, the Chairman of the Board and Chief Executive Officer of
Genesis, is our Chairman and Chief Executive Officer and Mr. George V. Hager,
Jr., the Chief Financial Officer of Genesis, is our Chief Financial Officer. In
addition, Mr. Walker, Mr. Hager and Mr. Richard R. Howard, President and a
member of the board of directors of Genesis, constitute the majority of our
board of directors. In April 2000, Ms. Beverly S. Anderson became an employee of
Multicare and a member of the board of directors. Ms. Anderson is our
Independent Director and Chief Restructuring Officer of Multicare. Based on the
foregoing, Genesis and Messrs. Walker, Hager and Howard have substantial
influence on Multicare and the outcome of any matters submitted to our
stockholders for approval, and are in positions that may result in conflicts of
interest with respect to transactions involving us and Genesis. Genesis and its
affiliates provide healthcare and related services to our customers and
facilities either directly or through contracts with us. Genesis is the
principal supplier to our customers of all pharmacy and rehabilitation services
either directly or through contracts with us. Conflicts of interest may arise in
connection with the negotiation of the terms of such arrangements.
Genesis is in the business of providing healthcare and support services to the
elderly, and substantially all of its markets are contiguous to or overlap with
our existing markets. Genesis may compete with us in certain of these markets or
in the provision of certain healthcare services. Although our directors who are
also directors or officers of Genesis have certain fiduciary obligations to us
under Delaware law, such directors and Genesis are in positions that may create
potential conflicts of interest with respect to certain business opportunities
available to and certain transactions involving us. Neither Genesis nor Messrs.
Walker, Hager and Howard are obligated to present to us any particular
investment opportunity which comes to their attention, even if such opportunity
is of a character which might be suitable for investment by us.
6
Part I
Item 1. Business.
General
The Multicare Companies, Inc. ("Multicare" or the "Company") provides high
quality eldercare and specialty medical services in selected geographic regions.
As used herein, unless the context otherwise requires, "Multicare", the
"Company", "we", "our", or "us" refers to The Multicare Companies, Inc.
Multicare's eldercare services include skilled nursing care, assisted living,
Alzheimer's care and related support activities traditionally provided in
eldercare facilities. We provide sub-acute care such as ventilator care,
intravenous therapy, and various forms of coma, pain and wound management. We
also provide management services to 28 facilities and consulting services to 14
facilities.
Multicare believes it is well positioned in its markets because it provides high
quality care in concentrated geographic regions. Multicare's overall occupancy
rate was approximately 91%, 91%, and 92% for the years ended September 30, 2000,
1999 and 1998, respectively. Multicare achieved a quality mix (defined as
non-Medicaid revenues) of 54%, 55%, and 62% of net revenues for the years ended
September 30, 2000, 1999 and 1998, respectively.
As of September 30, 2000, Multicare operated 137 eldercare facilities with
14,153 beds (80 wholly owned, 10 joint ventures, 19 leased and 28 managed) in
Connecticut, Illinois, Massachusetts, New Jersey, Pennsylvania, Rhode Island,
Vermont, Virginia, West Virginia and Wisconsin.
Voluntary Petition for Relief under Chapter 11 of the United States Bankruptcy
Code
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 their capital
structures under Chapter 11 of the United States Bankruptcy Code. These
bankruptcy cases, among other factors such as the Company's recurring losses,
and defaults under its borrowing agreements raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying 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 of December 19, 2000 was 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.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to eligible individuals. The changes have had a significantly
negative impact on the healthcare industry as a whole and on our cash flows.
7
Second, the federal reimbursement changes have exacerbated a long-standing
problem of less than fair reimbursement by states for medical services provided
to indigent persons. Third, numerous other factors have adversely affected our
cash flows, including increased labor costs, increased professional and
liability insurance costs and increased interest rates. Finally, as a result of
declining governmental reimbursement rates in the face of rising inflationary
costs, we are too highly leveraged to service our indebtedness, including our
long-term lease obligations. See "Revenue Sources and Government Regulation".
The Tender Offer and Merger
On October 9, 1997, Genesis Eldercare Acquisition Corp., ("Acquisition Corp."),
The Cypress Group, (together with its affiliates, "Cypress", TPG Partners II,
L.P., (together with its affiliates, "TPG"), and Nazem, Inc. ("Nazem"), acquired
99.65% of the shares of the common stock of Multicare, pursuant to a Tender
Offer commenced on June 20, 1997. On October 10, 1997, Genesis ElderCare Corp.
completed the merger (the "Merger") of Acquisition Corp. with and into Multicare
in accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated as of June 16, 1997 by and among Genesis ElderCare Corp., Acquisition
Corp., Genesis and the Company. Upon consummation of the Merger, Multicare
became a wholly-owned subsidiary of Genesis ElderCare Corp.
In connection with the Merger, Multicare and Genesis entered into a management
agreement (the "Management Agreement") pursuant to which Genesis manages our
operations. The Management Agreement has a term of five years with automatic
renewals for two years unless either party terminates the Management Agreement.
Genesis is paid a fee of six percent of Multicare's net revenues for its
services under the Management Agreement provided that payment of such fee in
respect of any month in excess of the greater of (i) $1,991,666 and (ii) four
percent of Multicare's consolidated net revenues for such month, shall be
subordinate to the satisfaction of Multicare's senior and subordinate debt
covenants; and provided, further, that payment of such fee shall be no less than
$23,900,000 in any given year. Under the Management Agreement, Genesis is
responsible for Multicare's non-extraordinary sales, general and administrative
expenses (other than certain specified third-party expenses), and all other
expenses of Multicare will be paid by Multicare. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - The Tender Offer
and Merger and its Restructuring."
Patient Services
Our skilled nursing centers offer three levels of care for their customers:
skilled, intermediate and personal. Skilled care provides 24-hour per day
professional services of a registered nurse; intermediate care provides less
intensive nursing care; and personal care provides for the needs of customers
requiring minimal supervision and assistance. Each eldercare center is
supervised by a licensed healthcare administrator and engages the services of a
Medical Director to supervise the delivery of healthcare services to residents
and a Director of Nursing to supervise the nursing staff. Genesis maintains a
corporate quality assurance program to monitor regulatory compliance and to
enhance the standard of care provided in each center.
The Company has established programs for elderly and other customers who require
subacute levels of medical care. These programs include ventilator care,
intravenous therapy, post-surgical recovery, respiratory management, orthopedic
or neurological rehabilitation, terminal care and various forms of coma, pain
and wound management. Private insurance companies and other third party payors,
including certain state Medicaid programs, have recognized that treating
customers requiring subacute medical care in centers such as those operated by
Multicare is a cost-effective alternative to treatment in an acute care
hospital. We provide such care at rates that we believe are substantially below
the rates typically charged by acute care hospitals for comparable services.
8
Management Services
We provide management services to 28 eldercare centers pursuant to management
agreements that provide generally for the day-to-day responsibility for the
operation and management of the centers. In turn, Multicare receives management
fees, depending on the agreement, computed as either an overall fixed fee, a
fixed fee per customer, a percentage of net revenues of the center plus an
incentive fee, or a percentage of gross revenues of the center with some
incentive clauses.
Operations
General. The day-to-day operations of each eldercare facility are managed by an
on-site state licensed administrator who is responsible for the overall
operation of the facility, including quality of care, marketing, and financial
performance. The administrator is assisted by an array of professional and
non-professional personnel (some of whom may be independent providers),
including a medical director, nurses and nursing assistants, social workers,
therapists, dietary personnel, therapeutic recreation staff, and housekeeping,
laundry and maintenance personnel. The business office staff at each facility
manage the day-to-day administrative functions, including data processing,
accounts payable, accounts receivable, billing and payroll.
Upon consummation of the Merger, Genesis and Multicare entered into the
Management Agreement pursuant to which Genesis manages our operations. We
believe that the integration of Genesis and Multicare management is facilitated
by the geographic concentration of Multicare's facilities, the proximity of
Multicare facilities to Genesis' existing markets, the quality of Multicare's
unit and regional management and Multicare's existing information systems which
will allow a rational phase-in of Genesis' systems.
Revenue Sources
We receive revenues from Medicare, Medicaid, private insurance, self-pay
residents, and other third party payors. The health care industry is
experiencing the effects of the federal and state governments trend toward cost
containment, as government and other third party payors seek to impose lower
reimbursement and utilization rates and negotiate reduced payment schedules with
providers. These cost containment measures, combined with the increasing
influence of managed care payors and competition for patients, generally have
resulted in reduced rates of reimbursement for services to be provided by us.
The sources and amounts of our patient revenues will be determined by a number
of factors, including licensed bed capacity and occupancy rates of our centers,
the mix of patients and the rates of reimbursement among payers. Changes in the
case mix of patients as well as payor mix among private pay, Medicare, and
Medicaid will significantly affect our profitability.
Medicare and Medicaid. The Health Insurance for Aged and Disabled Act (Title
XVIII of the Social Security Act), known as "Medicare," has made available to
nearly every American 65 years of age and older a broad program of health
insurance designed to help the nation's elderly meet hospital and other health
care costs. Health insurance coverage has been extended to certain persons under
age 65 qualifying as disabled and those having end-stage renal disease. Medicare
includes three related health insurance programs: (i) hospital insurance ("Part
A"); and (ii) supplementary medical insurance ("Part B"); and (iii) a managed
care option for beneficiaries who are entitled to Part A and enrolled in Part B
("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently
administered by fiscal intermediaries (for Part A and some Part B services) and
carriers (for Part B) under the direction of the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS").
Medicaid (Title XIX of the Social Security Act) is a federal-state matching
program, whereby, the federal government under a needs based formula matches
funds provided by the participating states for medical assistance to "medically
indigent" persons. The programs are administered by the applicable state welfare
9
or social service agencies under Federal rules. Although Medicaid programs vary
from state to state, traditionally they have provided for the payment of certain
expenses, up to established limits, at rates determined in accordance with each
state's regulations. For nursing centers, most states pay prospective rates, and
have some form of acuity adjustment. In addition to facility based services,
most states cover an array of medical ancillary services, including
institutional pharmacy. Payment methodologies for these services vary based upon
state preferences and practices permitted under Federal rules.
Medicare and Medicaid are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially affect the timing and/or levels of
payments to us for our services. We are subject to periodic audits by the
Medicare and Medicaid programs, which have various rights and remedies against
us if they assert that we have overcharged the programs or failed to comply with
program requirements. Such rights and remedies may include requiring the
repayment of any amounts alleged to be overpayments or in violation of program
requirements, or making deductions from future amounts due to us. Such programs
may also impose fines, criminal penalties or program exclusions. Other payor
sources also reserve rights to conduct audits and make monetary adjustments.
Congress has enacted three major laws during the past five years that have
significantly altered payment for nursing home and medical ancillary services.
The Balanced Budget Act of 1997 (the 1997 Act), signed into law on August 5,
1997, reduced federal spending on the Medicare and Medicaid programs. The
Medicare Balanced Budget Refinement Act (BBRA), enacted in November 1999,
addressed a number of the funding difficulties caused by the 1997 Act. A second
enactment, the Benefits Improvement and Protection Act of 2000 (BIPA), was
enacted on December 15, 2000, further modifying the law and restoring additional
funding. The following provides an overview to the impact of each enactment on
Multicare's services.
Under the 1997 Act, participating skilled nursing facilities are reimbursed
under a prospective payment system ("PPS") for inpatient Medicare covered
services. The PPS system commenced with a facility's first cost reporting period
beginning on or after July 1, 1998. Under PPS, nursing facilities are paid a
predetermined amount per patient, per day (per diem) based on the anticipated
costs of treating patients. The per diem rate is determined by classifying each
patient into a resource utilization group ("RUG") using the information gathered
during the minimum data set ("MDS") assessment. There is a separate per diem
rate for each of the RUG classifications. The per diem rate also covers
rehabilitation and non-rehabilitation ancillary services. The law phased in PPS
over a three-year period. PPS reimbursement is based largely on a nursing
facility's costs for the services it provided to Medicare beneficiaries in the
1994-1995 base year.
As implemented by the Health Care Financing Administration, PPS has had an
adverse impact on the Medicare revenues of many skilled nursing facilities.
There have been three primary problems. First, the base year calculations
understate costs. Second, the market basket index used to trend payments forward
does not adequately reflect market experience. Third, the RUGs case mix
allocation is not adequately predictive of the costs of care for patients, and
does not equitably allocate funding, especially for non-therapy ancillary
services.
In November 1999, the Medicare Balanced Budget Refinement Act (BBRA) was passed
in Congress. This enactment provided relief for certain reductions in Medicare
reimbursement caused by the 1997 Act. For covered skilled nursing facility
services furnished on or after April 1, 2000, the federal per diem rates were to
be increased by 20% for 15 RUG payment categories. While this provision was
initially expected to adjust payment rates for only 6 months, HCFA withdrew
proposed RUG refinement rules. These payment add-ons will continue until HCFA
completes certain mandated recalculations of current RUG weightings. For fiscal
years 2001 and 2002, the BBRA mandated federal per diem rates for all RUG
categories will be increased by an additional 4% over the required market basket
adjustment. The law provided that certain specific services (such as prostheses
and chemotherapy drugs) would be reimbursed separately from and in addition to
the federal per diem rate. A provision was included that provided that for cost
report years beginning on or after January 1, 2000, skilled nursing facilities
could waive the PPS transition period and elect to receive 100% of the federal
10
per diem rate. The enactment also lifted for two years the $1,500 cap on
rehabilitation therapy services provided under Medicare Part B.
On December 15, 2000 Congress passed the Benefit Improvement and Protection Act
of 2000 ("BIPA") that, among other provisions, increases the nursing component
of Federal PPS rates by approximately 16.7% for the period from April 1, 2001
through September 30, 2002. The legislation also changes the 20% add-on to three
of the fourteen rehabilitation RUG categories to a 6.7 % add-on to all 14
rehabilitation RUG categories beginning April 1, 2001. The Part B Consolidated
Billing Provision of BBRA will be repealed except for Medicare Part B therapy
services and, the moratorium on the $1,500 therapy caps will be extended through
calendar year 2002. The Company has not yet evaluated what effect BIPA will have
on its operating results.
The 1997 Act included several provisions affecting Medicaid. The 1997 Act
repealed the "Boren Amendment" federal payment standard for Medicaid payments to
nursing facilities effective October 1, 1997. The Boren Amendment required that
Medicaid payments to certain health care providers be reasonable and adequate in
order to cover the costs of efficiently and economically operated healthcare
facilities. Under the 1997 Act states must now use a public notice and comment
period in order to determine rates and provide interested parties a reasonable
opportunity to comment on proposed rates and the justification for and the
methodology used in calculating such rates. With the repeal of the Federal
payment standards, there can be no assurances that budget constraints or other
factors will not cause states to reduce Medicaid reimbursement to nursing
facilities and pharmacies or that payments to nursing facilities and pharmacies
will be made on timely basis. The 1997 Act also grants greater flexibility to
states to establish Medicaid managed care projects without the need to obtain a
federal waiver. Although these projects generally exempt institutional care,
including nursing facilities and institutional pharmacy services, no assurances
can be given that these projects ultimately will not change the reimbursement
methodology for nursing facility services or pharmacy services from
fee-for-service to managed care negotiated or capitated rates. We anticipate
that federal and state governments will continue to review and assess
alternative health care delivery systems and payment methodologies.
Congress and state governments continue to focus on efforts to curb spending on
health care programs such as Medicare and Medicaid. Such efforts have not been
limited to skilled nursing facilities, but have and will most likely include
other services provided by us. We cannot at this time predict the extent to
which these proposals will be adopted or, if adopted and implemented, what
effect, if any, such proposals will have on us. Efforts to impose reduced
allowances, greater discounts and more stringent cost controls by government and
other payors are expected to continue.
The following table identifies Multicare's net revenues attributable to each of
its revenue sources for the years ended September 30, 2000, 1999 and 1998.
2000 1999 1998
---- ---- ----
Private and other 30% 33% 37%
Medicaid 46% 45% 38%
Medicare 24% 22% 25%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
See "Cautionary Statements Regarding Forward Looking Statements" and "Business -
Government Regulation."
Marketing
Genesis manages our marketing program. Marketing for eldercare centers is
focused at the local level and is conducted primarily by the center
administrator and its admissions director who call on referral sources such as
doctors, hospitals, hospital discharge planners, churches and various
organizations. Genesis management's marketing objective is to maintain public
awareness of the eldercare center and its capabilities. Genesis' management also
11
takes advantage of our regional concentrations in its marketing efforts, and
where appropriate, through consolidated marketing programs which benefit more
than one center.
Genesis has consolidated our core business under the name Genesis ElderCare
(SM). The Genesis ElderCare logo and trademark have been featured in a series of
print advertisements and publications serving many of the regional markets in
which we operate. The marketing of Genesis ElderCare is aimed at increasing
awareness among decision-makers in key professional and business audiences.
Genesis is using and will continue to use advertising to promote the Genesis
ElderCare brand name in trade, professional and business publications and to
promote services directly to consumers.
Personnel
As of September 30, 2000, Multicare employed approximately 13,200 persons.
Approximately 2,300 employees at 33 of Multicare's facilities are covered by
collective bargaining agreements. Although we have been subject to an aggressive
union organizing campaign by the Service Employees International Union ("SEIU"),
we have experienced little impact at the facility level. We believe that our
relationship with our employees is generally good.
The Company and the industry continue to experience significant shortages in
qualified professional clinical staff. We compete with other healthcare
providers and with non-healthcare providers for both professional and
non-professional employees. As the demand for these services continually exceeds
the supply of available and qualified staff, the Company and our competitors
have been forced to offer more attractive wage and benefit packages to these
professionals and to utilize outside contractors for these services at premium
rates. Furthermore, the competitive arena for this shrinking labor market has
fostered high turnover among clinical professional staff as many seek to take
advantage of the plentiful supply of available positions, each offering new and
more attractive wage and benefit packages. In addition to the wage pressures
inherent in this environment, the cost of training new employees amid the high
turnover rates has caused added pressure on our operating margins. While we have
been able to retain the services of an adequate number of qualified personnel to
staff our facilities appropriately and maintain our standards of quality care,
there can be no assurance that continued shortages will not in the future affect
our ability to attract and maintain an adequate staff of qualified healthcare
personnel. A lack of qualified personnel at a facility could result in
significant increases in labor costs at such facility or otherwise adversely
affect operations at such facility. Any of these developments could adversely
affect our operating results.
Employee Training and Development
The Company believes that nursing and professional staff retention and
development has been and continues to be a critical factor in our successful
operation. In response to this challenge, a compensation program which provides
for annual merit reviews as well as financial and quality of care incentives has
been implemented to promote center staff motivation and productivity and to
reduce turnover rates. Management believes that our wage rates for professional
nursing staff are commensurate with market rates.
In addition, the Company has established an internal training and development
program for both nurse assistants and nurses. Employee training is emphasized
through a variety of in-house programs as well as a tuition reimbursement
program. We have established the Nursing Assistant Specialist Program, which is
offered on a joint basis with community colleges. Classes are held on the
employees' time, at our cost, last for approximately six months and provide
advanced instruction in nursing care. When all of the requirements for class
participation have been met through attendance, discussion and examinations, the
nurses aide graduates and is awarded the title of Nursing Assistant Specialist
and receives a salary adjustment. As the nurse aide continues through the career
ladder, we continue to provide incentives. At the next level, Senior Nursing
Assistant Specialist, the employee receives another increase in salary and
12
additional tuition reimbursement of up to $2,500 toward becoming a Licensed
Practical Nurse ("LPN") or Registered Nurse ("RN") and at the Senior Nursing
Assistant Specialist Coordinator level, tuition reimbursement increases to a
maximum of $3,000 per year towards a nursing degree. Similar programs are
currently under development for both pharmacy technicians and nursing assistants
who work in the assisted living environment.
We have a junior level management and leadership training program referred to as
the Pilot Light Program. The target audience for this training is RN's and LPN's
occupying charge nurse positions within the Company's nursing centers as well as
junior level managers.
Governmental Regulation
Our business is subject to extensive federal, state and, in some cases, local
regulation with respect to, among other things, licensure, certification and
health planning. This regulation relates, among other things, to the adequacy of
physical plant and equipment, qualifications of personnel, standards of care and
operational requirements. Compliance with such regulatory requirements, as
interpreted and amended from time to time, can increase operating costs and
thereby adversely affect the financial viability of our business. Failure to
comply with current or future regulatory requirements could also result in the
imposition of various remedies including fines, restrictions on admission, the
revocation of licensure, decertification, imposition of temporary management or
the closure of the facility. All of our eldercare centers and healthcare
services, to the extent required, are licensed under applicable law. All skilled
nursing centers and healthcare services, or practitioners providing the services
therein, are certified or approved as providers under one or more of the
Medicaid and Medicare programs. Generally, assisted living centers are not
eligible to be certified under Medicare or Medicaid. Licensing, certification
and other applicable standards vary from jurisdiction to jurisdiction and are
revised periodically. State and local agencies survey all skilled nursing
centers on a regular basis to determine whether such centers are in compliance
with governmental operating and health standards and conditions for
participation in government sponsored third party payor programs. We believe
that our centers are in substantial compliance with the various Medicare,
Medicaid and state regulatory requirements applicable to them. However, in the
ordinary course of our business, we receive notices of deficiencies for failure
to comply with various regulatory requirements. Multicare reviews such notices
and takes appropriate corrective action. In most cases, Multicare and the
reviewing agency will agree upon the measures to be taken to bring the center
into compliance with regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take various adverse actions against a
provider, including:
o the imposition of fines;
o suspension of payments for new admissions to the center, and
o in extreme circumstances, decertification from participation in the
Medicare or Medicaid programs and revocation of a center's license.
These actions may adversely affect a center's ability to continue to operate,
the ability for us to provide certain services, and/or eligibility to
participate in the Medicare or Medicaid programs or to receive payments from
other payors. Additionally, actions taken against one center may subject other
centers under common control or ownership to adverse measures, including loss of
licensure or eligibility to participate in Medicare and Medicaid programs.
All Multicare eldercare centers are currently certified to receive benefits
under Medicaid. Both initial and continuing qualifications of an eldercare
center to participate in such programs depend upon many factors including
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls. Generally, assisted
living facilities are not eligible to be certified under Medicare or Medicaid.
Many states in which Multicare operates have adopted Certificate of Need or
similar laws which generally require that a state agency approve certain
acquisitions and determine that the need for certain bed additions, new
13
services, and capital expenditures or other changes exist prior to the
acquisition or addition of beds or services, the implementation of other
changes, or the expenditure of capital. State approvals are generally issued for
a specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
centers, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the center's license
and adverse reimbursement action. During the past year, several states have
passed legislation altering their Certificate of Need requirements. Virginia
will phase out its requirement. These changes are not expected to materially
alter our business opportunities.
We are also subject to federal and state laws, which govern financial and other
arrangements between healthcare providers. These laws often prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. These laws include
o the "anti-kickback" provisions of the federal Medicare and Medicaid
programs, which prohibit, among other things, knowingly and
willfully soliciting, receiving, offering or paying any remuneration
(including any kickback, bribe or rebate) directly or indirectly in
return for or to induce the referral of an individual to a person
for the furnishing or arranging for the furnishing of any item or
service for which payment may be made in whole or in part under
Medicare or Medicaid; and
o the "Stark laws" which prohibit, with limited exceptions, the
referral of patients by physicians for certain services, including
home health services, physical therapy and occupational therapy, to
an entity in which the physician has a financial interest.
In addition, some states restrict certain business relationships between
physicians and other providers of healthcare services. Many states prohibit
business corporations from providing, or holding themselves out as a provider of
medical care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. From time to time, we have sought guidance as to the
interpretation of these laws; however, there can be no assurance that such laws
will ultimately be interpreted in a manner consistent with our practices
There have also been a number of recent federal and state legislative and
regulatory initiatives concerning reimbursement under the Medicare and Medicaid
programs. During the past two years, the Office of the Inspector General, HHS
has issued a series of voluntary compliance guidelines. These compliance
guidelines provide guidance on acceptable practices. Skilled nursing facility
services and DMEPOS supplier performance practices have been among the services
addressed in these publications. Genesis' corporate compliance committee is
working to assure that our practices conform. The Office of the Inspector
General, HHS also issues fraud alerts and advisory opinions. Directives
concerning double billing, home health services and the provision of medical
supplies to nursing facilities have been released. It is anticipated that areas
addressed by these advisories may come under closer scrutiny by the government.
While we have focused our internal compliance reviews to assure our practices
conform to government instructions, we cannot accurately predict the impact of
any such initiatives. See "Cautionary Statements Regarding Forward Looking
Statements" and "Revenue Sources".
Corporate Integrity Program
The Corporate Integrity Program (the "Integrity Program") was developed to
assure that we continue to achieve our goal of providing a high level of care
and service in a manner consistent with all applicable state and federal laws
and regulations, and our internal standard of conduct. This program is intended
14
to allow personnel to prevent, detect and resolve any conduct or action that
fails to satisfy all applicable laws and our standard of conduct.
Genesis has a Corporate Compliance Officer responsible for administering the
Integrity Program. The Corporate Compliance Officer, with the concurrence of the
Chief Executive Officer or the Board of Directors, may use any of Genesis'
resources to evaluate and resolve compliance issues. The Compliance Officer
reports significant compliance issues to the Board of Directors, including the
results of investigations and any subsequent disciplinary or remedial actions
taken.
In December 1998, Genesis established the Corporate Integrity Hotline (the
"Hotline"), which offers a toll-free number available to all employees of
Genesis to report non-compliance issues. Employee calls to the hotline are kept
anonymous. All calls reporting alleged non-compliance are logged, investigated,
addressed and remedied by appropriate company officials.
In 1999, two subcommittees were established to further ensure the effectiveness
of the Integrity Program. The Regulatory Compliance Advisory Committee ("RCAC")
was formed to ensure that a mechanism exists to monitor federal and state
regulations which effect the Company and to ensure that existing regulations are
being adhered to throughout the organization. The RCAC is comprised of senior
level management of Genesis and meets bimonthly to discuss regulatory issues,
which potentially impact the Company. The Corporate Integrity Subcommittee (the
"CIS") was established to ensure a mechanism exists for the Company to monitor
compliance issues. Potential compliance issues are referred by the Corporate
Compliance Officer to members of the CIS for investigation. The CIS members are
senior members of the risk management, human resources, legal, clinical
practices and internal audit departments of Genesis.
Periodically, the Company receives information from the Department of Health and
Human Services Office of Inspector General (HHS OIG) regarding individuals and
providers that are excluded from participation in Medicare, Medicaid and other
federal healthcare programs. Providers include medical directors, attending
physicians, vendors, consultants and therapists. On a monthly basis, management
compares the information provided by the HHS OIG to databases containing
providers and individuals doing business with Genesis. Any potential matches are
investigated and any necessary corrective action is taken to ensure we cease
doing business with such providers and individuals.
Competition in the Healthcare Services Industry
We compete with a variety of other companies in providing healthcare services.
Certain competing companies have greater financial and other resources and may
be more established in their respective communities than us. Competing companies
may offer newer or different centers or services than we do and may thereby
attract our customers who are either presently residents of its eldercare
centers or are otherwise receiving its healthcare services.
We operate eldercare centers in 10 states. In each market, our eldercare centers
may compete for customers with rehabilitation hospitals; subacute units of
hospitals; skilled or intermediate nursing centers, and personal care or
residential centers which offer comparable services to those offered by our
centers.
Certain of these providers are operated by not-for-profit organizations and
similar businesses, which can finance capital expenditures on a tax-exempt basis
or receive charitable contributions unavailable to us. In competing for
customers, a center's local reputation is of paramount importance. Referrals
typically come from acute care hospitals, physicians, religious groups, health
maintenance organizations ("HMO's"), the customer's families and friends, and
other community organizations.
Members of a customer's family generally actively participate in selecting an
eldercare center. Competition for subacute patients is intense among hospitals
with long-term care capability, rehabilitation hospitals and other specialty
15
providers and is expected to remain so in the future. Important competitive
factors include the reputation in the community, services offered, the
appearance of a center, and the cost of services.
Multicare competes in providing specialty medical services with a variety of
different companies. Generally, this competition is national, regional and local
in nature. The primary competitive factors in the specialty medical services
businesses are similar to those in the eldercare center business and include:
reputation, cost of services, quality of clinical services, responsiveness to
patient needs, and ability to provide support in other areas such as third party
reimbursement, information management and patient record keeping.
Insurance
The Company carries property, general and professional liability coverage on
behalf of itself and its subsidiaries in amounts deemed adequate by management.
However, there can be no assurance that any current or future claims will not
exceed applicable insurance coverage.
There have been significant changes in the commercial insurance marketplace for
general and professional liability insurance coverage ("GL/PL"). Prior to June
1, 2000, the Company purchased GL/PL insurance from various commercial insurers
on a first dollar coverage basis. Beginning with the June 1, 2000 policy, the
Company has purchased GL/PL coverage from a commercial insurer subject to a
$500,000 per claim retention. On an annual basis, the cost of the GL/PL has
increased by approximately $1,600,000, for the policy year ending June 1, 2001
as compared to the policy year ending May 31, 2000.
Workers' compensation insurance has been maintained as statutorily required, or
in certain jurisdictions for certain periods, the Company has qualified as
exempt ("self insured"). Most of the commercial insurance purchased is loss
sensitive in nature. As such, the Company is responsible for adverse loss
development or in some cases may be entitled to refunds if losses are below
certain levels. The Company believes that adequate reserves are in place to
cover the ultimate liability related to workers' compensation.
Genesis maintains a wholly owned captive insurance subsidiary, Liberty Health
Corporation, LTD ("LHC") which provides reinsurance for Genesis, Multicare and
others. LHC has, or is currently, reinsuring certain windstorm, workers'
compensation and GL/PL deductibles. Based on independent actuarial studies,
Genesis believes that LHC's reserves are sufficient to meet their obligations.
LHC continues to operate as a going concern, and has been excluded from Chapter
11 filings in Federal Bankruptcy Court.
The Company provides several health insurance options to its employees. Prior to
fiscal 1999, the Company offered a self-insured 80/20 indemnity plan (the "80/20
Plan") and several fully insured HMO's. In late fiscal 1999 a new self-insured
indemnity plan (the "Choice Plan") was developed and made available to a limited
number of employees. The Choice Plan became available to all employees in
January 2000. The Choice Plan enabled employees to take advantage of much lower
co-pays that were competitive with HMO co-pays, while still allowing them to go
to any provider in the 80/20 Plan preferred provider organization. In fiscal
2000, the medical and pharmacy utilization levels under the Choice Plan and the
80/20 Plan were greater than the Company anticipated, resulting in additional
health insurance costs of approximately $8,200,000. Effective April 1, 2001, the
Choice Plan will be eliminated from the Company's benefit program and employee
co-pays for prescriptions will be increased.
16
Item 2. Properties.
As of September 30, 2000, Multicare operated 137 eldercare facilities (80 wholly
owned, 10 joint ventures, 19 leased and 28 managed). Nineteen of Multicare's
facilities are leased from third parties. Our inability to make rental payments
under these leases could result in loss of the leased property through eviction
or other proceedings. Certain facility leases do not provide for non-disturbance
from the mortgagee of the fee interest in the property and consequently each
such lease is subject to termination in the event that the mortgage is
foreclosed following a default by the owner.
We believe our physical properties are well maintained and suitable for the
purposes for which they are being used.
The following table summarizes by state certain information regarding
Multicare's eldercare centers at September 30, 2000 (excluding 14 facilities
with 1,668 beds at which Multicare provides quality assurance consulting
services):
Owned Joint Venture Leased Managed Total
----- ------------- ------ ------- -----
Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Massachusetts 8 1,107 7 886 2 244 25 1,185 42 3,422
New Jersey 14 1,672 --- --- 8 1,294 --- --- 22 2,966
Pennsylvania 17 1,881 --- --- --- --- 1 360 18 2,241
West Virginia 15 1,369 3 208 4 326 1 62 23 1,965
Connecticut 6 766 --- --- 2 250 1 90 9 1,106
Illinois 9 909 --- --- 1 92 --- --- 10 1,001
Wisconsin 6 719 --- --- 2 215 --- --- 8 934
Rhode Island 3 370 --- --- --- --- --- --- 3 370
Virginia 1 90 --- --- --- --- --- --- 1 90
Vermont 1 58 --- --- --- --- --- --- 1 58
-- ----- -- ----- -- ----- -- ----- --- ------
80 8,941 10 1,094 19 2,421 28 1,697 137 14,153
== ===== == ===== == ===== == ===== === ======
Subsequent to September 30, 2000, the Company has terminated the lease of a 120
bed center in Connecticut and has terminated the lease of a 92 bed center in
Illinois.
Item 3. Legal Proceedings.
We are a party to claims and legal actions arising in the ordinary course of
business. We do not believe that the ultimate resolution of any litigation, to
which Multicare is currently a party, alone or in the aggregate, will have a
material adverse effect on us. See "Cautionary Statements Regarding Forward
Looking Statements."
Item 4. Submission of Matters to a Vote of Security Holders. None.
17
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Upon completion of the Merger our shares are no longer traded. See "The Tender
Offer and Merger."
18
Item 6. Selected Consolidated Financial Data.
Nine Months Twelve Months
Fiscal Year Ended Ended
Ended September 30, September 30, December 31,
--------------------------------------------- ------------- --------------
2000 1999 1998 1997(8) 1997(8) 1996(8)
---- ---- ---- ---- ---- ----
(unaudited)
Statement of Operations Data
(in thousands):
Net revenues $ 645,579 $ 640,414 $ 695,633 $ 679,292 $ 533,952 $ 532,230
Expenses:
Operating expenses 554,125 515,800 524,542 515,576 406,173 400,897
Corporate, general and administrative --- --- --- 31,984 25,203 25,408
Management fee 38,740 38,360 42,235 --- --- ---
Depreciation and amortization 38,064 45,702 44,875 27,916 21,620 22,344
Lease expense 12,965 12,955 13,194 15,929 12,693 12,110
Interest expense, net 57,943 66,671 61,728 27,857 21,640 25,164
Debenture conversion expense (1) --- --- --- 785 785 ---
Debt restructuring and reorganization
charges 11,824 --- --- --- --- ---
Impairment charges (2) 182,601 397,269 --- --- --- ---
---------- ---------- --------- --------- --------- ---------
Total expenses 896,262 1,076,757 686,574 620,047 488,114 485,923
---------- ---------- --------- --------- --------- ---------
Income (loss) before income taxes, share
in loss of unconsolidated affiliates,
cumulative effect of accounting change,
and extraordinary item (250,683) (436,343) 9,059 59,245 45,838 46,307
Income tax provision (benefit) (17,946) (29,016) 8,821 22,152 17,087 17,570
---------- ---------- --------- --------- --------- ---------
Income (loss) before share in loss of
unconsolidated affiliates, cumulative
effect of accounting change, and
extraordinary item (232,737) (407,327) 238 37,093 28,751 28,737
Share in loss of unconsolidated affiliates 886 --- --- --- --- ---
---------- ---------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change and extraordinary item (233,623) (407,327) 238 37,093 28,751 28,737
Cumulative effect of accounting change, net 3,623 --- --- --- --- ---
---------- ---------- --------- --------- --------- ---------
Income (loss) before extraordinary item (237,246) (407,327) 238 37,093 28,751 28,737
Extraordinary item, net of tax benefit (3) --- --- --- 2,219 873 2,827
---------- ---------- --------- --------- --------- ---------
Net income (loss) $(237,246) $(407,327) $ 238 $ 34,874 $ 27,878 $ 25,910
========== ========== ========= ========= ========= =========
Other Financial Data (in thousands except ratios):
EBITDA (4) $ 39,749 $ 73,299 $ 115,662 $ 115,803 $ 89,883 $ 93,815
EBITDAR(5) 52,714 86,254 128,856 131,732 102,576 105,925
Ratio of EBITDA to interest expense, net 0.7x 1.1 x 1.9x 4.2x 4.1x 3.7 x
Ratio of EBITDAR to interest expense, net,
Plus lease expense 0.7x 1.1x 1.7x 3.0x 3.0x 2.8 x
Ratio of earnings to fixed charges (6) 0.1x 0.5x 1.1x 2.7x 2.8x 2.5 x
Capital expenditures $ 8,420 $ 15,307 $ 25,803 $ 54,226 $ 39,301 $ 64,215
Operating Data:
Average number of licensed beds 14,952 17,524 17,355 15,222 15,934 11,620
Occupancy 91.3% 90.5% 91.6% 91.1% 90.4% 91.0 %
Payor mix:
Quality mix (7) 54.5% 55.4% 62.1% 66.8% 67.3% 64.5 %
Medicaid 45.5% 44.6% 37.9% 33.2% 32.7% 35.5 %
Balance Sheet Data:
Total assets 1,101,693 1,302,364 1,698,955 823,133 823,133 761,667
Working capital 68,824 10,350 22,818 51,822 51,822 39,327
Liabilities subject to compromise 875,111 --- --- --- --- ---
Long-term debt, including current portion 10,240 775,956 755,841 424,046 424,046 429,168
Shareholders' equity $ 88,665 $ 325,911 $ 733,238 $ 263,174 $ 263,174 $ 207,935
- ------------------------
(1) Represents a non-recurring charge relating to the early conversion of $11.0
million of Multicare's 7% Convertible Debentures.
(2) Represents non-cash impairment charges relating to the write-down of
long-lived assets.
(3) Multicare incurred extraordinary charges relating to early extinguishment
of debt.
(4) EBITDA represents earnings before interest expense, net, income taxes,
depreciation and amortization, extraordinary items (net of tax benefit),
debenture conversion expense, debt restructuring and reorganization
charges, and impairment charges. EBITDA should not be considered an
alternative measure of Multicare's net income (loss), operating
performance, cash flow or liquidity. It is included herein to provide
additional information related to Multicare's ability to service debt.
(5) EBITDAR represents earnings before interest expense, net, income taxes,
depreciation and amortization, lease expense, extraordinary items (net of
tax benefit), debenture conversion expense, debt restructuring and
reorganization charges, and impairment charges. EBITDAR should not be
considered an alternative measure of Multicare's net income, operating
performance, cash flow or liquidity. It is included herein to provide
additional information related to Multicare's ability to service debt.
(6) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of the sum of earnings before income taxes, impairment
charges, debt restructuring and reorganization charges, and extraordinary
items (net of tax benefit) plus fixed charges. Fixed charges consist of
interest on all indebtedness, amortization of debt issuance costs and
one-third of rental expense, which Multicare believes to be representative
of the interest factor. The definition of fixed charges used in this
calculation differs from that used in the Consolidated Fixed Charge
Coverage Ratio contained in the Indenture.
(7) Quality mix is defined as non-Medicaid patient revenues.
(8) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - The Tender Offer and Merger and its Restructuring."
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Upon consummation of the Merger in October 1997, Multicare and Genesis entered
into the Management Agreement pursuant to which Genesis manages our operations.
Under Genesis' management, our strategy is to integrate the talents of case
managers, comprehensive discharge planning and, to provide cost effective care
management to achieve superior outcomes and return our customers to the
community. Genesis' management believes that achieving improved customer
outcomes will result in increased utilization of specialty medical services and
a broader base of repeat customers in our network. Moreover, we believe that
this strategy will lead to a high quality payor mix and continued high levels of
occupancy. Genesis' management also focuses on the revenue and cost
opportunities presented through the further integration of our acquisitions. We
have completed no new acquisitions and little new construction since the Merger;
accordingly, capital expenditures since the Merger have decreased significantly
from historical levels.
Liquidity and Going Concern Assumption
The accompanying consolidated 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 agreements and
the ability to generate sufficient cash flow.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to individuals. The changes have had a significant adverse
impact on the healthcare industry as a whole and on our cash flows. Second, the
federal reimbursement changes have exacerbated a long-standing problem of less
than fair reimbursement by the states for medical services provided to indigent
persons under the various state Medicaid programs. Third, numerous other factors
have adversely affected our cash flows, including increased labor costs,
increased professional liability and other insurance costs, and increased
interest rates. Finally, as a result of declining governmental reimbursement
rates and in the face of rising inflationary costs, we were too highly leveraged
and could not service our debt, including our long-term lease obligations. See
"Business - Revenue Sources, Personnel, Government Regulation, and Insurance."
Also see-"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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
20
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 Stockholder's Agreement
On November 15, 1999, the Multicare Stockholder's 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.
21
ElderTrust Transactions
Effective January 31, 2001, we reached an agreement to restructure our
relationship with ElderTrust, a Maryland healthcare real estate investment
trust, sponsored by Genesis. Multicare filed a motion in U.S. Bankruptcy Court
seeking approval of the agreement, which is also subject to endorsement by
certain other parties involved in the Chapter 11 restructuring process. Among
other things, the agreement encompasses the resolution of mortgages for three
properties operated by Multicare. In its agreement with ElderTrust, Multicare
sold three owned assisted living properties that are mortgaged to ElderTrust for
principal amounts totaling $19,500,000 in exchange for the outstanding
indebtedness. ElderTrust will lease the properties back to Multicare under a new
ten-year lease with annual rents of $791,561.
Results of Operations
Effective September 30, 1997, we changed our fiscal year end to September 30
from December 31.
Fiscal 2000 Compared to Fiscal 1999
Net Revenues. Net revenues increased 0.8% or $5.2 million to $645.6 million in
2000 from the prior year ended September 30, 1999.
An increase in average daily Medicare census resulted in an increase of $25.3
million in net revenues in the year ended September 30, 2000. Net revenues in
the current year also increased by $1.6 million due to an additional day in the
year ended September 30, 2000. However, effective June 1, 2000, the Company sold
substantially all of its assets in Ohio, resulting in a decrease in net revenues
of $16.4 million for the year ended September 30, 2000. Net revenues for the
year ended September 30, 2000 also declined by approximately $5.3 million due to
Medicare rate dilution. The Medicare Prospective Pay System was adopted in
January 1, 1999 resulting in rate dilution in nine months of the prior year and
twelve months in the current year as facilities continue to transition to
payment rates based on 100% of the federal rate.
Our quality mix of non-Medicaid patient revenues was 54% and 55% for the years
ended September 30, 2000 and 1999, respectively. Occupancy rates were 91% for
the years ended September 30, 2000 and 1999.
Other Operating Expenses and Margins. Operating expenses for the year ended
September 30, 2000 increased $38.3 million or 7% from the prior year to $554.1
million. An increase of $50.7 million resulted primarily from a 7% or $37.8
million increase in nursing expense, $8.2 million in higher health insurance
costs, and $4.7 million in higher bad debt expense. The offsetting decrease in
operating expenses reflects the impact of the sale of the Ohio assets of $12.4
million ($9.0 million of salaries, wages and benefits and $3.4 million of other
operating expenses).
Facility operating margins (net revenues less operating expense, divided by net
revenues) were 14.2% and 19.5% for the years ended September 30, 2000 and 1999,
respectively. Income before interest expense, net, income tax benefits,
depreciation and amortization, lease expense, debt restructuring and
reorganization charges, and impairment charges (EBITDAR) was 8.2% and 13.5% of
net revenues for the years ended September 30, 2000 and 1999, respectively.
Impairment Charges and Loss on Sale of Assets. Impairment charges for the year
ended September 30, 2000 were $182.6 million compared to $397.3 million in the
prior year. Impairment charges of $155.1 million for the year ended September
30, 2000 relate to the write-down of long-lived assets. The Company evaluated
the recoverability of its long-lived assets, including goodwill. In part,
changes in government regulations since the Merger have precluded the Company
from achieving operating profits from levels that existed prior to the Merger.
During the fourth quarter of fiscal 2000 in connection with our budget
preparations for the forthcoming year, we reviewed the current and projected
undiscounted cash flows of our eldercare centers. This review indicated that the
22
estimated undiscounted future cash flows were below the carrying value of
long-lived assets for 19 centers. The value of the impaired eldercare centers
was estimated based on an estimated fair value per bed value resulting in a
write-down of $155.1 million of primarily goodwill. In addition, the Company
recorded a $19.5 million impairment charge based on the write-off of working
capital of discontinued operations of leased centers in Virginia, Illinois, and
Connecticut and discontinued construction projects. In the third quarter of
fiscal 2000, the Company recorded an additional loss on the sale of Ohio assets
of $7.9 million based on a lower than anticipated sales price.
The impairment charges of $397.3 million for the year ended September 30, 1999
relate to the write-down of long-lived assets. The Company evaluated the
recoverability of its long-lived assets, including goodwill. In the fourth
quarter of fiscal 1999, the Company determined that estimated undiscounted
future cash flows were below the carrying value of long-lived assets for 21
centers. The fair market value of the impaired eldercare centers was estimated
based on a multiple of projected cash flows resulting in a write-down of $167.4
million of primarily goodwill. In addition, the Company anticipated the sale of
28 centers in Ohio, Illinois and Wisconsin, in the second quarter of fiscal
2000. These centers were evaluated based on the anticipated sales price.
Long-lived asset values of all centers anticipated to be sold were compared to
the anticipated sales price resulting in a write-down of $229.9 million of
primarily goodwill. The Company no longer anticipates the sale of the Illinois
and Wisconsin assets and sold the Ohio assets for $7.9 million less than the
anticipated sales price.
Management Fee Expense. In connection with the Management Agreement, Genesis
manages Multicare's operations for a fee of six percent of Multicare's
non-extraordinary sales (as defined by the Management Agreement) and is
responsible for Multicare's corporate general and administrative expenses other
than certain specified third party expenses. Management fees increased by $0.4
million or 1% to $38.7 million due to the increase in net revenues.
Lease Expense. Lease expense is $13.0 million for the years ended September 30,
2000 and 1999. Lease expense decreased by $0.4 million in the year ended
September 30, 2000 because three leased centers in Ohio were assigned to the
buyer of the Ohio assets effective June 1, 2000 and the Company did not renew
the lease of a center in Virginia effective July 1, 2000. The decrease in lease
expense due to a decrease in the number of centers leased was offset by
increases in lease rates in the year ended September 30, 2000.
Depreciation and Amortization. Depreciation and amortization expense for the
year ended September 30, 2000 decreased $7.6 million or 17% from the prior year
to $38.1 million. In 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 $7.1 million for the year ended September
30, 2000. Also, for the year ended September 30, 2000, depreciation decreased by
$0.5 million due to the sale of the Ohio assets effective June 1, 2000.
Interest Expense, net. Net interest expense for the year ended September 30,
2000 decreased $8.7 million from the prior year to $57.9 million. Effective July
1, the Company did not accrue any interest on its Senior Credit Facility and its
9% Senior Subordinated Notes which resulted in a decrease of $16.4 million of
interest expense in the year ended September 30, 2000. No interest was accrued
because during the bankruptcy proceedings no interest on the Senior Credit
Facility or the 9% Senior Subordinated Notes will be paid nor is it probable
that this interest would be an allowed priority, secured, or unsecured claim.
The decrease in interest expense was offset by an increase in the effective
borrowing rate of approximately 1.2% to 9.8% for the year ended September 30,
2000. 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. The increase in the effective borrowing rate resulted
in a $6.7 million increase in interest expense in the year ended September 30,
2000. Interest also increased by $0.8 million due to less interest capitalized
in the current year and an increase in $0.2 million relating to an increase of
one day in the year ended September 30, 2000.
23
Debt Restructuring and Reorganization charges. For the year ended September 30,
2000, the Company incurred and expensed $11.8 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 and reorganization charges was
$1.3 million in bank charges and $10.5 million in legal and financial and
consultant expense. As of September 30, 2000 the Company has paid $8.1 million
of the $11.8 million of debt restructuring and reorganization charges.
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 for the year ended September 30, 2000
decreased by $11.1 million to a benefit of $17.9 million. Of the decrease $20.8,
million relates to the tax effect of the impairment charge in the prior year for
which no benefit was taken in the current year. The offsetting increase of $9.7
million relates to lower operating income before impairment charges and after
the addition of non-deductible goodwill amortization in the year ended September
30, 2000.
Fiscal 1999 Compared to Fiscal 1998
Net Revenues. Net revenues decreased 7.9% or $55.2 million to $640.4 million in
1999 from the prior year ended September 30, 1998.
Of the net revenues decrease for the year ended September 30, 1999, $31.7
million or 4.6% is attributable to Medicare rate dilution as a result of the
Medicare Prospective Pay System implemented on January 1, 1999. Effective
January 1, 1998, the Company sold its institutional pharmacy business to
Genesis, which resulted in a decrease in net revenues of $19.7 million or 2.8%.
The remaining decrease is primarily attributable to an overall decrease in
census and quality mix in our eldercare centers.
Our quality mix of non-Medicaid patient revenues was 55% and 62% for the years
ended September 30, 1999 and 1998, respectively. The decrease is primarily due
to the exclusion of pharmacy revenues effective January 1998. Occupancy rates
were 91% and 92% for the years ended September 30, 1999 and 1998, respectively.
Operating Expense and Margins. Operating expenses for the year ended September
30, 1999 decreased $8.7 million or 2% from the prior year to $515.8 million. The
decrease in operating expenses reflects the impact of the Pharmacy Sale of $16.3
million ($5.2 million of salaries, wages and benefits and $11.1 million of other
operating expenses). The offsetting increase of $7.6 million resulted primarily
from $10.8 million in higher salaries, wages and benefits offset by a decline in
ancillary expenses of $3.2 million.
Facility operating margins (net revenues less operating expense) were 19.5% and
24.6% for the years ended September 30, 1999 and 1998, respectively. Income
before interest expense, income taxes, depreciation and amortization, debenture
conversion expense, impairment charges, and lease expense (EBITDAR) was 13.5%
and 18.5% of net revenues for the years ended September 30, 1999 and 1998,
respectively. The dilution in margins is principally due to Medicare Rate
dilution as a result of the implementation beginning January 1, 1999 of PPS.
Impairment Charges and Loss on Sale of Assets. The impairment charges of $397.3
million for the year ended September 30, 1999 relate to the write-down of
long-lived assets. The Company evaluated the recoverability of its long-lived
assets, including goodwill. In the fourth quarter of fiscal 1999, the Company
determined that estimated undiscounted future cash flows were below the carrying
value of long-lived assets for 21 centers. The fair market value of the impaired
eldercare centers was estimated based on a multiple of projected cash flows
resulting in a write-down of $167.4 million of primarily goodwill. In addition,
24
the Company anticipated the sale of 28 centers in Ohio, Illinois and Wisconsin,
in the second quarter of fiscal 2000. These centers were evaluated based on the
anticipated sales price. Long-lived asset values of all centers anticipated to
be sold were compared to the anticipated sales price resulting in a write-down
of $229.9 million of primarily goodwill. The Company no longer anticipates the
sale of the Illinois and Wisconsin assets and sold the Ohio assets for $7.9
million less than the anticipated sales price.
Management Fee Expense. In connection with the Management Agreement, Genesis
manages Multicare's operations for a fee of six percent of Multicare's
non-extraordinary sales (as defined by the Management Agreement) and is
responsible for Multicare's corporate general and administrative expenses other
than certain specified third party expenses. Management fees decreased by $3.9
million or 9% to $38.4 million due to the decline in net revenues.
Lease Expense. Lease expense of $13.0 million and $13.2 million for the year
ended September 30, 1999 and 1998, respectively was relatively unchanged as the
same number of eldercare centers were leased in 1999 as in 1998.
Depreciation and Amortization. Depreciation and amortization expense for the
year ended September 30, 1999 increased $0.8 million or 2% from the prior year
to $45.7 million. The increase is due to capital expenditures for routine
maintenance and renovation, the Company has not completed any acquisitions and
has begun little new construction since the Merger.
Interest Expense, net. Net interest expense for the year ended September 30,
1999 increased $4.9 million from the prior year to $66.7 million. The increase
is principally due to an increase in the effective borrowing rate of
approximately 0.7% to 8.6% for the year ended September 30, 1999.
Income Tax Provision (Benefit). The provision for income taxes for the year
ended September 30, 1999 decreased by $37.8 million to a benefit of $29.0
million. Of the decrease, $20.8 million relates to the tax effect of the
impairment charge. The remainder of the decrease, $17.0 million, relates to the
decrease in operating income before impairment charges of $48.1 million at an
effective rate of 35%.
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 ("DIP") 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, as defined, 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 January 31, 2001, there has been no usage under the
DIP Facility, other than for standby letters of credit. The DIP Facility
25
provides for the issuance of up to $20 million in standby letters of credit. As
of January 31, 2001 there were $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 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.
On February 14, 2001, Multicare received waivers from its respective lenders
(the "DIP Lenders") under the Multicare DIP Facility (the "DIP Facility") for
any event of default regarding certain financial covenants relating to minimum
EBITDA that may have resulted from asset impairment and other non-recurring
charges recorded by the Company in the fourth quarter of Fiscal 2000. The
waivers extend through December 31, 2000. In addition, the Company received
certain amendments to the DIP Facilities, including an amendment that makes the
minimum EBITDA covenant less restrictive in future periods ("the EBITDA
amendment"). The EBITDA Amendment can be terminated by the DIP Lenders if on or
before April 2, 2001, the Bankruptcy Court has not approved payment by Multicare
to the DIP Lenders for amendment fees related thereto. There can be no
assurances that Bankruptcy Court approval for the amendment fee will be granted,
and as a result, there can be no assurances that the DIP Lenders will not
exercise their rights under the DIP Facilities, including but not limited to,
precluding future borrowings under the DIP Facilities.
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 voting 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.
26
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases follows (in thousands):
As of September 30,
2000
-------------------
Liabilities Subject to Compromise:
Secured revolving credit and term loans $424,110
Senior subordinated notes 250,000
Revenue bonds and other debt 52,140
--------
Long-term debt subject to compromise 726,250
--------
Deferred management fee due to Genesis 36,335
Accrued interest 28,737
Accounts payable and accrued liabilities due to Genesis 56,574
Accounts payable and accrued liabilities 27,215
--------
$875,111
========
A summary of the principal categories of reorganization items follows (in
thousands):
For the Year Ended
September 30, 2000
--------------------
Legal, accounting and consulting fees $10,541
Bank Fees 1,283
-------
$11,824
=======
At September 30, 2000, the Company had working capital of $68.8 million as
compared with net working capital of $10.3 million at September 30, 1999
primarily because certain liabilities classified as current 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 (before cash paid for restructuring and
reorganization charges) was $25.7 million for the year ended September 30, 2000
compared to cash flow used in operations of $19.9 million for the year ended
September 30, 1999. Operating cash flows increased as a result of the decline in
receivable growth from the prior year of $40.1 million. Net accounts receivable
were $102.0 million and $123.1 million at September 30, 2000 and 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. 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 $49.6 million primarily
as a result of increased accrued interest and amounts owed Genesis which were
not paid. Accrued interest was $30.5 and $7.2 million as of September 30, 2000
and 1999, respectively. Trade payables owed to Genesis were $75.1 million
(excluding a deposit of $23.0 million) and $21.0 million as of September 30,
2000 and 1999, respectively. Genesis is Multicare's primary provider of
pharmacy, rehabilitation therapy and hospitality services.
Cash flows provided by investing activities in fiscal year 2000 include the
proceeds from the sale of Ohio assets effective June 1, 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 activities and were 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 $12.9 million as a source of cash. Capital
expenditures of $8.4 million for the year ended September 30, 2000 are
principally for routine renovation.
27
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
Multicare'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 "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 is in Default under the Credit Facility and has not made any scheduled
interest payments since March 29, 2000. The aggregate outstanding balance of the
Credit Facility at September 30, 2000 is classified as a liability subject to
compromise.
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 September 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 September 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 September 30, 2000 (the
"Tranche C Term Facility"); and
o a Revolving Facility, with an outstanding balance of $107.7 million
at September 30, 2000 becomes payable in full on September 30, 2003.
Effective June 1, 2000, substantially all the assets of 14 eldercare centers in
Ohio were sold for approximately $36 million in cash. The net proceeds of $33
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.
28
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 would have
expired on June 30, 2000, but was precluded by the Bankruptcy filing. 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. The
Senior Lenders agreed to waive the imposition of a 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
until Multicare filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code on June 22, 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 Company is in default under the 9% Notes and has not made any
scheduled interest payments since February 1, 2000 and will not pay or accrue
any interest during bankruptcy.
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.
Multicare is in default of the 9% Note Indenture Agreement. The aggregate
outstanding 9% Notes at September 30, 2000 is classified as a liability subject
to compromise.
29
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. As of December 31, 2000 $43.0 million is
subordinated and due to Genesis Health Ventures, Inc. and $36.3 million is
classified as a liability subject to compromise. 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.
ElderTrust Transactions
In February 1998, ElderTrust, 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).
Effective January 31, 2001, we reached agreements to restructure our
relationship with ElderTrust. Multicare filed a motion in U.S. Bankruptcy Court
seeking approval of the agreement, which are also subject to endorsement by
certain other parties involved in the Chapter 11 restructuring process. Among
other things, the agreement encompasses the resolution of mortgages for three
properties operated by Multicare. In its agreement with ElderTrust, Multicare
sold three owned assisted living properties that are mortgaged to ElderTrust for
principal amounts totaling $19.5 million in exchange for the outstanding
indebtedness. ElderTrust will lease the properties back to Multicare under a new
ten-year lease with annual rents of $0.8 million.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997 Act and
the Balanced Budget Refinement Act and the Benefits Improvement Protection Act
of 2000, 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 us.
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
30
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 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.
On December 15, 2000 Congress passed the Benefit Improvement and Protection Act
of 2000 ("BIPA") that, among other provisions, increases the nursing component
of Federal PPS rates by approximately 16.7% for the period from April 1, 2001
through September 30, 2002. The legislation will also change the 20% add-on to
three of the fourteen rehabilitation groups to a 6.7 % add-on to all fourteen
rehabilitation groups beginning April 1, 2001. The Part B consolidated billing
provision of BBRA will be repealed except for Medicare Part B therapy services
and, the moratorium on the $1,500 therapy caps will be extended through calendar
year 2002. The Company has not yet evaluated what effect BIPA will have on its
operating results.
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.
Year 2000 Compliance
The Company did not experience any material interruptions of business as a
result of the Year 2000 computer problem.
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 depend on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters in 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.
31
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes. To achieve its
objectives of limiting its interest rate exposure, until June 2000, 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 no longer 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.
32
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 34
Consolidated Balance Sheets as of September 30, 2000 and 1999 35
Consolidated Statements of Operations for the years ended September 30, 2000,
1999, and 1998 36
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2000, 1999 and 1998 37
Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998 38
Notes to Consolidated Financial Statements 39-54
The Board of Directors and Shareholders
The Multicare Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The Multicare
Companies, Inc. and subsidiaries as of September 30, 2000 and 1999 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended September 30, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Multicare
Companies, Inc. and subsidiaries as of September 30, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for costs of start-up activities effective
October 1, 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 3 to the
consolidated financial statements, the Company has suffered recurring losses in
2000 and 1999, is in default of various loan agreements and, on June 22, 2000
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. As discussed in note 4 to the
consolidated financial statements, management intends to develop a plan of
reorganization for approval by the Company's creditors and confirmation by the
United States Bankruptcy Court. If the plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve successful future operations. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
KPMG LLP
Philadelphia, Pennsylvania
February 14, 2001
34
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30,
--------------------------
2000 1999
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 19,636 $ 3,967
Accounts receivable, net of allowance for doubtful accounts of
$12,797 and $18,494 in 2000 and 1999, respectively 101,953 123,131
Prepaid expenses and other current assets 16,929 13,130
Deferred taxes --- 2,027
---------- ----------
Total current assets 138,518 142,255
Property, plant and equipment:
Land, buildings and improvements 557,750 590,334
Equipment, furniture and fixtures 54,061 57,996
Construction in progress 11,623 15,197
---------- ----------
623,434 663,527
Less: accumulated depreciation and amortization 59,989 42,156
---------- ----------
563,445 621,371
Goodwill, net 337,806 480,809
Debt issuance costs, net 14,528 17,444
Other assets 47,396 40,485
---------- ----------
$1,101,693 $1,302,364
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 20,087 $ 44,062
Accrued liabilities 49,607 53,143
Current portion of long-term debt --- 34,700
---------- ----------
Total current liabilities 69,694 131,905
Liabilities Subject to Compromise 875,111 ---
Long-term debt 10,240 741,256
Deferred taxes 54,082 76,007
Due to Genesis Health Ventures, Inc. and other liabilities 3,901 27,285
Shareholders' equity:
Common stock, par value $.01, 100 shares authorized,
100 issued and outstanding in 2000 and 1999 --- ---
Additional-paid-in capital 733,000 733,000
Accumulated deficit (644,335) (407,089)
---------- ----------
Total shareholders' equity 88,665 325,911
---------- ----------
$1,101,693 $1,302,364
========== ==========
See accompanying notes to consolidated financial statements.
35
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Consolidated Statements of Operations
(In thousands)
Year ended September 30,
--------------------------------------
2000 1999 1998
---- ---- ----
Net revenues $ 645,579 640,414 695,633
Expenses:
Operating expenses:
Salaries, wages and benefits 339,575 330,254 341,859
Other operating expenses 214,550 185,546 182,683
Impairment and other charges 174,679 397,269 ---
Debt restructuring and reorganization charges 11,824 --- ---
Loss on sale of assets 7,922 --- ---
Management fee 38,740 38,360 42,235
Lease expense 12,965 12,955 13,194
Depreciation and amortization expense 38,064 45,702 44,875
Interest expense, net (contractual interest for the year ended
September 30, 2000 was $76,154) 57,943 66,671 61,728
----------- --------- -------
Total expenses 896,262 1,076,757 686,574
Income (loss) before income taxes, share in loss of
Unconsolidated affiliates and cumulative effect of
Accounting change (250,683) (436,343) 9,059
Income tax provision (benefit) (17,946) (29,016) 8,821
----------- --------- -------
Income (loss) before share in loss of unconsolidated
Affiliates, and cumulative effect of accounting change (232,737) (407,327) 238
Share in loss of unconsolidated affiliates 886 --- ---
----------- --------- -------
Income (loss) before cumulative effect of accounting change (233,623) (407,327) 238
Cumulative effect of accounting change, net 3,623 --- ---
----------- --------- -------
Net income (loss) $ (237,246) (407,327) 238
=========== ========= =======
See accompanying notes to consolidated financial statements.
36
The Multicare Companies, Inc. and Subsidiaries
DEBTOR-IN-POSSESSION
Consolidated Statements of Shareholders' Equity
Years Ended September 30, 2000, 1999 and 1998
(In thousands)
Common Stock Additional Total
------------------ Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ----------- -------------
Balances, September 30, 1997 31,731 $ 317 $ 170,858 $ 91,999 $ 263,174
Merger with Genesis Eldercare
Acquisition Corp. (31,731) (317) (170,858) (91,999) (263,174)
Equity Contribution, net --- --- 733,000 --- 733,000
Net income --- --- --- 238 238
-------- -------- ----------- ----------- ------------
Balances, September 30, 1998 --- $ --- $ 733,000 $ 238 $ 733,238
Net loss --- --- --- (407,327) (407,327)
-------- -------- ----------- ----------- ------------
Balances, September 30, 1999 --- $ --- $ 733,000 $ (407,089) $ 325,911
-------- -------- ----------- ----------- ------------
Net loss --- --- --- (237,246) (237,246)
-------- -------- ----------- ----------- ------------
Balances, September 30, 2000 --- $ --- $ 733,000 $ (644,335) $ 88,665
======== ======== =========== =========== ============
See accompanying notes to consolidated financial statements.
37
THE MULTICARE COMPANIES, INC AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Years Ended September 30,
--------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(237,246) $ (407,327) $ 238
Adjustments to reconcile net income to net
cash provided by operating activities:
Impairment charges 182,601 397,269 ---
Cumulative effect of accounting change, net
of taxes 3,623 --- ---
Debt restructuring and reorganization
charges 11,824 --- ---
Depreciation and amortization 38,064 45,702 44,722
Changes in assets and liabilities:
Deferred taxes (26,959) (29,016) 28,724
Accounts receivable 4,445 (35,704) (42,734)
Prepaid expenses and other assets (6,363) 3,077 (4,402)
Accounts payable and accrued liabilities 55,741 6,108 (3,433)
---------- ------------ -------------
Net cash provided by (used in) operating
activities before Restructuring and
reorganization charges 25,730 (19,891) 23,115
Cash paid for restructuring and
reorganization charges (6,804) --- ---
---------- ------------ -------------
Net cash provided by (used in) operating
activities 18,926 (19,891) 23,115
---------- ------------ -------------
Cash flows from investing activities:
Proceeds from sale of Ohio assets 33,000 --- ---
Assets and operations acquired --- --- (1,563)
Capital expenditures (8,420) (15,307) (25,803)
Purchase of shares in tender offer --- --- (921,326)
Costs in connection with merger --- --- (102,733)
Proceeds from sale of pharmacy business --- --- 50,000
Proceeds from sale of therapy business --- --- 24,000
Deferred management fee and other 12,912 10,653 (4,212)
---------- ------------ -------------
Net cash provided by (used in) investing
activities 37,492 (4,654) (981,637)
---------- ------------ -------------
Cash flows from financing activities:
Cash paid for debt restructuring and
reorganization charges (1,283) --- ---
Equity contribution --- --- 733,000
Debt and other financing obligation
repayments in Connection with merger --- --- (453,725)
Proceeds from long-term debt 17,534 320,911 2,306,947
Payments of long-term debt (57,000) (300,796) (1,596,892)
Debt issuance costs --- (2,947) (21,582)
---------- ------------ -------------
Net cash provided by (used in) financing
activities (40,749) 17,168 967,748
---------- ------------ -------------
Increase (decrease) in cash and cash equivalents 15,669 (7,377) 9,226
Cash and cash equivalents at beginning of period 3,967 11,344 2,118
---------- ------------ -------------
Cash and cash equivalents at end of period $ 19,636 $ 3,967 $ 11,344
========== ============ =============
Supplemental disclosure of non cash investing
and financing activities:
Fair value of assets and operations acquired $ --- $ --- $ 16,622
Debt and liabilities assumed in connection with
assets and operations acquired --- --- 15,059
---------- ------------ -------------
$ --- $ --- $ 1,563
========== ============ =============
See accompanying notes to consolidated financial statements.
38
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
Notes to Consolidated Financial Statements
Years Ended September 30, 2000, 1999 and 1998
(In thousands, except share data)
The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the
"Company") own, operate and manage skilled eldercare and assisted living
facilities, which provide long-term care and specialty medical services in
selected geographic regions within the eastern and midwestern United
States. In addition, the Company operated institutional pharmacies, medical
supply companies, outpatient rehabilitation centers and other ancillary
healthcare businesses before the Merger (as defined below). As a result of
the Merger of Genesis ElderCare Acquisition Corp. with the Company, Genesis
Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis
ElderCare Corp., which owns 100% of the outstanding capital stock of the
Company. The Company and Genesis have entered into a management agreement
pursuant to which Genesis manages the Company's operations.
(1) Organization and Basis of Presentation
--------------------------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. On June 22,
2000 (the "Petition Date"), 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 and defaults under its loan agreements,
raise substantial doubt about the Company's ability to continue as a going
concern.
In the opinion of management, the consolidated financial statements for the
year ended September 30, 2000 include all necessary adjustments (consisting
of normal recurring accruals and all adjustments pursuant to 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 periods presented. SOP 90-7
requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the Petition Date and identification of all
transactions and events that are directly associated with the
reorganization of the Company. Pursuant to SOP 90-7, pre-petition
liabilities are reported on the basis of the expected amounts of such
allowed claims, as opposed to the amounts for which those claims may be
settled. Under a confirmed final plan of reorganization, those claims may
be settled at amounts substantially less than allowed amounts.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
39
The consolidated financial statements include the accounts of the Company
and its majority owned and controlled subsidiaries. Investments in
affiliates in which the Company has a 20% to 50% equity interest are
reported using the equity method.
Effective September 30, 1997, Multicare changed its fiscal year end to
September 30 from December 31. All dollars herein are expressed in
thousands. All other amounts are expressed in whole numbers.
All significant intercompany transactions and accounts of the Company have
been eliminated.
Multicare operates predominantly in one industry segment, operating skilled
eldercare centers, which represents over 95% of consolidated revenues.
Revenue Recognition
Revenue is recognized by the Company in the period the related services are
rendered. Revenues are recorded based on standard charges applicable to all
customers. The Company derives a substantial portion of its revenue under
Medicaid and Medicare reimbursement systems. Under certain prospective
Medicaid systems and Medicare the Company is reimbursed at a predetermined
rate based upon the historical cost to provide the service, demographics of
the site of service and the acuity of the customer. The differences between
the established billing rates and the predetermined rates are recorded as
contractual adjustments and deducted from revenues. Under the prospective
reimbursement system, there is no adjustment or settlement of the
difference between the actual cost to provide the service and the
predetermined rate. Under certain retrospective Medicaid systems and other
cost-based reimbursement programs, the Company is reimbursed for services
rendered to covered customers as determined by reimbursement formulas. The
differences between established billing rates and the amounts reimbursable
by the programs and customer payments are recorded as contractual
adjustments and deducted from revenues. Retroactively calculated
third-party contractual adjustments are accrued on an estimated basis in
the period the related services are rendered. Revisions to estimate
contractual adjustments are recorded based upon audits by third-party
payors, as well as other communications with third-party payors such as
desk reviews, regulation changes and policy statements. Adjustments and
final settlements with third-party payors are reflected in operations at
the time of the adjustment or settlement as an increase or decrease to the
balance of cost report receivables/ payables and revenue.
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Cash Equivalents
Cash equivalents consist of highly liquid instruments with original
maturities of three months or less.
(b) Financial Instruments
The carrying amounts of cash and cash equivalents, and other current assets
and current liabilities approximate fair value due to the short-term
maturity of these instruments. As a result of the Chapter 11 cases, fair
value of long-term debt can not be determined.
(c) Property, Plant and Equipment
Land, buildings and improvements, equipment, furniture and fixtures are
stated at fair market value at the date of the Merger (as defined below).
Subsequent additions are stated at cost. Depreciation of buildings and
improvements is calculated using the straight-line method over their
estimated useful lives that range from twenty to thirty-five years.
Depreciation of equipment and furniture and fixtures is calculated using
the straight-line method over their estimated useful lives of seven years.
40
Depreciation expense was $21,614, $22,197, and $22,227, respectively for
the years ended September 30, 2000, 1999 and 1998.
The Company records impairment losses on long-lived assets including
property, plant and equipment used in operations when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
(d) Goodwill
Goodwill resulting from acquisitions accounted for in accordance with
purchase accounting of $390,376 and $520,109 at September 30, 2000 and 1999
is amortized on a straight-line basis over periods of five to forty years.
As of September 30, 2000 and 1999 accumulated amortization of goodwill was
$52,570 and $39,300, respectively.
Goodwill is reviewed for impairment whenever events or circumstances
provide evidence that support that the carrying amount of goodwill may not
be recoverable. The Company assesses the recoverability of goodwill by
determining whether the amortization of the goodwill balance will be
recovered through projected undiscounted future cash flows.
(e) Debt Issuance Costs
Debt issuance costs are amortized on a straight-line basis, which
approximates the effective interest method over periods of seven to ten
years.
(f) Other Assets
Direct costs of $4,946 at September 30, 1999 were incurred to develop
certain facilities and were deferred during the start-up period and
amortized on a straight-line basis over five years. There were no such
direct costs incurred and deferred during the year ended September 30,
2000.
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 ("the Statement"). This statement requires costs of start-up
activities, including organizational costs, to be expensed as incurred.
Start-up activities are defined as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new process in an
existing facility, or commencing new operations. The initial application of
the Statement resulted in a charge of $3.6 million, net of tax, which was
recorded as a cumulative effect of accounting change, net of tax, for the
year ended September 30, 2000.
At September 30, 2000 and 1999, investments in non-consolidated affiliates
included in other assets amounted to $3,627 and $16,684, respectively.
Results of operations relating to the non-consolidated affiliates were
insignificant to the Company's consolidated financial statements for the
years ended September 30, 2000 and 1999.
(g) Net Revenues
Net revenues primarily consist of services paid for by patients and amounts
for services provided that are reimbursable by certain third-party payors.
Medicare and Medicaid revenues are determined by various rate setting
formulas and regulations. Net revenues are recorded net of contractual
allowances.
41
Final determinations of amounts paid by Medicaid and Medicare are subject
to review or audit. In the opinion of management, adequate provision has
been made for any adjustment that may result from these reviews or audits.
To the extent that final determination may result in amounts which vary
from management estimates, future, earnings will be charged or credited.
Net revenues also include management fees revenue of $8,010, $10,978, and
$13,306 for the years ended September 30, 2000, 1999 and 1998,
respectively.
The distribution of net patient service revenue by class of payor was as
follows:
Year Ended Year Ended Year Ended
Class of Payor September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
Private pay and other $ 194,665 211,558 256,699
Medicaid 293,758 285,559 263,507
Medicare 157,156 143,297 175,427
--------- ------- -------
$ 645,579 640,414 695,633
========= ======= =======
(h) Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
(i) New Accounting Pronouncements
In 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 depend 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. We intend to adopt this accounting
standard as required. The adoption of this standard is not expected to have
a material impact on our earnings or financial position.
(3) 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 and defaults under
its loan agreements, 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
42
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.
Through January 31, 2001, there has been no usage except for standby letters of
credit under the DIP Facility. The DIP Facility also provides for the issuance
of up to $20 million in standby letters of credit. As of January 31, 2001 there
was $3.7 million in letters of credit issued thereunder.
Since the Company filed for protection under the Bankruptcy Code, the
accompanying consolidated financial statements for the year ended September 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 22, 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 September 30,
2000
-------------------
Liabilities Subject to Compromise:
Secured revolving credit and term loans $424,110
Senior subordinated notes 250,000
Revenue bonds and other debt 52,140
--------
Long-term debt subject to compromise 726,250
--------
Deferred management fee due to Genesis 36,335
Accrued interest 28,737
Accounts payable and accrued liabilities due to Genesis 56,574
Accounts payable and accrued liabilities 27,215
--------
$875,111
========
A summary of the principal categories of reorganization items follows (in
thousands):
For the Year Ended
September 30, 2000
------------------
Legal, accounting and consulting fees $10,541
Bank Fees 1,283
-------
$11,824
=======
43
(4) 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."
Going Concern
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
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 agreements and the ability to generate sufficient cash from operations
and financing arrangements to meet obligations. There can be no assurances the
Company will be successful in achieving a confirmed plan of reorganization,
future profitable operations, compliance with the terms of the
debtor-in-possession financing arrangements and sufficient cash flows from
operations and financing arrangements to meet obligations.
Revenue Sources
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
Balanced Budget Refinement Act and the Benefit Improvement
Protection Act of 2000; 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.
44
(5) Tender Offer and Merger and its Restructuring
---------------------------------------------
In October 1997, Genesis, affiliates of Cypress, TPG and certain of its
affiliates and an affiliate of Nazem, acquired all of the issued and outstanding
common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG
and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare
Corp. common stock, respectively, representing in the aggregate approximately
56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for
an aggregate purchase price of $420,000. Genesis purchased 325,000 shares of
Genesis ElderCare Corp. common stock, representing approximately 43.6% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $325,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors." Genesis also entered into an asset sale
agreement (the "Therapy Sale Agreement") with Multicare and certain of its
subsidiaries pursuant to which Genesis acquired all of the assets used in
Multicare's outpatient and inpatient rehabilitation therapy business for $24,000
(the "Therapy Sale") and a stock purchase agreement (the "Pharmacy Sale
Agreement") with Multicare and certain subsidiaries pursuant to which Genesis
acquired all of the outstanding capital stock and limited partnership interests
of certain subsidiaries of Multicare that are engaged in the business of
providing institutional pharmacy services to third parties for $50,000 (the
"Pharmacy Sale"). The Company completed the Pharmacy Sale effective January 1,
1998. The Company completed the Therapy Sale in October 1997.
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
In connection with their investments in the common stock of Genesis ElderCare
Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement
dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and
Genesis, Cypress, TPG and Nazem entered into a put / call agreement, dated as of
October 9, 1997 (the "Put/Call Agreement") relating to their respective
ownership interests in Genesis ElderCare Corp.
On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network
Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management
agreement (the "Management Agreement") pursuant to which Genesis ElderCare
Network Services manages Multicare's operations.
Restructuring
On October 8, 1999, Genesis entered into a restructuring agreement with Cypress,
TPG and Nazem (the "Restructuring Agreement") to restructure their joint
investment in Genesis ElderCare Corp., the parent company of Multicare.
Amendment to Put/Call Agreement
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for shares of Genesis preferred stock. In addition,
the Call under the Put/Call Agreement was amended to provide Genesis with the
right to purchase all of the shares of common stock of Genesis ElderCare Corp.
not owned by Genesis for $2,000 in cash at any time prior to the 10th
anniversary of the closing date of the restructuring transaction.
45
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.
(6) Disposition of Assets
---------------------
Effective June 1, 2000, Multicare sold substantially all of its Ohio operations,
which included 14 eldercare centers with 1,128 beds, to Trans Healthcare, Inc.
for $33,000 in cash. Included in the impairment charge for the year ended
September 30, 2000 was a $7,922 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.
In addition, the Company recorded a $19,540 impairment charge based on the
write-off of working capital of discontinued operations of leased centers in
Virginia, Illinois, and Connecticut and discontinued construction projects.
(7) Asset Impairment
----------------
Impairment charges of $155,139 for the year ended September 30, 2000 relate
primarily to the write-down of long-lived assets. The Company evaluated the
recoverability of its long-lived assets, including goodwill. In part, changes in
government regulations since the Merger has precluded the Company from achieving
operating profits from levels that existed prior to the Merger. During the
fourth quarter of fiscal 2000 in connection with budget preparation for the
forthcoming year management reviewed the current and projected undiscounted cash
flows of the eldercare centers. This review indicated that estimated
undiscounted future cash flows were below the carrying value of long-lived
assets for 19 centers. The value of the impaired eldercare centers was estimated
based on an estimated fair value per bed value resulting in a write-down of
$155,139 of primarily goodwill.
The impairment charges of $397,269 for the year ended September 30, 1999 relate
to the write-down of long-lived assets. The fair value of the impaired eldercare
centers was estimated based on a multiple of projected cash flows resulting in a
write-down of $167,365 of primarily goodwill. In addition, in the prior year the
Company anticipated the sale of 28 centers in Ohio, Illinois and Wisconsin.
These centers were evaluated based on the anticipated sales price. Long-lived
asset values of all centers anticipated to be sold were compared to the
46
anticipated sales price resulting in a write-down of $229,904 of primarily
goodwill. The Company no longer anticipates the sale of the Illinois or
Wisconsin assets and sold the Ohio assets for $7,922 less than the anticipated
sales price.
(8) Income Taxes
------------
Total income tax expense (benefit) for the years ended September 30, 2000, 1999
and 1998 was as follows:
2000 1999 1998
---- ---- ----
Income (loss) before share in net loss of
unconsolidated affiliates $(17,946) $(29,016) $8,821
Cumulative effect of accounting change (1,268) --- ---
--------- --------- ------
Total $(19,214) $(29,016) $8,821
========= ========= ======
Income tax expense (benefit), exclusive of income taxes related to the
cumulative effect of accounting change, consists of the following:
September 30,
2000 1999 1998
---- ---- ----
Federal:
Current $ --- $ --- $ 8,647
Deferred (17,946) (29,016) 79
-------- -------- --------
(17,946) (29,016) 8,726
-------- -------- --------
State:
Current --- --- 87
Deferred --- --- 8
---------- -------- --------
--- --- 95
---------- -------- --------
$ (17,946) $ (29,016) $ 8,821
========= ========== ========
Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 35% to net income (loss)
before income taxes and extraordinary items as a result of the following:
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
Computed "expected" tax expense (benefit) $(87,739) $(152,720) $3,170
Increase in income taxes resulting from:
State and local income taxes, net of
federal tax benefits --- --- 95
Change in valuation allowance 18,371 --- ---
Write-off of non-deductible goodwill 47,353 117,134 ---
Amortization of goodwill 4,069 6,570 6,280
Work opportunity tax credits --- --- (724)
---------- ---------- ------
$ (17,946) $ (29,016) $8,821
========== ========== ======
47
The tax effects of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
September 30,
2000 1999
---- ----
Deferred tax assets:
Accounts receivable $ --- $ 1,325
Employee benefits and compensated
absences 680 702
Net operating loss carryforward 20,391 ---
Change in accounting method 1,268 ---
Accrued liabilites and reserves 684
Valuation allowance (18,371) ---
---------- --------
$ 4,652 $ 2,027
========== ========
Deferred tax liabilities:
Property, plant and equipment $ 57,558 $ 75,491
Accounts receivable 673 ---
Other 503 516
----------- --------
$ 58,734 $ 76,007
=========== ========
Cash paid for income taxes was $0, $0, and $1,542 in the years ended
September 30, 2000, 1999 and 1998, respectively.
(9) 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 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
("the DIP Facility") with a group of banks led by Mellon Bank, N. A. and
authorization for advances in the interim period of up to $30,000 out of a
possible $50,000 facility. On July 18, 2000, the Bankruptcy Court entered the
final order approving the $50,000 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 $50,000 commitment limit), by
the Company of up to 90% of outstanding eligible accounts receivable, as
defined, 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. The DIP Facility provides for the issuance of
up to $20,000 in standby letters of credit subject to the $50,000 commitment
limit. Through January 31, 2001, there has been no usage under the DIP Facility
except for standby letters of credit. As of January 31, 2001 there was $3,659 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 non-avoidable 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
48
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 re-imposed by the Bankruptcy Court) which could materially impair the
ability of the Company to successfully reorganize under Chapter 11.
On February 14, 2001, Multicare received waivers from its respective lenders
(the "DIP Lenders") under the Multicare DIP Facility (the "DIP Facility") for
any event of default regarding certain financial covenants relating to minimum
EBITDA that may have resulted from asset impairment and other non-recurring
charges recorded by the Company in the fourth quarter of Fiscal 2000. The
waivers extend through December 31, 2000. In addition, the Company received
certain amendments to the DIP Facilities, including an amendment that makes the
minimum EBITDA covenant less restrictive in future periods ("the EBITDA
amendment"). The EBITDA Amendment can be terminated by the DIP Lenders if on or
before April 2, 2001, the Bankruptcy Court has not approved payment by Multicare
to the DIP Lenders for amendment fees related thereto. There can be no
assurances that Bankruptcy Court approval for the amendment fee will be granted,
and as a result, there can be no assurances that the DIP Lenders will not
exercise their rights under the DIP Facilities, including but not limited to,
precluding future borrowings under the DIP Facilities.
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.
49
(10) Credit Facility and Other Debt
------------------------------
A summary of long-term debt follows:
September 30,
2000 1999
---- ----
Bank credit facility, with interest at approximately 9.8% and 8.3% in
2000 and 1999 ("Senior Facilities") $424,110 $ 459,875
Senior subordinated notes, due 2007, net of unamortized original
issue discount of $961 and $1,101 in 2000 and 1999, respectively
with interest at 9.0% 249,039 248,899
Term Loans with ElderTrust with interest at 10.5% 19,650 19,650
Mortgages and other debt, including unamortized premium of
$2,948 and $3,259 in 2000 and 1999, respectively, payable in
varying monthly or quarterly installments with interest at rates
between 7.25% and 11.0%. These loans mature between 2002 and
2033 43,691 47,532
-------- ---------
736,490 775,956
Less current portion --- 34,700
Less debt subject to compromise 726,250 ---
-------- ---------
Long-term debt of non-filing affiliates, less current portion $ 10,240 $ 741,256
======== =========
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 is developed
and approved or otherwise authorized by the Bankruptcy Court.
In connection with the Merger, Multicare entered into three term loans and a
revolving credit facility of up to $525,000, 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 $400,000 (collectively, the "Term Loans"), and a $125,000
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 $132,239 at September 30, 2000 (the "Tranche
A Term Facility");
o an original seven year term loan maturing in September 2004 with an
outstanding balance of $138,339 at September 30, 2000 (the "Tranche
B Term Facility");
o an original eight year term loan maturing in June 2005 with an
outstanding balance of $45,877 at September 30, 2000 (the "Tranche C
Term Facility"); and
o The Revolving Facility, with an outstanding balance of $107,655 at
September 30, 2000, becomes payable in full on September 30, 2003.
50
Effective June 1, 2000, substantially all of the assets of 14 eldercare centers
in Ohio were sold for approximately $36,000 in cash. The net proceeds of $33,000
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.
Subject to liens granted under the DIP Facility, 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. 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.
Multicare is in default under the Credit Facility and has not made any scheduled
interest payments since March 29, 2000. The aggregate outstanding balance of the
Credit Facility at September 30, 2000 is classified as a liability subject to
compromise.
On August 11, 1997, Genesis ElderCare Acquisition Corp. sold $250,000 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
51
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.
Multicare is in default of the 9% Note Indenture Agreement. The aggregate
outstanding 9% Notes at September 30, 2000 is classified as a liability subject
to compromise.
The Company is exposed to the impact of interest rate changes. To achieve its
objectives of limiting its interest rate exposure, until June 2000, 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 no longer 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 $100.
Interest expense of $240, $967, and $2,136 was capitalized in the years ended
September 30, 2000, 1999 and 1998, respectively, in connection with new
construction and facility renovations and expansions.
Cash paid for interest was $34,856, $67,619, and $60,498 in the years ended
September 30, 2000, 1999 and 1998, respectively.
(11) Accrued Liabilities
-------------------
At September 30, 2000 and 1999 accrued liabilities consist of the
following:
2000 1999
---- ----
Salaries and wages $ 32,162 $ 25,580
Interest 1,755 7,165
Other 15,690 20,398
-------- --------
$ 49,607 $ 53,143
======== ========
(12) Other Long Term Liabilities
---------------------------
Deferred management fees under the terms of the Management Agreement are
$39,779 and $26,868 as of September 30, 2000 and 1999. (See Note (5) -
Tender Offer and Merger and its Restructuring). Since inception of the
Management Agreement, 2% of Multicare's net revenue payable as a management
fee to Genesis has been deferred. Genesis earns a fee of six percent of
Multicare's net revenues for its services under the Management Agreement
provided that payment of such fee in respect of any month in excess of the
greater of (i) $1,992 and (ii) four percent of Multicare's consolidated net
revenues for such month, shall be subordinate to the satisfaction of
Multicare's senior and subordinate debt covenants; and provided, further,
that payment of such fee shall be no less than $23,900 in any given year.
As of September 30, 2000, deferred management fees of $36,335 are
classified as liabilities subject to compromise and the remaining $3,444 is
classified as other long-term liabilities.
52
(13) Commitments and Contingencies
-----------------------------
The Company has operating leases on certain of its facilities and offices.
Minimum rental commitments under all non-cancelable leases at September 30,
2000 are as follows:
Year
2001 $11,294
2002 11,376
2003 10,513
2004 9,686
2005 4,881
Thereafter 18,636
-------
$66,386
=======
The Company may assume or reject executory contracts, including lease
agreements, under the Bankruptcy Code. The Company has rejected two lease
agreements since the Chapter 11 Cases were filed. The annual revenues,
operating income and lease costs of the properties underlying the rejected
lease agreements are $10,067, $494 and $1,420, respectively.
Letters of credit ensure the Company's performance or payment to third
parties in accordance with specified terms and conditions. At September 30,
2000 letters of credit outstanding amounted to $3,700.
The Company has guaranteed $7,700 of indebtedness to others. The Company's
exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for guarantees, loan commitments and letters of
credit is represented by the dollar amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet financial instruments. The
Company does not anticipate any material losses as a result of these
commitments.
In February 1998 ElderTrust ("ETT"), a Maryland real estate investment
trust sponsored by Genesis, made term loans to subsidiaries of the Company
with respect to the lease-up of three assisted living facilities. The loans
have a fixed annual rate of interest of 10.5% and mature three years from
the date of the loans, subject to the right of the Company to extend the
term for up to three one-year extension periods in the event the facility
has not reached "stabilized occupancy" (as defined) as of the third
anniversary of the loan (or at the end of any extension period, if
applicable).
Effective January 31, 2001, subsequent to year end, the Company reached an
agreement to restructure our relationship with ElderTrust, a Maryland
healthcare real estate investment trust. Multicare filed a motion in U.S.
Bankruptcy Court seeking approval of the agreement, which is also subject
to endorsement by certain other parties involved in the Chapter 11
restructuring process. Among other things, the agreement encompasses the
resolution of mortgages for three properties operated by Multicare. In its
agreement with ElderTrust, Multicare sold three owned assisted living
properties that were mortgaged to ElderTrust for principal amounts totaling
$19,500 in exchange for the outstanding indebtedness. ElderTrust will lease
the properties back to Multicare under a new ten-year lease with annual
rents of approximately $792 per year.
The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. In addition, suppliers pass
along rising costs to the Company in the form of higher prices. When faced
with increases in operating costs, the Company has increased its charges
for services. The Company's operations could be adversely affected if it is
unable to recover future cost increases or experiences significant delays
in increasing rates of reimbursement of its labor and other costs from
Medicaid and Medicare revenue sources.
53
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of pending legal proceedings will not have a material effect on
the Company's consolidated financial statements.
(14) Fair Value of Financial Instruments
-----------------------------------
As a result of the Chapter 11 cases, fair value of long-term debt can not
be determined. At September 30, 2000, nearly all of the Company's long-term
debt is classified as liabilities subject to compromise. As of September
30, 1999, the fair value of the Company's fixed rate and floating rate
long-term debt is estimated based on the quoted market prices for the same
or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. At September 30, 1999, the fair value of
the Company's debt was estimated at $408,257.
(15) Quarterly Results of Operations (Unaudited)
-------------------------------------------
Fiscal Year Ended September 30, 2000
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(1)
------- ------- ------- ----------
Net revenues $ 160,361 $ 163,241 $ 161,846 $ 160,131
Loss before cumulative effect of accounting change (10,035) (12,152) (19,653) (191,783)
Net loss (13,658) (12,152) (19,653) (191,783)
Fiscal Year ended September 30, 1999
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(1)
------- ------- ------- ----------
Net revenues $ 168,484 $ 154,725 $ 157,295 $ 159,910
Net loss (2,578) (10,157) (8,509) (386,083)
- -------------------------------------
(1) The Company incurred non-cash impairment charges related to the impairment
of long-lived assets. See Note 7.
54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Company.
The following table sets forth certain information regarding each of our
directors and executive officers. Each was elected in connection with the
restructuring of the Merger in October 1997 except for the Independent Director
and Chief Restructuring Officer who was elected April 2000.
Name Age Position
- ---- --- --------
Michael R. Walker 52 Chairman, Chief Executive Officer and Director
George V. Hager, Jr. 45 Executive Vice President, Chief Financial Officer and Director
Richard R. Howard 51 Vice-Chairman and Director
Beverly S. Anderson 48 Independent Director and Chief Restructuring Officer
Michael R. Walker is our Chairman of the Board, Chief Executive Officer and a
director. Mr. Walker is the founder of Genesis and has served as Chairman and
Chief Executive Officer of Genesis since its inception. Mr. Walker is also
founder and chairman of the board of trustees of ElderTrust (NYSE:ETT), a
healthcare real estate investment trust. In addition to his responsibilities
with Genesis and ElderTrust, Mr. Walker leads the Alliance for Quality Nursing
Home Care, a national coalition of the nation's top 12 long term care providers.
Since 1999, The Alliance has lobbied for and gained nearly $5 billion in
additional Medicare funding for long term care providers. Mr. Walker holds a
master of business administration degree from Temple University and bachelor of
arts in business administration degree from Franklin and Marshall College.
Richard R. Howard is a director of Multicare. As Vice Chairman of Genesis, Mr.
Howard oversees Multicare's ElderCare regional operations plus clinical
practice, real estate and property management. Prior to becoming Vice Chairman
of Genesis in 1998, Mr. Howard served as President and as President and Chief
Operating Officer of Genesis. He joined Genesis in 1985 as Vice President of
Development. Mr. Howard's experience also includes over ten years in the banking
industry. He is a graduate of the Wharton School, University of Pennsylvania,
where he received a Bachelor of Science degree in Economics in 1971.
George V. Hager, Jr. is our Executive Vice President, Chief Financial Officer
and a director and is responsible for corporate finance, information services,
reimbursement, and risk management. Mr. Hager joined Genesis in 1992 as Vice
President and Chief Financial Officer and was named Senior Vice President and
Chief Financial Officer in 1994. Mr. Hager has over 20 years experience in the
healthcare industry including leading KPMG LLP's healthcare practice in
Philadelphia. He holds a Bachelor of Arts degree in Economics from Dickinson
College and a Master of Business Administration degree from Rutgers Graduate
School of Management. Mr. Hager is a certified public accountant and a member of
both the AICPA and PICPA.
Beverly S. Anderson is our Independent Director and Chief Restructuring Officer.
Ms. Anderson has served Multicare in this capacity since April 2000. Ms.
Anderson has 26 years of healthcare management experience, including publicly
traded long-term care, rehabilitation and pharmaceutical companies. From March
1995 to present, Ms. Anderson has been President of a private healthcare
consulting company, BSAC, Inc. From March 1992 to August 1995, Ms. Anderson
served as Senior Vice President of Operations at Ornda Healthcorp, a start-up
company post bankruptcy and subsequent merger of Safecare, American Healthcare
Management and Summit Health. Ms. Anderson is a former partner and practice
leader with Ernst & Young's Healthcare Consulting Group, has served as their
Senior National Healthcare Advisor and has led financial turnarounds for
55
numerous healthcare companies. Ms. Anderson graduated from The University of
Rochester with a Bachelor's in Nursing Science in 1974, the University of
Kentucky with a Master's in Nursing Science in 1977 and the University of Miami
with Masters in Business and Health Care Administration in 1983.
Item 11. Executive Compensation.
The Company's Directors and Officers except for the independent director and
chief restructuring officer are not employees of the Company and are compensated
by Genesis.
Annual Compensation
-----------------------------------
Name and Position Fiscal All Other
with the Company Year Salary Bonus Compensation
---------------- ----- ------ ------ ------------
Beverly S. Anderson 2000 $209,869 --- $158,137
Independent Director and Chief
Restructuring Officer
(since April 2000)
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the common stock with respect to
o each person known to the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock;
o each person who is currently a director or nominee to be a director
of the Company;
o all current directors and executive officers of the Company as a
group; and
o those persons named in the Summary Compensation Table.
To the best of our knowledge, except as otherwise noted, the holder listed below
has sole voting power and investment power over the Common Stock owned
beneficially own.
Name of Beneficial Owner(1)(2) Number of Shares Percent of Class
- ------------------------------ ---------------- ----------------
Genesis ElderCare Corp. 100 100%
- ------------------------------
(1) None of the current directors or executive officers of the Company
beneficially own stock of the Company.
(2) None of the persons named in the Summary Compensation beneficially own
stock of the Company.
Item 13. Certain Relationships and Related Transactions.
In connection with the Merger, Multicare and Genesis entered into the Management
Agreement pursuant to which Genesis manages our operations. The Management
Agreement has a term of five years with automatic renewals for two years unless
either party terminates the Management Agreement. Genesis will be paid a fee of
six percent of Multicare's net revenues for its services under the Management
Agreement provided that payment of such fee in respect of any month in excess of
the greater of (i) $1,991,666 and (ii) four percent of Multicare's consolidated
56
net revenues for such month, shall be subordinate to the satisfaction of
Multicare's senior and subordinate debt covenants; and provided, further, that
payment of such fee shall be no less than $23,900,000 in any given year. Under
the Management Agreement, Genesis is responsible for Multicare's
non-extraordinary sales, general and administrative expenses (other than certain
specified third-party expenses), and all other expenses of Multicare are paid by
Multicare. Genesis also entered into Therapy Sale Agreement with Multicare and
certain of its subsidiaries pursuant to which Genesis acquired all of the assets
used in Multicare's outpatient and inpatient rehabilitation therapy business for
$24,000,000 subject to adjustment and the Pharmacy Sale Agreement with Multicare
and certain subsidiaries pursuant to which Genesis acquired all of the
outstanding capital stock and limited partnership interest of certain
subsidiaries of Multicare that are engaged in the business of providing
institutional pharmacy services to third parties for $50,000,000, subject to
adjustment.
In connection with the Merger, Genesis acquired from certain former stockholders
of Multicare the land and buildings of an eldercare facility located in New
London, Connecticut, for a purchase price of $8.4 million. Our operating
subsidiary that leases the facility pays annual rent to Genesis of $725,000.
Genesis sponsored the formation of ElderTrust ("ETT"), a Maryland real estate
investment trust. Michael R. Walker, our Chairman and Chief Executive Officer,
is Chairman of ETT. In February 1998 ETT made term loans to Multicare with
respect to the lease-up of three assisted living facilities. The loans have a
fixed annual rate of interest of 10.5% and mature three years from the date of
the loans, subject to our right to extend the term for up to three one-year
extension periods in the event the facility has not reached "stabilized
occupancy" (as defined) as of the third anniversary of the loan (or at the end
of any extension period, if applicable).
Effective January 31, 2001, we reached an agreement to restructure our
relationship with ElderTrust, a Maryland healthcare real estate investment
trust. Multicare filed a motion in U.S. Bankruptcy Court seeking approval of the
agreement, which is also subject to endorsement by certain other parties
involved in the Chapter 11 restructuring process. Among other things, the
agreement encompasses the resolution of mortgages for three properties operated
by Multicare. In its agreement with ElderTrust, Multicare sold three owned
assisted living properties that are mortgaged to ElderTrust for principal
amounts totaling $19,500,000 in exchange for the outstanding indebtedness.
ElderTrust will lease the properties back to Multicare under a new ten-year
lease with annual rents of $791,561.
57
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a.) 1. Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 2000
and 1999
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999, and 1998
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts for the
years ended September 30, 2000, 1999, and 1998
3. Exhibits
--------
Exhibit
No. Description
------ -----------
(1) 2 Reorganization and Subscription Agreement,
dated as of August 21, 1992, among The
Multicare Companies, Inc., Daniel E. Straus,
Moshael J. Straus, Adina S. Rubin and
Bethia S. Quintas
(2) 3.1 Restated Certificate of Incorporation of the
Multicare Companies, Inc.
(3) 3.2 Certificate of Amendment of Restated
Certificate of Incorporation of the Multicare
Companies, Inc.
(2) 3.3 By-laws of The Multicare Companies, Inc.
(1) 4.1 Indenture for Senior Subordinated Notes
(4) 4.2 Fiscal Agency Agreement for Subordinated
Convertible Debentures among The Multicare
Companies, Inc., Subsidiary Co-Borrowers,
Subsidiary Guarantors and The Chase
Manhattan Bank, N.A.
(4) 10.1 Loan Agreement dated October 13, 1992 between
Meditrust Mortgage Investments, Inc. and
various Glenmark entities
(4) 10.2 Intercreditor Agreement dated December 1,
1995 between The Chase Manhattan Bank, N.A.,
Meditrust Mortgage Investments, Inc. and
Meditrust of West Virginia, Inc.
(4) 10.3 Second Amendment to Loan Agreement entered
into effective as of November 30, 1995
(4) 10.4 Second Amendment Agreement dated as of
February 22, 1996 among The Multicare
Companies, Inc. Subsidiary Co-Borrowers,
Subsidiary Guarantors, the Banks Signatory
hereto, and The Chase Manhattan Bank, N.A., as
Agent
58
(5) 10.5 Acquisition Agreement, dated as of June 17,
1996, by and among AoDoS/Multicare, Inc. and
Alan D. Solomont, David Solomont, Ahron M.
Solomont, Jay H. Solomont, David Solomont,
Susan S. Bailis and the Seller Entities
signatory thereto (the "AoDoS Acquisition
Agreement")
(5) 10.6 Amendment No. 1, dated August 12, 1996, to the
AoDoS Acquisition Agreement.
(6) 10.7 Amendment No. 2, dated as of September 25,
1996 to the AoDoS Acquisition Agreement.
(6) 10.8 Amendment No. 3, dated as of October 29, 1996
to the AoDoS Acquisition Agreement.
(6) 10.9 Amendment No. 4, dated as of December 11, 1996
to the AoDoS Acquisition Agreement.
(6) 10.10 Appendix A to Participation Agreement, Master
Lease, Supplements, Loan Agreement, and Lease
Facility Mortgages.
(7) 10.11 Agreement and Plan of Merger dated June 16,
1997 by and among Genesis ElderCare Corp.,
Genesis ElderCare Acquisition Corp., Genesis
Health Ventures, Inc. and The Multicare
Companies, Inc.
(8) 10.12 Third Amended and Restated Credit Agreement
dated October 9, 1997 to Genesis Health
Ventures, Inc. from Mellon Bank, N.A.,
Citicorp USA, Inc., First Union National Bank
and NationsBank, N.A.
(9) 10.13 Credit Agreement dated October 14, 1997 to The
Multicare Companies, Inc. from Mellon Bank,
N.A., Citicorp USA, Inc., First Union National
Bank and NationsBank, N.A.
(9) 10.14 Management Agreement dated October 9, 1997
among The Multicare Companies, Inc., Genesis
Health Ventures, Inc. and Genesis ElderCare
Network Services, Inc.
(8) 10.15 Stockholders' Agreement dated October 9, 1997
among Genesis ElderCare Corp., The Cypress
Group L.L.C., TPG Partners II, L.P., Nazem,
Inc. and Genesis Health Ventures, Inc.
(8) 10.16 Put/Call Agreement dated October 9, 1997 among
The Cypress Group L.L.C., TPG Partners II,
L.P., Nazem, Inc. and Genesis Health Ventures,
Inc.
(9) 10.17 Stock Purchase Agreement dated October 10,
1997 among Genesis Health Ventures, Inc., The
Multicare Companies, Inc., Concord Health
Group, Inc., Horizon Associates, Inc., Horizon
Medical Equipment and Supply, Inc.,
Institutional Health Care Services, Inc.,
Care4, L.P., Concord Pharmacy Services, Inc.,
Compass Health Services, Inc. and Encare of
Massachusetts, Inc.
(9) 10.18 Asset Purchase Agreement dated October 10,
1997 among Genesis Health Ventures, Inc., The
Multicare Companies, Inc., Health Care Rehab
Systems, Inc., Horizon Rehabilitation, Inc.,
Progressive Rehabilitation Centers, Inc. and
Total Rehabilitation Center, L.L.C.
59
(10) 10.19 Amendment No. 1 to Credit Agreement, October
14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and
NationsBank, N.A. (10)10.19 Amendment No. 1 to
Credit Agreement, October 14, 1997 Multicare
Inc. from Mellon Bank, N.A., Citicorp. USA
Inc., First Union Bank and NationsBank, N.A.
(10) 10.20 Amendment No. 2 to Credit Agreement, October
14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and
NationsBank, N.A.
(10) 10.21 Amendment No. 3 to Credit Agreement, October
14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and
NationsBank, N.A.
(11) 10.22 Amendment No. 4 to Credit Agreement, October
14, 1997 Multicare Inc. from Mellon Bank,
N.A., Citicorp. USA Inc., First Union Bank and
NationsBank, N.A.
(12) 10.23 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
(13) 10.24 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.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- ---------------------------
(1) Incorporated by reference from Registration Statement No. 33-51176 on Form
S-1 effective November 18, 1992.
(2) Incorporated by reference from Registration Statement No. 33-65444 on Form
S-1 effective August 18, 1993.
(3) Incorporated by reference from Registration Statement No. 33-79298
effective June 22, 1994.
(4) Incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1995.
(5) Incorporated by reference from Registration Statement No. 333-12819 on
Form S-3 effective October 24, 1996.
(6) Incorporated by reference from Current Report on Form 8-K, dated December
26, 1996.
(7) Incorporated by reference to the Tender Offer on Schedule 14D-1 filed by
Genesis ElderCare Acquisition Corp. on June 20, 1997.
(8) Incorporated by reference to Amendment No.7 to the Tender Offer Statement
on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare
Acquisition Corp. on June 20,1997.
(9) Incorporated by reference to Genesis Health Ventures, Inc.'s Current
Report on Form 8-K dated October 9, 1997.
(10) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly period ended December 31, 1998.
(11) Incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1999.
(12) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly period ended March 31, 2000.
(13) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly period ended June 30, 2000.
60
The Multicare Companies, Inc.
Independent Auditors' Report
The Board of Directors and Shareholders
The Multicare Companies, Inc.
Under date of February 14, 2001, we reported on the consolidated balance sheets
of the Multicare Companies, Inc. and subsidiaries as of September 30, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the years in the three-year period
ended September 30, 2000, as contained in the Multicare Companies, Inc. annual
report on Form 10-K for the year 2000. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule in the Form 10-K. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits. In
our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for costs of start-up activities effective
October 1, 1999.
The audit report on the consolidated financial statements of the Company
referred to above contains an explanatory paragraph that states the Company's
recurring losses from operations, shareholders' deficit, defaults under various
loan agreements and filing for voluntary petitions for relief under Chapter 11
of the United States Bankruptcy Code, raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
schedule referred to above does not include any adjustments that might result
from the outcome of this uncertainty.
KPMG LLP
Philadelphia, Pennsylvania
February 14, 2001
61
SCHEDULE II
THE MULTICARE COMPANIES, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended September 30, 2000, 1999, and 1998
(In thousands)
Balance at Charged to
beginning Charged to Other Disposition Balance
Classifications of Costs and accounts Deductions Of At end
period Expenses (1) (2) Business of period
------------ ------------ ----------- -------------- --------------- ------------
Year ended September 30, 2000:
Allowance for doubtful accounts $ 18,494 8,808 --- 12,421 2,084 12,797
====== ===== === ====== ===== ======
Year ended September 30, 1999:
Allowance for doubtful accounts $ 10,080 11,406 --- 2,992 --- 18,494
====== ====== === ===== === ======
Year ended September 30, 1998
Allowance for doubtful accounts $ 11,069 4,702 533 5,100 1,124 10,080
====== ===== === ===== ===== ======
- -----------------------------------------------------
(1) Represents amounts related to acquisitions
(2) Represents amounts written off as uncollectible
62
Signature Page
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Multicare Companies, Inc.
By: MICHAEL R. WALKER
--------------------------------------
Chairman and Chief Executive Officer
February 15, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
---------- ----- ----
Chairman of the Board,
Chief Executive Officer
and Director (Principal
/s/Michael R. Walker Executive Officer) February 15, 2001
- ------------------------------------------
Michael R. Walker
/s/Richard R. Howard Vice-Chairman and Director February 15, 2001
- ------------------------------------------
Richard. R. Howard
Executive Vice President,
Chief Financial Officer and
Director (Principal
/s/George V. Hager, Jr. Accounting Officer) February 15, 2001
- ------------------------------------------
George V. Hager, Jr.
Independent Director and
/s/Beverly S. Anderson Chief Restructuring Officer February 15, 2001
- ------------------------------------------
Beverly S. Anderson
63