UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 34-22090
THE MULTICARE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3152527
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 East State Street
Kennett Square, Pennsylvania 19348
(Address, including zip code, of principal executive offices)
(610) 444-6350
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) 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, and (ii) has been subject to such filing requirements
for the past 90 days.
YES [x] NO [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Note: The Company is currently in the process of formulating a plan of
reorganization in connection with the registrant and certain of its
subsidiaries' filings under Chapter 11 of the Bankruptcy Code. Consequently, no
plan of reorganization has been submitted to or confirmed by a bankruptcy court.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of March 13, 2001: 100 shares of common stock
TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS......................2
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements..........................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...21
Part II: OTHER INFORMATION
Item 1. Legal Proceedings............................................22
Item 2. Changes in Securities........................................22
Item 3. Defaults Upon Senior Securities..............................22
Item 4. Submission of Matters to a Vote of Security Holders..........22
Item 5. Other Information............................................22
Item 6. Exhibits and Reports on Form 8-K.............................22
SIGNATURES....................................................................23
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to certain statements in
"Management's Discussion and Analysis of Financial Condition and Results Of
Operations," such as our ability or inability to meet our liquidity needs, meet
expected future capital expenditure requirements, obtain affordable insurance
coverage and control costs; and the expected effects of government regulation on
reimbursement for services provided and on the costs of doing business;
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that any statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o our bankruptcy cases and our ability to continue as a going concern;
o certain covenant amendments to our debtor-in-possession financing that
may be terminated;
o our default under our senior credit agreement and our senior
subordinated and other notes;
o confirmation of a restructuring plan;
o our substantial indebtedness and significant debt service obligations;
o our ability to retain and attract management and other key personnel;
o our ability or inability to access 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
patients to pay for 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 our ability to continue as a going concern.
On June 22, 2000, The Multicare Companies, Inc. and certain of its affiliates
("Multicare") filed for relief under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court (singularly and collectively referred to herein as "the Chapter
11 cases" or "the bankruptcy cases" unless the context otherwise requires).
Multicare is currently operating as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. These cases, among other factors such as
the Company's recurring losses and defaults under various loan agreements, raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying unaudited condensed 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.
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
accompanying consolidated 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 agreements and
the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
On June 22, 2000, Genesis Health Ventures, Inc. and certain of its subsidiaries,
a 43.6% owner of Multicare and the Company's manager, also filed for voluntary
relief under Chapter 11 of the Bankruptcy Code.
These and other factors have been discussed in more detail in the Company's
periodic reports.
3
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
The Multicare Companies Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31, September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2000 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 19,070 $ 19,636
Accounts receivable, net of allowance for doubtful accounts 104,581 101,953
Prepaid expenses and other current assets 15,876 16,929
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 139,527 138,518
- ------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 559,963 563,445
Other long-term assets 62,052 61,924
Goodwill and other intangibles, net 335,147 337,806
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,096,689 $ 1,101,693
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities not subject to
compromise:
Accounts payable and accrued expenses $ 64,101 $ 69,694
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 64,101 69,694
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 875,649 875,111
Long-term debt 10,161 10,240
Deferred income taxes 54,082 54,082
Due to Genesis Health Ventures, Inc. and other liabilities 7,120 3,901
Shareholders' equity:
Common stock, par $.01, 100 shares authorized, issued and outstanding - -
Additional paid-in capital 733,000 733,000
Accumulated deficit (647,424) (644,335)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 85,576 88,665
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,096,689 $ 1,101,693
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
The Multicare Companies, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Statements of Operations
(in thousands)
Three months ended
December 31
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues:
Inpatient services $ 157,443 $ 156,973
Other revenue 2,953 3,388
- ------------------------------------------------------------------------------------------------------------------------------------
Total net revenues 160,396 160,361
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses 147,100 142,792
Debt restructuring and reorganization costs 3,504 -
Depreciation and amortization 8,528 9,558
Lease expense 3,139 3,251
Interest expense (contractual interest for the
three months ended December 31, 2000 is $19,954) 1,257 18,329
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, equity in
net earnings of unconsolidated affiliates, and
cumulative effect of accounting change (3,132) (13,569)
Income tax benefit - 3,985
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before equity in net loss of unconsolidated affiliates, and
cumulative effect of accounting change (3,132) (9,584)
Equity in net income (loss) of unconsolidated affiliates 43 (451)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (3,089) (10,035)
Cumulative effect of accounting change - (3,623)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (3,089) $ (13,658)
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
The Multicare Companies, Inc. and Subsidiaries
(Debtor-in-Possession)
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Three months ended
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,089) $ (13,658)
Net charges included in operations not requiring funds 17,397 10,550
Changes in assets and liabilities:
Accounts receivable (4,784) (3,848)
Accounts payable and accrued expenses (5,561) 8,272
Other, net 1,053 1,109
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities before debt
restructuring and reorganization costs 5,016 2,425
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (2,998) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,018 2,425
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,688) (2,542)
Other assets and liabilities, net (817) 1,824
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,505) (718)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving
credit facilities and other debt (79) (1,497)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (79) (1,497)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (566) 210
Cash and equivalents
Beginning of period 19,636 3,967
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $ 19,070 $ 4,177
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
The Multicare Companies, Inc. and Subsidiaries
(Debtor-In-Possession)
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the "Company")
operates predominantly in one industry segment, operating eldercare centers,
which represents over 95% of consolidated revenues. As a result of the Merger
(as defined in Footnote 5 - Tender Offer and Merger and its Restructuring) of
Genesis ElderCare Acquisition Corp. with the Company, Genesis Health Ventures,
Inc. and Subsidiaries ("Genesis") owns 43.6% 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.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 2000. The accompanying unaudited condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. On June 22, 2000, (the "Petition Date") Multicare and
certain of its affiliates filed for relief under Chapter 11 of the Bankruptcy
Code with the Bankruptcy Court (singularly and collectively referred to herein
as "the Chapter 11 cases" or "the bankruptcy cases" unless the context otherwise
requires). The Company is currently operating as a debtor-in-possession subject
to the jurisdiction of the Bankruptcy Court. These cases, among other factors
such as the Company's recurring losses and defaults of various loan agreements,
raise substantial doubt about the Company's ability to continue as a going
concern. See Footnote 2 - Voluntary Petitions for Relief Under Chapter 11 of the
United States Bankruptcy Code.
The accompanying unaudited condensed consolidated financial statements are
unaudited and have been prepared in accordance with generally accepted
accounting principles. In the opinion of management, the unaudited condensed
consolidated financial statements include all necessary adjustments (consisting
of normal recurring accruals and, subsequent to the Petition Date, all
adjustments pursuant to the American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 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, prepetition 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 their allowed
amounts.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Voluntary Petition for Relief Under Chapter 11 of the United States
Bankruptcy Code
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 prepetition debt obligations or
agreements of the Company and those of its subsidiaries or affiliates which are
debtors in the Chapter 11 cases. In connection with the Chapter 11 cases, the
Company expects to develop a plan of reorganization that will be approved by its
creditors and confirmed by the Bankruptcy Court overseeing the Company's Chapter
11 cases. In the event the plan of reorganization is accepted, continuation of
the business thereafter is dependent on the Company's ability to achieve
successful future operations.
The Bankruptcy Court approved, on a final basis, borrowings of up to $50,000,000
in respect of the Multicare debtor-in-possession financing facility (the
"Multicare DIP Facility") with Mellon Bank, N.A. as Agent and a syndicate of
lenders. The Multicare Debtors intend to utilize the Multicare DIP Facility and
7
existing cash flows to fund ongoing operations during the Chapter 11 cases. As
of December 31, 2000 no borrowings were outstanding under the Multicare DIP
Facility.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain prepetition 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 prepetition claims of
certain critical vendors and patients. All other unsecured prepetition
liabilities are classified in the unaudited condensed 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 as of December 31, 2000 and
September 30, 2000 follows (in thousands):
December 31, September 30,
2000 2000
- ---------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $424,110 $424,110
Senior subordinated notes, net of unamortized discount 249,074 249,039
Revenue bonds and other indebtedness 53,066 53,101
- ---------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $726,250 $726,250
- ---------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 27,215 27,215
Accounts payable and accrued liabilities
due to Genesis 56,574 56,574
Accrued interest 29,275 28,737
Deferred management fee due to Genesis 36,335 36,335
- ---------------------------------------------------------------------------------------------------------
$875,649 $875,111
- ---------------------------------------------------------------------------------------------------------
For the three months ended December 31, 2000, $3,504,000 of debt restructuring
and reorganization costs consisting of legal, accounting, bank and consulting
fees were incurred.
3. 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.
On February 14, 2001, Multicare received a waiver from its lenders (the
"Multicare DIP Lenders") under the Multicare DIP Facility for any event of
default regarding certain financial covenants relating to minimum EBITDA
(earnings before interest, taxes, depreciation and amortization) that may have
resulted from asset impairment and other non-recurring charges recorded in the
fourth quarter of Fiscal 2000. The waiver extends through December 31, 2000. In
addition, Multicare received certain amendments to the
8
Multicare DIP Facility, including an amendment that makes the minimum EBITDA
covenant less restrictive in future periods (the "Multicare EBITDA Amendment").
The Multicare EBITDA Amendment can be terminated by the Multicare DIP Lenders if
on or before April 2, 2001, the Bankruptcy Court has not approved payment by
Multicare to the Multicare Lenders of an amendment fee 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 Multicare DIP
Lenders will not exercise their rights under the Multicare DIP Facility in an
event of default, including but not limited to, precluding future borrowings
under the Multicare DIP Facility.
Multicare discontinued paying interest on virtually all of its prepetition long
term debt obligations following the Petition Date, which has, in part, resulted
in Multicare's ability to fund capital and working capital needs through
operations without borrowing under the Multicare DIP Facility. An event of
default and any related borrowing restrictions placed under the Multicare DIP
Facility could have a material adverse effect on the financial position of
Multicare, and could result in factors including, but not limited to,
Multicare's inability to:
o extend required letters of credit in the ordinary course of business;
o fund capital and working capital requirements; and
o successfully reorganize.
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care facilities which
utilize our specialty medical services. The healthcare 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, have resulted in reduced rates
of reimbursement for services provided by the Company.
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. As
implemented by HCFA, the 1997 Act has had an adverse impact on the Medicare
revenues of many skilled nursing facilities. There have been three primary
problems with the 1997 Act. 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. 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.
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, including pharmacy and therapy services. We
cannot at this time predict the extent to which these proposals will be adopted
or, if adopted and implemented, what effect, if any, such proposals will have on
us. Efforts to impose reduced allowances, greater discounts and more stringent
cost controls by government and other payors are expected to continue.
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 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
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.
9
4. Long-Term Debt
Long-term debt at December 31, 2000 and September 30, 2000 consists of the
following (in thousands):
December 31, September 30,
2000 2000
- -------------------------------------------------------------------------------------------------------------
Secured debt
Multicare Credit Facility $ 424,110 $ 424,110
Mortgage and other secured debt, including unamortized
debt premium 63,227 63,341
- -------------------------------------------------------------------------------------------------------------
Total secured debt 487,337 487,451
Unsecured debt
Senior subordinated notes, net of unamortized debt discount 249,074 249,039
- -------------------------------------------------------------------------------------------------------------
Total unsecured debt 249,074 249,039
Total Debt 736,411 736,490
Less:
Long term debt subject to compromise (726,250) (726,250)
- -------------------------------------------------------------------------------------------------------------
Long-term debt $ 10,161 $ 10,240
- -------------------------------------------------------------------------------------------------------------
In connection with the Chapter 11 cases, no principal or interest payments have
been made on certain indebtedness incurred by the Company prior to June 22, 2000
("Prepetition Debt"). Specifically, no principal or interest payments have been
made on $424,110,000 of the Multicare Credit Facility, $250,000,000 of senior
subordinated notes and $53,066,000 of other indebtedness. Multicare continues to
pay interest on an aggregate outstanding balance of $10,161,000 of two secured
loans of subsidiaries not party to the Chapter 11 cases.
Secured Debt
Multicare Debtor-in-Possession Financing
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 Multicare and
those of its affiliates which had filed petitions for reorganization under
Chapter 11 of the Bankruptcy Code and (b) authorization for Multicare to enter
into a secured debtor-in-possession revolving credit facility with a group of
banks led by Mellon Bank, N. A., (the "Multicare DIP Facility") and authorizing
advances in the interim period of up to $30,000,000 out of a possible
$50,000,000. On July 18, 2000, the Bankruptcy Court entered the Final Order
approving the $50,000 Multicare DIP Facility and permitting full usage
thereunder. Usage under the Multicare DIP Facility is subject to a Borrowing
Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable, as defined, and a real estate component. The Multicare DIP Facility
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP
Facility are available for general working capital purposes. As of December 31,
2000, there has been no usage under the Multicare DIP Facility. The Multicare
DIP Facility provides for the issuance of up to $20,000,000 in standby letters
of credit. As of December 31, 2000 there were $2,383,000 in letters of credit
issued thereunder.
Pursuant to the agreement, Multicare and each of its affiliates named as
borrowers or guarantors under the Multicare DIP Facility have granted to the
lenders first priority liens and security interests (subject to valid,
perfected, enforceable and nonavoidable liens of record existing immediately
prior to the petition date and other carve-outs and exceptions as fully
described in the Multicare DIP Facility) in all unencumbered pre- and post-
petition property of Multicare. The Multicare DIP Facility also has priority
over the liens on all collateral pledged under the prepetition Multicare Credit
Facility (later defined) dated as of October 9, 1997 as amended, which
collateral includes, but is not limited to, all personal property, including
bank accounts
10
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 Multicare DIP financing agreement limits, among other things, Multicare'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 Multicare DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Multicare 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 Multicare's inability to obtain further advances under the Multicare
DIP Facility and the potential exercise of remedies by the Multicare DIP
Facility lenders (without regard to the automatic stay unless reimposed by the
Bankruptcy Court) which could materially impair the ability of Multicare to
successfully reorganize under Chapter 11.
On February 14, 2001, Multicare received a waiver from its lenders (the
"Multicare DIP Lenders") under the Multicare 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
in the fourth quarter of Fiscal 2000. The waiver extends through December 31,
2000. In addition, Multicare received certain amendments to the Multicare DIP
Facility, including an amendment that makes the minimum EBITDA covenant less
restrictive in future periods (the "Multicare EBITDA Amendment"). The Multicare
EBITDA Amendment can be terminated by the Multicare DIP Lenders if on or before
April 2, 2001, the Bankruptcy Court has not approved payment by Multicare to the
Multicare Lenders of an amendment fee 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 Multicare DIP Lenders will
not exercise their rights under the Multicare DIP Facility in an event of
default, including but not limited to, precluding future borrowings under the
Multicare DIP Facility.
Multicare Credit Facility
Multicare and certain of its subsidiaries are borrowers under a prepetition
credit facility totaling $525,000,000 (the "Multicare Credit Facility"). As of
December 31, 2000, $424,110,000 was outstanding under the Multicare Credit
Facility, which is classified as a liability subject to compromise.
Subject to liens granted under the Multicare DIP Facility, The Multicare Credit
Facility (as amended) is secured by first priority security interests (subject
to certain exceptions) in all personal property, including inventory, accounts
receivable, equipment and general intangibles. Mortgages on certain of
Multicare's subsidiaries' real property were also granted.
Multicare is in default under the Multicare Credit Facility and has not made any
scheduled interest payments since March 29, 2000.
Mortgage and Other Secured Debt
At December 31, 2000, the Company has $63,227,000 of mortgage and other secured
debt consisting principally of secured revenue bonds and secured bank loans,
including loans insured by the Department of Housing and Urban Development. With
exception to $10,161,000, the aggregate mortgage and other secured debt is
classified as liabilities subject to compromise.
11
Unsecured Debt
Senior Subordinated Notes
On August 11, 1997, Multicare sold $250,000,000 principal amount of 9% Senior
Subordinated Notes due 2007 (the "9% Notes"). Multicare is in default of the
indenture agreement of the 9% Notes. Consequently, the outstanding balance of
the 9% Notes, net of unamortized discount, is classified as a liability subject
to compromise.
5. Tender Offer and Merger and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors."
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
(the "Merger"). 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. pursuant to
which, among other things, Genesis had the option to purchase (the "Call")
Genesis ElderCare Corp. common stock held by Cypress, TPG and Nazem at a price
determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and
Nazem had the option to sell (the "Put") such Genesis ElderCare Corp. common
stock at a price determined pursuant to the Put/Call Agreement.
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.
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible
Participating Cumulative Preferred Stock (the "Series H
Preferred"), which were issued to Cypress, TPG and Nazem, or
their affiliated investment funds, in proportion to their
respective investments in Genesis ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock, (the
"Series I Preferred") which were issued to Cypress, TPG and
Nazem, or their affiliated investment funds, in proportion to
their respective investments in Genesis ElderCare Corp.
6. Cumulative Effect of Accounting Change
Effective October 1, 1999, the Company adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5") which requires the costs of start-up activities be expensed as
incurred, rather than capitalized and subsequently amortized. The adoption of
SOP 98-5 resulted in the write-off of $3,623,000, net of tax, of unamortized
start-up costs and is reflected
12
as a cumulative effect of accounting change in the unaudited condensed
consolidated statements of operations for the three months ended December 31,
1999.
7. Subsequent Event
Effective January 31, 2001, Multicare restructured its relationship with
ElderTrust, a Maryland healthcare real estate investment trust. In its agreement
with ElderTrust, Multicare sold three owned assisted living properties that were
mortgaged to ElderTrust for principal amounts totaling $19,500,000 in exchange
for the outstanding indebtedness. ElderTrust leases the properties back to
Multicare under a new ten-year lease with annual rents of $792,000. These
transactions will be recorded in the Company's second fiscal quarter ending
March 31, 2001.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Upon consummation of the Merger in October 1997, Multicare and Genesis entered
into a 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.
We include in inpatient services revenue all room and board charges and
ancillary service revenue for the customers of our 96 owned and leased eldercare
centers.
Certain Transactions and Events
Liquidity and Going Concern Assumption
The accompanying unaudited condensed 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, defaults under various loan agreements 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
to service our debt, including our long-term lease obligations.
Tender Offer and Merger and its Restructuring
In October 1997, Genesis, The Cypress Group (together with its affiliates,
"Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and
Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of
Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem
purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common
stock, respectively, representing in the aggregate approximately 56.4% of the
issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate
purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis
ElderCare Corp. common stock, representing approximately 43.6% of the issued and
outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase
price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively
referred to herein as the "Sponsors."
In October 1997, as a result of a tender offer and a merger transaction, Genesis
ElderCare Corp. acquired 100% of the outstanding shares of common stock of
Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp.
14
(the "Merger"). 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. pursuant to
which, among other things, Genesis had the option to purchase (the "Call")
Genesis ElderCare Corp. common stock held by Cypress, TPG and Nazem at a price
determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and
Nazem had the option to sell (the "Put") such Genesis ElderCare Corp. common
stock at a price determined pursuant to the Put/Call Agreement.
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.
Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement
was terminated in exchange for:
o 24,369 shares of Genesis' Series H Senior Convertible Participating
Cumulative Preferred Stock (the "Series H Preferred"), which were
issued to Cypress, TPG and Nazem, or their affiliated investment
funds, in proportion to their respective investments in Genesis
ElderCare Corp.; and
o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable
Participating Cumulative Preferred Stock, (the "Series I Preferred")
which were issued to Cypress, TPG and Nazem, or their affiliated
investment funds, in proportion to their respective investments in
Genesis ElderCare Corp.
ElderTrust Transactions
Effective January 31, 2001, Multicare restructured its relationship with
ElderTrust, a Maryland healthcare real estate investment trust. The agreements
encompass, among other things, 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 $19,500,000 in exchange for the outstanding indebtedness.
ElderTrust leases the properties back to Multicare under a new ten-year lease
with annual rents of $791,561. These transactions will be recorded in the
Company's second fiscal quarter ending March 31, 2001.
Sale of Ohio Operations
In the third fiscal quarter of 2000, effective May 31, 2000, Multicare sold 14
eldercare centers with 1,128 beds located in the state of Ohio for approximately
$33,000,000. The Company recorded a loss on sale of the Ohio properties of
approximately $7,922,000.
Results of Operations
Three months ended December 31, 2000 compared to three months ended December 31,
1999
The Company's total net revenues for the quarter ended December 31, 2000 were
$160,396,000 compared to $160,361,000 for the quarter ended December 31, 1999,
an increase of $35,000.
Inpatient service revenue increased $470,000 to $157,443,000 from $156,973,000.
Of this increase, approximately $3,100,000 is attributed to the consolidation of
two eldercare centers previously under joint ownership that became wholly-owned
effective July 1, 2000 (the "P&R Transaction"), approximately $11,170,000 is
principally attributed to increased payment rates, improved occupancy and higher
Medicare, private pay and insurance patient days ("Quality Mix") as a percentage
of total patient days. The Company's average rate per patient day for the
quarter ended December 31, 2000 was $166 compared to $153 for the comparable
15
period in the prior year. This increase in the average rate per patient day is
principally driven by the effect of the BBRA on our average Medicare rate per
patient day, which increased to $323 for the quarter ended December 31, 2000
compared to $292 for the comparable period in the prior year. The Company's
revenue Quality Mix for the quarter ended December 31, 2000 was 54.4% compared
to 52.3% for the comparable period in the prior year. These rate and mix
increases are offset by a decrease in revenue of approximately $13,800,000
resulting from the sale, closure or lease terminations of certain eldercare
centers. Total patient days decreased 78,921 to 950,217 during the quarter ended
December 31, 2000 compared to 1,029,138 during the comparable period last year.
Of this decrease, 101,738 patient days are attributed to the sale, closure or
lease terminations of certain eldercare centers; offset by the consolidation of
20,825 patient days of two eldercare centers following the P&R Transaction, and
the remaining increase of 1,992 patient days is the result of an increase in
overall occupancy.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $4,308,000 or 3% to $147,100,000 for the
quarter ended December 31, 2000 from $142,792,000 for the comparable period in
the prior year. Approximately $2,800,000 of this increase is attributed to the
consolidation of the operating expenses of two eldercare centers following the
P&R Transaction and approximately $3,400,000 is attributed to increases in the
cost of certain self-insured employee health coverage. This net increase is
offset by $9,800,000 of operating cost savings resulting from the sale, closure
or lease terminations of certain eldercare centers. The remaining increase of
approximately $13,200,000, is attributed to growth in labor related costs,
property and liability insurance related costs and general inflationary cost
increases.
The operating cost growth rate (approximately 6.9%) approximates the inpatient
services revenue growth rate (approximately 7.1%) and is attributed to continued
pressure on wage and benefit related costs. The Company and the industry
continue to experience significant shortages in qualified professional clinical
staff. 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 created high turnover
among clinical professional staff as many seek to take advantage of the supply
of available positions, many 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. In addition to labor pressures, the Company
and industry continue to experience an adverse effect on operating profits due
to an increase in the cost of certain of its insurance programs. 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. Also, the impact of government
regulation in a heavily regulated environment has adversely impacted our ability
to reduce costs. The pressures on operating expenses described above are coupled
with the effects of the federal and state governments' and other third party
payors' trend toward imposing lower reimbursement rates, resulting in our
inability to grow revenues at a rate that equals or exceeds the growth in our
cost levels.
For the three months ended December 31, 2000, $3,504,000 of debt restructuring
and reorganization costs consisting of legal, accounting, bank and consulting
fees were incurred.
Depreciation and amortization expense decreased $1,030,000, principally
attributed to the fourth quarter of fiscal 2000 write-off of impaired goodwill
and the sale, closure or lease terminations of certain eldercare centers.
Lease expense decreased $112,000, of which approximately $472,000 is attributed
to the sale, closure or lease terminations of certain eldercare centers. The
remaining increase of approximately $360,000 is primarily attributed to the
consolidation of lease expense of two eldercare centers following the P&R
Transaction and scheduled increases in fixed lease rates.
16
Interest expense decreased $17,072,000. In accordance with SOP 90-7, the Company
ceased accruing interest following the Petition Date on certain long-term debt
instruments classified as liabilities subject to compromise. The Company's
contractual interest expense for the three months ended December 31, 2000 was
$19,954,000, leaving $18,697,000 of interest expense unaccrued for the three
months ended December 31, 2000 as a result of the Chapter 11 filings. The
relative increase in contractual interest expense of $1,625,000 for the three
months ended December 31, 2000 compared to the same period in the prior year is
the result of additional net capital and working capital borrowings and an
increase in the Company's weighted average borrowing rate prompted by increases
in market rates of interest and higher interest rate spreads charged by the
Company's lenders in connection with the Company's worsening financial condition
and the Chapter 11 cases.
As a result of the Company's Chapter 11 filings and uncertainties regarding its
ability to generate sufficient taxable income to utilize future net operating
loss carryforwards, the Company recorded a valuation allowance on all
incremental net operating loss carryforward benefits during the three months
ended December 31, 2000, and consequently did not report an income tax benefit
for the three months ended December 31, 2000. The Company reported a $3,985,000
tax benefit for the three months ended December 31, 1999.
Equity in net income (loss) of unconsolidated affiliates for the three months
ended December 31, 2000 resulted in income of $43,000 compared to a loss of
$451,000 for the comparable period in the prior year, which is attributed to
changes in the earnings / losses reported by the Company's unconsolidated
affiliates.
Effective October 1, 1999, Genesis adopted the provisions of the American
Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be
expensed as incurred. For the three months ended December 31, 1999, the
cumulative effect of expensing all unamortized start-up costs at October 1, 1999
was $3,623,000 after tax.
Liquidity and Capital Resources
Chapter 11 Bankruptcy and Debtor-In-Possession Financing
On June 22, 2000, Multicare and substantially all of its affiliates, filed
voluntary petitions in the United States Bankruptcy Court for the District of
Delaware under the Bankruptcy Code. While this action constituted a default
under Multicare'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 Multicare and those of its affiliates which had filed petitions
for reorganization under Chapter 11 of the Bankruptcy Code and b) authorization
for Multicare to enter into a secured debtor-in-possession revolving credit
facility with a group of banks led by Mellon Bank, N. A., (the "Multicare DIP
Facility") and authorizing advances in the interim period of up to $30,000,000
out of a possible $50,000,000. On July 18, 2000, the Bankruptcy Court entered
the Final Order approving the $50,000,000 Multicare DIP Facility and permitting
full usage thereunder. Usage under the Multicare DIP Facility is subject to a
Borrowing Base which provides for maximum borrowings (subject to the $50,000,000
commitment limit) by Multicare of up to 90% of outstanding eligible accounts
receivable, as defined, and a real estate component. The Multicare DIP Facility
matures on December 21, 2001 and advances thereunder accrue interest at either
Prime plus 2.25% or the LIBO Rate plus 3.75%. Proceeds of the Multicare DIP
Facility are available for general working capital purposes. Through March 13,
2001, there has been no usage under the Multicare DIP Facility, other than for
standby letters of credit. The Multicare DIP Facility provides for the issuance
of up to $20,000,000 in standby letters of credit. As of March 13, 2001 there
were $2,200,000 in letters of credit issued thereunder.
The obligations of Multicare under the Multicare DIP Facility are jointly and
severally guaranteed by each of Multicare's filing affiliates. Pursuant to the
agreement, Multicare and each of its affiliates named as borrowers or guarantors
under the Multicare DIP Facility have granted to the lenders first priority
liens and security interests (subject to valid, perfected, enforceable and
17
nonavoidable liens of record existing immediately prior to the petition date and
other carve-outs and exceptions as fully described in the Multicare DIP
Facility) in all unencumbered pre- and post- petition property of Multicare. The
Multicare DIP Facility also has priority over the liens on all collateral
pledged under the Multicare Credit Facility, 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 Multicare DIP financing agreement limits, among other things, Multicare'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 Multicare DIP Facility contains customary
representations, warranties and covenants, including certain financial covenants
relating to minimum EBITDA, occupancy and Multicare 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 Multicare's inability to obtain further advances under the Multicare
DIP Facility and the potential exercise of remedies by the Multicare DIP
Facility lenders (without regard to the automatic stay unless reimposed by the
Bankruptcy Court) which could materially impair the ability of Multicare to
successfully reorganize under Chapter 11.
On February 14, 2001, Multicare received a waiver from its lenders (the
"Multicare DIP Lenders") under the Multicare 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
in the fourth quarter of Fiscal 2000. The waiver extends through December 31,
2000. In addition, Multicare received certain amendments to the Multicare DIP
Facility, including an amendment that makes the minimum EBITDA covenant less
restrictive in future periods (the "Multicare EBITDA Amendment"). The Multicare
EBITDA Amendment can be terminated by the Multicare DIP Lenders if on or before
April 2, 2001, the Bankruptcy Court has not approved payment by Multicare to the
Multicare Lenders of an amendment fee 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 Multicare DIP Lenders will
not exercise their rights under the Multicare DIP Facility in an event of
default, including but not limited to, precluding future borrowings under the
Multicare DIP Facility.
Multicare discontinued paying interest on virtually all of its prepetition long
term debt obligations following the Petition Date, which has, in part, resulted
in Multicare's ability to fund capital and working capital needs through
operations without borrowing under the Multicare DIP Facility. An event of
default and any related borrowing restrictions placed under the Multicare DIP
Facility could have a material adverse effect on the financial position of
Multicare, and could result in factors including, but not limited to,
Multicare's inability to:
o extend required letters of credit in the ordinary course of
business;
o fund capital and working capital requirements; and
o successfully reorganize.
Under the Bankruptcy Code, actions to collect prepetition indebtedness are
enjoined and other contractual obligations generally may not be enforced against
the Company. In addition, the Company may reject executory contracts and lease
obligations. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. If the Company
is able to successfully reorganize, substantially all unsecured liabilities as
of the petition date would be subject to modification under a plan of
reorganization to be voted upon by all impaired classes of creditors and equity
security holders and approved by the Bankruptcy Court.
On June 23, 2000 the Bankruptcy Court entered an order authorizing the Debtors
to pay certain prepetition 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 prepetition claims of
certain critical vendors and patients. All other unsecured prepetition
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.
18
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of December 31, 2000 and
September 30, 2000 follows (in thousands):
December 31, September 30,
2000 2000
- -------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $424,110 $424,110
Senior subordinated notes, net of unamortized discount 249,074 249,039
Revenue bonds and other indebtedness 53,066 53,101
- -------------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $726,250 $726,250
- -------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities 27,215 27,215
Accounts payable and accrued liabilities due to
Genesis 56,574 56,574
Accrued interest 29,275 28,737
Deferred management fee due to Genesis 36,335 36,335
- -------------------------------------------------------------------------------------------------------------
$875,649 $875,111
- -------------------------------------------------------------------------------------------------------------
For the three months ended December 31, 2000, $3,504,000 of debt restructuring
and reorganization costs consisting of legal, accounting, bank and consulting
fees were incurred.
General Operations
At December 31, 2000, the Company reported working capital of $75,426,000 as
compared to working capital of $68,824,000 at September 30, 2000. Cash flow from
operations for the three months ended December 31, 2000 was a source of cash of
$2,018,000 compared to a source of cash of $2,425,000 for the three months ended
December 31, 1999. For the three months ended December 31, 2000, approximately
$3,000,000 of payments were made for debt restructuring and reorganization
costs. The Company's days sales outstanding for the three months ended December
31, 2000 were unchanged from the three months ended September 30, 2000 at 60
days. The Company's cash balance at December 31, 2000 was approximately
$19,100,000 and is available to fund general working capital needs.
Investing activities for the three months ended December 31, 2000 include
approximately $1,700,000 of capital expenditures compared to approximately
$2,500,000 for the comparable period of the prior year. Capital expenditures
consist primarily of betterments and expansion of eldercare centers. In order to
maintain our physical properties in a suitable condition to conduct our business
and meet regulatory requirements, the Company expects to continue to incur
capital expenditure costs at levels at or above those for the three months ended
December 31, 2000 for the foreseeable future.
The Company incurred approximately $3,504,000 of debt restructuring and
reorganization costs for the three months ended December 31, 2000. The Company
anticipates that such costs will be incurred throughout the duration of the
bankruptcy.
The Company has prepetition long term debt obligations of approximately
$726,250,000 at December 31, 2000, which are classified as liabilities subject
to compromise. Due to the failure to make required debt service payments, meet
certain financial covenants and the commencement of the Chapter 11 cases, the
Company is in default on substantially all of the related debt agreements. The
automatic stay protection afforded by the Chapter 11 cases prevents any action
from being taken with regard to any of the defaults under the prepetition debt
agreements.
For the three months ended December 31, 2000, the Company incurred approximately
$3,100,000 of lease obligation costs which is expected to increase by
approximately $800,000 on an annual basis as a result of certain transactions
with ElderTrust previously described under "Certain Transactions and Events".
19
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.
Although management believes that cash flow from operations, coupled with
available borrowings under the Multicare DIP Facility will be sufficient to fund
the Company's working capital requirements throughout the bankruptcy
proceedings, there can be no assurances that such capital resources will be
sufficient to fund operations until such time as the Company is able to propose
a plan or reorganization that will be acceptable to creditors and confirmed by
the Bankruptcy Court.
Insurance
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 the
Company's current financial condition it is unable to continue certain
self-insured programs and has replaced these programs with outside insurance
carriers.
Prior to June 1, 2000, the Company purchased general and professional liability
insurance coverage ("GL/PL") 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 ended June 1, 2000.
Genesis maintains a wholly owned captive insurance subsidiary, Liberty Health
Corp., LTD ("LHC") to provide reinsurance for the Company and others. LHC has,
or is currently, reinsuring certain windstorm, workers' compensation and GL/PL
deductibles. The Company, based on independent actuarial studies, believes that
LHC's reserves are sufficient to meet their obligations. LHC continues to
operate as a going concern, and has been excluded from Genesis' Chapter 11
cases.
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
copays for prescriptions will be increased.
Legislative and Regulatory Issues
Legislative and regulatory action, including but not limited to the 1997
Balanced Budget Act, the Balanced Budget Refinement Act and the Benefits
Improvement Protection Act of 2000 has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs which has adversely impacted us.
The changes have limited, and are expected to continue to limit, payment
increases under these programs. Also, the timing of payments made under the
20
Medicare and Medicaid programs is subject to regulatory action and governmental
budgetary constraints; in recent years, the time period between submission of
claims and payment has increased. Within the statutory framework of the Medicare
and Medicaid programs, there are substantial areas subject to administrative
rulings and interpretations which may further affect payments made under those
programs. Further, the federal and state governments may reduce the funds
available under those programs in the future or require more stringent
utilization and quality reviews of eldercare centers or other providers. There
can be no assurances that adjustments from Medicare or Medicaid audits will not
have a material adverse effect on us.
In July 1998, the Clinton administration issued a new initiative to promote the
quality of care in nursing homes. 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.
Anticipated Impact of Healthcare Reform
On December 15, 2000 Congress passed the Benefit Improvement and Protection Act
of 2000 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 3 of the
14 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.
Seasonality
Our earnings generally fluctuate from quarter to quarter. This seasonality is
related to a combination of factors which include the timing of Medicaid rate
increases, seasonal census cycles, and the number of calendar days in a given
quarter.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a result of the Chapter 11 cases, the Company has ceased accruing and paying
interest on all debt subject to market rates of interest.
21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities
On June 22, 2000, the Company and certain of its subsidiaries
and affiliates filed voluntary petitions with the United
States Bankruptcy Court for the District of Delaware to
reorganize their capital structure under Chapter 11 of the
United States Bankruptcy Code. As a result of the Chapter 11
cases, no principal or interest payments will be made on
certain indebtedness incurred by the Company prior to June 22,
2000, including, among others, senior subordinated notes,
until a plan of reorganization defining the payment terms has
been approved by the Bankruptcy Court. Additional information
regarding the Chapter 11 cases is set forth elsewhere in this
Form 10-Q, including Note 2 to the Unaudited Condensed
Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of
Operations."
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
99.1 Second Amendment and Waiver, dated as of February 14, 2001
to the Revolving Credit And Guarantee Agreement, dated as of
June 22, 2000 among The Multicare Companies, Inc. and
certain of its lenders.
(b) Reports on Form 8-K
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereto duly authorized.
THE MULTICARE COMPANIES, INC.
Date: March 22, 2001 /s/ George V. Hager, Jr.
---------------------------
George V. Hager, Jr.
Executive Vice President
and Chief Financial Officer
23