UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 May 9, 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.......................23
Part II: OTHER INFORMATION
Item 1. Legal Proceedings................................................................24
Item 2. Changes in Securities............................................................24
Item 3. Defaults Upon Senior Securities..................................................24
Item 4. Submission of Matters to a Vote of Security Holders..............................24
Item 5. Other Information................................................................24
Item 6. Exhibits and Reports on Form 8-K.................................................24
SIGNATURES.........................................................................................25
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 statements as to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results Of Operations," such as our ability
or inability to meet our liquidity needs, make scheduled debt and
interest payments, 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; and
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 risks associated with operating a business in Chapter 11;
o the delays or the inability to complete and/or consummate our plan
of reorganization;
o our ability to comply with the provisions of our
debtor-in-possession financing;
o our substantial indebtedness and significant debt service
obligations;
o our default under our senior credit agreement and our senior
subordinated and other notes;
o adverse actions which may be taken by creditors;
o adverse developments with respect to our liquidity or results of
operations;
o the effect of planned dispositions of assets;
o our ability to consummate or complete development projects or to
profitably operate or successfully integrate enterprises into our
other operations;
o our ability or inability to secure the capital and the related cost
of the capital necessary to fund future growth;
o our ability to attract customers given our current financial
position;
o our ability to attract and retain key executives and other
personnel;
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 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 the adoption of cost containment measures by other third party
payors;
o competition in our industry; and
o changes in general economic conditions.
2
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. We caution
investors that any forward-looking statements made by us are not guarantees of
future performance. We disclaim any obligation to update any such factors or to
announce publicly the results of any revisions to any of the forward-looking
statements to reflect future events or developments.
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 accompanying unaudited condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts reported in the accompanying unaudited condensed consolidated 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 unaudited condensed 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.
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)
March 31, September 30,
- -----------------------------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 23,867 $ 19,636
Accounts receivable, net of allowance for doubtful accounts 99,221 101,953
Prepaid expenses and other current assets 15,046 16,929
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 138,134 138,518
- -----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 539,093 563,445
Other long-term assets 59,485 61,924
Goodwill and other intangibles, net 332,489 337,806
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,069,201 $ 1,101,693
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities not subject to compromise:
Accounts payable and accrued expenses $ 59,684 $ 69,694
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities not subject to compromise 59,684 69,694
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 855,372 875,111
Long-term debt 10,047 10,240
Deferred income taxes 54,082 54,082
Due to Genesis Health Ventures, Inc. and other liabilities 12,520 3,901
Shareholders' equity:
Common stock, par $.01, 100 shares authorized, issued and outstanding - -
Additional paid-in capital 733,000 733,000
Accumulated deficit (655,504) (644,335)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 77,496 88,665
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,069,201 $ 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 Six months ended
March 31, March 31,
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Net revenues:
Inpatient services $ 156,447 $ 159,642 $ 313,890 $ 316,615
Other revenue 2,431 3,599 5,384 6,987
- ------------------------------------------------------------------------------------------------------------------------------
Total net revenues 158,878 163,241 319,274 323,602
- ------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses 147,915 146,567 295,015 289,359
Debt restructuring, reorganization costs,
and other charges 4,397 2,143 7,901 2,143
Loss on sale of eldercare center 2,310 - 2,310 -
Depreciation and amortization 8,393 9,497 16,921 19,055
Lease expense 3,061 3,284 6,200 6,535
Interest expense (contractual interest for the three
and six months ended March 31, 2001 is $17,229
and $34,841, respectively) 1,041 18,634 2,298 36,963
- ------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, equity in
net income (loss) of unconsolidated affiliates and
cumulative effect of accounting change (8,239) (16,884) (11,371) (30,453)
Income tax benefit - (5,068) - (9,053)
- ------------------------------------------------------------------------------------------------------------------------------
Loss before equity in net income (loss) of unconsolidated
affiliates and cumulative effect of accounting change (8,239) (11,816) (11,371) (21,400)
Equity in net income (loss) of unconsolidated affiliates 159 (336) 202 (787)
- ------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (8,080) (12,152) (11,169) (22,187)
Cumulative effect of accounting change - - - (3,623)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss $ (8,080) $ (12,152) $ (11,169) $ (25,810)
- ------------------------------------------------------------------------------------------------------------------------------
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)
Six months ended
March 31,
- -----------------------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (11,169) $ (25,810)
Net charges included in operations not requiring funds 37,880 13,625
Changes in current assets and liabilities:
Accounts receivable (1,753) 925
Accounts payable and accrued expenses (15,065) 14,311
Other, net 1,882 532
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities before debt
restructuring and reorganization costs 11,775 3,583
- -----------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (4,474) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,301 3,583
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,043) (4,274)
Other assets and liabilities, net 1,166 5,907
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) or provided by investing activities (2,877) 1,633
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving
credit facilities and other debt - 17,534
Repayments of long-term debt (193) (23,519)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (193) (5,985)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 4,231 (769)
Cash and equivalents
Beginning of period 19,636 3,967
- -----------------------------------------------------------------------------------------------------------------------
End of period $ 23,867 $ 3,198
- -----------------------------------------------------------------------------------------------------------------------
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")
generates over 98% of its consolidated revenues through the operation of
eldercare centers. 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 (the "Multicare Debtors") 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 condensed consolidated financial statements are unaudited and
have been prepared in accordance with accounting principles generally accepted
in the United States of America. 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.
7
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
existing cash flows to fund ongoing operations during the Chapter 11 cases. As
of March 31, 2001, no borrowings were outstanding under the Multicare DIP
Facility, with the exception of letter of credit borrowings of $2,203,000,
thereunder.
On or about May 14, 2001, the official committee of Multicare unsecured
creditors (the "Multicare Creditors' Committee") appointed in the Multicare
Chapter 11 cases filed a motion (the "Trustee Motion") with the Bankruptcy Court
requesting entry of an order directing the appointment of a trustee in the
Multicare cases. By the Trustee Motion, the Multicare Creditors' Committee seeks
the appointment of a trustee to, generally, (a) evaluate and negotiate the
various contractual and other relationships between Multicare and Genesis and
its related entities, (b) evaluate and prosecute claims of Multicare against
Genesis, and (c) propose and seek confirmation of a plan of reorganization for
Multicare. Alternatively, the Multicare Creditors' Committee has requested in
the Trustee Motion that Multicare be directed to engage in a market bid process
with respect to its contractual and other relationships with Genesis. Although
there can be no assurances as to the outcome of the Trustee Motion, the Company
does not believe that the relief requested in the motion is warranted and
intends to vigorously oppose such motion in the Bankruptcy Court. A hearing date
on the Trustee Motion is presently scheduled to take place on June 6, 2001,
although the Company and the Multicare Creditors' Committee have engaged in
discussions concerning, among other related matters, an adjournment of the
presently scheduled hearing date.
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 March 31, 2001 and
September 30, 2000 follows (in thousands):
March 31, September 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $424,110 $424,110
Senior subordinated notes, net of unamortized discount 249,039 249,039
Revenue bonds and other indebtedness 33,451 53,101
- --------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $706,600 $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 28,648 28,737
Deferred management fee due to Genesis 36,335 36,335
- --------------------------------------------------------------------------------------------------------
$855,372 $875,111
- --------------------------------------------------------------------------------------------------------
For the three and six month periods ended March 31, 2001, the company incurred
charges of approximately $4,397,000 and $7,901,000, respectively, for debt
restructuring and reorganization costs consisting of legal, accounting, bank and
consulting fees, and costs associated with exiting certain terminated
businesses.
3. Certain Significant Risks and Uncertainties
Going Concern
In connection with the Chapter 11 cases, the Company, together with Genesis,
expects to develop a joint plan of reorganization that will be approved by their
creditors and confirmed by the Bankruptcy Court overseeing the Companys' Chapter
11 cases. In the event the joint plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Companys' ability to
achieve successful future operations. The Companys' ability to continue as a
going concern is dependent upon, among other things, confirmation of a joint
plan of reorganization with Genesis, future profitable operations, the ability
to comply with the terms of the Companys' 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
Companies will be successful in achieving a confirmed joint 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.
8
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 concerning the minimum EBITDA covenant
requirements extended 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"). On April 4, 2001, the Bankruptcy Court granted
approval for the payment of an amendment fee related thereto.
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 Resource Utilization Groups
("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 March 31, 2001 and September 30, 2000 consists of the
following (in thousands):
March 31, September 30,
2001 2000
- -----------------------------------------------------------------------------------------------------------
Secured debt
Multicare Credit Facility $ 424,110 $ 424,110
Mortgage and other secured debt, including unamortized
debt premium 43,498 63,341
- ----------------------------------------------------------------------------------------------------------
Total secured debt 467,608 487,451
Unsecured debt
Senior subordinated notes, net of unamortized debt discount 249,039 249,039
- ----------------------------------------------------------------------------------------------------------
Total unsecured debt 249,039 249,039
Total Debt 716,647 736,490
Less:
Long term debt subject to compromise (706,600) (726,250)
- ----------------------------------------------------------------------------------------------------------
Long-term debt $ 10,047 $ 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 the petition
date of 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 $32,490,000 of other
indebtedness. Multicare continues to pay interest on an aggregate outstanding
balance of $10,047,000 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 $50,000,000 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 May 9,
2001, there has been no usage under the Multicare DIP Facility other than
standby letters of credit. The Multicare DIP Facility provides for the issuance
of up to $20,000,000 in standby letters of credit. Through May 9, 2001 there
were $2,203,000 in letters of credit issued thereunder.
10
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 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 concerning the minimum EBITDA
covenant requirements extended 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"). On April 4, 2001, the Bankruptcy
Court granted approval for the payment of an amendment fee related thereto.
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
March 31, 2001, $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 March 31, 2001, the Company has $43,498,000 of mortgage and other secured
debt consisting principally of secured revenue bonds and secured bank and other
mortgaged loans, including loans insured by the Department of Housing and Urban
Development. With exception to $10,047,000, 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 as a cumulative effect of accounting change in
the unaudited condensed consolidated statements of operations for the six months
ended March 31, 2000.
12
7. ElderTrust Transactions
Effective January 31, 2001, Multicare restructured its relationship with
ElderTrust, a Maryland healthcare real estate investment trust (the "ElderTrust
Transactions"). In its agreement with ElderTrust, Multicare sold three owned
assisted living properties that were mortgaged to ElderTrust for principal
amounts totaling $19,650,000 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. The net impact of these transactions to the
Company was a gain of $2,229,000, which has been deferred over the average term
of the lease agreements.
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 95 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, together with Genesis, 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
Companys's leveraged financial structures, 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 Companies may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the financial statements. Further, a joint plan of reorganization
with Genesis 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 joint plan
of reorganization. The Companys' ability to continue as a going concern is
dependent upon, among other things, confirmation of a joint plan of
reorganization with Genesis, future profitable operations, the ability to comply
with the terms of the Companys' 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."
14
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.
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 $19,650,000 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. The net impact of these transactions to the
Company was a gain of $2,229,000, which has been deferred over the average term
of the lease agreements.
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 March 31, 2001 compared to three months ended March 31, 2000
The Company's total net revenues for the quarter ended March 31, 2001 were
$158,878,000 compared to $163,241,000 for the quarter ended March 31, 2000, a
decrease of $4,363,000.
15
Inpatient service revenue decreased $3,195,000, or 2%, to $156,447,000 from
$159,642,000. The decrease can principally be attributed to a decrease in
revenue of approximately $14,015,000 resulting from the sale, closure or lease
terminations of certain eldercare centers. This decrease is offset by
approximately $3,008,000 which 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"), and approximately $7,812,000 is
principally attributed to increased payment rates, 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 March 31,
2001 was $171 compared to $156 for the comparable 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
$320 for the quarter ended March 31, 2001 compared to $291 for the comparable
period in the prior year. The Company's revenue Quality Mix for the quarter
ended March 31, 2001 was 53.6% compared to 51.8% for the comparable period in
the prior year. Total patient days decreased 103,295 to 917,169 patient days
during the quarter ended March 31, 2001 compared to 1,020,464 during the
comparable period last year. Of this decrease, 102,035 patient days are
attributed to the sale, closure or lease terminations of certain eldercare
centers; offset by the consolidation of 19,567 patient days of two eldercare
centers following the P&R Transaction. A decrease of 10,093 patient days
compared to the comparable period last year is attributed to one additional
calendar day in the March 31, 2000 quarter due to a leap year. The remaining
decrease of 10,734 patient days is the result of a decrease in overall
occupancy.
Other revenues decreased approximately $1,168,000, or 32%, from $3,599,000 for
the comparable period in the prior year to $2,431,000 for the three months ended
March 31, 2001. The decrease is attributed to a decline in management fee
revenues and revenues of other service businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $1,348,000 or 1% to $147,915,000 for the
quarter ended March 31, 2001 from $146,567,000 for the comparable period in the
prior year. Approximately $2,817,000 of this increase is attributed to the
consolidation of the operating expenses of two eldercare centers following the
P&R Transaction; approximately $968,000 is attributed to increases in the cost
of certain self-insured employee health coverage; and approximately $986,000 is
attributed to higher bad debt provisions. This net increase is offset by
$11,760,000 of operating cost savings resulting from the sale, closure or lease
terminations of certain eldercare centers. The remaining increase of
approximately $8,337,000, is attributed to growth in labor related costs,
property and liability insurance related costs and general inflationary cost
increases.
The accelerated operating cost growth rate 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.
During the three months ended March 31, 2001, we incurred $3,905,000 of legal,
bank, accounting and other costs in connection with our debt restructuring and
the Chapter 11 cases, compared to $2,143,000 for the comparable period in the
prior year. In addition, we incurred approximately $492,000 of costs associated
with exiting certain terminated businesses. The Company expects that such debt
restructuring, reorganization costs and other charges will continue at current,
and perhaps accelerated, levels throughout the course of our Chapter 11 cases.
16
In April of 2001, the Company sold an operational 121 bed eldercare center for
cash consideration of approximately $461,000. The sale resulted in a net loss on
sale of approximately $2,310,000 which has been accrued at March 31, 2001.
Depreciation and amortization expense decreased $1,104,000, 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 $223,000, of which approximately $671,000 is attributed
to the sale, closure or lease terminations of certain eldercare centers. The
offsetting increase of approximately $448,000 is primarily attributed to the
consolidation of lease expense of two eldercare centers following the P&R
Transaction, the conversion of three mortgaged eldercare centers to leases in
connection with the ElderTrust Transactions, and scheduled increases in fixed
lease rates.
Interest expense decreased $17,593,000. 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 March 31, 2001 was
$17,229,000, leaving $16,188,000 of interest expense unaccrued for the three
months ended March 31, 2001 as a result of the Chapter 11 filings. Contractual
interest expense for the three months ended March 31, 2001 decreased $1,405,000
when compared to the same period in the prior year due to debt reductions
resulting from the Eldertrust Transaction and the Ohio Sale; partially offset by
additional net capital and working capital borrowings and an increase in the
Company's estimated weighted average borrowing rate prompted by increases in
market rates of interest and higher interest rate spreads that would be expected
to be 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 tax benefits during the three months
ended March 31, 2001, and consequently did not report an income tax benefit for
the three months ended March 31, 2001. The Company reported a $5,068,000 tax
benefit for the three months ended March 31, 2000.
Equity in net income (loss) of unconsolidated affiliates for the three months
ended March 31, 2001 resulted in income of $159,000 compared to a loss of
$336,000 for the comparable period in the prior year, which is attributed to
changes in the earnings / losses reported by the Company's unconsolidated
affiliates, as well as the P&R Transaction.
Six months ended March 31, 2001 compared to six months ended March 31, 2000
The Company's total net revenues for the six months ended March 31, 2001 were
$319,274,000 compared to $323,602,000 for the six months ended March 31, 2000, a
decrease of $4,328,000.
Inpatient service revenue decreased $2,725,000, or 1%, to $313,890,000 from
$316,615,000. The decrease can principally be attributed to a decrease in
revenue of approximately $27,763,000 resulting from the sale, closure or lease
terminations of certain eldercare centers. This decrease is offset by
approximately $6,200,000, which 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 $18,838,000 is
principally attributed to increased payment rates 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 six months ended March
31, 2001 was $168 compared to $154 for the comparable period in the prior year.
17
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 $322 for the six months ended March 31, 2001 compared to $291 for the
comparable period in the prior year. The Company's revenue Quality Mix for the
six months ended March 31, 2001 was 54.0% compared to 52.3% for the comparable
period in the prior year. Total patient days decreased 182,216 to 1,867,386
patient days during the six months ended March 31, 2001 compared to 2,049,602
during the comparable period last year. Of this decrease, 203,773 patient days
are attributed to the sale, closure or lease terminations of certain eldercare
centers; offset by the consolidation of 40,392 patient days of two eldercare
centers following the P&R Transaction. A decrease of 10,093 patient days
compared to the comparable period last year is attributed to one additional
calendar day in the March 31, 2000 quarter due to a leap year. The remaining
decrease of 8,742 patient days is the result of a decrease in overall occupancy.
Other revenues decreased approximately $1,603,000 from $6,987,000 for the
comparable period in the prior year to $5,384,000 for the six months ended March
31, 2001. The decrease is attributed to net decline in management fee revenues
and revenues of other service businesses.
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $5,656,000 or 2% to $295,015,000 for the six
months ended March 31, 2001 from $289,359,000 for the comparable period in the
prior year. Approximately $5,600,000 of this increase is attributed to the
consolidation of the operating expenses of two eldercare centers following the
P&R Transaction; approximately $1,700,000 is attributed to increases in the cost
of certain self-insured employee health coverage; and approximately $1,900,000
is attributed to higher bad debt provisions. This net increase is offset by
$23,500,000 of operating cost savings resulting from the sale, closure or lease
terminations of certain eldercare centers. The remaining increase of
approximately $19,956,000, is attributed to growth in labor related costs,
property and liability insurance related costs and general inflationary cost
increases.
The accelerated operating cost growth rate 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.
During the six months ended March 31, 2001, we incurred $7,262,000 of legal,
bank, accounting and other costs in connection with our debt restructuring and
the Chapter 11 cases, compared to $2,143,000 for the comparable period in the
prior year. In addition, we incurred approximately $639,000 of costs associated
with exiting certain terminated businesses. The Company expects that such debt
restructuring, reorganization costs and other charges will continue at current,
and perhaps accelerated, levels throughout the course of our Chapter 11 cases.
In April of 2001, the Company sold an operational 121 bed eldercare center for
cash consideration of approximately $461,000. The sale resulted in a net loss on
sale of approximately $2,310,000, which has been accrued at March 31, 2001.
18
Depreciation and amortization expense decreased $2,134,000, 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 $335,000, of which approximately $940,000 is attributed
to the sale, closure or lease terminations of certain eldercare centers. The
offsetting increase of approximately $605,000 is primarily attributed to the
consolidation of lease expense of two eldercare centers following the P&R
Transaction, the conversion of three mortgaged eldercare centers to leases in
connection with the ElderTrust Transactions, and scheduled increases in fixed
lease rates.
Interest expense decreased $34,665,000. 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 six months ended March 31, 2001 was
$34,841,000, leaving $32,543,000 of interest expense unaccrued for the six
months ended March 31, 2001 as a result of the Chapter 11 filings. Contractual
interest expense for the six months ended March 31, 2001 decreased $2,122,000
when compared to the same period in the prior year due to debt reductions
resulting from the Eldertrust Transaction and the Ohio Sale; partially offset by
additional net capital and working capital borrowings and an increase in the
Company's estimated weighted average borrowing rate prompted by increases in
market rates of interest and higher interest rate spreads that would be expected
to be 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 tax benefits during the six months
ended March 31, 2001, and consequently did not report an income tax benefit for
the six months ended March 31, 2001. The Company reported a $9,053,000 tax
benefit for the six months ended March 31, 2000.
Equity in net income (loss) of unconsolidated affiliates for the six months
ended March 31, 2001 resulted in income of $202,000 compared to a loss of
$787,000 for the comparable period in the prior year, which is attributed to
changes in the earnings / losses reported by the Company's unconsolidated
affiliates, as well as the P&R Transaction.
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 six months ended March 31, 2000, 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
19
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 May 9,
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. Through May 9, 2001 there
were $2,203,000 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
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 concerning the minimum EBITDA
covenant requirements extended 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"). On April 4, 2001, the Bankruptcy
Court granted approval for the payment of an amendment fee related thereto.
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.
20
On or about May 14, 2001, the official committee of Multicare unsecured
creditors (the "Multicare Creditors' Committee") appointed in the Multicare
Chapter 11 cases filed a motion (the "Trustee Motion") with the Bankruptcy Court
requesting entry of an order directing the appointment of a trustee in the
Multicare cases. By the Trustee Motion, the Multicare Creditors' Committee seeks
the appointment of a trustee to, generally, (a) evaluate and negotiate the
various contractual and other relationships between Multicare and Genesis and
its related entities, (b) evaluate and prosecute claims of Multicare against
Genesis, and (c) propose and seek confirmation of a plan of reorganization for
Multicare. Alternatively, the Multicare Creditors' Committee has requested in
the Trustee Motion that Multicare be directed to engage in a market bid process
with respect to its contractual and other relationships with Genesis. Although
there can be no assurances as to the outcome of the Trustee Motion, the Company
does not believe that the relief requested in the motion is warranted and
intends to vigorously oppose such motion in the Bankruptcy Court. A hearing date
on the Trustee Motion is presently scheduled to take place on June 6, 2001,
although the Company and the Multicare Creditors' Committee have engaged in
discussions concerning, among other related matters, an adjournment of the
presently scheduled hearing date.
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.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of March 31, 2001 and
September 30, 2000 follows (in thousands):
March 31, September 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------
Liabilities subject to compromise:
Revolving credit and term loans $424,110 $424,110
Senior subordinated notes, net of unamortized discount 249,039 249,039
Revenue bonds and other indebtedness 33,451 53,101
- --------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $706,600 $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 28,648 28,737
Deferred management fee due to Genesis 36,335 36,335
- --------------------------------------------------------------------------------------------------------
$855,372 $875,111
- --------------------------------------------------------------------------------------------------------
For the three and six month periods ended March 31, 2001, the company incurred
charges of approximately $4,397,000 and $7,901,000, respectively, for debt
restructuring and reorganization costs consisting of legal, accounting, bank and
consulting fees, and costs associated with exiting discontinued businesses.
General Operations
At March 31, 2001, the Company reported working capital of $78,450,000 as
compared to working capital of $68,824,000 at September 30, 2000. Cash flow from
operations for the six months ended March 31, 2001 was a source of cash of
$7,301,000 compared to a source of cash of $3,583,000 for the six months ended
March 31, 2000. For the six months ended March 31, 2001, approximately
$4,474,000 of payments were made for debt restructuring and reorganization
costs. The Company's days sales outstanding for the three months ended March 31,
2001 decreased 2 days to 58 days from 60 days for the three months ended
December 31, 2000. The Company's cash balance at March 31, 2001 was
approximately $23,867,000 and is available to fund general working capital
needs.
Investing activities for the six months ended March 31, 2001 include
approximately $4,043,000 of capital expenditures compared to approximately
$4,274,000 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 six months ended
March 31, 2001 for the foreseeable future.
21
For the three and six month periods ended March 31, 2001, the company incurred
charges of approximately $4,397,000 and $7,901,000, respectively, for debt
restructuring and reorganization costs consisting of legal, accounting, bank and
consulting fees, and costs associated with exiting certain terminated
businesses.
The Company has prepetition long term debt obligations of approximately
$706,600,000 at March 31, 2001, 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 six months ended March 31, 2001, the Company incurred approximately
$6,200,000 of lease obligation costs which is expected to increase by
approximately $670,000 on an annual basis as a result of certain transactions
with ElderTrust previously described under "Certain Transactions and Events".
The Company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a joint plan of reorganization with Genesis,
future profitable operations, the ability to comply with the terms of the
Companys' 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 Companies will be successful in achieving a
confirmed joint 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 joint plan of with Genesis 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 have 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.
22
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 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 was 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
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.
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.
23
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
None
(b) Reports on Form 8-K
None
24
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: May 17, 2001 /s/ George V. Hager, Jr.
----------------------------------------
George V. Hager, Jr.
Executive Vice President and Chief
Financial Officer
25