UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement
for the Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code, (the "Disclosure Statement"), and directed the Debtors to solicit votes
with regard to the approval or rejection of the Debtors' Joint Plan of
Reorganization.
YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of August 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...................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..27
Part II: OTHER INFORMATION
Item 1. Legal Proceedings...........................................28
Item 2. Changes in Securities.......................................28
Item 3. Defaults Upon Senior Securities.............................28
Item 4. Submission of Matters to a Vote of Security Holders.........28
Item 5. Other Information...........................................28
Item 6. Exhibits and Reports on Form 8-K............................28
SIGNATURES....................................................................29
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 any delays or the inability to confirm and consummate our
joint plan of reorganization with Genesis;
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 debtor-in-possession financing facility,
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 rules and regulations, including the
Medicare Prospective Payment System ("PPS"), the Balanced
Budget Refinement Act ("BBRA") and the Benefit Improvement and
Protection Act of 2000 ("BIPA"), the Health Insurance
Portability and Accountability Act ("HIPAA") and the adoption
of any 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 any 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, our joint plan of reorganization if confirmed, will
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 our joint 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 our
joint plan of reorganization, future profitable operations, 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
(Debtors-in-Possession)
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
June 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 33,853 $ 19,636
Accounts receivable, net of allowance for doubtful accounts 96,202 101,953
Prepaid expenses and other current assets 15,428 16,929
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 145,483 138,518
- --------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 532,511 563,445
Other long-term assets 52,514 61,924
Goodwill and other intangibles, net 329,830 337,806
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,060,338 $ 1,101,693
================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities not subject to compromise:
Accounts payable and accrued expenses $ 53,553 $ 69,694
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities not subject to compromise 53,553 69,694
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities subject to compromise 853,730 875,111
Long-term debt 9,920 10,240
Deferred income taxes 54,082 54,082
Due to Genesis Health Ventures, Inc. and other liabilities 15,549 3,901
Shareholders' equity:
Common stock, par $.01, 100 shares authorized, issued and outstanding - -
Additional paid-in capital 733,000 733,000
Accumulated deficit (659,496) (644,335)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 73,504 88,665
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,060,338 $ 1,101,693
================================================================================================================================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
The Multicare Companies, Inc. and Subsidiaries
(Debtors-in-Possession)
Unaudited Condensed Consolidated Statements of Operations
(in thousands)
Three months ended Nine months ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenues:
Inpatient services $ 158,961 $ 158,787 $ 472,851 $ 475,402
Other revenue 2,432 3,059 7,816 10,046
- ----------------------------------------------------------------------------------------------------------------------------------
Total net revenues 161,393 161,846 480,667 485,448
- ----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses 148,959 145,770 443,974 435,129
Debt restructuring, reorganization costs, and other charges 4,348 4,464 12,249 6,607
Loss on sale of eldercare centers - 7,922 2,310 7,922
Depreciation and amortization 8,330 9,435 25,251 28,490
Lease expense 3,020 3,227 9,220 9,762
Interest expense (contractual interest for the three and nine months
ended June 30, 2001 is $15,635 and $50,476, respectively) 755 19,562 3,053 56,525
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit, equity in
net income (loss) of unconsolidated affiliates and
cumulative effect of accounting change (4,019) (28,534) (15,390) (58,987)
Income tax benefit - (9,325) - (18,378)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before equity in net income (loss) of unconsolidated
affiliates and cumulative effect of accounting change (4,019) (19,209) (15,390) (40,609)
Equity in net income (loss) of unconsolidated affiliates 27 (444) 229 (1,231)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (3,992) (19,653) (15,161) (41,840)
Cumulative effect of accounting change - - - (3,623)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (3,992) $ (19,653) $ (15,161) $ (45,463)
==================================================================================================================================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
The Multicare Companies, Inc. and Subsidiaries
(Debtors-in-Possession)
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine months ended
June 30,
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (15,161) $ (45,463)
Net charges included in operations not requiring funds 55,675 21,656
Changes in current assets and liabilities:
Accounts receivable (354) 4,245
Accounts payable and accrued expenses (20,623) 32,998
Other, net 1,251 528
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities before debt
restructuring and reorganization costs 20,788 13,964
- ------------------------------------------------------------------------------------------------------------------------------
Cash paid for debt restructuring and reorganization costs (6,590) -
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,198 13,964
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (6,872) (6,777)
Proceeds from the sale of eldercare centers - 33,000
Other assets and liabilities, net 7,314 7,574
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 442 33,797
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under working capital revolving
credit facilities and other debt - 17,534
Repayments of long-term debt (423) (56,833)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (423) (39,299)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 14,217 8,462
Cash and equivalents
Beginning of period 19,636 3,967
- ------------------------------------------------------------------------------------------------------------------------------
End of period $ 33,853 $ 12,429
==============================================================================================================================
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
The Multicare Companies, Inc. and Subsidiaries
(Debtors-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. 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
(later defined), 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
General.
On June 22, 2000 (the "Petition Date"), Multicare and certain of its affiliates
(the "Multicare Debtors" or the "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.
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.
7
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 party 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.
Plan of Reorganization.
On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement for the
Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code,
(the "Disclosure Statement"), and authorized the Debtors to solicit votes with
regard to the approval or rejection of the Debtors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, dated July 6, 2001 (as amended or as
may be amended, the "Plan"). The Bankruptcy Court has established July 6, 2001
as the record date for determining parties entitled to vote on the Plan and has
approved the voting, balloting and solicitation procedures for the Plan. Also,
the Bankruptcy Court established procedures for objecting to the confirmation of
the Plan and scheduled a confirmation hearing for the Plan for August 28, 2001
(the "Confirmation Hearing").
The Plan calls for the merger of Genesis and Multicare under the Genesis banner,
and is supported by both Genesis and Multicare senior bank lenders and the
official statutory committees of unsecured creditors in both the Genesis
Debtors' cases and Multicare Debtors' cases. The Plan provides for the issuance
of new notes and new common and preferred stock by Genesis. Approximately 93
percent of the new common stock will be issued to the Genesis and Multicare
senior secured creditors and approximately seven percent of the new common stock
to the Genesis and Multicare unsecured creditors. Genesis unsecured creditors
will also receive warrants to purchase up to approximately seven percent of the
new common stock and Multicare unsecured creditors will receive warrants to
purchase up to approximately four percent of the new common stock. Existing
holders of Genesis preferred stock, and Genesis and Multicare common stock will
not receive any distribution under the Plan.
The Plan is based on extensive negotiations with the holders of the largest
claims against the Debtors. The Debtors believe that approval of the Plan is
their best chance for emerging from Chapter 11 and returning their businesses to
profitability. The confirmation and consummation of the Plan are subject to a
number of material conditions including, without limitation, the receipt of the
requisite acceptances from various creditor classes to confirm the Plan and the
Bankruptcy Court's determination that the Plan satisfies the statutory
requirements for confirmation under the Bankruptcy Code. Despite the support of
the official statutory committees of both Genesis and Multicare, GMS Group LLC
("GMS"), a member of the official statutory committee of the Genesis unsecured
creditors for the Genesis Debtors and, together with its customers, the
purported holder of approximately $172,000,000 of Genesis senior subordinated
notes is urging all general unsecured creditors to vote against the Plan on the
basis that it is not fair and equitable to junior classes of claims. The Debtors
believe that GMS's contentions are without merit. The deadline to file
objections to the Plan is August 17, 2001. The Court will consider any
objections to the Plan at the Confirmation Hearing scheduled for August 28,
2001. There can be no assurances that the Plan as submitted will be confirmed or
consummated.
In the event the Plan is confirmed, continuation of the business thereafter is
dependent on our ability to achieve successful future operations.
Debtor-in-possession financing.
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 intended to utilize the Multicare DIP Facility
and existing cash flows to fund ongoing operations during the Chapter 11 cases.
As of June 30, 2001, no borrowings were outstanding under the Multicare DIP
Facility, with the exception of letter of credit borrowings of $1,479,000,
thereunder.
8
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare as a result of this event. In July 2001, the Company
notified the Multicare DIP Lenders that the Company desired to reduce the
Multicare DIP Facility commitment limit to $10,000,000 from $50,000,000.
Additionally, the Company may notify the Multicare DIP Lenders to terminate the
Multicare DIP Facility as there are no borrowings expected to be drawn against
the Multicare DIP Facility.
Exit financing facility.
Genesis and Multicare have contemplated and are planning for emergence from
bankruptcy. The Plan requires that certain administrative claims and any amounts
outstanding under the Genesis DIP Facility and the Multicare DIP Facility be
paid on the effective date of such emergence. In addition, the reorganized
Genesis will require both working capital financing and financing for its
potential acquisitions. On June 21, 2001, Genesis and Multicare filed a motion
with and received authorization from the Bankruptcy Court to (1) enter into an
exit financing facility commitment letter and certain fee letters with a
syndicate of lenders, and (2) make payments for fees and expenses related
thereto. The exit financing of $415,000,000 will consist of the following
facilities: (1) a $125,000,000 revolving line of credit; (2) a $235,000,000 term
loan; and (3) a $55,000,000 delayed draw term loan, (collectively the "Exit
Financing Facility"). The Exit Financing Facility will bear interest at a
variable base rate plus a margin or LIBOR plus a margin.
Other.
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. The Debtors and the Multicare Creditors' Committee reached an
agreement concerning the terms of the plan and, as part of the agreement, the
Multicare Creditors' Committee withdrew the Trustee Motion.
Liabilities subject to compromise.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of June 30, 2001 and
September 30, 2000 follows (in thousands):
June 30, 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 31,167 53,101
- ---------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $704,316 $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 29,290 28,737
Deferred management fee due to Genesis 36,335 36,335
- ---------------------------------------------------------------------------------------------------------
$853,730 $875,111
- ---------------------------------------------------------------------------------------------------------
9
Genesis has managed Multicare pursuant to certain management services agreements
since 1997. Those agreements were negotiated with the majority owners of
Multicare at that time. As of the Petition Date, approximately $36,000,000 in
deferred fees under the management services agreements, and approximately
$57,000,000 on account of pharmacy, rehabilitation, and other ancillary services
provided by Genesis to the Multicare Debtors remained outstanding. Following the
Petition Date, the Multicare Debtors reviewed and evaluated these claims and
their defenses thereto, as well as certain claims that the Multicare Debtors may
have against the Genesis Debtors. After consideration of the merits of the
claims between the Multicare Debtors and Genesis, and after a series of
settlement discussions and negotiations between the parties, a settlement
agreement (the "Genesis/Multicare Settlement") was reached whereby each side
shall set off their claims against one another and waive and release any and all
claims against one another that they may have. The Company will seek approval of
the Genesis/Multicare Settlement in connection with confirmation of the Plan.
For the three and nine month periods ended June 30, 2001, the Company incurred
charges of approximately $4,348,000 and $12,249,000, respectively, for debt
restructuring and reorganization costs consisting of legal, accounting, bank and
consulting fees, and costs associated with exiting certain terminated
businesses. For the three and nine month periods ended June 30, 2000, the
Company incurred debt restructuring and reorganization costs of $4,464,000 and
$6,607,000, respectively.
3. Certain Significant Risks and Uncertainties
Going Concern
In connection with the Chapter 11 cases, the Company, together with Genesis,
expects that the Plan will be approved by their creditors and confirmed by the
Bankruptcy Court overseeing the Companies' Chapter 11 cases. In the event the
Plan is accepted, continuation of the business thereafter is dependent on our
ability to achieve successful future operations. The Companies' ability to
continue as a going concern is dependent upon, among other things, confirmation
of the Plan, future profitable operations, 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, and
sufficient cash flows from operations and financing arrangements to meet
obligations.
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.
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare as a result of this event. In July 2001, the Company
notified the Multicare DIP Lenders that the Company desired to reduce the
Multicare DIP Facility commitment limit to $10,000,000 from $50,000,000.
Additionally, the Company may notify the Multicare DIP Lenders to terminate the
Multicare DIP Facility as there are no borrowings expected to be drawn against
the Multicare DIP Facility.
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.
10
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 the Centers for Medicare and Medicaid Services ("CMS"), formerly
the Health Care Financing Administration ("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, 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.
4. Long Term Debt
Long-term debt at June 30, 2001 and September 30, 2000 consists of the following
(in thousands):
June 30, September 30,
2001 2000
- -----------------------------------------------------------------------------------------------------------
Secured debt
Multicare Credit Facility $ 424,110 $ 424,110
Mortgage and other secured debt, including unamortized
debt premium 41,087 63,341
- -----------------------------------------------------------------------------------------------------------
Total secured debt 465,197 487,451
Unsecured debt
Senior subordinated notes, net of unamortized debt discount 249,039 249,039
- -----------------------------------------------------------------------------------------------------------
Total unsecured debt 249,039 249,039
Total Debt 714,236 736,490
Less:
Long term debt subject to compromise (704,316) (726,250)
- -----------------------------------------------------------------------------------------------------------
Long-term debt $ 9,920 $ 10,240
- -----------------------------------------------------------------------------------------------------------
11
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 $31,167,000 of other
indebtedness. Multicare continues to pay interest on an aggregate outstanding
balance of $9,920,000 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.
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.
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare as a result of this event. In July 2001, the Company
notified the Multicare DIP Lenders that the Company desired to reduce the
Multicare DIP Facility commitment limit to $10,000,000 from $50,000,000.
Additionally, the Company may notify the Multicare DIP Lenders to terminate the
Multicare DIP Facility as there are no borrowings expected to be drawn against
the Multicare DIP Facility.
12
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
June 30, 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 June 30, 2001, the Company has $41,087,000 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 the exception of $9,920,000, the aggregate mortgage and other
secured debt is classified as liabilities subject to compromise.
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.
13
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 nine
months ended June 30, 2000.
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.
14
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 91 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, losses from operations and defaults under various loan
agreements, 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 confirmed 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 confirmed 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, and the
ability to generate sufficient cash flow from operations and financing
arrangements to meet obligations.
Our financial difficulties are attributed to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to 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.
On July 13, 2001, the Bankruptcy Court approved the Disclosure Statement for the
Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code,
(the "Disclosure Statement"), and authorized the Debtors to solicit votes with
regard to the approval or rejection of the Debtors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, dated July 6, 2001 (as amended or as
may be amended, the "Plan"). The Bankruptcy Court has established July 6, 2001
as the record date for determining parties entitled to vote on the Plan and has
approved the voting, balloting and solicitation procedures for the Plan. Also,
the Bankruptcy Court established procedures for objecting to the confirmation of
the Plan and scheduled a confirmation hearing for the Plan for August 28, 2001
(the "Confirmation Hearing").
15
The Plan calls for the merger of Genesis and Multicare under the Genesis banner,
and is supported by both Genesis and Multicare senior bank lenders and the
official statutory committees of unsecured creditors in both the Genesis
Debtors' cases and Multicare Debtors' cases. The Plan provides for the issuance
of new notes and new common and preferred stock by Genesis. Approximately 93
percent of the new common stock will be issued to the Genesis and Multicare
senior secured creditors and approximately seven percent of the new common stock
to the Genesis and Multicare unsecured creditors. Genesis unsecured creditors
will also receive warrants to purchase up to approximately seven percent of the
new common stock and Multicare unsecured creditors will receive warrants to
purchase up to approximately four percent of the new common stock. Existing
holders of Genesis preferred stock, and Genesis and Multicare common stock will
not receive any distribution under the Plan.
The Plan is based on extensive negotiations with the holders of the largest
claims against the Debtors. The Debtors believe that approval of the Plan is
their best chance for emerging from Chapter 11 and returning their businesses to
profitability. The confirmation and consummation of the Plan are subject to a
number of material conditions including, without limitation, the receipt of the
requisite acceptances from various creditor classes to confirm the Plan and the
Bankruptcy Court's determination that the Plan satisfies the statutory
requirements for confirmation under the Bankruptcy Code. Despite the support of
the official statutory committees of both Genesis and Multicare, GMS Group LLC
("GMS"), a member of the official statutory committee of the Genesis unsecured
creditors for the Genesis Debtors and, together with its customers, the
purported holder of approximately $172,000,000 of Genesis senior subordinated
notes is urging all general unsecured creditors to vote against the Plan on the
basis that it is not fair and equitable to junior classes of claims. The Debtors
believe that GMS's contentions are without merit. The deadline to file
objections to the Plan is August 17, 2001. The Court will consider any
objections to the Plan at the Confirmation Hearing scheduled for August 28,
2001. There can be no assurances that the Plan as submitted will be confirmed or
consummated.
In the event the Plan is confirmed, continuation of the business thereafter is
dependent on our ability to achieve successful future operations.
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.
16
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 June 30, 2001 compared to three months ended June 30, 2000
The Company's total net revenues for the quarter ended June 30, 2001 were
$161,393,000 compared to $161,846,000 for the quarter ended June 30, 2000, a
decrease of $453,000.
Inpatient service revenue increased $174,000, or less than 1%, to $158,961,000
from $158,787,000. The increase is principally attributed to approximately
$8,615,000 from 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 June 30, 2001
was $174 compared to $160 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 BIPA on our average Medicare rate per patient day, which increased to
$342 for the quarter ended June 30, 2001 compared to $300 for the comparable
period in the prior year. The Company's revenue Quality Mix for the quarter
ended June 30, 2001 was 54.8% compared to 53.3% for the comparable period in the
prior year. In addition, approximately $2,824,000 of the increase 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"). This
increase is offset by a decrease in revenue of approximately $11,265,000
resulting from the sale, closure or lease terminations of certain eldercare
centers. Total patient days decreased 79,796 to 910,997 patient days during the
quarter ended June 30, 2001 compared to 990,793 during the comparable period
last year. Of this decrease, 79,484 patient days are attributed to the sale,
closure or lease terminations of certain eldercare centers; offset by the
consolidation of 18,728 patient days of two eldercare centers following the P&R
Transaction. The remaining decrease of 19,040 patient days is the result of a
decline in overall occupancy.
Other revenues decreased approximately $626,000, or 20%, from $3,059,000 for the
comparable period in the prior year to $2,432,000 for the three months ended
June 30, 2001. The decrease is attributed to a decline in management fee
revenues and revenues of other service businesses.
17
The Company's operating expenses before depreciation, amortization, lease
expense, interest expense and certain charges, more fully described in
paragraphs that follow, increased $3,189,000 or 2% to $148,959,000 for the
quarter ended June 30, 2001 from $145,770,000 for the comparable period in the
prior year. Approximately $2,869,000 of this increase is attributed to the
consolidation of the operating expenses of two eldercare centers following the
P&R Transaction; approximately $787,000 is attributed to increases in the cost
of certain self-insured employee health coverage; and approximately $225,000 is
attributed to higher bad debt provisions. This net increase is offset by
$9,559,000 of operating cost savings resulting from the sale, closure or lease
terminations of certain eldercare centers. The remaining increase of
approximately $8,867,000, is attributed to growth in labor related costs,
property and liability insurance related costs and general inflationary cost
increases.
The operating cost growth 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 June 30, 2001, we incurred $2,953,000 of legal,
bank, accounting and other costs in connection with our debt restructuring and
the Chapter 11 cases, compared to $4,464,000 for the comparable period in the
prior year. In addition, we incurred approximately $1,395,000 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.
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 for the
quarter ended June 30, 2000.
Depreciation and amortization expense decreased $1,105,000, 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 $207,000, of which approximately $635,000 is attributed
to the sale, closure or lease terminations of certain eldercare centers. The
offsetting increase of approximately $428,000 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.
18
Interest expense decreased $18,807,000. 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 June 30, 2001 was
$15,635,000, leaving $14,880,000 of interest expense unaccrued for that period
as a result of the Chapter 11 filings. Contractual interest expense for the
three months ended June 30, 2001 decreased $3,927,000 when compared to
$19,562,000 for the same period in the prior year due to debt reductions
resulting from the ElderTrust Transactions and the Sale of Ohio Operations; a
decrease in the Company's estimated weighted average borrowing rate; and
partially offset by additional net capital and working capital borrowings.
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 June 30, 2001, and consequently did not report an income tax benefit for
the three months ended June 30, 2001. The Company reported a $9,325,000 tax
benefit for the three months ended June 30, 2000.
Equity in net income (loss) of unconsolidated affiliates for the three months
ended June 30, 2001 resulted in income of $27,000 compared to a loss of $444,000
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.
Nine months ended June 30, 2001 compared to nine months ended June 30, 2000
The Company's total net revenues for the nine months ended June 30, 2001 were
$480,667,000 compared to $485,448,000 for the nine months ended June 30, 2000, a
decrease of $4,781,000.
Inpatient service revenue decreased $2,551,000, or 1%, to $472,851,000 from
$475,402,000. The decrease can principally be attributed to a decrease in
revenue of approximately $39,028,000 resulting from the sale, closure or lease
terminations of certain eldercare centers. This decrease is offset by
approximately $8,922,000, 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 $27,555,000 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 nine months ended June
30, 2001 was $170 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 and BIPA on our average Medicare rate per patient day, which
increased to $329 for the nine months ended June 30, 2001 compared to $295 for
the comparable period in the prior year. The Company's revenue Quality Mix for
the nine months ended June 30, 2001 was 54.0% compared to 52.3% for the
comparable period in the prior year. Total patient days decreased 262,012 to
2,778,383 patient days during the nine months ended June 30, 2001 compared to
3,040,395 during the comparable period last year. Of this decrease, 283,257
patient days are attributed to the sale, closure or lease terminations of
certain eldercare centers; offset by the consolidation of 59,120 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 June 30, 2000 period due to a leap year. The
remaining decrease of 27,782 patient days is the result of a decline in overall
occupancy.
Other revenues decreased approximately $2,230,000 from $10,046,000 for the
comparable period in the prior year to $7,816,000 for the nine months ended June
30, 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 $8,845,000 or 2% to $443,974,000 for the nine
months ended June 30, 2001 from $435,129,000 for the comparable period in the
prior year. Approximately $8,464,000 of this increase is attributed to the
consolidation of the operating expenses of two eldercare centers following the
P&R Transaction; approximately $2,497,000 is attributed to increases in the cost
of certain self-insured employee health coverage; and approximately $2,139,000
is attributed to higher bad debt provisions. This net increase is offset by
$33,041,000 of operating cost savings resulting from the sale, closure or lease
terminations of certain eldercare centers. The remaining increase of
approximately $28,786,000, is attributed to growth in labor related costs,
property and liability insurance related costs and general inflationary cost
increases.
19
The operating cost growth 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 nine months ended June 30, 2001, we incurred $9,283,000 of legal,
bank, accounting and other costs in connection with our debt restructuring and
the Chapter 11 cases, compared to $6,607,000 for the comparable period in the
prior year. In addition, we incurred approximately $2,035,000 of costs
associated with exiting certain terminated businesses and approximately $931,000
pertaining to certain bankruptcy related salary and benefit related costs for
the nine months ended June 30, 2001. 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 for the nine months ended June 30, 2001.
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 for the nine
months ended June 30, 2000.
Depreciation and amortization expense decreased $3,239,000, 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 $542,000, of which approximately $1,575,000 is
attributed to the sale, closure or lease terminations of certain eldercare
centers. The offsetting increase of approximately $1,033,000 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 $53,472,000. 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 nine months ended June 30, 2001 was
$50,476,000, leaving $47,423,000 of interest expense unaccrued for that period
as a result of the Chapter 11 filings. Contractual interest expense for the nine
months ended June 30, 2001 decreased $6,049,000 when compared to $56,525,000 for
the same period in the prior year due to debt reductions resulting from the
ElderTrust Transactions and the Sale of Ohio Operations; a decrease in the
Company's estimated weighted average borrowing rate; and partially offset by
additional net capital and working capital borrowings.
20
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 nine months
ended June 30, 2001, and consequently did not report an income tax benefit for
the nine months ended June 30, 2001. The Company reported a $18,378,000 tax
benefit for the nine months ended June 30, 2000.
Equity in net income (loss) of unconsolidated affiliates for the nine months
ended June 30, 2001 resulted in income of $229,000 compared to a loss of
$1,231,000 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, Multicare 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 nine months ended June 30, 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
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.
Multicare is currently in default of certain financial covenant requirements of
the Multicare DIP Facility. The Company does not intend to cure or seek waivers
for this event of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance of standby letters
of credit. To date, cash provided from Multicare operating activities has been
sufficient to fund working capital and capital requirements. In addition, at
June 30, 2001, Multicare held over $33,000,000 of cash and cash equivalents. In
light of these factors, the Company does not believe there is any significant
impact or risk to Multicare as a result of this event. In July 2001, the Company
notified the Multicare DIP Lenders that the Company desired to reduce the
Multicare DIP Facility commitment limit to $10,000,000 from $50,000,000.
Additionally, the Company may notify the Multicare DIP Lenders to terminate the
Multicare DIP Facility as there are no borrowings expected to be drawn against
the Multicare DIP Facility.
21
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.
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. The Debtors and the Multicare Creditors' Committee reached an
agreement concerning the terms of the plan and, as part of the agreement, the
Multicare Creditors' Committee withdrew the Trustee Motion.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 cases as of June 30, 2001 and
September 30, 2000 follows (in thousands):
June 30, 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 31,167 53,101
- ---------------------------------------------------------------------------------------------------------
Subtotal - long-term debt subject to compromise $704,316 $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 29,290 28,737
Deferred management fee due to Genesis 36,335 36,335
- ---------------------------------------------------------------------------------------------------------
$853,730 $875,111
- ---------------------------------------------------------------------------------------------------------
Genesis has managed Multicare pursuant to certain management services agreements
since 1997. Those agreements were negotiated with the majority owners of
Multicare at that time. As of the Petition Date, approximately $36,000,000 in
deferred fees under the management services agreements, and approximately
$57,000,000 on account of pharmacy, rehabilitation, and other ancillary services
provided by Genesis to the Multicare Debtors remained outstanding. Following the
Petition Date, the Multicare Debtors reviewed and evaluated these claims and
their defenses thereto, as well as certain claims that the Multicare Debtors may
have against the Genesis Debtors. After consideration of the merits of the
claims between the Multicare Debtors and Genesis, and after a series of
settlement discussions and negotiations between the parties, a settlement
agreement (the "Genesis/Multicare Settlement") was reached whereby each side
shall set off their claims against one another and waive and release any and all
claims against one another that they may have. The Company will seek approval of
the Genesis/Multicare Settlement in connection with confirmation of the Plan.
For the three and nine month periods ended June 30, 2001, the Company incurred
charges of approximately $4,348,000 and $12,249,000, respectively, for debt
restructuring and reorganization costs consisting of legal, accounting, bank and
consulting fees, and costs associated with exiting certain terminated
businesses. For the three and nine month periods ended June 30, 2000, the
Company incurred debt restructuring and reorganization costs of $4,464,000 and
$6,607,000, respectively.
22
General Operations
At June 30, 2001, the Company reported working capital of $91,930,000 as
compared to working capital of $68,824,000 at September 30, 2000. Cash flow from
operations for the nine months ended June 30, 2001 was a source of cash of
$14,198,000 compared to a source of cash of $13,964,000 for the nine months
ended June 30, 2000. For the nine months ended June 30, 2001, approximately
$6,590,000 of payments were made for debt restructuring and reorganization
costs. The Company's days sales outstanding for the three months ended June 30,
2001 decreased 1 day to 57 days from 58 days for the three months ended March
31, 2001. The Company's cash balance at June 30, 2001 was approximately
$33,853,000 and is available to fund general working capital needs.
Investing activities for the nine months ended June 30, 2001 include
approximately $6,872,000 of capital expenditures compared to approximately
$6,777,000 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 nine months ended
June 30, 2001 for the foreseeable future.
For the three and nine month periods ended June 30, 2001, the Company incurred
charges of approximately $4,348,000 and $12,249,000, 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
$704,316,000 at June 30, 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 nine months ended June 30, 2001, the Company incurred approximately
$9,200,000 of lease obligation costs which is expected to increase by
approximately $470,000 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, 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, and sufficient cash flows from
operations and financing arrangements to meet obligations.
Although management believes that cash flow from operations, 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 achieve
a joint plan of reorganization that will be acceptable to creditors and
confirmed by the Bankruptcy Court.
Genesis and Multicare have contemplated and are planning for emergence from
bankruptcy. The Plan requires that certain administrative claims and any amounts
outstanding under the Genesis DIP Facility and the Multicare DIP Facility be
paid on the effective date of such emergence. In addition, the reorganized
Genesis will require both working capital financing and financing for its
potential acquisitions. On June 21, 2001, Genesis and Multicare filed a motion
with and received authorization from the Bankruptcy Court to (1) enter into an
exit financing facility commitment letter and certain fee letters with a
syndicate of lenders, and (2) make payments for fees and expenses related
thereto. The exit financing of $415,000,000 will consist of the following
facilities: (1) a $125,000,000 revolving line of credit; (2) a $235,000,000 term
loan; and (3) a $55,000,000 delayed draw term loan, (collectively the "Exit
Financing Facility"). The Exit Financing Facility will bear interest at a
variable base rate plus a margin or LIBOR plus a margin.
23
Insurance
The Company continues to experience an adverse effect on operating cash flow 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.
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 purchased
GL/PL coverage from a commercial insurer subject to a per claim retention. As of
June 1, 2001, the self insured retention increased from $500,000 per claim to
$750,000 for all states except in Florida, where the retention remains
$2,500,000 per claim. On an annual basis, the cost of insurance has remained
relatively unchanged for the policy year ending June 1, 2002 as compared to the
policy year ended June 1, 2001.
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 were increased.
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 the Centers for Medicare and Medicaid Services ("CMS"), formerly
the Health Care Financing Administration ("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, 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.
24
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.
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 the
Company. The changes have limited, and are expected to continue to limit,
payment increases under these programs. Also, the timing of payments made under
the Medicare and Medicaid programs is subject to regulatory action and
governmental budgetary constraints; in recent years, the time period between
submission of claims and payment has increased. Within the statutory framework
of the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings and interpretations which may further affect payments
made under 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.
The Company faces additional federal requirements that mandate major changes in
the transmission and retention of health information. The Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") was enacted to ensure,
first, that employees can retain and at times transfer their health insurance
when they change jobs, and secondly, to simplify health care administrative
processes. This simplification includes expanded protection of the privacy and
security of personal medical data and requires for the adoption of standards for
the exchange of electronic health information. Among the standards that the
Department of Health and Human Services will adopt pursuant to HIPAA are
standards for the following: electronic transactions and code sets; unique
identifiers for providers, employers, health plans and individuals; security and
electronic signatures; privacy; and enforcement.
Although HIPAA was intended to ultimately reduce administrative expenses and
burdens faced within the healthcare industry, the Company believes that
implementation of this law will result in significant costs. The Company has
approximately two years to comply with the regulation. The Company has
established a HIPAA task force consisting of both clinical and information
services professionals focused on HIPAA compliance. The Company has estimated
the cost over the next twelve months to be approximately $765,000 and has not
yet quantified the cost to future periods.
25
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. Final fiscal year 2002 rules for skilled nursing facilities under PPS were
issued July 31, 2001. The final rules were in line with expectations.
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.
26
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.
27
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.
Multicare is currently in default of certain financial
covenant requirements of the Multicare DIP Facility. The
Company does not intend to cure or seek waivers for this event
of default. Through August 10, 2001, there has been no usage
under the Multicare DIP Facility, other than for the issuance
of standby letters of credit. To date, cash provided from
Multicare operating activities has been sufficient to fund
working capital and capital requirements. In addition, at June
30, 2001, Multicare held over $33,000,000 of cash and cash
equivalents. In light of these factors, the Company does not
believe there is any significant impact or risk to Multicare
as a result of this event. In July 2001, the Company notified
the Multicare DIP Lenders that the Company desired to reduce
the Multicare DIP Facility commitment limit to $10,000,000
from $50,000,000. Additionally, the Company may notify the
Multicare DIP Lenders to terminate the Multicare DIP Facility
as there are no borrowings expected to be drawn against the
Multicare DIP Facility.
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
2.1(1) Amended Disclosure Statement for Debtors'
Joint Plan of Reorganization dated July 6,
2001.
2.2(1) Amended Debtors' Joint Plan of
Reorganization under Chapter 11 of the
Bankruptcy Code dated July 6, 2001.
(1) Incorporated by reference to Genesis Health
Ventures, Inc.'s Quarterly Report on Form
10-Q for the period ended June 30, 2001.
(b) Reports on Form 8-K
On June 19, 2001 the Company filed a Report on Form
8-K reporting that Genesis Health Ventures, Inc. and
The Multicare Companies, Inc. filed a joint plan of
reorganization in the U.S. Bankruptcy Court for the
District of Delaware on June 5, 2001. The Report on
Form 8-K does not include financial statements.
28
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: August 14, 2001 /s/ James V. McKeon
------------------------------------
James V. McKeon
Senior Vice President and Corporate Controller
29