Exhibit 2.1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- ----------------------------------------
In re Chapter 11 Cases No.
GENESIS HEALTH VENTURES INC., et al., 00-2692 (JHW)
Debtors.
(Jointly Administered)
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In re Chapter 11 Cases No.
MULTICARE AMC, INC., et al., 00-2494 (JHW)
Debtors.
(Jointly Administered)
- ----------------------------------------
DISCLOSURE STATEMENT FOR
DEBTORS' JOINT PLAN OF REORGANIZATION
WEIL, GOTSHAL & MANGES LLP RICHARDS, LAYTON & FINGER P.A.
767 Fifth Avenue One Rodney Square
New York, New York 10153 P.O. Box 551
(212) 310-8000 Wilmington, Delaware 19899
(302) 658-6541
Co-Attorneys for the Genesis Debtors Co-Attorneys for the Genesis Debtors
as Debtors and Debtors in Possession as Debtors and Debtors in Possession
WILLKIE FARR & GALLAGHER YOUNG CONAWAY STARGATT & TAYLOR LLP
787 Seventh Avenue 11th Floor, Wilmington Trust Company
New York, New York 10019 P.O. Box 391
(212) 728-8000 Wilmington, Delaware 19899-0391
(302) 571-6600
Co-Attorneys for the Multicare Debtors Co-Attorneys for the Multicare Debtors
as Debtors and Debtors in Possession as Debtors and Debtors in Possession
Dated: July 6, 2001
GLOSSARY
The terms in the following table are used in the Disclosure Statement and Plan
of Reorganization. These definitions are summaries. Please refer to the Plan of
Reorganization for the complete definitions of these terms.
Administrative Expense Any expense relating to the administration of the
Claim chapter 11 cases, including actual and necessary
costs and expenses of preserving the Debtors' estates
and operating the Debtors' businesses, any
indebtedness or obligations incurred or assumed
during the chapter 11 cases, allowances for
compensation and reimbursement of expenses to the
extent allowed by the Bankruptcy Court, claims
arising under (i) that certain Revolving Credit and
Guaranty Agreement, dated as of June 22, 2000, as
amended, among Genesis, certain subsidiary Genesis
Debtors named therein, Mellon Bank N.A., as
administrative agent, and the lenders party thereto,
or (ii) that certain Revolving Credit and Guaranty
Agreement, dated as of June 22, 2000, as amended,
among The Multicare Companies, Inc., certain
subsidiary Multicare Debtors named therein, Mellon
Bank N.A., as administrative agent, and the lenders
party thereto, and certain statutory fees chargeable
against the Debtors' estates.
Bankruptcy Code Title 11 of the United States Code.
Bankruptcy Court The United States Bankruptcy Court for the District
of Delaware.
Commencement Date The date the Debtors' chapter 11 cases were commenced
(June 22, 2000, for all the Debtors other than
Healthcare Resources Corp., whose Commencement Date
is July 31, 2000).
Debtors The Genesis Debtors and the Multicare Debtors.
Disclosure Statement This document together with the annexed exhibit.
Effective Date A business day selected by the Debtors on or after
the date of confirmation of the Plan of
Reorganization, on which any conditions to the
effectiveness of the Plan have been satisfied or
waived and there is no stay of the order confirming
the Plan of Reorganization.
Genesis Genesis Health Ventures, Inc.
Genesis Debtors Genesis and the entities listed on Exhibit "A" to the
Plan of Reorganization.
Genesis General Any general unsecured claim against any of the
Unsecured Claim Genesis Debtors.
Genesis Senior Lender Any claim against any of the Genesis Debtors based on
Claim the Genesis Senior Lender Agreements (as defined in
the Plan of Reorganization) net of all postpetition
cash payments made by the Genesis Debtors.
Multicare Genesis ElderCare Corp. (the corporate parent of The
Multicare Companies, Inc.).
Multicare Debtors Multicare and the entities listed on Exhibit "B" to
the Plan of Reorganization.
Multicare General Any general unsecured claim against any of the
Unsecured Claim Multicare Debtors.
Multicare Senior Any claim against any of the Multicare Debtors based
Lender Claim on the Multicare Senior Lender Agreements (as defined
in the Plan of Reorganization).
New Common Stock New common stock of Reorganized Genesis to be issued
under the Plan of Reorganization as described in
section II.H.3 of this Disclosure Statement.
New Convertible New convertible 6% PIK preferred stock of Reorganized
Preferred Stock Genesis to be issued under the Plan of Reorganization
as described in section II.H.2 of this Disclosure
Statement.
New Multicare Stock New common stock of Reorganized Multicare to be
issued under the Plan of Reorganization as described
in section II.H.5 of this Disclosure Statement.
New Senior Notes New senior notes in the aggregate principal amount of
$242.6 million to be issued under the Plan of
Reorganization as described in section II.H.1 of this
Disclosure Statement.
New Warrants New warrants to purchase 11.1% of the New Common
Stock to be issued under the Plan of Reorganization,
as described in section II.H.4 of this Disclosure
Statement.
Plan of Merger The Plan of Merger among Genesis, Multicare
Acquisition Corporation, and Multicare, as set forth
in the Plan Supplement. The proposed merger is
described in section II.A of this Disclosure
Statement.
Plan or Plan of The Debtors' Joint Plan of Reorganization Under
Reorganization Chapter 11 of the Bankruptcy Code annexed as Exhibit
A to this Disclosure Statement.
Plan Securities The New Senior Notes, the New Convertible Preferred
Stock, the New Common Stock, and the New Warrants.
Plan Supplement A supplemental appendix to the Plan of
Reorganization. The Plan Supplement will be filed
with the Bankruptcy Court within 10 days before the
hearing to confirm the Plan, but no later than 5 days
before the last day to vote to accept or reject the
Plan. Documents to be included in the Plan Supplement
will be posted at www.ghv.com as they become
available, but no later than 5 days before the last
day to vote to accept or reject the Plan. After the
Plan Supplement is filed, copies may be requested
from the Voting Agent.
Reorganized Genesis Genesis as reorganized as of the Effective Date in
accordance with the Plan of Reorganization and after
giving effect to the merger described in section II.A
of this Disclosure Statement.
Voting Agent See section I of this Disclosure Statement for
contact information.
2
I.
Introduction
The Genesis Debtors and the Multicare Debtors are soliciting
votes to accept or reject their joint plan of reorganization. A copy of the Plan
is attached as Exhibit A to this Disclosure Statement. Please refer to the
Glossary and the Plan for definitions of terms used in this Disclosure
Statement.
The purpose of the Disclosure Statement is to provide
sufficient information to enable the creditors of the Debtors who are entitled
to vote to make an informed decision on whether to accept or reject the Plan of
Reorganization. The Disclosure Statement describes:
o the proposed merger of Genesis and Multicare, the new
capital structure for the combined companies, how
creditors and shareholders of the Debtors are treated, and
the terms of the securities to be issued under the Plan
(section II)
o how to vote on the Plan and who is entitled to vote
(section III)
o certain financial information about the Debtors, including
their 5-year cash flow projections, and a range of
potential enterprise valuations (section IV)
o the businesses of the Debtors and the reasons why they
commenced their chapter 11 cases (section V)
o significant events that have occurred in the Debtors'
chapter 11 cases (section VI)
o how the Debtors will be governed when the Plan becomes
effective (section VII)
o how distributions under the Plan will be made and the
manner in which disputed claims are resolved (section
VIII)
o certain factors creditors should consider before voting
(section IX)
o the procedure and requirements for confirming the Plan,
including a liquidation analysis (section X)
o alternatives to the Plan (section XI) and
o certain federal tax considerations (section XII)
Additional financial information about the Genesis Debtors can
be found in the annual report on Form 10-K for the fiscal year ended September
30, 2000, which was filed by Genesis with the Securities and Exchange Commission
on February 21, 2001, and the quarterly report on Form 10-Q for the fiscal
quarter ended March 31, 2001, which was filed by Genesis on May 17, 2001. Copies
of these SEC filings are included in the Plan Supplement and may be obtained
over the internet at www.sec.gov or www.freeedgar.com.
3
Additional financial information about the Multicare Debtors
can be found in the annual report on Form 10-K for the fiscal year ended
September 30, 2000, which was filed by The Multicare Companies, Inc. (the
wholly-owned subsidiary of Multicare) with the Securities and Exchange
Commission on February 21, 2001, and that company's quarterly report on Form
10-Q for the fiscal quarter ended March 31, 2001, which was filed on May 17,
2001. Copies of these SEC filings are included in the Plan Supplement and may be
obtained over the internet at www.sec.gov or www.freeedgar.com.
This Disclosure Statement and the attached Plan of
Reorganization are the only materials creditors should use to determine whether
to vote to accept or reject the Plan of Reorganization.
--------------------------------------------------------------
The last day to vote to accept or reject the Plan of
Reorganization is August 17, 2001.
The record date for determining which creditors may vote on
the Plan of Reorganization is July 6, 2001.
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The Plan of Reorganization is based on extensive negotiations
with the holders of the largest claims against the Genesis Debtors and the
Multicare 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 agent and the informal steering committee for the holders of
the Genesis Senior Lender Claims and the Multicare Senior Lender Claims and the
respective official committees of unsecured creditors in the Genesis Debtors'
and the Multicare Debtors' reorganization cases fully support the Plan of
Reorganization.
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Recommendations: The Debtors believe that confirmation of the
Plan is the best chance for creditors to maximize their
recoveries and for the business operations of the Debtors to
succeed. The Debtors encourage creditors to vote in favor of
the Plan.
The respective official unsecured creditors' committees in the
Genesis Debtors' and the Multicare Debtors' reorganization
cases have participated fully in the reorganization process
and also urge creditors of the Genesis Debtors and Multicare
Debtors to vote to accept the Plan. Please review the letter
from the Genesis unsecured creditors' committee which is
included with this Disclosure Statement.
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Additional copies of this Disclosure Statement or copies of
the Plan Supplement are available upon request made to the Voting Agent, at the
following address:
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If by overnight or hand delivery: If by standard mailing:
Poorman-Douglas Corporation Poorman-Douglas Corporation
10300 S.W. Allen Boulevard P.O. Box 4390
Beaverton, Oregon 97005 Portland, Oregon 97208-4390
Attn: Genesis-Multicare Attn: Genesis-Multicare
Balloting Ctr. Balloting Center
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4
The summaries of the Plan and other documents related to the
restructuring of the Debtors are qualified in their entirety by the Plan, its
exhibits, and the documents and exhibits contained in the Plan Supplement. The
Plan Supplement will be filed with the Bankruptcy Court within 10 days prior to
the hearing to confirm the Plan, but no later than 5 days before the last day to
vote to accept or reject the Plan. Documents to be included in the Plan
Supplement will also be posted at www.ghv.com as they become available, but no
later than 5 days before the last day to vote to accept or reject the Plan. The
financial and other information included in this Disclosure Statement is for
purposes of soliciting acceptances of the Plan and are being communicated for
settlement purposes only.
The Bankruptcy Code provides that only creditors who vote on
the Plan will be counted for purposes of determining whether the requisite
acceptances have been attained. Failure to timely deliver a properly completed
ballot by the voting deadline will constitute an abstention and any improperly
completed or late ballot will not be counted.
II.
Treatment of Creditors and Shareholders
Under the Plan of Reorganization
The Plan of Reorganization governs the treatment of claims
against and interests in the Genesis Debtors and the Multicare Debtors. This
section describes the proposed merger of Genesis and Multicare, summarizes the
new capital structure of the combined companies, summarizes the treatment of
each of the classes, describes which claims and interests are in each class, and
discusses certain legal issues affecting the trading of Plan Securities.
A. Merger of Genesis and Multicare
Genesis and Multicare are proposing a merger as part of the
Plan of Reorganization. Both Debtors believe that the merger of the two
companies will be beneficial to all creditors receiving distributions under the
Plan due primarily to the preservation of the benefits created by the
significant synergies each company already realizes under the current
relationship, enhanced by the incremental savings which may be achieved. Today,
Multicare is a significant subsidiary of Genesis which, while not wholly-owned,
is consolidated from an operational perspective as well as for public financial
reporting purposes. Multicare is managed by Genesis subject to a comprehensive
management agreement which includes all operational as well as financial and
administrative responsibilities and accordingly, has no management or
administrative infrastructure of its own. Together, the two companies create
significant critical mass which benefits both entities in numerous ways,
including: a) revenue enhancements through the marketing and provision of
services under a common "ElderCare" brand name and strategy, b) purchasing
leverage, which both reduces operating costs and expands access to services
which are more difficult to obtain, such as professional liability insurance, c)
the ability to attract and effectively utilize human resources, and d) providing
better access to capital markets in which size and diversification are critical
factors. The merger of the two companies would eliminate risks created by
continuing uncertainty regarding the permanence of these operating and
administrative efficiencies, as well as create additional administrative cost
savings through the reduction of duplicative staffing and other costs required
to maintain segregated accounts and financial reporting and separate governance
structures. For a more complete discussion of the benefits of the merger and the
effects of a separation of the companies, see section VIII.A, below.
5
At the present time, Genesis owns 43.6% of the common stock of
Multicare. The balance of that common stock presently is owned by persons who
have no affiliation with Genesis. Under the Plan of Reorganization, the common
stock of Multicare will be cancelled and new common stock of Reorganized
Multicare will be deemed to be allocated to certain of the creditors of the
Multicare Debtors. By voting for the Plan of Reorganization, such creditors, as
persons otherwise entitled to the new common stock of Multicare, will also be
deemed to have voted to adopt the Plan of Merger. The Plan of Merger provides
that such creditors will receive cash, New Senior Notes, New Convertible
Preferred Stock, New Common Stock, and/or New Warrants of Reorganized Genesis in
exchange for the new common stock of Reorganized Multicare allocated to them and
that a newly created indirect subsidiary of Genesis will be merged into
Multicare. The creditors who will participate in this exchange are described
below. The Plan of Merger will be effective on the Effective Date and will
result in Multicare and all its interests in the other Multicare Debtors
becoming owned by Reorganized Genesis. It is important to note that the merger
of Genesis and Multicare is not based on Genesis's present 43.6% ownership
interest in Multicare. Reorganized Genesis will be providing Plan Securities to
the future owners of the Multicare Debtors as consideration for agreeing to the
proposed merger. By voting to accept the Plan of Reorganization, the creditors
of the Genesis Debtors will also be approving the transaction, including the
issuance of shares of the New Common Stock of Reorganized Genesis to accomplish
the merger.
B. Summary of New Capital Structure of Reorganized Genesis
The following table summarizes the proposed capital structure
for Reorganized Genesis, including the post-Effective Date financing
arrangements Genesis expects to execute to fund Administrative Expense Claims
and the working capital needs of the ongoing business operations of the
restructured companies. The post-Effective Date financing arrangements are
anticipated to include a revolving credit facility in the amount of at least
$100,000,000. The Debtors' administrative expenses will be paid through the
incurrence of senior secured debt of approximately $235,000,000. In the
alternative, it may be desirable for Reorganized Genesis to raise funds in the
public debt markets. The Debtors will determine the best form of such exit
financing as the projected Confirmation Date approaches. Possible terms of the
exit financing are described in section VIII.C, below. Except as otherwise
provided in the Plan and described herein, unless the underlying property is
sold or surrendered, the Genesis Debtor or Multicare Debtor that is the current
obligor on a mortgage will continue as the mortgagee. The securities to be
issued to creditors are described in section II.H, below.
Instrument Description Comments
- --------------------------------------------------------------------------------------------------------------------
Revolver up to $150.0 million (exit financing)
Senior Secured Term Loans or $235.0 to $245.0 million (exit financing)
New Public Debt
Mortgages $146.4 million (reinstated or amended)
New Senior Notes $242.6 million (restructuring securities)
New Convertible Preferred Stock $42.6 million (restructuring securities)
New Common Stock 41,000,000 shares (restructuring securities)
New Warrants To purchase up to 11.1% of the New Common Stock (restructuring securities)
6
C. Summary of Classification and Treatment
The following tables divide the claims against, and equity
interests in, the Genesis Debtors and the Multicare Debtors into separate
classes and summarize the treatment for each class. The tables also identify
which classes are entitled to vote on the Plan of Reorganization based on rules
set forth in the Bankruptcy Code and an order of the Bankruptcy Court
establishing voting procedures. Finally, the tables indicate an estimated
recovery for each class. Important Note: As described in section IX, below, the
long-term care industry is affected by numerous uncertainties, including changes
in Medicare and Medicaid reimbursement, labor costs, professional liability
exposure and the ability to insure those risks, and regulatory enforcement.
Those uncertainties and other risks related to the Genesis Debtors and the
Multicare Debtors make it difficult to determine a precise value for the Debtors
and the equity interests to be distributed under the Plan of Reorganization. The
recoveries described in the following tables represent the Debtors' best
estimates of those values given the information available at this time. Unless
otherwise specified, the information in the following tables and in the sections
below are based on calculations as of June 30, 2001. The estimation of
recoveries makes the following assumptions:
o The new debt instruments to be issued under the Plan of
Reorganization have a value equal to their face amounts.
o The enterprise value for the Debtors is $1,525,000,000
(including cash on hand). This amount, less cash on hand
of $25,000,000, is the mid-point of the range of
valuations for the Genesis Debtors and the Multicare
Debtors described in section IV, below.
o The aggregate amount of allowed secured claims against the
Genesis Debtors (excluding the Genesis Senior Lender
Claims) is $120,077,000 and against the Multicare Debtors
(excluding the Multicare Senior Lender Claims) is
$26,318,000.
o The aggregate amount of Genesis Senior Lender Claims is
$1,193,460,000 (excluding postpetition interest and before
giving effect to postpetition payments) and the aggregate
amount of Multicare Senior Lender Claims is $443,400,000
(excluding postpetition interest).
o The aggregate amount of general unsecured claims against
the Genesis Debtors is $467,494,000 (Classes G4 and G5
described below, but excluding the claims of the Multicare
Debtors against the Genesis Debtors) and the aggregate
amount of general unsecured claims against the Multicare
Debtors is $284,256,000 (Classes M4 and M5 described
below, but excluding the claims of the Genesis Debtors
against the Multicare Debtors).
o For purposes of the recovery estimate in the table below,
no current value is included for the New Warrants because
they are priced at the approximate projected value of the
New Common Stock. However, under a Black-Scholes analysis,
the New Warrants would have a value between $16,000,000
and $23,000,000.
7
Treatment of Genesis Creditors and Shareholders
- ---------------------------------------------------------------------------------------------------------------------
Class Description Treatment Entitled Estimated
to Vote Recovery
- ---------------------------------------------------------------------------------------------------------------------
-- Debtor in Possession Credit Payment of all amounts outstanding, and cash No 100%
Agreement Claims collateralization or replacement of
outstanding letters of credit by letters of
credit issued under the exit facility.
- ---------------------------------------------------------------------------------------------------------------------
-- Other Administrative Expense Paid in full. No 100%
Claims
- ---------------------------------------------------------------------------------------------------------------------
-- Priority Tax Claims Paid in full or with interest over a period No 100%
not to exceed six (6) years from the date of
assessment of the tax.
- ---------------------------------------------------------------------------------------------------------------------
G1 Genesis Other Secured Claims See separate descriptions in section II.E, See below See below
below.
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G2 Genesis Senior Lender Claims $195,979,000 in cash* Yes 78.89%
$94,923,000 in New Senior Notes
$31,000,000 in New Conv. Preferred Stock
74.35% of the New Common Stock.
*cash payments through June 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
G3 Genesis Priority Non-Tax Claims Paid in full. No 100%
- ---------------------------------------------------------------------------------------------------------------------
G4 Genesis General Unsecured Claims Uninsured Claims: Yes 7.34%
0.71% of the New Common Stock (exclusive
10.65% of the New Warrants. of the value
Insured Claims: Paid in ordinary course of of the New
business from insurance proceeds to the Warrants)
extent of such insurance; any portion of
such claims which are not covered by
insurance will be treated in same manner as
uninsured claims.
- ---------------------------------------------------------------------------------------------------------------------
G5 Genesis Senior Subordinated Note 3.41% of the New Common Stock Yes 7.34%
Claims 51.54% of the New Warrants. (exclusive
of the value
of the New
Warrants)
- ---------------------------------------------------------------------------------------------------------------------
G6 Genesis Intercompany Claims Unimpaired. No 100%
- ---------------------------------------------------------------------------------------------------------------------
G7 Genesis Punitive Damage Claims No distribution (except to the extent No None
covered by insurance).
- ---------------------------------------------------------------------------------------------------------------------
G8 Genesis Series G Preferred Stock No distribution. No None
Interests
- ---------------------------------------------------------------------------------------------------------------------
G9 Genesis Series H Preferred Stock No distribution. No None
Interests
- ---------------------------------------------------------------------------------------------------------------------
G10 Genesis Series I Preferred Stock No distribution. No None
Interests
- ---------------------------------------------------------------------------------------------------------------------
G11 Genesis Common Stock Interests No distribution. No None
- ---------------------------------------------------------------------------------------------------------------------
8
Treatment of Multicare Creditors and Shareholders
- ---------------------------------------------------------------------------------------------------------------------
Class Description Treatment Entitled Estimated
to Vote Recovery
- ---------------------------------------------------------------------------------------------------------------------
-- Debtor in Possession Credit Payment of all amounts outstanding, and cash No 100%
Agreement Claims collateralization or replacement of
outstanding letters of credit by letters of
credit issued under the exit facility.
- ---------------------------------------------------------------------------------------------------------------------
-- Other Administrative Expense Paid in full. No 100%
Claims
- ---------------------------------------------------------------------------------------------------------------------
-- Priority Tax Claims Paid in full or with interest over a period No 100%
not to exceed six (6) years from the date of
assessment of the tax.
- ---------------------------------------------------------------------------------------------------------------------
M1 Multicare Other Secured Claims See separate descriptions in section II.F, See below See below
below.
- ---------------------------------------------------------------------------------------------------------------------
M2 Multicare Senior Lender Claims $25,000,000 in cash Yes 77.31%
$147,682,000 in New Senor Notes
$11,600,000 in New Conv. Preferred Stock
19.02% of the New Common Stock.
- ---------------------------------------------------------------------------------------------------------------------
M3 Multicare Priority Non-Tax Claims Paid in full. No 100%
- ---------------------------------------------------------------------------------------------------------------------
M4 Multicare General Unsecured Uninsured Claims: Yes 7.34%
Claims 0.23% of the New Common Stock (exclusive
3.52% of the New Warrants. of the value
Insured Claims: of the New
Paid in ordinary course of business from Warrants)
insurance proceeds to the extent of such
insurance; any portion of such claims which
are not covered by insurance will be treated
in same manner as uninsured claims.
- ---------------------------------------------------------------------------------------------------------------------
M5 Multicare Senior Subordinated 2.27% of the New Common Stock Yes 7.34%
Note Claims 34.29% of the New Warrants. (exclusive
of the value
of the New
Warrants)
- ---------------------------------------------------------------------------------------------------------------------
M6 Multicare Intercompany Claims Unimpaired. No 100%
- ---------------------------------------------------------------------------------------------------------------------
M7 Multicare Punitive Damage Claims No distribution (except to the extent No None
covered by insurance).
- ---------------------------------------------------------------------------------------------------------------------
M8 Multicare Common Stock Interests No distribution. No None
- ---------------------------------------------------------------------------------------------------------------------
D. Allocation of Value Under the Plan of Reorganization
The largest claims against the Genesis Debtors and the
Multicare Debtors consist of the Genesis Senior Lender Claims (Class G2) and the
Multicare Senior Lender Claims (Class M2). With minor exceptions discussed
below, the claims in these classes are secured by first priority liens on
substantially all the property of the Genesis Debtors and the Multicare Debtors,
subject to the liens of the lenders under the debtor in possession credit
agreements and the liens of pre-existing mortgagees and other secured creditors
described in Classes G1 and M1.
9
1. Senior Lender Deficiencies
After setting aside the value of the properties that are
collateral for the pre-existing secured claims (Classes G1 and M1), there is not
enough enterprise value remaining to provide a full recovery to the holders of
the Genesis Senior Lender Claims and the Multicare Senior Lender Claims, even if
those classes received 100% of the New Senior Notes, the New Convertible
Preferred Stock, the New Common Stock, and the New Warrants. In the absence of a
consensual restructuring and except as described in section II.D.3, below, the
absolute priority rule in section 1129(b) of the Bankruptcy Code would preclude
the distribution of any value to junior classes, including to holders of
unsecured claims in Classes G4, G5, M4, and M5. The following table, which draws
information from later sections of the Disclosure Statement, illustrates the
deficiencies of the Genesis Senior Lender Claims and the Multicare Senior Lender
Claims.
Value or Claim Section
---------------------------------------------------------------------------------------
Genesis Enterprise Value $1,125,000,000 IV.B.3
less: Debtor in Possession financing 200,000,000 II.E
Administrative Expenses 25,000,000
Other Secured Claims (Class G1) 120,077,000
-----------------
Value Remaining $779,923,000
Amount of Genesis Senior Lender Claims (Class G2) $1,193,460,000 II.E.2
less: Adequate Protection Payments Received 195,979,000 II.E.2
-----------------
Remaining Genesis Senior Lender Claims (Class G2) $997,481,000
Deficiency for Class G2 ($217,558,000)
---------------------------------------------------------------------------------------
Multicare Enterprise Value (including cash on hand) $400,000,000 IV.C.3
less: Administrative Expenses 10,000,000 II.F
Other Secured Claims (Class M1) 26,318,000
-----------------
Value Remaining $363,682,000
Amount of Multicare Senior Lender Claims (Class M2) $443,400,000 II.F.2
-----------------
Deficiency for Class M2 ($79,718,000)
In the case of the Genesis Debtors, the holders of the Genesis Senior Lender
Claims have a deficiency of over $217 million. As to the claims of holders of
the Genesis senior subordinated note claims (Class G5), the deficiency would
include postpetition interest on the Genesis Senior Lender Claims, for a total
deficiency, calculated as of June 30, 2001, of approximately $330 million. In
the case of the Multicare Debtors, the holders of the Multicare Senior Lender
Claims have a deficiency of over $79 million. As to the claims of holders of the
Multicare senior subordinated note claims (Class M5), the deficiency would
include postpetition interest on the Multicare Senior Lender Claims, for a total
deficiency, calculated as of June 30, 2001, of approximately $120 million.
10
2. Compromise and Settlement with Unsecured Classes
The Genesis Debtors, the Genesis unsecured creditors'
committee, and the holders of the Genesis Senior Lender Claims have had
extensive negotiations concerning a consensual restructuring and the advantages
of facilitating a rapid conclusion to these chapter 11 cases. Based on those
discussions and notwithstanding the deficiencies specified above, the holders of
the Genesis Senior Lender Claims have agreed to provide a portion of the value
to which they would otherwise be entitled to holders of unsecured claims in
Classes G4 and G5. The Multicare Debtors, the Multicare unsecured creditors'
committee, and the holders of the Multicare Senior Lender Claims have also
engaged in negotiations concerning a consensual restructuring. Those discussions
have also resulted in an agreement which is reflected in the terms of the Plan
and is based on the agreement of the holders of the Multicare Senior Lender
Claims to provide a portion of the value to which they would otherwise be
entitled to holders of unsecured claims in Classes M4 and M5. The treatment of
those classes in the Plan reflects this settlement and is not an admission by
the holders of the Genesis Senior Lender Claims and the Multicare Senior Lender
Claims that such classes would otherwise be entitled to any recovery.
Conversely, the support of the Plan by the Genesis unsecured creditors'
committee and the Multicare unsecured creditors' committee is not an agreement
as to the enterprise value of the Genesis Debtors or the Multicare Debtors
described in the Disclosure Statement, the validity of the liens of the holders
of the Genesis Senior Lender Claims or the Multicare Senior Lender Claims, or,
as to the Multicare unsecured creditors' committee, the representations made
herein concerning the business relationship described below between the Genesis
Debtors and the Multicare Debtors.
3. Exceptions to the Liens of the Senior Lenders
As to Classes G4 and M4, the absolute priority rule would not
apply to any properties of the Debtors that are not encumbered. As the following
analysis indicates, Classes G4 and M4 would receive small recoveries in a
nonconsensual restructuring.
Recovery for Class G4 Under the Absolute Priority Rule. The
aggregate value of the properties owned by the Genesis Debtors that are
unencumbered or likely would become unencumbered through the exercise of the
Genesis Debtors' avoidance powers is approximately $4,290,000. In a
nonconsensual restructuring, the value of these two properties would be
available to the holders of unsecured claims, including the deficiency claims of
the holders of the Genesis Senior Lender Claims. The following table shows how
the value of those properties would be allocated, giving effect to the
contractual subordination provisions of the holders of claims in Class G5 in
favor of the Genesis Senior Lender Claims in Class G2.
Recovery
Claim % Distribution %
--------------------------------------------------------------------------------------
Genesis Sr Lender Deficit $221,848,000* 32.18% $3,792,000 1.71%**
G4 (Gen Unsecured Claims) 80,069,000 11.62% 498,000 0.62%
G5 (Gen Subord Claims) 387,425,000 56.20% 0 0.00%**
--------------------------------------------------------------------------------------
total unsecured claims $689,342,000 100.00% $4,290,000
* This amount is greater than the deficiency calculated in section
II.D.1, above because it includes the value of the property on which
the liens securing the Genesis Senior Lender Claims may be avoidable.
11
**All value otherwise allocable to Class G5 would be distributed to
Class G2 until the deficiency in Class G2 is paid in full, in
accordance with the subordination provisions in the indentures
governing the senior subordinated notes in Class G5.
As the table illustrates, the recovery under the Plan is superior to the
application of the absolute priority rule for Class G4 (7.34% compared to 0.62%)
and Class G5 (7.34% compared to 0.00%).
Recovery for Class M4 Under the Absolute Priority Rule. The
aggregate value of the properties owned by the Multicare Debtors that are
unencumbered or likely would become unencumbered through the exercise of the
Multicare Debtors' avoidance powers is approximately $19,300,000. In a
nonconsensual restructuring, the value of these properties would be available to
the holders of unsecured claims, including the deficiency claims of the holders
of the Multicare Senior Lender Claims. The following table shows how such value
would be allocated, giving effect to the contractual subordination provisions of
the holders of claims in Class M5 in favor of the Multicare Senior Lender Claims
in Class M2.
Recovery
Claim % Distribution %
--------------------------------------------------------------------------------------
Multicare Sr Lender Deficit $99,018,000* 25.83% $17,969,000 18.15%**
M4 (Mul Unsecured Claims) 26,439,000 6.90% 1,331,000 5.04%
M5 (Mul Subord Claims) 257,817,000 67.27% 0 0.00%**
--------------------------------------------------------------------------------------
total unsecured claims $383,247,000 100.00% $19,300,000
* This amount is greater than the deficiency calculated in section
II.D.1, above because it includes the value of the property on which
the liens securing the Multicare Senior Lender Claims may be avoidable.
**All value otherwise allocable to Class M5 would be distributed to
Class M2 until the deficiency in Class M2 is paid in full, in
accordance with the subordination provisions in the indentures
governing the senior subordinated notes in Class M5.
As the table illustrates, the recovery under the Plan is superior to the
application of the absolute priority rule for Class M4 (7.34% compared to 5.04%)
and Class M5 (7.34% compared to 0.00%).
E. Description of the Genesis Classes
Unless otherwise indicated, the characteristics and amount of
the claims or equity interests in the following classes are based on the books
and records of the Genesis Debtors. Each subclass is treated as a separate class
for purposes of the Plan of Reorganization and the Bankruptcy Code. However, the
following discussion may refer to a group of subclasses as a single class for
ease of reference.
1. Genesis Other Secured Claims (Class G1)
Description. Class G1 is a group of subclasses, including
aggregate allowed mortgage secured claims of approximately $120,077,000 as of
the date of this Disclosure Statement (exclusive of interest and net of
reinstatement payments). For the most part, claims in these subclasses are
mortgage financings of various properties owned and/or operated by the Genesis
Debtors and equipment financings of various types. Each subclass represents a
separate mortgage or collateral pool. The following table describes the material
subclasses in Class G1.
12
The Plan of Reorganization reinstates the claims in Subclasses
G1-1 through G1-12. The aggregate cost to cure defaults and reinstate the debt
in these subclasses is projected to be $6,604,000 as of June 30, 2001. These
claims are not impaired, and the holders of the debt are not entitled to vote to
accept or reject the Plan of Reorganization. Subclasses G1-13 through G1-17 are
impaired and are entitled to vote. The following table identifies and summarizes
the treatment for each of the material subclasses in Class G1. The interest
rates for the new notes proposed for certain of the impaired classes will be as
specified below, unless modified by the Bankruptcy Court at the time of
confirmation of the Plan of Reorganization. The proposed notes will be secured
by the same collateral securing the existing obligations. In the event any of
those impaired classes rejects the Plan of Reorganization, the Genesis Debtors
reserve the right to return the collateral in full satisfaction of the claims
secured by such property or adjust the principal amount of the proposed note to
the value of the collateral as determined by the Bankruptcy Court. The
percentage recovery indicated in the following table is based on the value of
the collateral securing these obligations.
Treatment of Subclasses
- -----------------------------------------------------------------------------------------------------------
Description Entitled Estimated
Sub-Class Collateral (lender or guarantor) Treatment to Vote Recovery
- -----------------------------------------------------------------------------------------------------------
G1-1 Broad Street Office Building $1,600,000 mortgage reinstated No 100%
148 West State Street, Kennett
Square, Pa. (Pa. IDA)
- -----------------------------------------------------------------------------------------------------------
G1-2 Broad Street Office Building $985,039 mortgage reinstated No 100%
148 West State Street, Kennett
Square, Pa. (Pa. IDA)
- -----------------------------------------------------------------------------------------------------------
G1-3 Pleasant View Center (HUD) $8,864,446 mortgage reinstated No 100%
- -----------------------------------------------------------------------------------------------------------
G1-4 Country Village Center (HUD) $1,810,259 mortgage reinstated No 100%
- -----------------------------------------------------------------------------------------------------------
G1-5 Abington Manor (Lackawanna County $3,475,000 mortgage reinstated No 100%
IDA)
- -----------------------------------------------------------------------------------------------------------
G1-6 Silver Lake Center (Del. EDA $2,155,000 mortgage reinstated No 100%
Bonds)
- -----------------------------------------------------------------------------------------------------------
G1-7 River Street Center (Luzerne $2,430,000 mortgage reinstated No 100%
County IDA)
- -----------------------------------------------------------------------------------------------------------
G1-8 Kresson View Center (NJEDA $5,535,000 mortgage reinstated No 100%
Refunding Bonds) See description below.
See description below.
- -----------------------------------------------------------------------------------------------------------
G1-9 Mifflin Court (ElderTrust) $2,474,000 mortgage reinstated (as No 100%
previously reduced and approved by
the Bankruptcy Court)
- -----------------------------------------------------------------------------------------------------------
G1-10 Oaks Center (ElderTrust) $3,500,086 mortgage reinstated (as No 100%
previously reduced and approved by
the Bankruptcy Court)
- -----------------------------------------------------------------------------------------------------------
G1-11 Coquina Assisted Living $1,400,000 mortgage reinstated (as No 100%
(ElderTrust) previously reduced and approved by
the Bankruptcy Court)
- -----------------------------------------------------------------------------------------------------------
13
- -----------------------------------------------------------------------------------------------------------
Description Entitled Estimated
Sub-Class Collateral (lender or guarantor) Treatment to Vote Recovery
- -----------------------------------------------------------------------------------------------------------
G1-12 Homestead Center $19,337,000 mortgage reinstated No 100%
Kimberly Hall South Center
Kimberly Hall North Center
Seaford Center
Milford Center
Windsor Center
(U.S. Bank, N.A., as trustee for
the "Bradford Bonds")
- -----------------------------------------------------------------------------------------------------------
G1-13 Brakeley Park Center (HUD) New secured note maturing on Yes 100%*
Outstanding Mortgage: $7,985,079 January 1, 2033, in $7,985,079
Interest Rate: 10.35% principal amount with annual
Value of Collateral: interest at 8.5% and level monthly
approximately equal to amount of payments of principal and interest
claim
- -----------------------------------------------------------------------------------------------------------
G1-14 North Cape Center (HUD) New secured note maturing on March Yes 100%*
Outstanding Mortgage: $5,573,020 1, 2036, in $5,573,020 principal
Interest Rate: 9.5% amount with annual interest at
Value of Collateral: 8.0% and level monthly payments of
approximately equal to amount of principal and interest
claim
- -----------------------------------------------------------------------------------------------------------
G1-15 Oak Hill Center (HUD) Return the collateral Yes 100%*
Outstanding Mortgage: $7,805,061
Interest Rate: 8.75%
- -----------------------------------------------------------------------------------------------------------
G1-16 Rittenhouse Pine Center New secured 10 year note in Yes 100%*
(Meditrust) $5,000,000 principal amount with
Outstanding Mortgage: $6,690,441 annual interest at 8% and level
Interest Rate: 10.75% monthly payments of principal and
interest based on a 25-year
amortization schedule (unsecured
deficiency of $1,690,441)
- -----------------------------------------------------------------------------------------------------------
G1-17 Atlantis Center New secured 6 year note in Yes 100%*
Bowmans Center $50,000,000 principal amount with
Fairway Center annual interest at LIBOR plus 5%
Oakwood Center and no amortization before
Riverwood Center maturity (secured deficiency of
Tierra Center $28,236,000, but see discussion in
Willimsburg Center section II.E.2, below)
Windham Center
Woodmont Center
(synthetic lease lenders)
Outstanding Liability:
$78,235,000
- -----------------------------------------------------------------------------------------------------------
* Based on a valuation of the collateral securing these claims. Section
506(a) of the Bankruptcy Code provides that a claim is secured only to
the extent of the value of the underlying collateral. Any deficiency
claims of the holders of claims in Subclasses G1-13 through G1-16 are
part of Class G4 (Genesis General Unsecured Claims). The obligations of
the Genesis Debtors under the synthetic lease (Subclass G1-17) are
secured by the property identified above and by all the property of the
Genesis Debtors that secures the claims in Class G2. Therefore the
deficiency claims of the holders of claims in Subclass G1-17 are part
of Class G2 (Genesis Senior Lender Claims). To the extent the
Bankruptcy Court determines that any of the proposed interest rates do
not meet the standards set forth in section 1129 of the Bankruptcy
Code, the Debtors will adjust such rates accordingly.
14
Subclass G1-8. Subclass G1-8 consists of the secured claim of
SunTrust Bank, as successor indenture trustee ("SunTrust") under that certain
Trust Indenture, dated as of May 1, 1990 (the "SunTrust Indenture"), between the
New Jersey Economic Development Authority ("NJEDA") and SunTrust, pursuant to
which NJEDA issued (a) those certain $1,175,000 New Jersey Economic Development
Authority Economic Development Refunding Bonds (Geriatric and Medical Services,
Inc.--Care Inn of Voorhees Project) 1990 Series A; and (b) those certain
$5,000,000 New Jersey Economic Development Authority Economic Development
Refunding Bonds (Geriatric and Medical Services, Inc.--Care Inn of Voorhees
Project) 1990 Series B (collectively, the "Kresson View Center Bonds"). The
secured claim of SunTrust in Subclass G1-8 is (i) allowed in the principal
amount of $5,535,000, plus accrued and unpaid interest, and reasonable costs and
expenses, as more fully provided in the SunTrust Indenture and all other
documents and agreements executed in connection with the Kresson View Center
Bonds, and (ii) secured by a duly perfected, first priority mortgage and lien on
certain real and personal property (whether now owned or hereafter acquired) of
Geriatric and Medical Services, Inc. relating to a project known as the "Kresson
View Center" f/k/a "Care Inn of Voorhees" located in the Township of Voorhees,
New Jersey, including without limitation, all revenues and accounts arising
therefrom, among other collateral. In addition, the secured claim of SunTrust in
Subclass G1-8 is guaranteed pursuant to a Guaranty Agreement (the "Kresson View
Center Guaranty") by and between Geriatric & Medical Companies, Inc. (as
successor to Geriatric & Medical Centers, Inc.) and SunTrust.
As of the Effective Date, the Genesis Debtors' obligations in
connection with the Kresson View Center Bonds shall be reinstated and each and
every indenture, loan agreement, mortgage, security agreement, guaranty,
subordination agreement, and other document executed in connection with the
Kresson View Center Bonds, including, without limitation, the Kresson View
Center Guaranty and the Subordination Agreement dated May 1, 1990 executed by
Mellon Bank N.A., as agent, in favor of NJEDA (all of the foregoing, together
with the Kresson View Center Bonds, the "Kresson View Center Bond Documents"),
shall be reinstated. All legal, equitable, and contractual rights under the
Kresson View Center Bond Documents and the Kresson View Center Bonds shall
remain unaltered after confirmation of the Plan. To the extent necessary to
reinstate all such obligations, rights, agreements, and documents, the Genesis
Debtors shall execute and obtain such replacement agreements and documents,
including, without limitation, a guaranty, subordination agreements, and UCC
financing statements, each in form and substance materially identical to
existing agreements and documents, as SunTrust may require. As of the Effective
Date, the maturity date of the Kresson View Center Bonds shall be reinstated. On
the Effective Date, the Genesis Debtors shall cure any default under the Kresson
View Center Bonds and the Kresson View Center Bond Documents (including, without
limitation, past due payments of principal), and shall reimburse SunTrust for
all reasonable fees, costs, and expenses, including legal fees and expenses,
which have accrued and are required to be paid under the relevant Kresson View
Center Bond Documents.
15
Subclass G1-12. Upon confirmation of the Plan, the claim of
U.S. Bank Trust National Association ("U.S. Bank"), as successor indenture
trustee pursuant to the Indenture of Mortgage and Deed of Trust, dated as of
September 1, 1992 (the "U.S. Bank Indenture"), shall be deemed an allowed
Genesis Other Secured Claim in the principal amount of $19,337,000, plus accrued
and unpaid interest, fees, and other costs. The Plan shall leave unaltered the
legal, equitable, and contractual rights to which the holders of claims in
Subclass G1-12 are entitled, and the allowed Claim of U.S. Bank in Subclass
G1-12 shall be unimpaired under the Plan. In satisfaction of their allowed
Subclass G1-12 claim, members of Subclass G1-12 shall receive, on or before the
Effective Date, (i) all accrued and unpaid interest due under the 9 1/4% First
Mortgage Bonds (Series A) due 2007 in the original principal amount of
$25,000,000 (the "Bradford Bonds"), whether incurred prior to or after the
Commencement Date, together with interest on interest, pursuant to the terms of
the U.S. Bank Indenture, and (ii) all indenture trustee fees and expenses due
under the U.S. Bank Indenture, including reasonable attorneys' fees, whether
incurred prior to or after the Commencement Date. U.S. Bank shall submit to the
Genesis Debtors an itemization of the amounts due and owing under the U.S. Bank
Indenture ten (10) days prior to the Effective Date. From and after the
Effective Date, all documents relating to the Bradford Bonds, including, but not
limited to, the U.S. Bank Indenture, the mortgages securing repayment of the
Bradford Bonds, and the bond instruments shall be deemed reinstated in their
entirety. In connection with such reinstatement and as a result of the Genesis
Debtors' failure to redeem the Bradford Bonds in April 2001, any holder of a
Bradford Bond shall have the right for sixty (60) days following the Effective
Date to present such Bradford Bonds for redemption in accordance with Article 9
of the U.S. Bank Indenture. Thereafter, the deadline to present the Bradford
Bonds for redemption shall be governed by the applicable provisions of the
Indenture. All rights and liens of U.S. Bank, as indenture trustee, shall
survive to the same extent, validity, and priority as existed prior to the
Commencement Date. Among other things, all of the mortgages securing repayment
of the Bradford Bonds shall continue to be valid and perfected, and no further
notice, filing, or other act shall be required to effect such perfection.
Subclass G1-17. Subclass G1-17 consists of the claims under
the Amended and Restated Synthetic Lease Financing Facility, dated as of October
7, 1996, among Genesis, Genesis Eldercare Properties, Inc., Mellon Bank N.A., as
administrative agent, certain co-agents named therein, and the lender parties
thereto. These claims are secured by the properties identified in the chart
above (the "G1-17 Properties"). Under the Plan, the holders of these claims will
receive a mortgage note in the principal amount of $50,000,000. The mortgage
note will bear interest at LIBOR plus 5% and will mature on the sixth
anniversary of the Effective Date. The mortgage note will be secured by (i) the
G1-17 Properties and (ii) a lien of equal priority with the New Senior Notes on
the property securing such notes. The mortgage documents will permit a junior
lien on the G1-17 property in favor of the New Senior Notes.
Other Subclasses. In addition to Subclasses G1-1 through
G1-17, there are other subclasses of miscellaneous secured claims of
approximately $3,536,000 against the Genesis Debtors, each of which will be
treated as a separate class. This class also includes certain contingent claims
of Bank of America, N.A. in connection with a guaranty by Genesis of the
obligations of the Age Institute. Under the Plan of Reorganization, either these
claims will be reinstated or the Reorganized Debtors will return the property
securing such claim. The reinstated claims are not impaired and the holders are
not entitled to vote to accept or reject the Plan of Reorganization.
2. Genesis Senior Lender Claims (Class G2)
Description. The prepetition claims in this class aggregate
approximately $1.2 billion and are the largest claims against the Genesis
Debtors. This class consists of the following prepetition claims:
16
Instrument Amount
----------------------------------------------------------------
Revolver $650,000,000
Term Loan A 110,445,000
Term Loan B 152,131,000
Term Loan C 151,378,000
Tranche II 40,000,000*
Swap termination claims 17,291,000
Synthetic Lease deficiency claims 28,236,000
--------------
Subtotal $1,149,481,000
Prepetition interest 43,979,000*
--------------
Total prepetition claims $1,193,460,000
* Paid as part of adequate protection payments pursuant to the cash
collateral order described in sections VI.C and VI.D, below.
The claims under the Revolver, Term Loan A, Term Loan B, Term
Loan C, and Tranche II arise under Genesis's Fourth Amended and Restated Credit
Agreement, dated as of August 20, 1999, among Genesis, certain subsidiary
Genesis Debtors named therein, Mellon Bank N.A., as administrative agent,
certain co-agents named therein, and the lenders participating in such
agreement. To secure those claims, the Genesis Debtors granted first priority
security interests in substantially all their assets and junior security
interests in certain properties already subject to liens.
The swap termination claims arise from the prepetition
termination of certain interest rate hedging agreements between Citibank, N.A.
and Genesis. Prior to the commencement of these chapter 11 cases, Genesis hedged
a portion of the floating interest rate risk associated with the obligations
under the credit agreement identified above. In accordance with that credit
agreement, Genesis's obligations under those hedging agreements were entitled to
share in the collateral securing the other Genesis Senior Lender Claims.
Citibank, N.A. asserted $28,548,000 of claims against Genesis due to the
termination of the hedging agreements. Genesis and Citibank, N.A. have agreed
that $17,290,962 of those claims share the same collateral as the other Genesis
Senior Lender Claims. The balance of the claims of Citibank, N.A. are part of
Class G4. That agreement was approved by the Bankruptcy Court on May 11, 2001.
Certain properties owned by the Genesis Debtors were financed
through a "synthetic lease." The claims of the lenders under that financing
arise under the Amended and Restated Synthetic Lease Financing Facility, dated
as of October 7, 1996, among Genesis, Genesis Eldercare Properties, Inc., Mellon
Bank N.A., as administrative agent, certain co-agents named therein, and the
lender parties thereto. For purposes of bankruptcy law, the "synthetic lease" is
treated as a loan rather than a true lease. The synthetic lease claims, which
total $78,236,000, are secured by the properties leased under the Synthetic
Lease Financing Facility referred to above, as well as by the same collateral
securing the other Genesis Senior Lender Claims. Accordingly, a portion of such
claims ($50,000,000) is classified in Subclass G1-17 (based on a negotiated
valuation of the properties securing such claims - see the discussion for Class
G1, above). The remaining portion of the claims (deficiency claims of
$28,236,000) are part of this Class G2. However, for purposes of the pro rata
distribution of property to this class, the deficiency claims of the synthetic
lease lenders shall be deemed to be $35,154,762.47. This amount reflects a
negotiated settlement among the holders of claims in Class G2.
17
At the commencement of these chapter 11 cases, the Bankruptcy
Court entered a cash collateral order which permitted the Genesis Debtors to
grant senior postpetition liens on their properties to the lenders under their
debtor in possession financing. The debtor in possession financing and the cash
collateral order are described in sections VI.C and VI.D, below. Under the cash
collateral order, the Genesis Debtors will have made approximately $195,979,000
of payments as of June 30, 2001, with respect to the Genesis Senior Lender
Claims. Based on the valuation of the Genesis Debtors presented in section IV,
below, these postpetition payments are assumed to apply against the prepetition
Genesis Senior Lender Claims described above, resulting in an outstanding
Genesis Senior Lender Claim of approximately $997,481,000. However, in the event
the Bankruptcy Court determines that the value of the Genesis Debtors is higher,
the Genesis Senior Lender Claims would include postpetition interest. In that
case, the postpetition payments would be allocated to repay the Tranche II
facility ($40,000,000), prepetition interest ($43,979,000), and approximately
$112,000,000 of postpetition interest at contractual nondefault rates. Other
than interest that accrued prior to the Commencement Date on overdue payments of
interest as of that date, no portion of the postpetition payments would be
allocated to compound interest.
The claims in Class G2 have the benefit of subordination
provisions in the various instruments representing the claims in Class G5
(Genesis Senior Subordinated Note Claims). The effect of these subordination
provisions is to require that distributions that would otherwise be made to
Class G5 be made to the holders of Genesis Senior Lender Claims. The Plan of
Reorganization does not give effect to those provisions, and the distribution of
New Common Stock and New Warrants to the holders of claims in Class G5 (Genesis
Senior Subordinated Note Claims) represents a negotiated settlement between the
official committee of unsecured creditors in the Genesis reorganization cases
and the holders of the Genesis Senior Lender Claims.
Treatment. Class G2 will receive
o cash in an amount equal to the interest on the Genesis
Senior Lender Claims at contractual, nondefault rates, as
paid pursuant to certain cash collateral and adequate
protection stipulations described in section VI.D.1, below
(as of June 30, 2001, such amount is $195,979,000)
o New Senior Notes in the principal amount of $94,923,000
o shares of New Convertible Preferred Stock with an
aggregate liquidation preference of $31,000,000
o approximately 74.35% of the New Common Stock
The allocation of New Common Stock is also subject to dilution based on future
issuances of additional shares of New Common Stock, including in connection with
the conversion of the New Convertible Preferred Stock, the exercise of the New
Warrants, and the issuance of restricted shares of New Common Stock and options
under the New Management Incentive Plan for key employees. Distributions to
Class G2 will be made to the individual holders of the Genesis Senior Lender
Claims in such denominations and registered in the names of the holders as
Mellon Bank, N.A. shall have directed in writing.
18
3. Genesis Priority Non-Tax Claims (Class G3)
Description. The claims in Class G3 are the types of claims
identified in section 507(a) of the Bankruptcy Code that are entitled to
priority in payment (other than administrative expense claims and priority tax
claims). For the Genesis Debtors, these claims relate primarily to prepetition
wages and employee benefit plan contributions that had not yet been paid as of
the Commencement Date. The Genesis Debtors believe that all of these claims have
already been paid pursuant to an order entered by the Bankruptcy Court on the
Commencement Date.
Treatment. Claims in Class G3 that have not already been paid
will be paid on the later of (i) the Effective Date, (ii) the date such claim
becomes allowed, and (iii) the date for payment provided by any agreement or
understanding between the parties, except to the extent the holders of such
claims agree to a different treatment.
4. Genesis General Unsecured Claims (Class G4)
Description. The aggregate amount of general unsecured claims
filed against the Genesis Debtors on or before the December 19, 2000 bar date
was approximately $1,131,655,000. However, the Genesis Debtors estimate that the
aggregate amount of allowed claims in Class G4 will be approximately
$80,069,000, after deducting duplicate claims, claims not supported by the
Genesis Debtors' books and records, claims that are covered by insurance, and
claims that are subject to other objections. The claims in Class G4 consist of
the claims of suppliers and other vendors, landlords with prepetition rent
claims and/or claims based on rejection of leases, personal injury and other
litigation claimants to the extent not covered by insurance, parties to
contracts with the Genesis Debtors that are being rejected, deficiency claims of
mortgage lenders, the unsecured portion of the claims arising from the
prepetition termination of certain interest rate hedging agreements, claims (if
any) arising from the remaining qui tam suit identified in section V.D.6, below,
contingent (as of the date hereof) claims relating to bonds executed on behalf
of the Debtors by Liberty Bond Services, and other general unsecured claims. The
following table lists the types of claims and the estimated amount in these
groups to the extent material.
Type of claim Amount
------------------------------------------------------------------------
Suppliers and vendors (estimated amount) $51,329,000
Mortgage deficiency claims 7,483,000
Swap deficiency claims 11,257,000
Other (including estimate of rejection damages) 10,000,000
-----------
Total $80,069,000
For purposes of the initial distribution, and as part of the distribution
mechanism under the Plan for holders of claims in Classes G4 and G5, the Debtors
will be required to estimate the total amount of claims that will be allowed.
See section V.D.5, below.
For completeness, this class also includes claims covered by
insurance in whole or in part maintained by the Genesis Debtors. However, such
claims will be entitled to share in the treatment of this class only to the
extent they are not covered by such insurance. See section V.D.7, below. The
Genesis Debtors believe that their professional liability insurance is
sufficient to cover all allowed claims for personal injury or wrongful death.
19
Treatment. The holders of claims in Class G4 which are
uninsured in whole or in part will share 4.12% of the New Common Stock and
62.19% of the New Warrants with the holders of claims in Class G5. Based on the
books and records of the Genesis Debtors, the holders of claims in Class G4 will
receive
o approximately 0.71% of the New Common Stock
o 10.65% of the New Warrants
Holders of claims in this class that are covered by insurance in whole or in
part will be paid in the ordinary course of the business of the Reorganized
Debtors to the extent of such insurance, and to the extent that these claims are
not covered by insurance will be treated in the same manner as the holders of
uninsured claims in this class. All shares of New Common Stock are subject to
dilution based on future issuances of additional shares of New Common Stock,
including in connection with the conversion of the New Convertible Preferred
Stock, the exercise of the New Warrants, and the issuance of restricted shares
of New Common Stock and options under the New Management Incentive Plan for key
employees.
5. Genesis Senior Subordinated Note Claims (Class G5)
Description. The claims in this class total $387,425,000 and
consist of the principal and interest accrued and unpaid through the
Commencement Date under four separate series of senior subordinated notes issued
by Genesis. The following table describes the notes:
Subordinated Note Amount
----------------------------------------------------------------------
9-3/4% Senior Subordinated Notes due 2005 $120,000,000
Indenture, dated as of June 15, 1995,
between Genesis and State Street Bank and
Trust Company, as trustee
9-1/4% Senior Subordinated Notes due 2006 125,000,000
Indenture, dated as of October 7, 1996,
between Genesis and State Street Bank and
Trust Company, as successor trustee
9-7/8% Senior Subordinated Notes due 2009 120,920,000*
Indenture, dated as of December 23, 1998,
between Genesis and The Bank of New York,
as trustee
9-3/8% Senior Subordinated Notes due 2005 1,590,000
Indenture, dated as of September 15, 1995,
between Grancare, Inc. and Marine Midland
Bank, as trustee
Plus prepetition interest 19,915,000
------------
Total $387,425,000
*$125,000,000 face amount less $4,080,000 of original issue discount
The claims in Class G5 are contractually subordinated to the Genesis Senior
Lender Claims in Class G2.
20
Treatment. The holders of claims in Class G5 will share 4.12%
of the New Common Stock and 62.19% of the New Warrants with the holders of
claims in Class G4. Based on the books and records of the Genesis Debtors, Class
G5 will receive
o approximately 3.41% of the New Common Stock
o 51.54% of the New Warrants
All shares of New Common Stock are subject to dilution based on future issuances
of additional shares of New Common Stock, including in connection with the
conversion of the New Convertible Preferred Stock, the exercise of the New
Warrants, and the issuance of restricted shares of New Common Stock and options
under the New Management Incentive Plan for key employees.
6. Genesis Intercompany Claims (Class G6)
Description. The Genesis Debtors record transfers of funds
among themselves as intercompany claims. For example, funds raised by Genesis
through the issuance of securities to the public (both stock and debt), as well
as amounts borrowed under its prepetition credit agreement, have been used to
fund and build the operations of many of the other Genesis Debtors. In addition,
funds earned by the subsidiaries of Genesis have been transferred to Genesis as
partial repayment of such advances.
Treatment. For purposes of the Plan, these claims are
unimpaired.
7. Genesis Punitive Damage Claims (Class G7)
Description. Class G7 consists of any claim against any of the
Genesis Debtors for any fine, penalty, forfeiture, or attorneys' fees (but only
to the extent such attorneys' fees are punitive in nature), or for multiple,
exemplary, or punitive damages, to the extent that such fine, penalty,
forfeiture, attorneys' fees, or damages is not compensation for actual pecuniary
loss suffered by the holder of such claim and not statutorily prescribed. In
general, punitive or exemplary damage claims are intended to punish or make an
example of a wrongdoer. However, in the context of an insolvent entity, such as
the Genesis Debtors, the enforcement of punitive claims would have the effect of
punishing unsecured creditors by diluting the ultimate recovery to all unsecured
creditors. Moreover, punitive and exemplary damage claims differ significantly
from other general unsecured claims which are based upon pecuniary losses. For
these reasons, such claims have been classified separately from other unsecured
claims. The Genesis Debtors do not believe that there will be any allowed claims
in this class. However, several proofs of claim have been filed concerning
personal injury or wrongful death claims that include punitive or exemplary
damage amounts and this class has been included in the Plan for completeness. In
addition, the AGE Institute has asserted unspecified punitive and exemplary
damages in connection with certain counterclaims it has asserted against certain
Genesis Debtors in response to the commencement of an adversary proceeding
commenced against it.
Treatment. To the extent there are any allowed claims in this
class, they are subordinated to the claims in other classes. No property will be
distributed to the holders of any allowed claims in this class from the Genesis
Debtors' estates. Solely, to the extent these claims are covered by applicable
insurance policies, and such insurance is permitted under state law, holders of
allowed claims in this class shall receive insurance proceeds.
21
8. Genesis Series G Preferred Stock Interests (Class G8)
Description. Class G8 consists of the equity interests
represented by the outstanding shares of Genesis's Series G Cumulative
Convertible Preferred Stock. This issue consists of 586,240 shares of preferred
stock issued to HCR Manor Care, Inc. in connection with Genesis's 1998
acquisition of the pharmacy business of that company. This class also includes
any claims that HCR Manor Care, Inc. has or may assert against Genesis in
connection with the issuance of this preferred stock, whether based on state or
federal securities laws or otherwise (although no proof of claim for such
amounts has been filed).
Treatment. Holders of equity interests in Class G8 will
receive no property under the Plan, and these equity interests will be cancelled
on the Effective Date.
9. Genesis Series H Preferred Stock Interests (Class G9)
Description. Class G9 consists of the equity interests
represented by the outstanding shares of Genesis's Series H Senior Convertible
Participating Cumulative Preferred Stock. This issue consists of 24,369 shares
of preferred stock issued to The Cypress Group and certain of its affiliates,
TPG Partners II, L.P., and Nazem, Inc. in connection with a 1999 restructuring
of Genesis's obligations. That restructuring is described in detail in Genesis's
Form 10-K for the fiscal year ended September 30, 2000.
Treatment. Holders of equity interests in Class G9 will
receive no property under the Plan and these equity interests will be cancelled
on the Effective Date.
10. Genesis Series I Preferred Stock Interests (Class G10)
Description. Class G10 consists of the equity interests
represented by the outstanding shares of Genesis's Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock. This issue consists of
17,631 shares of preferred stock issued to The Cypress Group and certain of its
affiliates, TPG Partners II, L.P., and Nazem, Inc. in connection with a 1999
restructuring of Genesis's obligations. That restructuring is described in
detail in Genesis's Form 10-K for the fiscal year ended September 30, 2000.
Treatment. Holders of equity interests in Class G10 will
receive no property under the Plan, and these equity interests will be cancelled
on the Effective Date.
11. Genesis Common Stock Interests (Class G11)
Description. This class consists of the common equity
interests in Genesis represented by Genesis's outstanding 48,641,456 shares of
common stock, $0.02 par value. The class includes all shares owned by affiliates
or members of the management of the Genesis Debtors and any outstanding options,
warrants, or rights to purchase such stock, including conversion or exchange
rights under the Series G Cumulative Convertible Preferred Stock, the Series H
Senior Convertible Participating Cumulative Preferred Stock, and the Series I
Senior Convertible Exchangeable Participating Cumulative Preferred Stock.
Treatment. Holders of equity interests in Class G11 will
receive no property under the Plan, and these equity interests will be cancelled
on the Effective Date.
22
F. Description of the Multicare Classes
Unless otherwise indicated, the characteristics and amount of
the claims or equity interests in the following classes are based on the books
and records of the Multicare Debtors. Each subclass is treated as a separate
class for purposes of the Plan of Reorganization and the Bankruptcy Code.
However, the following discussion may refer to a group of subclasses as a single
class for ease of reference.
1. Multicare Other Secured Claims (Class M1)
Description. Class M1 is a group of subclasses, with aggregate
allowed secured claims of approximately $26,318,000 as of the date of this
Disclosure Statement (exclusive of interest and net of reinstatement payments).
For the most part, claims in these subclasses are mortgage financings of various
properties owned and/or operated by the Multicare Debtors and equipment
financings of various types. Each subclass represents a separate mortgage or
collateral pool. The following table describes the material subclasses in Class
M1.
The Plan of Reorganization reinstates the claims in Subclasses
M1-1 through M1-6. The aggregate cost to cure defaults and reinstate the debt in
these subclasses is projected to be $3,522,000 as of June 30, 2001. These claims
are not impaired, and the holders of the debt are not entitled to vote to accept
or reject the Plan. Subclass M1-7 is impaired and is entitled to vote. The
following table identifies and summarizes the treatment for each of the material
subclasses in Class M1. The percentage recovery indicated in the following table
is based on the value of the collateral securing these obligations.
Treatment of Subclasses
- -------------------------------------------------------------------------------------------------------------------
Subclass Description Entitled Estimated
Collateral (lender or guarantor) Treatment to Vote Recovery
- -------------------------------------------------------------------------------------------------------------------
M1-1 Rosewood Center (Tyler County, WV) $825,000 mortgage reinstated No 100%
- -------------------------------------------------------------------------------------------------------------------
M1-2 Sisterville Center (Care Haven) $1,960,000 mortgage reinstated No 100%
(Tyler County, WV)
- -------------------------------------------------------------------------------------------------------------------
M1-3 Raleigh Center (WV Hospital $1,840,000 mortgage bonds reinstated No 100%
Authority)
- -------------------------------------------------------------------------------------------------------------------
M1-4 Westford Center (HUD) $6,637,992 mortgage reinstated No 100%
- -------------------------------------------------------------------------------------------------------------------
M1-5 Willows Center $11,900,815 mortgage reinstated No 100%
Cedar Ridge Center
Dawn View Center
(MediTrust)
- -------------------------------------------------------------------------------------------------------------------
M1-6 Teays Valley (West Virginia Hospital $3,665,000 mortgage reinstated No 100%
Authority)
- -------------------------------------------------------------------------------------------------------------------
M1-7 Point Pleasant (Mason County WV) Return of collateral Yes 100%*
Outstanding Mortgage: $1,535,000
- -------------------------------------------------------------------------------------------------------------------
* Based on a valuation of the collateral securing these claims.
Section 506(a) of the Bankruptcy Code provides that a claim is
secured only to the extent of the value of the underlying collateral.
23
In addition to Subclasses M1-1 through M1-7, there are other
subclasses of miscellaneous secured claims of approximately $71,000 against the
Multicare Debtors, each of which will be treated as a separate class. Under the
Plan of Reorganization, either these claims will be reinstated or the
Reorganized Debtors will return the property securing such claim. The reinstated
claims are not impaired, and the holders are not entitled to vote to accept or
reject the Plan of Reorganization.
2. Multicare Senior Bank Claims (Class M2)
Description. The prepetition claims in this class aggregate
approximately $443,400,000 and are the largest claims against the Multicare
Debtors. This class consists of the following prepetition claims:
Instrument Amount
----------------------------------------------- --------------------
Revolver $112,700,000
Term Loan A 116,400,000
Term Loan B 145,800,000
Term Loan C 49,100,000
--------------------
Subtotal $424,000,000
Prepetition interest 19,400,000
--------------------
Total prepetition claims $443,400,000
The claims under the Revolver, Term Loan A, Term Loan B, and
Term Loan C arise under Multicare's Fourth Amended and Restated Credit
Agreement, dated as of August 20, 1999, among The Multicare Companies, Inc.,
certain subsidiary Multicare Debtors named therein, Mellon Bank N.A., as
administrative agent, certain co-agents named therein, and the lenders
participating in such agreement. To secure those claims, the Multicare Debtors
granted first priority security interests in substantially all their assets and
junior security interests in certain properties already subject to liens.
The claims in Class M2 have the benefit of subordination
provisions in the instruments representing the claims in Class M5 (Multicare
Senior Subordinated Note Claims). The effect of these subordination provisions
is to require that distributions that would otherwise be made to Class M5 be
made to the holders of Multicare Senior Lender Claims. The Plan of
Reorganization does not give effect to those provisions, and the distribution of
New Common Stock and New Warrants to the holders of claims in Class M5
(Multicare Senior Subordinated Note Claims) represents a negotiated settlement
between the official committee of unsecured creditors in the Multicare
reorganization cases and the holders of the Multicare Senior Lender Claims.
Treatment. Class M2 will be entitled to receive 88.37% of the
shares of the New Multicare Stock. However, approval of the Plan will implement
the Plan of Merger, under which all such stock will be deemed to be immediately
exchanged for
o $25,000,000 in cash
o New Senior Notes in the principal amount of $147,682,000
o shares of New Convertible Preferred Stock with an
aggregate liquidation preference of $11,600,000
24
o approximately 19.02% of the New Common Stock
The allocation of New Common Stock is also subject to dilution based on future
issuances of additional shares of New Common Stock, including in connection with
the conversion of the New Convertible Preferred Stock, the exercise of the New
Warrants, and the issuance of restricted shares of New Common Stock and options
under the New Management Incentive Plan for key employees. Distributions to
Class M2 will be made to the individual holders of the Multicare Senior Lender
Claims in such denominations and registered in the names of the holders as
Mellon Bank, N.A. shall have directed in writing.
3. Multicare Priority Non-Tax Claims (Class M3)
Description. The claims in Class M3 are the types of claims
identified in section 507(a) of the Bankruptcy Code that are entitled to
priority in payment (other than administrative expense claims and priority tax
claims). For the Multicare Debtors, these claims relate primarily to prepetition
wages and employee benefit plan contributions that had not yet been paid as of
the Commencement Date. The Multicare Debtors believe that all of these claims
have already been paid pursuant to an order entered by the Bankruptcy Court on
the Commencement Date.
Treatment. Claims in Class M3 that have not already been paid
will be paid on the later of (i) the Effective Date, (ii) the date such claim
becomes allowed, and (iii) the date for payment provided by any agreement or
understanding between the parties, except to the extent the holders of such
claims agree to a different treatment.
4. Multicare General Unsecured Claims (Class M4)
Description. The aggregate amount of general unsecured claims
filed against the Multicare Debtors on or before the December 19, 2000 bar date
was approximately $1,702,490,000. However, the Multicare Debtors estimate that
the aggregate amount of allowed claims in Class M4 will be approximately
$26,439,000, after deducting duplicate claims, claims not supported by the
Multicare Debtors' books and records, claims covered by insurance, and claims
that are subject to other objections. The claims in Class M4 consist of the
claims of suppliers and other vendors, landlords with prepetition rent claims
and/or claims based on rejection of leases, personal injury and other litigation
claimants to the extent not covered by insurance, parties to contracts with the
Multicare Debtors that are being rejected, deficiency claims of mortgage
lenders, contingent (as of the date hereof) claims relating to bonds executed on
behalf of the Debtors by Liberty Bond Services, and other general unsecured
claims. For completeness, this class also includes claims covered by insurance
in whole or in part maintained by or on behalf of the Multicare Debtors.
However, such claims will be entitled to share in the treatment of this class
only to the extent they are not covered by such insurance. The Multicare Debtors
believe that their professional liability insurance is sufficient to cover all
allowed claims for personal injury or wrongful death. See section V.D.7, below.
For purposes of the initial distribution, and as part of the distribution
mechanism under the Plan for holders of claims in Classes M4 and M5, the Debtors
will be required to estimate the total amount of claims that will be allowed.
See section V.D.5, below.
25
Treatment. The holders of claims in Class M4 which are
uninsured in whole or in part will share 11.63% of the shares of New Multicare
Stock with the holders of claims in Class M5. Approval of the Plan will
implement the Plan of Merger, under which all such stock will be deemed to be
immediately exchanged for 2.50% of the New Common Stock and 37.81% of the New
Warrants, which will be shared with the holders of claims in Class M5 on a pro
rata basis. Based on the books and records of the Multicare Debtors, Class M4
will receive
o approximately 0.23% of the New Common Stock
o 3.52% of the New Warrants
Holders of claims in this class that are covered by insurance will be paid in
the ordinary course of the business of the Reorganized Debtors to the extent of
such insurance, and to the extent that these claims are not covered by insurance
will be treated in the same manner as the holders of uninsured claims in this
class. All shares of New Common Stock are subject to dilution based on future
issuances of additional shares of New Common Stock, including in connection with
the conversion of the New Convertible Preferred Stock, the exercise of the New
Warrants, and the issuance of restricted shares of New Common Stock and options
under the New Management Incentive Plan for key employees.
5. Multicare Senior Subordinated Note Claims (Class M5)
Description. The claims in this class total $257,817,000 and
consist of the principal and interest accrued and unpaid through the
Commencement Date, less unamortized original issue discount, under Multicare's
9% Senior Subordinated Notes due 2007, issued and governed by the Indenture,
dated as of August 11, 1997, between Multicare and PNC Bank, National
Association, as trustee. The claims in Class M5 are contractually subordinated
to the Multicare Senior Lender Claims in Class M2.
Treatment. The holders of claims in Class M5 will share 11.63%
of the shares of New Multicare Stock with the holders of claims in Class M4.
Approval of the Plan will implement the Plan of Merger, under which all such
stock will be deemed to be immediately exchanged for 2.50% of the New Common
Stock and 37.81% of the New Warrants, which will be shared with the holders of
claims in Class M4 on a pro rata basis. Based on the books and records of the
Multicare Debtors, Class M5 will receive
o approximately 2.27% of the New Common Stock
o 34.29% of the New Warrants
All shares of New Common Stock are subject to dilution based on future issuances
of additional shares of New Common Stock, including in connection with the
conversion of the New Convertible Preferred Stock, the exercise of the New
Warrants, and the issuance of restricted shares of New Common Stock and options
under the New Management Incentive Plan for key employees.
6. Multicare Intercompany Claims (Class M6)
Description. The Multicare Debtors record transfers of funds
among themselves as intercompany claims. For example, funds borrowed by
Multicare under its prepetition credit agreement have been used to fund and
build the operations of many of the other Multicare Debtors. In addition, funds
earned by the subsidiaries of Multicare have been transferred to Multicare as
partial repayment of such advances.
Treatment. For purposes of the Plan, these claims are
unimpaired.
26
7. Multicare Punitive Damage Claims (Class M7)
Description. Class M7 consists of any claim against any of the
Multicare Debtors for any fine, penalty, forfeiture, or attorneys' fees (but
only to the extent such attorneys' fees are punitive in nature), or for
multiple, exemplary, or punitive damages, to the extent that such fine, penalty,
forfeiture, attorneys' fees, or damages is not compensation for actual pecuniary
loss suffered by the holder of such claim and not statutorily prescribed. In
general, punitive or exemplary damage claims are intended to punish or make an
example of a wrongdoer. However, in the context of an insolvent entity, such as
the Multicare Debtors, the enforcement of punitive claims would have the effect
of punishing unsecured creditors by diluting the ultimate recovery to all
unsecured creditors. Moreover, punitive or exemplary damage claims differ
significantly from other general unsecured claims which are based upon pecuniary
losses. For these reasons, such claims have been classified separately from
other unsecured claims. The Multicare Debtors do not believe that there will be
any allowed claims in this class. However, several proofs of claim have been
filed concerning personal injury or wrongful death claims that include punitive
or exemplary damage amounts and this class has been included in the Plan for
completeness.
Treatment. To the extent there are any allowed claims in this
class, they are subordinated to the claims in other classes. No property will be
distributed to the holders of any allowed claims in this class from the
Multicare Debtors' estates. Solely, to the extent these claims are covered by
applicable insurance policies, and such insurance is permitted under state law,
holders of allowed claims in this class shall receive insurance proceeds.
8. Multicare Common Stock Equity Interests (Class M8)
Description. This class consists of all the common equity
interests in Genesis ElderCare Corp., including any outstanding options,
warrants, or rights to acquire such equity interests, represented by that
company's 745,000 outstanding shares of common stock, $0.01 par value, of which
approximately 43.6% is currently owned by Genesis.
Treatment. Holders of equity interests in Class M8 will
receive no property under the Plan, and these equity interests will be cancelled
on the Effective Date.
G. Administrative Expenses for the Genesis Debtors and the Multicare
Debtors
In order to confirm the Plan of Reorganization, Administrative
Expense Claims and Priority Tax Claims must be paid in full or in a manner
otherwise agreeable to the holders of those claims. Administrative expenses are
the actual and necessary costs and expenses of the chapter 11 cases of the
Genesis Debtors and the Multicare Debtors. Those expenses include, but are not
limited to, postpetition salaries and other benefits for employees, postpetition
rent for facilities and offices, amounts owed to vendors providing goods and
services during the chapter 11 cases, tax obligations incurred after the
commencement of the chapter 11 cases, and certain statutory fees and expenses.
Other administrative expenses include the actual, reasonable, and necessary
professional fees and expenses of the professionals retained by the Genesis
Debtors, the Multicare Debtors, and their respective creditors' committees, as
well as the obligations outstanding under the separate debtor in possession
financing agreements for the Genesis Debtors and the Multicare Debtors.
27
Consistent with the requirements of the Bankruptcy Code, the
Plan of Reorganization generally provides for allowed Administrative Expense
Claims to be paid in full on the later of the Effective Date and the first
business day after the date that is thirty (30) days after the date such
Administrative Expense Claim becomes allowed, except for Administrative Expense
Claims relating to ordinary course of business transactions or for money
borrowed, both of which will be paid in accordance with the past practice of the
Debtors and the terms of the agreements governing such obligations.
Administrative Expense Claims relating to compensation of the professionals
retained by the Genesis Debtors, the Multicare Debtors, their respective
creditors' committees, or for the reimbursement of expenses for certain members
of their respective creditors' committees will, unless otherwise agreed by the
claimant, be paid on the later of the Effective Date and the date on which an
order allowing such Administrative Expense Claim is entered.
Allowed tax claims entitled to priority under the Bankruptcy
Code will be paid either in full on the later of the Effective Date and the
first business day after the date that is thirty (30) days after the date such
claim becomes allowed or with interest at a fixed annual rate equal to eight
percent (8%) over a period not exceeding six (6) years from the date of
assessment of the tax.
1. Debtor in Possession Financing
The Genesis Debtors estimate that there will be approximately
$200,000,000 outstanding under their debtor in possession financing agreements
on the Effective Date. Of that amount, approximately $2,500,000 will relate to
outstanding letters of credit. With the exception of those letters of credit,
obligations under the debtor in possession financing agreements will be paid on
the Effective Date. On the Effective Date, outstanding letters of credit will
either be replaced or will remain outstanding and will be backed up with new
letters of credit or cash collateralized on the Effective Date. The Multicare
Debtors do not expect that any amounts will be outstanding under their debtor in
possession financing agreements on the Effective Date, other than approximately
$500,000 of letters of credit, which will either be replaced or will remain
outstanding and will be backed up with new letters of credit or cash
collateralized on the Effective Date.
2. Federal Medicare Claims
The Medicare fiscal intermediaries for the Genesis Debtors and
the Multicare Debtors have determined that the Debtors have received Medicare
overpayments. The Medicare statute, regulations, and procedures require the
fiscal intermediaries to adjust Medicare payments to recover such overpayments
upon determining those overpayments. However, because of the bankruptcy, many of
these determined overpayments remain outstanding. In addition, the Centers for
Medicare and Medicaid Services (CMS) f/k/a the Health Care Financing
Administration (HCFA) has imposed civil money penalties (CMPs) on certain of the
Debtors that remain unpaid to date. CMS asserts no other claims against the
Debtors.
CMS and the Debtors agree that total determined overpayments
have not taken into account underpayments that Genesis and Multicare believe are
due under the Medicare program. The Debtors expect that these determined
overpayments, and CMPs, will be reduced to zero, as of the effective date of the
confirmation of the Plan of Reorganization, by application of underpayments.
After the effective date, the Debtors will pay all Medicare determined
overpayments and CMPs, and receive all determined underpayments, in the ordinary
course of their businesses, in accordance with the Medicare statute,
regulations, and procedures.
28
Separately, the Genesis Debtors have entered into an agreement
to resolve four pending civil qui tam suits filed by private citizens under the
federal False Claims Act, 31 U.S.C. ss. 3729 et seq. relating to alleged
overbilling to the federal Medicare program. The terms of that settlement, which
involve a payment of approximately $2.1 million to the federal government, are
described in section II.K.1, below.
3. State Medicaid Claims
Certain of the Genesis Debtors have accrued credits or
overpayments due to various state Medicaid programs. The aggregate amount of
such credits and overpayments is approximately $8,000,000. As part of the
assumption of certain agreements and/or programs related to participation in the
Medicaid programs in those states, the Genesis Debtors expect to make such
payments in the ordinary course of their businesses.
4. Fees and Expenses of Professionals
The Genesis Debtors estimate that the fees and expenses of the
various professionals in their chapter 11 cases will be approximately
$8,000,000, including amounts paid on an interim basis during the chapter 11
cases. The Multicare Debtors estimate that the fees and expenses of the various
professionals in their chapter 11 cases will be approximately $10,000,000,
including amounts paid on an interim basis during the chapter 11 cases.
5. Payments to Employees
The Bankruptcy Court has approved retention programs for key
employees of the Genesis Debtors and has approved the reimbursement of a portion
of those expenses from the estates of the Multicare Debtors. Under those
programs, approximately $4.4 million in retention payments has not yet been made
and approximately $2.1 million in plan of reorganization incentive payments will
be made (assuming an Effective Date of August 31, 2001).
6. Fees and Expenses of Indenture Trustees
The Debtors estimate that the fees and expenses of the
trustees under the indentures described in sections II.E.5 and II.F.5, above,
including the fees and expenses of any professionals retained by such indenture
trustees, assuming an Effective Date of August 31, 2001, will be approximately
$280,000.
H. Securities to be Issued Under the Plan of Reorganization
1. New Senior Notes
Reorganized Genesis will issue $242,605,000 of New Senior
Notes as part of the Plan. The New Senior Notes will bear interest at LIBOR plus
5.0%. The New Senior Notes will mature 6 months after the term note portion of
the exit financing, which is expected to be 5-1/2 years after the Effective
Date. The New Senior Notes will amortize 1% each year and will be secured by a
junior lien on real property and related fixtures of substantially all the
Debtors, subject to the liens granted to the lenders providing exit financing
and any other pre-existing liens on such property. The liens granted to secure
the New Senior Notes will also secure, on an equal and ratable basis, the claims
in Subclass G1-17 and the liens of the property securing the claims in Subclass
G1-17 will secure the New Senior Notes, on a junior and subordinate basis. The
New Senior Notes will be governed by an Indenture, a copy of which is part of
the Plan Supplement. The Indenture will include covenants that are standard for
29
public debt. Reorganized Genesis may prepay all or a portion of the New Senior
Notes at any time without penalty (although such prepayment may be restricted by
the terms of the exit financing). The New Senior Notes will be guarantied by
substantially all the Debtors. The only Debtors excluded from the liens and
guaranties are ones that have obligations which are being reinstated under the
Plan if the terms of those obligations would prohibit such liens and/or
guaranties. See sections II.E.1 and II.F.1, above, for a discussion of
reinstated classes, and section VIII.C, below, for a discussion of the exit
financing.
The Debtors used the following methodology to allocate the New
Senior Notes between the holders of the Genesis Senior Lender Claims and the
holders of the Multicare Senior Lender Claims. After consultation with their
respective advisors and with prospective exit financing lenders, the Debtors
determined that the overall debt capacity of the combined companies should not
exceed $624,000,000. The Debtors allocated this debt capacity pro rata, based on
the respective adjusted year 2001 EBITDA projections for the Genesis Debtors and
the Multicare Debtors, to determine an overall debt capacity of $440,000,000 for
the Genesis Debtors and $184,000,000 for the Multicare Debtors. The Genesis
Debtors then deducted their aggregate miscellaneous secured claims (Class G1)
and the amount of exit financing needed to pay their administrative expenses
from their overall debt capacity allocation. After those calculations, the
Genesis Debtors would have a remaining debt capacity of $94,923,000. The
Multicare Debtors performed a similar calculation, resulting in a remaining debt
capacity of $147,682,000. These amounts were used to allocate the New Senior
Notes.
2. New Convertible Preferred Stock
On the Effective Date, Reorganized Genesis will issue
convertible preferred stock with a liquidation preference of $42,600,000. The
New Convertible Preferred Stock will accrue dividends at the annual rate of 6%,
payable by Reorganized Genesis in additional shares of New Convertible Preferred
Stock. The New Convertible Preferred Stock is convertible at any time, at the
option of the holders, into shares of New Common Stock. Reorganized Genesis will
have the right to convert all the shares of New Convertible Preferred Stock to
shares of New Common Stock at any time after the first anniversary of the
Effective Date when the average trading price for a share of New Common Stock
over the immediately preceding 30 calendar days is $30.00 or more. In either
case, the conversion rate will be $20.33 of liquidation preference for each
share of New Common Stock. Reorganized Genesis will have the right to redeem the
New Convertible Preferred Stock at any time by giving 30 days notice to the
holders (although such redemptions may be restricted by the terms of the exit
financing). The holders may convert their shares prior to the expiration of that
30-day period. The New Convertible Preferred Stock is also subject to mandatory
redemption on the 9th anniversary of the Effective Date. It will also be subject
to mandatory redemption from the actual cash received by Reorganized Genesis
from the following: (i) the sale of certain real and personal property, as
identified in the Plan Supplement; (ii) the exercise of the New Warrants; (iii)
any settlement with the federal government in connection with certain
administrative appeals identified in the Plan Supplement; (iv) the settlement or
other resolution of the claims of the Genesis Debtors against the AGE Institute
and its related entities; and (v) the issuance of any equity (other than
exercise of the New Warrants) to the extent that such proceeds are not required
to be a mandatory prepayment pursuant to the terms of the exit financing
required by the Plan. Although the recovery of any cash from the AGE Institute
is uncertain (the AGE Institute has asserted that there will be no recovery),
the receipt of such amounts is not needed to meet the redemption requirements
for the New Convertible Preferred Stock. See section V.D.5, below. Reorganized
Genesis will give 30 days notice to the holders of any mandatory redemption, and
holders of the New Convertible Preferred Stock may convert their shares prior to
the expiration of that period.
30
3. New Common Stock
On the Effective Date, Reorganized Genesis will issue
41,000,000 shares of its New Common Stock, par value $0.01. The shares will be
issued to the holders of claims in Classes G2, G4, G5, M2, M4, and M5. The
following table shows the allocation among these classes:
Shares of New % of New
Class Common Stock Common Stock
---------------------------------------------------------------------------------------
G2 (Genesis Senior Lender Claims) 30,485,079 74.35%
G4 (Genesis General Unsecured Claims) 289,305 0.71%
G5 (Genesis Senior Subordinated Claims) 1,399,842 3.41%
--------------------------------------
Subtotal 32,174,226 78.47%
M2 (Multicare Senior Lender Claims) 7,798,917 19.02%
M4 (Multicare General Unsecured Claims) 95,509 0.23%
M5 (Multicare Senior Subordinated Claims) 931,348 2.27%
--------------------------------------
Subtotal 8,825,774 21.53%
--------------------------------------
Total 41,000,000 100.00%
The New Common Stock will vote as a single class for the
election of directors and on other matters that require shareholder approval and
will be subject to dilution for the issuance of additional shares of New Common
Stock, including in connection with the conversion of the New Convertible
Preferred Stock, the exercise of the New Warrants, and the issuance of
restricted shares of New Common Stock and options under the New Management
Incentive Plan for key employees. The Management Incentive Plan is described in
section VIII.F, below. The Plan of Reorganization will provide for authorization
of sufficient shares of New Common Stock to accomplish the purposes described
hereunder.
4. New Warrants
On the Effective Date, Reorganized Genesis will issue warrants
to purchase 4,559,475 shares of New Common Stock. This represents approximately
11.12% of the New Common Stock issued on the Effective Date, before dilution for
stock issuances or the exercise of options under the New Management Incentive
Plan for key employees described in section VIII.F, below. The New Warrants will
expire on the first anniversary of the Effective Date and will have an exercise
price of $20.33 per share of New Common Stock. The current valuation of the New
Warrants of between $16,000,000 and $23,000,000 is based on (i) a volatility of
40% - 60%, (ii) a market price of $20.33 per share for the New Common Stock,
(iii) the exercise price of $20.33 for the New Warrants, (iv) a one-year
expiration for the New Warrants, and (v) a risk free rate of 3.6%.
5. New Multicare Common Stock
On the Effective Date, Multicare will issue shares of its new
common stock to the holders of claims in Classes M2, M4, and M5. This stock will
not be distributed. Instead, it will be exchanged for New Senior Notes, New
Convertible Preferred Stock, New Common Stock, and New Warrants in accordance
with the Plan and the terms of the Plan of Merger.
31
I. Deemed Consolidation of Certain Debtors for Purposes of the Plan
For purposes of distributions to Classes G2, G4, and G5, the
Genesis Debtors will be considered to be a single legal entity. Similarly, for
purposes of distributions to Classes M2, M4, and M5, the Multicare Debtors will
be considered to be a single legal entity (although separate from the Genesis
Debtors). This "deemed" consolidation has three major effects. First, it
eliminates intercompany claims from the treatment scheme. Second, it eliminates
guaranties of the obligations of one Genesis Debtor by another Genesis Debtor
and one Multicare Debtor by another Multicare Debtor. Finally, each claim filed
in Classes G2, G4, and G5 against any of the Genesis Debtors will be considered
to be a single claim against the consolidated Genesis Debtors and each claim
filed in Classes M2, M4, and M5 against any of the Multicare Debtors will be
considered to be a single claim against the consolidated Multicare Debtors.
The deemed consolidation will not affect the legal and
organizational structure of the Reorganized Debtors, the modification or
reinstatement of claims in Classes G1 and M1 (with the legal, equitable, and
contractual rights to which the holder of any such claim in Glass G1 or M1 being
reinstated and unimpaired under the Plan being left unaltered), guaranties or
the grants of collateral in connection with any financing entered into, or New
Senior Notes issued, on the Effective Date or pursuant to any contract or lease
that is assumed under the Plan, or distributions out of any insurance policies
or proceeds of policies. The foregoing deemed consolidation of the Genesis
Debtors will result in the deemed elimination of multiple and duplicative
claims, joint and several liability claims and guaranties, and the payment of
allowed claims against each of the Genesis Debtors from a common fund. The
deemed consolidation of the Multicare Debtors will have the same effect in their
respective chapter 11 cases.
Subject to the proviso contained at the end of this section,
the Genesis Debtors and the Multicare Debtors believe that the foregoing deemed
consolidation of their respective estates is warranted in light of the criteria
established by the courts in ruling on the propriety of substantive
consolidation in other cases. The two critical factors considered in assessing
the entitlement to substantive consolidation are (i) whether creditors dealt
with the Genesis Debtors or the Multicare Debtors as a single economic unit and
did not rely on their separate identity in extending credit or (ii) whether the
affairs of the Genesis Debtors or the Multicare Debtors are so entangled that
consolidation will benefit all creditors. With respect to the first factor,
creditors who make loans on the basis of the financial status of a separate
entity expect to be able to look to the assets of their particular borrower for
satisfaction of that loan. The second factor involves whether there has been a
commingling of the assets and business functions and considers whether all
creditors will benefit because untangling is either impossible or so costly as
to consume the assets. The following is a discussion of these factors as they
relate to the Genesis Debtors and the Multicare Debtors.
1. Genesis Debtors
There is an ample factual basis for the deemed consolidation
of the Genesis Debtors. First, the holders of the Genesis Senior Lender Claims
dealt with substantially all the Genesis Debtors as a single economic unit and
did not rely on their separate identity in extending credit. Specifically,
almost all the Genesis Debtors are obligors under the credit agreement governing
the Genesis Senior Lender Claims. In addition, almost all the Genesis Debtors
granted first priority security interests in substantially all their assets and
junior security interests in certain properties already subject to liens to
secure the Genesis Senior Lender Claims. This course of dealing and the
expectations of the holders of the Genesis Senior Lender Claims together justify
consolidation.
32
Second, the affairs of the Genesis Debtors are entangled to
the extent that consolidation will benefit all creditors. The Genesis Debtors
consist of Genesis and 152 of its direct and indirect subsidiaries. Genesis's
integrated healthcare networks provide inpatient, pharmacy, medical supply, and
other healthcare services through eldercare centers, long-term care pharmacies,
medical supply distribution centers serving over 1,000 eldercare centers, and
community-based pharmacies in over 40 states. There is little correlation
between the names of the centers and the names of the legal entities that
technically own such facilities. This fact alone will make it very difficult for
creditors to ascertain which Genesis Debtors they have a claim against. In fact,
due to the organization of their books and records, the Genesis Debtors filed
with the Bankruptcy Court their statement of financial affairs, schedules of
assets and liabilities, and schedules of executory contracts and unexpired
leases on a partially consolidated basis.
Third, the books and records of the Genesis Debtors reflect a
large amount of intercompany claims reflecting, among other things, advances
from Genesis to fund and build its operations, upstreamed funds from the other
Genesis Debtors to enable Genesis to make payments to creditors, the allocation
of corporate overhead, and the transfer of other property from one Genesis
Debtor to another. In view of the complexity of such transactions and the
adjustments that have been made over time, it would be difficult to reconcile
intercompany claims without embarking on an enormous effort that would diminish
the return for all creditors.
Finally, for the most part, the business units of the Genesis
Debtors operate as integrated units, without all the formalities of separate
corporate entities. As such, the Genesis Debtors participate in a unified cash
management system (which includes non-Debtor subsidiaries) which would make it
extremely difficult to confirm a plan of reorganization for individual Genesis
Debtors.
In view of the foregoing, the Genesis Debtors believe that
creditors would not be prejudiced to any significant degree by the deemed
consolidation proposed in the Plan of Reorganization, which is consistent with
creditors' having dealt with the Genesis Debtors as a single economic entity,
and further believe that such deemed consolidation would best utilize the
Genesis Debtors' assets and potential of all of the Genesis Debtors to pay to
the creditors of each entity the distributions proposed in the Plan of
Reorganization.
2. Multicare Debtors
There is an ample factual basis for the deemed consolidation
of the Multicare Debtors. First, the Multicare Debtors all share a single
manager -- Genesis -- which, as a general matter, operates each of the Multicare
Debtors under the "Genesis" trade name.
Second, holders of the Multicare Senior Lender Claims dealt
with substantially all the Multicare Debtors as a single economic unit and did
not rely on their separate identity in extending credit. Specifically, almost
all the Multicare Debtors are obligors under the credit agreement governing the
Multicare Senior Lender Claims. In addition, almost all the Multicare Debtors
granted first priority security interests in substantially all their assets and
junior security interests in certain properties already subject to liens to
secure the Multicare Senior Lender Claims. This course of dealing and the
expectations of the holders of the Multicare Senior Lender Claims together
justify consolidation.
33
Third, the affairs of the Multicare Debtors are entangled to
the extent that consolidation will benefit all creditors. The Multicare Debtors
operate as a single enterprise, and have a single line of business -- the
operation of assisted living and skilled nursing care facilities. There is not
always a correlation between the names of the centers and the names of the legal
entities that technically own such facilities. This fact alone will make it very
difficult for some creditors to ascertain which Multicare Debtors they have a
claim against. In fact, due to the organization of their books and records, the
Multicare Debtors filed with the Bankruptcy Court their statement of financial
affairs, schedules of assets and liabilities, and schedules of executory
contracts and unexpired leases on a partially consolidated basis.
Fourth, the books and records of the Multicare Debtors reflect
a large amount of intercompany claims reflecting, among other things, advances
from Multicare to fund and build its operations, upstreamed funds from the other
Multicare Debtors to enable Multicare to make payments to creditors, the
allocation of corporate overhead, and the transfer of other property from one
Multicare Debtor to another. In view of the complexity of such transactions and
the adjustments that have been made over time, it would be difficult to
reconcile intercompany claims without embarking on an enormous effort that would
diminish the return for all creditors.
Finally, for the most part, the Multicare Debtors operate as a
single integrated unit, without all the formalities of separate corporate
entities. As such, the Multicare Debtors participate in a unified cash
management system (which includes non-Debtor subsidiaries) which would make it
extremely difficult to confirm a plan of reorganization for individual Multicare
Debtors.
In view of the foregoing, the Multicare Debtors believe that
creditors would not be prejudiced to any significant degree by the deemed
consolidation proposed in the Plan of Reorganization, which is consistent with
creditors' having dealt with the Multicare Debtors as a single economic entity,
and further believe that such deemed consolidation would best utilize the
Multicare Debtors' assets and potential of all of the Multicare Debtors to pay
to the creditors of each entity the distributions proposed in the Plan of
Reorganization.
3. Proviso
In the event the Plan of Reorganization is not confirmed, any
and all statements made in section II.I, above and any and all evidence
presented with respect to the appropriateness of the substantive consolidation
of (i) each of the Genesis Debtors into a single legal entity for purposes of
distributions under the Plan and (ii) each of the Multicare Debtors into a
single legal entity for purposes of distributions under the Plan, shall be
deemed withdrawn by the Debtors and shall not constitute admissions with respect
to the appropriateness of substantive consolidation of such entities. The Plan
represents a negotiated settlement among the holders of the Genesis Senior
Lender Claims, the Multicare Senior Lender Claims, and the respective official
committees of unsecured creditors appointed in the Genesis Debtors' and
Multicare Debtors' reorganization cases concerning the distribution of property
to unsecured creditors despite the deficiency claims of the holders of the
Genesis Senior Lender Claims and the Multicare Senior Lender Claims. Because the
Plan is a settlement, the statements contained herein and in the Plan are
entitled to the protection of Rule 408 of the Federal Rules of Evidence.
J. Securities Law Matters
Holders of allowed claims in Classes G2, G4, G5, M2, M4, and
M5 will receive Plan Securities pursuant to the Plan of Reorganization. Section
1145 of the Bankruptcy Code provides certain exemptions from the securities
registration requirements of federal and state securities laws with respect to
the distribution of securities under a plan of reorganization.
34
1. Issuance and Resale of New Securities Under the Plan of
Reorganization
Section 1145 of the Bankruptcy Code provides that the
securities registration requirements of federal and state securities laws do not
apply to the offer or sale of stock, warrants, or other securities by a debtor
if (i) the offer or sale occurs under a plan of reorganization, (ii) the
recipients of securities hold a claim against, an interest in, or claim for
administrative expense against the debtor, and (iii) the securities are issued
in exchange for a claim against or interest in a debtor or are issued
principally in such exchange and partly for cash and property. In reliance upon
this exemption, the issuance of the New Senior Notes, the New Convertible
Preferred Stock, the New Common Stock, and the New Warrants on the Effective
Date as provided in the Plan of Reorganization generally will be exempt from the
registration requirements of the Securities Act. Accordingly, such securities
may be resold without registration under the Securities Act or other federal
securities laws pursuant to an exemption provided by section 4(1) of the
Securities Act, unless the holder is an "underwriter" (see discussion below)
with respect to such securities, as that term is defined in the Bankruptcy Code.
In addition, such securities generally may be resold without registration under
state securities or "blue sky" laws pursuant to various exemptions provided by
the respective laws of the several states. However, recipients of securities
issued under the Plan of Reorganization are advised to consult with their own
legal advisors as to the availability of any such exemption from registration
under state law in any given instance and as to any applicable requirements or
conditions to such availability.
Section 1145(b)(1) of the Bankruptcy Code defines
"underwriter" for purposes of the Securities Act as one who, except with respect
to "ordinary trading transactions" of an entity that is not an "issuer," (A)
purchases a claim against, interest in, or claim for an administrative expense,
with a view to distribution of any security to be received in exchange for the
claim or interest, or (B) offers to sell securities issued under a plan to the
holders of such securities, or (C) offers to buy securities issued under a plan
from the holders of such securities, if the offer to buy is made with a view to
distribution of such securities and under an agreement made in connection with
the plan, the consummation of the plan, or the offer or sale of securities under
the plan, or (D) is an issuer of the securities within the meaning of section
2(11) of the Securities Act.
The term "issuer" is defined in section 2(4) of the Securities
Act; however, the reference contained in section 1145(b)(1)(D) of the Bankruptcy
Code to section 2(11) of the Securities Act purports to include as statutory
underwriters all persons who, directly or indirectly, through one or more
intermediaries, control, are controlled by, or are under common control with, an
issuer of securities. "Control" (as defined in Rule 405 under the Securities
Act) means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise. Accordingly, an
officer or director of a reorganized debtor or its successor under a plan of
reorganization may be deemed to be a "control person" of such debtor or
successor, particularly if the management position or directorship is coupled
with ownership of a significant percentage of the reorganized debtor's or its
successor's voting securities. Moreover, the legislative history of section 1145
of the Bankruptcy Code suggests that a creditor who owns ten percent (10%) or
more of the securities of a reorganized debtor may be presumed to be a "control
person."
35
To the extent that persons deemed to be "underwriters" receive
Plan Securities pursuant to the Plan, resales by such persons would not be
exempted by section 1145 of the Bankruptcy Code from registration under the
Securities Act or other applicable law. Entities deemed to be statutory
underwriters for purposes of section 1145 of the Bankruptcy Code may, however,
be able, at a future time and under certain conditions described below, to sell
securities without registration pursuant to the resale provisions of Rule 144
and Rule 144A under the Securities Act.
Under certain circumstances, holders of Plan Securities deemed
to be "underwriters" may be entitled to resell their securities pursuant to the
limited safe harbor resale provisions of Rule 144. Generally, Rule 144 provides
that if certain conditions are met (e.g., the availability of current public
information with respect to the issuer, volume limitations, and notice and
manner of sale requirements), specified persons who resell "restricted
securities" or who resell securities which are not restricted but who are
"affiliates" of the issuer of the securities sought to be resold, will not be
deemed to be "underwriters" as defined in section 2(11) of the Securities Act.
Pursuant to the Plan, certificates evidencing Plan Securities
received by a holder of ten percent (10%) or more of the outstanding New Common
Stock will bear a legend substantially in the form below in the event the
Debtors reasonably believe such holder is an underwriter:
The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended, or
under the securities laws of any state or other jurisdiction
and may not be sold, offered for sale, or otherwise
transferred unless registered or qualified under said act and
applicable state securities laws or unless the company
receives an opinion of counsel reasonably satisfactory to it
that such registration or qualification is not required.
Any person or entity that would receive legended securities as
provided above may instead receive certificates evidencing Plan Securities
without such legend if, prior to the Effective Date, such person or entity
delivers to Reorganized Genesis (i) an opinion of counsel reasonably
satisfactory to Reorganized Genesis to the effect that the Plan Securities to be
received by such person or entity are not subject to the restrictions applicable
to "underwriters" under section 1145 of the Bankruptcy Code and may be sold
without registration under the Securities Act and (ii) a certification that such
person or entity is not an "underwriter" within the meaning of section 1145 of
the Bankruptcy Code.
Any holder of a certificate evidencing Plan Securities bearing
such legend may present such certificate to the transfer agent for the shares of
Reorganized Genesis for exchange for one or more new certificates not bearing
such legend or for transfer to a new holder without such legend at such time as
(i) such shares are sold pursuant to an effective registration statement under
the Securities Act, or (ii) such holder delivers to Reorganized Genesis an
opinion of counsel reasonably satisfactory to Reorganized Genesis to the effect
that such shares are no longer subject to the restrictions applicable to
"underwriters" under section 1145 of the Bankruptcy Code and may be sold without
registration under the Securities Act or to the effect that such transfer is
exempt from registration under the Securities Act, in which event the
certificate issued to the transferee shall not bear such legend, unless
otherwise specified in such opinion.
36
Whether or not any particular person would be deemed to be an
"underwriter" of Plan Securities to be issued pursuant to the Plan, or an
"affiliate" of Reorganized Genesis, would depend upon various facts and
circumstances applicable to that person. Accordingly, the Debtors express no
view as to whether any such person would be such an "underwriter" or an
"affiliate."
In view of the complex, subjective nature of the question of
whether a particular person may be an underwriter or an affiliate of Reorganized
Genesis, the Debtors make no representations concerning the right of any person
to trade in Plan Securities. Accordingly, the Debtors recommend that potential
recipients of Plan Securities consult their own counsel concerning whether they
may freely trade such securities.
2. Listing
Reorganized Genesis will use reasonable commercial efforts to
continue to be a reporting company under the Securities Exchange Act of 1934 and
will continue to file periodic and current reports as required by that statute.
Reorganized Genesis will also list the New Common Stock on a nationally
recognized market or exchange or a qualifying interdealer quotation system.
Listing criteria initially may not be satisfied.
3. Secondary Stock Offering
Reorganized Genesis will undertake a secondary stock offering
for up to 30% of the shares of New Common Stock received by holders of Genesis
Senior Lender Claims and Multicare Senior Lender Claims. Reorganized Genesis
will retain an underwriter and holders of the New Common Stock may enter into
underwriter agreements with such entity. The secondary stock offering will take
place as soon as reasonably practical after the Effective Date, but no sooner
than the time when Reorganized Genesis has filed financial reports with the
Securities and Exchange Commission for two full financial quarters after the
Effective Date.
4. Registration Rights
The Plan of Reorganization provides for the execution of a
registration rights agreement, under which Reorganized Genesis will have the
obligation to register the Plan Securities. A copy of the registration rights
agreement will be part of the Plan Supplement.
K. Settlement and Compromise
The Plan incorporates two significant settlements under
Bankruptcy Rule 9019. The settlement with the federal government is being
submitted for approval to the Bankruptcy Court. Approval for the settlement
between the Genesis Debtors and the Multicare Debtors will be sought at the time
of the hearing on confirmation of the Plan. On the Effective Date, the
settlement between the Genesis Debtors and the Multicare Debtors will be binding
on the Debtors and all holders of claims or interests in these chapter 11 cases.
Entry of the order confirming the Plan will constitute a finding that this
compromise and settlement is in the best interests of the Genesis Debtors and
the Multicare Debtors, are fair, equitable, and reasonable, and are made in good
faith in accordance with Bankruptcy Rule 9019.
37
1. Settlement with the Federal Government
The Genesis Debtors have entered into a settlement agreement
to resolve four pending civil qui tam suits filed by private citizens under the
federal False Claims Act, 31 U.S.C. 3729 et seq. Each action will be dismissed
and a release executed, consistent with the settlement agreement, for a total
payment of $2,095,000, plus statutory attorneys' fees in the amount of
approximately $80,000. The Genesis Debtors dispute the allegations asserted in
these actions, and the agreement contains no admission of liability. The
settlement agreement will resolve all claims against the Debtors in connection
with these suits.
The parties to the settlement agreement are Genesis and
certain affiliates, the private citizens who brought the suits, the Department
of Justice, and the Office of Inspector General for the Department of Health and
Human Services. The Department of Justice will provide a release of all
administrative and civil monetary claims under the False Claims Act, Civil
Monetary Penalties Law, Program Fraud Civil Remedies, common law theories of
payment by mistake, unjust enrichment, breach of contract, and fraud for the
covered conduct in the agreement. The Office of Inspector General will provide a
release of its permissive exclusion remedies for the covered conduct in the
agreement.
The Debtors are in negotiation with CMS over claims asserted
by that agency, as well as claims asserted by Genesis and Multicare regarding
reimbursement issues. The parties are working towards a global negotiation of
the pending claims.
2. Settlement Between the Genesis Debtors and the Multicare
Debtors
Genesis has managed the Multicare Debtors pursuant to certain
management services agreements since 1997. Those agreements were negotiated with
the majority owners of Multicare at that time. As of the date the Multicare
Debtors commenced their chapter 11 cases, approximately $36 million in deferred
fees under these management services agreement and approximately $57 million on
account of pharmacy, rehabilitation, and other ancillary services provided by
Genesis to the Multicare Debtors remained outstanding.
In April 2000, the Multicare Debtors retained Beverly Anderson
as their independent restructuring officer and as a director. Shortly
thereafter, the Multicare Debtors retained Ernst & Young and E&Y Capital
Advisers to assist Ms. Anderson in undertaking an investigation and evaluation
of all the relationships between the Genesis Debtors and the Multicare Debtors,
including the management services agreements. The Multicare Debtors, with the
assistance of their legal and financial advisors, also evaluated potential
claims that they may have against the Genesis Debtors. The Genesis Debtors
engaged in a similar evaluation with respect to claims they held against the
Multicare Debtors and claims held by the Multicare Debtors against the Genesis
Debtors. These evaluations were not completed before the December 19, 2000 bar
date, and the Multicare Debtors and the Genesis Debtors therefore agreed to
extend the bar date to give them additional time to complete their analyses.
Pursuant to a series of stipulations and orders, the bar date for the Multicare
Debtors to assert claims against the Genesis Debtors, and for the Genesis
Debtors to assert claims against the Multicare Debtors, presently is June 30,
2001, which the parties have agreed to extend to September 15, 2001.
38
After consideration of the merits of the claims between the
Multicare Debtors and the Genesis Debtors, and after a series of settlement
discussions and negotiations between the parties, the Genesis Debtors and the
Multicare Debtors have determined to enter into a Settlement and Release
Agreement (the "Genesis/Multicare Settlement"), a copy of which will be part of
the Plan Supplement. Pursuant to the Genesis/Multicare Settlement, the Genesis
Debtors and the Multicare Debtors shall set off their claims against one another
and waive and release any and all claims against one another that they may have
as of the date of the Settlement Agreement in excess of such setoff. Under the
Settlement Agreement, the Genesis Debtors also will acknowledge and agree that
they will not seek to recover from the Multicare Debtors any deferred or unpaid
management fees that might accrue or have accrued under the Management Agreement
on and after the Commencement Date. The Debtors believe that the
Genesis/Multicare Settlement represents a fair and equitable settlement of the
claims between the parties and satisfies the standards for approval of
settlements under Bankruptcy Rule 9019 and applicable law. In addition, the net
results of the litigation of these counterclaims would not provide meaningful
benefit to the creditors of the winning side. This results from the fact that
such claims would share pro rata with hundreds of millions of dollars of other
prepetition unsecured claims against the losing debtor and the recoveries under
the Plan provide for a relatively small stock and warrant distribution.
Moreover, sharing recoveries with the unsecured creditors on the losing side of
this litigation could significantly dilute the recoveries of that group.
The Debtors will seek approval of the Genesis/Multicare
Settlement in connection with confirmation of the Plan.
L. Reservation of "Cram Down" Rights
The Bankruptcy Code permits the Bankruptcy Court to confirm a
chapter 11 plan of reorganization over the dissent of any class of claims or
equity interests as long as the standards in section 1129(b) are met. This power
to confirm a plan over dissenting classes -- often referred to as "cram down" --
is an important part of the reorganization process. It assures that no single
group (or multiple groups) of claims or interests can block a restructuring that
otherwise meets the requirements of the Bankruptcy Code and is in the interests
of the other constituents in the case.
The Genesis Debtors and the Multicare Debtors each reserve the
right to seek confirmation of the Plan, notwithstanding the rejection of the
Plan by any class entitled to vote. In the event a class votes to reject the
Plan, the Debtors will request the Bankruptcy Court to rule that the Plan meets
the requirements specified in section 1129(b) of the Bankruptcy Code with
respect to such class. The Debtors will also seek such a ruling with respect to
each class that is deemed to reject the Plan.
III.
Voting Procedures And Requirements
Detailed voting instructions are provided with the ballot
accompanying this Disclosure Statement. The following classes are the only ones
entitled to vote to accept or reject the Plan.
Subclass Description
-------------------------------------------------------------
G1-13 Brakeley Park Center
G1-14 North Cape Center
G1-15 Oak Hill Center
G1-16 Rittenhouse Pine Center
G1-17 Synthetic Lease Claims
G2 Genesis Senior Lender Claims
G4 Genesis General Unsecured Claims
G5 Genesis Senior Subordinated Note Claims
M1-7 Point Pleasant
M2 Multicare Senior Lender Claims
M4 Multicare General Unsecured Claims
M5 Multicare Senior Subordinated Note Claims
39
If your claim is not in one of these classes, you are not entitled to vote and
you will not receive a ballot with this Disclosure Statement. If your claim is
in one of these classes, you should read your ballot and follow the listed
instructions carefully. Please use only the ballot that accompanies this
Disclosure Statement.
- -----------------------------------------------------------------------------------
Ballot information number: For creditors of the Genesis Debtors: (800) 510-0923
For creditors of the Multicare Debtors: (800) 473-1419
- -----------------------------------------------------------------------------------
A. Vote Required for Acceptance by a Class
Under the Bankruptcy Code, acceptance of a plan of
reorganization by a class of claims is determined by calculating the number and
the amount of claims voting to accept, based on the actual total claims voting.
Acceptance requires an affirmative vote of a majority of the total claims voting
and two-thirds in amount of the total claims voting.
B. Classes Not Entitled to Vote
Under the Bankruptcy Code, creditors are not entitled to vote
if their contractual rights are unimpaired by the Plan or if they will receive
no property under the Plan. Based on this standard, for example, the holders of
claims in Classes G3 and M3 and certain miscellaneous secured claims are not
being affected by the Plan. In addition, the holders of claims in Classes G7 and
M7 and holders of equity interests in Classes G8, G9, G10, G11, and M8 are not
receiving any property and are therefore deemed to reject the Plan. For a
summary of the classes entitled to vote, see the charts in section II.C, above.
C. Voting
In order for your vote to be counted, your vote must be
received by the voting agent at the following address before the voting deadline
of 5:00 p.m., Pacific time, on August 17, 2001:
--------------------------------------------------------------
If by overnight or hand delivery: If by standard mailing:
Poorman-Douglas Corporation Poorman-Douglas Corporation
10300 S.W. Allen Boulevard P.O. Box 4390
Beaverton, Oregon 97005 Portland, Oregon 97208-4390
Attn: Genesis-Multicare Attn: Genesis-Multicare
Balloting Ctr. Balloting Center
--------------------------------------------------------------
40
If the instructions on your ballot require you to return the
ballot to your bank, broker, or other nominee, or to their agent, you must
deliver your ballot to them in sufficient time for them to process it and return
it to the voting agent before the voting deadline. If a ballot is damaged or
lost, you may contact the Debtors' voting agent at the number set forth above.
Any ballot that is executed and returned but which does not indicate an
acceptance or rejection of the Plan of Reorganization will not be counted.
IV.
Financial Information, Projections, and Valuation Analyses
A. Introduction
This section provides summary information concerning the
recent financial performance of the Genesis Debtors and the Multicare Debtors.
They also provide a summary of five year projections and financial statements
for each group of Debtors. Finally, the following discusses an estimate of a
going concern valuation for the Genesis Debtors and the Multicare Debtors, based
on information available at the time of the preparation of this Disclosure
Statement. For purposes of these valuations, the Genesis Debtors and an
independent Restructuring Officer for the Multicare Debtors renegotiated the
terms of the management and service agreements between the Debtors to reflect
current market conditions. The effects of those changes have been included in
the projections and valuations described below.
The financial projections assume that the Plan will be
confirmed and consummated in accordance with its terms and that there will be no
material change in the legislation or negotiation that will have an unexpected
impact on the Debtors' operations. The Projections assume an Effective Date of
September 30, 2001, with allowed claims treated in accordance with those
provided for in the Plan. Expenses incurred as a result of the reorganization
cases are assumed to be paid upon confirmation of the Plan of Reorganization. If
the Debtors do not emerge from chapter 11 by September 30, 2001, additional
bankruptcy expenses will be incurred until such time as a plan of reorganization
is confirmed. These expenses could significantly impact the Debtors' results of
operations and cash flows. The financial projections of both Genesis and
Multicare were prepared individually and on an unlevered basis. Pursuant to the
Plan, the Debtors are to be merged, and accordingly, the impact of the new Plan
Securities is reflected on a pro forma consolidated basis.
It is important to note that the projections and estimates of
values described below may differ from actual performance and are highly
dependent on significant assumptions concerning the future operations of these
businesses. These assumptions include reimbursement levels under the Medicare
and state Medicaid programs, professional liability insurance costs, growth of
certain lines of business, labor, and other operating costs, inflation, and the
level of investment required for capital expenditures and working capital.
Please refer to section IX, below, for a discussion of many of the factors that
could have a material effect on the information provided in this section.
The estimates of value are not intended to reflect the values
that may be attainable in public or private markets. They also are not intended
to be appraisals or reflect the value that may be realized if assets are sold.
41
B. The Genesis Debtors
1. Operating Performance
For a recent description of the operating performance of the
Genesis Debtors and the Multicare Debtors on a consolidated basis, see the Form
10-K for the fiscal year ended September 30, 2000, which was filed by Genesis
with the Securities and Exchange Commission on February 21, 2001, and the Form
10-Q for the period ended March 31, 2001, which was filed by Genesis on May 17,
2001. The following is a consolidating balance sheet and income statement
indicating the relative contribution of Genesis and Multicare, individually, to
the consolidated totals for the same periods.
Balance Sheet for the Year Ended December 31, 2000 ($000)
Genesis Multicare Eliminations Consolidated
------------- ------------ ------------ ------------
Cash and equivalents $ 3,312 $ 19,636 $ - $ 22,948
Restricted investments in marketable securities 27,899 - - 27,899
Accounts receivable, net 396,473 101,953 (51,812) 446,614
Other current assets 102,931 16,929 - 119,860
------------- ------------ ------------ ------------
Current Assets 530,615 138,518 (51,812) 617,321
Property and equipment, net 543,901 563,445 - 1,107,346
Goodwill and other intangibles, net 897,500 337,806 - 1,235,306
Other long-term assets 207,401 61,924 (101,399) 167,926
------------- ------------ ------------ ------------
Total Assets $ 2,179,417 $ 1,101,693 $ (153,211) $ 3,127,899
============= ============ ============ ============
Current installments of long-term debt $ 133,000 $ - $ - $ 133,000
Other current liabilities 127,440 69,694 (17,054) 180,080
------------- ------------ ------------ ------------
Current Liabilities 260,440 69,694 (17,054) 313,080
Liabilities subject to compromise 1,665,921 875,111 (94,359) 2,446,673
Deferred income taxes - 54,082 - 54,082
Other long term liabilities 51,113 14,141 (3,140) 62,114
Minority interest 6,052 - 50,007 56,059
Redeemable preferred stock (subject to compromise) 442,820 - - 442,820
Shareholders' equity (deficit) (246,929) 88,665 (88,665) (246,929)
------------- ------------ ------------ ------------
Total Liabilities and shareholders' deficit $ 2,179,417 $ 1,101,693 $ (153,211) $ 3,127,899
============ ============ ============ ============
42
Income Statement for the Year Ended September 30, 2000 ($000)
Genesis Multicare Eliminations Consolidated
------------ ------------- --------------- --------------
Pharmacy and medical supply services $ 993,215 $ - $ (40,865) $ 952,350
Inpatient services 688,073 632,078 - 1,320,151
Other revenues 243,126 13,501 (95,270) 161,357
----------- ---------- ----------- -----------
Revenues, net 1,924,414 645,579 (136,135) 2,433,858
Operating expenses
Operating expenses 1,740,701 592,865 (136,135) 2,197,431
Debt restructuring, reorganization and
other charges 250,999 186,503 - 437,502
Loss on sale of eldercare centers - 7,922 - 7,922
Multicare joint venture restructuring charge 420,000 - - 420,000
----------- ---------- ----------- -----------
EBITDAR (487,286) (141,711) - (628,997)
Lease expense 25,159 12,965 - 38,124
----------- ---------- ----------- -----------
EBITDA (512,445) (154,676) - (667,121)
Depreciation and amortization 78,897 38,064 - 116,961
Interest expense (Note A) 145,627 57,943 - 203,570
----------- ---------- ----------- -----------
Pretax loss before income tax (benefit),
minority interest, equity in net income
(loss) of unconsolidated affiliates and
cumulative effect of accounting change $ (736,969) $ (250,683) $ - $ (987,652)
=========== ========== =========== ===========
Note A - Genesis and Multicare contractual interest expense for the period
presented was $155,345 and $76,154, respectively.
Balance Sheet as of March 31, 2001 ($000)
Genesis Multicare Eliminations Consolidated
------------- ------------ -------------- --------------
Cash and equivalents $ - $ 23,867 $ - $ 23,867
Restricted investments in marketable securities 34,493 - - 34,493
Accounts receivable, net 390,086 99,221 (50,912) 438,395
Other current assets 118,747 15,046 - 133,793
----------- ------------ ------------ ------------
Current Assets 543,326 138,134 (50,912) 630,548
Property and equipment, net 542,938 539,093 - 1,082,031
Goodwill and other intangibles, net 884,055 332,489 - 1,216,544
Other long-term assets 194,883 59,485 (99,689) 154,679
----------- ------------ ------------ ------------
Total Assets $ 2,165,202 $ 1,069,201 $ (150,601) $ 3,083,802
=========== ============ ============ ============
Current installments of long-term debt $ 165,000 $ - $ - $ 165,000
Other current liabilities 145,879 59,684 (14,396) 191,167
----------- ------------ ------------ ------------
Current Liabilities 310,879 59,684 (14,396) 356,167
Liabilities subject to compromise 1,657,661 855,372 (92,909) 2,420,124
Deferred income taxes - 54,082 - 54,082
Other long term liabilities 50,335 22,567 (9,508) 63,394
Minority interest 5,652 - 43,708 49,360
Redeemable preferred stock (subject to
compromise) 455,735 - - 455,735
Shareholders' equity (deficit) (315,060) 77,496 (77,496) (315,060)
----------- ------------ ------------ ------------
Total Liabilities and shareholders'
deficit $ 2,165,202 $ 1,069,201 $ (150,601) $ 3,083,802
=========== ============ ============ ============
43
Income Statement for the Six Months Ended March 31, 2001 ($000)
Genesis Multicare Eliminations Consolidated
------------ ------------ -------------- --------------
Pharmacy and medical supply services $ 529,543 $ - $ (18,368) $ 511,175
Inpatient services 354,084 313,890 - 667,974
Other revenues 129,443 5,384 (54,875) 79,952
----------- ---------- ----------- ------------
Revenues, net 1,013,070 319,274 (73,243) 1,259,101
Operating expenses
Operating expenses 922,881 295,015 (73,243) 1,144,653
Debt restructuring, reorganization and
other charges 20,305 7,901 - 28,206
(Gain)/loss on sale of eldercare center (1,770) 2,310 - 540
----------- ---------- ----------- ------------
EBITDAR 71,654 14,048 - 85,702
Lease expense 12,301 6,200 - 18,501
----------- ---------- ----------- ------------
EBITDA 59,353 7,848 - 67,201
Depreciation and amortization 36,466 16,921 - 53,387
Interest expense (Note A) 63,469 2,298 - 65,767
----------- ---------- ----------- ------------
Pretax loss before income tax (benefit),
minority interest and equity in net income
(loss) of unconsolidated affiliates $ (40,582) $ (11,371) $ - $ (51,953)
=========== ========== =========== ============
Note A - Genesis and Multicare contractual interest expense for the period
presented was $41,798 and $19,954, respectively.
2. Five Year Projections
General Operating Assumptions. Genesis will continue to operate its
healthcare service businesses through its five lines of business: ElderCare,
NeighborCare Pharmacies, Rehabilitation Services, Other Services, and Management
Services & Overhead. ElderCare operates long-term care nursing facilities,
NeighborCare is Genesis's institutional pharmacy business and medical supply
business, and Rehabilitation Services is the rehabilitation therapy business.
Other Services includes hospitality services, group purchasing services,
diagnostic services, consulting services, and physician services. Management
Services & Overhead includes third party management contracts and administrative
costs.
The operation of Genesis's business will not change materially from
that described in Genesis's Form 10-K as of and for the year ended September 30,
2000. The financial projections generally assume inflationary rate increases and
relatively stable occupancy and pharmacy beds served. The financial projections
do not assume that Genesis acquires additional nursing facilities or new
institutional pharmacies. For purposes of calculating the financial projections
of Reorganized Genesis it has been assumed that no consolidated NOLs or NOL
carryforwards of the Genesis Group or the Multicare Group will survive the
reorganization and that any reduction in the tax basis in depreciable or
amortizable assets of the Debtors would be insignificant.
44
Fiscal year 2001 reflects the Genesis Business Plan developed through a
detailed bottom-up budgeting approach. Fiscal years 2002-2006 have been
projected using fiscal year 2001 as a basis and adjusted for anticipated changes
in government reimbursement, patient mix, occupancy rates, and industry trends.
The following represents the highlights of the financial projections:
o No growth assumed from acquisitions
o Revenue CAGR 2001-2006 of 5.6%
o EBITDA CAGR 2001-2006 of 4.5%
o EBITDA Margin % at 7.7% in 2001, increasing to 8.0% in 2002 and
declining to 7.5% in 2006
o Capital expenditures at $40 million in 2001 and growing at a CAGR
from 2001 to 2006 of 4.5%
Projections. The following table presents summary projected financial
information for Genesis:
Fiscal Years ($ in 000's)
---------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006
------------ ------------- ------------- ------------- ------------ -------------
Revenue $2,039,000 2,126,000 2,229,000 2,349,000 2,476,000 2,610,000
EBITDA 158,000 170,000 174,000 182,000 190,000 197,000
EBITDA % 7.7% 8.0% 7.8% 7.7% 7.7% 7.5%
Capital Expenditures 40,000 42,000 44,000 46,000 48,000 50,000
More detailed information on the financial projections is included in
the Plan Supplement.
3. Going Concern Valuation
UBS Warburg has acted as financial advisor for the Genesis Debtors in
their chapter 11 cases. In connection with UBS Warburg's engagement, Genesis
requested that UBS Warburg analyze the enterprise value of Genesis. The
valuation analyses did not address other aspects of the proposed restructuring
or any related transaction. The valuation analyses were prepared for the
information of the Board of Directors of Genesis in connection with its
consideration of the Plan of Reorganization and for the purpose of determining
the value available to distribute to creditors pursuant the Plan and the
relative recoveries to creditors thereunder. These analyses do not constitute a
recommendation to any holder of claims against Genesis as to how to vote on the
Plan. UBS Warburg's estimate of a range of enterprise value does not constitute
an opinion as to the fairness from a financial point of view of the
consideration to be received under the Plan or of the terms and provisions of
the Plan.
45
In arriving at its views on valuation, UBS Warburg reviewed the Plan
and certain related documents, as well as publicly available business and
financial information relating to Genesis. UBS Warburg also reviewed other
information relating to Genesis, including the 2001 to 2006 financial
projections (the "Genesis Projections") (which are included in the Plan
Supplement), which Genesis provided to or discussed with UBSW, and met with the
management of Genesis to discuss the business and prospects of Genesis. A
summary of the Genesis Projections are included above. UBS Warburg also
considered financial data of Genesis and compared that data with similar data
for other publicly held companies in businesses similar to Genesis and
considered, to the extent publicly available, the financial terms of
restructurings and other similar transactions that have recently been effected.
UBS Warburg also considered other information, financial studies, analyses and
investigations, and financial, economic, and market criteria that it deemed
relevant.
The analysis of comparable companies involved identifying a group of
publicly traded companies comparable, in whole or in part, to Genesis and then
calculating ratios of the enterprise values and equity values (based on publicly
traded stock prices) for such companies to certain operating and financing data
estimates for such companies (i.e., EBITDAR and EBITDA). The ranges of ratios
indicated by such analysis were then applied to corresponding operating and
financial data and estimates for Genesis based on the Genesis Projections to
derive an implied enterprise value. UBS Warburg also conducted a discounted cash
flow analysis applied on the unlevered free cash flows that Genesis would
generate assuming the Genesis Projections were realized. Based on discussions
with management, UBS Warburg then applied a range of perpetual growth rates and
discount rates based upon the weighted average cost of capital ("WACC") for
Genesis after the restructuring. Genesis's WACC was determined by analyzing the
WACC of comparable companies and applying the comparable companies' unlevered
betas to Genesis's reorganized capital structure.
In connection with its review, UBS Warburg did not assume any
responsibility for independent verification of any of the information that was
provided to, or otherwise reviewed by, it and relied on that information being
complete and accurate in all material respects. With respect to financial
forecasts, UBS Warburg was advised, and assumed, that the Genesis Projections
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of Genesis's management as to the future financial
performance of Genesis after giving effect to the proposed restructuring. No
representation or warranty, express or implied, can be or is made by UBS Warburg
as to the accuracy or achievability of any such valuations, estimates, and/or
forecasts, and UBS Warburg expressly disclaims any and all liability relating to
or resulting from the use of this material. In addition, UBS Warburg assumed
that the restructuring would be completed in accordance with the terms of the
Plan without any amendments, modifications, or waivers and also assumed that in
the course of obtaining the necessary judicial, regulatory, and third party
consents for the proposed restructuring and related transactions, there will be
no delays, modifications, or restrictions imposed that will have a material,
adverse effect on the contemplated benefits of the proposed restructuring to
Genesis. UBS Warburg was not requested to, and did not, make an independent
evaluation or appraisal of the individual assets or liabilities, contingent or
otherwise, of Genesis, and was not furnished with any such evaluations or
appraisals. UBS Warburg's valuation analyses were based on information available
to, and financial, economic, market, and other conditions as they existed and
could be evaluated by, UBS Warburg on April 6, 2001. Actual results may vary
from such estimates, valuation, or forecasts and such variations may be
material.
The preparation of valuation analyses is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to particular facts
46
and circumstances, many of which are beyond the control of Genesis and UBS
Warburg. The valuation range indicated by UBS Warburg's analyses is not
necessarily indicative of the prices at which the common stock or other
securities of Genesis may be bought or sold or predictive of future financial
results or values, which may be significantly more or less favorable than those
indicated by the analyses. Accordingly, UBS Warburg's analyses and estimates are
inherently subject to substantial uncertainty.
In arriving at its enterprise valuation, UBSW reviewed the current
trading performance of Beverly Enterprises, HCR Manor Care, and Omnicare. This
comparable company analysis indicated a range of multiples of enterprise to 2001
projected EBITDA multiples of 6.3x - 7.5x, and adjusted enterprise value (which
capitalizes Genesis's rent expense as a long-term liability and accounts for
other off balance sheet liabilities) to 2001 projected EBITDAR multiples of 6.5x
- - 7.7x. These ranges were based on the multiples indicated by the comparable
companies identified above, adjusted to take into account, among other things,
the relative size of the enterprise, payor mix, quality of assets, and business
plan risk. The ranges were applied to Genesis's comparably projected 2001 EBITDA
and EBITDAR.
UBS Warburg has advised Genesis that, based upon and subject to the
foregoing, as of April 6, 2001, their analyses indicated that the enterprise
value of Genesis would be between $1.0 billion and $1.25 billion.
C. The Multicare Debtors
1. Operating Performance
For a recent description of the operating performance of the Multicare
Debtors, see the Form 10-K for the fiscal year ended September 30, 2000, which
was filed by The Multicare Companies, Inc. (the wholly-owned subsidiary of
Multicare) with the Securities and Exchange Commission on February 21, 2001, and
the Form 10-Q for the period ended March 31, 2001, which was filed on May 17,
2001.
2. Five Year Projections
General Operating Assumptions. The Multicare only projections are
exclusive of capital structure (100% equity) and fresh-start accounting is not
applied. The projections assume no taxes are paid and no interest is either paid
or accrued. These assumptions are made since a capital structure is not relevant
in determining a total enterprise value for Multicare and the postbankruptcy
capital structure is relevant to feasibility and other issues as applied against
only the pro forma consolidated Genesis and Multicare. Accordingly, these issues
are discussed in the consolidated assumption section of the Disclosure
Statement.
Multicare will continue to operate in its primary line of business of
ElderCare which operates nursing facilities.
The operations of Multicare's business will not change materially from
that described in Multicare's Form 10-K as of and for the year ended September
30, 2000. The financial projections generally assume inflationary rate increases
and relatively stable occupancy. The financial projections do not assume that
Multicare will acquire additional nursing facilities. For purposes of
calculating the financial projections of Reorganized Genesis it has been assumed
that no consolidated NOLs or NOL carryforwards of the Genesis Group or the
Multicare Group will survive the reorganization and that any reduction in the
tax basis in depreciable or amortizable assets of the Debtors would be
insignificant.
47
Fiscal year 2001 reflects the Multicare Business Plan developed through
a detailed bottom-up budgeting approach. Fiscal years 2002-2006 have been
projected using fiscal year 2001 as a basis and adjusted for anticipated changes
in government reimbursement, patient mix, occupancy rates, and industry trends.
The following represents the highlights of the financial projections:
o No growth assumed from acquisitions
o Revenue CAGR 2001-2006 of 3.3%
o EBITDA CAGR 2001-2006 of 4.4%
o EBITDA Margin % at 8.7% in 2001, increasing to 9.2% in 2003, and
remaining constant through 2006
o Capital expenditures at $10 million in 2001 and growing at a CAGR
from 2001 to 2006 of 4.2%
Projections. The following table presents summary projected financial
information for Multicare:
Fiscal Years ($ in 000's)
---------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006
------------ ------------- ------------- ------------- ------------ -------------
Revenue $641,800 670,100 690,500 711,500 733,100 755,300
EBITDA 56,000 59,400 63,300 65,200 67,300 69,500
EBITDA % 8.7% 8.9% 9.2% 9.2% 9.2% 9.2%
Capital Expenditures 10,000 10,400 10,800 11,200 11,700 12,200
More detailed information on the financial projections is included in
the Plan Supplement.
3. Going Concern Valuation
Credit Suisse First Boston Corporation ("CSFB") has acted as financial
advisor for the Multicare Debtors in their chapter 11 cases. In connection with
CSFB's engagement, Multicare requested that CSFB analyze the enterprise value of
Multicare. The valuation analyses did not address other aspects of the proposed
restructuring or any related transaction. The valuation analyses were prepared
for the information of the Board of Directors of Multicare in connection with
its consideration of the Plan of Reorganization and for the purpose of
determining the value available to distribute to creditors pursuant to the Plan
and the relative recoveries to creditors thereunder. These analyses do not
constitute a recommendation to any holder of claims against Multicare as to how
to vote on the Plan. CSFB's estimate of a range of enterprise value does not
constitute an opinion as to the fairness from a financial point of view of the
consideration to be received under the Plan or of the terms and provisions of
the Plan.
48
In arriving at its views on valuation, CSFB reviewed the Plan and
certain related documents, as well as publicly available business and financial
information relating to Multicare. CSFB also reviewed other information relating
to Multicare, including the 2001 to 2006 financial projections (the "Multicare
Projections") (which are included in the Plan Supplement), which Multicare
provided to or discussed with CSFB, and met with the management of Multicare to
discuss the business and prospects of Multicare. A summary of the Multicare
Projections is included above. CSFB also considered financial data of Multicare
and compared that data with similar data for other publicly held companies in
businesses similar to Multicare and considered, to the extent publicly
available, the financial terms of restructurings and other similar transactions
that have recently been effected. CSFB also considered other information,
financial studies, analyses and investigations, and financial, economic, and
market criteria that it deemed relevant.
The analysis of comparable companies involved identifying a group of
publicly traded companies comparable, in whole or in part, to Multicare and then
calculating ratios of the enterprise values and equity values (based on publicly
traded stock prices) for such companies to certain operating and financing data
estimates for such companies (i.e., EBITDAR and EBITDA). The ranges of ratios
indicated by such analysis were then applied to corresponding operating and
financial data and estimates for Multicare based on the Multicare Projections to
derive an implied enterprise value. CSFB also conducted a discounted cash flow
analysis applied on the unlevered free cash flows that Multicare would generate
assuming the Multicare Projections were realized. Based on discussions with
management, CSFB then applied a range of perpetual growth rates and discount
rates based upon the weighted average cost of capital ("WACC") for Multicare
after the restructuring. Multicare's WACC was determined by analyzing the WACC
of comparable companies and applying the comparable companies' unlevered betas
to Multicare's reorganized capital structure.
In connection with its review, CSFB did not assume any responsibility
for independent verification of any of the information that was provided to, or
otherwise reviewed by, it and relied on that information being complete and
accurate in all material respects. With respect to financial forecasts, CSFB was
advised, and assumed, that the Multicare Projections were reasonably prepared on
bases reflecting the best currently available estimates and judgments of
Multicare's management as to the future financial performance of Multicare after
giving effect to the proposed restructuring. In addition, CSFB assumed that the
restructuring would be completed in accordance with the terms of the Plan
without any amendments, modifications, or waivers and also assumed that in the
course of obtaining the necessary judicial, regulatory, and third party consents
for the proposed restructuring and related transactions, there will be no
delays, modifications, or restrictions imposed that will have a material,
adverse effect on the contemplated benefits of the proposed restructuring to
Multicare. CSFB was not requested to, and did not, make an independent
evaluation or appraisal of the individual assets or liabilities, contingent or
otherwise, of Multicare, and was not furnished with any such evaluations or
appraisals. CSFB's valuation analyses were based on information available to,
and financial, economic, market, and other conditions as they existed and could
be evaluated by, CSFB on March 19, 2001.
The preparation of valuation analyses is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to particular facts
and circumstances, many of which are beyond the control of Multicare and CSFB.
The valuation range indicated by CSFB's analyses is not necessarily indicative
49
of the prices at which the common stock or other securities of Multicare may be
bought or sold or predictive of future financial results or values, which may be
significantly more or less favorable than those indicated by the analyses.
Accordingly, CSFB's analyses and estimates are inherently subject to substantial
uncertainty.
In arriving at its enterprise valuation though the comparable company
analysis, CSFB reviewed the enterprise values of Beverly Enterprises and HCR
Manor Care and the reorganization value of Vencor (now known as Kindred
Healthcare, Inc.) reflected in the company's disclosure statement. This
comparable company analysis indicated a range of multiples of enterprise value
to 2001 projected EBITDA in the range of 5.0x - 7.0x and of adjusted enterprise
value (which capitalizes Multicare's rent expense as a long-term liability and
accounts for other off balance sheet liabilities) to 2001 projected EBITDAR in
the range of 6.0x - 8.0x. These ranges were based on the multiples indicated by
the comparable companies identified above adjusted to take into account, among
other things, the relative size of the enterprise, payor mix, quality of assets,
and business plan risk. These ranges were then applied to Multicare's projected
2001 EBITDA and EBITDAR.
CSFB has advised Multicare that, based upon and subject to the
foregoing, as of March 20, 2001, their analyses indicated that the enterprise
value of Multicare would be between $350 million and $400 million.
D. Reorganized Genesis (Merger of Genesis and Multicare)
1. Operating Performance
Genesis currently reports its financial results on a consolidated basis
with Multicare. The most recent results can be found in the Form 10-K for the
fiscal year ended September 30, 2000, which was filed with the Securities and
Exchange Commission on February 21, 2001, and the Form 10-Q for the fiscal
quarter ended March 31, 2001, which was filed on May 17, 2001.
2. Five Year Projections
The following table presents summary projected financial information
for the combined companies of Genesis and Multicare:
Fiscal Years ($ in 000's)
---------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006
------------ ------------- ------------- ------------- ------------ -------------
Revenue $2,545,443 2,660,686 2,783,726 2,924,518 3,073,072 3,229,942
EBITDA 214,457 229,743 238,163 247,495 257,094 266,917
EBITDA % 8.4% 8.6% 8.6% 8.5% 8.4% 8.3%
Capital Expenditures 50,000 52,400 54,800 57,200 59,700 62,200
More detailed information on the financial projections is included in
the Plan Supplement.
50
V.
Business Description and Reasons for Chapter 11
A. The Debtors' Businesses
The Genesis Debtors and the Multicare Debtors are leading providers of
healthcare and support services to the elderly. They operate inpatient
facilities in five regional areas of the United States and a national pharmacy
and medical supply business. The Genesis Debtors also provide an extensive range
of rehabilitation therapy services, including speech pathology and physical and
occupational therapy, through six certified rehabilitation agencies. Other
related healthcare services provided by the Genesis Debtors include management
of elder care centers, group purchasing and shared services programs, portable
x-ray, diagnostic, home healthcare, physician, adult day care, staffing,
transportation, and consulting services.
1. Relationship Between the Genesis Debtors and the Multicare Debtors
Prior to October 1997, The Multicare Companies, Inc. was publicly-owned
and not affiliated with the Genesis Debtors. Genesis, The Cypress Group, L.L.C.,
TPG Partners II, L.P., and Nazem, Inc. formed Genesis ElderCare Corp. for the
purpose of acquiring The Multicare Companies, Inc. Through a tender offer and
merger transaction, Genesis ElderCare Corp. (a Multicare Debtor) acquired 100%
of the outstanding stock of The Multicare Companies, Inc. Genesis owns 43.6% of
the common stock of Genesis ElderCare Corp. Genesis ElderCare Network Services,
Inc., one of the Genesis Debtors, manages Genesis ElderCare Corp. pursuant to a
management services agreement, dated as of October 7, 1997.
At the time the management services agreement and other agreements were
entered into, Multicare was controlled by parties unrelated to Genesis or the
Genesis Debtors. The terms of these agreements were the product of arm's-length
negotiations between Genesis and the parties controlling Multicare and the
agreements were approved by Multicare's independent board of directors. In
addition, the terms were disclosed at the time of the issuance of Multicare's
senior subordinated notes (Class M5).
Services provided by Genesis to Multicare under the management services
and other agreements between the parties include operational oversight and
management of Multicare's inpatient facilities, rehabilitation, pharmacy,
medical supply, and other operational services, as well as accounting, financial
services, and corporate administrative services. (In addition to the management
services agreement, Genesis (through Genesis ElderCare Rehabilitation Services,
Inc., a Genesis Debtor) is the predominant provider of inpatient and outpatient
rehabilitation services for Multicare's facilities, and Genesis also is
currently the predominant provider of institutional pharmacy services for
Multicare's facilities.) In accordance with the understandings between Genesis
and Multicare's independent board, the prices under the ancillary agreements
were adjusted each year to reflect changes in the marketplace and the market
median rate charged by Genesis for similar goods and services provided to other
parties.
In November 1999, as part of an overall restructuring of the financial
obligations of Genesis and Multicare, Genesis became the effective controlling
shareholder of Multicare. At that time, the independent members of the board of
directors of Multicare resigned. At no time since that change in control were
any changes made to the management services and other agreements that were
beneficial to Genesis. Within seven months after the change in control, both
Genesis and Multicare filed these chapter 11 cases.
51
Multicare's board of directors now consists of two members of Genesis's
board of directors, one Genesis officer, and one independent director and
officer unaffiliated with Genesis (the "Independent Director"). Each of
Multicare's officers (other than the Independent Director) is also an officer of
or affiliated with Genesis. As Multicare has no corporate infrastructure and
relies upon Genesis to provide operational oversight and accounting, financial,
and corporate administrative services, the Independent Director was hired in
April 2000 to review and evaluate Multicare's relationships with Genesis.
To assist the Independent Officer in performing its duties, Multicare
retained Ernst & Young and E&Y Capital Advisers (together, "E&Y") to conduct a
comprehensive review and analysis of the related party transactions between
Genesis and Multicare. In this regard, E&Y reviewed the following broad lines of
contractual and/or business relationships between Genesis and Multicare: (a)
Genesis's management of Multicare; (b) Genesis's provision of rehabilitation
services to Multicare; (c) Genesis's provision of hospitality services to
Multicare; and (d) Genesis's provision of pharmacy services to Multicare. More
specifically, E&Y evaluated, among other matters, (i) whether the rehabilitation
therapy rates being charged by Genesis were the same or better than those
Genesis charged to third parties, (ii) the expected costs and required
management structure if Multicare were to provide these services directly, (iii)
the costs, benefits, and structure of the hospitality services (such as food,
dietary, housekeeping, linen, and laundry services) being provided by Genesis to
Multicare, (iv) the cost and structure of the management services agreement, and
(v) the cost and structure of the pharmacy services being provided by Genesis to
Multicare.
The Independent Director, utilizing the findings and recommendations of
E&Y, thereafter engaged in negotiations with Genesis management regarding the
terms of the related party relationships to reflect current market conditions.
Ultimately, Multicare and Genesis agreed to modifications of the related party
business and contractual relationships that resulted in an annualized cost
savings to the Multicare Debtors of approximately $12 million. The effects of
these changes have been included in the budgets, projections, and valuations
described in section IV, above. Thus, the effects have been included in the
materials needed for valuation of the separate estates of the Genesis Debtors
and the Multicare Debtors. However, the effects of the changes have not been
reflected in Multicare's historical financial statements and new contracts have
not actually been entered into due to the proposed merger of Genesis and
Multicare.
2. Pharmacy and Medical Supply Services (Genesis Debtors)
The Genesis Debtors provide pharmacy and medical supply services
through their NeighborCare pharmacy subsidiaries. Included in pharmacy and
medical supply service revenues are institutional pharmacy revenues, which
include the provision of prescription and nonprescription pharmaceuticals,
infusion therapy, medical supplies, and equipment provided to eldercare centers
operated by the Genesis Debtors, as well as to independent healthcare providers
by contract. The pharmacy services provided in these settings are tailored to
meet the needs of the institutional customer. These services include highly
specialized packaging and dispensing systems, computerized medical records
processing, and 24-hour emergency services. NeighborCare provides institutional
pharmacy products and services to the elderly, chronically ill, and disabled in
long-term care and alternate sites settings, including skilled nursing
facilities, assisted living facilities, residential and independent living
communities, and the home. The Genesis Debtors also provide pharmacy consulting
services to assure proper and effective drug therapy. The Genesis Debtors
provided these services through institutional pharmacies (one is jointly-owned)
and medical supply distribution centers located in their various market areas.
In addition, the Genesis Debtors operated community-based pharmacies which are
located in or near medical centers, hospitals, and physician office complexes.
52
The community-based pharmacies provide prescription and over-the-counter
medications and certain medical supplies as well as personal service and
consultation by licensed professional pharmacists. Approximately 91% of the
sales attributable to all pharmacy operations in the twelve months ended
September 30, 2000 were generated through external contracts with independent
healthcare providers, with the balance attributable to centers owned or leased
by the Genesis Debtors, including centers jointly owned with the Multicare
Debtors.
3. Inpatient Services (Genesis Debtors and Multicare Debtors)
The Genesis Debtors own, lease, or manage eldercare centers, standalone
assisted living facilities, and transitional care units located in 15 states.
These include eldercare centers owned or leased by the Multicare Debtors. The
skilled nursing centers of the Genesis Debtors and the Multicare Debtors offer
three levels of care for their customers: skilled, intermediate, and personal.
Skilled care provides 24-hour per day professional services of a registered
nurse; intermediate care provides less intensive nursing care; and personal care
provides for the needs of customers requiring minimal supervision and
assistance. Each eldercare center is supervised by a licensed healthcare
administrator and engages the services of a Medical Director to supervise the
delivery of healthcare services to residents and a Director of Nursing to
supervise the nursing staff. The Genesis Debtors maintain a corporate quality
assurance program to monitor regulatory compliance and to enhance the standard
of care provided in each center.
The Genesis Debtors have established and actively market programs for
elderly and other customers who require subacute levels of medical care. These
programs include ventilator care, intravenous therapy, postsurgical recovery,
respiratory management, orthopedic or neurological rehabilitation, terminal
care, and various forms of coma, pain, and wound management. Private insurance
companies and other third party payors, including certain state Medicaid
programs, have recognized that treating customers requiring subacute medical
care in centers such as those operated by the Genesis Debtors and the Multicare
Debtors is a cost-effective alternative to treatment in an acute care hospital.
The Genesis Debtors and the Multicare Debtors provide such care at rates that
they believe are substantially below the rates typically charged by acute care
hospitals for comparable services.
4. Other Services (Genesis Debtors and Multicare Debtors)
Rehabilitation Therapy. The Genesis Debtors provide an extensive range
of rehabilitation therapy services, including speech pathology, physical
therapy, and occupational therapy, through six certified rehabilitation agencies
in all five of their regional market concentrations. These services are provided
by approximately 3,200 licensed rehabilitation therapists and assistants
employed or contracted by Genesis to substantially all of the eldercare centers
it operates, as well as by contract to healthcare facilities operated by others.
Management Services. The Genesis Debtors provided management services
to 190 eldercare centers (including those owned or leased by the Multicare
Debtors) pursuant to management agreements that provide generally for the
day-to-day responsibility for the operation and management of the centers. In
turn, the Genesis Debtors receive management fees, depending on the agreement,
computed as either an overall fixed fee, a fixed fee per customer, a percentage
of net revenues of the center plus an incentive fee, or a percentage of gross
revenues of the center with some incentive clauses. The various management
agreements, including option periods, are scheduled to terminate between 2001
and 2015. The Genesis Debtors have arranged for the extension of various
mortgage and other loans to certain facilities under management contract. The
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Multicare Debtors also provided management services to eldercare centers
pursuant to similar management agreements in return for management fees
specified in the relevant agreement.
Group Purchasing. The Genesis Debtors jointly own and operate The
Tidewater Healthcare Shared Services Group, Inc. ("Tidewater"), one of the
largest group purchasing companies in the MidAtlantic region. Tidewater provides
purchasing and shared service programs specially designed to meet the needs of
eldercare centers and other long-term care facilities. Tidewater's services are
contracted to approximately 3,100 members with over 308,000 beds in 45 states
and the District of Columbia.
Other Services. The Genesis Debtors employ or have consulting
arrangements with approximately 81 physicians, physician assistants, and nurse
practitioners who are primarily involved in designing and administering clinical
programs and directing patient care. The Genesis Debtors also provide an array
of other specialty medical services in certain parts of their eldercare network,
including portable x-ray and other diagnostic services, home healthcare
services, adult day care services, consulting services, respiratory health
services and hospitality services such as dietary, housekeeping, laundry, plant
operations, and facilities management services.
5. Revenue Sources
The Genesis Debtors and the Multicare Debtors receive revenues from
Medicare, Medicaid, private insurance, self-pay residents, other third party
payors, and long term care facilities which utilize their specialty medical
services. The health care industry is experiencing the effects of the federal
and state governments' trend toward cost containment, as government and other
third party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures, combined with the increasing influence of managed care payors and
competition for patients, generally have resulted in reduced rates of
reimbursement for services provided by the Genesis Debtors and the Multicare
Debtors.
The sources and amounts of the patient revenues for the Genesis Debtors
and the Multicare Debtors are determined by a number of factors, including
licensed bed capacity and occupancy rates of the nursing centers, the mix of
patients, and the rates of reimbursement among payors. Changes in the case mix
of the patients as well as payor mix among private pay, Medicare, and Medicaid
significantly affect the profitability of the Genesis Debtors and the Multicare
Debtors.
Additional detail on the operations and business segments of the
Genesis Debtors and the Multicare Debtors can be found in Genesis's annual
report on Form 10-K for the fiscal year ended September 30, 2000 and quarterly
report on Form 10-Q for the fiscal quarter ended March 31, 2001, and in
Multicare's annual report on Form 10-K for the fiscal year ended September 30,
2000, and its quarterly report on Form 10-Q for the fiscal quarter ended March
31, 2001.
6. Personnel
At December 31, 2000, the Debtors employed over 46,000 people,
including approximately 33,000 full-time and 13,000 part-time employees.
Approximately 19% of these employees are physicians, nurses, and professional
staff. Approximately 13,000 of these employees are employed by the Multicare
Debtors.
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Including Multicare, the Debtors currently have 81 facilities that are
covered by, or are negotiating, collective bargaining agreements. The agreements
expire at various dates from 2001 through 2005 and cover approximately 5,100
employees. The Debtors believe that their relationship with their employees is
generally good.
The Debtors and the industry continue to experience significant
shortages in qualified professional clinical staff. They compete with other
healthcare providers and with nonhealthcare providers for both professional and
nonprofessional employees. As the demand for these services continually exceeds
the supply of available and qualified staff, the Debtors and their 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, each offering new and more
attractive wage and benefit packages. In addition to the wage pressures inherent
in this environment, the cost of training new employees amid the high turnover
rates has caused added pressure on the Debtors' operating margins. While the
Debtors have been able to retain the services of an adequate number of qualified
personnel to staff their facilities appropriately and maintain their standards
of quality care, there can be no assurance that continued shortages will not in
the future affect their ability to attract and maintain an adequate staff of
qualified healthcare personnel. A lack of qualified personnel at a facility
could result in significant increases in labor costs at such facility or
otherwise adversely affect operations at such facility. Any of these
developments could adversely affect the Debtors' operating results or business
strategy.
B. Events Leading to the Commencement of the Chapter 11 Cases
The Genesis Debtors and the Multicare Debtors believe that their
financial difficulties are attributable to a number of factors. First, the
federal government has made fundamental changes to the reimbursement for medical
services provided to eligible individuals. The changes have had a significantly
negative impact on the healthcare industry as a whole and on the Debtors' 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. Third, numerous other factors have
adversely affected the Debtors' cash flows, including increased labor costs,
increased professional liability costs and insurance, and increased interest
rates. Finally, as a result of declining governmental reimbursement rates and in
the face of rising inflationary costs, the Debtors were too highly leveraged to
service their indebtedness.
1. Medicare Reimbursement
The Health Insurance for Aged and Disabled Act (Title XVIII of the
Social Security Act), known as "Medicare," has made available to nearly every
American 65 years of age and older a broad program of health insurance designed
to help the nation's elderly meet hospital and other health care costs. Health
insurance coverage has been extended to certain persons under age 65 qualifying
as disabled and those having end-stage renal disease. Medicare includes three
related health insurance programs: (i) hospital insurance ("Part A"); (ii)
supplementary medical insurance ("Part B"); and (iii) a managed care option for
beneficiaries who are entitled to Part A and enrolled in Part B
("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently
55
administered by fiscal intermediaries (for Part A and some Part B services) and
carriers (for Part B) under the direction of CMS of the Department of Health and
Human Services ("HHS").
Pursuant to the Balanced Budget Act of 1997 and regulations promulgated
by HHS, reimbursement under the Medicare program has changed from a cost-based
retrospective reimbursement system to what is known as a prospective-payment
system ("PPS") for Medicare Part A services. The changes also resulted in the
adoption of fee screen schedules which limit and "cap" reimbursement for
Medicare Part B therapy services. The reimbursement rates under PPS were not
published until May 12, 1998, less than two months prior to the implementation
of PPS, and were significantly lower than anticipated within the industry.
The magnitude of the reduction in rates took the industry by surprise.
During the mid-1990's, CMS funded the development of the Multi-State Nursing
Home Care-Mix and Quality Demonstration. The purpose of that project was to
design, implement, and evaluate Medicare nursing home prospective payment and
quality monitoring system across several states. A number of facilities
participated in the demonstration and helped to perfect the case mix
classification system (RUG-III) developed to capture resource use of nursing
home patients. Under the demonstration project, most nontherapy ancillary costs
were passed through and Medicare Part B expenditures incurred during the
beneficiary's inpatient (Part A) stay were not considered. The industry was led
to believe that CMS would adjust its payment "grouper" to compensate for these
variable costs. That did not happen. First, the expected adjustments for
nontherapy ancillary costs were not made. Second, the Medicare Part B
expenditures during inpatient stays were undercalculated. Third, adjustments
were made that reduced the aggregate base year to the 1995 spending level.
Fourth, the market basket used by CMS to trend forward the 1995 expenditures to
1998 was defective. Fifth, the RUG-III case-mix classification system, as
implemented, was insensitive to patients requiring multiple services, e.g.,
rehabilitation and extensive medical care.
Since Medicare patients account for a substantial portion of the
Debtors' revenues, this change has materially and adversely affected the
financial condition of both the Genesis Debtors and the Multicare Debtors. Among
other effects, and despite efforts to reduce costs and otherwise adjust
operations, the Debtors' revenues fell short of the levels needed to service the
debt under their respective debt instruments.
In November of 1999, Congress passed the Medicare Balanced Budget
Refinement Act (the "Refinement Act"), which repealed the cap on Medicare Part B
services and provided for modest increases in the per diem rates paid to skilled
nursing facilities for their sickest patients. In spite of the Refinement Act,
the substantial reduction in reimbursement under the Medicare system has
materially impaired many of the lines of business of the Genesis Debtors and the
Multicare Debtors. Long-term care facilities now receive significantly less
compensation for any given level of care. In many cases, reimbursement does not
cover even the direct cost of care, let alone overhead and capital costs. The
Genesis Debtors' eldercare centers began implementation of PPS on October 1,
1998, and the majority of the Multicare Debtors' eldercare centers began
implementation of PPS on January 1, 1999.
On December 15, 2000, Congress passed the Benefit Improvement and
Protection Act of 2000 which, among other provisions, increases the nursing
component of Federal PPS rates by approximately 16.7% for the period 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
56
billing provision of BBRA will be repealed except for Medicare Part B therapy
services and the moratorium on the $1,500 therapy caps will be extended through
calendar year 2002.
The implementation of PPS has been identified as a significant factor
affecting the commencement of chapter 11 cases by five other national nursing
home chains (Vencor, Sun Healthcare Group, Inc., Integrated Health Services,
Inc., Mariner Post-Acute Network, Inc., and Mariner Health Group, Inc.), and the
bankruptcy of numerous smaller nursing home companies.
2. Medicaid Reimbursement
Medicaid (Title XIX of the Social Security Act) is a federal-state
cooperative program in which the federal government supplements funds provided
by the participating states for medical assistance to "medically indigent"
persons. The programs are administered by the applicable state welfare or social
service agencies. Although Medicaid programs vary from state to state,
traditionally they have provided for the payment of certain expenses, up to
established limits, at rates determined in accordance with each state's
regulations. Most states pay prospective rates and have some form of acuity
adjustment.
Although the amount of reimbursement varies significantly from state to
state, in general, Medicaid payments are lower than the costs associated with
treating those patients. Moreover, the Balanced Budget Act of 1997 repealed the
"Boren Amendment" federal payment standard for Medicaid payments to nursing
facilities effective October 1, 1997. The Boren Amendment required that Medicaid
payments to certain health care providers be reasonable and adequate in order to
cover the costs of efficiently and economically operated healthcare facilities.
This imbalance between Medicaid rates and the costs of providing
Medicaid patient care has been a chronic problem which, until the implementation
of PPS, was partially offset by Medicare reimbursement rates. With the
unanticipated and excessive reductions in Medicare reimbursement under PPS, the
Genesis Debtors and the Multicare Debtors no longer had the ability to subsidize
the treatment of their Medicaid patients while meeting their debt service
obligations.
3. Debt Burden
The most significant portion of the growth of the Genesis Debtors and
the Multicare Debtors has been through acquisitions. Those acquisitions were
financed through the sale of stock and the incurrence of a significant amount of
senior and junior debt obligations. The amount of debt (leverage) incurred was
based on revenue projections. Revenue projections were driven, for the most
part, by expected reimbursement from the Medicare and Medicaid programs. The
negative impact from the implementation of PPS changed the level of debt of the
Debtors from "moderate" to "far too high."
Following the completion of the Multicare acquisition, the Genesis
Debtors' obligations under their senior lender credit facility and Genesis's
senior subordinated notes alone aggregated in excess of $1.5 billion. Similarly,
the senior lender credit facility for the Multicare Debtors and Multicare's
senior subordinated notes aggregated over $700 million. Despite substantial
reductions in corporate overhead and operational changes, the Genesis Debtors
and the Multicare Debtors simply were unable to repay such indebtedness in
accordance with its terms.
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C. Prepetition Negotiations
In 1999, the Debtors developed a restructuring strategy based on an
infusion of additional equity, an increase in availability under existing bank
credit lines, and the sale of certain assets. These restructuring efforts are
described in detail in the most recent Form 10-K filed by Genesis. In early
2000, it became apparent that the Debtors would not be able to sell sufficient
assets to meet the repayment obligations under their existing debt obligations.
At that time they began discussions with the holders of their senior lender
claims. Those lenders agreed to forbear from exercising remedies due to certain
types of default through May 19, 2000, which was further extended through June
30, 2000. In addition, Genesis and The Multicare Companies, Inc. began
discussions with certain holders of their respective public senior subordinated
notes. Genesis and Multicare continued discussions with these creditor groups
until it became apparent that the businesses would require additional liquidity.
In addition, certain creditors threatened to commence involuntary bankruptcy
cases against Genesis and Multicare. During this process, Genesis and Multicare
determined to commence voluntary cases under chapter 11 of the Bankruptcy Code,
which, except for Healthcare Resources Corp., ultimately occurred on June 22,
2000.
D. Pending Litigation and Other Proceedings
1. The Genesis and Vitalink Actions Against the Manor Care Entities
On May 7, 1999, Genesis and Vitalink Pharmacy Services (d/b/a
NeighborCare(R)), a subsidiary of Genesis, filed multiple lawsuits requesting
injunctive relief and compensatory damages against HCR Manor Care, Inc. ("HCR
Manor Care"), Manor Care, Inc. ("Manor Care"), ManorCare Health Services, Inc.
("MCHS," and collectively, the "Manor Care Entities") and two principals of such
entities. The lawsuits arise from MCHS's threatened termination of long-term
pharmacy services contracts effective June 1, 1999. Vitalink filed a complaint
against HCR Manor Care, Manor Care, and MCHS in Baltimore City, Maryland circuit
court (the "Maryland State Court Action"). Genesis filed a complaint against HCR
Manor Care, Manor Care, and two of their principals in federal district court in
Delaware including, among other counts, securities fraud (the "Delaware Federal
Action"). Vitalink has also instituted an arbitration action before the American
Arbitration Association (the "Arbitration"). In these actions, Vitalink is
seeking a declaration that it has a right to provide pharmacy, infusion therapy,
and related services to all of HCR Manor Care's facilities and a declaration
that MCHS's termination of the long-term pharmacy service contracts was
unlawful. Genesis, certain of its subsidiaries, and Vitalink also seek over
$100,000,000 in compensatory damages and enforcement of a 10-year noncompetition
clause.
Genesis acquired Vitalink from Manor Care in August 1998. In 1991,
Vitalink and MCHS (then known as Manor Healthcare Corp.) had entered into
long-term master pharmacy, infusion therapy, and related agreements which gave
Vitalink the right to provide pharmacy services to all facilities owned or
licensed by MCHS and its affiliates. In 1998, the terms of the pharmacy service
agreements were extended to September 2004. Under the master service agreements,
Genesis and Vitalink receive revenues at the rate of approximately $107,000,000
per year. The projections upon which the valuation of the Genesis Debtors is
based assumes that the Manor Care Entities will not be allowed to terminate the
master service agreements and includes the amounts the Genesis Debtors expect to
receive in connection with these master service agreements over their remaining
3-1/2 year term. The termination of these agreements, if allowed, would decrease
the value of the New Common Stock, although it would not affect the Plan's
feasibility.
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By agreement dated May 13, 1999, the parties agreed to consolidate the
Maryland State Court Action relating to the master service agreements with the
Arbitration matter. Accordingly, on May 25, 1999, the Maryland State Court
Action was dismissed voluntarily. It is the position of the Genesis Debtors that
until such time as a final decision is rendered in such Arbitration, the parties
have agreed to maintain the master service agreements in full force and effect.
However, the Manor Care Entities take the position that the master service
agreements were properly terminated prior to the commencement of these chapter
11 cases and that upon a favorable ruling in the Arbitration they intend to
implement such termination.
The Manor Care Entities have asserted counterclaims in the Arbitration
seeking damages for Vitalink's alleged overbilling for products and services
provided to MCHS, a declaration that MCHS had the right to terminate the master
service agreements, and a declaration that Vitalink does not have the right to
provide pharmacy, infusion therapy, and related services to facilities owned by
HCR Manor Care (then known as Health Care and Retirement Corporation) prior to
its merger with Manor Care. According to an expert report submitted by the Manor
Care Entities on May 8, 2000, the Manor Care Entities are seeking $17,800,000 in
compensatory damages for alleged overbilling by Vitalink between September 1,
1998 and March 31, 2000.
On January 14, 2000, the Manor Care Entities moved to dismiss
Vitalink's claims in the Arbitration that it has a right to provide pharmacy and
related services to the HCR Manor Care facilities not previously under the
control of Manor Care. On May 17, 2000, the Arbitrator ordered the dismissal of
Vitalink's claims seeking a declaratory judgment and injunctive relief for
denial of Vitalink's right to service the additional HCR Manor Care facilities,
but sustained for trial Vitalink's claim seeking compensatory damages against
the Manor Care Entities for denial of that right.
Trial in the Arbitration was originally scheduled to begin on June 12,
2000. On May 23, 2000, however, the Arbitrator postponed the trial indefinitely
due to Vitalink's potential bankruptcy filing. In connection with this stay, the
parties agreed that MCHS may pay NeighborCare 90% of the face amount of all
invoices for pharmaceutical and infusion therapy goods and services that
NeighborCare renders to MCHS under the Master Service Agreements. After Genesis
and its affiliates, including Vitalink, commenced their chapter 11 cases on June
22, 2000, the Arbitration was automatically stayed pursuant to section 362(a) of
the Bankruptcy Code.
On August 1, 2000, the Manor Care Entities moved to lift the automatic
stay and compel arbitration. On September 5, 2000, the Bankruptcy Court denied
that motion, with leave to refile its request in 90 days. On December 8, 2000,
the Manor Care Entities filed a similar motion for relief from the stay. The
Genesis Debtors opposed the motion and filed their own motion to assume the
contracts between the parties. On February 6, 2000, the Bankruptcy Court ruled
in favor of the Manor Care Entities' renewed motion and deferred consideration
of the motion to assume until completion of the Arbitration. As a result, the
parties are proceeding forward in the Arbitration. The trial in the Arbitration
is now scheduled to commence during the week of July 30, 2001.
The Manor Care Entities have not filed proofs of claim in these chapter
11 cases. Accordingly, their claims for prepetition overcharges under the
contracts will not be a claim against the Genesis Debtors unless they
successfully assume those agreements. However, to the extent that the Manor Care
Entities have valid setoff or recoupment rights against any of the Debtors, they
will be entitled to reduce any recovery by such Debtors against any of the Manor
Care Entities by such amounts. Any such valid setoff or recoupment rights are
not being affected by the Plan.
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2. The Vitalink Action Against Omnicare and Heartland
On July 26, 1999, NeighborCare, through its Maryland counsel, filed an
additional complaint against Omnicare, Inc. ("Omnicare") and Heartland
Healthcare Services (a joint venture between Omnicare and HCR Manor Care)
seeking injunctive relief and compensatory and punitive damages. The complaint
includes counts for tortious interference with Vitalink's contractual rights
under its exclusive long-term service contracts with the Manor Care Entities. On
November 12, 1999, in response to a motion filed by the defendants, that action
was stayed pending a decision in the Arbitration.
3. The Manor Care Action Against Genesis in Delaware
On August 27, 1999, Manor Care, a wholly-owned subsidiary of HCR Manor
Care, filed a lawsuit against Genesis in federal district court in Delaware
based upon Section 11 and Section 12 of the Securities Act of 1933, as amended.
Manor Care alleges that in connection with the sale of the Genesis Series G
Cumulative Convertible Preferred Stock as part of the purchase price to acquire
Vitalink, Genesis failed to disclose or made misrepresentations related to the
effects of the conversion to PPS on Genesis's earnings, the restructuring of
Genesis's ElderCare Joint Venture, the impact of the operations of Genesis's
Multicare affiliate on Genesis's earnings, the status of Genesis's labor
relations, Genesis's ability to declare dividends on the Series G Preferred
Stock, the value of the conversion right attached to the Series G Preferred
Stock, and information relating to the ratio of combined fixed charges and
preference dividends to earnings. Manor Care seeks, among other things,
compensatory damages and rescission of the purchase of the Series G Preferred
Stock.
On November 23, 1999, Genesis moved to dismiss this action on the
ground, among others, that Manor Care's complaint failed to plead fraud with
particularity. On September 29, 2000, the court granted that motion in part and
denied it in part. Specifically, the court dismissed all of defendants'
allegations except those concerning the company's labor relations and the ratio
of combined fixed charges and preference dividends to earnings.
On January 18, 2000, Genesis moved to consolidate this action with the
Delaware Federal Action. That motion has been fully submitted and is awaiting
decision. As a result of the commencement of Genesis's chapter 11 cases, this
action is also automatically stayed pursuant to section 362(a) of the Bankruptcy
Code. However, as noted above, Manor Care has not filed a proof of claim in
these chapter 11 cases. Therefore, it will not be entitled to any affirmative
relief against the Genesis Debtors based on these claims. Notwithstanding the
fact that no proofs of claim have been filed, to the extent that Manor Care has
valid setoff or recoupment rights against any of the Debtors, it will be
entitled to reduce any recovery by such Debtors against Manor Care by such
amounts. Any such valid setoff or recoupment rights are not being affected by
the Plan.
4. The Manor Care Action Against Genesis in Ohio
On December 22, 1999, Manor Care filed a lawsuit against Genesis and
others in the United States District Court for the Northern District of Ohio.
Manor Care alleges, among other things, that the Series H Senior Convertible
Participating Cumulative Preferred Stock and Series I Senior Convertible
Exchangeable Participating Cumulative Preferred Stock were issued in violation
60
of the terms of the Series G Preferred Stock and the Rights Agreement dated as
of April 26, 1998 between Genesis and Manor Care. Manor Care seeks, among other
things, damages and rescission or cancellation of the Series H and Series I
Preferred Stock. On February 29, 2000, Genesis moved to dismiss this action on
the ground, among others, that Manor Care's complaint failed to state a cause of
action. This motion has been fully submitted, including supplemental briefing by
both parties, and is awaiting decision. As a result of the commencement of
Genesis's chapter 11 cases, this action is also automatically stayed pursuant to
section 362(a) of the Bankruptcy Code. However, as noted above, Manor Care has
not filed a proof of claim in these chapter 11 cases. Therefore, it will not be
entitled to any affirmative relief against the Genesis Debtors based on these
claims. Notwithstanding the fact that no proofs of claim have been filed, to the
extent that Manor Care has valid setoff or recoupment rights against any of the
Debtors, it will be entitled to reduce any recovery by such Debtors against
Manor Care by such amounts. Any such valid setoff or recoupment rights are not
being affected by the Plan.
5. Age Institute
On November 27, 2000, Genesis, along with several other Genesis
Debtors, filed an adversary proceeding in their chapter 11 cases against four
related nursing home owners affiliated with AGE Holdings, Inc. (the "AGE
Entities") to collect unpaid receivables, among other things. In response, the
AGE Entities filed counterclaims against the Genesis Debtors alleging violations
of RICO, fraud, lender liability, breach of fiduciary duty, breach of management
agreements, breach of professional standards/professional negligence,
conversion, interference with business relations, and conspiracy. The
counterclaims seek punitive, compensatory, statutory, and/or exemplary damages,
as well as claims to invalidate certain working capital and subordinated loan
obligations of the AGE Entities to the Genesis Debtors. The counterclaims
further seek administrative expense treatment of any amount found due to the AGE
Entities for postpetition damages. While the Genesis Debtors believe that the
counterclaims have no merit, in the event the AGE Entities were to prevail on
their counterclaims, such counterclaims could exceed the claims of the Genesis
Debtors against the AGE Entities. The AGE Entities have filed proofs of claim
(in unliquidated amounts) in the Genesis Reorganization Cases in connection with
their counterclaims. It is anticipated that the adversary proceeding will not be
tried until the summer of 2002. It should be noted that any recovery against the
AGE Entities is uncertain. As part of the mechanics of distribution under the
Plan, the Genesis Debtors will estimate the amount that the AGE Entities may
establish as an allowed claim against the Genesis Debtors. This amount will
result in a holdback from the distribution to unsecured creditors in Classes G4
and G5 until the claims of the AGE Entities are resolved. Based upon the
information the Genesis Debtors have at this time, the Genesis Debtors believe
that such holdback, if any, will be minimal with respect to this dispute.
Inasmuch as the adversary proceeding will not be tried until the summer of 2002,
the AGE Entities and the Genesis Debtors have agreed that the AGE Entities will
retain the ability to (i) set off or recoup any allowed claims they may have
against the Genesis Debtors against the claims the Genesis Debtors have against
the AGE Entities and assert any counterclaims against the Genesis Debtors even
if said counterclaims exceed the Genesis Debtors' claims, and (ii) participate
in any recovery for holders of claims in Class G4 notwithstanding that the Plan
will become effective before the claims of the AGE Entities are resolved.
6. Qui Tam Suits
Currently pending against Genesis or its affiliates, divisions, or
subsidiaries are five private citizen suits filed under the federal False Claims
Act, 31 U.S.C.ss. 3729 et seq. Genesis has reached an agreement to resolve four
of the pending suits. For a description of that settlement, see section II.K,
61
above. The remaining private citizen suit, styled U.S. ex rel Scherfel v.
Genesis Health Ventures et al. (D.N.J.), is the subject of a proof of claim in
the Genesis reorganization case.
In the Scherfel suit, the plaintiff alleges that a pharmacy owned by
NeighborCare, Inc. failed to process Medicaid credits for returned medications.
The allegations are vaguely alleged for other jurisdictions. While the action
was under seal in United States District Court, Genesis fully cooperated with
the Department of Justice's evaluation of the allegations. On or about March
2001, the Department of Justice declined to intervene in the suit and prosecute
the allegations. The plaintiff filed a proof of claim in the bankruptcy
proceeding initially for approximately $650 million and more recently has
submitted an amended claim in the amount of approximately $325 million. The
Debtors believe that the allegations have no merit and intend to object to the
proof of claim and defend the suit. In the event the Debtors are incorrect, any
claims ultimately allowed in connection with this suit will be treated as part
of Class G4 (Genesis General Unsecured Claims) and thus would dilute the
recovery for holders of claims in Class G4 on a pro rata basis. Inasmuch as the
claims in Classes G4 and G5 share recoveries on a pro rata basis, any recovery
against the Genesis Debtors in connection with the Scherfel suit will dilute the
recoveries for the holders of other claims in those classes (which aggregate
$467,494,000).
7. Personal Injury and Employment Law Litigation
Prior to the Commencement Date, the Debtors and/or persons or entities
which the Debtors indemnify, were defendants in approximately 375 prepetition
lawsuits alleging personal injury, employment disputes, and similar allegations,
and/or potential lawsuits where a statutory notice of intent to sue was timely
served. These lawsuits allege a variety of personal injury allegations arising
from patient care, automobile accidents, and other personal injury incidents, as
well as employment discrimination, wrongful termination, and related employment
law claims. The lawsuits are pending in state and federal courts nationwide.
The majority of the claims asserted in the personal injury lawsuits are
covered by insurance. Until June 1, 2000, the Debtors' various insurance
policies on personal injury claims contained neither a self-insured retention
nor a deductible. Between June 1, 2000 and the Commencement Date, the relevant
insurance policies contained a self-insured retention of $500,000 per claim,
subject to a $5 million aggregate, except in the state of Florida where the
relevant insurance policies contained a self-insured retention of $2.5 million
per claim, subject to a $9 million aggregate. Thus, insurance coverage for
claims arising in the 22-day period from June 1, 2000 until the Commencement
Date are subject to such limitations. However, the Debtors believe that these
amounts are fully covered by assets in the Debtors' captive insurance company,
which is a non-Debtor subsidiary of Genesis. As of June 10, 2001, the Debtors
are aware of 15 claims for which counsel for the claimant has requested
insurance information from the Debtors where at least a portion of such claims
might be attributed to the period June 1, 2000 through the Commencement Date.
Certain claims asserted in the personal injury lawsuits, such as claims for
punitive damages, may be uninsured or uninsurable in certain states. With
respect to employment law claims, the Debtors purchased an insurance policy in
1999 with a $500,000 self-insured retention per claim. The Debtors vigorously
dispute the allegations contained in the personal injury and employment
lawsuits. The Debtors are not aware of any general denials of, or challenges to,
coverage by any of the Debtors' insurance carriers other than the possibility of
the existence of individual reservation of rights letters received in the
ordinary course.
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To the extent these claims are not covered by insurance, they
will be treated as part of Class G4 or M4, as applicable. The following table
sets forth certain information about the Debtors' personal injury insurance
coverage:
# of Open # of
Policy Coverage Period Claims* Aggregate Coverage Paid Losses* Opt-Outs**
- -------------------------------------------------------------------------------------------------------------
June '95 - May '96 (Genesis) 13 $50 million*** $5,005,369 4
Mar. '95 - Feb. '96 (Multicare) 3 $52 million 358,419 2
Mar. '96 - Apr. 12, 1996 (Multicare) 1 $52 million 137,527 1
June '96 - May '97 (Genesis) 31 $50 million*** 10,809,194 7
Apr. 12, 1996 -- Apr. '97 (Multicare) 14 $52 million 1,537,846 7
June '97 - May '98 (Genesis) 34 $50 million*** 7,413,521 4
May '97 - June '98 (Multicare) 20 $52 million 1,098,903 5
June '98 - May '99 (Genesis & Multicare) 102 $125 million*** 4,146,320 27
June '99 - May '00 (Genesis & Multicare) 76 $128 million 476,235 3
June '00 - May '01 (Genesis & Multicare) 52**** $110 million 10,715 0
*These numbers are based upon information provided to the Debtors by their
insurance carriers AIG, CAN, and Zurich as of April 5, 2001, January 15, 2001,
and March 31, 2001, respectively. There can be no guarantee that other claims
did not settle prior to the date such numbers were compiled by the respective
insurance carrier.
**Number of plaintiffs who have stipulated to relief from the automatic stay and
agreed to proceed against insurance coverage only. ***The coverage specified is
in addition to $1 million per occurrence/$3 million aggregate per location
coverage.
****As set forth in the text above, as of June 10, 2001, the Debtors are aware
of 15 claims in which counsel for the claimant has requested insurance
information from the Debtors where at least a portion of such claims might be
attributed to the period June 1, 2000 through June 22, 2000. The aggregate
coverage for this policy is in excess of the self-insured retention (in the
amounts described above) under this policy. However, the Debtors believe that
these amounts are fully covered by the Debtors' captive insurance company.
8. Multicare Litigation
The Multicare Debtors are not party to any significant litigation,
other than litigation arising from the ordinary course of their businesses.
9. Ordinary Course Litigation
The Debtors are parties to various other legal actions and
administrative proceedings and are subject to various claims arising in the
ordinary course of business.
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VI.
Significant Events During the Reorganization Cases
A. Filing and First Day Orders
On June 22, 2000, the Genesis Debtors (other than Healthcare Resources
Corp.) and the Multicare Debtors filed their petitions under chapter 11 of the
Bankruptcy Code. On June 23, 2000, the Bankruptcy Court entered certain orders
designed to minimize the disruption of the Debtors' business operations and to
facilitate their reorganization.
o Case Administration Orders. These orders (i) authorized separate
joint administration of the Genesis Debtors' chapter 11 cases and
Multicare Debtors' chapter 11 cases, (ii) established interim
compensation procedures for professionals, (iii) granted an
extension of the time to file the Debtors' schedules and
statements, and (iv) authorized the mailing of initial notices and
all other mailings directly to parties in interest and the filing
of a list of creditors without claim amounts in lieu of a matrix.
o Payments on Account of Certain Prepetition Claims. The Bankruptcy
Court authorized the payment of prepetition (i) wages,
compensation, and employee benefits, (ii) sales and use taxes,
(iii) claims of common carriers and warehousemen, (iv) claims of
critical trade vendors, and (v) refunds to patients.
o Business Operations. The Bankruptcy Court authorized the Genesis
Debtors and the Multicare Debtors to (i) comply with certain
license and regulatory agency fee requirements, (ii) continue
customer service programs, (iii) continue prepetition premium
obligations under workers' compensation insurance and all other
insurance policies, and bonds relating thereto, (iv) maintain
existing bank accounts and business forms, (v) continue their
existing cash management system, (vi) employ certain investment
guidelines, (vii) provide adequate assurance to utility companies
including the payment of certain prepetition claims, (viii) grant
administrative expense status to undisputed obligations arising
from the postpetition delivery of goods ordered in the prepetition
period and make payment of such claims in the ordinary course of
business, and (ix) maintain patient trust accounts.
o Other Stipulations. The Bankruptcy Court authorized a stipulation
between one of the Genesis Debtors and Cardinal Distribution which
provided for a long-term commitment by Cardinal Distribution to
continue to ship inventory on credit terms in exchange for the
payment over time of certain secured prepetition amounts owed to
that company. That stipulation has been amended to provide
additional postpetition credit to the Genesis Debtors. The
Bankruptcy Court also authorized separate stipulations between the
Genesis Debtors and certain agencies of the federal government and
between the Multicare Debtors and those entities. These
stipulations provided adequate protection to the federal government
in the form of payment over time of certain prepetition
overpayments alleged to have been made under the Medicare program.
The stipulation with the Genesis Debtors was amended to reduce the
amounts to be paid and provide the federal government with an
administrative expense claim to the extent of additional amounts
discovered.
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o Bankruptcy Matters. The Bankruptcy Court authorized the Genesis
Debtors and the Multicare Debtors to (i) establish notice
procedures and (ii) obtain interim postpetition financing under
debtor in possession credit agreements on a superpriority basis for
$250 million (for the Genesis Debtors) and $50 million (for the
Multicare Debtors), pending further interim and final hearings.
On July 31, 2000, Healthcare Resources Corp. ("HRC"), one of the
Genesis Debtors, filed a petition under chapter 11 of the Bankruptcy Code. On
August 1, 2000, the Bankruptcy Court entered orders in HRC's reorganization case
substantially similar to the orders entered on June 23, 2000 for the other
Genesis Debtors. HRC is a party to the Genesis debtor in possession credit
facility.
B. Appointment of the Creditors' Committee
On July 12, 2000, the United States Trustee for the District of
Delaware, pursuant to its authority under section 1102 of the Bankruptcy Code,
appointed a statutory committee of unsecured creditors in the Genesis
reorganization cases and a separate committee in the Multicare reorganization
cases.
1. Genesis Creditors' Committee
The Genesis creditors' committee currently consists of the following
six members:
American General Investment Management, L.P.
2929 Allen Parkway
Houston, Texas 77019
Abbot Laboratories
625 Cleveland Avenue
Columbus, Ohio 43215
GMS Group, LLC
c/o LeBouf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019
Service Employees International Union, AFL-CIO
c/o Cohen, Weiss and Simon, LLP
3030 W. 42nd Street
25th Floor
New York, New York 10036
State Street Bank and Trust Company
2 Avenue de Lafayette
6th Floor
Boston, Massachusetts 02111
The Bank of New York
101 Barclay Street
Floor 21W
New York, New York 10286
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The Genesis creditors' committee has retained Akin, Gump, Strauss,
Hauer & Feld, L.L.P., 590 Madison Avenue, New York, New York 10022, and
Pachulski Stang Ziehl Young & Jones PC, 919 N. Market Street, 16th Floor, P.O.
Box 8075, Wilmington, Delaware 19899-8705, as its attorneys, and Houlihan Lokey
Howard & Zukin, 2 First National Plaza, 20 South Clark Street, 21st Floor,
Chicago, Illinois 60603-1881, as its financial advisors. The Genesis creditors'
committee has actively participated in all aspects of the Genesis reorganization
cases.
2. Multicare Creditors' Committee
The Multicare creditors' committee currently consists of the following
three members:
Mackay-Shields Financial Corp.
9 West 57th Street
New York, NY 10019
HSBC Bank USA, as Indenture Trustee
452 Fifth Avenue
New York, NY 10018-2706
Gulf South Medical Supply, Inc.
4345 Southpoint Blvd
Jacksonville, FL 3216
The Multicare creditors' committee has retained Kasowitz, Benson,
Torres & Friedman LLP, 1633 Broadway, New York, New York 10019, and Saul, Ewing,
Remick & Saul LLP, 222 Delaware Avenue, Suite 1200, P.O. Box 1266, Wilmington,
Delaware 19899-1266, as its attorneys, and Chanin Capital Partners, 11100 Santa
Monica Blvd, Suite 830, Los Angeles, California 90025, as its financial
advisors. The Multicare creditors' committee has actively participated in all
aspects of the Multicare reorganization cases.
C. DIP Credit Agreements
1. Genesis Debtors
On July 18, 2000, the Bankruptcy Court entered a final order (i)
authorizing the Genesis Debtors to (a) obtain postpetition financing and (b)
utilize cash collateral, and (ii) granting adequate protection to certain
prepetition secured parties. In particular, the Bankruptcy Court approved that
certain Revolving Credit and Guaranty Agreement, dated as of June 22, 2000,
among Genesis, as borrower, the other Genesis Debtors, as guarantors, Mellon
Bank, N.A., as agent, and the lender parties thereto. This agreement provided
for maximum borrowings of $250 million and terminates on December 21, 2001. The
obligations of the Genesis Debtors under this agreement are secured by
substantially all the assets of the Genesis Debtors, subject to certain existing
mortgages and inventory liens. The liens granted to the postpetition lenders are
senior to the liens securing the Genesis Senior Lender Claims. As of the date
hereof, the Debtors have drawn approximately $180,000,000 under their debtor in
possession credit facility. The borrowings under this facility have been used to
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make payments to the holders of the Genesis Senior Lender Claims, to issue
letters of credit, to make payments to Cardinal Distribution, and to make other
miscellaneous payments. See section II.E.2, above, for a description of those
claims and the payments made. The Genesis Debtors amended certain covenants
under their debtor in possession credit facility as of February 14, 2001, to
bring those covenants into line with current performance and projections.
2. Multicare Debtors
On July 18, 2000, the Bankruptcy Court entered a final order (i)
authorizing the Multicare Debtors to (a) obtain postpetition financing and (b)
utilize cash collateral, and (ii) granting adequate protection to certain
prepetition secured parties. In particular, the Bankruptcy Court approved that
certain Revolving Credit and Guaranty Agreement, dated as of June 22, 2000,
among Multicare, as borrower, the other Multicare Debtors, as guarantors, Mellon
Bank, N.A., as agent, and the lender parties thereto. This agreement provided
for maximum borrowings of $50 million and terminates on December 21, 2001. The
obligations of the Multicare Debtors under this agreement are secured by
substantially all the assets of the Multicare Debtors, subject to certain
existing mortgages and inventory liens. The liens granted to the postpetition
lenders are senior to the liens securing the Multicare Senior Lender Claims. As
of the date hereof, the Debtors have not drawn any funds under this debtor in
possession credit facility, although letters of credit for approximately $2
million issued under the facility are outstanding. The Multicare Debtors have
been paying the Genesis Debtors under the various service agreements on a
current basis postpetition. The Multicare Debtors amended certain covenants
under their debtor in possession credit facility as of February 14, 2001, to
bring those covenants into line with current performance and projections.
D. Cash Collateral Protection
1. Genesis Debtors
At the commencement of these chapter 11 cases, a number of third-party
lenders, including the holders of the Genesis Senior Lender Claims, had an
interest in the Genesis Debtors' receivables or other cash collateral. In order
to provide for the continued use of such cash collateral, the Genesis Debtors
agreed to provide certain protections to those third-party lenders. For the
holders of the Genesis Senior Lender Claims, the protections consisted of the
following:
o a superpriority administrative claim against the Genesis Debtors,
immediately junior to the claims of the lenders under the debtor in
possession credit facility
o liens on substantially all the property of the Genesis Debtors
immediately junior to the claims of the lenders under the debtor in
possession credit facility and existing third party liens
o payment of an amount equal to interest on the Genesis Senior Lender
Claims at the contractual nondefault rate
o reimbursement for the reasonable fees and disbursements of counsel
and consultants to the holders of the Genesis Senior Lender Claims
and payment of certain administrative fees
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In addition, the Bankruptcy Court entered a generic order protecting
all other third party lenders for the use of cash collateral that they had an
interest in by providing a postpetition interest in certain accounts and
inventory. Since entry of that order, the Genesis Debtors have agreed to provide
more specific adequate protection to certain third party lenders, based on the
extent to which the claims of such lenders are secured. For Subclasses G1-5,
G1-6, and G1-7, the Genesis Debtors agreed to pay amounts equal to postpetition
interest at contractual nondefault rates and to pay real estate taxes and
insurance on the underlying real property collateral. For Subclass G1-8, the
Genesis Debtors agreed to pay amounts equal to postpetition interest at
contractual nondefault rates and to maintain insurance on the underlying real
property collateral. Finally, for Subclass G1-12, the Genesis Debtors agreed to
pay postpetition real estate taxes and maintain insurance on the underlying real
property collateral.
2. Multicare Debtors
As of the Commencement Date, the Multicare Debtors also required the
continued use of cash collateral of certain third parties holding security
interests in specified accounts receivable, inventory, or other rights to
payments, or cash proceeds thereof. The Multicare Debtors therefore requested
and received authority from the Bankruptcy Court to use cash collateral as is
necessary to continue the Multicare Debtors' business operations. The
protections granted to the holders of the Multicare Senior Lender Claims in
return for permitting the Multicare Debtors' continued use of cash collateral
consisted of the following:
o a superpriority administrative claim against the Multicare Debtors,
immediately junior to the claims of the lenders under the debtor in
possession credit facility
o liens on substantially all the property of the Multicare Debtors
immediately junior to the claims of the lenders under the debtor in
possession credit facility and existing third party liens
o reimbursement for the reasonable fees and disbursements of counsel
and consultants to the holders of the Multicare Senior Lender
Claims and payment of certain administrative fees
To date, the Multicare Debtors have not been required to provide more
specific adequate protection to any third party lenders (except for Subclass
M1-4), although the Multicare Debtors presently are engaged in discussions with
a number of such lenders regarding more specific adequate protection. For
Subclass M1-4, the Multicare Debtors agreed to bring current their prepetition
and postpetition obligations on the underlying loan and to remain current on a
go-forward basis.
E. Key Employee and Executive Retention Programs
The Genesis Debtors have established two separate retention programs
for key employees. The first program covers all key employees, other than the
top four executives of Genesis and was approved by the Bankruptcy Court on
September 5, 2000. The second program covers the top four executives of Genesis
and was approved by the Bankruptcy Court on February 23, 2001. Both retention
programs are designed to encourage key employees to remain with the Debtors by
providing them with additional incentives, including cash payments. Inasmuch as
the Multicare Debtors do not have any management employees, no retention
programs have been implemented for those Debtors (although the Multicare Debtors
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did request and receive authority from the Bankruptcy Court to reimburse Genesis
for retention bonuses made by it to administrators and directors of nursing at
those of Multicare's facilities managed by Genesis).
1. First Retention Program
Pursuant to the first retention program, a maximum aggregate of $11.5
million in retention bonus payments are available for all qualifying key
employees. The retention payments, paid out over a course of four payments
beginning September 30, 2000 and ending on May 31, 2001, are available to middle
managers, senior officers, directors, or officers (other than the top four
executives of Genesis) who were employed by the Genesis Debtors on or before
April 1, 2000, and continue to be employed on the date of payment. As part of
this program, the Genesis Debtors also assumed 24 employment agreements of
certain key employees.
2. Second Retention Program
The second retention program, which was not submitted to the Bankruptcy
Court until several months after the initial program was implemented, is
designed to retain the top four executives through the restructuring process and
beyond. The program does not include any guarantied retention payments. Instead,
it provides for incentive or restructuring payments to be made on the Effective
Date. The aggregate amount of such payments will be approximately $2.1 million
if the Effective Date is August 31, 2001. Such amounts increase or decrease if
the Effective Date is earlier or later than that date. An earlier Effective Date
results in an increase of 5% (up to a maximum increase of 15%) for each month. A
later Effective Date results in a decrease of 7.5% (up to a maximum decrease of
15%) for each month.
The program also provides severance protection in an amount equal to
two times the base salary of the executive. This protection is in place of
existing severance arrangements in the prepetition employment agreements for
those individuals. In exchange for such protection, each executive will agree to
a two-year noncompete arrangement.
Finally, the program provides for the assumption of certain deferred
compensation arrangements and the forgiveness of certain loans that three of the
executives incurred in order to comply with a prepetition requirement by the
Board of Directors that they purchase shares of the stock of Genesis. The
forgiveness will occur on the earlier of the first anniversary of the Effective
Date or the termination of the employment of the executive. The forgiveness
includes an agreement to pay any taxes due from the executives due to such
forgiveness. The aggregate amount of such loans is approximately $2.5 million.
F. Claims Process and Bar Date
1. Schedules and Statements
On October 19, 2000, the Genesis Debtors filed with the Bankruptcy
Court their statement of financial affairs, schedules of assets and liabilities,
schedules of executory contracts and unexpired leases, and schedule of equity
security holders. The Genesis Debtors' schedules and statements were filed on a
partially consolidated basis.
On October 19, 2000, the Multicare Debtors filed with the Bankruptcy
Court their statement of financial affairs, schedules of assets and liabilities,
schedules of executory contracts and unexpired leases, and schedule of equity
security holders. The Multicare Debtors' schedules and statements were filed on
a partially consolidated basis.
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2. Bar Date
By separate orders dated November 6, 2000, the Bankruptcy Court fixed
December 19, 2000, at 4:00 p.m. (Eastern Time) as the date and time by which
proofs of claim were required to be filed in the Genesis and Multicare
reorganization cases, except that governmental entities have until June 25,
2001, at 4:00 p.m. (Eastern Time) to file proofs of claim against the Genesis
Debtors and the Multicare Debtors. In accordance with the orders fixing the bar
date, on or about November 6, 2000, notices informing creditors of the last date
to timely file proofs of claims, and a "customized" proof of claim form,
reflecting the nature, amount, and status of each creditor's claim as reflected
in the schedules of assets and liabilities, were mailed to all creditors listed
on the schedules of assets and liabilities. In addition, consistent with that
order, the Debtors caused to be published in the national editions of the Wall
Street Journal, New York Times, and USA Today a notice of the last date to
timely file proofs of claim.
G. ElderTrust Transactions
In November 2000, the Genesis Debtors and the Multicare Debtors reached
agreements to restructure their relationship with ElderTrust, a Maryland
healthcare real estate investment trust, and certain of its affiliates
(collectively, "ElderTrust"). On January 4, 2001, the Bankruptcy Court approved
those agreements. The following transactions were consummated on January 31,
2001. The agreements with ElderTrust cover leases and mortgages for 33
properties operated by the Genesis Debtors and the Multicare Debtors, either
directly or through joint ventures. Under its agreement with ElderTrust, Genesis
has (i) assumed its leases with ElderTrust, subject to certain modifications,
including a reduction in annual lease expenses of $745,000, (ii) extended the
maturity and reduced the principal balances for three assisted living properties
by $8,500,000 through the satisfaction of an ElderTrust obligation of like
amount, and (iii) acquired a building currently leased from ElderTrust, which is
located on the campus of a Genesis skilled nursing facility, for $1,250,000.
Pursuant to its agreement with ElderTrust, the Multicare Debtors sold
three owned assisted living properties that were mortgaged to ElderTrust in
exchange for a release of principal amounts owed totaling $19,500,000.
ElderTrust has leased the properties back to the Multicare Debtors under a new
ten-year lease with annual rents of $791,561.
H. CareFirst Transactions
On January 4, 2001, the Bankruptcy Court approved the Genesis Debtors'
settlement agreement with CareFirst of Maryland, Inc., a health insurance
corporation, and its affiliates (collectively, "CareFirst"). This agreement
settles certain disputes among the Genesis Debtors and CareFirst, and provides a
basis from which the Genesis Debtors are able to maintain their integral
business relationship with CareFirst and its 2.9 million members. More
specifically, the agreement authorizes the Genesis Debtors to (i) assume certain
contracts with CareFirst, including (a) home care provider contracts under which
the Debtors receive payments in exchange for arranging for or providing certain
home care services to CareFirst, and (b) preferred provider agreements which
formalize the Genesis Debtors' status as the preferred healthcare provider to
CareFirst, (ii) continue to hold as deposit without any impact resulting from
the Genesis reorganization cases, the aggregate $4 million in service deposits
previously provided by CareFirst, and provide the terms under which such service
deposits will be allocated, (iii) pay $4,673,398 to CareFirst as settlement for
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amounts owed under that certain Transition Agreement between certain of the
Genesis Debtors and CareFirst, dated October 20, 1999, and (iv) enter into new
business agreements with CareFirst. These agreements were consummated on January
19, 2001.
I. Swap Settlement
Genesis and Citibank, N.A. ("Citibank") are parties to certain interest
rate hedging agreements ("swap agreements"). Certain of those agreements allowed
Genesis to fulfill its obligation under its prepetition credit agreement to
hedge against a portion of the risk of the floating rate of interest in such
facility. The obligations of Genesis under swap agreements that met certain
requirements are entitled to share in the collateral securing the Genesis Senior
Lender Claims. On March 24, 2000, Citibank terminated all its swap agreements
with Genesis. Based on the underlying documents and information obtained from
other financial institutions engaged in interest rate hedging agreements,
Citibank asserted a claim against Genesis of approximately $28.5 million to
unwind the swap agreement. Citibank also asserted that such claims constituted
Genesis Senior Lender Claims. After negotiations between the parties, they
agreed to treat approximately 61% of the claim as a Genesis Senior Lender Claim
and the balance as a Genesis General Unsecured Claim in Class G4. The Bankruptcy
Court approved this settlement on May 11, 2001.
J. Alternative Dispute Resolution Procedures
The Genesis Debtors and the Multicare Debtors identified approximately
375 prepetition claims (not including claims in which a lawsuit has yet to be
commenced or a statutory pre-suit demand has yet to be served) (the "Pending
Actions") against the Debtors based on personal injury, employment litigation,
and similar claims by various entities (the "Claimants"). Certain Pending
Actions related or relate to claims against persons or entities for whom the
Debtors retain ultimate liability, including non-Debtor defendants in Pending
Actions who are current or former employees, officers, and directors of the
Debtors, and any person or entity indemnified by any of the Debtors or listed as
additional insureds under the Debtors' liability policies (collectively, the
"Indemnitees").
By motions dated March 19, 2001, the Genesis Debtors and the Multicare
Debtors respectively sought Bankruptcy Court approval of the implementation of
alternative dispute resolution procedures (the "ADR Procedures") to assist in
expediting the resolution of the Pending Actions. The ADR Procedures in the
Genesis Debtors' and the Multicare Debtors' reorganization cases are governed by
substantially similar "ADR Term Sheets." By orders dated June 8, 2001 and July
10, 2001, the Bankruptcy Court approved the Genesis Debtors' and the Multicare
Debtors' revised ADR Term Sheets, respectively (the "ADR Orders"). The ADR
Procedures are implemented as follows:
o The Debtors compiled lists of all the Pending Actions of which the
Debtors were aware (the "Preliminary ADR Claims Lists"). The
Debtors will serve upon the Claimant (or such Claimant's counsel,
if known) in each Pending Action a Bankruptcy Court approved notice
(the "ADR Notice") indicating that such Claimant's Pending Action
shall be deemed an "ADR Claim" and shall be subject to the ADR
Procedures.
o Additional Pending Actions, which are omitted from the Preliminary
ADR Claims Lists, will be added to the ADR Procedures by serving
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upon such Claimants (i) the appropriate ADR Orders; (ii) the
appropriate ADR Term Sheet; (iii) an ADR Notice; and (iv) an
Opt-Out Stipulation (as defined below) (the "Additional ADR
Claims"). If the holder of an Additional ADR Claim does not timely
object to inclusion in the ADR Procedures, or if the Bankruptcy
Court overrules such objection, such holder's Additional ADR Claim
will become subject to the ADR Procedures.
o The ADR Term Sheets provide for an injunction, which enjoins until
one year from the date of entry of the ADR Orders, holders of ADR
Claims and Additional ADR Claims from, among other things,
commencing or continuing any action or proceeding in any manner or
any place to collect or otherwise enforce such claims against the
Debtors or their property other than through the ADR Procedures
(the "ADR Injunction"). In addition, the ADR Injunction enjoins
proceedings against any Indemnitee and any direct action against a
third party payer (which includes insurance companies).
o The ADR Procedures establish a four stage process for the orderly
and efficient resolution of the ADR Claims and Additional ADR
Claims. The first stage is a formal demand/counteroffer stage,
where limited discovery is available to the parties. The second
stage is mediation. The third stage is binding arbitration for
those Claimants who have previously consented to such arbitration
and whose ADR and Additional ADR Claims are not resolved through
the first two stages of the ADR Procedures. The fourth stage, which
shall commence only after all mediations have been completed, is
relief from the automatic stay for those Claimants whose ADR Claims
and Additional ADR Claims are not settled or submitted to binding
arbitration.
o At any time, a Claimant has the option to opt out of the ADR
Procedures by entering into a stipulation with the Debtors (the
"Opt-Out Stipulation"), which requires the Claimant to (i) waive
any and all claims for punitive damages, attorneys' fees, and any
similar enhanced remedies; (ii) dismiss, with prejudice, any and
all claims against any Indemnitee; (iii) agree not to name any
Indemnitee as a defendant in the Pending Action; and (iv) agree to
limit his or her recovery, if any, solely to available insurance
proceeds and waive any and all rights to seek recovery from the
assets of the Debtors or their estates. Relief from the automatic
stay granted pursuant to an Opt-Out Stipulation shall commence no
earlier than four (4) months after the entry of the ADR Orders.
Because the ADR Notices were recently sent out in the Genesis reorganization
cases, and have not yet been sent out in the Multicare reorganization cases, the
Debtors are not aware of any Claimants who have elected to opt out of the ADR
Procedures to date.
K. Settlement with the Multicare Debtors
As described in section II.K, above, the Genesis Debtors and the
Multicare Debtors have entered into a settlement of the claims between them. The
Debtors intend to seek approval of that settlement at the hearing on
confirmation of the Plan.
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L. Appointment of Fee Auditor
On April 26, 2001, the Bankruptcy Court ordered the appointment of the
legal auditing firm Stuart, Maue, Mitchell & James, Ltd. as the fee auditor in
the reorganization cases to act as a special consultant to the Bankruptcy Court
for professional fee review and analysis.
M. Motion for Appointment of Trustee in the Multicare Reorganization Cases
On May 14, 2001, the statutory committee of unsecured creditors in the
Multicare reorganization cases filed a motion seeking, in the alternative, (i)
the appointment of a trustee to renegotiate the management services and other
agreements between Genesis and Multicare, evaluate and prosecute alleged claims
of Multicare against Genesis, and propose a competing plan of reorganization for
Multicare, or (ii) to force Multicare to bid out its agreements with Genesis.
Based on the distribution of property to Classes M4 and M5 under the Plan, the
Multicare committee has agreed to withdraw the motion, without prejudice. The
Multicare committee has also agreed that it will not refile the motion as long
as the Debtors are prosecuting the Plan or any other plan of reorganization that
provides the same economic benefit to Classes M4 and M5.
N. Potential Purchase of Pharmacy Business of Mariner Post-Acute Networks and
Mariner Health Group
Genesis and NeighborCare Pharmacy Services, Inc. ("NeighborCare" and
one of the Genesis Debtors) are considering entering into an asset purchase
agreement (the "APS Agreement") with Mariner Post-Acute Networks, Inc., Mariner
Health Group, Inc., and certain of their affiliates (collectively, the "Mariner
Debtors"). Under the APS Agreement, Genesis and NeighborCare propose to purchase
the pharmacy businesses of the Mariner Debtors and certain assets related to
those businesses (the "APS Pharmacy Business"). Genesis and NeighborCare will
also assume certain of the obligations of the Mariner Debtors in connection with
the performance of certain contractual employee-related obligations and the
payment of a portion of certain personal property and ad valorem taxes.
According to the Mariner Debtors, the APS Pharmacy Business provides pharmacy
and related services to a significant number of nursing care facilities.
The APS Agreement, which will be submitted for approval to the
Bankruptcy Court by separate motion, will require an initial cash payment of at
least $40 million, with additional earnout payments over time. Due to the fact
that the Mariner Debtors have also commenced chapter 11 cases under the
Bankruptcy Code, the sale of the APS Pharmacy Business is subject to an auction
procedure and approval by the Bankruptcy Court in their chapter 11 cases. The
APS Agreement will provide certain bidding protections for Genesis and
NeighborCare, including a breakup fee of $1.2 million. The Mariner Debtors will
seek court approval for the auction procedures, including the payment of the
breakup fee to Genesis and NeighborCare in the event the APS Pharmacy Business
is sold to a higher bidder. In addition, Genesis and NeighborCare will seek
approval from the Bankruptcy Court in their chapter 11 cases to purchase the APS
Pharmacy Business and obtain any necessary financing for that transaction.
Genesis and NeighborCare believe that the acquisition of the APS
Pharmacy Business will enhance NeighborCare's operations and increase the value
of their estates. However, it is not possible at this time to quantify those
benefits. In addition, it is not possible to predict whether Genesis and
NeighborCare ultimately will be the successful bidders for these assets.
Accordingly, the projections described in section IV, above, do not include any
adjustments for this potential acquisition.
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VII.
Governance of the Reorganized Debtors
A. Board of Directors of Reorganized Genesis
The initial Board of Directors of Reorganized Genesis will consist of
seven members, whose names, qualifications, and compensation will be available
upon request to the Genesis Debtors and will be posted on www.ghv.com no later
than seven days before the last date to vote to accept or reject the Plan. Six
members will be selected by the holders of the Genesis Senior Lender Claims and
the Multicare Senior Lender Claims. The Chief Executive Officer of Reorganized
Genesis will be the remaining director and Chairman of the Board. Each member of
the initial Board of Directors will serve on the Board of Directors in
accordance with Reorganized Genesis's Amended Certificate of Incorporation and
Bylaws, as the same may be amended from time to time. The Debtors expect that
the compensation for directors will include (i) $25,000 and options to purchase
2,500 shares of New Common Stock each year, (ii) $1,500 for attendance at each
board meeting, (iii) $1,000 for attendance at each meeting of a committee of the
board of directors, and (iv) a one-time grant of options to purchase 25,000
shares of New Common Stock. The final compensation will also be posted on
www.ghv.com no later than seven days before the last date to vote.
B. Senior Management of Reorganized Genesis
As of the Effective Date, Reorganized Genesis will enter into long term
employment agreements with its top four senior executives. In general, the
contracts provide for three year employment terms which are automatically
renewed unless either Reorganized Genesis or the employee provides advance
notice. The following table summarizes the base salary for the top four
executives of Reorganized Genesis:
Name Title Base Salary
------ ------- -----------
Michael R. Walker Chief Executive Officer and $850,000
Chairman of the Board
Richard R. Howard Vice Chairman $500,000
David C. Barr Vice Chairman $500,000
George V. Hager, Jr. Executive Vice President and $400,000
Chief Financial Officer
These executives will also be entitled to incentive compensation, based on a
determination by the new board of directors of Reorganized Genesis. The maximum
amount of incentive compensation for these employees under the current incentive
plan is 50% of their respective base salaries.
Reorganized Genesis will also adopt a new long term Management
Incentive Plan under which stock grants and options will be allocated to 129
management employees, including the senior executives. See section VIII.F,
below, for a description of the New Management Incentive Plan. Copies of the new
employment agreements and the New Management Incentive Plan will be part of the
Plan Supplement. The executives named above are also entitled to certain rights
under an executive retention plan approved by the Bankruptcy Court. That plan is
described in section VI.E, above.
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The Plan of Reorganization will be deemed a solicitation of the holders
of New Common Stock for approval of the New Management Incentive Plan. The
Debtors believe that the order confirming the Plan of Reorganization should
constitute such approval of the New Management Incentive Plan for purposes of
sections 422 and 162(m) of the Internal Revenue Code. There can be no assurance,
however, that the Internal Revenue Service will agree with such position.
VIII.
Other Aspects of the Plan of Reorganization
A. Analysis of the Proposed Merger of Genesis and Multicare
At the present time, Genesis manages the Multicare Debtors pursuant to
a management contract that was negotiated with the independent majority
shareholders of Multicare in 1997 which is comprehensive and encompasses all
management and administrative functions. For the reasons described in the
followings sections, both the Genesis Debtors and the Multicare Debtors have
concluded that a merger will result in the best outcome for the creditors who
will receive distributions under the Plan of Reorganization for the following
reasons:
At the present time, Genesis and Multicare employ a management
structure which serves the combined assets of both companies. Significant
efficiencies are realized through the maintenance of a single infrastructure,
particularly in an environment where qualified managerial personnel are
difficult to recruit and retain. The creation and execution of a common
operating strategy implemented using common practices enhances revenues for both
companies in the most efficient manner. For instance, Genesis and Multicare are
marketed using a common "ElderCare" branding strategy which promotes better name
recognition, increasing referrals, and enhances the options for referral sources
and third-party payers in geographically concentrated markets. Likewise, the
companies are able to leverage off of common resources, such as discharge
planning functions and care coordinators and the ElderCare telephone line, to
increase the admissions for both companies' centers. The utilization of common
systems and a single uniform set of policies and procedures improves internal
controls and compliance to standards which result in greater operating cost
efficiencies. The merger of Genesis and Multicare creates incentive for
additional investment of time and resources to enhance the companies' abilities
to realize efficiencies and capitalize on revenue opportunities across the wider
group of operating entities.
Together, Genesis and Multicare enjoy considerable purchasing power,
which is utilized to achieve favorable pricing for nearly all goods and services
needed for the operation of their businesses. Additionally, the size and clout
of the combined organization provides access to certain goods and services which
are more difficult to obtain, for various reasons. For instance, both Genesis
and Multicare are able to contract for adequate professional liability
insurance, which due to the recent exit of insurers has become significantly
more difficult to obtain.
Similarly, the availability of debt and equity capital, which has
become scarce for the long-term care industry and is essential to the long-term
viability and success of each company, is greatly enhanced through the merger of
the two companies. Capital markets favor larger and more diverse companies. For
instance, the proposed exit financing is possible due, in part, to the size of
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the combined credit facility, which promotes greater liquidity and the more
diversified business operation financed, which mitigates credit risk. Access to
capital is important for three reasons. First, the long term care industry is
real estate based and accordingly, capital intensive. Eldercare centers require
regular maintenance in order to remain competitive and meet regulatory
standards. Second, capital is necessary in order for either company to realize
new business opportunities or to provide necessary working capital for internal
growth. Finally, changes in the regulatory landscape, whether state or federal,
can result in a significant cash drain, which may be temporary or more
permanent, which effects can be mitigated through stronger liquidity. The larger
capital base and greater float for the new equity securities than either company
would have or enjoy individually enhances the market value for both Genesis and
Multicare.
While today Genesis and Multicare realize certain savings and
efficiencies from contracting with common accounting professionals for financial
auditing and consulting services, the merger of Genesis and Multicare into a
single corporate entity will eliminate the duplicative costs associated with
preparing separate audits and filing separate financial statements and other
documents as required by the federal securities laws.
In summary, the security the creditors are entitled to receive under
the proposed scenario incorporates the value of the combined Multicare and
Genesis estates. It is the position of both Debtors that through the
preservation of the common infrastructure, purchasing power, access to capital,
and opportunities for administrative cost reductions, value is created which
exceeds the value that each company would be able to realize independently.
B. Mechanics of the Merger
The merger will be implemented through the Plan of Merger, a copy of
which is part of the Plan Supplement. A subsidiary of Genesis will create a new
subsidiary - Multicare Acquisition Corporation -- to effectuate the merger.
Genesis, Multicare Acquisition Corporation, and Multicare will be parties to the
Plan of Merger. Authorization for the merger will be pursuant to the Plan of
Reorganization and the approval of the shareholders of Multicare Acquisition
Corporation and the deemed shareholders of Reorganized Multicare. As part of the
merger process, Multicare Acquisition Corporation will be merged into Multicare.
Note that the shareholders of Multicare will consist of the holders of the
Multicare Senior Lender Claims, the Multicare General Unsecured Claims, and the
Multicare Senior Subordinated Note Claims in accordance with the distribution
provisions of the Plan. The Plan of Merger will provide for the exchange of the
stock of Reorganized Multicare received by (i) the holders of the Multicare
Senior Lender Claims for New Senior Notes, New Convertible Preferred Stock, and
New Common Stock, (ii) the holders of the Multicare General Unsecured Claims for
New Common Stock and New Warrants, and (iii) the holders of the Multicare Senior
Subordinated Note Claims for New Common Stock and New Warrants.
C. Exit Facility -- Condition Precedent to Effective Date
The Effective Date cannot occur unless the Debtors arrange for
sufficient financing to pay the administrative expenses of their respective
chapter 11 cases (an "Exit Facility") and all the conditions precedent to the
initial extensions of credit thereunder shall be satisfied. The Genesis Debtors
estimate that their administrative expenses will total approximately $225
million, including repayment of their debtor in possession financing. The
Multicare Debtors estimate their administrative expenses at approximately $10
million. The Debtors expect to arrange for a revolving line of credit for
working capital purposes with availability of up to $150 million. In addition,
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to fund the administrative expenses of the reorganization cases, the Debtors
expect to issue senior secured debt of between $235 million and $245 million,
repayable at the end of 5-1/2 years. The Exit Facility will permit the New
Senior Notes to be outstanding. It is anticipated that the obligations under the
Exit Facility will be guarantied by all the Debtors and will be secured by all
their assets.
Several lending institutions have expressed an interest in providing an
Exit Facility in the amounts needed. In the alternative, it may be desirable for
Reorganized Genesis to raise funds in the public debt markets. The exact form
and terms of the Exit Facility selected by the Debtors will be finalized as the
Debtors prepare for confirmation of the Plan.
D. Distributions Under the Plan of Reorganization
One of the key concepts under the Bankruptcy Code is that only claims
and equity interests that are "allowed" may receive distributions under a
chapter 11 plan. This term is used throughout the Plan of Reorganization and the
descriptions below. In general, an "allowed" claim or "allowed" equity interest
simply means that the debtor agrees, or in the event of a dispute, that the
Bankruptcy Court determines, that the claim or interest, and the amount thereof,
is in fact a valid obligation of the debtor.
1. Timing and Conditions of Distributions
(a) Date of Distribution
Except as otherwise provided for in the Plan of Reorganization,
distribution on account of allowed claims will be made on or as soon as
practicable after the later of the Effective Date and the date an order allowing
a disputed claim becomes a Final Order. Disputed claims will be treated as set
forth below. All distributions to the holders of the Genesis Senior Lender
Claims and the Multicare Senior Lender Claims will be made to the individual
holders of the Genesis Senior Lender Claims and Multicare Senior Lender Claims
in such denominations and registered in the names of the holders as Mellon Bank,
N.A. shall have directed in writing.
(b) Surrender of Certain Securities Necessary for Distribution
Plans of reorganization generally require a holder of an instrument or
security of a debtor to surrender such instrument or security prior to receiving
a new instrument or security in exchange therefor under a plan of
reorganization. This rule avoids disputes regarding who is the proper recipient
of instruments or securities under a plan of reorganization.
As a condition to participating in the distribution under the Plan, a
holder of a certificated instrument or note must surrender such instrument or
note prior to the first anniversary of the Effective Date or provide the
Disbursing Agent with a satisfactory affidavit of loss and/or indemnity and
bond. Failure to do so will result in the forfeiture of such holder's right to
receive any distribution relating to such instrument or note. This requirement
does not apply to certificated instruments or notes that are being reinstated
under the Plan.
Holders of the Debtors' preferred or common equity interests shall not
be required to surrender such securities because they are not receiving a
distribution under the Plan of Reorganization on account of such securities.
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(c) Fractional Shares
No fractional shares of New Convertible Preferred Stock, New Common
Stock, or fractional New Warrants or cash in lieu thereof will be distributed.
For purposes of distribution, fractional shares of New Convertible Preferred
Stock or New Common Stock, and fractional New Warrants shall be rounded down to
the next whole number or zero, as appropriate.
(d) Final Distribution of New Common Stock and New Warrants
Upon the resolution or determination of all disputed claims, the
Disbursing Agent shall distribute to all holders of allowed claims entitled to
receive New Common Stock and New Warrants the amount of such securities that
such holders would have received if the resolution of all disputed claims had
been known on the Effective Date. In the event that dividend distributions have
been made with respect to the New Common Stock, such holder shall be entitled to
receive the allocable portion of such dividends without any interest with
respect thereto.
2. Certain Claims Allowed
Claims in the following classes are allowed in the following amounts
(exclusive of postpetition interest, if applicable):
Class Description Allowed Claim
-------------------------------------------------------------------------------
G2 Genesis Senior Lender Claims $1,193,460,000
G5 Genesis Senior Subordinated Note Claims 387,425,000
M2 Multicare Senior Lender Claims 443,400,000
M5 Multicare Senior Subordinated Note Claims 257,817,000
3. Procedures for Treating Disputed Claims Under the Plan of
Reorganization
For purposes of the following discussion, the term "allowed" when it
applies to a claim means that the claim has been recognized as a valid claim
against the Debtors and is entitled to participate in the class to which such
claim belongs.
(a) Disputed Claims
Disputed claims include those claims (i) listed by any Debtor in such
Debtors' schedules of assets and liabilities, as may be amended from time to
time, as not liquidated in amount or contingent or disputed, (ii) to which an
objection or request for estimation has been filed and not withdrawn or
determined, (iii) for which a proof of claim has been filed and with respect to
which no corresponding claim is listed in the schedules or the corresponding
claim is listed as other than contingent, disputed, or unliquidated but for
which the nature or amount of the claim as filed differs from that listed in the
schedules, or (iv) asserting tort claims.
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(b) Objections to Claims
The Debtors shall be entitled to object to all claims. Any objections
to claims shall be served and filed on or before one hundred and twenty (120)
days after the Effective Date or such later date as may be fixed by the
Bankruptcy Court.
(c) No Distributions Pending Allowance
If any portion of a claim is a disputed claim, no payment or
distribution shall be made on account of the claim until the disputed portion of
the claim becomes an allowed claim or is otherwise resolved. Pending the
allowance or disallowance of the disputed claims, the Debtors shall withhold
from the payments and distributions made pursuant to the Plan of Reorganization
to the holders of allowed claims the payments and distributions allocable to the
disputed claims as if the disputed claims had been allowed claims.
(d) Distributions After Allowance
Once a disputed claim becomes an allowed claim, the holder of such
allowed claim shall receive a distribution in accordance with the provisions of
the Plan of Reorganization. If the holder is entitled to a cash distribution
under the Plan, the cash distribution shall include interest, calculated at the
average rate received by the Debtors in their deposit accounts, from the
Effective Date until the date of distributions. Cash distributions shall be made
as soon as practicable after the order allowing the disputed claim becomes a
Final Order. If the holder of a disputed claim which becomes allowed after the
Effective Date is entitled to New Common Stock or New Warrants, the Disbursing
Agent may distribute to such holder the amount of shares of such securities as
such holder would have received had such holder's claim been allowed in such
amount on the Effective Date. In the event dividend distributions have been made
with respect to the New Common Stock, such holder shall be entitled to receive
such previously distributed dividends without any interest with respect thereto.
To the extent that a disputed claim is disallowed, the amount of
property withheld by the Debtors on account of such claim shall be retained by
the Debtors.
E. Treatment of Executory Contracts and Unexpired Leases
1. Contracts and Leases Not Expressly Rejected Are Assumed
All executory contracts and unexpired leases, except for those
expressly rejected by the Plan of Reorganization or by separate motion, are
assumed pursuant to the Plan of Reorganization, including the bonds executed by
Liberty Bond Services on behalf of the Debtors. The Plan of Reorganization
provides for the Debtors to reject those executory contracts and unexpired
leases specifically designated as a contract or lease to be rejected as
specified in the Schedule of Rejected Contracts attached to the Plan. Any time
prior to the first Business Day prior to the commencement of the hearing on
confirmation of the Plan of Reorganization, the Debtors may modify that list.
The Debtors will provide notice to the parties affected by any such amendment.
The Debtors expressly reserve the right to reject any contract in the event
there is a dispute concerning the amount necessary to cure defaults,
notwithstanding the fact that such dispute may arise after the confirmation of
the Plan.
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2. Cure of Defaults
Generally, if there has been a default (other than a default specified
in section 365(b)(2) of the Bankruptcy Code) under an executory contract or
unexpired lease, the debtor can assume the contract or lease only if the debtor
cures the default. Accordingly, a condition to the assumption of an executory
contract or unexpired lease is that any default under an executory contract or
unexpired lease that is to be assumed pursuant to the Plan of Reorganization
will be cured in a manner consistent with the Bankruptcy Code and as set forth
in the Plan of Reorganization.
3. Rejection Claims
If an entity with a claim for damages arising from the rejection of an
executory contract or unexpired lease under the Plan of Reorganization has not
filed a proof of claim for such damages, that claim shall be barred and shall
not be enforceable against the Debtors and the Reorganized Debtors unless a
proof of claim is filed with the Bankruptcy Court and served upon counsel for
the Debtors within thirty (30) days after the Confirmation Date.
F. Management Incentive Plan
Reorganized Genesis will adopt a New Management Incentive Plan, which
will provide for grants of shares of New Common Stock and options to purchase
additional shares of New Common Stock to the senior managers of Reorganized
Genesis. The New Management Incentive Plan will include grants of 750,000 shares
of New Common Stock which shall be allocated among 43 management employees.
Although all shares shall be allocated to this group, the exact amount of shares
allocated to each employee, as well as the establishment of the vesting period
(within the range of 3-5 years), will be determined by the new board of
directors for Reorganized Genesis or pursuant to agreement with the steering
committee for the holders of the Genesis Senior Lenders Claims and the Multicare
Senior Lender Claims.
The New Management Incentive Plan will also include options to purchase
3,480,000 shares of New Common Stock, which shall be allocated among 129
management employees. As with the stock grants, the exact amount of shares
allocated to each employee, as well as the establishment of the vesting period
(within the range of 3-5 years), will be determined by the new board of
directors for Reorganized Genesis or pursuant to agreement with the steering
committee for the holders of the Genesis Senior Lenders Claims and the Multicare
Senior Lender Claims. The option exercise price will be $20.33 per share and is
based on the enterprise valuations described in this Disclosure Statement.
A copy of the New Management Incentive Plan is part of the Plan
Supplement.
G. Releases
The Plan of Reorganization includes two types of releases. First,
certain affiliates of the Genesis Debtors and the Multicare Debtors, that are
not Debtors in these reorganization cases, are obligors on the Debtors'
prepetition credit agreements. As part of the Plan, the holders of the Genesis
Senior Lender Claims and the Multicare Senior Lender Claims will release those
non-Debtors, provided that such entities become guarantors of the New Senior
Notes and assuming that the net worth of such entities is not significant.
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Second, the Plan provides for a release of all claims by the Debtors
against the officers, directors, employees, financial advisors, professionals,
accountants, and attorneys of the Debtors, the Genesis unsecured creditors'
committee, the Multicare unsecured creditors' committee, and Mellon Bank, N.A.,
as agent for the holders of the Genesis Senior Lender Claims, the Multicare
Senior Lender Claims, and the lenders under the Debtors' postpetition financing.
This provision is intended to release all claims of the Debtors, whether arising
prepetition or postpetition, and based on any theory (whether negligence, gross
negligence, or willful misconduct) against these individuals. The release is
limited to claims that could be asserted by the Debtors and only applies to
claims against such parties in their representative capacity. The Plan also
provides that the releases may be further limited by the provisions of the order
of the Bankruptcy Court confirming the Plan and does not release certain loan
obligations of certain of the senior officers, except as provided in a prior
order of the Bankruptcy Court, dated February 23, 2001 (see section VI.E.2,
above).
The purpose of the release of the Genesis and Multicare personnel is to
prevent a collateral attack against those individuals based on derivative
actions. It is the intent of the Plan to bring finality to the disruption caused
by the reorganization of these companies. Because of the extraordinary
regulatory scrutiny which currently exists in the healthcare industry, it is
generally very difficult to retain qualified management. This difficulty is
compounded when the healthcare company is operating as a debtor in possession
under chapter 11 of the Bankruptcy Code. Despite these daunting obstacles,
management of the Debtors has not only continued to stay with the company, but
also made enormous contributions to the reorganization efforts and the
compromises set forth in the Plan. The Debtors are not aware of any pending or
threatened actions, whether civil or criminal, against the management of the
Debtors. However, in order to continue to retain the Debtors' management, it is
important that they be relieved of the threat of any derivative actions against
them personally by parties in these reorganization cases that may be
dissatisfied with the treatment provided in the Plan.
The purpose of the release of the representatives of the other major
constituencies in these cases, such as the creditors' committees, is to protect
the chapter 11 process for individuals who have contributed to the restructuring
process. The Debtors are not aware of any pending or threatened actions against
these representatives.
H. Effect of Confirmation
1. Discharge of Claims and Termination of Equity Interests
Except as otherwise provided in the Plan, confirmation of the Plan of
Reorganization will discharge all existing debts and claims and terminate all
equity interests, of any kind, nature, or description whatsoever, against or in
the Debtors or any of their assets or properties. All holders of existing claims
against and equity interests in the Debtors will be enjoined from asserting
against the Reorganized Debtors, or any of their assets or properties, any other
or further claim or equity interest based upon any act or omission, transaction,
or other activity that occurred prior to the Effective Date, whether or not such
holder has filed a proof of claim or proof of equity interest. In addition, upon
the Effective Date, each holder of a claim against or equity interest in the
Debtors shall be forever precluded and enjoined from prosecuting or asserting
any discharged claim against or terminated equity interest in the Debtors or the
Reorganized Debtors.
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2. Indemnification
The Plan provides for the assumption and continuation of normal
corporate indemnification provisions related to the protection of officers and
directors.
3. Exculpation
The Plan of Reorganization exculpates the Debtors, the Disbursing
Agent, the statutory committees of unsecured creditors appointed in these
reorganization cases, Mellon Bank, N.A., as administrative agent under, and any
lender under, the Genesis Senior Lender Agreements, the Multicare Senior Lender
Agreements, and the Revolving Credit and Guaranty Agreements described in
sections II.E.2, II.F.2, and VI.C, above, and their respective agents for
conduct relating to the prosecution of the reorganization cases. Specifically,
the Plan of Reorganization provides that neither the Debtors, the Disbursing
Agent, the statutory committees of unsecured creditors appointed in these
reorganization cases, nor their respective members, officers, directors,
employees, agents, or professionals shall have or incur any liability to any
holder of any claim or equity interest for any act or omission in connection
with, or arising out of, the reorganization cases, the confirmation of the Plan
of Reorganization, the consummation of the Plan of Reorganization, or the
administration of the Plan of Reorganization or property to be distributed under
the Plan of Reorganization, except for willful misconduct or gross negligence.
I. Preservation of Certain Avoidance Actions
The Debtors and the Reorganized Debtors are waiving all avoidance
actions except as set forth in the Plan Supplement.
J. Miscellaneous Provisions
The Plan of Reorganization contains provisions relating to the
cancellation of existing securities, corporate actions, the Disbursing Agent,
delivery of distributions, manner of payment, vesting of assets, binding effect,
term of injunctions or stays, injunction against interference with the Plan of
Reorganization, payment of statutory fees, retiree benefits, dissolution of the
statutory committees of unsecured creditors appointed in the reorganization
cases, recognition of guaranty rights, substantial consummation, compliance with
tax requirements, severablity, revocation, and amendment of the Plan of
Reorganization, governing law, and timing. For more information regarding these
items, see the Plan of Reorganization attached hereto as Exhibit A.
IX.
Certain Factors To Be Considered
A. Certain Bankruptcy Considerations
Although the Debtors believe that the Plan of Reorganization will
satisfy all requirements necessary for confirmation by the Bankruptcy Court,
there can be no assurance that the Bankruptcy Court will reach the same
conclusion. Moreover, there can be no assurance that modifications of the Plan
of Reorganization will not be required for confirmation or that such
modifications would not necessitate the resolicitation of votes. In addition,
although the Debtors believe that the Effective Date will occur soon after the
Confirmation Date, there can be no assurance as to such timing.
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The Plan of Reorganization provides for no distribution to Classes G7
(Genesis Punitive Damage Claims), M7 (Multicare Punitive Damage Claims), and
equity interests in the Debtors. The Bankruptcy Code conclusively deems these
classes to have rejected the Plan of Reorganization. Notwithstanding the fact
that these classes are deemed to have rejected the Plan of Reorganization, the
Bankruptcy Court may confirm the Plan of Reorganization if at least one impaired
class with respect to the Genesis Debtors and one impaired class with respect to
the Multicare Debtors votes to accept the Plan of Reorganization (with such
acceptance being determined without including the vote of any "insider" in such
class). Thus, for the Plan of Reorganization to be confirmed, (i) one of the
impaired subclasses in Class G1 or one of Classes G2 (Genesis Senior Lender
Claims), G4 (Genesis General Unsecured Claims), or G5 (Genesis Senior
Subordinated Note Claims), and (ii) one of the impaired subclasses in Class M1
or one of Classes M2 (Multicare Senior Lender Claims), M4 (Multicare General
Unsecured Claims), or M5 (Multicare Senior Subordinated Note Claims) must vote
to accept the Plan of Reorganization. As to each impaired class that has not
accepted the Plan of Reorganization, the Plan of Reorganization may be confirmed
if the Bankruptcy Court determines that the Plan of Reorganization "does not
discriminate unfairly" and is "fair and equitable" with respect to these
classes. The Debtors believe that the Plan of Reorganization satisfies these
requirements. For more information, see section XI.F, below.
B. Risks Relating to the Plan Securities
1. Variances from Projections
The projections included in this Disclosure Statement reflect numerous
assumptions concerning the anticipated future performance of the Debtors and
with respect to the prevailing market and economic conditions which are beyond
the control of the Debtors and which may not materialize. The projections
include assumptions concerning reimbursement rates with respect to third party
payors and patient mix, occupancy, the collectability of accounts receivable,
operating costs, and rent expense. The Debtors believe that the assumptions
underlying the projections are reasonable. However, unanticipated events and
circumstances occurring subsequent to the preparation of the projections may
affect the actual financial results of the Debtors. Therefore, the actual
results achieved throughout the periods covered by the projections necessarily
will vary from the projected results, which variations may be material and
adverse.
2. Substantial Leverage; Ability to Service Debt
The Reorganized Debtors will have substantial indebtedness. On the
Effective Date, after giving effect to the transactions contemplated by the Plan
of Reorganization, the Reorganized Debtors will have approximately $624 million
in secured indebtedness. Although this level of debt represents significantly
less leverage than many of the Debtors' competitors, significant amounts of cash
flows will be necessary to make payments of interest and repay the principal
amount of this indebtedness.
3. Significant Holders
Under the Plan of Reorganization, certain holders of allowed claims may
receive distributions of shares in Reorganized Genesis representing in excess of
five percent (5%) of the outstanding shares of New Common Stock. If holders of a
significant number of shares of Reorganized Genesis were to act as a group, such
holders may be in a position to control the outcome of actions requiring
shareholder approval, including the election of directors. Further, the
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possibility that one or more of the holders of a number of shares of Reorganized
Genesis may determine to sell all or a large portion of their shares in a short
period of time may adversely affect the market price of the stock of Reorganized
Genesis.
4. Lack of Trading Market
Reorganized Genesis will use reasonable commercial efforts to cause the
shares of New Common Stock to be listed on a national securities exchange or a
qualifying interdealer quotation system as soon as practicable following the
Effective Date. There can be no assurance, however, that the New Common Stock
will be listed on such exchange or system. Accordingly, there can be no
assurance that a holder of such securities will be able to sell such shares in
the future or as to the price at which such shares might trade.
5. Dividend Policies
Because all of the Debtors' cash flows will be used in the foreseeable
future to make payments under the exit facility that will be entered into in
connection with the emergence from chapter 11 and under certain of the Plan
Securities, Reorganized Genesis does not anticipate paying dividends on the New
Common Stock in the near future.
6. Restrictions on Transfer
Holders of Plan Securities who are deemed to be "underwriters" as
defined in section 1145(b) of the Bankruptcy Code, including holders who are
deemed to be "affiliates" or "control persons" within the meaning of the
Securities Act, will be unable freely to transfer or to sell their securities
except pursuant to (i) "ordinary trading transactions" by a holder that is not
an "issuer" within the meaning of section 1145(b), (ii) an effective
registration of such securities under the Securities Act and under equivalent
state securities or "blue sky" laws, or (iii) pursuant to the provisions of Rule
144 under the Securities Act or another available exemption from registration
requirements. For a more detailed description of these matters, see section
II.J, above.
C. Risks Associated with the Business
The following categories of risks associated with the Debtors'
businesses are set forth in their respective Form 10-Ks, which have been filed
with the Securities and Exchange Commission: Risk Associated with Reimbursement
Process; Reduced Revenues Resulting from Prospective Payment System; Self-Funded
Insurance; Competitive Conditions; Collectability of Certain Accounts
Receivable; Risks Related to Investigations and Legal Proceedings; Risk Of
Adverse Effect Of Future Healthcare Reform; Potential Adverse Effect of Change
in Revenue Sources; Potential Adverse Impact from Extensive Regulation; Risk of
International Operations; Foreign Exchange Risk; and Increased Labor Costs.
Please refer to those SEC filings for a further discussion on this topic.
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X.
Confirmation of the Plan of Reorganization
A. Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after appropriate notice, to hold a hearing on confirmation of a plan of
reorganization. The confirmation hearing is scheduled for August 28, 2001 (and
August 29, 2001 if necessary), at 9:30 a.m., Eastern Time, before the Honorable
Judith H. Wizmur, United States Bankruptcy Court for the District of New Jersey,
Mitchell H. Cohen Courthouse, Courtroom 4B, 4th and Cooper Street, Camden, New
Jersey 08101. The confirmation hearing may be adjourned from time to time by the
Debtors or the Bankruptcy Court without further notice except for an
announcement of the adjourned date made at the confirmation hearing or any
subsequent adjourned confirmation hearing.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of a plan of reorganization. Any objection
to confirmation of the Plan of Reorganization must be in writing, must conform
to the Federal Rules of Bankruptcy Procedure, must set forth the name of the
objector, the nature and amount of claims or interests held or asserted by the
objector against the particular Debtor or Debtors, the basis for the objection
and the specific grounds therefor, and must be filed with the Bankruptcy Court,
with a copy to Chambers, together with proof of service thereof, and served upon
(i) Weil, Gotshal & Manges LLP, Co-Attorneys for the Genesis Debtors and Debtors
in Possession, 767 Fifth Avenue, New York, New York 10153, Attention: Michael F.
Walsh, Esq.; (ii) Richards, Layton & Finger PA, Co-Attorneys for the Genesis
Debtors and Debtors in Possession, One Rodney Square, P.O. Box 551, Wilmington,
Delaware 19899, Attention: Mark D. Collins, Esq.; (iii) Willkie, Farr &
Gallagher, Co-Attorneys for the Multicare Debtors and Debtors in Possession, 787
Seventh Avenue, New York, New York 10019, Attention: Marc Abrams, Esq.; (iv)
Young, Conaway, Stargatt & Taylor, Co-Attorneys for the Multicare Debtors and
Debtors in Possession, 11th Floor, Wilmington Trust Company, P.O. Box 391,
Wilmington, Delaware 19899-0391, Attention: James J. Patton, Esq.; (v) The
United States Trustee for the District of Delaware, Attention: Joseph McMahon,
Esq., 601 Walnut Street, Suite 950 West, Philadelphia, Pennsylvania 19106; (vi)
Akin, Gump, Strauss, Hauer & Feld, L.L.P., Co-Attorneys for the Official
Committee of Unsecured Creditors for the Genesis Debtors, 590 Madison Avenue,
New York, New York 10022, Attention: Lisa Beckerman, Esq.; (vii) Pachulski Stang
Ziehl Young & Jones PC, Co-Attorneys for the Official Committee of Unsecured
Creditors for the Genesis Debtors, 919 N. Market Street, 16th Floor, P.O. Box
8075, Wilmington, Delaware 19899-8705, Attention: Laura Davis Jones, Esq.,
(viii) Kasowitz, Benson, Torres & Friedman LLP, Co-Attorneys for the Official
Committee of Unsecured Creditors for the Multicare Debtors, 1633 Broadway, New
York, New York 10019, Attention: David Rosner, Esq.; (ix) Saul, Ewing, Remick &
Saul LLP, Co-Attorneys for the Official Committee of Unsecured Creditors for the
Multicare Debtors, 222 Delaware Avenue, Suite 1200, P.O. Box 1266, Wilmington,
Delaware 19899-1266, Attention: Norman Pernick, Esq., (x) Morgan, Lewis &
Bockius LLP, Co-Attorneys for Agent for the Prepetition Senior Secured Lenders
and Postpetition Lenders, 101 Park Avenue, New York, New York 10178-0060,
Attention: Richard S. Toder, Esq., and (xi) Klett Rooney Lieber & Schorling,
Co-Attorneys for Agent for the Prepetition Senior Secured Lenders and
Postpetition Lenders, 1000 West Street, Suite 1410, Wilmington, Delaware 19801,
Attention: Teresa Currier, Esq.
Objections to confirmation of the Plan of Reorganization are governed
by Rule 9014 of the Federal Rules of Bankruptcy Procedure. UNLESS AN OBJECTION
TO CONFIRMATION IS TIMELY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE
BANKRUPTCY COURT.
85
B. General Requirements of Section 1129
At the confirmation hearing, the Bankruptcy Court will determine
whether the following confirmation requirements specified in section 1129 of the
Bankruptcy Code have been satisfied:
1. The Plan complies with the applicable provisions of the Bankruptcy
Code.
2. The Debtors have complied with the applicable provisions of the
Bankruptcy Code.
3. The Plan has been proposed in good faith and not by any means
proscribed by law.
4. Any payment made or promised by the Debtors or by a person issuing
securities or acquiring property under the Plan for services or for
costs and expenses in, or in connection with, the chapter 11 cases, or
in connection with the Plan and incident to the chapter 11 cases, has
been disclosed to the Bankruptcy Court, and any such payment made
before the confirmation of the Plan is reasonable or if such payment is
to be fixed after confirmation of the Plan, such payment is subject to
the approval of the Bankruptcy Court as reasonable.
5. The Debtors have disclosed the identity and affiliations of any
individual proposed to serve, after confirmation of the Plan, as a
director, officer, or voting trustee of the Debtors, affiliates of the
Debtors participating in the Plan with the Debtors, or a successor to
the Debtors under the Plan, and the appointment to, or continuance in,
such office of such individual is consistent with the interests of
creditors and equity holders and with public policy, and the Debtors
have disclosed the identity of any insider that will be employed or
retained by the Debtors, and the nature of any compensation for such
insider.
6. With respect to each class of claims or equity interests, each holder
of an impaired claim or impaired equity interest either has accepted
the Plan or will receive or retain under the Plan on account of such
holder's claim or equity interest, property of a value, as of the
Effective Date, that is not less than the amount such holder would
receive or retain if the Debtors were liquidated on the Effective Date
under chapter 7 of the Bankruptcy Code. See discussion of "Best
Interests Test," below.
7. Except to the extent the Plan meets the requirements of section 1129(b)
of the Bankruptcy Code (discussed below), each class of claims or
equity interests has either accepted the Plan or is not impaired under
the Plan. Classes G7 (Genesis Punitive Damage Claims), G8 (Genesis
Series G Preferred Stock Interests), G9 (Genesis Series H Preferred
Stock Interests), G10 (Genesis Series I Preferred Stock Interests), G11
(Genesis Common Stock Interests), M7 (Multicare Punitive Damage
Claims), and M8 (Multicare Common Stock Interests) are deemed to have
rejected the Plan and thus the Plan can be confirmed only if the
requirements of section 1129(b) of the Bankruptcy Code are met.
86
8. Except to the extent that the holder of a particular claim has agreed
to a different treatment of such claim, the Plan provides that
Administrative Expense Claims and Priority Non-Tax Claims will be paid
in full on the Effective Date and that Priority Tax Claims will receive
on account of such claims deferred cash payments, over a period not
exceeding six (6) years after the date of assessment of such claims, of
a value, as of the Effective Date, equal to the allowed amount of such
claims.
9. At least one class of impaired claims has accepted the Plan, determined
without including any acceptance of the Plan by any insider holding a
claim in such class.
10. Confirmation of the Plan is not likely to be followed by the
liquidation or the need for further financial reorganization of the
Debtors or any successor to the Debtors under the Plan, unless such
liquidation or reorganization is proposed in the Plan. See discussion
of "Feasibility," below.
11. The Plan provides for the continuation after the Effective Date of
payment of all retiree benefits (as defined in section 1114 of the
Bankruptcy Code), at the level established pursuant to section
1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at any time prior to
confirmation of the Plan, for the duration of the period the Debtors
have obligated themselves to provide such benefits.
C. Best Interests Tests
As described above, the Bankruptcy Code requires that each holder of an
impaired claim or equity interest either (i) accept the Plan or (ii) receive or
retain under the Plan property of a value, as of the Effective Date, that is not
less than the value such holder would receive if the Debtors were liquidated
under chapter 7 of the Bankruptcy Code.
The first step in determining whether this test has been satisfied is
to determine the dollar amount that would be generated from the liquidation of
the Debtors' assets and properties in the context of a chapter 7 liquidation
case. The gross amount of cash that would be available for satisfaction of
claims and equity interests would be the sum consisting of the proceeds
resulting from the disposition of the unencumbered assets and properties of the
Debtors, augmented by the unencumbered cash held by the Debtors at the time of
the commencement of the liquidation case.
The next step is to reduce that gross amount by the costs and expenses
of liquidation and by such additional administrative and priority claims that
might result from the termination of the Debtors' business and the use of
chapter 7 for the purposes of liquidation. Any remaining net cash would be
allocated to creditors and shareholders in strict priority in accordance with
section 726 of the Bankruptcy Code. Finally, the present value of such
allocations (taking into account the time necessary to accomplish the
liquidation) are compared to the value of the property that is proposed to be
distributed under the Plan on the Effective Date.
The Debtors' costs of liquidation under chapter 7 would include the
fees payable to a trustee in bankruptcy, as well as those fees that might be
payable to attorneys and other professionals that such a trustee might engage.
Other liquidation costs include the expenses incurred during the chapter 11
cases allowed in the chapter 7 case, such as compensation for attorneys,
financial advisors, appraisers, accountants, and other professionals for the
Debtors and statutory committees of unsecured creditors appointed in the chapter
11 cases, and costs and expenses of members of the statutory committee of
87
unsecured creditors, as well as other compensation claims. In addition, claims
would arise by reason of the breach or rejection of obligations incurred and
leases and executory contracts assumed or entered into by the Debtors during the
pendency of the chapter 11 cases.
The foregoing types of claims, costs, expenses, fees, and such other
claims that may arise in a liquidation case would be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay prepetition priority and unsecured claims. The Debtors believe
that in a chapter 7 case, Classes G4 (other than insured claims to the extent of
such insurance), G5, G6, G7, G8, G9, G10, G11, M4 (other than insured claims to
the extent of such insurance), M5, M6, M7, and M8 would receive no distribution
of property.
After consideration of the effects that a chapter 7 liquidation would
have on the ultimate proceeds available for distribution to creditors in the
chapter 11 cases, including (i) the increased costs and expenses of a
liquidation under chapter 7 arising from fees payable to a trustee in bankruptcy
and professional advisors to such trustee, (ii) additional costs associated with
the rapid transfer or cessation of operations at the facilities and the erosion
in value of assets in a chapter 7 case in the context of the expeditious
liquidation required under chapter 7 and the "forced sale" atmosphere that would
prevail, and (iii) the substantial increases in claims that would be satisfied
on a priority basis, the Debtors have determined that confirmation of the Plan
will provide each holder of an allowed claim with a recovery that is not less
than such holder would receive pursuant to liquidation of the Debtors under
chapter 7.
The Debtors also believe that the value of any distributions to each
class of allowed claims in a chapter 7 case, including all secured claims, would
be less than the value of distributions under the Plan because such
distributions in a chapter 7 case would not occur for a substantial period of
time. In this regard, it is possible that distribution of the proceeds of the
liquidation could be delayed for one or more years or more after the completion
of such liquidation in order to resolve claims and prepare for distributions. In
the event litigation was necessary to resolve claims asserted in a chapter 7
case, the delay could be prolonged and administrative expenses increased.
The Debtors' liquidation analysis is an estimate of the proceeds that
may be generated as a result of a hypothetical chapter 7 liquidation of the
Debtors. The analysis is based on a number of significant assumptions which are
described. The liquidation analysis does not purport to be a valuation of the
Debtors' assets and is not necessarily indicative of the values that may be
realized in an actual liquidation.
D. Liquidation Analyses
The liquidation analyses has been prepared in consultation with the
auditors of Genesis and Multicare. The full reports, including assumptions for
each company, are included in the Plan Supplement.
88
1. The Genesis Debtors
Notes Unaudited Asset Realization Liquidation Values
Ref Book Value Scenario I Scenario II Scenario I Scenario II
--------- -------------- ------------------------ ---------------------------
Statement of Assets ($000)
Cash & equivalents A $ 806 100% 100% $ 806 $ 806
Restricted investments in marketable
securities B 31,697 0% 0% - -
Accounts receivable (net) C 404,770 39% 53% 157,860 214,528
Inventory D 65,011 0% 0% - -
Prepaid expenses and other current
assets E 45,884 21% 36% 9,636 16,518
Proceeds from the sale of operating
entities F N/A N/A 273,635 478,557
Property, plant and equipment G 537,215 N/A N/A 11,893 22,436
Notes receivable and other investments H 38,881 48% 63% 18,663 24,495
Other long term assets I 114,222 16% 24% 18,276 27,413
Investments in unconsolidated
affiliates J 56,801 0% 0% - -
Goodwill and other intangibles K 890,888 0% 0% - -
Avoidance & contingency claims L Unknown Unknown
---------- --------- ---------
Total liquidated proceeds 2,186,175 22.45% 35.90% 490,769 784,753
---------- --------- ---------
Estimated Recovery
Scenario I Scenario II
---------------------------
CHAPTER 7 ADMINISTRATIVE CLAIMS - Section 503(b)
Trustee & Receiver fees M 14,747 23,599
Counsel for Trustee N 7,374 11,800
Other professional fees O 13,200 13,200
Estimated liquidation costs P 39,262 62,780
--------- ---------
TOTAL CHAPTER 7 ADMINISTRATIVE CLAIMS 74,583 11,379
--------- ---------
Net Estimated Recovery - Chapter 7 Admin Claims 100% 100%
Net Estimated Proceeds Available for Distribution $416,186 $673,374
Estimated
Balance
--------------
SECURED CLAIMS
DIP Financing Q 180,000 100% 100% 180,000 180,000
G1 miscellaneous mortgage claims R 120,385 28% 45% 33,765 54,631
G2 senior lender claims R 1,198,460 17% 37% 202,421 438,743
---------- --------- ---------
TOTAL SECURED CLAIMS 1,498,845 416,186 673,374
---------- --------- ---------
Net Estimated Proceeds Available for Distribution After Secured Claims $0 $0
ADMINISTRATIVE CLAIMS
Post petition trade creditor claims S 47,655 0% 0% - -
Accrued salaries, wages, and other
compensation T 51,753 0% 0% - -
---------- --------- ---------
TOTAL ADMINISTRATIVE CLAIMS 99,408 - -
---------- --------- ---------
Balance available for distribution to priority creditors $0 $0
PRIORITY CLAIMS (G3)
Accrued salaries, wages, and other
compensation U 17 0% 0% - -
Taxes U 11,508 0% 0% - -
Other claims U 2,056 0% 0% - -
---------- --------- ---------
TOTAL PRIORITY CLAIMS 13,581 - -
---------- --------- ---------
Balance available for distribution to unsecured creditors $0 $0
GENERAL UNSECURED CLAIMS
G4 general unsecured claims V 80,761 0% 0% - -
G5 senior subordinated note claims W 387,425 0% 0% - -
---------- --------- ---------
TOTAL GENERAL UNSECURED CLAIMS 468,186 - -
---------- --------- ---------
89
Notes to Genesis Liquidation Analysis
GENERAL ASSUMPTIONS
1 This Liquidation Analysis was prepared in accordance with section
1129(a)(7)(A)(ii) of the Bankruptcy Code to determine that the Plan of
Reorganization is in the best interest of each holder of a claim or
interest.
2 The Liquidation Analysis is based upon a number of estimates and
assumptions that, although developed and considered reasonable by the
management of Genesis, are inherently subject to significant economic,
business, governmental regulation, competitive uncertainties, and
contingencies beyond the control of Genesis or its management. The
Liquidation Analysis is also based on assumptions with regard to
liquidation decisions that are subject to change. Accordingly, there can be
no assurance that the values reflected in this Liquidation Analysis would
be realized if Genesis were, in fact, to undergo such a liquidation and
actual results could vary materially and adversely from those contained
herein.
3 This analysis assumes the conversion of the current chapter 11 cases to
chapter 7 cases with the liquidation of the company's assets being
finalized over a six-month period. A chapter 7 trustee would be either
elected by creditors or appointed by the Bankruptcy Court to administer the
estates. The chapter 7 trustee is independent and would be entitled to make
all of his or her own decisions regarding the liquidation of the estates,
the hiring of professionals, the pursuit of claims or litigation, the
payment of or objection to claims, and the distribution of any ultimate
dividend. The chapter 7 trustee would be compensated in accordance with
section 326 of the Bankruptcy Code.
4 The Liquidation Analysis assumes that Genesis's captive insurance business
would be liquidated separately, and accordingly, that business is excluded
from this analysis. It is assumed that this Liquidation Analysis includes
all other assets of Genesis, including investments in subsidiaries not
currently in bankruptcy. It is assumed that all operating assets would be
disposed of through sale, liquidation, and/or termination as appropriate.
5 The Liquidation Analysis uses Genesis's unaudited financial statements as
of December 31, 2000, and other figures estimated by Genesis's management.
6 Genesis operates skilled nursing and assisted living eldercare facilities
("centers"). The skilled nursing centers offer three levels of care to
their customers: skilled, intermediate, and personal. This analysis assumes
that the majority of these centers will be sold as a going-concern over the
six-month liquidation period. Genesis believes a six-month liquidation
period is sufficient to allow for an orderly transfer of operations to
acquirers. During this time, certain personnel would be retained as
necessary to support the completion of the sale and liquidation process.
90
7 Management has assumed that those centers generating negative earnings will
be either closed within the six month liquidation period or involuntarily
placed into receivership by various state authorities as a result of
Genesis's conversion to a chapter 7 case.
8 Genesis operates pharmacy and medical supply services that provide
prescription and nonprescription pharmaceuticals, infusion therapy, medical
supplies, and equipment to elderly, chronically ill, and disabled patients
in long-term care and alternative site settings. Genesis also operates
community-based pharmacies which are located in or near medical centers,
hospitals, and physician office complexes. This analysis assumes that
Genesis's pharmacy services will be sold as a going-concern over the
six-month liquidation period. Genesis believes a six-month liquidation
period is sufficient to allow for an orderly transfer of operations to
acquirers. During this time, certain personnel would be retained as
necessary to support the completion of the sale and liquidation process.
9 Genesis provides physical, speech, and occupational rehabilitation
services. This analysis assumes that Genesis's rehabilitation services will
be sold as a going-concern over the six-month liquidation period. Genesis
believes a six-month liquidation period is sufficient to allow for an
orderly transfer of operations to acquirers. During this time, certain
personnel would be retained as necessary to support the completion of the
sale and liquidation process.
10 Genesis provides other ancillary services including group purchasing,
hospitality services, respiratory health services, diagnostic services,
home healthcare, and other miscellaneous healthcare, management, and
consulting services. This analysis assumes that Genesis's other ancillary
services will be sold as a going-concern over the six-month liquidation
period. Genesis believes a six-month liquidation period is sufficient to
allow for an orderly transfer of operations to acquirers. During this time,
certain personnel would be retained as necessary to support the completion
of the sale and liquidation process.
11 This liquidation analysis assumes that all assets of the Genesis Debtors
will be liquidated during the six-month liquidation period. There can be no
assurances made that all assets will be completely liquidated during this
time period.
12 For purposes of this analysis, management has assumed a high and low range
of liquidation scenarios entitled Scenario I and II.
NOTES TO ASSET ACCOUNTS
A Cash & equivalents. The Liquidation Analysis assumes no further cash would
be generated during the chapter 7 cases for distribution, except for net
proceeds from the disposition of noncash assets. It is assumed that the
cash at the date of the actual liquidation would be equal to the cash
balance as of December 31, 2000. That cash would be fully available for
distribution to creditors.
B Restricted investments in marketable securities. This amount represents
investments in marketable securities held by Genesis's captive insurance
subsidiary which did not file for bankruptcy. Restricted investments in
marketable securities would not be available in Genesis's chapter 7
liquidation. All outstanding liabilities (potential claims) in connection
with Genesis's captive insurance subsidiary are omitted from this analysis.
C Accounts receivable. Genesis will retain ownership of the accounts
receivable for all entities. The chapter 7 trustee will bill and collect
these receivables. For purposes of this analysis, management anticipates
recovering between 39% and 53% of net accounts receivable. These
percentages are based upon a review of the detailed aging balance for the
various payers. Management has assessed the potential recoverability for
these receivables based on payer-mix and the days outstanding of these
receivables.
91
Below are the recovery percentages applied for the nursing centers:
Medicare/Medicaid Managed Care/Private
----------------- --------------------
Scenario I Scenario II Scenario I Scenario II
---------- ----------- ---------- -----------
Current 80% 95% 75% 90%
31 - 60 65% 85% 55% 75%
61 - 90 55% 80% 45% 65%
91 - 120 30% 60% 25% 55%
121 - 365 15% 35% 10% 30%
Over 365 0% 0% 0% 0%
Below are the recovery percentages applied for the pharmacy and medical
supply division:
Medicare/Medicaid Managed Care/Private
----------------- --------------------
Scenario I Scenario II Scenario I Scenario II
---------- ----------- ---------- -----------
Current 75% 90% 70% 85%
31 - 60 60% 80% 50% 70%
61 - 90 50% 75% 40% 60%
91 - 120 25% 55% 20% 50%
121 - 365 10% 30% 5% 25%
Over 365 0% 0% 0% 0%
Certain trade receivables are due from a related entity - Multicare - for
prepetition services rendered. It is estimated that no recovery will be made
from these receivables.
All other receivables from rehabilitation and other ancillary services represent
approximately 5% of net receivables. The cash recovery value for these other
receivables was estimated by applying the aggregate recovery percentage average
for nursing and pharmacy receivables.
The estimate herein reflects management's approximation of the recoverable value
of these receivables during the six-month liquidation period.
D Inventory. For purposes of this analysis, it is assumed that inventory will
be included in the sale of going-concern entities and is therefore not
projected.
E Prepaid expenses and other current assets. This asset account consists
primarily of miscellaneous receivables, prepaid rents, prepaid property
taxes, and prepaid insurance. Management has reviewed the individual
account balances for this account and has estimated that in aggregate
approximately $9 million and $17 million will be recovered under a
liquidation scenario.
F Proceeds from the sale of operating entities. The proceeds from the
distressed sale of going-concern operations is estimated to be in the range
of $274 million to $479 million. The entities sold include Genesis's
inpatient nursing centers, pharmacy business, rehabilitation services, and
other ancillary businesses. The values estimated for those businesses are
based upon various earnings multiples for distressed going concern
operations which management considers reasonable.
The enterprise value for these entities was determined by applying these
multiples to a normalized earnings for Genesis. The 2001 projected earnings
(EBITDA) were adjusted to reflect the following:
- current operations through January 31, 2001;
- the elimination of negative earnings for underperforming entities likely
to be closed;
- allocation of corporate overhead to the operating businesses
92
A range of multiple of earnings was then applied to this "normalized
EBITDA" to estimate enterprise value for these entities. The calculated
enterprise value was then further reduced by the secured debt and current
liabilities from nonbankrupt subsidiaries of Genesis. It is assumed that
any secured debt and current liabilities of the nonbankrupt entities would
be paid upon sale of the business units.
G Property, plant & equipment.
i. Centers, Pharmacy, Rehabilitation, and Other Ancillary Services:
Property, plant, and equipment will be included in the sale as a going
concern.
ii. Corporate Division: Property, plant, and equipment net of accumulated
depreciation is approximately $70 million. The liquidation recovery as
a percentage of cost is assumed to be the following: Buildings & Land
(25% - 50%), Equipment (10% - 20%), Computer Equipment (10% - 15%),
and construction in progress (10% - 21%).
H Notes receivable and other investments. This asset account is comprised of
loans made to various third parties, including managed and jointly-owned
properties. Management has reviewed the various notes receivables and
investments to determine potential recoveries under a liquidation scenario.
It is estimated that Genesis would be able to recover approximately $19
million and $24 million from these receivables and investments.
I Other long-term assets. This asset account is primarily comprised of real
estate deposits, deferred financing costs, a deferred management fee due
from Multicare, net receivables from CMS and other third-party payors.
Management estimates that approximately $18 million and $27 million will be
recovered under a liquidation scenario.
J Investments in unconsolidated affiliates. The majority of the investments
in unconsolidated affiliates is with Multicare. Management of Genesis
assigns no recoverability for this asset.
K Goodwill and other intangibles. Goodwill and other intangible assets are
estimated to have no liquidation recovery value.
L Avoidance & contingency claims. The Genesis Debtors may have certain rights
for avoidance actions and other contingency claims that may benefit the
estate. It is unknown at this time the total benefit that these claims may
generate for the estates if the Genesis Debtors were successful in
litigating these matters.
NOTES TO CHAPTER 7 ADMINISTRATIVE CLAIMS
M Trustee & Receiver fees. Compensation for the chapter 7 trustee will be
limited to fee guidelines in section 326 of the Bankruptcy Code.
N Counsel for Trustee. Compensation for trustee's counsel is estimated at 50%
of estimated trustee fees.
O Other professional fees. Management estimates that professional fees for
legal, financial, and other advice relating to the bankruptcy proceedings
will be $1.7 million per month for the first three months of the
liquidation process. It is anticipated that professional fees would reduce
to $1 million per month for the subsequent three months. In addition, there
was approximately $5.1 million owing in relation to fees outstanding from
the Commencement Date to December 31, 2000.
93
P Liquidation costs. For purposes of this analysis, liquidation costs are
estimated as 8% of total liquidated proceeds.
NOTES TO SECURED CLAIMS
Q DIP financing. The administrative claim owing in relation to DIP Financing
has been estimated as the amount outstanding as disclosed in the Debtors'
borrowing base certificate as of May 31, 2001.
R Secured Claims. Amount of liability represented herein is based on proof of
claims filed by the various claimants.
NOTES TO ADMINISTRATIVE CLAIMS
S Postpetition trade creditor claims. This amount represents the trade
creditor debt incurred during the Genesis reorganization cases payable as
an administrative claim.
T Accrued salaries, wages, and other compensation. Amount represents
salaries, wages, and other compensation incurred pre- and postpetition
subject to Bankruptcy Court order.
NOTES TO PRIORITY CLAIMS
U Priority Claims. Amount represents section 507 claims.
NOTES TO UNSECURED CLAIMS
V General unsecured - Class G4 claims. Amount represents trade creditor debt
outstanding as of the Commencement Date. Although not specifically shown,
technically, this class would also include deficiency claims from Classes
G1 and G2.
W Unsecured debt - Class G5 claims. Amount represents claims under certain
prepetition senior subordinated notes.
Best Interest Comparison
Liquidation Recovery Chapter 11
Class Low High Recovery
G1 (Misc Secured Claims) 28% 45% 100.00%
G2 (Genesis Senior Lender Claims 17% 37% 78.89%
G3 (Priority Claims) 0% 0% 100.00%
G4 (Genesis General Unsecured Claims) 0% 0% 7.34%
G5 (Genesis Sr Subordinated Note Claims) 0% 0% 7.34%
G7 (Genesis Punitive Damage Claims) 0% 0% 0.00%
94
2. Multicare Debtors
Asset Realization Liquidation Values
Notes Unaudited Scenario Scenario
Ref Book Value 1 2 Scenario 1 Scenario 2
------- -------------- --------- -------- ------------ ------------
Statement of Assets ($000)
Cash and equivalents A $ 19,070 100% 100% $ 19,070 $ 19,070
Accounts receivable, net B 104,581 46% 63% 48,107 65,886
Prepaid expenses and other current assets C 15,876 15% 29% 2,381 4,604
Proceeds from the sale of operating entities D N/A N/A 83,672 148,731
Property, plant and equipment, net E 559,963 0% 0% - -
Other long-term assets F 62,052 N/A N/A 5,000 10,000
Goodwill and other intangibles, net G 335,147 0% 0% - -
Avoidance & contingency claims H Unknown Unknown
---------- --------- ---------
Total $1,096,689 14.4% 22.6% $ 158,230 $ 248,291
========== ========= =========
CHAPTER 7 ADMINS - Section 503(b)
Trustee & Receiver fees I 4,771 7,473
Counsel for Trustee J 2,386 3,737
Other professional fees K 8,252 8,252
Estimated liquidation costs L 12,658 19,863
--------- ---------
TOTAL CHAPTER 7 ADMIN CLAIMS 28,067 39,325
--------- ---------
Net Estimated Recovery - Chapter 7 Admin Claims 100% 100%
Net Estimated Proceeds Available for Distribution $130,163 $208,966
SECURED CLAIMS
DIP financing M - - -
M1 miscellaneous mortgage claims N 27,854 28% 44% 7,693 12,351
M2 senior lender claims N 443,400 28% 44% 122,470 196,615
---------- --------- ---------
TOTAL SECURED CLAIMS 471,254 130,163 208,966
---------- --------- ---------
Net Estimated Proceeds available for distribution $0 $0
ADMINISTRATIVE CLAIMS
Postpetition trade creditor claims O 23,755 0% 0% - -
Accrued salaries, wages, and other
compensation P 13,594 0% 0% - -
---------- --------- ---------
TOTAL ADMINISTRATIVE CLAIMS 37,349 - -
---------- --------- ---------
Balance available for distribution to priority creditors $0 $0
PRIORITY CLAIMS (M3)
Accrued salaries, wages, and other
compensation Q 50 0% 0% - -
Taxes Q 5,570 0% 0% - -
Other claims Q 405 0% 0% - -
---------- --------- ---------
TOTAL PRIORITY CLAIMS 6,025 - -
---------- --------- ---------
Balance available for distribution to general unsecured creditors $0 $0
GENERAL UNSECURED CLAIMS
M4 General Unsecured Claims R 26,439 0% 0%
M5 Unsecured Debt S 257,817 0% 0% - -
---------- --------- ---------
TOTAL GENERAL UNSECURED CLAIMS 284,256 - -
---------- --------- ---------
95
Notes to Multicare Liquidation Analysis
GENERAL ASSUMPTIONS
1 This Liquidation Analysis was prepared in accordance with section
1129(a)(7)(A)(ii) of the Bankruptcy Code to determine that the Plan of
Reorganization is in the best interest of each holder of a claim or
interest.
2 The Liquidation Analysis is based upon a number of estimates and
assumptions that, although developed and considered reasonable by
Multicare's management, are inherently subject to significant economic,
business, governmental regulation, competitive uncertainties, and
contingencies beyond the control of Multicare or its management. The
Liquidation Analysis is also based upon assumptions with regard to
liquidation decisions that are subject to change. Accordingly, there can be
no assurance that the values reflected in this Liquidation Analysis would
be realized if Multicare were, in fact, to undergo such a liquidation and
actual results could vary materially and adversely from those contained
herein.
3 This analysis assumes the conversion of the current chapter 11 cases to
chapter 7 cases with the liquidation of the company's assets being
finalized over a six-month period. A chapter 7 trustee would be appointed
to administer the estates. The chapter 7 trustee is independent and would
be entitled to make all of his or her own decisions regarding the
liquidation of the estates, the hiring of professionals, the pursuit of
claims or litigation, the payment of or objection to claims, and the
distribution of any ultimate dividends. The chapter 7 trustee would be
compensated in accordance with section 326 of the Bankruptcy Code.
4 It is assumed that this Liquidation Analysis includes all assets of the
parent company, including investments in subsidiaries not currently in
bankruptcy. It is assumed that all operating assets would be disposed of
through sale, liquidation, and/or termination as appropriate.
5 The Liquidation Analysis utilizes Multicare's unaudited financial
statements as of December 31, 2000, and other figures estimated by
management.
6 This analysis assumes that the majority of inpatient services assets will
be sold as a going-concern over the six-month liquidation period. Multicare
believes a six-month liquidation period is sufficient to allow for an
orderly transfer of operations to acquirers. During this time, certain
personnel would be retained as necessary to support the completion of the
sale and liquidation process.
7 Management has assumed that those centers generating negative earnings will
be either closed within the six month liquidation period or involuntarily
placed into receivership by various state authorities as a result of
Multicare's conversion to a chapter 7 case.
8 This Liquidation Analysis assumes that all assets of the Multicare Debtors
will be liquidated during the six-month liquidation period. There can be no
assurances made that all assets will be completely liquidated during this
time period.
9 For purposes of this analysis, management has assumed a high and low range
of liquidation scenarios entitled Scenario I and II.
NOTES TO ASSET ACCOUNTS
A Cash & equivalents. The Liquidation Analysis assumes no further cash would
be generated during the chapter 7 case for distribution, except for net
proceeds from the disposition of noncash assets. It is assumed that the
available cash at the date of liquidation would be equal to the cash
balance as of December 31, 2000. That cash would be fully available for
distribution to creditors.
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B Accounts receivable. Multicare will retain ownership of the accounts
receivable for all entities. The trustee will bill and collect these
receivables. For purposes of this analysis, management anticipates
recovering between 46% and 63% of net accounts receivable. These
percentages are based upon a review of the detailed aging balance for the
various payors. Management has assessed the potential recoverability for
these receivables based on payor-mix and the days outstanding for these
receivables. Listed below are the recovery percentages applied:
Medicare/Medicaid Managed Care/Private
----------------- --------------------
Scenario I Scenario II Scenario I Scenario II
---------- ----------- ---------- -----------
Current 80% 95% 75% 90%
31 - 60 65% 85% 55% 75%
61 - 90 55% 80% 45% 65%
91 - 120 30% 60% 25% 55%
121 - 365 15% 35% 10% 30%
Over 365 0% 0% 0% 0%
The estimate herein reflects management's estimate of the recoverable value
of these trade receivables during the six-month liquidation period.
C Prepaid expenses and other current assets. This asset account is comprised
of the following assets: prepaid insurance, patient trust accounts,
miscellaneous inventory, and miscellaneous receivables. For purposes of
this analysis, management estimates that approximately $2.3 to $4.6 million
will be recoverable under a liquidation scenario.
D Proceeds from sale of going-concern operations. The proceeds from the
distressed sale of going-concern operations is estimated to be in the range
of $83 million to $148 million. The values estimated for those businesses
sold are based upon various earnings multiples for distressed going-concern
operations which management considers reasonable.
The enterprise value for these entities was determined by applying these
multiples to a normalized earnings for Multicare. The 2001 projected
earnings (EBITDA) were adjusted to reflect the following:
- current operations through January 31, 2001;
- elimination of negative earnings for underperforming entities likely
to be closed;
- potential management fee savings upon termination with Multicare's
relationship with Genesis;
- loss of revenues from management contracts due to liquidation of
Multicare
A range of multiple of earnings was then applied to this "normalized
EBITDA" to estimate enterprise value for these entities. The calculated
enterprise value was then further reduced by the secured debt and current
liabilities from nonbankrupt subsidiaries of Multicare. It is assumed that
any secured debt and current liabilities of the nonbankrupt entities would
be paid upon sale of the business units.
E Property, plant & equipment. Property, plant, and equipment will be
included in the sale of centers as a going concern and therefore no value
is contained herein.
F Other long-term assets. Other long term assets are comprised of deferred
financing costs, deposits to a related company, investments in
joint-ventures, and potential settlement with CMS. Management estimates to
receive approximately $5 to $10 million from CMS. Other long term costs are
estimated to have no liquidation recovery value.
G Goodwill and other intangibles. Goodwill and other intangible assets are
estimated to have no liquidation recovery value.
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H Avoidance & contingency claims. The Multicare Debtors may have certain
rights for avoidance actions and other contingency claims that may benefit
the estates. It is unknown at this time the total benefit that these claims
may generate for the estates if the Multicare Debtors were successful in
litigating these matters.
NOTES TO CHAPTER 7 ADMINISTRATIVE CLAIMS
I Trustee & Receiver fees. Compensation for the chapter 7 trustee will be
limited to fee guidelines in section 326 of the Bankruptcy Code.
J Counsel for Trustee. Compensation for trustee's counsel is estimated at 50%
of estimated trustee fees.
K Professional fees. As of December 31, 2000, approximately $3.7 million in
professional fees was outstanding. Management estimates that combined
professional fees will be $1,000,000 per month for the first three months
of the liquidation process. It is anticipated that professional fees would
reduce to $500,000 per month for the subsequent three months.
L Liquidation costs. For purposes of this analysis, liquidation costs are
estimated as 8% of total liquidated proceeds.
NOTES TO SECURED CLAIMS
M DIP Financing. As of May 31, 2001, Multicare did not have an outstanding
balance on its debtor in possession lending facility.
N Secured claims. Amount of liability represented herein is based on proofs
of claim filed by the various claimants.
NOTES TO ADMINISTRATIVE CLAIMS
O Postpetition trade creditor claims. Amount represents trade creditor debt
incurred during the Multicare reorganization cases. Management has reduced
the trade payable by $23 million for intercompany debt payable to Genesis
related to certain deposits that have been made. Management does not
anticipate paying this obligation upon liquidation.
P Accrued salaries, wages and other compensation. Amount represents salaries,
wages, and other compensation incurred postpetition. For purposes of this
analysis, this amount is estimated as one-half of payroll and benefits
expense for the month of December 2000.
NOTES TO PRIORITY CLAIMS
Q Priority claims. Amount represents management estimates for priority
claims.
NOTES TO GENERAL UNSECURED CLAIMS
R Other unsecured creditor claims. This balance is exclusive of a $93 million
intercompany claim filed by Genesis.
S Unsecured Debt. Amount represents claims under certain prepetition senior
subordinated notes.
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Best Interest Comparison
Liquidation Recovery Chapter 11
Class Low High Recovery
M1 (Misc Secured Claims) 28% 44% 100.00%
M2 (Multicare Senior Lender Claims 28% 44% 77.31%
M3 (Priority Claims) 0% 0% 100.00%
M4 (Multicare General Unsecured Claims) 0% 0% 7.34%
M5 (Multicare Sr Sub Note Claims) 0% 0% 7.34%
M7 (Multicare Punitive Damage Claims) 0% 0% 0.00%
E. Feasibility
The Bankruptcy Code requires that a debtor demonstrate that
confirmation of a plan is not likely to be followed by liquidation or the need
for further financial reorganization. For purposes of determining whether the
Plan meets this requirement, the Debtors have analyzed their ability to meet
their obligations under the Plan. As part of this analysis, the Debtors have
prepared projections contained in section IV, above. Based upon such
projections, the Debtors believe that they will be able to make all payments
required pursuant to the Plan and, therefore, that confirmation of the Plan is
not likely to be followed by liquidation or the need for further reorganization.
F. Section 1129(b)
The Bankruptcy Court may confirm a plan of reorganization over the
rejection or deemed rejection of the plan of reorganization by a class of claims
or equity interests if the plan of reorganization "does not discriminate
unfairly" and is "fair and equitable" with respect to such class.
1. No Unfair Discrimination
This test applies to classes of claims or equity interests that are of
equal priority and are receiving different treatment under the Plan of
Reorganization. The test does not require that the treatment be the same or
equivalent, but that such treatment be "fair."
2. Fair and Equitable Test
This test applies to classes of different priority and status (e.g.,
secured versus unsecured) and includes the general requirement that no class of
claims receive more than 100% of the allowed amount of the claims in such class.
As to the dissenting class, the test sets different standards, depending on the
type of claims or interests in such class:
o Secured Creditors. Each holder of an impaired secured claim either
(i) retains its liens on the property, to the extent of the allowed
amount of its secured claim and receives deferred cash payments
having a value, as of the effective date, of at least the allowed
amount of such claim, or (ii) has the right to credit bid the
amount of its claim if its property is sold and retains its liens
on the proceeds of the sale (or if sold, on the proceeds thereof)
or (iii) receives the "indubitable equivalent" of its allowed
secured claim.
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o Unsecured Creditors. Either (i) each holder of an impaired
unsecured creditor receives or retains under the plan property of a
value equal to the amount of its allowed claim, or (ii) the holders
of claims and interests that are junior to the claims of the
dissenting class will not receive any property under the plan.
o Equity Interests. Either (i) each equity interest holder will
receive or retain under the plan property of a value equal to the
greater of (a) the fixed liquidation preference or redemption
price, if any, of such stock and (b) the value of the stock, or
(ii) the holders of interests that are junior to the equity
interests of the dissenting class will not receive or retain any
property under the plan of reorganization.
These requirement are in addition to other requirements established by case law
interpreting the statutory requirement.
The Debtors believe the Plan of Reorganization will satisfy the "fair
and equitable" requirement notwithstanding that Classes G7 (Genesis Punitive
Damage Claims), G8 (Genesis Series G Preferred Stock Interests), G9 (Genesis
Series H Preferred Stock Interests), G10 (Genesis Series I Preferred Stock
Interests), G11 (Genesis Common Stock Interests), M7 (Multicare Punitive Damage
Claims), and M8 (Multicare Common Stock Interests) are deemed to reject the Plan
of Reorganization because no class that is junior to such classes will receive
or retain any property on account of the claims or equity interests in such
class.
The Genesis Senior Subordinated Note Claims (Class G5) are unsecured
claims that are contractually subordinated to the Genesis Senior Lender Claims
(Class G2). Pursuant to the terms of the respective indentures under which these
senior subordinated notes were issued, holders of these senior subordinated
notes are not entitled to receive a distribution unless the Genesis Senior
Lender Claims are paid in full. The Plan of Reorganization does not give effect
to these subordination provisions as to the Genesis Senior Subordinated Note
Claims. The distribution provided to the holders of claims in Class G5 (Genesis
Senior Subordinated Note Claims) under the Plan of Reorganization represents a
negotiated settlement between the unsecured creditors' committee in the Genesis
reorganization cases on behalf of the holders of claims in Class G5 and the
holders of the Genesis Senior Lender Claims. Accordingly, the distributions to
the holders of the Genesis Senior Subordinated Note Claims shall not be subject
to levy, garnishment, attachment, or other legal process by any senior holder of
indebtedness by reason of claimed contractual subordination rights. On the
Effective Date, all holders of claims against the Genesis Debtors shall be
deemed to have waived any and all contractual subordination rights which they
may have with respect to such distribution, and the Confirmation Order shall
permanently enjoin, effective as of the Effective Date, all holders of senior
indebtedness from enforcing or attempting to enforce any such rights with
respect to the distributions under the Plan of Reorganization to the holders of
the Genesis Senior Subordinated Note Claims.
The Multicare Senior Subordinated Note Claims (Class M5) are unsecured
claims that are contractually subordinated to the Multicare Senior Lender Claims
(Class M2). Pursuant to the terms of the indenture under which these senior
subordinated notes were issued, holders of these senior subordinated notes are
not entitled to receive a distribution unless the Multicare Senior Lender Claims
are paid in full. The Plan of Reorganization does not give effect to these
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subordination provisions as to the Multicare Senior Subordinated Note Claims.
The distribution provided to the holders of claims in Class M5 (Multicare Senior
Subordinated Note Claims) under the Plan of Reorganization represents a
negotiated settlement between the unsecured creditors' committee in the
Multicare reorganization cases on behalf of the holders of claims in Class M5
and the holders of the Multicare Senior Lender Claims. Accordingly, the
distributions to the holders of the Multicare Senior Subordinated Note Claims
shall not be subject to levy, garnishment, attachment, or other legal process by
any senior holder of indebtedness by reason of claimed contractual subordination
rights. On the Effective Date, all holders of claims against the Multicare
Debtors shall be deemed to have waived any and all contractual subordination
rights which they may have with respect to such distribution, and the
Confirmation Order shall permanently enjoin, effective as of the Effective Date,
all holders of senior indebtedness from enforcing or attempting to enforce any
such rights with respect to the distributions under the Plan of Reorganization
to the holders of the Multicare Senior Subordinated Note Claims.
Because several classes of claims are not being paid in full, the
existing equity interests in the Debtors are being extinguished.
XI.
Alternatives to Confirmation and Consummation of the Plan of Reorganization
A. Liquidation Under Chapter 7
If no chapter 11 plan can be confirmed, the chapter 11 cases may be
converted to cases under chapter 7 of the Bankruptcy Code in which a trustee
would be elected or appointed to liquidate the assets of the Debtors for
distribution in accordance with the priorities established by the Bankruptcy
Code. A discussion of the effect that a chapter 7 liquidation would have on the
recoveries of holders of claims is set forth in sections X.C and X.D, above. The
Debtors believe that liquidation under chapter 7 would result in smaller
distributions being made to creditors than those provided for in the Plan of
Reorganization because of (i) the likelihood that other assets of the Debtors
would have to be sold or otherwise disposed of in a less orderly fashion, (ii)
additional administrative expenses attendant to the appointment of a trustee and
the trustee's employment of attorneys and other professionals, and (iii)
additional expenses and claims, some of which would be entitled to priority,
which would be generated during the liquidation and from the rejection of leases
and other executory contracts in connection with a cessation of the Debtors'
operations. In a chapter 7 liquidation, the Debtors believe that there would be
no distribution to holders of claims in Classes G4 (other than insured claims to
the extent of such insurance) through G11 and Classes M4 (other than insured
claims to the extent of such insurance) through M8.
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B. Alternative Plan of Reorganization
If the Plan of Reorganization is not confirmed, the Debtors or any
other party in interest (if the Debtors' exclusive period in which to file a
plan of reorganization has expired) could attempt to formulate a different plan
of reorganization. Such a plan might involve either a reorganization and
continuation of the Debtors' business or an orderly liquidation of the Debtors'
assets under chapter 11. The Debtors have concluded that the Plan of
Reorganization enables creditors and equity holders to realize the most value
under the circumstances. In a liquidation under chapter 11, the Debtors would
still incur the expenses associated with closing or transferring to new
operators numerous facilities. The process would be carried out in a more
orderly fashion over a greater period of time. Further, if a trustee were not
appointed, because such appointment is not required in a chapter 11 case, the
expenses for professional fees would most likely be lower than those incurred in
a chapter 7 case. Although preferable to a chapter 7 liquidation, the Debtors
believe that liquidation under chapter 11 is a much less attractive alternative
to creditors and equity holders than the Plan of Reorganization because of the
greater return provided by the Plan of Reorganization.
XII.
Certain Federal Income Tax Consequences of the Plan of Reorganization
The following discussion summarizes certain federal income tax
consequences of the implementation of the Plan to the Debtors and certain
holders of claims. The following summary does not address the federal income tax
consequences to (i) holders whose claims are entitled to reinstatement or
payment in full in cash, or are otherwise unimpaired under the Plan (e.g.,
holders of certain Genesis Other Secured Claims, Genesis Priority Non-Tax
Claims, Multicare Priority Non-Tax Claims, and certain Multicare Other Secured
Claims) and (ii) holders of equity interests or claims which are extinguished
without a distribution in exchange therefor (e.g., holders of Genesis Punitive
Damage Claims and Multicare Punitive Damage Claims).
The following summary is based on the Internal Revenue Code of 1986, as
amended (the "Tax Code"), Treasury Regulations promulgated thereunder, judicial
decisions, and published administrative rules and pronouncements of the Internal
Revenue Service ("IRS") as in effect on the date hereof. Changes in such rules
or new interpretations thereof may have retroactive effect and could
significantly affect the federal income tax consequences described below.
The federal income tax consequences of the Plan are complex and are
subject to significant uncertainties. The Debtors have not requested a ruling
from the IRS or an opinion of counsel with respect to any of the tax aspects of
the Plan. Thus, no assurance can be given as to the interpretation that the IRS
will adopt. In addition, this summary does not address foreign, state, or local
tax consequences of the Plan, nor does it purport to address the federal income
tax consequences of the Plan to special classes of taxpayers (such as foreign
taxpayers, broker-dealers, mutual funds, insurance companies, financial
institutions, small business investment companies, regulated investment
companies, tax-exempt organizations, and investors in pass-through entities).
This discussion assumes that the various debt and other arrangements to
which the Debtors are currently a party and any consideration issued to the
Debtors under the Plan of Reorganization will be respected for federal income
tax purposes in accordance with their form.
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Accordingly, the following summary of certain federal income tax
consequences is for informational purposes only and is not a substitute for
careful tax planning and advice based upon the individual circumstances
pertaining to a holder of a claim. All holders of claims are urged to consult
their own tax advisors for the federal, state, local, and other tax consequences
to them of the implementation of the Plan.
A. Consequences to the Debtors
The Genesis Debtors, on the one hand (the "Genesis Group"), and the
Multicare Debtors, on the other hand (the "Multicare Group"), each file a
separate consolidated federal income tax return, excluding those Debtors that
are treated as partnerships for federal income tax purposes.
Genesis estimates that, for federal income tax purposes, the Genesis
Group will have consolidated net operating losses ("NOLs") and/or NOL
carryforwards and consolidated capital loss carryforwards of roughly $300
million and $740 million, respectively, through the Effective Date of the Plan,
which is anticipated to occur on or about September 30, 2001. Of this amount,
only a minor portion of the NOL carryforwards, but all of the capital loss
carryforwards, was incurred by Genesis. Multicare estimates that, for federal
income tax purposes, the Multicare Group will have consolidated NOLs and/or NOL
carryforwards of roughly $60 million through the Effective Date of the Plan (of
which only a minor portion was incurred by Multicare). The amount of such losses
of the Genesis Group and the Multicare Group may be adjusted during the course
of the preparation of the actual tax returns and remain subject to examination
by the IRS.
Moreover, at or about the end of 1999, the Genesis Group and the
Multicare Group each underwent an "ownership change" within the meaning of
Section 382 of the Tax Code. As a result, approximately $110 million of NOL
carryforwards and a substantial portion of the capital loss carryforwards of the
Genesis Group, and only approximately $1 million of NOL carryforwards of the
Multicare Group, cannot be used to offset future taxable income to any
significant extent. However, such loss carryforwards remain an available tax
attribute for purposes of the cancellation of debt ("COD") rules discussed
below.
The Genesis Group and the Multicare Group each has a substantial tax
basis in its assets. Both Genesis and Multicare believe that the aggregate tax
basis of the business assets (including goodwill) of the Genesis Group and the
Multicare Group, respectively, approximates the fair market value of such
assets.
As discussed below, the current year losses and loss carryforwards of
the Genesis Group and the Multicare Group may be substantially reduced or
eliminated, or subject to additional limitations upon implementation of the
Plan. In addition, certain other tax benefits (such as the tax basis of Genesis
and Multicare in the stock of certain subsidiaries) may be reduced, or subject
to limitation, upon implementation of the Plan.
1. Cancellation of Debt
In general, the discharge of a debt obligation by a debtor for an
amount less than the remaining balance of the debt obligation (as determined for
federal income tax purposes) gives rise to COD income which must be included in
the debtor's income, subject to certain statutory or judicial exceptions that
can apply to limit the amount of COD income in a title 11 bankruptcy case (such
as where the payment of the cancelled debt would have given rise to a tax
deduction). A statutory exception applies to corporate and certain other debtors
if the discharge is granted in a title 11 bankruptcy case or pursuant to a plan
approved by a bankruptcy court.
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In general, for debtors in bankruptcy, no portion of the COD is
includable in income; however, the debtor must still reduce certain of its tax
attributes -- such as NOL carryforwards, current year NOLs, capital loss
carryforwards, current year capital losses, tax credits, and tax basis in assets
- -- by the amount of any COD. To the extent the amount of COD exceeds the tax
attributes available for reduction, the remaining excludable COD income is
simply forgiven. It is unclear whether the reduction in tax attributes will
occur on a separate company basis, even though the Debtors file consolidated
federal income tax returns with the other members of their respective groups.
The Debtors are aware that the IRS has, in certain cases, asserted that such
reduction generally should occur on a consolidated basis. Any reduction in tax
attributes does not effectively occur until the first day of the taxable year
following the year the COD occurs. If advantageous, a debtor could elect to
reduce the basis of depreciable property prior to any reduction in their loss
carryforwards.
In the case of a partnership (or a limited liability company treated as
a partnership for federal income tax purposes), the above bankruptcy exception
to COD income applies at the partner level, rather than the partnership level,
and is determined by the financial status of the partner. Thus, a corporate
partner that is itself in bankruptcy should be able to apply the above
bankruptcy exception to its allocable share of the COD income of the
partnership.
As a result of the discharge of claims pursuant to the Plan, the
Debtors will incur COD, resulting in a reduction of their respective current
year NOLs, loss carryforwards, and, possibly, the tax basis in their respective
assets, effective as of the beginning of the taxable year following the taxable
year in which the Effective Date occurs. The extent of such COD and resulting
tax attribute reduction will depend, in part, on the fair market value of the
New Common Stock, New Convertible Preferred Stock, New Warrants, New Senior
Notes, and cash distributed and the dollar amount of claims ultimately allowed.
Based on the estimated enterprise value of Reorganized Genesis (see section IV,
above), it is anticipated that the Genesis Debtors will incur approximately $800
million of COD (almost all of which is attributable to debt of Genesis), and
that the Multicare Debtors will incur approximately $375 million of COD (almost
all of which is attributable to debt of Multicare). Due to the magnitude of the
loss carryforwards of the Multicare Group and the Genesis Group and the fact
that substantially all of the COD is attributable to debt of Genesis and
Multicare, both of which are holding companies with little or no operating
assets, it is not anticipated that the Debtors' tax basis in depreciable or
amortizable assets will be significantly reduced, if at all. Accordingly, for
purposes of calculating the financial projections of Reorganized Genesis (see
section IV, above), it has been assumed that no consolidated NOLs or NOL
carryforwards of the Genesis Group or the Multicare Group will survive the
reorganization and that any reduction in the tax basis in depreciable or
amortizable assets of the Debtors would be insignificant.
2. Limitations on Loss Carryforwards and Other Tax Benefits
Following the implementation of the Plan, any NOLs and capital losses
(and carryforwards thereof) and certain other tax attributes of the corporate
Debtors allocable to the period prior to the Effective Date of the Plan will be
subject to the limitations imposed by Section 382 of the Tax Code.
Under Section 382, if a corporation undergoes an "ownership change,"
the amount of its pre-change losses that may be utilized to offset future
taxable income is, in general, subject to an annual limitation. Such limitation
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also may apply to certain losses or deductions that are "built-in" (i.e.,
economically accrued but unrecognized) as of the date of the ownership change
that are subsequently recognized. The Debtors anticipate that an ownership
change of the Genesis Group and the Multicare Group will occur upon
implementation of the Plan.
a. General Section 382 Limitation. The amount of the annual limitation
to which a loss corporation may be subject (i) depends, in part, on whether the
corporation is in bankruptcy and the ownership change occurs pursuant to a plan
of reorganization confirmed by the bankruptcy court, and (ii) within the context
of an affiliated group of corporations that file a consolidated federal income
tax return, generally applies on a consolidated basis. As discussed below, a
corporation in bankruptcy may also be able to avoid any annual limitation.
In general, the amount of the annual limitation to which a corporation
(or consolidated group) would be subject would be equal to the product of (i)
the fair market value of the stock of the corporation (or, in the case of a
consolidated group, the common parent) immediately before the ownership change
(with certain adjustments) multiplied by (ii) the "long-term tax-exempt rate" in
effect for the month in which the ownership change occurs (5.01% for ownership
changes occurring in July 2001). For a corporation in bankruptcy and,
presumably, where, as in the case of the Genesis Group and the Multicare Group,
the common parent is in bankruptcy and undergoes the ownership change pursuant
to a confirmed plan, the stock value generally is determined immediately after
(rather than before) the ownership change, and some of the adjustments that
ordinarily would apply do not apply.
For example, the annual limitation applicable to a corporation not in
bankruptcy generally would be determined after reduction of its stock value for
any capital infusions within the two year period ending on the date of the
ownership change, whereas the stock value of Genesis and Multicare for purposes
of computing the annual limitation generally would not. However, regardless of
whether the ownership change occurs pursuant to a confirmed plan, certain
"anti-duplication" rules apply. These rules principally are intended to prevent
the value of a nonconsolidated, more than 50% owned subsidiary from being taken
into account both in the determination of such subsidiary's own annual
limitation and, as a result of being an asset of the controlling corporation,
indirectly in the determination of the annual limitation of the controlling
corporation (or group). Similar rules or principles can apply within a
consolidated group in those cases where the consolidated return regulations
continue to require separate company (or subgroup) annual limitations. As a
result, the stock value of Reorganized Genesis attributable to its ownership of
Reorganized Multicare will not be able to be taken into account in determining
the annual limitation applicable to the Genesis Group to the extent that the
value of Reorganized Multicare is taken into account in determining the annual
limitation applicable to the Multicare Group (and possibly will only be useable
by Genesis if an affirmative election is made by Multicare permitting it to do
so).
Any unused limitation may be carried forward, thereby increasing the
annual limitation in the subsequent taxable year. However, if the corporation
(or consolidated group) does not continue its historic business or use a
significant portion of its assets in a new business for two years after the
ownership change, the annual limitation resulting from the ownership change is
zero.
b. Built-In Gains and Losses. If a loss corporation (or consolidated
group) has a net unrealized built-in gain at the time of an ownership change
(determined taking into account most assets and all items of "built-in" income
and deductions), any built-in gains recognized during the following five years
(up to the amount of the original net built-in gain) generally will increase the
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annual limitation in the year recognized, such that the loss corporation (or
consolidated group) would be permitted to use its pre-change losses against such
built-in gain income in addition to its regular annual allowance.
On the other hand, if the loss corporation (or consolidated group) has
a net unrealized built-in loss at the time of an ownership change, then any
built-in losses recognized during the following five years (up to the amount of
the original net built-in loss) generally will be treated as a pre-change loss
and will be subject to the annual limitation in the same fashion as a pre-change
NOL carryforward. In addition, although this net built-in loss rule generally
applies to consolidated groups on a consolidated basis, any corporation that
joins the consolidated group within the preceding five years may have to be
excluded from the group computation and tested for a net built-in loss on a
separate company basis. Accordingly, even though a consolidated group of
corporations may not have a net unrealized built-in loss on an overall group
basis, the group may have a net unrealized built-in loss if certain members of
the group are required to be excluded. Additionally, if the excluded member has
a net built-in loss when tested on a separate company basis, any subsequently
recognized built-in losses of such corporation may be subject to a more
restrictive annual limitation based on the separate value of such member.
A loss corporation's (or consolidated group's) net unrealized built-in
gain or loss generally will be deemed to be zero unless it is greater than the
lesser of (i) $10 million or (ii) 15% of the fair market value of its gross
assets (with certain adjustments) immediately before the ownership change.
It is currently unclear whether the Genesis Group or the Multicare
Group will be in a net unrealized built-in loss position and/or a net unrealized
built-in gain position as of the Effective Date. However, neither Genesis nor
Multicare believes that deductibility of future depreciation or amortization
deductions of the Genesis Debtors or the Multicare Debtors, respectively, would
be significantly impaired, even if the Genesis or Multicare Group (as the case
may be) were determined to be in a net unrealized built-in loss position.
c. Special Bankruptcy Exception. An exception to the general annual
limitation (including the described built-in gain and loss rules) applies where
the stockholders and/or qualified creditors of the debtor retain or receive
(other than for new value) at least 50% of the vote and value of the stock of
the reorganized debtor pursuant to a confirmed bankruptcy plan. Under this
exception, a debtor's pre-change losses are not limited on an annual basis, but
are required to be reduced by the amount of any interest deductions claimed
during the three taxable years preceding the date of the reorganization, and
during the part of the taxable year prior to and including the reorganization,
in respect of the debt converted into stock in the reorganization. Moreover, if
this exception applies, any further ownership change of the debtor within a
two-year period will preclude the debtor's utilization of any pre-change losses
at the time of the subsequent ownership change against future taxable income.
Because the creditors of the Multicare Debtors (even though partially
overlapping with those of the Genesis Debtors) will not receive 50% or more of
the stock of Reorganized Genesis in exchange for their claims against the
Multicare Debtors, this exception will not apply to the Multicare Group. It is
possible, however, that the receipt of New Common Stock by the holders of
Genesis Senior Lender Claims solely in exchange for such interests would qualify
for this exception with respect to the Genesis Group. Even if the Genesis Group
so qualifies, Genesis may, if it so desires, elect not to have the exception
apply and instead remain subject to the annual limitation and built-in gain and
loss rules described above. Such election would have to be made in the Genesis
Group's federal income tax return for the taxable year in which the
reorganization occurs.
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The statute does not address whether this exception can be applied on a
consolidated basis or only on a separate company basis. Accordingly, it is
possible that only any pre-change losses attributable to Genesis itself (rather
than to the other members of the Genesis Group)--all of which would likely be
eliminated in any event due to the attribute reduction resulting from the COD
under the Plan--may be able to benefit from this exception. If the exception
were applicable only to Genesis itself, it appears that the pre-change losses
attributable to the other members of the Genesis Group would be subject to the
annual limitation rules described above determined as if Genesis had not
qualified for this exception.
3. Alternative Minimum Tax
In general, an alternative minimum tax ("AMT") is imposed on a
corporation's "alternative minimum taxable income" ("AMTI") at a 20% rate to the
extent such tax exceeds the corporation's regular federal income tax for the
year. AMTI is generally equal to regular taxable income with certain
adjustments. For purposes of computing AMTI, certain tax deductions and other
beneficial allowances are modified or eliminated. In particular, even though a
corporation otherwise might be able to offset all of its taxable income for
regular tax purposes by available NOL carryforwards, a corporation (or
consolidated group) is entitled to offset no more than 90% of its AMTI with NOLs
(as recomputed for AMT purposes).
In addition, if a corporation (or consolidated group) undergoes an
"ownership change" within the meaning of Section 382 and is in a net unrealized
built-in loss position on the date of the ownership change, the corporation's
(or group's) aggregate tax basis in its assets would be reduced for certain AMT
purposes to reflect the fair market value of such assets as of the change date.
The application of this provision is unaffected by whether the special
bankruptcy exception to the annual limitation (and built-in gain and loss) rules
of Section 382 applies.
Any AMT that the corporation pays generally will be allowed as a
nonrefundable credit against its regular federal income tax liability in future
taxable years when the corporation is no longer subject to AMT.
4. Issuance of the New Senior Notes
It is possible, although not anticipated, that the New Senior Notes
will be issued at original issue discount ("OID"). See section XII.B.11, below.
Any such OID generally would be amortizable by Genesis utilizing the constant
interest method, and deductible as interest, unless the New Senior Notes are
treated as applicable high-yield discount obligations ("AHYDO") within the
meaning of Section 163(e)(5) of the Tax Code. The New Senior Notes would be
treated as AHYDOs if, among other requirements, their yield to maturity is at
least five percentage points over the applicable federal rate in effect for the
calendar month in which such notes are issued (approximately 5.01% compounded
annually for the month of June 2001) and the notes have significant OID (in
general, where there is unamortized OID as of the end of the fifth year after
issuance that exceeds the amount of one year's interest, both actual and
imputed).
If the New Senior Notes are treated as AHYDOs, a portion of the accrued
discount attributable to the "disqualified portion," if any, of the interest
deduction otherwise allowable as OID would be disallowed, and the balance of
such deduction would be deferred until actually paid in cash. The "disqualified
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portion" of any interest deduction otherwise allowable as OID on an AHYDO is
that portion, if any, of the total OID multiplied by a fraction, the numerator
of which is equal to the "disqualified yield" (i.e., the excess of the yield to
maturity of the notes over the sum of the applicable federal rate for the
calendar month in which the notes are issued plus six percentage points) and the
denominator of which is equal to the total yield to maturity of the notes.
B. Consequences to Holders of Certain Claims
Pursuant to, and in accordance with, the Plan, holders of allowed
claims in Class G2 (Genesis Senior Lender Claims) and holders of allowed claims
in Class M2 (Multicare Senior Lender Claims) will be entitled to receive in
satisfaction of their claims cash, New Senior Notes, New Common Stock, and New
Convertible Preferred Stock. Holders of allowed claims in Class G4 (Genesis
General Unsecured Claims), except to the extent such a claim constitutes an
Insured Claim, and holders of allowed claims in Class G5 (Genesis Senior
Subordinated Note Claims) will receive in satisfaction of their Claims New
Common Stock and New Warrants. Holders of allowed claims in Class M4 (Multicare
General Unsecured Claims), except to the extent such a claim constitutes an
Insured Claim, will receive in satisfaction of their claims New Common Stock,
and holders of allowed claims in Class M5 (Multicare Senior Subordinated Note
Claims) will receive in satisfaction of their claims New Common Stock and New
Warrants.
The federal income tax consequences of the Plan to holders of allowed
claims against Genesis depend, in part, on whether such claims, and in the case
of Genesis Senior Lender Claims, whether the New Senior Notes, constitute
"securities" for federal income tax purposes. The term "security" is not defined
in the Tax Code or in the regulations issued thereunder and has not been clearly
defined by judicial decisions. The determination of whether a particular debt
constitutes a "security" depends on an overall evaluation of the nature of the
debt. One of the most significant factors considered in determining whether a
particular debt is a security is its original term. In general, debt obligations
issued with a weighted average maturity at issuance of five years or less (e.g.,
trade debt and revolving credit obligations) do not constitute securities,
whereas debt obligations with a weighted average maturity at issuance of ten
years or more constitute securities. For purposes of the following discussion it
has been assumed that Genesis Senior Subordinated Note Claims constitute
"securities." Each holder of a Genesis Senior Lender Claim, Genesis General
Unsecured Claim, and Genesis Senior Subordinated Note Claim is urged to consult
its tax advisor regarding the status of its claim, or any portion thereof, as a
"security."
The following discussion does not necessarily apply to holders who have
claims in more than one class relating to the same underlying obligation (such
as where the underlying obligation is classified as partially secured and
partially unsecured). Such holders should consult their tax advisor regarding
the effect of such dual status obligations on the federal income tax
consequences of the Plan to them.
1. Consequences to All Holders (Including Holders Whose Claims Are Against
Any of the Multicare Debtors) Who Receive Cash, New Senior Notes, New
Convertible Preferred Stock, New Common Stock, or New Warrants, Other
Than Holders of Claims Against Genesis That Constitute "Securities"
In general, holders of claims who receive Cash, New Senior Notes, New
Common Stock, New Convertible Preferred Stock, and/or New Warrants (other than
holders of claims against Genesis that constitute "securities") will recognize
gain or loss in an amount equal to the difference between (i) the "amount
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realized" by the holder in satisfaction of its claim (other than any claim for
accrued but unpaid interest) and (ii) the holder's adjusted tax basis in its
claim (other than any claim for accrued but unpaid interest). For a discussion
of the tax consequences of any claims for accrued interest, see section XII.B.4,
below.
For these purposes, the "amount realized" by a holder will equal the
sum of the aggregate of (i) cash, (ii) the "issue price" of any New Senior Notes
(see section XII.B.11, below), (iii) the fair market value of any New
Convertible Preferred Stock, (iv) the fair market value of any New Common Stock,
and (iv) the fair market value of any New Warrants received by the holder (less
any portion of such distribution required to be treated as imputed interest as a
result of any such distribution being made after the Effective Date).
Due to the possibility that a holder of a Genesis General Unsecured
Claim and Multicare General Unsecured Claim may receive a distribution of New
Common Stock and/or New Warrants subsequent to the Effective Date in respect of
any subsequently disallowed disputed claims, the imputed interest provisions of
the Tax Code may apply to treat a portion of the distribution to such holders as
imputed interest. Such imputed interest may (with respect to certain holders)
accrue over time using the constant interest method, in which event the holder
may be required to include such imputed interest in income prior to the actual
distribution.
In addition, because distributions of New Common Stock and/or New
Warrants to such holders may be made after the Effective Date, any loss, and a
portion of any gain, realized by a holder in satisfaction of its claim may be
deferred until all such subsequent distributions are made. Such holders are
urged to consult their tax advisors regarding the possible application of (or
ability to elect out of) the "installment method" of reporting any gain that may
be recognized by such holder in respect of its claim.
Where gain or loss is recognized by a holder, the character of such
gain or loss as long-term or short-term capital gain or loss or as ordinary
income or loss will be determined by a number of factors, including the tax
status of the holder, whether the claim constitutes a capital asset in the hands
of the holder and how long it has been held, whether the claim was acquired at a
market discount, and whether and to what extent the holder had previously
claimed a bad debt deduction.
A holder's aggregate tax basis in any New Convertible Preferred Stock,
New Common Stock, and any New Warrants received will equal the fair market value
of such preferred stock, common stock, and warrants. A holder's tax basis in any
New Senior Notes received will equal the "issue price" of such notes. The
holding period for any New Convertible Preferred Stock, New Common Stock, New
Senior Notes, and New Warrants generally will begin the day following the
issuance of such preferred stock, common stock, notes, or warrants.
Notwithstanding the foregoing, it is possible the IRS may attempt to
treat the receipt of New Common Stock, New Convertible Preferred Stock, New
Senior Notes, and/or New Warrants in satisfaction of claims against Multicare or
any subsidiary of Genesis as part of a non-recognition transaction. So treated,
such a holder would not be permitted to recognize any loss, but to the extent
that the holder receives New Senior Notes, New Warrants, and possibly New
Convertible Preferred Stock, such holder would still be required to recognize a
portion of its gain. In the case of a holder that does not recognize loss, the
holder's tax basis in its New Common Stock would reflect the unrecognized loss.
In addition, the holder's holding period in the New Common Stock would, in whole
or in part, include its holding period in its claim. However, Genesis believes,
and the discussion herein assumes, that the satisfaction of claims described in
this paragraph should be treated as a fully taxable transaction, in which both
gain and loss may be recognized.
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For a discussion of the tax treatment of New Warrants, New Common
Stock, New Convertible Preferred Stock, and New Senior Notes, see sections
XII.B.5, XII.B.6, XII.B.7, XII.B.8, XII.B.9, XII.B.10, XII.B.11, below.
2. Consequences to Holders of Genesis Senior Subordinated Note Claims and
Genesis General Unsecured Claims That Constitute "Securities"
The receipt of New Common Stock and New Warrants in satisfaction of a
Genesis Senior Subordinated Note Claim or a Genesis General Unsecured Claim
against Genesis that constitutes a "security" will be a "recapitalization" for
federal income tax purposes. Accordingly, in general, the holder of such a claim
will not recognize loss upon such exchange, but will recognize gain (computed as
described in the preceding section), if any, to the extent of any consideration
received other than the New Common Stock and New Warrants (such as proceeds from
insurance), excluding the portion of any consideration allocable to a claim for
accrued but unpaid interest or required to be treated as imputed interest due to
the distribution of such consideration after the Effective Date. The character
and timing of such gain would also be determined in accordance with the
principles discussed in the preceding section. For a discussion of the tax
consequences of any claims for accrued interest, see section XII.B.4, below.
In the case of a recapitalization, a holder's aggregate tax basis in
any New Common Stock and New Warrants received in satisfaction of its claim will
equal the holder's aggregate adjusted tax basis in its claim (including any
claim for accrued but unpaid interest) increased by any gain or interest income
recognized in respect of its claim and decreased by any consideration received
other than New Common Stock and New Warrants and any deductions claimed in
respect of any previously accrued interest. Such tax basis would be allocated
between the New Common Stock and the New Warrants based on relative fair market
value. In general, the holder's holding period for the New Common Stock and the
New Warrants received will include the holder's holding period for the claim
except to the extent that the New Common Stock and the New Warrants were issued
in respect of a claim for accrued but unpaid interest or treated as imputed
interest.
For a discussion of the tax treatment of New Warrants, see sections
XII.B.5 and XII.B.10, below.
3. Consequences to Holders of Genesis Senior Lender Claims That Constitute
"Securities"
The receipt of New Common Stock or New Convertible Preferred Stock, and
the receipt of New Senior Notes if such notes constitute "securities," in
partial satisfaction of a Genesis Senior Lender Claim (to the extent such claim
constitutes a "security") will be a "recapitalization" for federal income tax
purposes. Accordingly, in general, the holder of such claim will not recognize
loss upon such exchange with respect to the portion of its claim constituting a
"security," but will recognize gain (computed as described above in the case of
non-securities), if any, to the extent of any consideration received other than
stock or securities (such as cash and the New Senior Notes if such notes do not
constitute "securities"), excluding the portion of any consideration allocable
to a claim for accrued but unpaid interest. The character and timing of such
gain would also be determined in accordance with the principles discussed above
with respect to claims that are not securities. See section XII.B.1, above. For
a discussion of the tax consequences of any claims for accrued interest, see
section XII.B.4, below.
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If the New Senior Notes do not constitute "securities," the holder's
aggregate tax basis in any New Common Stock and New Convertible Preferred Stock
received in satisfaction of the portion of its claim constituting a "security"
will equal the holder's aggregate tax basis in such portion (including any claim
for accrued but unpaid interest), increased by any gain or interest income
recognized in respect of such portion and decreased by any consideration
received other than stock or securities (such as any cash or New Senior Notes
received) and any deductions claimed in respect of any previously accrued
interest. Such basis would be allocated between the New Common Stock and the New
Convertible Preferred Stock based on relative fair market value. In general, the
holder's holding period for any New Common Stock and the New Convertible
Preferred Stock received will include the holder's holding period for the claim,
except to the extent that the New Common Stock or New Convertible Preferred
Stock was issued in respect of a claim for accrued but unpaid interest. A
holder's tax basis in any New Senior Notes received would equal the "issue
price" of such notes, and the holding period for any New Senior Notes generally
would begin the day following the issuance of such notes.
If the New Senior Notes do constitute "securities," a holder will have
an aggregate tax basis in any New Common Stock, New Convertible Preferred Stock,
and New Senior Notes received in satisfaction of the portion of its claim
constituting a "security" equal to the holder's adjusted tax basis in such
portion (including any claim for accrued but unpaid interest) increased by any
gain or interest income recognized in respect of such portion and decreased by
any consideration received other than stock or securities (such as any cash
received) and any deductions claimed in respect of any previously accrued
interest. Such tax basis would then be allocated between the New Common Stock,
New Convertible Preferred Stock, and New Senior Notes based on relative fair
market value. A holder's holding period for any New Common Stock, New
Convertible Preferred Stock, and New Senior Notes in this instance will include
that holder's holding period for the claim, except to the extent that the New
Common Stock, New Convertible Preferred Stock, or New Senior Notes were issued
in respect of a claim for accrued but unpaid interest.
4. Distributions in Discharge of Accrued Interest
Pursuant to the Plan, all distributions in respect of an allowed claim
will be allocated first to the principal amount of the claim, with any excess
allocated to the remaining portion of the claim. However, there is no assurance
that such allocation would be respected by the IRS for federal income tax
purposes. In general, to the extent that any amount received (whether stock,
cash, or other property) by a holder of a debt is received in satisfaction of
accrued interest during its holding period, such amount will be taxable to the
holder as interest income (if not previously included in the holder's gross
income). Conversely, a holder generally recognizes a deductible loss to the
extent any accrued interest claimed was previously included in its gross income
and is not paid in full. Each holder of a claim is urged to consult its tax
advisor regarding the allocation of consideration and the deductibility of
unpaid interest for tax purposes.
5. Market Discount
A holder which purchased its claim from a prior holder at a market
discount may be subject to the market discount rules of the Tax Code. Under
those rules, assuming that the holder has made no election to amortize the
market discount into income on a current basis with respect to any market
discount instrument, any gain recognized on the exchange of its claim (subject
to a de minimis rule) generally would be characterized as ordinary income to the
extent of the accrued market discount on such claim as of the date of the
exchange.
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To the extent that a holder's claim constitutes a "security" and is
exchanged in a "recapitalization" for federal income tax purposes, the Treasury
Department is expected to promulgate regulations that will provide that any
accrued "market discount" not treated as ordinary income upon such exchange
would carry over to the nonrecognition property received in the exchange. If
such regulations are promulgated and applicable to the Plan (and arguably even
without issuance of regulations), any holder of a claim that is exchanged in a
"recapitalization" would carry over any accrued market discount incurred in
respect of such claim, on an allocable basis, to any New Common Stock, New
Convertible Preferred Stock, New Senior Notes (if such notes constitute
"securities"), and/or New Warrants received, such that any gain recognized by
the holder upon a subsequent disposition of such New Common Stock, New
Convertible Preferred Stock, New Senior Notes, or New Warrants would be treated
as ordinary income to the extent of any accrued market discount not previously
included in income. In addition, any accrued market discount that carries over
to the New Convertible Preferred Stock would, in turn, carry over to any New
Common Stock received upon conversion of such preferred stock, and it is
possible that any accrued market discount that carries over to the New Warrants
would, in turn, carryover to any New Common Stock received upon the exercise of
such warrants.
6. Treatment of Distributions on New Convertible Preferred Stock and
New Common Stock
Distributions - In General. The amount of distributions, if any, by
Reorganized Genesis in respect of the New Common Stock and the New Convertible
Preferred Stock will be equal to the amount of cash and the fair market value as
of the date of distribution of any property distributed, other than possibly in
the case of distributions of the New Convertible Preferred Stock which are
payable in kind with additional shares (so called "PIK" distributions). Subject
to the discussion below regarding redemption of New Convertible Preferred Stock
(see section XII.B.9, below), distributions generally will be treated for
federal income tax purposes first as a taxable dividend to the extent of
Reorganized Genesis's current and accumulated earnings and profits (as
determined for federal income tax purposes) and then as a tax-free return of
capital to the extent of the holder's tax basis in its stock, with any excess
treated as capital gain from the sale or exchange of the stock.
PIK /Constructive Distributions. The New Convertible Preferred Stock
provides for annual distributions payable in kind with additional shares of New
Convertible Preferred Stock, which will accumulate if not paid. Reorganized
Genesis intends to declare and pay such distributions annually. Accordingly,
Reorganized Genesis intends to treat the distributions of additional shares of
New Convertible Preferred Stock under the normal distribution rules described
above. Under the normal distribution rules, the amount of any such distribution
will equal the fair market value of the New Convertible Preferred Stock on the
distribution date, a holder's tax basis in the New Convertible Preferred Stock
so received will equal the fair market value of such stock on the distribution
date, and such holder's holding period for such stock will commence on the day
following the distribution date.
Additionally, the constructive distribution rules will apply to the New
Convertible Preferred Stock acquired pursuant to the Plan if the "redemption
price" of the New Convertible Preferred Stock ($20.33) exceeds its issue price
(generally fair market value at issue). A holder would be required to accrue
such excess -- regardless of the holder's regular method of accounting -- over
the term of the New Convertible Preferred Stock. The stated term of the New
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Convertible Preferred Stock is nine years, but for purposes of calculating
constructive distributions the term may be regarded as being less than nine
years if an earlier date upon which a redemption may occur is the date that a
redemption is most likely to occur based upon all the facts and circumstances at
the time of issuance. Under the applicable Treasury Regulations, each holder
will be bound by Reorganized Genesis's determination as to the presence or
absence of constructive distributions, unless the holder explicitly discloses in
its timely filed tax return for the taxable year in which it acquires the New
Convertible Preferred Stock that it is taking a contrary position.
The constructive distributions would be treated in the same manner as
an ordinary distribution (discussed above). To the extent a constructive
distribution results in a taxable dividend to the holder, the holder's aggregate
tax basis in the New Convertible Preferred Stock (including any additional
shares actually distributed in respect of the stated dividend) would be
increased by the amount of the constructive distribution. To the extent a
constructive distribution does not result in a taxable dividend to the holder,
the aggregate tax basis of the holder's New Convertible Preferred Stock will
remain unchanged but will be spread over a greater number of shares (assuming
actual payment of the stated dividend).
Aside from the treatment of any excess redemption premium, the presence
or absence of an adjustment to the conversion price of the New Convertible
Preferred Stock under anti-dilution provisions may, under certain circumstances,
result in constructive distributions to the holder. Conversely, the absence of
an adjustment to the conversion price of the New Convertible Preferred Stock may
result in a constructive distribution to the holders of the New Common Stock or
the holder of the New Warrants.
Any additional shares of New Convertible Preferred Stock distributed to
the holders of the New Convertible Preferred Stock will be subject to the same
tax treatment as the underlying New Convertible Preferred Stock. Accordingly,
the rules discussed above relating to distributions and constructive
distributions would apply to any New Convertible Preferred Stock received as a
distribution. However, for purposes of applying the constructive distribution
rules, the issue price of such New Convertible Preferred Stock would be
determined at the time of the distribution, and the term of such stock would be
determined based upon the date such stock is distributed. Thus, it is possible
that the tax treatment of the additional shares received may not be identical to
that of the underlying New Convertible Preferred Stock, and that the additional
shares may, therefore, not be fungible with the underlying New Convertible
Preferred Stock.
There is no assurance that the Internal Revenue Service will not take a
contrary position. Because all stated dividends on the New Convertible Preferred
Stock are required to be paid annually in additional shares of such stock, with
the result that holders will not be entitled to the receipt of cash until the
redemption of the New Convertible Preferred Stock, it is possible that for
purposes of applying the constructive distribution rules, the Internal Revenue
Service may take the position that "redemption price" of the New Convertible
Preferred Stock is equal to the sum of the instrument's stated redemption price
($20.33) and the aggregate stated dividends provided for over the term of the
instrument. Under such treatment, the right to distributions of additional
shares of New Convertible Preferred Stock would be taxable solely under the
constructive distribution rules, and the actual distribution of such stock in
respect of a stated dividend would not be considered a separate taxable event.
Distributions to Corporate Shareholders. In general, a distribution to
a corporate shareholder which is treated as a dividend for federal income tax
purposes will qualify for the 70% dividends received deduction that is available
to corporate shareholders that own less than 20% of the voting power or value of
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the outstanding stock of the distributing corporation (other than certain
preferred stock not applicable here). A corporate shareholder holding 20% or
more of the distributing corporation (other than certain preferred stock not
applicable here) may be eligible for an 80% dividends received deduction. No
assurance can be given that Reorganized Genesis will have sufficient earnings
and profits (as determined for federal income tax purposes) to cause
distributions to be eligible for a dividends received deduction. Dividend income
that is not subject to regular federal income tax as a consequence of the
dividends received deduction may be subject to the federal alternative minimum
tax.
The dividends received deduction is only available if certain holding
periods and taxable income requirements are satisfied. The length of time that a
shareholder has held stock is reduced for any period during which the
shareholder's risk of loss with respect to the stock is diminished by reason of
the existence of certain options, contracts to sell, short sales, or similar
transactions. The law is unclear whether there would also be excluded any period
during which a holder can require, pursuant to the terms of the stock itself,
the redemption of the stock, as in the case of New Convertible Preferred Stock.
Also, to the extent that a corporation incurs indebtedness that is directly
attributable to an investment in the stock on which the dividend is paid, all or
a portion of the dividends received deduction may be disallowed. In addition,
any dividend received by a corporation is also subject to the "extraordinary
distribution" provisions of the Tax Code.
7. Subsequent Sale of New Common Stock or New Convertible Preferred Stock
Any gain recognized by a holder upon a subsequent taxable disposition
of New Convertible Preferred Stock or New Common Stock (including any New Common
Stock received upon conversion) received pursuant to the Plan (or any stock or
property received for it in a later tax-free exchange) will be treated as
ordinary income to the extent of (i) any bad debt deductions (or additions to a
bad debt reserve) claimed with respect to its claim and any ordinary loss
deductions incurred upon satisfaction of its claim, less any income (other than
interest income) recognized by the holder upon satisfaction of its claim, and
(ii) with respect to a cash-basis holder, also any amounts which would have been
included in its gross income if the holder's claim had been satisfied in full
but which was not included by reason of the cash method of accounting.
In addition, a portion of any gain may be treated as ordinary income
under the "market discount" rules of the Tax Code. See section XII.B.5, above.
8. Conversion of New Convertible Preferred Stock
Except for cash received in lieu of a fractional share, a holder of New
Convertible Preferred Stock generally will not recognize gain or loss upon
conversion of the New Convertible Preferred Stock for New Common Stock. A holder
who receives cash in lieu of a fractional share should recognize capital gain or
loss equal to the difference between the amount of cash received and the
holder's tax basis exchanged allocable to the fractional share.
Generally, a holder's tax basis in the New Common Stock received upon
conversion of shares of New Convertible Preferred Stock will equal the tax basis
of the shares of New Convertible Preferred Stock exchanged therefor (less the
portion of the holder's basis allocable to any fractional share, as to which the
holder receives cash), and the holding period of the New Common Stock received
upon conversion will include the holding period of the shares of the New
Convertible Preferred Stock exchanged therefor.
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9. Redemption of New Convertible Preferred Stock
The federal income tax treatment of a redemption to a holder of New
Convertible Preferred Stock will depend on the particular facts relating to such
holder at the time of the redemption. If the redemption of such stock (i) is
"not essentially equivalent to a dividend" with respect to the holder (taking
into account any ownership of common stock), (ii) is "substantially
disproportionate" with respect to the holder (defined generally as a greater
than 20% reduction in a holder's voting stock interest in a corporation), or
(iii) results in a "complete termination" of all such holder's equity interest
in the corporation, then the receipt of cash or property by such holder will be
treated as an exchange on which gain or loss will be recognized. Such exchange
will be treated as a taxable disposition in which gain or loss will be
recognized. See section X.B.7, above. In applying these tests, certain
constructive ownership rules apply to determine stock ownership.
If none of the above tests giving rise to taxable disposition treatment
is satisfied in respect of a redemption of New Convertible Preferred Stock, the
holder will be treated as having received an ordinary distribution with respect
to such stock. The amount of such distribution generally will be equal to the
amount of cash and the fair market value of property received in the redemption,
and will be treated first as a taxable dividend to the extent of Reorganized
Genesis's current and accumulated earnings and profits, if any, and then as a
tax-free return of capital to the extent of the holder's tax basis in the stock
redeemed, with any excess treated as capital gain from the sale or exchange of
such stock. See section X.B.6, above, for discussion of distributions to
corporate shareholders.
10. Ownership and Disposition of New Warrants
A holder of a New Warrant will not recognize gain or loss upon the
exercise of such warrant (except possibly in respect of any cash received in
lieu of fractional shares). A holder's tax basis in the New Common Stock
received upon exercise of a New Warrant will be equal to the sum of the holder's
tax basis in the New Warrant and the exercise price (less the sum of the portion
of the holder's tax basis allocable to any fractional share, as to which the
holder receives cash, as discussed below). The holding period of the New Common
Stock received upon exercise of a New Warrant will commence on the day following
the exercise of such warrant.
A holder who receives cash in lieu of a fractional share upon exercise
of a New Warrant should recognize capital gain or loss equal to the difference
between the amount of cash received and the portion of the holder's tax basis in
the New Warrant allocable to such fractional share.
The presence of an adjustment to the exercise price of the New Warrants
under anti-dilution provisions may, under certain circumstances, result in
constructive distributions to the holder. Conversely, the absence of an
adjustment to the exercise price of the New Warrants may result in a
constructive distribution to the holders of the New Common Stock or the holders
of the New Convertible Preferred Stock.
Upon the lapse or disposition of a New Warrant, the holder generally
should recognize gain or loss equal to the difference between the amount
received (nothing in the case of a lapse) and its tax basis in the warrant. In
general, such gain or loss should be a capital gain or loss, long-term or
short-term, depending on whether the requisite holding period was satisfied.
115
11. Interest and Original Issue Discount on the New Senior Notes
Pursuant to the Plan, interest on the New Senior Notes generally will
be payable at least annually at a rate of interest equal to the LIBOR plus 5%.
Stated interest on the New Senior Notes should be includable in income by a
holder in accordance with such holder's method of accounting.
In addition, under certain circumstances, holders of the New Senior
Notes may be required to recognize imputed interest to the extent that such New
Senior Notes are issued with OID. In general, a debt instrument is treated as
having OID to the extent its "stated redemption price at maturity" (in this
case, the stated principal amount of the New Senior Notes) exceeds its "issue
price." The "issue price" of the New Senior Notes will depend upon whether they
are traded on an "established securities market" during the sixty day period
ending thirty days after the Effective Date. Pursuant to Treasury Regulations,
an "established securities market" includes a system of general circulation
(including a computer listing disseminated to subscribing brokers, dealers, or
traders) that provides a reasonable basis to determine fair market value by
disseminating either recent price quotations or actual prices of recent sales
transactions. If the New Senior Notes are traded on an established securities
market, the "issue price" will be their fair market value. If they are not so
traded, the issue price of the New Senior Notes will be their stated principal
amount.
In general, if the New Senior Notes are treated as issued with OID,
each holder will be required to accrue the OID in respect of its New Senior
Notes, and include such amount in gross income as interest, over the term of
such notes based on the constant interest method. Accordingly, each holder
generally will be required to include amounts in gross income in advance of the
payment of cash in respect of such income. A holder's tax basis in a New Senior
Note will be increased by the amount of any OID included in income and reduced
by any cash payments (other than payment of stated interest) made with respect
to such New Senior Note.
In addition, as discussed in section XII.A.4, above, certain debt
obligations that are issued with substantial OID and have a maturity of over
five years are treated as applicable high yield discount obligations (AHYDOs)
within the meaning of the Tax Code. With respect to such obligations, a portion
of a corporate holder's income with respect to such accrued OID may be treated
as a dividend for purposes of the dividend-received-deduction to the extent such
amount would be so treated if it had been a distribution made by the issuer with
respect to its stock (that is, to the extent the issuer has sufficient earnings
and profits such that a distribution in respect of stock would constitute a
dividend for federal income tax purposes and, presumably, subject to certain
holding period and taxable income requirements and other limitations on the
dividend-received-deduction). The AHYDO rules will have no applicability to the
New Senior Notes unless the New Senior Notes are considered to be traded on an
established securities market and are issued with sufficient OID such that there
would be unamortized OID as of the end of the fifth year after issuance in
excess of one year's interest, both actual and imputed.
12. Information Reporting and Withholding
All distributions to holders of allowed claims under the Plan are
subject to any applicable withholding (including employment tax withholding).
Under federal income tax law, interest, dividends, and other reportable payments
may, under certain circumstances, be subject to "backup withholding" at a rate
of 31%, subject to adjustment under recent legislation. Backup withholding
generally applies if the holder (i) fails to furnish its social security number
or other taxpayer identification number ("TIN"), (ii) furnishes an incorrect
TIN, (iii) fails properly to report interest or dividends, or (iv) under certain
116
circumstances, fails to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Backup withholding is not an additional tax but merely an
advance payment, which may be refunded to the extent it results in an
overpayment of tax. Certain persons are exempt from backup withholding,
including, in certain circumstances, corporations and financial institutions.
THE FOREGOING SUMMARY HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY. ALL
HOLDERS OF CLAIMS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE
FEDERAL, STATE, LOCAL, AND OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN.
XIII.
Conclusion
The Debtors believe the Plan of Reorganization is in the best interests
of all creditors and equity holders and urges the holders of impaired claims in
Subclasses G1-13 through G1-17 (Genesis Other Secured Claims), Class G2 (Genesis
Senior Lender Claims), Class G4 (Genesis General Unsecured Claims), Class G5
(Genesis Senior Subordinated Note Claims), Subclass M1-7 (Multicare Other
Secured Claims), Class M2 (Multicare Senior Lender Claims), Class M4 (Multicare
General Unsecured Claims), and Class M5 (Multicare Senior Subordinated
117
Note Claims) to vote to accept the Plan of Reorganization and to evidence such
acceptance by returning their Ballots so that they will be received not later
than August 17, 2001.
Dated: July 6, 2001
Respectfully submitted,
GENESIS HEALTH SERVICES CORPORATION
GENESIS HEALTH VENTURES, INC.
ACCUMED, INC.
ASCO HEALTHCARE, INC.
ASCO HEALTHCARE OF NEW ENGLAND, INC.
BRINTON MANOR, INC.
BURLINGTON WOODS CONVALESCENT CENTER, INC.
CARECARD, INC.
CAREFLEET, INC.
CHELTENHAM LTC MANAGEMENT, INC.
COMPASS HEALTH SERVICES, INC.
CONCORD HEALTHCARE CORPORATION
CONCORD PHARMACY SERVICES, INC.
CRESTVIEW CONVALESCENT HOME, INC.
CRESTVIEW NORTH, INC.
CRYSTAL CITY NURSING CENTER, INC.
DELCO APOTHECARY, INC.
DERBY NURSING CENTER CORPORATION
DIANE MORGAN AND ASSOCIATES, INC.
DOVER HEALTHCARE ASSOCIATES, INC.
EASTERN MEDICAL SUPPLIES, INC.
EASTERN REHAB SERVICES, INC.
EIDOS, INC.
ENCARE OF MASSACHUSETTS, INC.
GENESIS ELDERCARE ADULT DAY HEALTH SERVICES, INC.
GENESIS ELDERCARE DIAGNOSTIC SERVICES, INC.
GENESIS ELDERCARE HOME CARE SERVICES, INC.
GENESIS ELDERCARE HOME HEALTH SERVICES-SOUTHERN, INC.
GENESIS ELDERCARE HOSPITALITY SERVICES, INC.
GENESIS ELDERCARE MANAGEMENT SERVICES, INC.
GENESIS ELDERCARE NETWORK SERVICES, INC.
GENESIS ELDERCARE NATIONAL CENTERS, INC.
GENESIS ELDERCARE NETWORK SERVICES OF
MASSACHUSETTS, INC.
GENESIS ELDERCARE PHYSICIAN SERVICES, INC.
GENESIS ELDERCARE PROPERTIES, INC.
GENESIS ELDERCARE REHABILITATION MANAGEMENT
SERVICES, INC.
GENESIS ELDERCARE REHABILITATION SERVICES, INC.
GENESIS ELDERCARE STAFFING SERVICES, INC.
GENESIS ELDERCARE TRANSPORTATION SERVICES, INC.
GENESIS HEALTH VENTURES OF ARLINGTON, INC.
GENESIS HEALTH VENTURES OF BLOOMFIELD, INC.
118
GENESIS HEALTH VENTURES OF CLARKS SUMMIT, INC.
GENESIS HEALTH VENTURES OF INDIANA, INC.
GENESIS HEALTH VENTURES OF LANHAM, INC.
GENESIS HEALTH VENTURES OF MASSACHUSETTS, INC.
GENESIS HEALTH VENTURES OF NAUGATUCK, INC.
GENESIS HEALTH VENTURES OF NEW GARDEN, INC.
GENESIS HEALTH VENTURES OF POINT PLEASANT, INC.
GENESIS HEALTH VENTURES OF WAYNE, INC.
GENESIS HEALTH VENTURES OF WEST VIRGINIA, INC.
GENESIS HEALTH VENTURES OF WILKES-BARRE, INC.
GENESIS HEALTH VENTURES OF WINDSOR, INC.
GENESIS HEALTHCARE CENTERS HOLDINGS, INC.
GENESIS HOLDINGS, INC.
GENESIS IMMEDIATE MED CENTER, INC.
GENESIS PROPERTIES OF DELAWARE CORPORATION
GENESIS SELECTCARE CORP.
GERIATRIC & MEDICAL COMPANIES, INC.
GERIATRIC AND MEDICAL SERVICES, INC.
GERIATRIC AND MEDICAL INVESTMENTS CORPORATION
GERIMED CORP.
GMC LEASING CORPORATION
GMC MEDICAL CONSULTING SERVICES, INC.
GMS MANAGEMENT-TUCKER, INC.
GMS MANAGEMENT, INC.
GOVERNOR'S HOUSE NURSING HOME, INC.
HEALTHCARE RESOURCES CORP.
HEALTH CONCEPTS AND SERVICES, INC.
HEALTHOBJECTS CORPORATION
HILLTOP HEALTH CARE CENTER, INC.
HORIZON MEDICAL EQUIPMENT AND SUPPLY, INC.
INNOVATIVE HEALTH CARE MARKETING, INC.
INNOVATIVE PHARMACY SERVICES, INC.
INSTITUTIONAL HEALTH CARE SERVICES, INC.
KEYSTONE NURSING HOME, INC.
KNOLLWOOD MANOR, INC.
KNOLLWOOD NURSING HOME, INC.
LIFE SUPPORT MEDICAL EQUIPMENT, INC.
LIFE SUPPORT MEDICAL, INC.
LINCOLN NURSING HOME, INC.
MANOR MANAGEMENT CORP. OF GEORGIAN MANOR, INC.
MCKERLEY HEALTH CARE CENTERS, INC.
MEDICAL SERVICES GROUP, INC.
MERIDIAN HEALTH, INC.
MERIDIAN HEALTHCARE, INC.
METRO PHARMACEUTICALS, INC.
NATIONAL PHARMACY SERVICE, INC.
NEIGHBORCARE INFUSION SERVICES, INC.
NEIGHBORCARE-MEDISCO, INC.
NEIGHBORCARE OF NORTHERN CALIFORNIA, INC.
NEIGHBORCARE OF OKLAHOMA, INC.
NEIGHBORCARE OF VIRGINIA, INC.
119
NEIGHBORCARE OF WISCONSIN, INC.
NEIGHBORCARE PHARMACIES, INC.
NEIGHBORCARE PHARMACY SERVICES, INC.
NEIGHBORCARE-ORCA, INC.
NEIGHBORCARE-TCI, INC.
NETWORK AMBULANCE SERVICES, INC.
OAK HILL HEALTH CARE CENTER, INC.
PHARMACY EQUITIES, INC.
PHILADELPHIA AVENUE CORPORATION
PROFESSIONAL PHARMACY SERVICES, INC.
PROSPECT PARK LTC MANAGEMENT, INC.
STATE STREET ASSOCIATES, INC.
SUBURBAN MEDICAL SERVICES, INC.
THE TIDEWATER HEALTHCARE SHARED SERVICES GROUP, INC.
THERAPY CARE, INC.
TRANSPORT SERVICES, INC.
UNITED HEALTH CARE SERVICES, INC.
VALLEY MEDICAL SERVICES, INC.
VALLEY TRANSPORT AMBULANCE SERVICE, INC.
VERSALINK, INC.
VILLAS REALTY & INVESTMENTS, INC.
WALNUT LTC MANAGEMENT, INC.
WAYSIDE NURSING HOME, INC.
WEISENFLUH AMBULANCE SERVICE, INC.
WEST PHILA. LTC MANAGEMENT, INC.
WYNCOTE HEALTHCARE CORP.
YORK LTC MANAGEMENT, INC.
BY: GENESIS HEALTH VENTURES, INC., as agent and
attorney-in-fact for each of the foregoing entities
By:
-----------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
ASCO HEALTHCARE OF NEW ENGLAND, LIMITED PARTNERSHIP
BY: ASCO HEALTHCARE OF NEW ENGLAND, INC., its
General partner
By:
------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
120
BREVARD MERIDIAN LIMITED PARTNERSHIP
CATONSVILLE MERIDIAN LIMITED PARTNERSHIP
EASTON MERIDIAN LIMITED PARTNERSHIP
GREENSPRING MERIDIAN LIMITED PARTNERSHIP
HAMMONDS LANE MERIDIAN LIMITED PARTNERSHIP
MERIDIAN EDGEWOOD LIMITED PARTNERSHIP
MERIDIAN PERRING LIMITED PARTNERSHIP
MERIDIAN VALLEY LIMITED PARTNERSHIP MERIDIAN
VALLEY VIEW LIMITED PARTNERSHIP
MERIDIAN/CONSTELLATION LIMITED PARTNERSHIP
MILLVILLE MERIDIAN LIMITED PARTNERSHIP
BY: MERIDIAN HEALTHCARE, INC., as General Partner of
each of the foregoing limited partnerships
By:
--------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
CARE4, L.P.
BY: INSTITUTIONAL HEALTH CARE SERVICES, INC., its
general partner
By:
--------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
EDELLA STREET ASSOCIATES
BY: GENESIS HEALTH VENTURES OF CLARK SUMMIT,
INC., its General Partner
By:
-------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
121
GENESIS-GEORGETOWN SNF/JV, LIMITED LIABILITY
COMPANY
RESPIRATORY HEALTH SERVICES, L.L.C.
BY: GENESIS HEALTH VENTURES, INC., its Member
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
GENESIS ELDERCARE EMPLOYMENT SERVICES, LLC
BY: GENESIS ELDERCARE MANAGEMENT SERVICES,
INC., its Member
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
GENESIS HEALTH VENTURES OF WEST VIRGINIA,
LIMITED PARTNERSHIP
BY: GENESIS HEALTH VENTURES OF WEST VIRGINIA,
INC., its General Partner
By:
---------=---------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
GENESIS PROPERTIES LIMITED PARTNERSHIP
BY: GENESIS HEALTH VENTURES OF ARLINGTON,
INC., its General Partner
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
122
GENESIS PROPERTIES OF DELAWARE LTD.
PARTNERSHIP, L.P.
BY: GENESIS PROPERTIES OF DELAWARE
CORPORATION, its General Partner
By:
----------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
HALLMARK HEALTHCARE LIMITED PARTNERSHIP
BY: PHARMACY EQUITIES, INC., its General Partner
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
MAIN STREET PHARMACY, L.L.C.
BY: PROFESSIONAL PHARMACY SERVICES, INC., its
Member
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
MCKERLEY HEALTH CARE CENTER-CONCORD LIMITED
PARTNERSHIP
BY: MCKERLEY HEALTH CARE CENTER-CONCORD,
INC., its General Partner
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
123
MCKERLEY HEALTH FACILITIES
SEMINOLE MERIDIAN LIMITED PARTNERSHIP
VOLUSIA MERIDIAN LIMITED PARTNERSHIP
BY: MERIDIAN HEALTH, INC., as General Partner of each of
the foregoing Limited Partnerships
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
NORRISTOWN NURSING AND REHABILITATION CENTER
ASSOCIATES, LIMITED PARTNERSHIP
BY: GMC-LTC MANAGEMENT, INC., its General Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
NORTH CAPE CONVALESCENT CENTER ASSOCIATES, L.P.
NORTHWEST TOTAL CARE CENTER ASSOCIATES, L.P.
BY: GERIATRIC AND MEDICAL SERVICES, INC., as
General Partner for each of the foregoing Limited
Partnerships
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
PHILADELPHIA AVENUE ASSOCIATES
BY: PHILADELPHIA AVENUE CORPORATION, its General
Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
124
RIVER RIDGE PARTNERSHIP
RIVER STREET ASSOCIATES
BY: GENESIS HEALTH VENTURES OF WILKES-BARRE, INC.,
as General Partner for each of the foregoing
Limited Partnerships
By:
-----------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
STATE STREET ASSOCIATES, L.P.
BY: STATE STREET ASSOCIATES, INC., its General Partner
By:
-----------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
THERAPY CARE SYSTEMS, LP
BY: GENESIS ELDERCARE REHABILITATION
SERVICES, INC., its General Partner
By:
-----------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
MULTICARE AMC, INC.
ADS PALM CHELMSFORD, INC.
ADS RESERVOIR WALTHAM, INC.
MARKGLEN, INC.
ACADEMY NURSING HOME, INC.
ADS CONSULTING, INC.
ADS HINGHAM ALF, INC.
ADS HOME HEALTH, INC.
ADS VILLAGE MANOR, INC.
ANR, INC.
APPLEWOOD HEALTH RESOURCES, INC.
ASL, INC.
AUTOMATED PROFESSIONAL ACCOUNTS, INC.
BERKS NURSING HOME, INC.
BETHEL HEALTH RESOURCES, INC.
125
BREYUT CONVALESCENT CENTER, INC.
BRIGHTWOOD PROPERTY, INC.
CENTURY CARE CONSTRUCTION, INC.
CENTURY CARE MANAGEMENT, INC.
CHEATEAU VILLAGE HEALTH RESOURCES, INC.
CHG INVESTMENT CORP., INC.
CHNR - 1, INC.
COLONIAL HALL HEALTH RESOURCES, INC.
COLONIAL HOUSE HEALTH RESOURCES, INC.
CONCORD CAMPANION CARE, INC.
CONCORD HEALTHCARE SERVICES, INC.
CONCORD HEALTH GROUP, INC.
CONCORD HOME HEALTH, INC.
CONCORD REHAB, INC.
CONCORD SERVICE CORPORATION
CVNR, INC.
DAWN VIEW MANOR, INC.
DELM NURSING, INC.
ELDERCARE RESOURCES CORP.
ELMWOOD HEALTH RESOURCES, INC.
ENCARE OF MENDHAM, INC.
ENCARE OF PENNYPACK, INC.
ENR, INC.
GENESIS ELDERCARE CORP.
GLENMARK ASSOCIATES - DAWN VIEW MANOR, INC.
GLENMARK PROPERTIES, INC.
GMA - BRIGHTWOOD, INC.
GMA - MADISON, INC.
GMA - CONSTRUCTION, INC.
GMA UNIONTOWN, INC.
HEALTH RESOURCES OF ACADEMY MANOR, INC.
HEALTH RESOURCES OF BOARDMAN, INC.
HEALTH RESOURCES OF BRIDGETON, INC.
HEALTH RESOURCES OF BROOKLYN, INC.
HEALTH RESOURCES OF CEDAR GROVE, INC.
HEALTH RESOURCES OF CINNAMINSON, INC.
HEALTH RESOURCES OF COLCHESTER, INC.
HEALTH RESOURCES OF COLUMBUS, INC.
HEALTH RESOURCES OF CRANBURY, INC.
HEALTH RESOURCES OF ENGLEWOOD, INC.
HEALTH RESOURCES OF EATONTOWN, INC.
HEALTH RESOURCES OF EWING, INC.
HEALTH RESOURCES OF FARMINGTON, INC.
HEALTH RESOURCES OF GARDNER, INC.
HEALTH RESOURCES OF GLASTONBURY, INC.
HEALTH RESOURCES OF JACKSON, INC.
HEALTH RESOURCES OF KARAMENTA AND MADISON, INC.
HEALTH RESOURCES OF LAKEVIEW, INC.
HEALTH RESOURCES OF LEMONT, INC.
HEALTH RESOURCES OF LYNN, INC.
HEALTH RESOURCES OF MARCELLA, INC.
126
HEALTH RESOURCES OF MONTCLAIR, INC.
HEALTH RESOURCES OF MORRISTOWN, INC.
HEALTH RESOURCES OF NORFOLK, INC
HEALTH RESOURCES OF NORTH ANDOVER, INC.
HEALTH RESOURCES OF NORWALK, INC.
HEALTH RESOURCES OF PENNINGTON, INC.
HEALTH RESOURCES OF RIDGEWOOD, INC.
HEALTH RESOURCES OF ROCKVILLE, INC.
HEALTH RESOURCES OF SOLOMONT/BROOKLINE, INC.
HEALTH RESOURCES OF SOUTH BRUNSWICK, INC.
HEALTH RESOURCES OF TROY HILL, INC.
HEALTH RESOURCES OF VOORHEES, INC.
HEALTH RESOURCES OF WESTWOOD, INC.
HEALTHCARE REHAB SYSTEMS, INC.
HELSTAT, INC.
HMNR REALTY, INC.
HNCA, INC.
HORIZON MOBILE, INC.
HORIZON REHABILITATION, INC.
SCHUYLKILL NURSING HOMES, INC.
SCHUYLKILL PARTNERSHIP ACQUISITION CORPORATION
SCOTCHWOOD MASS. HOLDING CO., INC.
SENIOR LIVING VENTURES, INC.
SENIOR SOURCE, INC.
SNOW VALLEY HEALTH RESOURCES, INC.
SVNR, INC.
THE ADS GROUP, INC.
RIDGELAND HEALTH RESOURCES, INC.
RIVER PINES HEALTH RESOURCES, INC.
RIVERSHORES HEALTH RESOURCES, INC.
RLNR, INC.
ROPHEL CONVALESCENT CENTER, INC.
ROSE HEALTHCARE, INC.
ROSE VIEW MANOR, INC.
ROXBOROUGH NURSING HOME, INC.
RSNR, INC.
LWNR, INC.
MABRI CONVALESCENT CENTER, INC.
MARSHFIELD HEALTH RESOURCES, INC.
MHNR, INC.
MNR, INC.
MONTGOMERY NURSING HOMES, INC.
MULTICARE HOME HEALTH OF ILLINOIS, INC.
NORTHWESTERN MANAGEMENT SERVICES, INC.
NURSING AND RETIREMENT CENTER OF THE ANDOVERS, INC.
ARACADIA ASSOCIATES
PHC OPERATING CORP.
POCOHANTAS CONTINUOUS CARE CENTER, INC.
POMPTON CARE, INC.
PRESCOTT NURSING HOME, INC.
PROGRESSIVE REHABILITATION CENTERS, INC.
127
PROVIDENCE FUNDING CORPORATION
PROVIDENCE HEALTH CARE, INC.
PROVIDENCE MEDICAL, INC.
REST HAVEN NURSING HOME, INC.
HR OF CHARLESTON, INC.
HRWV HUNTINGTON, INC.
LAKEWOOD HEALTH RESOURCES, INC.
LAUREL HEALTH RESOURCES, INC.
LEHIGH NURSING HOMES, INC.
LRC HOLDING COMPANY
S.T.B. INVESTORS, LTD.
THE ASSISTED LIVING ASSOCIATES OF BERKSHIRE, INC.
THE ASSISTED LIVING ASSOCIATES OF LEHIGH, INC.
THE ASSISTED LIVING ASSOCIATES OF SANATOGA, INC.
THE ASSISTED LIVING ASSOCIATES OF WALL, INC.
THE HOUSE OF CAMPBELL, INC.
TM ACQUISITION CORP.
TRI-STATE MOBILE MEDICAL SERVICES, INC.
WILLOW MANOR NURSING HOME, INC.
WESTFORD NURSING AND RETIREMENT CENTER, INC.
RVNR, INC.
HORIZON ASSOCIATES, INC.
HEALTH RESOURCES OF WARWICK, INC.
HEALTH RESOURCES OF WALLINGFORD, INC.
HEALTH RESOURCES OF MIDDLETOWN (RI), INC.
HEALTH RESOURCES OF GROTON, INC.
HEALTH RESOURCES OF CUMBERLAND, INC.
HEALTH RESOURCES OF ARCADIA, INC.
ENCARE OF WYNCOTE, INC.
ENCARE OF QUAKERTOWN, INC.
ADS SENIOR HOUSING, INC.
ADS RECUPERATIVE CENTER, INC.
ADS HINGHAM NURSING FACILITY, INC.
ADS APPLE VALLEY, INC.
ADS/MULTICARE, INC.
GLENMARK ASSOCIATES, INC.
GMA PARTNERSHIP HOLDING COMPANY, INC.
STAFFORD CONVALESCENT CENTER, INC.
THE MULTICARE COMPANIES, INC.
NORTH MADISON, INC.
BY: Genesis Eldercare Corporation, as agent and
attorney-in-fact for each of the foregoing entities
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
128
CARE HAVEN ASSOCIATES LIMITED PARTNERSHIP
GLENMARK PROPERTIES I, LIMITED PARTNERSHIP
POINT PLEASANT HAVEN LIMITED PARTNERSHIP
RALEIGH MANOR LIMITED PARTNERSHIP
ROMNEY HEALTH CARE CENTER LTD. LIMITED PARTNERSHIP
SISTERVILLE HAVEN LIMITED PARTNERSHIP
TEAYS VALLEY HAVEN LIMITED PARTNERSHIP
BY: GLENMARK ASSOCIATES, INC., as General Partner of
each of the foregoing limited partnerships
By:
--------------=------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
ADS HINGHAM LIMITED PARTNERSHIP
BY: ADS HINGHAM NURSING FACILITY, INC., its General
Partner
By:
---------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
ADS RECUPERATIVE CENTER LIMITED PARTNERSHIP
BY: ADS RECUPERATIVE CENTER, INC., its General Partner
By:
---------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
WESTFORD NURSING AND RETIREMENT CENTER, LIMITED
PARTNERSHIP
BY: WESTFORD NURSING AND RETIREMENT CENTER, INC.,
its General Partner
By:
---------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
129
ADS APPLE VALLEY LIMITED PARTNERSHIP
BY: ADS APPLE VALLEY, INC., its General Partner
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
HOLLY MANOR ASSOCIATES OF NEW JERSEY, L.P.
BY: ENCARE OF MENDHAM, L.L.C., its General Partner
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President, Chief Financial
Officer of The Multicare Companies, Inc. for and
as the Majority Member of Encare of
Mendham, L.L.C.
MERCERVILLE ASSOCIATES OF NEW JERSEY, L.P.
BY: BREYUT CONVALESCENT CENTER, L.L.C., its General
Partner
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
MIDDLETOWN (RI) ASSOCIATE OF RHODE ISLAND, L.P.
BY: HEALTH RESOURCES OF MIDDLETOWN (RI), INC., its
General Partner
By:
-------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
130
POMPTON ASSOCIATES, L.P.
BY: POMPTON CARE, L.L.C., its General Partner
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President, Chief Financial
Officer of The Multicare Companies, Inc. for and
as Majority Member of Pompton Care, L.L.C.
THE STRAUS GROUP - OLD BRIDGE, L.P.
BY: HEALTH RESOURCES OF EMERY, L.L.C., its General
Partner
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President, Chief Financial
Officer of The Mutlicare Companies, Inc. for and
as Majority Member of Health Resources of
Emery, L.L.C.
THE STRAUS GROUP - RIDGEWOOD, L.P.
BY: HEALTH RESOURCES OF RIDGEWOOD, L.L.C., its
General Partner
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President, Chief Financial
Officer of The Multicare Companies, Inc. for and
as the Majority Member of Health Resources of
Ridgewood, L.L.C.
WALLINGFORD ASSOCIATES OF CONNECTICUT, L.P.
BY: HEALTH RESOURCES OF WALLINGFORD, INC., its
General Partner
By:
------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
131
WARWICK ASSOCIATES OF RHODE ISLAND, L.P.
BY: HEALTH RESOURCES OF WARWICK, INC., its General
Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
THE STRAUS GROUP - HOPKINS HOUSE, L.P.
BY: ENCARE OF WYNCOTE, INC., its General Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
THE STRAUS GROUP - QUAKERTOWN MANOR, L.P.
BY: ENCARE OF QUAKERTOWN, INC., its General Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
CUMBERLAND ASSOCIATES OF RHODE ISLAND, L.P.
BY: HEALTH RESOURCES OF CUMBERLAND, INC., its
General Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
GROTON ASSOCIATES OF CONNECTICUT, L.P.
BY: HEALTH RESOURCES OF GROTON INC., its General
Partner
By:
--------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
132
HEALTH RESOURCES OF BRIDGETON, L.L.C.
HEALTH RESOURCES OF CINNAMINSON, L.L.C.
HEALTH RESOURCES OF CRANBURY, L.L.C.
HEALTH RESOURCES OF ENGLEWOOD, L.L.C.
HEALTH RESOURCES OF EWING, L.L.C.
HEALTH RESOURCES OF FAIRLAWN, L.L.C.
HEALTH RESOURCES OF JACKSON, L.L.C.
HEALTH RESOURCES OF WEST ORANGE, L.L.C.
ROEPHEL CONVALESCENT CENTER, L.L.C.
TOTAL REHABILITATION CENTER, L.L.C.
POMPTON CARE, L.L.C.
HEALTH RESOURCES OF LAKEVIEW, L.L.C.
HEALTH RESOURCES OF RIDGEWOOD, L.L.C.
HEALTH RESOURCES OF EMERY, L.L.C.
ENCARE OF MENDHAM. L.L.C.
BREYUT CONVALESCENT CENTER, L.L.C.
BY: THE MULTICARE COMPANIES, INC., as Member of the
foregoing Limited Liability Companies
By:
---------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
GLENMARK LIMITED LIABILITY COMPANY I
BY: GLENMARK ASSOCIATES, INC., its Member
By:
---------------------------------------------------
Name: George V. Hager, Jr.
Title: Executive Vice President,
Chief Financial Officer
133
EXHIBIT A TO
DISCLOSURE STATEMENT
TABLE OF CONTENTS
Page
I. Introduction...................................................................................3
II. Treatment of Creditors and Shareholders Under the Plan of Reorganization.......................5
A. Merger of Genesis and Multicare.......................................................5
B. Summary of New Capital Structure of Reorganized Genesis...............................6
C. Summary of Classification and Treatment...............................................7
D. Allocation of Value Under the Plan of Reorganization..................................9
1. Senior Lender Deficiencies..................................................10
2. Compromise and Settlement with Unsecured Classes............................11
3. Exceptions to the Liens of the Senior Lenders...............................11
E. Description of the Genesis Classes...................................................12
1. Genesis Other Secured Claims (Class G1).....................................12
2. Genesis Senior Lender Claims (Class G2).....................................16
3. Genesis Priority Non-Tax Claims (Class G3)..................................19
4. Genesis General Unsecured Claims (Class G4).................................19
5. Genesis Senior Subordinated Note Claims (Class G5)..........................20
6. Genesis Intercompany Claims (Class G6)......................................21
7. Genesis Punitive Damage Claims (Class G7)...................................21
8. Genesis Series G Preferred Stock Interests (Class G8).......................22
9. Genesis Series H Preferred Stock Interests (Class G9).......................22
10. Genesis Series I Preferred Stock Interests (Class G10)......................22
11. Genesis Common Stock Interests (Class G11)..................................22
F. Description of the Multicare Classes.................................................23
1. Multicare Other Secured Claims (Class M1)...................................23
2. Multicare Senior Bank Claims (Class M2).....................................24
3. Multicare Priority Non-Tax Claims (Class M3)................................25
4. Multicare General Unsecured Claims (Class M4)...............................25
5. Multicare Senior Subordinated Note Claims (Class M5)........................26
6. Multicare Intercompany Claims (Class M6)....................................26
7. Multicare Punitive Damage Claims (Class M7).................................27
8. Multicare Common Stock Equity Interests (Class M8)..........................27
G. Administrative Expenses for the Genesis Debtors and the Multicare Debtors............27
i
TABLE OF CONTENTS
(continued)
Page
1. Debtor in Possession Financing..............................................28
2. Federal Medicare Claims.....................................................28
3. State Medicaid Claims.......................................................29
4. Fees and Expenses of Professionals..........................................29
5. Payments to Employees.......................................................29
6. Fees and Expenses of Indenture Trustees.....................................29
H. Securities to be Issued Under the Plan of Reorganization.............................29
1. New Senior Notes............................................................29
2. New Convertible Preferred Stock.............................................30
3. New Common Stock............................................................31
4. New Warrants................................................................31
5. New Multicare Common Stock..................................................31
I. Deemed Consolidation of Certain Debtors for Purposes of the Plan.....................32
1. Genesis Debtors.............................................................32
2. Multicare Debtors...........................................................33
3. Proviso.....................................................................34
J. Securities Law Matters...............................................................34
1. Issuance and Resale of New Securities Under the Plan of Reorganization......35
2. Listing.....................................................................37
3. Secondary Stock Offering....................................................37
4. Registration Rights.........................................................37
K. Settlement and Compromise............................................................37
1. Settlement with the Federal Government......................................37
2. Settlement Between the Genesis Debtors and the Multicare Debtors............38
L. Reservation of "Cram Down" Rights....................................................39
III. Voting Procedures And Requirements............................................................39
A. Vote Required for Acceptance by a Class..............................................40
B. Classes Not Entitled to Vote.........................................................40
C. Voting...............................................................................40
IV. Financial Information, Projections, And Valuation Analyses....................................41
A. Introduction.........................................................................41
ii
TABLE OF CONTENTS
(continued)
Page
B. The Genesis Debtors..................................................................42
1. Operating Performance.......................................................42
2. Five Year Projections.......................................................44
3. Going Concern Valuation.....................................................45
C. The Multicare Debtors................................................................47
1. Operating Performance.......................................................47
2. Five Year Projections.......................................................47
3. Going Concern Valuation.....................................................48
D. Reorganized Genesis (Merger of Genesis and Multicare)................................50
1. Operating Performance.......................................................50
2. Five Year Projections.......................................................50
V. Business Description and Reasons for Chapter 11...............................................51
A. The Debtors' Businesses..............................................................51
1. Relationship Between the Genesis Debtors and the Multicare Debtors..........51
2. Pharmacy and Medical Supply Services (Genesis Debtors)......................52
3. Inpatient Services (Genesis Debtors and Multicare Debtors)..................53
4. Other Services (Genesis Debtors and Multicare Debtors)......................53
5. Revenue Sources.............................................................54
6. Personnel...................................................................54
B. Events Leading to the Commencement of the Chapter 11 Cases...........................55
1. Medicare Reimbursement......................................................55
2. Medicaid Reimbursement......................................................57
3. Debt Burden.................................................................57
C. Prepetition Negotiations.............................................................58
D. Pending Litigation and Other Proceedings.............................................58
1. The Genesis and Vitalink Actions Against the Manor Care Entities............58
2. The Vitalink Action Against Omnicare and Heartland..........................60
3. The Manor Care Action Against Genesis in Delaware...........................60
4. The Manor Care Action Against Genesis in Ohio...............................60
5. Age Institute...............................................................61
6. Qui Tam Suits...............................................................61
iii
TABLE OF CONTENTS
(continued)
Page
7. Personal Injury and Employment Law Litigation...............................62
8. Multicare Litigation........................................................63
9. Ordinary Course Litigation..................................................63
VI. Significant Events During the Reorganization Cases............................................64
A. Filing and First Day Orders..........................................................64
B. Appointment of the Creditors' Committee..............................................65
1. Genesis Creditors' Committee................................................65
2. Multicare Creditors' Committee..............................................66
C. DIP Credit Agreements................................................................66
1. Genesis Debtors.............................................................66
2. Multicare Debtors...........................................................67
D. Cash Collateral Protection...........................................................67
1. Genesis Debtors.............................................................67
2. Multicare Debtors...........................................................68
E. Key Employee and Executive Retention Programs........................................68
1. First Retention Program.....................................................69
2. Second Retention Program....................................................69
F. Claims Process and Bar Date..........................................................69
1. Schedules and Statements....................................................69
2. Bar Date....................................................................70
G. ElderTrust Transactions..............................................................70
H. CareFirst Transactions...............................................................70
I. Swap Settlement......................................................................71
J. Alternative Dispute Resolution Procedures............................................71
K. Settlement with the Multicare Debtors................................................72
L. Appointment of Fee Auditor...........................................................73
M. Motion for Appointment of Trustee in the Multicare Reorganization Cases..............73
N. Potential Purchase of Pharmacy Business of Mariner Post-Acute Networks and
Mariner Health Group.................................................................73
VII. Governance of the Reorganized Debtors.........................................................74
A. Board of Directors of Reorganized Genesis............................................74
B. Senior Management of Reorganized Genesis.............................................74
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TABLE OF CONTENTS
(continued)
Page
VIII. Other Aspects of the Plan of Reorganization...................................................75
A. Analysis of the Proposed Merger of Genesis and Multicare.............................75
B. Mechanics of the Merger..............................................................76
C. Exit Facility -- Condition Precedent to Effective Date...............................76
D. Distributions Under the Plan of Reorganization.......................................77
1. Timing and Conditions of Distributions......................................77
2. Certain Claims Allowed......................................................78
3. Procedures for Treating Disputed Claims Under the Plan of Reorganization....78
E. Treatment of Executory Contracts and Unexpired Leases................................79
1. Contracts and Leases Not Expressly Rejected are Assumed.....................79
2. Cure of Defaults............................................................80
3. Rejection Claims............................................................80
F. Management Incentive Plan............................................................80
G. Releases.............................................................................80
H. Effect of Confirmation...............................................................81
1. Discharge of Claims and Termination of Equity Interests.....................81
2. Indemnification.............................................................82
3. Exculpation.................................................................82
I. Preservation of Certain Avoidance Actions............................................82
J. Miscellaneous Provisions.............................................................82
IX. Certain Factors To Be Considered..............................................................82
A. Certain Bankruptcy Considerations....................................................82
B. Risks Relating to the Plan Securities................................................83
1. Variances from Projections..................................................83
2. Substantial Leverage; Ability to Service Debt...............................83
3. Significant Holders.........................................................83
4. Lack of Trading Market......................................................84
5. Dividend Policies...........................................................84
6. Restrictions on Transfer....................................................84
C. Risks Associated with the Business...................................................84
X. Confirmation of the Plan of Reorganization....................................................85
v
TABLE OF CONTENTS
(continued)
Page
A. Confirmation Hearing.................................................................85
B. General Requirements of Section 1129.................................................86
C. Best Interests Tests.................................................................87
D. Liquidation Analyses.................................................................88
1. The Genesis Debtors.........................................................89
2. Multicare Debtors...........................................................94
E. Feasibility..........................................................................99
F. Section 1129(b)......................................................................99
1. No Unfair Discrimination....................................................99
2. Fair and Equitable Test.....................................................99
XI. Alternatives to Confirmation and Consummation of the Plan of Reorganization..................101
A. Liquidation Under Chapter 7.........................................................101
B. Alternative Plan of Reorganization..................................................102
XII. Certain Federal Income Tax Consequences of the Plan of Reorganization........................102
A. Consequences to the Debtors.........................................................103
1. Cancellation of Debt.......................................................103
2. Limitations on Loss Carryforwards and Other Tax Benefits...................104
3. Alternative Minimum Tax....................................................107
4. Issuance of the New Senior Notes...........................................107
B. Consequences to Holders of Certain Claims...........................................108
1. Consequences to All Holders (Including Holders Whose Claims Are Against
Any of the Multicare Debtors) Who Receive Cash, New Senior Notes, New
Convertible Preferred Stock, New Common Stock, or New Warrants, Other
Than Holders of Claims Against Genesis That Constitute "Securities"........108
2. Consequences to Holders of Genesis Senior Subordinated Note Claims and
Genesis General Unsecured Claims That Constitute "Securities"..............110
3. Consequences to Holders of Genesis Senior Lender Claims That Constitute
"Securities"...............................................................110
4. Distributions in Discharge of Accrued Interest.............................111
5. Market Discount............................................................111
6. Treatment of Distributions on New Convertible Preferred Stock and
New Common Stock...........................................................112
vi
TABLE OF CONTENTS
(continued)
Page
7. Subsequent Sale of New Common Stock or New Convertible Preferred Stock.....114
8. Conversion of New Convertible Preferred Stock..............................114
9. Redemption of New Convertible Preferred Stock..............................115
10. Ownership and Disposition of New Warrants..................................115
11. Interest and Original Issue Discount on the New Senior Notes...............116
12. Information Reporting and Withholding......................................116
XIII. Conclusion...................................................................................117
vii