-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OPXAnILmHSPvsFEBFn/pAmuE5A7A3swXNxYutHLZTC1LTKPE1LkQ8PcDqtLSiD91 9kPkVND4AZVc2QgcC6te9w== 0000950116-00-000250.txt : 20000215 0000950116-00-000250.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950116-00-000250 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MULTICARE COMPANIES INC CENTRAL INDEX KEY: 0000890925 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 223152527 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22090 FILM NUMBER: 541386 BUSINESS ADDRESS: STREET 1: 101 EAST STATE STREET STREET 2: OMITTED INTENTIONALLY CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: (610) 925-4144 MAIL ADDRESS: STREET 1: 411 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 34-22090 THE MULTICARE COMPANIES, INC. (Exact name of registrant as specified in its charter) Delaware 22-3152527 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 101 East State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at February 11, 2000 - ----------------------------------- --------------------------------------- Common Stock ($.01 Par Value) 100 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Table of Contents ----------------- CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS............... 1 Part I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets December 31, 1999 (Unaudited) and September 30, 1999... 2 Condensed Consolidated Statements of Operations Three months ended December 31, 1999 and 1998 (Unaudited) ........................................... 3 Condensed Consolidated Statements of Cash Flows Three months ended December 31, 1999 and 1998 (Unaudited) ........................................... 4 Notes to Condensed Consolidated Financial Statements .. 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 16 Part II: OTHER INFORMATION.............................................. 17 SIGNATURES..................................................... 18 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Statements made in this report, and in our other public filings and releases, which are not historical facts contain "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to statements as to: o certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations", such as our ability to meet our liquidity needs, scheduled debt and interest payments and expected future capital expenditure requirements, and to control costs; and the expected effects of government regulation on reimbursement for services provided and on the costs of doing business. The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that any statements are not guarantees of future performance and that actual results and trends in the future may differ materially. Factors that could cause actual results to differ materially include, but are not limited to the following: o our substantial indebtedness and significant debt service obligations; o the affect of planned dispositions of assets; o our ability or inability to secure the capital and the related cost of the capital necessary to fund future operations; o the impact of health care reform, including the Medicare Prospective Payment System ("PPS"), the Balanced Budget Refinement Act ("BBRA"), and the adoption of cost containment measures by the federal and state governments; o the adoption of cost containment measures by other third party payors; o the impact of government regulation, including our ability to operate in a heavily regulated environment and to satisfy regulatory authorities; o the occurrence of changes in the mix of payment sources utilized by our patients to pay for our services; o competition in our industry; o our ability to consummate or complete development projects or to profitably operate or successfully integrate enterprises into our other operations; and o changes in general economic conditions. These and other factors have been discussed in more detail in the Company's periodic reports, including its Annual Report on Form 10-K for the fiscal year ended September 30, 1999. PART I: FINANCIAL INFORMATION Item 1. Financial Statements THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except share and per share data)
December 31, September 30, 1999 1999 ---- ---- (Unaudited) Assets Current Assets: Cash and cash equivalents $ 4,177 $ 3,967 Accounts receivable, net 116,080 113,586 Prepaid expenses and other current assets 12,021 13,130 Deferred taxes - current portion 2,027 2,027 ---------- ---------- Total current assets 134,305 132,710 ---------- ---------- Property, plant and equipment, net 618,472 621,371 Goodwill, net 477,492 480,809 Other assets 62,468 67,474 ---------- ---------- $1,292,737 $1,302,364 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued liabilities $ 105,476 $ 97,205 Current portion of long-term debt 35,734 34,700 ---------- ---------- Total current liabilities 141,210 131,905 ---------- ---------- Long-term debt 738,725 741,256 Deferred taxes 70,071 76,007 Due to Genesis Health Ventures, Inc. and other liabilities 30,478 27,285 Stockholders' Equity: Common stock, par value $.01, 100 shares authorized 100 shares issued and outstanding --- --- Additional paid-in-capital 733,000 733,000 Retained deficit (420,747) (407,089) --------- ---------- Total stockholders' equity 312,253 325,911 --------- ---------- $1,292,737 $1,302,364 ========== ==========
See accompanying notes to condensed consolidated financial statements. 2 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands)
Three Months Ended December 31, ------------ 1999 1998 ---- ---- Net revenues $160,361 $168,484 Expenses: Operating expense 133,168 129,812 Management fee 9,624 10,051 Depreciation and amortization expense 9,558 11,281 Lease expense 3,251 3,124 Interest expense, net 18,329 16,185 -------- -------- Total expenses 173,390 170,453 -------- -------- Loss before income taxes, equity in loss of unconsolidated affiliates, and cumulative effect of accounting change (13,569) (1,969) Income tax (benefit) provision (3,985) 609 -------- -------- Loss before equity in loss of unconsolidated affiliates and cumulative effect of accounting change (9,584) (2,578) Equity in loss of unconsolidated affiliates 451 --- -------- -------- Loss before cumulative effect of accounting change (10,035) (2,578) Cumulative effect of accounting change, net of tax 3,623 --- -------- -------- Net loss $(13,658) $ (2,578) ======== ========
See accompanying notes to condensed consolidated financial statements. 3 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Three months ended December 31, ------------ 1999 1998 ---- ---- Cash flows from operating activities: Net loss $(13,658) $(2,578) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of accounting change, net of tax 3,623 --- Depreciation and amortization 9,558 11,281 Deferred taxes (3,985) --- Changes in assets and liabilities: Accounts receivable (2,494) (15,716) Prepaid expenses and other current assets 1,109 (2,940) Accounts payable and accrued liabilities 8,272 614 -------- ------- Net cash provided by (used in) operating activities 2,425 (9,339) -------- ------- Cash flows from investing activities: Capital expenditures (2,542) (5,261) Other assets and liabilities 1,824 2,285 -------- ------- Net cash used in investing activities (718) (2,976) -------- ------- Cash flows from financing activities: Proceeds from long-term debt 17,534 83,705 Repayments of long-term debt (19,031) (72,350) -------- ------- Net cash (used in) provided by financing activities (1,497) 11,355 -------- ------- Increase (Decrease) in cash and cash equivalents 210 (960) Cash and cash equivalents at beginning of period 3,967 11,344 -------- ------- Cash and cash equivalents at end of period $ 4,177 $10,384 ======== =======
See accompanying notes to condensed consolidated financial statements. 4 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements December 31, 1999 (Unaudited) (In thousands except share and per share data) (1) Organization and Basis of Presentation The Multicare Companies, Inc. and Subsidiaries ("Multicare" or the "Company") own, operate and manage skilled eldercare and assisted living facilities which provide long-term care and specialty medical services in selected geographic regions within the eastern and midwestern United States. As a result of the Merger (as defined below) of Genesis ElderCare Acquisition Corp. with the Company, Genesis Health Ventures, Inc. ("Genesis") owns approximately 44% of Genesis ElderCare Corp., which owns 100% of the outstanding capital stock of the Company. The Company and Genesis have entered into a management agreement pursuant to which Genesis manages the Company's operations. Multicare operates predominantly in one industry segment, operating skilled eldercare centers, which represents over 95% of consolidated revenues. The financial information as of December 31, 1999, and for the three months ended December 31, 1999 and 1998, is unaudited and has been prepared in conformity with the accounting principles and practices as reflected in the Company's audited annual financial statements. The unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of December 31, 1999 and the operating results for the three months ended December 31, 1999 and 1998 and the cash flows for the three months ended December 31, 1999 and 1998. Results for interim periods are not necessarily indicative of those to be expected for the year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. Certain prior year balances have been reclassified to conform with current year presentation. (2) Certain Significant Risks and Uncertainties The following information is provided in accordance with the AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties." We have substantial indebtedness and, as a result, significant debt service obligations. As of December 31, 1999, we had approximately $738,725 of long-term indebtedness (excluding current portion of $35,734) which represented 70% of our total capitalization. We also have significant long-term operating lease obligations with respect to certain of our eldercare centers. The degree to which we are leveraged could have important consequences, including, but not limited to the following: 5 o the Company's ability to obtain additional financing in the future for working capital, capital expenditures, or other purposes may be limited or impaired; o a substantial portion of the Company's cash flow from operations will be dedicated to the payment of principal and interest on the Company's indebtedness, thereby reducing the funds available to us for our operations; o the Company's operating flexibility is limited by restrictions contained in some of the Company's debt agreements which set forth minimum net worth requirements and/or limit the Company's ability to incur additional indebtedness, to enter into other financial transactions, to pay dividends, or to sell assets; o the Company's degree of leverage may make it more vulnerable to economic downturns and less competitive, may reduce the Company's flexibility in responding to changing business and economic conditions and may limit the Company's ability to pursue other business opportunities, to finance the Company's future operations or capital needs, and to implement its business strategy; and o certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company to the risk of greater interest rates. The Company expects to finance required payments of principal and interest on our indebtedness from its cash flow from operations and from the anticipated sale of certain assets in Illinois, Wisconsin and Ohio. Management is currently engaged in discussions for the asset sales, however, the Company has no firm commitments from potential purchasers for these assets. The Company's ability to make scheduled payments of the principal or interest on, or to refinance indebtedness, depends on the future performance of the Company business, which is in turn subject to financial, business, economic and other factors affecting the Company's business and operations, including factors beyond its control, such as prevailing economic conditions. There can be no assurances that the anticipated sales will be consummated and that cash flow from operations will be sufficient to enable the Company's to service its debt and meet other obligations. If such cash flow is insufficient, the Company may be required to refinance and/or restructure all or a portion of its existing debt, to sell additional assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such additional sales of assets or additional financing could be achieved. The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, and other third party payors. The health care industry is experiencing a strong trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, generally have resulted in reduced rates of reimbursement for services to be provided by the Company. In recent years, several significant actions have been taken with respect to Medicare and Medicaid reimbursement, including the following: o the adoption of the Medicare Prospective Payment System ("PPS") pursuant to the Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget Refinement Act; and o the repeal of the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities. While the Company has prepared certain estimates of the impact of the above changes, it is not possible to fully quantify the effect of recent legislation, the interpretation or administration of such legislation or any other governmental initiatives on its business. Accordingly, there can be no assurance that the impact of these changes will not be greater than estimated or that these legislative changes or any future healthcare legislation will not adversely affect the Company's business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company's financial condition and results of operations may be affected by the revenue reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. 6 (3) Tender Offer and Merger and its Restructuring In October 1997, Genesis, The Cypress Group (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors." In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for shares of Genesis preferred stock. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; 7 o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. (4) Cumulative effect of accounting change Effective October 1, 1999, the Company adopted the provisions of the AICPA's Position 98-5, "Reporting on the Costs of Start-up Activities," (SOP 98-5) which requires the costs of start-up activities to be expensed as incurred, rather than capitalizing and subsequently amortizing such costs. The change in accounting principle resulted in the write-off of costs capitalized in connection with six start-up facilities as of October 1, 1999. The cumulative effect of $3,623, net of tax is reflected in the cumulative effect of accounting change. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Upon consummation of the Merger, the Company and Genesis entered into the Management Agreement pursuant to which Genesis manages the Company's operations. Under Genesis' management, the Company's strategy is to integrate the talents of case managers, comprehensive discharge planning and, to provide cost effective care management to achieve superior outcomes and return the Company's customers to the community. Genesis' management believes that achieving improved customer outcomes will result in increased utilization of specialty medical services and a broader base of repeat customers in the Company's network. Moreover, the Company believes that this strategy will lead to a high quality payor mix and continued high levels of occupancy. It is contemplated that the Company will do little, if any, new acquisitions or new construction after the Merger; accordingly, capital expenditures after the Merger have decreased significantly from historical levels. The Tender Offer and Merger and its Restructuring In October 1997, Genesis, affiliates of Cypress, TPG and certain of its affiliates and an affiliate of Nazem, acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors." In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of Multicare, making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for shares of Genesis preferred stock. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. 9 Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. Results of Operations Net revenues. Net revenues for the three months ended December 31, 1999 decreased $8.1 million or 4.8% from the same period last year to $160.4 million. In the quarter ended December 31, 1999, net revenues decreased $10.8 due to Medicare rate dilution as a result of the Medicare Prospective Pay System implemented on January 1, 1999. The offsetting increase is primarily due to changes in payor mix with increased Medicare patient days. (Medicare patient days increased by 18,128 days, Medicaid patient days increased by 20,197 days while private and other patient days decreased by 39,483 days). The Company's quality mix of private, Medicare and insurance patient days was 39.4% of patient days for the three months ended December 31, 1999 compared to 41.4% in the similar periods of last year. Occupancy rates were 90.5% for the three months ended December 31, 1999 compared to 91.1% in the similar periods of last year. Operating Expense. Operating expenses for the three months ended December 31, 1999 increased $3.4 million or 2.6% from the comparable period last year to $133.2 million. Of this increase, approximately $1.6 million was due to the impact of a change in accounting principle which requires expensing start-up costs that were previously capitalized. The remaining increase resulted primarily from higher salaries, wages and benefits and overtime due to more competitive labor markets. Facility operating margins were 17.0% and 23.0% for the three months ended December 31, 1999 and 1998, respectively. Management Fee. In connection with the Management Agreement, Genesis manages Multicare's operations for a fee of approximately six percent of Multicare's non-extraordinary (as defined by the Management Agreement) sales and is responsible for Multicare's corporate general and administrative expenses other than certain specified third party expenses. Management fees decreased by $0.4 million or 4.2% to $9.6 million due to the decline in net revenues. Lease Expense. Lease expense of $3.3 million and $3.1 million for the three months ended December 31, 1999 and 1998, respectively, was relatively unchanged as the same number of eldercare centers were leased in 1999 and 1998. Depreciation and Amortization. Depreciation and amortization expense for the three months ended December 31, 1999 decreased $1.7 million or 15.3% from the 10 prior period to $9.6 million. Effective September 30, 1999, the company wrote-down impaired long-lived assets of $397.3 million. Due to this write-down of long-lived assets, amortization of goodwill decreased by approximately $1.7 million for the three months ended December 31, 1999. Decreases in depreciation due to the write-down of long lived assets were offset by increases due to capital expenditures for routine maintenance and renovation. The Company has not completed any acquisitions and has begun little new construction since the Merger. Interest Expense, net. Interest expense, net for the three months ended December 31, 1999 increased $2.1 million or 13.2% to $18.3 million from the same period in the prior year. The increase is principally due to an increase in the effective borrowing rate of approximately 1.0% to 9.4% for the three months ended December 31, 1999. The primary reason for the borrowing rate increase was due to senior bank debt amendments. Cumulative effect of accounting change, net of tax. Effective October 1, 1999, the Company adopted the provisions of the AICPA's Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities," (SOP 98-5) which requires the costs of start-up activities to be expensed as incurred. The initial application of SOP 98-5 resulted in a charge of $3.6 million, net of tax for the cumulative effect of this accounting change. Income Tax Provision (Benefit). The provision for income taxes decreased by $4.6 million to a benefit of $4.0 million for the three months ended December 31, 1999. Of the decrease $2.0 million relates to the tax benefit related to the cumulative effect of accounting change. The remainder of the decrease relates to the increase in loss before the cumulative effect of accounting change offset by lower non-deductible goodwill amortization. Liquidity and Capital Resources General We have substantial indebtedness and, as a result, significant debt service obligations. As of December 31, 1999, we had approximately $738,725,000 (excluding current portion of $35,734,000) of long-term indebtedness which represented 70% of our total capitalization. We also have significant long-term operating lease obligations with respect to certain of our eldercare centers. The degree to which we are leveraged could have important consequences, including, but not limited to the following: o our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be limited or impaired; o a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on indebtedness, thereby reducing the funds available to us for our operations; o our operating flexibility is limited by restrictions contained in some of our debt agreements which limit our ability to incur additional indebtedness and enter into other financial transactions, to pay dividends, or sell assets and set forth minimum net worth requirements; o our degree of leverage may make us more vulnerable to economic downturns and less competitive, may reduce our flexibility in responding to changing business and economic conditions and may limit our ability to pursue other business opportunities, to finance our future operations or capital needs, and to implement our business strategy; and o certain of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of higher interest rates. Required payments of principal and interest on our indebtedness is expected to be financed from our cash flow from operations and from the anticipated sale of certain assets in Illinois, Wisconsin and Ohio. Our ability to make scheduled payments of the principal of, to pay interest thereon, or to refinance our indebtedness, depends on the future performance of our business, which will in turn be subject to financial, business, economic and other factors affecting our business and operations, including factors beyond our control, such as prevailing economic conditions. Our ability to make scheduled payments of the principal or interest depends on our ability to complete the sale of assets in 11 Illinois, Wisconsin and Ohio. Management is currently engaged in discussions for the assets sales, however, we have no firm commitments from potential purchases for these assets. There can be no assurances that the anticipated sales will be consummated and that cash flow from operations will be sufficient to enable us to service our debt and meet our other obligations. If such cash flow is insufficient, we may be required to refinance and/or restructure all or a portion of our existing debt, to sell additional assets or to obtain additional financing. There can be no assurance that any such refinancing or restructuring would be possible or that any such additional sales of assets or additional financing could be achieved. We also have significant long-term operating lease obligations with respect to certain of our sites of service, including eldercare centers. Operating cash flow will depend upon our ability to effect cost reduction initiatives and to continue to reduce our investment in working capital. We believe that operating cash flow which is expected to be augmented by planned asset sales and refinancing transactions, will be sufficient to meet our future obligations. However, there can be no assurances that the cash flow from our operations will be sufficient to enable us to service our substantial indebtedness and meet our other obligations. At December 31, 1999 we had working capital deficit of $6.9 million. As of September 30, 1999 we had working capital of $0.8 million. Cash flow provided by operations was $2.4 million for the three months ended December 31, 1999 compared to cash flow used in operations of $9.3 million in the comparable period of 1998. Operating cash flows increased as a result of the decline of receivable growth of $13.2 million. Offsetting cash flows decline of $11.1 million relates to the decline in earnings primarily as a result of the implementation of PPS. Net accounts receivable were $116.1 million and $113.6 million at December 31, and September 30, 1999, respectively. Legislative and regulatory action and government budgetary constraints could change the timing of payments and reimbursement rates of the Medicare and Medicaid programs in the future. These changes have had a material adverse effect on the Company's future operating results and cash flows. In addition growth of accounts payable and accrued liabilities resulted in increased cash flow of $7.6 million primarily as a result of increased amounts owed Genesis. Genesis is the primary provider of pharmacy and rehabilitation services. Cash flows used in investing activities in fiscal year 1999 includes the deferred management fees due to Genesis of $3.2 million as a source of cash. Capital expenditures of $2.5 million are principally for routine maintenance and renovation. The Company has not completed any new acquisitions and has begun little new construction since the Merger. Credit Facility and Other Debt In connection with the Merger, Multicare entered into three term loans and a revolving credit facility of up to $525 million, in the aggregate (collectively, the "Credit Facility"), provided by a syndicate of banks and other financial institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as administrative agents (the "Administrative Agent"), pursuant to a certain credit agreement (the "Long Term Credit Agreement") dated as of October 14, 1997, as amended from time to time. Multicare entered into a fourth amended and restated credit agreement on August 20, 1999 which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Tranche A Term Facility and Revolving Facility (defined below), permitted the restructuring of the Put / Call Agreement, as defined, and increased the interest rates applying to the Term Loans (defined below) and the Revolving Facility and increased the level of management fees Multicare may defer from 2% to up to 4% of net revenues (on an annualized basis) in any fiscal year. The Credit Facilities consist of three term loans with an aggregate original balance of $400 million (collectively, the "Term Loans"), and a $125 million revolving credit loan (the "Revolving Facility") The Term Loans amortize in quarterly installments through 2005. The loans consist of: o an original six year term loan maturing in September 2003 with an outstanding balance of $140 million at December 31, 1999 (the "Tranche A Term Facility"); o an original seven year term loan maturing in September 2004 with an outstanding balance of $147 million at December 31, 1999 (the "Tranche B Term Facility"); and 12 o an original eight year term loan maturing in June 2005 with an outstanding balance of $49 million at December 31, 1999 (the "Tranche C Term Facility"). o The Revolving Facility, with an outstanding balance of $124 million at December 31, 1999, becomes payable in full on September 30, 2003. At January 31, 1999, approximately $460.4 million was outstanding under the Senior facilities, and there was no availability under the credit facilities after giving effect to approximately $1.5 million in outstanding letters of credit issued under the credit facilities. The Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. Effective with the Amendment on August 20, 1999, loans under the Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%; loans under the Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0%; loans under the Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. The Company continues to actively pursue sales of assets in Ohio, Illinois and Wisconsin. All net proceeds of the disposition of certain assets located in Ohio not in excess of $55 million shall be applied against the Revolving Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held be each applicable lender. All net proceeds of the disposition of certain assets located in Illinois and Wisconsin shall be applied first against the Tranche A Term Loan, on a pro rata basis in accordance with the relative aggregate principal amounts held by each applicable lender. The Company has no firm commitments from potential purchasers for these assets. There can be no assurance that any such sales of assets or additional financing could be achieved. The Credit Facility contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; causes Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Multicare to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. On August 11, 1997, Genesis ElderCare Acquisition Corp. sold $250 million principal amount of 9% Senior Subordinated Notes due 2007 ("the 9% Notes"). Interest on the 9% Notes is payable semiannually on February 1 and August 1 of each year. The 9% Notes are unsecured, general obligations of the issuer, subordinated in right of payment to all existing and future Senior Indebtedness, as defined in the Indenture, of the issuer, including indebtedness under the Senior Facilities. The 9% Notes rank pari passu in right of payment with any future senior subordinated indebtedness of the issuer and are senior in right of payment to all future subordinated indebtedness of the issuer. The 9% Notes are redeemable at the option of the issuer, in whole or in part, at any time on or after August 1, 2002, initially at 104.5% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after August 1, 2004. The 9% Notes are subject to mandatory redemption at 101%. Upon a Change in Control, as defined in the Indenture, the issuer is required to make an offer to purchase the 9% Notes at a purchase price equal to 101% of their principal amount, plus accrued interest. The Indenture contains a number of covenants that, among other things, restrict the ability of the issuer of the 9% Notes to incur additional indebtedness, pay 13 dividends, redeem capital stock, make certain investments, issue the capital stock of its subsidiaries, engage in mergers or consolidations or asset sales, engage in certain transactions with affiliates, and other restrictions affecting its subsidiaries. Merger and Other Transactions Upon the consummation of the Merger, Multicare assumed all obligations of Acquisition Corp. with respect to and under the 9% Notes and the related Indenture. On October 9, 1997, Multicare, Genesis and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis manages Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Effective with the Amendment on August 20, 1999, Multicare may not pay management fees under the Management agreement in excess of 6% of consolidated net revenue. The Company may defer not more than 4% (on an annualized basis) of the management fees due in any fiscal year. At December 31, 1999 $30.1 million is subordinated and due to Genesis Health Ventures, Inc. Under the Management Agreement, Genesis is responsible for Multicare's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare are paid by Multicare. In February 1998 ElderTrust ("ETT"), a Maryland real estate investment trust sponsored by Genesis, made term loans to subsidiaries of the Company with respect to the lease-up of three assisted living facilities. The loans have a fixed annual rate of interest of 10.5% and mature three years from the date of the loans, subject to the right of the Company to extend the term for up to three one-year extension periods in the event the facility has not reached "stabilized occupancy" (as defined) as of the third anniversary of the loan (or at the end of any extension period, if applicable). ETT is obligated to purchase and leaseback the three facilities that secure the term and construction loans being made to the Company, upon the earlier of the facility reaching stabilized occupancy or the maturity of the loan secured by the facility provided, however, that the Company will not be obligated to sell any facility if the purchase price for the facility would be less than the applicable loan amount. The purchase agreements provide for a cash purchase price in an amount which will result in an annual yield of 10.5% to ETT. If acquired by ETT, these facilities would be leased to the Company under minimum rent leases. The initial term of any minimum rent lease will be ten years, and the Company will have the option to extend the term for up to two five-year extension periods upon 12 months notice to ETT. Minimum rent for the first lease year under any minimum rent lease will be established by multiplying the purchase price for the applicable facility times 10.5%, and the increase each year by an amount equal to the lesser of (i) 5% of the increase in the gross revenues for such facility (excluding any revenues derived from ancillary healthcare services provided by Genesis or its affiliates to residents of the applicable facility) during the immediately preceding year or (ii) one-half of the increase in the Consumer Price Index during the immediately preceding year. During the last four years of the term (as extended, if applicable), the Company is required to make minimum capital expenditures equal to $3,000 per residential unit in each assisted living facility covered by a minimum rent lease. Legislative and Regulatory Issues Legislative and regulatory action, including but not limited to the 1997 Act and the Refinement Act, has resulted in continuing change in the Medicare and Medicaid reimbursement programs which has adversely impacted us. The changes have limited, and are expected to continue to limit, payment increases under 14 these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers or other providers. There can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on us. See "Cautionary Statements Regarding Forward Looking Statements." Anticipated Impact of Healthcare Reform The majority of the Multicare eldercare centers began implementation of PPS on January 1, 1999. The actual impact of PPS on our earnings in future periods will depend on many variables which can not be quantified at this time, including the effect of the Balanced Budget Refinement Act, regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, ability to reduce costs and growth of ancillary business. PPS and other existing and future legislation and regulation may also adversely affect our pharmacy and medical supply revenue, and other specialty medial services. As a result of the Balanced Budget Refinement Act, the Company transitioned 23 eldercare centers to the full federal rate effective January 1, 2000. The Company believes this transaction will result in incremental annualized revenue of approximately $2.2 million, which will in part be offset by the continued phase in of PPS. Year 2000 Compliance The Company did not experience any material interruptions of business as a result of the Year 2000 computer problem. Seasonality The Company's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, seasonal census cycles, and the number of calendar days in a given quarter. Impact of Inflation The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. To date, the Company has offset its increased operating costs by increasing charges for its services and expanding its services. The Company has also implemented cost control measures to limit increases in operating costs and expenses but cannot predict its ability to control such operating cost increases in the future. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company intends to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of interest rate changes. In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates. The Company's objective in managing its exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. Notional amounts of interest rate swap agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates. The estimated amount the Company would pay to terminate its interest rate swap agreements outstanding at September 30, 1999 is approximately $1 million. 16 PART II: OTHER INFORMATION Item 1. Legal Proceedings. Not Applicable. Item 2. Changes in Securities and Use of Proceeds. Not Applicable. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description ----------- ----------- 27 Financial Data Schedule. (b) Reports on Form 8-K. Not Applicable. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MULTICARE COMPANIES, INC. Date: February 11, 2000 /S/ George V. Hager, Jr. ---------------------------- George V. Hager, Jr. Executive Vice President and Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000890925 MULTICARE DOLLAR 3-MOS SEP-30-2000 OCT-01-1999 DEC-31-1999 1 4,177 0 116,080 0 0 134,305 618,472 0 1,292,737 141,210 738,725 0 0 0 312,253 1,292,737 160,361 160,361 133,168 133,168 9,558 0 18,329 (13,569) (3,985) (9,584) 0 0 3,623 (13,658) 0 0
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