-----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, TFH941v6KLfymx89se2YK/L9ze7/NVHx7am2904FXSKrkKIhy+ZIJGmU04lH6M7M pdMQGCzaUljektjsGSBCbg== 0000950116-00-001229.txt : 20000516 0000950116-00-001229.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950116-00-001229 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 634380 BUSINESS ADDRESS: STREET 1: 101 EAST STATE STREET STREET 2: OMITTED INTENTIONALLY CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: 6104446350 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 March 31, 2000 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________, Commission File Number: 34-22090 THE MULTICARE COMPANIES, INC. (Exact name of registrant as specified in its charter) Delaware 22-3152527 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 101 East State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (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 May 15, 2000 - ---------------------------------------- -------------------------------- Common Stock ($.01 Par Value) 100 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Table of Contents
Page ---- CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS...........................1 Part I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets March 31, 2000 (Unaudited) and September 30, 1999.................2 Consolidated Statements of Operations Three and six months ended March 31, 2000 and 1999 (Unaudited)....3 Consolidated Statements of Cash Flows Six months ended March 31, 2000 and 1999 (Unaudited)..............4 Notes to Consolidated Financial Statements......................5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................9-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......18 Part II: OTHER INFORMATION ........................................................19 SIGNATURES................................................................20
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 or inability to meet our liquidity needs, scheduled debt and interest payments, expected future capital expenditure requirements, to control costs, to consummate asset sales 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 default under our "Senior Credit Agreement"; 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. On March 29, 2000, we elected not to make interest payments due under our Senior Credit Agreement. We are also in violation of certain covenants under our Senior Credit Agreement. We have begun discussions with our lenders under our Senior Credit Agreement to revise our capital structure. We have been granted a forbearance period while discussion on an overall restructuring take place. Under the forbearance agreement the majority of the Senior Creditors agreed to refrain from accelerating the Senior Loans or exercising other remedies against us. During the forbearance period we have not made scheduled interest and principal payments under our Senior Credit Agreement. There can be no assurances that the senior lenders or holder of Senior Subordinated Notes will approve any amendment or restructuring of the Credit Agreement or the Senior Subordinated Notes. If Senior lenders accelerate obligations under the agreements, such events would have a material adverse effect on our liquidity and financial position. Under such circumstances, our financial position would necessitate the development of an alternative financial structure. Considering the limited financial resources and the existence of certain defaults there can be no assurance the we would succeed in formulating and consummating an acceptable alternative financial structure. In light of our current financial condition and default under our Senior Loans, the Company may need to seek protection under federal bankruptcy law. 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)
March 31, September 30, 2000 1999 ---- ---- (Unaudited) Assets Current Assets: Cash and cash equivalents $ 3,198 $ 3,967 Accounts receivable, net 112,661 113,586 Prepaid expenses and other current assets 12,598 13,130 Deferred taxes - current portion 2,027 2,027 ---------- ---------- Total current assets 130,484 132,710 ---------- ---------- Property, plant and equipment, net 614,825 621,371 Goodwill, net 474,175 480,809 Other assets 60,860 67,474 ---------- ---------- $1,280,344 $1,302,364 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued liabilities $ 111,517 $ 97,205 Current portion of long-term debt 720,352 34,700 ---------- ---------- Total current liabilities 831,869 131,905 ---------- ---------- Long-term debt 49,619 741,256 Deferred taxes 65,003 76,007 Due to Genesis Health Ventures, Inc. and other liabilities 33,752 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 Accumulated deficit (432,899) (407,089) ---------- ---------- Total stockholders' equity 300,101 325,911 ---------- ---------- $1,280,344 $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 Six Months Ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- Net revenues $ 163,241 154,725 323,602 $ 323,209 Expenses: Operating expense 136,769 127,541 269,937 257,353 Management fee 9,798 9,278 19,422 19,329 Depreciation and amortization expense 9,497 11,310 19,055 22,591 Lease expense 3,284 3,330 6,535 6,454 Interest expense, net 18,634 16,227 36,963 32,412 Debt restructuring expense 2,143 --- 2,143 --- --------- -------- -------- --------- Total expenses 180,125 167,686 354,055 338,139 --------- -------- -------- --------- Loss before income taxes, share in loss of unconsolidated affiliates, and cumulative effect of accounting change (16,884) (12,961) (30,453) (14,930) Income tax benefit (5,068) (2,804) (9,053) (2,195) --------- -------- -------- --------- Loss before share in loss of unconsolidated affiliates and cumulative effect of accounting change (11,816) (10,157) (21,400) (12,735) --------- -------- -------- --------- Share in loss of unconsolidated affiliates 336 --- 787 --- --------- -------- -------- --------- Loss before cumulative effect of accounting change (12,152) (10,157) (22,187) (12,735) --------- -------- -------- --------- Cumulative effect of accounting change, net of tax --- --- 3,623 --- --------- -------- -------- --------- Net loss $ (12,152) (10,157) (25,810) $ (12,735) ========= ======== ======== =========
See accompanying notes to condensed consolidated financial statements. 3 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six months ended March 31, 2000 1999 ---- ---- Cash flows from operating activities: Net loss $ (25,810) $(12,735) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Cumulative effect of accounting change, net of tax 3,623 --- Depreciation and amortization 19,055 22,591 Deferred taxes (9,053) 229 Changes in assets and liabilities: Accounts receivable 925 (18,078) Prepaid expenses and other current assets 532 (437) Accounts payable and accrued liabilities 14,311 (18,121) --------- -------- Net cash provided by (used in) operating activities 3,583 (26,551) --------- -------- Cash flows from investing activities: Capital expenditures (4,274) (8,396) Other assets and liabilities 5,907 4,548 --------- -------- Net cash provided by (used in) investing activities 1,633 (3,848) --------- -------- Cash flows from financing activities: Proceeds from long-term debt 17,534 229,900 Repayments of long-term debt (23,519) (205,367) Debt issuance costs --- (1,387) --------- -------- Net cash (used in) provided by financing activities (5,985) 23,146 --------- -------- (Decrease) in cash and cash equivalents (769) (7,253) Cash and cash equivalents at beginning of period 3,967 11,344 --------- -------- Cash and cash equivalents at end of period $ 3,198 $ 4,091 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 2000 (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 accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced significant losses and has a working capital deficit of $701.4 million at March 31, 2000. In addition the Company has violated certain financial covenants (as described below) under the Company's Senior Credit Agreement. In addition, the Company has received default notices from Eldertrust alleging certain payment and non-payment related defaults under certain mortgage loans. The financial information as of March 31, 2000, and for the three and six months ended March 31, 2000 and 1999, 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 March 31, 2000 and the operating results for the three and six months ended March 31, 2000 and 1999 and the cash flows for the six months ended March 31, 2000 and 1999. 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. 5 (2) Certain Significant Risks and Uncertainties - Liquidity and Going Concern Assumption The following information is provided in accordance with the AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties." Liquidity and Going Concern Assumption The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern with the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has experienced significant losses and has a working capital deficit of $701.4 million as of March 31, 2000 due to the reclassification of the Senior Loans and 9% Senior Subordinated Notes as currently due. The Company is in violation of certain covenants under the Company's Senior Credit Agreement. On March 29, 2000 the Company elected not to make interest payments due under the Senior Credit Agreement. Management has begun discussions with the Company's lenders under its Senior Credit Agreement and advisors to certain holders of the Company's 9% Senior Subordinated Notes to revise the Company's capital structure. The Company's Senior Lenders have granted a forbearance period while discussions on an overall restructuring take place. Under the forbearance agreement, the majority of the Senior Lenders have, subject to certain conditions, agreed to refrain from accelerating the Senior Loans or exercising other remedies against the Company. During the forbearance period, Multicare has not made scheduled interest and principal payments under its Senior Credit Agreement. As a result of the uncertainty related to the covenant defaults and corresponding remedies, amounts outstanding under Multicare's Senior Credit Agreement and its 9% Senior Subordinated Notes have been reclassified as a current liability at March 31, 2000. The forbearance period expires on May 19, 2000. The Company has requested that the forbearance period be extended through June 30, 2000. There can be no assurance that the Senior Lenders will agree to this request. There can be no assurances that the Senior Lenders or holders of Subordinated Notes will approve any amendment or restructuring of the Senior Credit Agreement or the Subordinated Notes. The financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty related to the covenant defaults and corresponding remedies. If the Senior Lenders accelerate the obligations under the agreement, such events would have a material adverse effect on the Company's liquidity and financial position and, if such acceleration were not discharged, rescinded or annulled within thirty days, would result in a default under the Indenture for the Company's 9% Senior Subordinated Notes. Under such circumstances, the financial position of the Company would necessitate the development of an alternative financial structure. Considering the limited financial resources and the existence of certain defaults there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial structure. Debt Restructuring Expense In connection with the debt restructuring discussions, the Company has incurred legal, bank, and other professional costs of $2.1 million which are recorded as expense in the quarter ended March 31, 2000. Included in the debt restructuring expense was $0.3 million in bank charges and $1.8 million in legal and financial consultant expense. Reimbursement Risk 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, have resulted in reduced rates of reimbursement for services provided by the Company. 6 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. (3) 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. 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. 7 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. (4) Sale of Ohio Assets The Company is actively involved in negotiations to sell the assets of 14 eldercare centers in Ohio for approximately $36 million in cash in accordance with a signed letter of intent. The net proceeds of the disposition of assets located in Ohio are expected to be applied against the Company's Senior Credit facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held by each applicable lender. There can be no assurance that any such sale of assets can be consummated. 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. Liquidity and Going Concern Assumption The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern with the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has experienced significant losses and has a working capital deficit of $701.4 million as of March 31, 2000 due to the reclassification of the Senior Loans and 9% Senior Subordinated Notes to currently due. The Company is in violation of certain covenants under the Company's Senior Credit Agreement. On March 29, 2000 the Company elected not to make interest payments due under the Senior Credit Agreement. Management has begun discussions with the Company's lenders under its Senior Credit Agreement and advisors to certain holders of the Company's 9% Senior Subordinated Notes to revise the Company's capital structure. The Company's Senior Lenders have granted a forbearance period while discussions on an overall restructuring take place. Under the forbearance agreement, the majority of the Senior Lenders have, subject to certain conditions, agreed to refrain from accelerating the Senior Loans or exercising other remedies against the Company. During the forbearance period, Multicare has not made scheduled interest and principal payments under its Senior Credit Agreement. As a result of the uncertainty related to the covenant defaults and corresponding remedies, amounts outstanding under Multicare's Senior Credit Agreement and its 9% Senior Subordinated Notes have been reclassified as a current liability at March 31, 2000. The forbearance period expires on May 19, 2000. The Company has requested that the forbearance period be extended through June 30, 2000. There can be no assurance that the Senior Lenders will agree to this request. There can be no assurances that the Senior Lenders or holders of Subordinated Notes will approve any amendment or restructuring of the Senior Credit Agreement or the Subordinated Notes. The financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty related to the covenant defaults and corresponding remedies. If the Senior Lenders accelerate the obligations under the agreement, such events would have a material adverse effect on the Company's liquidity and financial position and, if such acceleration were not discharged, rescinded or annulled within thirty days, would result in a default under the Indenture for the Company's 9% Senior Subordinated Notes. Under such circumstances, the financial position of the Company would necessitate the development of an alternative financial structure. Considering the limited financial resources and the existence of certain defaults there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial structure. 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 9 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. 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. 10 Results of Operations Three Months Ended March 31, 2000 Compared to Three Months ended March 31, 1999 Net revenues. Net revenues for the three months ended March 31, 2000 increased $8.5 million or 5.5% from the same period last year to $163.2 million. In the quarter ended March 31, 2000, net revenues increased by $1.7 million due to one more day in the quarter. In the quarter ended March 31, 2000, an increase in average daily Medicare census resulted in an increase in revenue of $7.8 million which was offset by a decrease in private and other average daily census decline causing a $1.0 million decline in revenue. The Company's quality mix of private, Medicare and insurance patient days was 40.4% of patient days for the three months ended March 31, 2000 compared to 40.6% in the similar period of last year. Occupancy rates were 91.3% for the three months ended March 31, 2000 compared to 90.5% in the similar period of last year. Operating Expense. Operating expenses for the three months ended March 31, 2000 increased $9.2 million or 7.2% from the comparable period last year to $136.8 million. Of this increase, $1.4 million was due to one more day in the March 31, 2000 quarter. The remaining increase resulted primarily from higher salaries, wages and benefits and overtime due to more competitive labor markets. Facility operating margins were 16.2% and 17.6% for the three months ended March 31, 2000 and 1999 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 increased by $0.5 million or 5.6% to $9.8 million for the three months ended March 31, 2000 due to the increase in net revenues. Lease Expense. Lease expense of $3.3 million for the three months ended March 31, 2000 and 1999 was unchanged as the same number of eldercare centers were leased in 2000 and 1999. Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2000 decreased $1.8 million or 16.0% from the prior period to $9.5 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 $1.8 million for the three months ended March 31, 2000. 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 for the three months ended March 31, 2000 increased $2.4 million or 14.8% to $18.6 million from the same period in the prior year. The increase is due to an increase in the effective borrowing rate to 9.7% for the three months ended March 31, 2000 from 8.4% for the three months ended March 31, 1999. The primary reason for the borrowing rate increase was due to amendments to the Senior Credit Agreement. Debt Restructuring Expense. During the March 31, 2000 quarter, the Company began discussions with its lenders under its Senior Credit Agreement to revise its capital structure. In connection with the debt restructuring, the Company has incurred legal, bank, and other professional costs of $2.1 million. Included in the debt restructuring expense was $0.3 million in bank charges and $1.8 million in legal and financial consultant expense. Income Tax Benefit. The income taxes benefit increased by $3.0 million to $5.1 million for the three months ended March 31, 2000. The increase relates to the increase in operating losses offset by lower non-deductible goodwill amortization. 11 Six Months Ended March 31, 2000 Compared to Six Months ended March 31, 1999 Net revenues. Net revenues for the six months ended March 31, 2000 increased $0.4 million from the same period last year to $323.6 million. In the six months ended March 31, 2000, net revenues decreased $10.8 due to Medicare rate dilution as a result of the Medicare Prospective Pay System implemented on January 1, 1999. Net revenues increased by $1.7 million due to one more day in the March 31, 2000 period. In the six months ended March 31, 2000, an increase in average daily Medicare census resulted in an increase in revenue of $15.5 million which was offset by private and other average daily census decline causing approximately a $6.0 million decline in revenue. The Company's quality mix of private, Medicare and insurance patient days was 39.9% of patient days for the six months ended March 31, 2000 compared to 41.0% in the similar periods of last year. Occupancy rates were 90.9% for the six months ended March 31, 2000 compared to 90.8% in the similar periods of last year. Operating Expense. Operating expenses for the six months ended March 31, 2000 increased $12.6 million or 4.9% from the comparable period last year to $269.9 million. Of this increase, $1.4 million was due to one more day in the March 31, 2000 quarter. The remaining increase resulted primarily from higher salaries, wages and benefits and overtime due to more competitive labor markets. Facility operating margins were 16.6% and 20.4% for the six months ended March 31, 2000 and 1999 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 increased by $0.1 million to $19.4 million for the six months ended March 31, 2000 due to the increase in net revenues. Lease Expense. Lease expense of $6.5 million for the six months ended March 31, 2000 and 1999 was unchanged as the same number of eldercare centers were leased in 2000 and 1999. Depreciation and Amortization. Depreciation and amortization expense for the six months ended March 31, 2000 decreased $3.5 million or 15.7% from the prior period to $19.1 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 $3.4 million for the six months ended March 31, 2000. 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 for the six months ended March 31, 2000 increased $4.6 million or 14.0% to $37.0 million from the same period in the prior year. The increase is due to an increase in the effective borrowing rate to 9.6% for the six months ended March 31, 2000 from 8.4% for the six months ended March 31, 1999. The primary reason for the borrowing rate increase was due to amendments to the Senior Credit Agreement. Debt Restructuring Expense. During the March 31, 2000 quarter, the Company began discussions with its lenders under its Senior Credit Agreement to revise its capital structure. In connection with the debt restructuring discussions, the Company has incurred legal, bank, and other professional costs of $2.1 million. Included in the debt restructuring expense was $0.3 million in bank charges and $1.8 million in legal and financial consultant expense. 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 Benefit. The income tax benefit increased by $6.9 million to $9.1 million for the six months ended March 31, 2000. Of the increase $2.0 million relates to the tax benefit related to the cumulative effect of accounting change. The remainder of the increase relates to the increase in operating losses offset by lower non-deductible goodwill amortization. 12 Liquidity and Capital Resources General The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern with the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has experienced significant losses and has a working capital deficit of $701.4 million as of March 31, 2000 due to the reclassification of the Senior Loans and 9% Senior Subordinated Notes to currently due. The Company is in violation of certain covenants under the Company's Senior Credit Agreement. On March 29, 2000 the Company elected not to make interest payments due under the Senior Credit Agreement. In addition, the Company has received default notices from Eldertrust alleging certain payment related defaults under certain mortgage loans. Management has begun discussions with the Company's lenders under its Senior Credit Agreement and advisors to certain holders of the Company's 9% Senior Subordinated Notes to revise the Company's capital structure. The Company's Senior Lenders have granted a forbearance period while discussions on an overall restructuring take place. Under the forbearance agreement, the majority of the Senior Lenders have, subject to certain conditions, agreed to refrain from accelerating the Senior Loans or exercising other remedies against the Company. During the forbearance period, Multicare has not made scheduled interest and principal payments under its Senior Credit Agreement. As a result of the uncertainty related to the covenant defaults and corresponding remedies, amounts outstanding under Multicare's Senior Credit Agreement and its 9% Senior Subordinated Notes have been reclassified as a current liability at March 31, 2000. The forbearance period expires on May 19, 2000. The Company has requested that the forbearance period be extended through June 30, 2000. There can be no assurance that the Senior Lenders will agree to this request. There can be no assurances that the Senior Lenders or holders of Subordinated Notes will approve any amendment or restructuring of the Senior Credit Agreement or the Subordinated Notes. The financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty related to the covenant defaults and corresponding remedies. If the Senior Lenders accelerate the obligations under the agreement, such events would have a material adverse effect on the Company's liquidity and financial position and, if such acceleration were not discharged, rescinded or annulled within thirty days, would result in a default under the Indenture for the Company's 9% Senior Subordinated Notes. Under such circumstances, the financial position of the Company would necessitate the development of an alternative financial structure. Considering the limited financial resources and the existence of certain defaults there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial structure. In light of the Company's current financial condition and its default under the Senior Loans, the Company may need to seek protection under federal bankruptcy law. Cash flow provided by operations was $3.6 million for the six months ended March 31, 2000 compared to cash flow used in operations of $26.6 million in the comparable period of 1999. Operating cash flows increased as a result of the decline of receivable growth from the prior period of $19.0 million. Operating cash flow decreased by $15.5 million which relates to the increase in net losses primarily as a result of the implementation of PPS. Net accounts receivable were $112.7 million and $113.6 million at March 31, 2000 and September 30, 1999, respectively. Legislative and regulatory action and government budgetary constraints have changed, and may in the future continue to change the timing of payments and reimbursement rates of the Medicare and Medicaid programs in the future. These changes have had and may in the future have a material adverse effect on the Company's operating results and cash flows and could have a further material adverse impact in the future. In addition growth of accounts payable and accrued liabilities resulted in increased cash flow of $32.4 million primarily as a result of increased accrued interest and amounts owed Genesis. Accrued interest was $12.3 million as of March 31, 2000. Trade payables owed to Genesis were $54.3 million as of March 31, 2000. Genesis is the primary provider of pharmacy, rehabilitation and hospitality services. 13 Cash flows provided by investing activities in fiscal year 1999 includes the deferred management fees due to Genesis of $6.5 million as a source of cash. Capital expenditures of $4.3 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. Multicare anticipates an adverse effect on operating cash flow beginning in the third quarter of 2000 due to an increase in the cost of certain of its insurance programs due to the timing of funding of premiums for new policies. Specifically, the costs of general and professional liability and property insurance premiums are expected to increase due to the rising costs of elder care malpractice litigation involving nursing care operators. In addition, as a result of the Company's current financial condition it is unable to continue certain self insured programs and has replaced these programs with outside insurance carriers. 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 agent (the "Administrative Agent"), pursuant to a certain credit agreement (the "Senior 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, 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 two percent to four percent (on an annualized basis) in any fiscal year. On March 20, 2000 the Company entered into a forbearance agreement with the Senior Lenders. Under the forbearance agreement, the majority of the Senior Lenders have, subject to certain conditions agreed to refrain from accelerating the Senior Loans or exercising other remedies against the Company through May 19, 2000. The Company has requested that the forbearance period be extended through June 30, 2000. There can be no assurance that the Senior Lenders will agree to this request. The Senior 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 $139.3 million at March 31, 2000 (the "Tranche A Term Facility"); o an original seven year term loan maturing in September 2004 with an outstanding balance of $145.9 million at March 31, 2000 (the "Tranche B Term Facility"); and o an original eight year term loan maturing in June 2005 with an outstanding balance of $48.3 million at March 31, 2000 (the "Tranche C Term Facility"). o The Revolving Facility, with an outstanding balance of $123.5 million at March 31, 2000 becomes payable in full on September 30, 2003. The Senior 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 substantially all of Multicare's subsidiaries' real property were also granted. Loans under the Senior Credit Facility bear, interest at the per annum Prime Rate as announced by the administrative agent plus a margin (the "Annual Applicable Margin") that is dependent upon a certain financial ratio test. The Senior Lenders have agreed to waive the imposition of the Default Rate during the forbearance period. However, effective with the default under the Senior Credit Agreement, the Company shall no longer be 14 entitled to elect a LIBO Rate. Effective March 20, 2000, loans under the Tranche A Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%; loans under the Tranche B Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.25%; loans under the Tranche C Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.5%; loans under the Revolving Credit Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%. The Company is actively involved in negotiations to sell the assets of 14 eldercare centers in Ohio for approximately $36 million in cash in accordance with a signed letter of intent. All net proceeds of the disposition of assets located in Ohio are expected to be applied against the Company's Senior Credit facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held by each applicable lender. There can be no assurance that any such sale of assets can be consummated. The Senior 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), as defined, and corporate separateness; and will cause Multicare to comply with the terms of other material agreements, as well as 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 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. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1.9 million and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23.9 million in any given 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 15 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 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. 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 transition will result in incremental annualized revenue of approximately $2.2 million, which will in part be offset by the continued phase in of PPS in other facilities. Year 2000 Compliance The Company did not experience any material interruptions of business as a result of the Year 2000 computer problem. 16 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. The Company has implemented cost control measures to attempt 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. 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of interest rate changes. 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 used interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. During the forbearance period the Company is not required to maintain interest rate hedging agreements. During the quarter ended March 31, 2000, the Company terminated all of its interest rate swap agreements for $0.1 million. 18 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. The Company has not made scheduled interest and principal payments in the amount of $13.5 million as of March 31, 2000 under its Senior Credit Facilities. 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. 99.1 Forbearance Agreement, dated as of March 20, 2000, among The Multicare Companies, Inc., Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of Credit, Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA, Inc. as Syndication Agent, First Union National Bank as Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders and Secured Parties (b) Reports on Form 8-K. On April 4, 2000, the Company filed a Report on Form 8-K dated March 21, 2000 reporting that it had begun debt restructuring discussions with its senior lenders and that it did not expect to make scheduled debt payments during the discussion period. 19 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: May 15, 2000 /S/ George V. Hager, Jr. ---------------------------- George V. Hager, Jr. Executive Vice President and Chief Financial Officer 20 EX-99.1 2 EXHIBIT 99.1 Exhibit 99.1 FORBEARANCE AGREEMENT (THE MULTICARE COMPANIES, INC.) FORBEARANCE AGREEMENT, dated as of March 20, 2000, (this "Agreement") among The Multicare Companies, Inc., certain Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent and Issuer of Letters of Credit, Citicorp USA, Inc. as Syndication Agent, First Union National Bank as Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders and Secured Parties referred to below. Reference is made to that certain Credit Agreement, dated as of October 7, 1997, as amended, among The Multicare Companies, Inc., certain Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent and Issuer of Letters of Credit, First Union National Bank as Documentation Agent, Citicorp USA, Inc. as Syndication Agent, Bank of America, N.A. as Syndication Agent and the Lenders referred to therein (the "Credit Agreement") and to the other Loan Documents entered into in connection therewith. Capitalized terms not otherwise defined herein are used as defined in the Credit Agreement or in the other Loan Documents referred to therein. WHEREAS, a meeting was held on March 14, 2000 in which Multicare presented certain information and plans (the "Presentation") to the Lenders and other Secured Parties including, among other things, that it wishes to restructure certain of its Indebtedness and that there is a possibility that it will be unable to make certain payments on Indebtedness due to the Lenders and other Secured Parties on a timely basis; WHEREAS, the Borrowers have requested an opportunity to more fully develop and effect certain proposals discussed at that meeting; WHEREAS, the Lenders and other Secured Parties are willing to accede to the request of the Borrowers under the circumstances referred to below on the terms and conditions set forth below; NOW THEREFORE, the undersigned hereby agree as follows: 1. Definitions. The following terms shall have the meanings specified herein. a. "Forbear" means to refrain from accelerating the Loans or other Obligations or exercising remedies, whether arising by contract, at law or in equity, under the Loan Documents or otherwise, against the Borrowers or Collateral or Additional Security or withdrawing or freezing funds in deposit or other accounts pursuant to set-off rights, rights to charge such accounts or other similar rights, whether arising under the Loan Documents (including Section 1.6(c)(Authorization to Charge Accounts) or 12.18 (Set-Off) of the Credit Agreement) or otherwise or taking similar action or demanding that the Borrowers comply with Section 9.2(a)(iii) of the Credit Agreement (but does not preclude cash management functions and usual and customary payments made in connection therewith). b. "Specified Defaults" means the occurrence or existence of any Defaults or Events of Default (or similar terms under any Loan Documents) arising out of any of the following events or conditions: (i) the failure of the Borrowers to pay any principal or interest on the Loans (as more fully set forth in Sections 9.1(a) and (b) of the Credit Agreement); (ii) the failure of the Borrowers to generally pay debts as they mature, or pay any subordinated obligations or other Indebtedness or otherwise default under any such Indebtedness (including, without limitation, events referred to in Section 9.1(f)(i), (iii) or (iv) of the Credit Agreement unless such events constitute a separate Event of Default under the Credit Agreement by virtue of a provision other than Section 9.1(f)), in each case so long as the holders of the subordinated obligations or other Indebtedness do not take any action to enforce remedies against the Borrowers or collateral, if any; (iii) any default in the financial covenants set forth in Article 7 of the Credit Agreement; (iv) any Event of Default solely by reason of Section 9.1(j) of the Credit Agreement (Material Adverse Effect) already disclosed to the Lenders in writing or in the Presentation; (v) the failure of the Borrowers to provide cash collateral in connection with Letters of Credit (i.e., as existing or extended) pursuant to Section 3.1(h) and 9.2(a)(iii) of the Credit Agreement; (vi) the failure to pay any commitment fees, Letter of Credit fees, the Administrative Agent's regular fees and similar fees (but not the failure to pay costs and expenses); (vii) any Event of Default that has occurred or may occur under either the Pledge Agreement or the Security Agreement solely as such defined term relates to a Default or Event of Default under the Credit Agreement or any other Loan Document that constitutes a Specified Default as set forth above; and (viii) any failure by any of the Loan Parties to perform its obligations under the Loan Documents which failure constitutes a Specified Default referred to in clauses (i) through (vii) above. 2. Forbearance and Waiver. ---------------------- a. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, the undersigned in their capacity as Lenders direct the Administrative Agent, and the Administrative Agent agrees to accept and follow such direction, to Forebear through May 19, 2000, notwithstanding any Specified Defaults. b. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, each of the undersigned in their capacity as Lender, a Swap Party or other 2 Secured Party, hereby agree to Forbear through May 19, 2000, notwithstanding any Specified Defaults. c. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, each of the undersigned in their capacity as a Lender, hereby agree to waive the imposition during the period commencing on the date hereof and ending on May 19, 2000 of the Default Rate in connection with any Specified Default. d. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, and notwithstanding the Borrowers' failure to satisfy each of the conditions set forth in Section 4.2 (Conditions to Each Loan and Issuance of Each Letter of Credit) of the Credit Agreement, each of the undersigned in their capacity as a Lender, hereby agrees that the Issuer of Letters of Credit may (but is not required to) issue extensions of existing Letters of Credit (in a face amount no greater than the face amount of the existing Letters of Credit) for the period commencing on the date hereof and ending on May 19, 2000 notwithstanding any Specified Default. e. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, each of the undersigned in their capacity as a Lender, hereby agrees that the Borrowers shall not be required to maintain Interest Rate Hedging Agreements pursuant to Section 6.12 (Interest Rate Hedging Agreements) of the Credit Agreement for the period commencing on the date hereof and ending on May 19, 2000. 3. Certain Limitations. To eliminate any uncertainty, it is expressly understood and agreed that the Administrative Agent may take any action granted to it under law or contract (including, without limitation, acceleration, foreclosure on Collateral and Additional Security and set-off), a. a. after May 19, 2000, b. in connection with any event or condition (including, without limitation, a filing of a petition in bankruptcy as referred to in section 9.1(m) of the Credit Agreement, a violation of the Indebtedness or Lien covenants set forth in Sections 8.1 and 8.2 of the Credit Agreement or the entry of a judgment referred to in Section 9.1(g) of the Credit Agreement) other than a Specified Default or c. if any of the events or conditions in Section 5 (Conditions/Additional Undertakings) below are not satisfied on a timely basis. 4. Not a Waiver. THIS AGREEMENT DOES NOT SERVE AS A WAIVER OF ANY DEFAULTS OR EVENTS OF DEFAULT WHICH MAY NOW OR HEREAFTER EXIST and, except as expressly provided above to the contrary for the period specified, the Secured Parties reserve any and all rights and remedies under the Loan Documents, at law or in equity, in connection with such Defaults or Events of Default. Without limiting the generality of the foregoing, the Borrowers acknowledge and agree that: 3 a. from and after the date that the Borrowers default in any payment obligations under the Loan Documents or there otherwise exists an Event of Default, without limiting the generality of Section 1.8(b) of the Credit Agreement, the Borrowers shall no longer be entitled to elect the LIBO Rate option for Loans, such prohibition to take place automatically without notice from the Administrative Agent which notice is hereby waived and b. in connection with any default in payment of any of the Obligations, Multicare will, and the Administrative Agent may, send notice to any and all trustees under subordinated debt instruments of any of the Borrowers stating that there has been a "Payment Default" or similar term and that the trustee and bond holders may not accept any payment from the Borrowers. No delay or failure on the part of the Secured Parties to exercise any right or remedy hereunder or under the Loan Documents shall operate as a waiver thereof, and no single or partial exercise of any right or remedy hereunder or thereunder shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action or forbearance by the Secured Parties shall be construed to constitute a waiver of any of the provisions hereof or thereof. 5. Conditions/Additional Undertakings. ---------------------------------- a. Attached hereto as Exhibit A are the conditions precedent to the effectiveness of this Forbearance Agreement. b. Attached hereto as Exhibit B are the conditions subsequent to the continued effectiveness of this Forbearance Agreement through May 19, 2000. If any of the conditions set forth on Exhibit B are not satisfied by the dates specified on said Exhibit B, then the obligations set forth in Section 2 (Forbearance and Waivers) above shall immediately terminate without notice on May 20, 2000 or, if earlier for any reason, upon written notice to the Borrowers given in accordance with the terms of the Credit Agreement. c. If at any time the forbearance agreement with Genesis is terminated, the obligations set forth in Section 2 (Forbearance and Waivers) above shall immediately terminate without notice. 6. Release. As a material inducement to the Secured Parties to enter into this Agreement, the Borrowers and each of them (A) do hereby remise, release, acquit, satisfy and forever discharge the Secured Parties and all of their past, present and future officers, directors, employees, agents, attorneys, representatives, participants, heirs, successors and assigns, from any and all manner of debts, accountings, bonds, warranties, representations, covenants, promises, contracts, controversies, agreements, liabilities, obligations, expenses, damages, judgments, executions, actions, claims, demands and causes of action of any nature whatsoever, whether at law or in equity, which any of the Borrowers has by reason of any matter, cause or thing, from the beginning of the world to and including the date of this Agreement with respect to any matters, transactions, occurrences, agreements, actions, or events arising out of, in connection with or relating to the Loan Documents; and (B) do hereby covenant and agree never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against the Secured Parties, or any of their past, 4 present or future officers, directors, employees, agents, attorneys, representatives, participants, heirs, successors or assigns, by reason of or in connection with any of the foregoing matters, claims or causes of action. The Borrowers expressly acknowledge and agree that the waivers, estoppels and releases contained in this Agreement shall not be construed as an admission of wrongdoing, liability or culpability on the part of any of the Secured Parties or the existence of any claims of the Borrowers against any of the Secured Parties. 7. Governing Law. This Agreement shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to the principles of conflict of laws. 8. Future Negotiations. The parties hereto acknowledge and agree that (A) the Secured Parties have not agreed to and have no future obligation whatsoever to discuss, negotiate or agree to any restructuring of the Borrowers' obligations with respect to the Loan Documents, or any of them, or any modification, amendment, restructuring or reinstatement of the Loan Documents or, except as expressly provided in this Agreement, to forbear from exercising its rights and remedies under the Loan Documents, (B) if there are any future discussions among the Secured Parties and the Borrowers concerning any such restructuring, modification, amendment or reinstatement, then no restructuring, modification, amendment, reinstatement, compromise, settlement, agreement or understanding with respect to the Borrowers' obligations with respect to the Loan Documents, or any of them, or any aspect thereof, shall constitute a legally binding agreement or contract or have any force or effect whatsoever unless and until reduced to writing and signed by authorized representatives of all parties, and that none of the parties hereto shall assert or claim in any legal proceedings or otherwise that any such agreement exists except in accordance with the terms of this Section 8. 9. Ratification. Except to the extent and for the period hereby waived or modified, the Credit Agreement and each of the Loan Documents is hereby confirmed and ratified in all respects. 10. Counterpart Signatures. This Agreement may be executed in any number of counterparts, each of which will constitute an original and all of which together shall constitute one instrument. A faxed copy of a signature page shall serve as the functional equivalent of a manually-executed copy for all purposes. 11. Payment of Fees. The Administrative Agent shall allocate the forbearance fee referred to in paragraph 2 of Exhibit A hereto among those Secured Parties who sign and deliver a counterpart signature page in the manner and time set forth in paragraph 1 of said Exhibit A on a pro rata basis, based on the amount of the Obligations owing to them. The Administrative Agent's records shall be conclusive for the purposes hereof. 12. Capacity of Signing Parties. Each of the undersigned Secured Parties signs this in its capacity as a Lender and, if applicable, and in any other capacity as a Secured Party. 5 IN WITNESS WHEREOF, the undersigned, intending to be legally bound, hereby signs as of the date first above written. ------------------------------------------ Name of Financial Institution(1) ------------------------------------------ By: Name: Title: THE MULTICARE COMPANIES, INC., for itself and each of the Borrowers under the Credit Agreement ------------------------------------------ By: Name: Title: GENESIS ELDERCARE CORP., as Surety ------------------------------------------ By: Name: Title: - ----------------- (1) Signing in all applicable capacities as Secured Parties, whether as Administrative Agent, Lender or otherwise. 6 Exhibit A To Forbearance Agreement Conditions Precedent 1. Execution of this Forbearance Agreement by (a) the Borrowers, or by Multicare on behalf of the Borrowers, (b) the Required Lenders, and (c) the Administrative Agent and return of counterpart signature pages by each to Drinker Biddle & Reath LLP (to the attention of Jill Bronson) by actual delivery at One Logan Square, 18th and Cherry Street, Philadelphia, PA 19103 or by facsimile transmission (facsimile number: 215-988-2757) no later than 5:00 p.m. (Eastern Standard Time) on March 20, 2000.(2) 2. Upon satisfaction of the condition precedent contained in the immediately preceding paragraph, payment of an irrevocable and nonrefundable fee to the Administrative Agent in immediately available funds for the benefit of each of the Secured Parties that signs and returns a counterpart to this Forbearance Agreement in the time and manner specified in paragraph 1 above. Such fee shall be in an amount equal to $333,000. 3. Payment of costs and expenses of the Administrative Agent including, without limitation, counsel and financial consultant fees. 4. Effectiveness of a forbearance agreement for Genesis. - ----------------- (2) For purposes of paragraphs 1 and 2 of this Exhibit A, the Administrative Agent, in its sole and absolute discretion, is authorized to extend the deadline set forth in paragraph 1 above for a period not to exceed 2 Business Days and any such action on the part of the Administrative Agent shall be conclusive and binding for all purposes. 7 Exhibit B To Forbearance Agreement Conditions Subsequent --------------------- 1. A financial advisor (that is not the same as the Genesis financial advisor), reasonably acceptable to the Agents (the "Multicare Financial Advisor"), shall be retained by Multicare no later than March 24, 2000. The Agents and Policano and Manzo, financial advisor to the Administrative Agent, shall be given the opportunity to discuss (by phone or in person) the affairs of the Borrowers with the Multicare Financial Advisor from time to time upon reasonable request. 2. Policano and Manzo shall be given full access to the financial records and to the management of the Borrowers and the Borrowers shall comply with the requests made by Policano and Manzo in the letter attached hereto as Annex 1 to Exhibit B. 3. The Borrowers shall cooperate with the Administrative Agent in all remaining aspects of obtaining and perfecting the Additional Security. Each of the Borrowers agrees that this undertaking is a material inducement to the forbearance provided herein and but for this undertaking the Secured Parties would be unwilling to agree to the terms of this Forbearance Agreement. Further, the Borrowers agree that the value to the Borrowers of the undertakings of the Secured Parties herein is at least equal or greater than the value of this undertaking. 4. No later than March 31, 2000, Multicare shall present to the Secured Parties, a proposed plan of reorganization of its capital structure which proposal shall be shared, in preliminary form, with the Agents at least one Business Day prior thereto. The plan will have specific target dates by which certain actions will be completed. Completion of the specified actions by the specified target dates shall be additional conditions incorporated herein by reference. 5. Concurrent with the actions specified in the preceding item #4, Multicare shall develop a contingency plan. Multicare will provide information to the Agents on a regular basis as to the development of such plan and, at the request of the Agents, will present the same to the Secured Parties. 8 EX-27 3 FINANCIAL DATA SCHEDULE
5 0000890925 THE MULTICARE COMPANIES INC 3-MOS SEP-30-2000 JAN-01-2000 MAR-31-2000 3,198 0 112,661 0 0 130,484 614,825 0 1,280,344 831,869 49,619 0 0 0 300,101 1,280,344 163,241 163,241 136,769 146,567 14,924 0 18,634 (16,884) (5,068) (16,884) 0 0 0 (12,152) 0 0
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