<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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
Commission File No. 1-10968
MARINER POST-ACUTE NETWORK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2012902
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Ravinia Drive, Suite 1500 30346
Atlanta, Georgia (Zip Code)
(Address of Principal Executive Office)
(678) 443-7000
(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 No X
--- ---
There were 73,695,081 shares of Common Stock of the registrant issued and
outstanding as of February 22, 2000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No N/A X (Due to the
--- --- ---
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recent nature of the filings made by the registrant and its subsidiaries under
Chapter 11 of the Bankruptcy Code, no plan of reorganization has been confirmed
by a bankruptcy court.)
<PAGE>
Mariner Post-Acute Network, Inc. and Subsidiaries
FORM 10-Q
December 31, 1999
TABLE OF CONTENTS
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Notes 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 46
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 2. Changes in Securities and Use of Proceeds 47
Item 3. Defaults Upon Certain Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 48
Item 6. Exhibits and Reports on Form 8-K 48
SIGNATURE PAGE 49
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share amounts)
(unaudited)
Three months
Ended December 31,
------------------
1999 1998
---- ----
Net Revenues
Nursing home revenue:
Net patient services........................... $462,270 $498,664
Other.......................................... 5,679 7,860
Non-nursing home revenue:
Pharmacy services.............................. 65,843 77,736
Therapy services............................... -- 76,180
Home health, hospital services, and other...... 3,414 12,240
-------- --------
537,206 672,680
Costs and Expenses:
Salaries and wages.............................. 257,740 276,672
Employee benefits............................... 49,435 48,102
Nursing, dietary and other supplies............. 33,421 33,352
Ancillary services.............................. 64,646 127,520
General and administrative...................... 60,611 65,141
Insurance expense............................... 26,236 19,426
Rent............................................ 22,689 26,996
Depreciation and amortization................... 10,830 30,584
Provision for bad debts......................... 8,400 36,484
Indirect merger and other expenses.............. 7,995 2,015
Loss on disposal of assets...................... 923 --
-------- --------
542,926 666,292
-------- --------
Income (loss) from operations................... (5,720) 6,388
-------- --------
Other Income and Expense:
Interest expense................................ 57,243 46,729
Interest and dividend income.................... (4,132) (2,443)
-------- --------
53,111 44,286
-------- --------
Loss before income taxes and minority interest.. (58,831) (37,898)
Provision for Income Taxes....................... -- 500
-------- --------
Loss before minority interest................... (58,831) (38,398)
Minority Interest................................ 790 (625)
-------- --------
Net loss........................................ $(58,041) $(39,023)
======== ========
Loss Per Share:
Basic and Diluted............................... $(0.79) $(0.53)
======== ========
Weighted Average Common Shares Outstanding:
Basic and Diluted............................... 73,695 73,277
======== ========
The accompanying notes are an integral part of these financial statements.
1
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 76,975 $ 71,817
Receivables (less allowances of $91,307 and $87,066)............... 312,727 307,571
Notes receivable, net.............................................. 3,229 3,259
Supplies........................................................... 22,974 22,866
Income tax refund receivable....................................... 1,943 1,943
Prepaid expenses and other current assets.......................... 37,409 34,200
----------- -----------
Total current assets...................................................... 455,257 441,656
Property and Equipment:
Land, buildings and improvements................................... 544,336 532,589
Furniture, fixtures and equipment.................................. 192,547 196,875
Leased property under capital leases............................... 63,833 63,797
----------- -----------
800,716 793,261
Less accumulated depreciation...................................... 340,214 333,708
----------- -----------
460,502 459,553
Goodwill, net............................................................. 243,160 247,353
Restricted Investments.................................................... 52,379 69,188
Notes Receivable, net..................................................... 16,667 16,792
Other Assets.............................................................. 38,283 40,429
------------ -----------
$ 1,266,248 $ 1,274,971
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable and current maturities of long-term debt............. $ 2,043,931 $ 2,028,226
Accounts payable................................................... 133,513 134,829
Accrued payroll and related expenses............................... 127,474 111,395
Accrued interest................................................... 80,748 49,317
Other accrued expenses............................................. 68,117 63,804
----------- -----------
Total current liabilities........................................ 2,453,783 2,387,571
Long-Term Debt, net of current maturities................................. 111,149 113,618
Long-Term Insurance Reserves.............................................. 73,337 80,899
Deferred Income Taxes and Other Noncurrent Liabilities.................... 72,235 78,902
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, par value $.01; 5,000,000 shares authorized;
none issued...................................................... -- --
Common stock, par value $.01; 500,000,000 shares authorized;
73,695,081 shares issued......................................... 737 737
Capital surplus.................................................... 980,952 980,952
Accumulated deficit................................................ (2,419,434) (2,361,393)
Accumulated other comprehensive loss............................... (6,511) (6,315)
----------- -----------
Total stockholders' deficit...................................... (1,444,256) (1,386,019)
----------- -----------
$ 1,266,248 $ 1,274,971
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Capital Accumulated Comprehensive
Shares Amount Surplus Deficit Loss Total
------- ------ ------- ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1999................ 73,695 $ 737 $980,952 $(2,361,393) $(6,315) $(1,386,019)
Comprehensive loss:
Net loss................................. -- -- -- (58,041) -- (58,041)
Unrealized losses on available-for-sale
securities............................ -- -- -- -- (196) (196)
-----------
Comprehensive loss......................... -- -- -- -- -- (58,237)
------ -------- -------- ----------- ------- -----------
Balance, December 31, 1999................. 73,695 $ 737 $980,952 $(2,419,434) $(6,511) $(1,444,256)
====== ======== ======== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)
(unaudited)
Three Months
Ended December 31,
------------------
1999 1998
---- ----
Cash Flows From Operating Activities:
Net loss.............................................. $(58,041) $(39,023)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 10,830 30,584
Interest accretion on Senior Notes.................. 5,593 4,981
Income taxes deferred............................... -- 500
Equity earnings/minority interest................... (790) 625
Provision for bad debts............................. 8,400 36,484
Loss on disposal of assets.......................... 923 --
Changes in noncash working capital:
Receivables......................................... (13,556) (36,348)
Supplies............................................ (108) (3,557)
Prepayments and other current assets................ (3,209) 23,751
Accounts payable.................................... (1,316) (5,458)
Accrued expenses and other current liabilities...... 57,036 (27,825)
Changes in long-term insurance reserves............... (7,562) (9,707)
Other................................................. (5,398) (12,840)
-------- --------
Net Cash Used In Operating Activities................... (7,198) (37,833)
Cash Flows From Investing Activities:
Purchases of property and equipment................... (11,910) (15,921)
Disposals of property, equipment and other assets..... 5,068 --
Restricted investments................................ 16,613 8,484
Net collections on notes receivable................... 155 4,063
Other................................................. -- (7,367)
-------- --------
Net Cash Provided By (Used In) Investing Activities..... 9,926 (10,741)
Cash Flows From Financing Activities:
Net draws under credit line........................... 12,702 67,000
Repayment of long-term debt........................... (10,272) (8,689)
Deferred financing fees............................... -- (7,313)
Other................................................. -- (435)
-------- --------
Net Cash Provided By Financing Activities............... 2,430 50,563
-------- --------
Increase in Cash and Cash Equivalents................... 5,158 1,989
Cash and Cash Equivalents, Beginning of Period.......... 71,817 3,314
-------- --------
Cash and Cash Equivalents, End of Period................ $ 76,975 $ 5,303
======== ========
The accompanying notes are an integral part of these financial statements.
4
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Organization and Basis of Presentation
Organization
Mariner Post-Acute Network, Inc. (the "Company") changed its name
effective August 1, 1998 from its former name, Paragon Health Network, Inc.
("Paragon"), following the consummation of the merger (the "Mariner Merger")
with Mariner Health Group, Inc. ("Mariner Health") on July 31, 1998 pursuant
to an agreement and plan of merger dated as of April 13, 1998 (the "Mariner
Merger Agreement"). The Company had previously changed its name from Living
Centers of America, Inc. ("LCA") to Paragon on November 4, 1997. At the time
of the Mariner Merger, Mariner Health operated long-term health care facilities
that provided skilled nursing and residential care services in 16 states and
comprehensive rehabilitation services. The Company was formed in November 1997
through the recapitalization by merger of LCA with a newly-formed entity owned
by certain affiliates of Apollo Management, L.P. and certain other investors
(the "Recapitalization Merger"), and the subsequent merger of GranCare, Inc.
("GranCare") with a wholly-owned subsidiary of LCA (the "GranCare Merger"
and collectively with the Recapitalization Merger, the "Apollo/LCA/GranCare
Mergers") pursuant to an agreement and plan of merger dated as of May 7, 1997,
as amended and restated as of September 17, 1997 (the "GranCare Merger
Agreement"). At the time of the GranCare Merger, GranCare operated long-term
health care facilities that provided skilled nursing and residential care
services in 15 states, a specialty hospital geriatric services company, and home
health operations. The accompanying unaudited condensed consolidated financial
statements include the accounts of the Company and its subsidiaries and all
significant intercompany accounts and transactions have been eliminated in
consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has experienced significant losses, has a working capital deficiency of
approximately $2.0 billion, and has a capital deficit of approximately $1.4
billion at December 31, 1999. In addition, the Company has violated certain
covenants of various loan agreements. On January 18, 2000, the Company, Mariner
Health and certain of their respective subsidiaries filed separate voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (referred to
herein as the "Chapter 11 Filings"). See Note 2.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments (which include normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended September 30,
2000. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended September
30, 1999 included in the Company's Annual Report filed with the Securities and
Exchange Commission on Form 10-K, file No. 1-10968.
Certain prior year amounts have been reclassified to conform with the
fiscal year 2000 presentation.
5
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Goodwill, net
Goodwill represents the excess of purchase price over fair market value of
assets acquired in various purchase transactions and is amortized on a straight-
line basis. The Company periodically reviews the goodwill and it is adjusted if
necessary. During the three months ended December 31, 1999, the Company revised
its estimate of the useful life of existing goodwill from 30 and 40 to 20 years.
The net effect of such change was a charge of $1.3 million or $0.02 per share,
which is included in the income statement classification "Depreciation and
Amortization Expense."
Recent Accounting Pronouncements
In March 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal-use software should be capitalized or expensed when incurred.
The Company adopted SOP 98-1 effective October 1, 1999. The adoption of SOP 98-1
did not affect results of operations or financial position.
In June 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides
guidance on the financial reporting of start-up costs. It requires costs of
start-up activities to be expensed as incurred. The Company adopted SOP 98-5
effective October 1, 1999. The adoption of SOP 98-5 did not effect results of
operations or financial position.
In June 1998 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. In
June 1999 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133" ("SFAS 137").
SFAS 137 deferred the effective date of SFAS 133 for one year which is now
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 will become effective in the Company's fiscal year ending September
30, 2001. The adoption of this statement is not expected to have a material
impact on the Company's financial statements.
NOTE 2. Going Concern and Issues Effecting Liquidity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses, has a working capital deficiency of
approximately $2.0 billion, and has a capital deficit of approximately $1.4
billion at December 31, 1999. In addition, as more fully described below, the
Company has violated certain covenants of various loan agreements. On January
18, 2000, the Company, Mariner Health and certain of their respective
subsidiaries filed separate voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the District of
Delaware. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management is in the process
of developing a plan of reorganization that will be submitted to the U.S.
Bankruptcy Court, the Company's and Mariner Health's creditors for their
approval. In the event the plan of reorganization is accepted, continuation of
the business thereafter is dependent on the Company's ability to achieve
successful future operations.
Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility (see Note 4)
and the Mariner Health Term Loan Facility (see Note 4) as of March 31, 1999,
June 30, 1999, September 30, 1999 and December 31, 1999. The Company has been
operating without a waiver of noncompliance for these credit facilities and
paying a default rate of interest of 200 basis points above the credit facility
rates. The maturity date of the Mariner Health Senior Credit Facility and the
Mariner Health
6
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Term Loan Facility was January 3, 2000, and therefore such debt is classified as
a current obligation of the Company at September 30, 1999 and December 31, 1999.
Mariner Health did not make the interest payments due on the Mariner Health
Senior Credit Facility and the Mariner Health Term Loan Facility (see Note 4).
Mariner Health did not make the interest payment due October 1, 1999 on the
Mariner Notes (see Note 4).
The Company obtained a waiver under the Senior Credit Facility (see Note 4)
with respect to certain financial covenant defaults existing at March 31, 1999.
However, at June 30, 1999, September 30, 1999 and December 31, 1999, the Company
was not in compliance with certain financial covenants under the Senior Credit
Facility, and such default has not been waived. The Company did not make the
scheduled interest and principal payments due on or subsequent to November 19,
1999 on its Senior Credit Facility (see Note 4). Due to the covenant violations,
the Company is not permitted to borrow additional cash under the Senior Credit
Facility. The Company did not make the interest payment due November 1, 1999 on
the Senior Subordinated Note (see Note 4).
The Company has also defaulted on certain covenants relating to the
Deficiency Note, Omega Note and various agreements with HRPT (see Note 4).
Except as may be otherwise determined by the Bankruptcy Court overseeing
the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11
Filings prevents any creditors or other third parties from taking any action in
connection with any defaults under prepetition obligations of the Company and
those of its subsidiaries which are debtors in the Chapter 11 Filings. In
connection with the Chapter 11 Filings, the Company must develop a plan of
reorganization that will be approved by its creditors, including those described
above and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11
Filings.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan Bank.
On January 28, 2000 the Bankruptcy Court approved an interim order (the "Company
Interim DIP Order") approving up to $50.0 million of the Company DIP Financing.
Another hearing was scheduled on February 16, 2000 for consideration of a final
order (the "Final Company DIP Order,") approving the full $100.0 million amount
of the Company DIP Financing. The final hearing was adjourned until March 20,
2000, to allow additional time for the Company and certain of its creditors to
resolve technical issues relating to the Company DIP Financing. Also as of
February 16, 2000, the Company had made no borrowings under the Company DIP
Credit Agreement. Mariner Health also obtained a commitment for $50 million in
DIP financing from a group of banks led by PNC Bank (the "Mariner Health DIP
Financing"; together with the Company DIP Financing, the "DIP Financings").
After a final hearing on February 16, 2000 the Bankruptcy Court entered an order
granting final approval of the full $50.0 million of the Mariner Health DIP
Financing (the "February 16 Mariner Health DIP Order", and together with the
Mariner Health Initial DIP Order, the Mariner Health DIP Orders").
The accompanying unaudited condensed consolidated financial statements have
been prepared on the basis of accounting principles applicable to going concerns
and contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. 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
classifications of liabilities that may result from the outcome of these
uncertainties. In addition, since the Company filed for protection under the
Bankruptcy Code subsequent to December 31, 1999, the accompanying condensed
consolidated financial statements have not been prepared in accordance with SOP
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code," ("SOP 90-7") and do not include disclosures of liabilities subject to
compromise. Financial statements prepared subsequent to the filings under
Chapter 11 will be prepared reflecting such amounts subject to compromise.
7
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NOTE 3. Indirect Merger and Other Expenses
For the three months ended December 31, 1999, indirect merger and other
costs total approximately $8.0 million and include approximately $5.5 million of
costs incurred to outside professionals related to the Company's defaults in
connection with its indebtedness, approximately $1.8 million of costs incurred
and paid related to the Mariner Health Merger and $0.7 million of other
expenses.
For the three months ended December 31, 1998, indirect merger and other
costs total approximately $2.0 million related to the Mariner Health Merger.
NOTE 4. Debt
Long-term debt at December 31, 1999 is summarized in the following table
(in thousands):
<TABLE>
<S> <C>
Senior Debt:
Senior Credit Facilities:
Revolving Credit Facility............................. $ 168,732
Term Loans............................................ 743,000
Mariner Health Senior Credit Facility................. 233,813
Mariner Health Term Loan Facility..................... 192,439
Deficiency Note........................................ 26,486
Mortgage notes (6% to 11% due through 2014)............ 47,778
Other notes payable (8% to 10% due through 2008)....... 82,469
Subordinated Debt:
Senior Subordinated Notes (due 2007)................... 274,039
Senior Subordinated Discount Notes (due 2007).......... 215,285
Mariner Health Senior Subordinated Notes (due 2006).... 103,130
----------
2,087,171
Obligations under capital leases........................ 67,909
----------
2,155,080
Less short-term notes payable and current portion....... 2,043,931
----------
Total long-term debt.................................... $ 111,149
==========
</TABLE>
Senior Credit Facility
The Senior Credit Facility consists of four components: a 6 1/2 year term
loan facility in an aggregate principal amount of $315 million (the "Tranche A
Term Loan Facility"); a 7 1/2 year term loan facility in an aggregate principal
amount of $250 million (the "Tranche B Term Loan Facility"); an 8 1/2 year term
loan facility in an aggregate principal amount of $250 million (the "Tranche C
Term Loan Facility"); and a 6 1/2 year revolving credit facility in the maximum
amount of $175 million (the "Revolving Credit Facility"). Loans made under the
Tranche A Term Loan Facility ("Tranche A Term Loans"), the Tranche B Term Loan
Facility ("Tranche B Term Loans") and the Tranche C Term Loan Facility ("Tranche
C Term Loans") are collectively referred to herein as "Term Loans." Advances
under the Revolving Credit Facility are sometimes referred to as "Revolving
Loans." The proceeds from borrowings under the Term Loans were used, along with
the proceeds of the Notes offering, to fund a portion of the Recapitalization
Merger, refinance a significant portion of LCA's and GranCare's pre-merger
indebtedness, and to pay costs and expenses associated with the
Apollo/LCA/GranCare Mergers.
As of December 31, 1999, outstanding indebtedness under the Revolving
Credit Facility was $168.7 million which excluded $5.5 million of letters of
credit. In addition, $271.4 million of the Tranche A Term Loan Facility, $235.8
million of the Tranche B Term Loan Facility, and $235.8 million of the Tranche C
Term Loan Facility were outstanding.
8
<PAGE>
The aggregate principal amounts of the Tranche A Term Loans and the
Revolving Credit Facility reflect increases to those facilities of $75.0 million
and $25.0 million, respectively, as part of the First Amendment to the Senior
Credit Facility effective on July 31, 1998 (the "July 1998 Amendments"), in
connection with the consummation of the Mariner Merger. As a result of the July
1998 Amendments, aggregate amortization of the Term Loans increased to the
following approximate quarterly amounts: $8.4 million (formerly $6.6 million),
$15.8 million (formerly $12.3 million), $16.6 million (formerly $12.9 million),
$16.6 million (formerly $12.9 million), $18.2 million (formerly $14.1 million),
$48.5 million (formerly $46.5 million), $59.8 million (unchanged) and $20.0
million (unchanged) in fiscal years 1999 through 2006, respectively. Principal
amounts outstanding under the Revolving Credit Facility will be due and payable
in April 2005.
Interest on outstanding borrowings under the Revolving Credit Facility
accrue, at the option of the Company, at the Alternate Base Rate (the "ABR") of
The Chase Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the
"Eurodollar Rate") plus, in each case, an Applicable Margin. The term
"Applicable Margin" means a percentage that will vary in accordance with a
pricing matrix based upon the respective term loan tenor and the Company's
leverage ratio.
Prior to the effectiveness of the December 22, 1998 amendment to the Senior
Credit Facility (the "December 1998 Amendment"), the Applicable Margins for the
Revolving Credit Facility and the Tranche A Term Loan Facility in the pricing
matrix ranged from 0% to 1.25% for ABR loans and 0.08% to 1.25% for loans under
the Eurodollar rate. The applicable interest rate margin for Tranche B Term
Loans was 1.50% for loans under the ABR and 2.50% for Eurodollar loans. The
applicable interest rate margin for Tranche C Term Loans was 1.75% for loans
under the ABR and 2.75% for Eurodollar loans. Immediately prior to the December
1998 Amendment, the Applicable Margins for ABR Loans and Eurodollar Loans under
the Revolving Credit Facility and the Tranche A Term Loan Facility were 1.25%
and 2.25%, respectively.
Following the December 1998 Amendment, the Applicable Margins in the
pricing matrix pertaining to the Revolving Credit Facility and Tranche A Term
Loans range from 0.25% to 1.25% for ABR loans and 1.75% to 2.75% for loans under
the Eurodollar. The applicable interest rate margin for Tranche B Term Loans is
2.25% for loans under the ABR and 3.25% for Eurodollar loans. The applicable
interest rate margin for Tranche C Term Loans is 2.25% for loans under the ABR
and 3.50% for Eurodollar loans.
In connection with the May 11, 1999 amendment (the "May 1999 Amendment") to
the Senior Credit Facility, all of the Applicable Margins were increased by 50
basis points. Following the May 1999 Amendment, the Applicable Margins in the
pricing matrix pertaining to Revolving Loans and Tranche A Term Loans ranged
from 0.75% to 1.75% for ABR loans and 2.25% to 3.25% for Eurodollar based loans.
The applicable interest rate margin for Tranche B Term Loans was 2.75% for loans
under the ABR and 3.75% for Eurodollar loans. The applicable interest rate
margin for Tranche C Term Loans was 3.00% for loans under the ABR and 4.00% for
Eurodollar loans.
As a result of certain continuing defaults, all loans made under the Senior
Credit Facility converted to ABR based loans during the three month period
ending December 31, 1999. Additionally, as of December 31, 1999, the interest
rates for loans made under the Senior Credit Facility were as follows: for
Revolving Loans and Tranche A Term Loans, 10.25%; for Tranche B Term Loans,
11.25%; and for Tranche C Term Loans, 11.75%.
The Senior Credit Facility contains customary covenants which, among other
things, require maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock. The Company obtained a waiver
under the Senior Credit Facility with respect to certain financial covenant
defaults existing at March 31, 1999. At December 31, 1999, the Company was in
violation of all financial covenants. In addition, in order to conserve its
liquidity, the Company did not make the November 1999 interest payments due on
the Senior Credit Facility. The lenders under the Senior Credit Facility signed
a forbearance agreement, pursuant to which they agreed not to take any remedial
action with respect to events of default (including acceleration of their debt),
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subject to no new events of default occurring. The forbearance agreement did
not waive any events of default, and it expired by its terms. Based on the
financial covenant defaults and Chapter 11 Filings described in Note 2 the
Senior Credit Facility is classified as a current obligation at December 31,
1999. Due to the covenant violations, the Company is not permitted to borrow
additional cash under the Senior Credit Facility.
Senior Subordinated Notes
Also in connection with the Apollo/LCA/GranCare Mergers, on November 4,
1997 the Company completed a private offering to institutional investors of $275
million of its 9.5% Senior Subordinated Notes due 2007, at a price of 99.5% of
face value and $294 million of its 10.5% Senior Subordinated Discount Notes due
2007, at a price of 59.6% of face value (collectively, the "Notes"). Interest on
the Senior Subordinated Notes is payable semi-annually. Interest on the Senior
Subordinated Discount Notes will accrete until November 1, 2002 at a rate of
10.57% per annum, compounded semi-annually, and were to be cash pay at a rate of
10.5% per annum thereafter. The Notes will mature on November 1, 2007. The
Company did not make the scheduled interest payment of approximately $13.2
million due on the Senior Subordinated Notes in November 1999 and such default
was not cured within the applicable grace period. Due to the defaults and the
Chapter 11 Filings described in Note 2, the Senior Subordinated Notes and Senior
Subordinated Discount Notes are classified as current obligations at December
31, 1999.
Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility
Mariner Health was the borrower under a $460.0 million senior secured
revolving loan facility (the "Mariner Health Senior Credit Facility"), by and
among Mariner Health, the lenders signatory thereto (the "Mariner Health
Lenders"), and PNC Bank, National Association, as agent for the Mariner Health
Lenders (the "Mariner Health Agent"). The borrowing availability and rate of
interest varied depending upon specified financial ratios, with applicable
interest rate margins ranging between 0% and 0.25% for prime-base borrowings,
and between 0.50% and 1.75% for Eurodollar-based advances. As a result of
certain continuing defaults, all loans made under the Mariner Health Senior
Credit Facility have converted to ABR based loans from Eurodollar based loans
and accrue interest at the default rate of interest. As of December 31, 1999,
the interest rate for loans made under the Mariner Health Senior Credit Facility
was 11.75%.
Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
to (a) reduce the amount of the revolving commitment from $460 million to $250
million, (b) to provide additional financial covenant flexibility for Mariner
Health and its subsidiaries, (c) to increase the applicable interest rate
margins so that they range from 0.25% to 1.25% for prime-based loans, and from
1.75% to 2.75% for Eurodollar-based advances, (d) to modify certain of the
operating covenants referred to in the immediately preceding paragraph, and (e)
to expand the amount and types of collateral pledged to secure the Mariner
Health Senior Credit Facility. Immediately after giving effect to the Mariner
Health Senior Credit Facility Amendment, the applicable interest rate margin for
prime-based advances increased to 0.75%, and the applicable interest rate margin
for Eurodollar-based borrowings increased to 2.25%. Accordingly, the applicable
interest rates on prime-based loans were initially 7.8%, and for Eurodollar-
based advances, 7.6%. The Mariner Health Senior Credit Facility terminated on
January 3, 2000, without the scheduled maturity payment being made.
Mariner Health's obligations under the Mariner Health Senior Credit
Facility are guaranteed by substantially all of its subsidiaries. The Mariner
Health Senior Credit Facility and related guarantees are secured by pledges of
the stock of substantially all of Mariner Health's direct and indirect
subsidiary guarantors, by mortgages on all wholly owned, unencumbered inpatient
facilities of Mariner Health and its subsidiaries, by leasehold mortgages on
certain inpatient facilities leased by Mariner Health or its subsidiaries, and
by security interests in substantially all other property and assets of Mariner
Health and its subsidiaries. As the owner of 100% of the capital stock of
Mariner Health, the Company has pledged such capital stock to Chase as
additional
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collateral to secure the Company's obligations in connection with the Senior
Credit Facility and the Synthetic Lease.
Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of the same date (the "Mariner Term Loan Agreement") with PNC Bank, as
administrative agent, First Union National Bank, as syndication agent, and the
financial institutions signatory thereto as lenders (the "Term Lenders"),
pursuant to which the Term Lenders made a $210 million senior secured term loan
to Mariner Health (the "Mariner Health Term Loan"). Proceeds of the Mariner
Health Term Loan were applied to reduce loan amounts under the Mariner Health
Senior Credit Facility in connection with the Mariner Health Senior Credit
Facility Amendment. The interest rate pricing and covenants contained in the
Mariner Health Term Loan Agreement are substantially similar to the
corresponding provisions of the Mariner Health Senior Credit Facility, as
amended by the Mariner Health Senior Credit Facility Amendment. The Mariner
Health Term Loan matured on January 3, 2000, is guaranteed by the same
subsidiary guarantors as the Mariner Health Senior Credit Facility, and is
cross-defaulted and cross-collateralized with the Mariner Health Senior Credit
Facility. As of December 31, 1999, approximately $233.8 million of loans and
$8.1 million of letters of credit were outstanding under the Mariner Health
Senior Credit Facility, and $192.4 million of the Mariner Health Term Loan was
outstanding. The Mariner Health Senior Credit Facility matured on January 3,
2000.
Mariner Health and its subsidiaries are treated as unrestricted
subsidiaries under the Senior Credit Facility. Unlike subsidiaries of the
Company other than Mariner Health and its subsidiaries (the "Non-Mariner
Subsidiaries"), Mariner Health and its subsidiaries neither guarantee the
Company's obligations under the Senior Credit Facility nor pledge their assets
to secure such obligations. Correspondingly, the Company and the Non-Mariner
Subsidiaries do not guarantee or assume any obligations under the Mariner Health
Senior Credit Facility. Mariner Health and its subsidiaries are not subject to
the covenants contained in the Senior Credit Facility, and the covenants
contained in the Mariner Senior Credit Facility are not binding on the Company
and the Non-Mariner Subsidiaries. Mariner Health and the Mariner Health
subsidiaries are obligated to continue to comply with the covenants contained in
the Mariner Health Senior Credit Facility without taking into account the
revenues, expenses, net income, assets or liabilities of the Company and the
Non-Mariner Subsidiaries. The converse is true with respect to the Company,
which (together with its Non-Mariner Health Subsidiaries) must continue to
comply with the covenants contained in its Senior Credit Facility without taking
into account the revenues, expenses, net income, assets or liabilities of
Mariner Health and its subsidiaries.
Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility and in the
Mariner Health Term Loan Facility as of March 31, 1999, and again as of June 30,
1999, September 30, 1999 and December 31, 1999. In addition, Mariner Health
failed to make its October 1, 1999 interest payments due on the Mariner Health
Senior Credit Facility and on the Mariner Health Term Loan Facility within the
applicable grace period, although it was ultimately able to satisfy such
obligations through amendments to those credit facilities which permitted cash
collateral held by the Collateral Agent to be applied for such purpose. Finally,
Mariner Health did not make the required payments with regard to the Mariner
Health Term Loan and Mariner Health Senior Credit Facility at their respective
January 3, 2000 maturity dates.
Mariner Health Senior Subordinated Notes
Mariner Health is also the issuer of $150.0 million of 9 1/2% Senior
Subordinated Notes due 2006 (the "Mariner Notes") which were issued pursuant to
an indenture dated as of April 4, 1996 (the "Mariner Indenture") with Mariner
Health as issuer and State Street Bank and Trust Company as trustee (the
"Mariner Trustee"). The Mariner Notes are obligations solely of Mariner Health
and are not guaranteed by the Company or any of its subsidiaries (other than
Mariner Health). Because of the existing, unwaived financial covenant defaults
under the Mariner Health Senior Credit Facility and the Mariner Health Term Loan
Facility, the agents under such facilities gave notice to Mariner Health and the
Mariner Trustee that they were instituting a 179-day payment blockage period,
during which no payments of debt service on the Mariner Notes could be made.
Accordingly, Mariner Health did not make the scheduled $7.1 million interest
payment due on the Mariner Notes on October 1, 1999.
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The 30-day grace period having expired without such interest being paid, an
event of default exists under the Mariner Indenture. The Mariner Health Senior
Subordinated Notes are classified as current obligations at December 31, 1999.
Approximately $46.7 million of the Mariner Notes are owned by the Company. See
"-Deficiency Note" below.
Deficiency Note
As a consequence of the Mariner Merger and the resulting change of control
at Mariner Health, the holders of the Mariner Notes had the right under the
Mariner Indenture to require that their Mariner Notes be purchased (the "Change
of Control Purchase") at a purchase price equal to 101% of the outstanding
principal amount of the Mariner Notes purchased. Effective on September 11,
1998, Mariner Health and the Mariner Trustee entered into an amendment to the
Mariner Indenture which permitted Mariner Health to designate a third-party to
purchase any Mariner Notes tendered pursuant to the Change of Control Purchase.
Mariner Health designated NationsBank, N.A. (n/k/a Bank of America, N.A., and
herein referred to as "Bank of America") as a third-party purchaser, and on
September 21, 1998 Bank of America acquired all $40,661,000 of the Mariner Notes
tendered in connection with the Change of Control Purchase (the "Tendered
Mariner Notes"). In agreeing to act as third-party purchaser, Bank of America
required the Company to enter into a total return swap agreement (the "Total
Return Swap"), with the financial institution as counterparty. See "Quantitative
and Qualitative Disclosures about Market Risk." The Company's obligations under
the Total Return Swap were guaranteed by Mariner Health and substantially all of
the subsidiaries of Mariner Health. During the quarter ended December 31, 1998,
an additional $6.0 million of the Mariner Notes were acquired by Bank of America
and made a part of the Total Return Swap.
The Total Return Swap terminated by its terms on August 16, 1999. Based on
the bids for the Tendered Mariner Notes solicited by Bank of America pursuant to
the Total Return Swap Agreement, the market value of the Tendered Mariner Notes
for purposes of unwinding the Total Return Swap was determined to be
approximately $0.7 million, resulting in capital depreciation of approximately
$46.5 million being owed by the Company. The Company was the winning bidder in
the auction for the Tendered Mariner Notes. On the August 16, 1999 termination
date, Bank of America applied $15.0 million drawn by it under a letter of credit
issued pursuant to the Mariner Health Senior Credit Facility and applied $5.0
million of cash collateral previously posted by Mariner Health, to satisfy $20.0
million of the total amount owed to Bank of America under the Total Return Swap,
leaving a net deficiency of approximately $26.5 million (the "Net Total Return
Swap Deficiency").
Effective August 16, 1999, Bank of America and the Company incorporated the
Net Total Return Swap Deficiency into a promissory note (the "Deficiency Note")
which generally matures and is payable as to principal and interest on the same
terms as the notes evidencing the Revolving Loans. The guarantee of the Total
Return Swap obligations of the Company by Mariner Health and its subsidiary
guarantors remains in place. Bank of America also waived any default arising
from any failure to be paid the Net Deficiency on the termination date of the
Total Return Swap, in return for the lenders under the Senior Credit Facility
amending the Senior Credit Facility to acknowledge the Deficiency Note as
permitted indebtedness and as an "Obligation" that is secured on a pari passu
basis with the indebtedness outstanding under the Senior Credit Facility. The
$46.7 of Mariner Notes acquired by Mariner Post-Acute Network, Inc. in
connection with the unwinding of the Total Return Swap remain outstanding as an
obligation of Mariner Health.
The Company did not make the scheduled November 1999 interest payments due
under the Deficiency Note. The terms of the Deficiency Note provide that the
forbearance by the lenders under the Senior Credit Facility with respect to the
failure to pay interest and certain other defaults under the Senior Credit
Facility automatically bind the holder of the Deficiency Note as well. The
forbearance period expired on January 14, 2000. The Deficiency Note is
classified as a current obligation at December 31, 1999.
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Other Significant Indebtedness
The Company and its GranCare, Inc. subsidiary are parties to an agreement
with Omega Healthcare Investors, Inc. ("Omega"). A wholly-owned subsidiary of
the Company, Professional Health Care Management, Inc. ("PHCMI"), is the
borrower under a $58.8 million mortgage note executed on August 14, 1992 (the
"Omega Note") in favor of Omega, and under a loan agreement dated as of June 7,
1992 as amended (the "Omega Loan Agreement"). All $58.8 million was outstanding
as of December 31, 1999.
The Omega Note bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by 58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Note for the prior calendar year. The current interest rate is 15.5% per annum
which is paid monthly. Additional interest accrues on the outstanding principal
of the Omega Note at the rate of 1% per annum. Such interest is compounded
annually and is due and payable on a pro rata basis at the time of each
principal payment or prepayment.
In addition to the interest on the Omega Note described in the preceding
paragraph, and as a condition to obtaining Omega's consent to a February 1997
transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI agreed
to pay additional interest to Omega in the amount of $20,500 per month, through
and including July 1, 2002. If the principal balance of the Omega Note for any
reason becomes due and payable prior to that date, there will be added to the
indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus (ii) interest
thereon at 11% per annum to the prepayment date; less (iii) the amount of such
additional interest paid to Omega prior to the prepayment date.
Beginning October 1, 2002, quarterly amortizing installments of principal
in the amount of $1.5 million will also become due and payable on the first day
of each calendar quarter. The entire outstanding principal amount of the Omega
Note is due and payable on August 13, 2007. The Omega Note may be prepaid
without penalty during the first 100 days following August 14, 2002.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10 million, which may be increased or
decreased under certain circumstances but may not be less than $10 million. The
Company's subsidiary GranCare, Inc. must contribute additional equity to PHCMI,
if and when necessary, to assure that such minimum tangible net worth test is
met. PHCMI and GranCare received notice from Omega asserting that PHCMI was in
default of its obligation to maintain its required minimum tangible net worth.
Omega demanded that such default be cured within 30 days, either by PHCMI or by
GranCare under its guaranty of PHCMI's compliance with such minimum tangible net
worth test, or else an event of default would exist under the Omega loan
documents. The Company received notice in late December 1999, declaring an event
of default as a result of the alleged breach of the tangible net worth covenants
contained in the Omega Loan Documents and accelerating all amounts due under
obligations to Omega. Effective January 2000, PHCMI ceased making its monthly
interest payments on the Omega Note. Omega subsequently initiated foreclosure
proceedings on three skilled nursing facilities located in North Carolina.
Hearings on the foreclosures were scheduled for February 3, 2000, but were not
held as a result of the automatic stay resulting from the Chapter 11 Filings. At
December 31, 1999, the Omega Note is classified as a current obligation.
The Company, through its GranCare subsidiaries, is a party to various
agreements between GranCare and Health and Retirement Properties Trust ("HRPT").
HRPT is the lessor with respect to certain facilities leased by two subsidiaries
of GranCare (the "Tenant Entities"). HRPT has an unlimited guaranty by the
Company and all subsidiaries of the Company having an ownership interest in
Tenant Entities which guaranty is secured by a cash collateral deposit of $15
million, the earned interest on which is retained by HRPT. The performance by
the Tenant Entities of their respective obligations to HRPT continues to be
secured by a pledge of one million shares of HRPT common stock beneficially
owned by GranCare. The Company does not have the ability to sell these shares to
meet any capital requirements. During the Fall of 1999, HRPT spun off its health
care portfolio,
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including the facilities operated by the Tenant Entities, into a new publicly-
traded company, SPTMNR Properties Trust ("SPTMNR"), which has succeeded to the
interests of HRPT under the HRPT Agreements. References to HRPT herein are
deemed to include SPTMNR in such capacity.
Debtor-in-Possession Financing for the Company.
Among the orders entered by the Bankruptcy Court on the Petition Date in
the Company's Chapter 11 case were orders approving on an interim basis (a) the
use of cash collateral by the Company and those of its subsidiaries which had
filed petitions for reorganization under Chapter 11 of the Bankruptcy Code
(excluding Mariner Health and the direct and indirect subsidiaries of Mariner
Health, the "Company Debtors"), and (b) the funding of up to $25.0 million in
principal amount at any time outstanding under a debtor-in-possession financing
arrangement (the "Company DIP Financing") established pursuant to that certain
Revolving Credit and Guaranty Agreement dated as of January 18, 2000 (the
"Petition Date") (as amended from time to time, the "Company DIP Credit
Agreement") by and among the Company, as borrower, the other Company Debtors, as
guarantors, the lenders signatory thereto as lenders (the "Company DIP
Lenders"), and The Chase Manhattan Bank, as Administrative Agent, Documentation
Agent and Collateral Agent (the "Company DIP Agent"). On January 28, 2000 the
Bankruptcy Court approved an interim order (the "Company Interim DIP Order") to
increase the approved portion of the Company DIP Financing to $50.0 million.
Another hearing is scheduled on March 8, 2000 for consideration of a final order
(the "Final Company DIP Order,") approving the full $100.0 million amount of the
Company DIP Financing. The final hearing was adjourned until March 20, 2000, to
allow additional time for the Company and certain of its creditors to resolve
technical issues relating to the Company DIP Financing. As of February 16, 2000
the Company had made no borrowings under the Company DIP Credit Agreement.
The Company DIP Credit Agreement establishes a one-year, $100.0 million
secured revolving credit facility to provide funds for working capital and other
lawful corporate purposes for use by the Company and the other Company Debtors;
provided, however, that amounts outstanding under the Company DIP Financing may
not at any time exceed the maximum borrowing amounts established for the Company
under the initial DIP order (the "Company Initial DIP Order"), the Company
Interim DIP Order or the Final DIP Order (collectively, the "Company DIP
Orders"), as the case may be, or the Company's borrowing base of eligible
accounts receivable (the "Company Borrowing Base"). Up to $10.0 million of the
Company DIP Financing may be utilized for the issuance of letters of credit as
needed in the businesses of the Company Debtors. Interest accrues on the
principal amount outstanding under the Company DIP Financing at a per annum rate
of interest equal to the ABR of Chase, plus three percent (3%) and is payable
monthly in arrears. During the existence and continuation of a default in the
payment of any amount due and payable by the Company Debtors under the Company
DIP Credit Agreement, interest will accrue at the default rate of ABR plus five
percent (5%) per annum.
The outstanding principal of the Company DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, are due and
payable one year from the Petition Date or, if earlier, on the Prepayment Date.
The term, "Prepayment Date," was originally defined as the first business day
which is at least 30 days after the entry of the Company First Day DIP Order, if
the Company Final DIP Order has not been entered, but was amended to March 22,
2000 to accommodate the adjournment of the hearing on the Final Company DIP
Order to March 20, 2000. The Company must also prepay principal to the extent
that the principal amount outstanding under the Company DIP Financing at any
time exceeds the Borrowing Base then in effect. To the extent proceeds of loans
under the Company DIP Financing are used to complete the construction of certain
healthcare facilities that are part of the Synthetic Lease (which proceeds are
not permitted to exceed $8.8 million), proceeds from the sale of any such
properties must be used first to repay any portion of the loans made pursuant to
the Company DIP, with 75% of any remaining net cash proceeds to be applied as an
adequate protection payment to the lenders under the Senior Credit Facility, and
the remaining 25% of such excess net cash proceeds to be retained by the Company
or its applicable subsidiary as additional working capital. Pursuant to the
terms of the Initial DIP Order, 75% of the net cash proceeds of other asset
sales approved by the Bankruptcy Court and the requisite Company DIP Lenders are
to be applied as an adequate protection payment to the lenders under the
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prepetition Senior Credit Facility. The Company has the right to make optional
prepayments in increments of $1.0 million, and to reduce the commitment under
the Company DIP Credit Agreement in increments of $5.0 million.
The obligations of the Company under the Company DIP Credit Agreement are
jointly and severally guaranteed by each of the other Company Debtors pursuant
to the Company DIP Agreement. Under the terms of the Initial Company DIP Order,
the obligations of the Company Debtors under the Company DIP Credit Agreement
(the "Company DIP Obligations") constitute allowed superpriority administrative
expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to
a carve-out for certain professional fees and expenses incurred by the Company
Debtors). The Company DIP Obligations will be secured by perfected liens on all
or substantially all of the assets of the Company Debtors (excluding bankruptcy
causes of action), the priority of which liens (relative to prepetition
creditors having valid, non-avoidable, perfected liens in those assets and to
any "adequate protection" liens granted by the Bankruptcy Court) is established
in the Initial Company DIP Order and the related cash collateral order entered
by the Bankruptcy Court (the "Initial Company Cash Collateral Order"). The
Bankruptcy Court has also granted certain prepetition creditors of the Company
Debtors replacement liens and other rights as "adequate protection" against any
diminution of the value of their existing collateral that may result from
allowing the Company Debtors to use cash collateral in which such creditors had
valid, non-avoidable and perfected liens as of the Petition Date. The discussion
contained in this paragraph is qualified in its entirety by reference to the
Interim Company DIP Order, the Initial Company Cash Collateral Order, and
related stipulations, and reference should be made to such orders (which are
available from the Bankruptcy Court) and stipulations for a more complete
description of such terms.
The Company DIP Credit Agreement contains customary representations,
warranties and covenants of the Company Debtors, as well as certain financial
covenants relating to minimum EBITDA, maximum capital expenditures, and minimum
patient census. The breach of such representations, warranties or covenants, to
the extent not waived cured within any applicable grace or cure periods, could
result in the Company being unable to obtain further advances under the Company
DIP Financing and possibly the exercise of remedies by the Company DIP Lenders,
either of which events could materially impair the ability of the Company to
successfully reorganize in Chapter 11.
Debtor-in-Possession Financing for Mariner Health.
Among the orders entered by the Bankruptcy Court on the Petition Date in
the Chapter 11 cases of Mariner Health and its subsidiaries (the "Mariner Health
Debtors"), were orders approving (a) the use of cash collateral by the Mariner
Health Debtors, and (b) the funding of up to $15.0 million in principal amount
at any time outstanding under a debtor-in-possession financing arrangement (the
"Mariner Health DIP Financing" and together with the Company DIP Financing, the
"DIP Financings") pursuant to that certain Debtor-in-Possession Credit Agreement
dated as of January 20, 2000 (as amended from time to time, the "Mariner Health
DIP Credit Agreement") by and among Mariner Health and each of the other Mariner
Health Debtors, as co-borrowers thereunder, the lenders signatory thereto as
lenders (the "Mariner Health DIP Lenders"), First Union National Bank, as
Syndication Agent, PNC Capital Markets, Inc. and First Union Securities, Inc.,
as co-arrangers, and PNC Bank, National Association, as Administrative Agent and
Collateral Agent. After a final hearing on February 16, 2000 the Bankruptcy
Court entered an order granting final approval of the full $50.0 million of the
Mariner Health DIP Financing (the "February 16 Mariner Health DIP Order," and
together with the Mariner Health Initial DIP Order, the "Mariner Health DIP
Orders").
The Mariner Health DIP Credit Agreement establishes a one-year, $50.0
million secured revolving credit facility, which is divided into two tranches -
a $40.0 million tranche A commitment, and a $10.0 million tranche B commitment.
The tranche B loan commitment is not activated unless and until the holders of
at least 75% of the Mariner Health DIP Financing loans or commitments so
approve. Advances under the Mariner Health DIP Financing may be used by the
Mariner Health Debtors (and to a limited degree, by certain joint venture
subsidiaries of Mariner Health that are not debtors in the Mariner Health
Chapter 11 cases) for working capital and other lawful corporate purposes.
Amounts outstanding under the Mariner Health DIP Financing may not at any
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time exceed the maximum borrowing amounts established for the Mariner Health
Debtors under the initial DIP order (the "Mariner Health Initial DIP Order") or
the DIP order entered on February 16, 2000 by the Bankruptcy Court (the
"February 16 Mariner Health DIP Order," and collectively with the Initial
Mariner Health DIP Order, the "Mariner Health DIP Orders"), as the case may be.
Up to $5.0 million of the Mariner Health DIP Financing may be utilized for the
issuance of letters of credit as needed in the businesses of the Mariner Health
Debtors. As of February 22, 2000 $1.0 million was outstanding under the
Mariner Health DIP Financing.
Interest accrues on the principal amount outstanding under the Mariner
Health DIP Financing at a per annum rate of interest equal to the "base rate" of
PNC Bank (i.e., the higher of the PNC Bank prime rate or a rate equal to the
federal funds rate plus 50 basis points) plus the applicable spread, which is
250 basis points for tranche A and 300 basis points for tranche B. Such interest
is due and payable monthly in arrears. During the existence and continuation of
any event of default under the Mariner Health DIP Credit Agreement, the interest
rates normally applicable to tranche A loans and tranche B loans under the
Mariner Health DIP Financing will be increased by another 250 basis points per
annum.
The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable in one year or, if earlier, on the Commitment Termination Date.
The term, "Commitment Termination Date," is defined as the first to occur of the
following: (i) the first anniversary of the Petition Date, (ii) the effective
date of a joint plan of reorganization for the Mariner Health Debtors, (iii) the
date of termination of the exclusivity rights of the Mariner Health Debtors to
file a plan of reorganization, (iv) the filing by the Mariner Health Debtors of
any plan of reorganization (or the modification of any such plan previously
filed with the Bankruptcy Court) not previously approved by the holders of at
least 66-2/3% of the outstanding loans or commitments under the Mariner Health
DIP Financing, (v) the date of termination of the commitments under the Mariner
Health DIP Credit Agreement during the continuation of an event of default
thereunder, (vi) 30 days after the Petition Date if the February 16 Mariner
Health DIP Order has not been entered (which deadline is subject to extension at
the discretion of the holders of at least 66-2/3% of the outstanding loans or
commitments under the Mariner Health DIP Financing), or (vii) the date on which
all or substantially all of the assets or stock of the Mariner Health Debtors is
sold or otherwise transferred. The Mariner Health Debtors must also prepay
principal to the extent that the principal amount outstanding under the Mariner
Health DIP Financing at any time exceeds the Borrowing Base then in effect. The
Mariner Health Borrowing Base for any month is an amount equal to $7.5 million
in excess of the "Working Capital Facility" borrowings projected for such month
in Mariner Health's year 2000 DIP budget. The Mariner Health DIP Credit
Agreement also provides for mandatory prepayments under the following
circumstances: (i) with net cash proceeds from asset sales, the incurrence of
certain debt, the issuance of new equity, the receipt of tax refunds exceeding
$100,000 in the aggregate, and the receipt of casualty proceeds in excess of
$100,000 that are not applied within 60 days after receipt to the repair,
rebuilding, restoration or replacement of the assets damaged or condemned (or
committed within such period of time to be so applied); and (ii) on each
business day, the amount of cash held by the Mariner Health Debtors in excess of
the sum of $5.0 million plus the aggregate sum of the minimum amount required by
depositary banks to be kept in deposit accounts, concentration accounts and
other with such banks. Amounts prepaid pursuant to clause (i) of the immediately
preceding sentence will permanently reduce the amount of the Mariner Health DIP
Financing commitments on a dollar-for-dollar basis (first tranche A, and then
tranche B). Amounts prepaid pursuant to clause (ii) of the same sentence will
not permanently reduce such commitments. The Mariner Health Debtors have the
right to make optional prepayments in the minimum principal amount of $1.0
million, and in increments of $100,000 in excess thereof, and, on three business
days' notice, to reduce the commitments under the Mariner Health DIP Credit
Agreement in the minimum amount of $5.0 million, or in increments of $1.0
million in excess thereof.
Under the terms of the Mariner Health DIP Orders, the obligations of the
Mariner Health Debtors under the Mariner Health DIP Credit Agreement (together
with certain potential cash management system liabilities secured on a pari
passu basis therewith, the "Mariner Health DIP Obligations") constitute allowed
superpriority administrative expense claims pursuant to Section 364(c)(1) of the
Bankruptcy Code (subject to a carve-out for certain professional fees and
expenses incurred by the Mariner Debtors). The Mariner Health DIP Obligations
will
16
<PAGE>
be secured by perfected liens on all or substantially all of the assets of the
Mariner Health Debtors (excluding bankruptcy causes of action), the priority of
which liens (relative to prepetition creditors having valid, non-avoidable,
perfected liens in those assets and to any "adequate protection" liens granted
by the Bankruptcy Court) is established in the Initial Mariner Health DIP Orders
and the related cash collateral orders entered by the Bankruptcy Court. The
Bankruptcy Court has also granted certain prepetition creditors of the Mariner
Health Debtors replacement liens and other rights as "adequate protection"
against any diminution of the value of their existing collateral that may result
from allowing the Mariner Health Debtors to use cash collateral in which such
creditors had valid, non-avoidable and perfected liens as of the Petition Date.
The discussion contained in this paragraph is qualified in its entirety by
reference to the Mariner Health DIP Orders, the related Mariner Health Cash
Collateral Orders, and related stipulations, and reference should be made to
such orders (which are available from the Bankruptcy Court) and stipulations for
a more complete description of such terms.
The Mariner Health DIP Credit Agreement contains customary representations,
warranties and covenants of the Mariner Health Debtors, as well as certain
financial covenants relating to minimum EBITDAR, minimum patient census, minimum
eligible accounts receivable, maximum variations from Mariner Health's year 2000
DIP budget and maximum capital expenditures. The breach of such representations,
warranties or covenants, to the extent not waived or cured within any applicable
grace or cure periods, could result in the Mariner Health Debtors being unable
to obtain further advances under the Mariner Health DIP Financing and the
possible exercise of remedies by the Mariner Health DIP Lenders, either of which
events could materially impair the ability of the Mariner Health Debtors to
successfully reorganize in Chapter 11.
Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the Company Debtors, but does
contemplate weekly overhead payments to the Company equal to 1.25% of projected
net inpatient revenues for such month, subject to a monthly "true-up," such that
the payments for such month equal 5% of actual net inpatient revenues of the
Mariner Health Debtors. Such payments may be suspended by the Mariner Health
Debtors if certain defaults specified in the Mariner Health Credit Agreement
occur and are continuing, though such fees will still accrue and will become due
and payable if and when the subject default has been cured or waived.
Except as may be otherwise determined by the bankruptcy court overseeing
the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11
Filings prevents any lenders or other third parties from taking any action in
connection with any defaults under prepetition obligations of the Company and
those of its subsidiaries which are debtors in the Chapter 11 Filings. In
connection with the Chapter 11 Filings, the Company must develop a plan of
reorganization that will be approved by its creditors, including those described
above and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11
Filings.
The Company periodically enters into interest rate swap agreements (the
"Swap Agreements") to manage its interest rate risk. The Swap Agreements
effectively convert a portion of the Company's floating interest rate debt to
fixed interest rate debt. Notional amounts of interest rate 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. Two Swap Agreements with a
notional amount of $40.0 million were terminated in fiscal year 1999. The
Company's one remaining Swap Agreement with a notional amount of $20.0 million
was terminated effective October 27, 1999 at no cost to the Company.
NOTE 5. Income Taxes
The Company has established a valuation allowance which completely offsets
all net deferred tax assets generated from the Company's losses.
17
<PAGE>
NOTE 6. Earnings per Common Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data) in accordance with
Financial Accounting Standards No. 128, ''Earnings per Share'' (''SFAS 128''):
Three Months
Ended
December 31,
-----------------
1999 1998
---- ----
Numerator for Basic and Diluted Loss Per Share:
Net loss...........................................$(58,041) $(39,023)
======== ========
Denominator:
Denominator for basic loss per share-weighted
Average shares.................................. 73,695 73,277
Effect of dilutive securities--Stock options.... -- --
======== ========
Denominator for diluted loss per share-adjusted
Weighted-average shares and assumed conversions.. 73,695 73,277
======== ========
Basic and Diluted Loss Per Share:
Net loss per common share........................ $ (0.79) $ (0.53)
======== =========
The effect of dilutive securities for the three months ended December 31,
1999 and 1998, respectively, has been excluded because the effect is
antidilutive as a result of the net loss for the period.
NOTE 7. Commitments and Contingencies
Litigation
As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents. In
addition, resident, visitor, and employee injuries will also subject the Company
to the risk of litigation. The Company has experienced an increasing trend in
the number and severity of litigation claims asserted against the Company.
Management believes that this trend is endemic to the long-term care industry
and is a result of the increasing number of large judgments, including large
punitive damage awards, against long-term care providers in recent years
resulting in an increased awareness by plaintiff's lawyers of potentially large
recoveries. In certain states in which the Company has significant operations,
including California and Florida, insurance coverage for the risk of punitive
damages arising from general and professional liability litigation is not
available due to state law public policy prohibitions. There can be no assurance
that the Company will not be liable for punitive damages awarded in litigation
arising in states for which punitive damage insurance coverage is not available.
The Company also believes that there has been, and will continue to be, an
increase in governmental investigations of long-term care providers,
particularly in the area of Medicare/Medicaid false claims as well as an
increase in enforcement actions resulting from these investigations. While the
Company believes that it provides quality care to the patients in its facilities
and materially complies with all applicable regulatory requirements, given the
Company's current financial difficulties and lack of liquidity, an adverse
determination in a legal proceeding or governmental investigation, whether
currently asserted or arising in the future, could have a material adverse
effect on the Company.
From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of their respective businesses.
In the opinion of management, except as described below, there are currently no
proceedings which, individually, if determined adversely to the Company and
after taking into account the insurance coverage maintained by the Company,
would have a material adverse effect on the Company's financial position or
results of operations. Although the Company believes that any of the proceedings
18
<PAGE>
not discussed below will not individually have a material adverse impact on the
Company if determined adversely to the Company, given the Company's current
financial condition, lack of liquidity and change in the Company's GL/PL
insurance policy, settling a large number of cases within the Company's $1
million self-insured retention limit could have a material adverse effect on the
Company.
On August 26, 1996, a class action complaint was asserted against GranCare
in the Denver, Colorado District Court, Salas, et al v. GranCare, Inc. and AMS
Properties, Inc. d/b/a Cedars Healthcare Center, Inc., case no. 96-CV-4449. On
March 15, 1998, the Court entered an Order in which it certified a class action
in the matter. On June 10, 1998, the Company filed a Motion to Dismiss all
claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds and
these motions were partially granted by the Court on October 30, 1998.
Plaintiffs' Motion for Reconsideration was denied by the Court on November 19,
1998, the Court's decision was certified as a final judgment on December 10,
1998, and plaintiffs then filed a writ with the Colorado Supreme Court and an
appeal with the Colorado Court of Appeal. This Supreme Court writ has been
denied, the Court of Appeal matter has been briefed and Oral Argument has been
set for January 18, 2000. In accordance with the Company's voluntary filing
under Chapter 11 of the United States Bankruptcy Code and more particularly,
(S) 362 of that Code, this matter was stayed on January 18, 2000. The Company
will continue in its opposition to all appeals and further intends to vigorously
contest the remaining allegations of class status.
On March 18, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Northern District of Alabama, alleging,
inter alia, employment discrimination, wrongful discharge, negligent hiring,
violation of the Federal False Claims Act, and retaliation under the False
Claims Act. The action is titled Powell, et al. v. Paragon Health Inc., et al.,
civil action No. CV-98-0630-S. The complaint has been unsealed and the Company
has been advised that the government has declined to intervene in this matter
under the Federal False Claims Act. The Company is vigorously contesting the
alleged claims.
On August 25, 1998, a complaint was filed by the United States against the
Company's GranCare and International X-Ray subsidiaries and certain other
parties under the Civil False Claims Act and in common law and equity. The
lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was
filed in United States District Court for the Eastern District of Michigan.
Valley X-Ray operates a mobile X-Ray company in Michigan. A Company subsidiary,
International X-Ray, owns a minority partnership interest in defendant Valley X-
Ray. The case asserts five claims for relief, including two claims for violation
of the Civil False Claims Act, two alternative claims of common law fraud and
unjust enrichment, and one request for application of the Federal Debt
Collection Procedures Act. The two primary allegations of the complaint are:
that the X-Ray company received Medicare overpayments for transportation costs
in the amount of $657,767; and that the X-Ray company "upcoded" Medicare claims
for EKG services in the amount of $631,090. The United States has requested
treble damages as well as civil penalties of $5,000 to $10,000 for each of the
alleged 388 submitted Medicare claims. The total damages sought varies from
$5.3 to $7.2 million. The Company is vigorously contesting all claims and filed
two motions to dismiss on behalf of its subsidiaries on November 23, 1998. The
United States has agreed to the motion to dismiss GranCare as a party. The Court
has heard a motion to dismiss the Civil False Claims Act and other claims
against International X-Ray. The Company is awaiting the Court's decision.
On October 1, 1998, a class action complaint was asserted against certain
of the Company's predecessor entities and affiliates and certain other parties
in the Tampa, Florida, Circuit Court, Ayres, et al v. Donald C. Beaver, et al,
case no. 98-7233. The complaint asserted three claims for relief, including
breach of fiduciary duty against one group of defendants, breach of fiduciary
duty against another group of defendants, and civil conspiracy arising out of
issues involving facilities previously operated by the Brian Center Corporation
or one of its subsidiaries, and later by a subsidiary of LCA, as a result of the
merger with Brian Center Corporation. All defendants submitted Motions to
Dismiss which were heard by the Court on September 15, 1999. The Court granted
Defendant, Donald C. Beaver's, Motion to Dismiss on December 6, 1999. Very
little discovery has been conducted and accordingly, this case is not in a
position to be evaluated in regard to the probability of a favorable outcome or
in regard to the range of potential loss. In accordance with the Company's
voluntary filing under
19
<PAGE>
Chapter 11 of the United States Bankruptcy Code and more particularly, (S) 362
of that Code, this matter was stayed on January 18, 2000. The Company intends to
vigorously contest the request for class certification, as well as all alleged
claims made.
On November 16, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Southern District of Texas, alleging
violation of the Federal False Claims Act. The action is titled United States ex
rel. Nelius, et al., v. Mariner Health Group, Inc., et al., civil action No.
H-98-3851. The complaint which was unsealed, has been recently amended to add
additional relators and allegations under the Federal False Claims Act. The
Company has been advised that the government is evaluating its decision not to
intervene with regard to the amended complaint and relators. The Company will
vigorously contest the alleged claims. In addition, a three judge panel of the
United States Court of Appeals for the Fifth Circuit recently held that qui tam
lawsuits in which the government does not intervene are unconstitutional under
the Take Care Clause of Article II of the United States Constitution. The Court
declined to rule whether qui tam suits in which the government does intervene
are unconstitutional. The full bench of the U.S. Court of Appeals for the Fifth
Circuit agreed November 15, 1999, to review this decision. Riley v. St. Luke's
Episcopal Hospital, No. 97-20948, rehearing en banc granted (5th Cir., 1999),
but has since stayed hearing pending the outcome of another matter which is
presently pending before the United States Supreme Court. The outcome of these
cases could favorably effect this action. In response to the Notice of Stay
submitted under 11 U.S.C. (S) 362, the District Court, on January 26, 2000,
dismissed the plaintiffs' claims against defendants subject to reinstatement
within thirty (30) days after the stay is discontinued. The Company intends to
vigorously contest the alleged claims herein.
On approximately June 8, 1999, the OIG issued a subpoena duces tecum to
Mariner of Catonsville. The subpoena requests medical records pertaining to
eighteen residents. The subpoena also requests other broad categories of
documents. The Company has produced a substantial amount of documents responsive
to the Subpoena. The Company is cooperating with the investigation and has
retained experienced counsel to assist in responding to the subpoena and to
advise the Company with respect to this investigation. This investigation is
still in its preliminary stages; therefore, the Company is unable to predict the
outcome of this matter.
On October 27, 1999, the Company was served with a Complaint in United
States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis
and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA Living
Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed in the
United States District Court for the Eastern District of Pennsylvania. This
action originally was filed under seal on November 5, 1997, by relators Cindy
Lee Anderson Rutledge and the Partnership for Fraud Analysis under the Federal
False Claims Act and the Florida False Claims Act. The Complaint alleges that
the Company is liable under the Federal False Claims Act and the Florida False
Claims Act for alleged violations of regulations pertaining to the training and
certification of nurse aides at former LCA facilities. After conducting an
investigation in which the Company cooperated by producing documents responsive
to an administrative subpoena and allowing certain employee interviews, the
United States Department of Justice elected not to intervene. The district court
unsealed the Complaint on October 15, 1999. On December 14, 1999, the Company
filed a motion to dismiss the relators' complaint. The Company intends
vigorously to defend this action.
On November 10, 1999, suit was filed in the United States District Court
for the Western District of Tennessee against the Company and its subsidiary,
National Heritage Realty, Inc. ("National Heritage") by Mid-South Healthcare
Associates, L.L.C. ("Mid-South"), civil action No. 99-299-MIA. Mid-South in its
complaint seeks declaratory judgment and injunctive relief related to Mid-
South's contention that two leases, currently held by National Heritage, for
twelve nursing home facilities in Tennessee and Mississippi expire on January
31, 2000, and Mid-South's contention that the nursing home facilities have not
been maintained to the levels required by the leases. Mid-South also seeks
unspecified damages. On December 16, 1999, the Company and National Heritage
answered the complaint and counterclaims were asserted on behalf of National
Heritage seeking a declaratory judgment that it properly exercised certain
options to extend the leases for five year periods (through January 31, 2005),
seeking injunctive relief to prevent interference with its right of possession
and seeking damages for Mid-
20
<PAGE>
South's breach of its duty of good faith and fair dealing. The dispute involves
the interpretation of language in certain lease amendments and whether or not
Mid-South, by failing to renew certain ground leases upon which three of the
twelve leased facilities are built, can unilaterally extinguish National
Heritage's options to extend the leases for an additional five year term.
On January 13, 2000, the Company, National Heritage and Mid-South entered
into a Lease Amendment Agreement (the "Agreement") to settle and resolve all of
the claims pending in the subject litigation. The Agreement requires, inter
alia, all parties to release and dismiss their respective claims and
counterclaims. In addition, Mid-South will agree that the leases on the
Facilities have been extended through January 31, 2005 (with an option term
through January 31, 2010), will invest up to $3.0 million in capital
improvements to certain of the Facilities and will provide certain consulting
services in connection therewith. The Company will pay Mid-South a consulting
fee of $1.7 million per year and additional rent contingent on the level of
capital expenditures actually made by Mid-South. The Company will also make
certain capital improvements to the Facilities. The Company will file the
necessary motion with the Bankruptcy Court seeking approval to assume this
contract on a post-petition basis.
On approximately January 20, 2000, the OIG issued subpoenas duces tecum to
Mariner Post-Acute Network, Inc. and Summit Medical Management (a subsidiary of
the Company). The subpoenas request documents relating to the purchase of Summit
Medical Management and other subsidiaries. In addition, the subpoenas request
other broad categories of documents. The Company is cooperating with the
investigation and has retained experienced counsel to assist in responding to
the subpoenas and advise the Company with respect to this investigation. This
investigation is still in its preliminary stages; therefore, the Company is
unable to predict the outcome of this matter.
21
<PAGE>
NOTE 8. Segment Information
The following tables exhibit the segment reporting of the Company for the
three months ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Inpatient
Nursing Therapy
Home Pharmacy All (Segment
1999 Services Services Other Disposed Of) Total
---- --------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external customers...... $442,985 $ 65,843 $ 27,151 $ -- $ 535,979
Intersegment revenues................. -- 13,341 71 -- 13,412
Segment net income (loss)............. 33,732 (2,711) (109) (948) 29,964
Segment total assets.................. 743,526 104,280 154,610 30,277 1,032,693
</TABLE>
<TABLE>
<CAPTION>
Inpatient
Nursing Therapy
Home Pharmacy All (Segment
1998 Services Services Other Disposed Of) Total
---- --------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external customers...... $485,420 $77,736 $31,380 $75,098 $669,634
Intersegment revenues................. -- 9,891 2,576 40,321 52,788
Segment net income (loss)............. 24,235 7,119 2,215 (641) 32,928
</TABLE>
The following tables reconcile the Company's segment reporting to the
totals on the Company's consolidated financial statements for the three months
ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------
1998 1998
---------- ---------
<S> <C> <C>
Revenues:
External revenues for reportable segments.......... $ 535,979 $ 669,634
Intersegment revenues for reportable segments...... 13,412 52,788
Corporate overhead................................. 1,227 3,046
Elimination of intersegment revenue................ (13,412) (52,788)
--------- ---------
Consolidated revenues.............................. $ 537,206 $ 672,680
========= =========
Net income (loss):
Net income for reportable segments................. $ 29,964 $ 32,928
Corporate overhead................................. (88,005) (71,951)
--------- ---------
Consolidated net income (loss)..................... $ (58,041) $ (39,023)
========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1999
------------
<S> <C>
Assets:
Assets for reportable segments.................. $ 1,032,693
Corporate overhead assets....................... 1,506,442
Elimination of intersegment assets.............. (1,272,887)
-----------
Consolidated assets............................. $ 1,266,248
===========
</TABLE>
22
<PAGE>
NOTE 9. Subsequent Events
On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions in the
United States Bankruptcy Court for the District of Delaware under Title 11 of
the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the Bankruptcy Code").
While this action will likely constitute a default under the Company's and such
subsidiaries various financing arrangements, Section 362 of the Bankruptcy Code
imposes an automatic stay that will generally preclude the creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
The Company's need to seek relief afforded by the Bankruptcy Code is due, in
part, to the significant financial pressure created by the Balanced Budget Act
of 1997 and its implementation, which reduced the Company's Medicare
reimbursement rate by approximately $115 per resident per day.
As discussed in Notes 2 and 4, in connection with the Chapter 11 Filings,
the Company obtained a commitment for $100 million in debtor-in-possession
financing from a group of banks led by The Chase Manhattan Bank. Mariner Health
also obtained a commitment for $50 million in DIP financing from a group of
banks led by PNC Bank.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Effective July 31, 1998, the Company acquired Mariner Health Group, Inc.
("Mariner Health") in a stock for stock merger (the "Mariner Merger") pursuant
to which: (i) Mariner Health became a wholly-owned subsidiary of the Company;
and (ii) the Company changed its name to "Mariner Post-Acute Network, Inc." The
Mariner Merger was accounted for under the purchase method of accounting and,
accordingly, the results of Mariner Health's operations have been included in
the Company's consolidated financial statements since the date of acquisition.
Effective November 1, 1997 for accounting purposes, the Company completed
two merger transactions. First, pursuant to an agreement and plan of merger
among Apollo Management, L.P. ("Apollo Management," and together with certain of
its affiliates, "Apollo"), Apollo LCA Acquisition Corp. (a corporation owned by
certain Apollo affiliates and other investors, "Apollo Sub") and Living Centers
of America, Inc. ("LCA"), Apollo Sub was capitalized with $240 million in cash
and was merged with and into LCA (the "Recapitalization Merger"). In the
Recapitalization Merger, LCA was the surviving corporation and was renamed
"Paragon Health Network, Inc." Second, pursuant to an agreement and plan of
merger among LCA, GranCare, Inc. ("GranCare"), Apollo Management and LCA
Acquisition Sub, Inc., a wholly-owned subsidiary of the Company ("LCA Sub"),
GranCare merged with LCA Sub with GranCare surviving as a wholly-owned
subsidiary of the Company (the "GranCare Merger," and collectively with the
Recapitalization Merger, the "Apollo/LCA/GranCare Mergers"). The GranCare Merger
was accounted for under the purchase method of accounting and, accordingly, the
results of GranCare's operations have been included in the Company's
consolidated financial statements since the date of acquisition, which, for
accounting purposes, is November 1, 1997.
On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions (the
"Chapter 11 Filings") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") under Title 11 of the United States Code,
11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will
likely constitute a default under the Company's and such subsidiaries various
financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic
stay that will generally preclude the creditors and other interested parties
under such arrangements from taking any remedial action in response to any such
resulting default without prior Bankruptcy Court approval. The Company's need
to seek relief afforded by the Bankruptcy Code is due, in part, to the
significant financial pressure created by the Balanced Budget Act of 1997
("Balanced Budget Act") and its implementation, which reduced the Company's
23
<PAGE>
Medicare reimbursement rate by approximately $115 per resident, per day, and had
a substantial negative effect on its ancillary businesses.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan Bank.
Mariner Health also obtained a commitment for $50 million in DIP financing from
a group of banks led by PNC Bank (the "Mariner Health DIP Financing"; together
with the Company DIP Financing, the "DIP Financings"). For a description of the
principal terms of the DIP Financings, see "Management's Discussion and Analysis
of Operations - Liquidity and Capital Resources." After having given interim
approval to the Company DIP Financing and the Mariner Health DIP Financing, the
Bankruptcy Court held final hearings on those financings on February 16, 2000,
and thereafter entered orders granting final approval on the Mariner Health DIP
Financing in its full amounts, but adjourned the final hearing on the Company
DIP Financing until March 20, 2000, to allow time for the Company and certain of
its creditors to resolve technical issues pertaining to the Financing.
On January 28, 2000 the Office of the United States Trustee appointed an
official committee to represent the unsecured creditors in connection with the
Chapter 11 Filings.
General
The Company is one of the nation's largest providers of post-acute health
care services, primarily through the operation of its skilled-nursing
facilities. As of December 31, 1999, the Company's significant operations
consist of (i) over 400 inpatient and assisted living facilities containing
approximately 47,000 beds, (ii) 37 institutional pharmacies servicing more than
1,000 long term care centers and (iii) 14 long-term acute care hospitals
("LTACs") with approximately 700 licensed beds. In addition, the Company has
limited home health, physician management and hospital contract management
operations, the majority of which the Company plans to exit in the near future.
The Company operates in 29 states with significant concentrations of facilities
and beds in seven states and several metropolitan markets.
Historically, the Company also (i) operated a large contract rehabilitation
therapy business that provided comprehensive therapy programs and services, on a
contractual basis, to over 1,200 inpatient healthcare facilities throughout the
United States, (ii) operated approximately 170 outpatient rehabilitation therapy
clinics in eighteen states, (iii) managed specialty medical programs in acute-
care hospitals through more than 100 hospital relationships in nineteen states
(the Company was out of this line of business as of December 31, 1999), and (iv)
operated more than thirty home health, hospice and private duty nursing branches
in seven states (only two of which are still operated by the Company and are in
the process of being divested). Primarily as a result of changes in Medicare
reimbursement effected under the Balanced Budget Act of 1997 (the "Balanced
Budget Act"), these businesses began to generate, or were anticipated to
generate, significant operating losses and negative cash flow and have been or
are being divested or closed.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain healthcare costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing. The
Company's percentage of total net patient revenues derived from Medicare and
Medicaid programs were 24.4% and 50.1%, respectively, for the quarter ended
December 31, 1999. Government payors, such as state-administered Medicaid
programs and, to a lesser extent, the federal Medicare program, generally
provide more restricted coverage and lower reimbursement rates than private pay
sources. Private payors accounted for 25.5% of the Company's total net patient
revenues for the quarter ended December 31, 1999.
The administrative procedures associated with the Medicare cost
reimbursement program, with respect to facilities and periods not subject to
PPS, generally preclude final determination of amounts due the Company until
annual cost reports are audited or otherwise reviewed and settled with the
applicable fiscal intermediaries and
24
<PAGE>
administrative agencies. Certain Medicare fiscal intermediaries have made audit
adjustments to settle cost reports for some of the Company's facilities that
reduce the amount of reimbursement that was previously received by the
facilities (see "--Results of Operations"). The Company believes that it has
properly recorded revenue under cost reimbursement programs based on the facts
and current regulations. If the Company was to receive adverse adjustments that
it had not contemplated in recording its revenue in the past, the differences
could be significant to the Company's results of operations in the period of
final determination. Beginning July 1, 1998, the Company's facilities began to
be phased into the PPS System under which nursing home providers are paid a
fixed per diem rate for Medicare patients based on their acuity level. Under
PPS, the Company is still required to file cost reports; however, the audit and
settlement process of Medicare cost reports is not expected to have a material
impact on total Medicare revenue. See "--Liquidity and Capital Resources." As
part of the bankruptcy process the Company, Mariner Health and their
subsidiaries are engaged in discussions with the HealthCare Financing
Administration ("HCFA") to potentially settle some or all matters related to
historical cost reimbursement. It is not possible to estimate as yet whether
this process will result in material differences of amounts already recorded or
the effects on future cash flows.
Results of Operations
Revenues from nursing home operations accounted for $467.9 million of the
Company's $537.2 million total revenues for the three months ended December 31,
1999. Nursing home revenues are derived from the provision of routine and
ancillary services and are a function of occupancy rates and payor mix in the
Company's long-term care facilities. Weighted average occupancy, as identified
in the following table decreased by 1.2% over the comparable period from 1998 to
1999.
<TABLE>
<CAPTION>
Three Months
Ended December 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Weighted average licensed bed count 47,189 48,169
Weighted average number of residents 39,973 41,385
Weighted average occupancy 84.7% 85.9%
</TABLE>
Payor mix is the source of payment for the services provided and consists
of private pay, Medicare and Medicaid. Private pay includes revenues from
individuals who pay directly for services without government assistance through
the Medicare and Medicaid programs, managed care companies, commercial insurers,
health maintenance organizations, Veteran's Administration contractual payments
and payments for services provided under contract management programs. Managed
care as a payor source to nursing home operators is likely to increase over the
next several years and the Company's infrastructure is preparing for more
managed care contracting. However, revenue from managed care payors does not
constitute a significant portion of the Company's revenue at this time.
Reimbursement rates from government sponsored programs, such as Medicare
and Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. Changes in reimbursement rates, including the
implementation of the Prospective Payment System ("PPS") for the Medicare system
and fee screen schedules and therapy caps for Part B Medicare patients beginning
January 1, 1999, have adversely affected the Company resulting in significantly
lower Medicare revenues than the Company would have received under the old
payment methodology. These Medicare charges drove the Company's decision to
terminate its contracts to provide therapy services during the third fiscal
quarter of 1999 and to liquidate that line of business. In June of 1999 the
Company's nursing homes were able to internally employ therapists to provide
services which were previously contracted. See "Liquidity and Capital
Resources". The table below presents the approximate percentage of the Company's
net patient revenues derived from the various sources of payment for the periods
indicated.
25
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended December 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Private and other 25.5% 32.2%
Medicare 24.4% 27.3%
Medicaid 50.1% 40.5%
</TABLE>
The combined mix of private/other and Medicare revenue was 49.9% for the
three months ended December 31, 1999 as compared to 59.5% for the same period in
1998. The net revenues from the non-nursing home operations are primarily
reimbursed by facility providers which are considered private pay sources. The
impact of decreased therapy revenue resulting from the Company exiting the
business of providing therapy services to unaffiliated third parties has
decreased the percentage of private revenue for the Company. As of June 30,
1999, all of the Company's nursing homes had converted to PPS based Medicare
payments which has influenced the comparison of revenue mix between the three
month periods ended December 31, 1998 and 1999. See "Liquidity and Capital
Resources".
The administrative procedures associated with the Medicare cost
reimbursement program, with respect to facilities and periods not subject to
PPS, generally preclude final determination of amounts due the Company until
annual reports are audited or otherwise reviewed and settled with the applicable
fiscal intermediaries and administrative agencies. Certain Medicare fiscal
intermediaries have made audit adjustments to settle cost reports for some of
the Company's facilities that reduce the amount of reimbursement that was
previously received by the facilities. The Company believes that it has properly
recorded revenue under cost reimbursement programs based on the facts and
current regulations. If the Company was to receive adverse adjustments that it
had not contemplated in recording its revenue in the past, the differences could
be significant to the Company's results of operations in the period of final
determination. Beginning July 1, 1998, the Company's facilities began to be
phased into the PPS System under which nursing home providers are paid a fixed
per diem rate for Medicare patients based on their acuity level. Under PPS, the
Company is not required to file cost reports and the audit and settlement
process is eliminated. See "Liquidity and Capital Resources".
Costs and expenses, excluding depreciation, amortization and indirect
merger and other expenses, primarily consists of salaries, wages, and employment
benefits. Various federal, state and local regulations impose, depending on the
services provided, a variety of regulatory standards for the type, quality and
level of personnel required to provide care or services. The regulatory
requirements have an impact on staffing levels, as well as the mix of staff, and
therefore impact salaries, wages and employee benefits. The cost of ancillary
services, which includes pharmaceuticals and therapy, is also affected by the
level of service provided and patient acuity. General and administrative
expenses include the indirect administrative costs associated with operating the
Company and its lines of business. Insurance expense includes the costs of the
various insurance programs such as automobile, general and professional
liability and workers' compensation.
Seasonality
The Company's revenues and operating income generally fluctuate from
quarter to quarter. This seasonality is related to a combination of factors
which include the timing of third party payment rate changes, the number of work
days in the period and seasonal census cycles.
First Quarter of Fiscal 2000 Compared to First Quarter of Fiscal 1999
Net revenues comprising nursing home and non-nursing home operations
totaled $537.2 million for the quarter ended December 31, 1999, a decrease of
$135.5 or 20.2%, as compared to the same period for fiscal 1999. Nursing home
operations accounted for $38.6 million of the revenue decrease mainly as a
result of implementing the Prospective Payment System ("PPS") beginning
July 1, 1998, causing significantly reduced Medicare
26
<PAGE>
revenues. Also a decline in average census, and facilities being closed or
divested during the past year contributed to the revenue decrease.
Non-nursing home operations revenues decreased by $96.9 million consisting
of $85.0 million as a result of the termination of all contracts to provide
therapy services to unrelated third parties effective May 31, 1999 and the
divestiture or closure of the Company's outpatient rehabilitation clinics,
hospital rehabilitation management contract business, and substantially all home
health operations. In addition there was a $11.9 million revenue decrease for
pharmacy services compared to the same period for fiscal 1999. The pharmacy
revenue decrease was also influenced significantly by the implementation of PPS
by the external customer base starting in July 1998. The inability of the
pharmacy business to reduce expenses to match the revenue decline has caused a
decline in net income resulting from the pharmacy business.
Costs and expenses excluding depreciation and amortization expenses and
indirect merger and other expenses totaled $524.1 million for the quarter ended
December 31, 1999, a decrease of $109.6 million or 17.3 % as compared to the
same period for fiscal 1999. The decrease was primarily the result of costs for
payroll and employee benefits which decreased by $17.6 million, while ancillary
expenses decreased by $ 62.9 million. The decrease in these two cost categories
was primarily attributable to the Company exiting the unrelated third party
therapy services, the clinic and hospital rehabilitation and home health
services businesses. Provision for bad debts totaled $8.4 million, a decrease of
$28.1 million or 77.0% for the quarter ended December 31, 1999. The decrease is
attributed to a charge of approximately $24.3 million in the quarter ended
December 31, 1998 to increase the reserve of the Mariner Health subsidiary
receivables.
For the three months ended December 31, 1999, depreciation and amortization
costs were $10.8 million a decrease of $19.8 million from the prior year quarter
ended December 31,1998. This decrease was principally the result of the Company
recording an impairment charge of $995.9 million in the fourth quarter of fiscal
year 1999.
For the three months ended December 31, 1999, indirect merger and other
costs total approximately $8.0 million and include approximately $5.5 million of
costs incurred to outside professionals related to the Company's defaults in
connection with its indebtedness, approximately $1.8 million of costs incurred
and paid related to the Mariner Health Merger and $0.7 million of other
expenses.
For the three months ended December 31, 1999, interest expense totaled
approximately $57.2 million, an increase of $10.5 million or 22%. This increase
was principally the result of incurring default rates on the Company's
indebtedness.
The Year 2000 Issue
Year 2000 ("Y2K") issues or problems observed within the Company were
minimal. No problems were seen in patient equipment, life safety systems,
information technology infrastructure or utilities. Problems seen included
isolated issues with phone and voice mail systems and minor discrepancies with
business applications which were repaired within hours of identification. No
Y2K related supply issues have been observed and there is no evidence to date of
payor or fiscal intermediary issues.
Exclusive of expenditures relating to the conversion of corporate
financial, payroll and human resource systems, approximately $6.9 million was
spent to remedy potential problems associated with Y2K issues.
The Company believes that the principal risk for the Company from Y2K
issues is from the potential for delay in the receipt of payments from third-
party payors. Currently, the Company's primary source of liquidity is the DIP
Financings. If the amounts available under the DIP Financings become exhausted
or unavailable, the Company will have minimal access to credit facilities and
its operating resources would be limited to invested cash, working capital and
proceeds from asset sales not required to be applied to satisfy obligations
under the plan of reorganization to be approved in connection with the Company's
Chapter 11 Filings. Given the Company's current and future liquidity sources, a
delay in receipts from third-party payors could have a material adverse effect
on the Company's financial condition and results of operations.
27
<PAGE>
Liquidity and Capital Resources of the Company
Cash and cash equivalents were $77.0 million at December 31, 1999. Working
capital, at December 31, 1999, was a deficit of approximately $2.0 million,
primarily due to continuing defaults which required substantially all of the
Company's debt to be reflected as current obligations, and is consistent with
the working capital deficit at September 30, 1999. (See Note 2 and 4 to the
Condensed Consolidated Financial Statements.) Cash used in operating activities
was $7.2 million in the three months ended December 31, 1999, as compared to
$37.8 million used in operating activities for the three months ended December
31, 1998. Receivables increased by $13.6 million, primarily as a result of
increased revenues during the three months ended December 31, 1999 as compared
to the three months ended September 30, 1999. Prepayments and other current
assets increased by $3.2 million, primarily as a result of additional cash pre-
payments on insurance and other expenses. Accrued expenses and other current
liabilities increased by $57.0 million, primarily as a result of the nonpayment
of interest on the senior credit facilities and subordinated debt during the
three months ended December 31, 1999.
Cash provided by investing activities was $9.9 million in the three months
ended December 31, 1999, as compared to $10.7 million used in investing
activities for the three months ended December 31, 1998. Investing activities
included the use of $6.8 million related to capital expenditures.
Cash provided by financing activities was $2.4 million in the three months
ended December 31, 1999, as compared to $50.6 million for the three months ended
December 31, 1998. Cash provided by financing activities included $12.7 million
in net draws under the Company's credit line, principal repayments of $10.3
million.
The primary source of revenues for the Company are the State Medicaid
programs and federal Medicare program. The Company receives payment for nursing
facility services based on rates that are set by individual state Medicaid
programs. Although payment cycles for these programs vary, payments generally
are made within 30 to 60 days after services are provided. For Medicare cost
reporting periods beginning July 1, 1998 and after, the federal Medicare program
converted to PPS for skilled nursing facility services. As of December 31, 1999
all of the Company's skilled nursing facilities are reimbursed under PPS. The
prospective payment system provides acuity-based rates that are established at
the beginning of the Medicare reporting year. Under PPS, claims are filed
monthly and clean claims are paid 14 days after submission.
For cost reporting periods that ended before the start of PPS, the
facilities were (and to the extent final cost reports for prior periods are not
settled, still are) reimbursed under Medicare on the basis of reasonable and
necessary cost as determined from annual cost reports. This retrospective
settlement system resulted in final cost report settlements that generally were
not finally settled until two years after the end of the cost reporting period
and that could be further delayed by appeals and litigation.
PPS has had a material adverse effect on the Company's financial condition.
While the effects of PPS have been somewhat ameliorated by recent legislation,
PPS is in large part responsible for the inability of the Company to operate
under its existing capital structure. See "Business--Regulation" and
"--Healthcare Regulatory Matters."
PPS reduced the cash flows of pharmacy's and therapy's customers which
resulted in an increased aging and uncollectable accounts in both pharmacy's and
therapy's accounts receivable. In addition, the Company's accounts receivable
continued to deteriorate during the three months ended December 31, 1999 due to
the multiple complexities involved with the change to Medicare PPS billing. The
Company's facilities were phased into PPS based upon their cost report years
(approximately 20 facilities during the fourth quarter of 1998; approximately
115 facilities during the first quarter of 1999; approximately 135 facilities
during the second quarter of 1999; and approximately 85 facilities during the
third quarter of 1999). At December 31, 1999, all facilities were being paid
by Medicare under PPS, and as such, revenue recorded for the prior three months
consists of the aggregate payments expected from Medicare for individual claims
at the appropriate payment rates. The PPS billing methodology is extremely
complex and its implementation is resource intensive. The claims amendment
process lacks procedures and the coordination of certain policies. The Company
has a commitment to training and compliance and has established procedures to
address PPS issues as they arise.
28
<PAGE>
The Company provides certain services and supplies between subsidiary
companies, some of which are charged at cost and others of which are charged at
market rates. Subject to certain exceptions, Medicare's "related organization
principle" generally requires that services and supplies furnished to nursing
facilities by related entities be included in the nursing facility's
reimbursable cost at the cost of the supplying entity. The Company believes
that the services and supplies furnished to nursing facilities at market rates
qualify for exception to the related organization principle. Certain of the
Company's Medicare fiscal intermediaries have taken the position that the
related party transactions do not qualify for this exception to the related
party rules and have made adjustments that reduce Medicare allowable cost to the
cost of the supplying entity. During the third quarter of fiscal 1999, the
intermediaries for the Mariner Health facilities reopened previously settled
cost reports to impose such related party adjustments for services furnished to
the facilities by Mariner Health's rehabilitation subsidiary. All related party
adjustments have been or will be appealed to the Provider Reimbursement Review
Board and through the full appeal process as is warranted. The adjustments
effect only periods during which the facilities were reimbursed for Medicare on
the basis of reasonable and necessary cost; there would not be any impact for
periods that are reimbursed under PPS following transition.
In the third quarter of fiscal 1999, Mariner Health received revised
Notices of Program Reimbursement ("NPRs") for certain of the cost reports on
approximately 50 of its facilities that require Mariner Health to repay
approximately $15.9 million to the Medicare program. On July 20, 1999, Mariner
Health reached agreement with HCFA to extend repayment of the $15.9 million net
liabilities resulting from the issuance of the revised NPRs. The extended
repayment plan requires payment of $1.8 million per month from July through
December 1999, and $1.5 million per month from January through May 2000. At
December 31, 1999, the Company had made approximately $10.8 million in payments
under the extended repayment plan. The current intermediary has notified Mariner
Health that it intends to issue revised NPRs for the remaining 1997 facility
cost reports during fiscal year 2000. Should the revised NPRs result in a
substantial repayment requirement, the Company and Mariner Health would seek to
enter into an extended repayment plan with HCFA at that time. The Company is
vigorously disputing the intermediaries' overpayment determinations through the
appeal process; however, a favorable outcome cannot be assured at this time.
In addition to the related party adjustments and cost report settlements
discussed above, any plan of reorganization confirmed by the Bankruptcy Court in
connection with the Company's Chapter 11 Filings will affect the Company's
liquidity in the future and could have a material adverse effect on the Company.
Mariner Health did not make the October 1, 1999 interest payment on the
Mariner Notes (defined below, see "- Mariner Health Senior Subordinated Notes"),
and the Company did not make the November 1, 1999 interest payment on the Senior
Subordinated Notes (defined below, see "- Senior Subordinated Notes"), did not
pay November, December or January rent under the Synthetic Lease (defined below,
see "- Other Factors Affecting Liquidity and Capital Resources"), and did not
make or any principal or interest payments on the Senior Credit Facility coming
due after November 1, 1999 (defined below, see "- Senior Credit Facility").
Also, the Mariner Health Senior Credit Facility and Mariner Health Term Loan
Facility (defined below, see "- Mariner Health Senior Credit Facility and
Mariner Health Term Loan Facility") matured on January 3, 2000, and Mariner
Health did not make the required payments in connection with those obligations.
The inability of the Company and Mariner Health to service or restructure their
respective debt and other obligations culminated in the Chapter 11 Filings on
January 18, 2000. Except as may be otherwise determined by the Bankruptcy Court
overseeing the Chapter 11 Filings, the automatic stay protection afforded by the
Chapter 11 Filings prevents any action from being taken by creditors with regard
to any defaults under the prepetition obligations of the Company and those of
its subsidiaries which are debtors in the Chapter 11 Filings.
Senior Credit Facility. In connection with the Recapitalization Merger, the
Company entered into the Senior Credit Facility, which originally consisted of a
$150.0 million revolving credit facility (the "Revolving Credit Facility"), and
three term loan credit facilities: a 6-1/2 year term loan facility in an
aggregate principal amount of $240.0 million (the "Tranche A Term Loan
Facility"), a 7-1/2 year term loan facility in an aggregate principal amount of
$250.0 million (the "Tranche B Term Loan Facility"), and an 8-1/2 year term loan
facility in
29
<PAGE>
an aggregate principal amount of $250.0 million (the "Tranche C Term Loan
Facility"). Loans made under the Tranche A Term Loan Facility ("Tranche A Term
Loans"), the Tranche B Term Loan Facility ("Tranche B Term Loans") and the
Tranche C Term Loan Facility ("Tranche C Term Loans") are collectively referred
to herein as "Term Loans." Advances under the Revolving Credit Facility are
sometimes referred to as "Revolving Loans." The proceeds from borrowings under
the Term Loans were used, along with the proceeds of the Notes (defined below)
offering, to fund a portion of the Recapitalization Merger, refinance a
significant portion of LCA's and GranCare's pre-merger indebtedness and to pay
costs and expenses associated with the Apollo/LCA/GranCare Mergers.
In July 1998 the Revolving Credit Facility was increased to $175.0 million
and the Tranche A Term Loan Facility to $315.0 million in connection with the
Mariner Merger. The proceeds of the $75.0 million increase in the Tranche A
Credit Facility and of certain Revolving Credit Loans were used to pay various
costs and expenses incurred in connection with the Mariner Merger. As of
December 31, 1999, there was $168.7 million borrowed under the Revolving Credit
Facility and approximately $5.5 million in letters of credit outstanding.
The obligations of the Company under the Senior Credit Facility are
guaranteed by substantially all of the Company's subsidiaries other than Mariner
Health and its subsidiaries, and are secured by substantially all of the
otherwise unencumbered owned assets of the Company and such subsidiaries.
Principal amounts outstanding under the Revolving Credit Facility were
originally due and payable in April 2005. The Term Loans are amortized in
quarterly installments which increase over the term of those loans. (see Note 4
to the Condensed Consolidated Financial Statements). Interest on outstanding
borrowings under the Senior Credit Facility accrue, at the option of the
Company, at the Alternate Base Rate (the "ABR") of The Chase Manhattan Bank
("Chase") or at a reserve-adjusted Eurodollar Rate (the "Eurodollar Rate"),
plus, in each case, an Applicable Margin. The term "Applicable Margin" means a
percentage that will vary in accordance with a pricing matrix based upon the
respective term loan tenor and the Company's leverage ratio (see Note 4 to the
Condensed Consolidated Financial Statements).
The Senior Credit Facility is subject to prepayment, in whole or in part,
at the Company's option and in certain minimum increments from time to time, and
is also subject to mandatory prepayment from the net cash proceeds received from
certain transactions. Those transactions include the sale or issuance of equity
by the Company, the incurrence of certain indebtedness by the Company, and the
sale of certain assets where the net cash proceeds are not reinvested in the
Company's business within 12 months (6 months in certain cases). The Company
must also make annual prepayments to the extent of 75% of its excess cash flow
for each fiscal year (reduced to 50% of excess cash flow once the Company's
leverage ratio as of the last day of any fiscal year is less than or equal to
4.50 to 1.00). Mandatory prepayments will be applied pro rata to the unmatured
installments of the Term Loans; provided, however, that holders of Tranche B
Term Loans or Tranche C Term Loans may refuse any such mandatory prepayment
otherwise allocable to them, in which case the amount so refused will be applied
as an additional prepayment of the Tranche A Term Loans. Subject to compliance
with customary borrowing conditions, amounts applied as prepayments of the
Revolving Credit Facility may be reborrowed; amounts prepaid under the Term
Loans may not be reborrowed.
The covenants contained in the Senior Credit Facility, among other things,
require the Company to maintain certain financial ratios and restrict the
ability of the Company to dispose of assets, repay other indebtedness or amend
other debt instruments, pay dividends, make investments, and make acquisitions.
The Company received the consent of the requisite lenders under the Senior
Credit Facility to permit the Mariner Merger and certain covenants in the Senior
Credit Facility were modified to accommodate the Mariner Merger. By amendment
effective December 22, 1998, certain of the Senior Credit Facility's financial
and operating covenants were amended to provide the Company with additional
flexibility, in return for which the Applicable Margins were increased. (See
Note 4 to the Condensed Consolidated Financial Statements.)
30
<PAGE>
In May 1999, the Senior Credit Facility was further amended in order to
waive non-compliance by the Company with certain financial covenants as of March
31, 1999, to increase loan pricing (see Note 4 to the Condensed Consolidated
Financial Statements) and, among other things, (i) to prohibit acquisitions,
(ii) to eliminate the Company's ability to defer mandatory prepayments with the
proceeds from asset sales and other transactions by reinvesting such proceeds in
other capital assets, and (iii) to restrict the Company's right to sell assets
without administrative agent or lender approval, incur capital expenditures
other than for maintenance and repair purposes, or make investments in Mariner
Health and the Mariner Health subsidiaries.
As of June 30, 1999, and again as of September 30, 1999 and December 31,
1999, the Company was in violation of certain of these financial covenants and
as a result has not been able to make additional borrowings under the Senior
Credit Facility. The Company was unable to obtain waivers of the June 30, 1999,
September 30, 1999 or December 31, 1999 financial covenant defaults under the
Senior Credit Facility. In addition, in order to conserve its liquidity and
facilitate a restructuring of its indebtedness and other obligations, the
Company did not made the interest payments due on the Senior Credit Facility
after October, 1999. The lenders under the Senior Credit Facility signed a
forbearance agreement, pursuant to which they temporarily agreed (but without
waiving any events of default) not to take any remedial action with respect to
such events of default (including acceleration of their debt), subject to no new
events of default occurring. The forbearance agreement expired by its terms.
However, the automatic stay protection afforded by the Chapter 11 Filings
prevents any action from being taken with regard to any of the defaults under
the Senior Credit Facility, except as otherwise may be determined by the
Bankruptcy Court.
Senior Subordinated Notes. In connection with the Apollo/LCA/GranCare
Mergers, on November 4, 1997 the Company completed a private offering to
institutional investors of $275 million of its 9.5% Senior Subordinated Notes
due 2007 (the "Senior Subordinated Notes"), at a price of 99.5% of face value
and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a
price of 59.6% of face value (collectively, the "Notes"). Interest on the
Senior Subordinated Notes is payable semi-annually. Interest on the Senior
Subordinated Discount Notes will accrete until November 1, 2002 at a rate of
10.57% per annum, compounded semi-annually, and will be cash pay at a rate of
10.5% per annum thereafter. The Notes mature on November 1, 2007. Pursuant to
the terms of the indenture with respect to the Notes, in March 1998, the Company
completed an exchange offer with respect to the Notes whereby Notes registered
under the Securities Act of 1933, as amended, were exchanged for unregistered
Notes. The terms of the exchange Notes are identical to the original Notes.
Mariner Health and its subsidiaries are "restricted subsidiaries" under the
indenture pursuant to which the Notes were issued. The Company did not make its
scheduled November 1, 1999 semi-annual interest payment on the Senior
Subordinated Notes, and such default was not cured within the applicable grace
period. Although the Company is in default with respect to the Notes, unless
otherwise determined by the Bankruptcy Court, the automatic stay protection
afforded by the Chapter 11 Filings prevents any action from being taken with
regard to such defaults.
Other Significant Indebtedness and Commitments. The Company, through
various of its GranCare subsidiaries, is a party to various agreements
(collectively, the "HRPT Agreements") between GranCare and Health and Retirement
Properties Trust ("HRPT"). HRPT is the lessor with respect to certain facilities
leased by two subsidiaries of GranCare (the "Tenant Entities"). In connection
with obtaining HRPT's consent to the Apollo/LCA/GranCare Mergers, GranCare and
HRPT executed a Restructure and Asset Exchange Agreement dated October 31, 1997
pursuant to which HRPT and GranCare restructured their relationship (the
"HRPT/GranCare Restructuring"). As a part of the HRPT/GranCare Restructuring,
HRPT consented to the consummation of the Apollo/LCA/GranCare Mergers and the
transactions related thereto, and HRPT has an unlimited guaranty by the Company
and all subsidiaries of the Company having an ownership interest in Tenant
Entities which guaranty is secured by a cash collateral deposit of $15 million,
the earned interest on which is retained by HRPT. The performance by the Tenant
Entities of their respective obligations to HRPT continues to be secured by a
pledge of one million shares of HRPT common stock beneficially owned by
GranCare. The Company does not have the ability to sell these shares to meet any
capital requirements. During the Fall of 1999, HRPT spun off its health care
portfolio, including the Facilities operated by the Tenant Entities into a
publicly
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<PAGE>
traded company, SPTMNR Properties Trust ("SPTMNR"), which succeeded to the
interests of HRPT under the HRPT Agreements. References to HRPT herein are
deemed to include SPTMNR in such capacity. Unless otherwise determined by the
Bankruptcy Court, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by HRPT with regard to any defaults
that may exist under the HRPT Agreements.
In connection with the GranCare Merger, the Company and its GranCare
subsidiary became parties to an agreement between GranCare and Omega Healthcare
Investors, Inc. ("Omega"). A wholly-owned subsidiary of the Company,
Professional Health Care Management, Inc. ("PHCMI"), is the borrower under a
$58.8 million mortgage note executed on August 14, 1992 (the "Omega Note") in
favor of Omega, and under the related Michigan loan agreement dated as of
June 7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million was
outstanding as of December 31, 1999.
The Omega Note bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by $58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Note for the prior calendar year. The current interest rate is 15.5% per annum
which is paid monthly. Additional interest accrues on the outstanding principal
of the Omega Note at the rate of 1% per annum. Such interest is compounded
annually and is due and payable on a pro rata basis at the time of each
principal payment or prepayment.
In addition to the interest on the Omega Note described in the preceding
paragraph, and as a condition to obtaining Omega's consent to a February 1997
transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI agreed
to pay additional interest to Omega in the amount of $20,500 per month, through
and including July 1, 2002. If the principal balance of the Omega Note for any
reason becomes due and payable prior to that date, there will be added to the
indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus (ii) interest
thereon at 11% per annum to the prepayment date; less (iii) the amount of such
additional interest paid to Omega prior to the prepayment date.
Subsequent to September 30, 1999, PHCMI and GranCare received notice from
Omega asserting that PHCMI was in default of its obligation to maintain its
required minimum tangible net worth. Omega demanded that such default be cured
within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's
compliance with such minimum tangible net worth test, or else an event of
default would exist under the Omega loan documents. The Company received notice
in late December 1999, declaring an event of default as a result of the alleged
breach of the tangible net worth covenants contained in the Omega Loan Documents
and accelerating all amounts due under obligations to Omega. Effective January,
2000 PHCMI ceased making its monthly interest payments on the Omega Note. Omega
subsequently initiated foreclosure proceedings on three skilled nursing
facilities located in North Carolina. Hearings on the foreclosures were
scheduled for February 3, 2000; however, unless otherwise determined by the
Bankruptcy Court, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by Omega with regard to any
defaults that may exist under the Omega Loan Documents.
Debtor-in-Possession Financing for the Company. Among the orders entered by
the Bankruptcy Court on the Petition Date in the Company's Chapter 11 case were
orders approving on an interim basis (i) the use of cash collateral by the
Company and those of its subsidiaries which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code (excluding Mariner Health
and the direct and indirect subsidiaries of Mariner Health, the "Company
Debtors"), and (ii) the funding of up to $25.0 million in principal amount at
any time outstanding under a debtor-in-possession financing arrangement (the
"Company DIP Financing") established pursuant to that certain Revolving Credit
and Guaranty Agreement dated as of January 18, 2000 (the "Petition Date") (as
amended from time to time, the "Company DIP Credit Agreement") by and among the
Company, as borrower, the other Company Debtors, as guarantors, the lenders
signatory thereto as lenders (the "Company DIP Lenders"), and The Chase
Manhattan Bank, as Administrative Agent, Documentation Agent and Collateral
Agent
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(the "Company DIP Agent"). Following a hearing on January 28, 2000, the
Bankruptcy Court entered an interim order (the "Company Interim DIP Order") to
increase the approved portion of the Company DIP Financing to $50.0 million, and
scheduled a final hearing on February 16, 2000, for consideration of a final
order (the "Final Company DIP Order") approving the full $100.0 million amount
of the Company DIP Financing. The final hearing, however, was adjourned to March
20, 2000, to allow the Company and certain of its creditors to resolve technical
issues related to the Financing.
The Company DIP Credit Agreement establishes a one-year, $100.0 million
secured revolving credit facility to provide funds for working capital and other
lawful corporate purposes for use by the Company and the other Company Debtors;
provided, however, that amounts outstanding under the Company DIP Financing may
not at any time exceed the maximum borrowing amounts established for the Company
under the initial DIP order (the "Company Initial DIP Order"), the Company
Interim DIP Order or the Final Company DIP Order (collectively, the "Company DIP
Orders"), as the case may be, or the Company's borrowing base of eligible
accounts receivable (the "Company Borrowing Base"). Up to $10.0 million of the
Company DIP Financing may be utilized for the issuance of letters of credit as
needed in the businesses of the Company Debtors. Interest accrues on the
principal amount outstanding under the Company DIP Financing at a per annum rate
of interest equal to the ABR of Chase, plus three percent (3%) and is payable
monthly in arrears. During the existence and continuation of a default in the
payment of any amount due and payable by the Company Debtors under the Company
DIP Credit Agreement, interest will accrue at the default rate of ABR plus five
percent (5%) per annum. As of February 16, 2000, no borrowings were outstanding
under the Company DIP Financing.
The outstanding principal of the Company DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, are due and
payable one year from the Petition Date or, if earlier, on the Prepayment Date.
The term, "Prepayment Date," was originally defined as the first business day
which is at least 30 days after the entry of the Company Initial DIP Order, if
the Final Company DIP Order has not been entered, but was amended to March 22,
2000, to accommodate the adjournment of a hearing on the Final Company DIP
Order. The Company must also prepay principal to the extent that the principal
amount outstanding under the Company DIP Financing at any time exceeds the
Company Borrowing Base then in effect. To the extent proceeds of loans under
the Company DIP Financing are used to complete the construction of certain
healthcare facilities that are part of the Synthetic Lease (which proceeds are
not permitted to exceed $8.8 million), proceeds from the sale of any such
properties must be used first to repay any portion of the loans made pursuant to
the Company DIP Financing, with 75% of any remaining net cash proceeds to be
applied as an adequate protection payment to the lenders under the Senior Credit
Facility, and the remaining 25% of such excess net cash proceeds to be retained
by the Company or its applicable subsidiary as additional working capital.
Pursuant to the terms of the Company DIP Orders, 75% of the net cash proceeds of
other asset sales approved by the Bankruptcy Court and the requisite Company DIP
Lenders are to be applied as an adequate protection payment to the lenders under
the prepetition Senior Credit Facility. The Company has the right to make
optional prepayments in increments of $1.0 million, and to reduce the commitment
under the Company DIP Credit Agreement in increments of $5.0 million.
The obligations of the Company under the Company DIP Credit Agreement are
jointly and severally guaranteed by each of the other Company Debtors pursuant
to the Company DIP Agreement. Under the terms of the Company DIP Orders, the
obligations of the Company Debtors under the Company DIP Credit Agreement (the
"Company DIP Obligations") constitute allowed superpriority administrative
expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to
a carve-out for certain professional fees and expenses incurred by the Company
Debtors). The Company DIP Obligations will be secured by perfected liens on all
or substantially all of the assets of the Company Debtors (excluding bankruptcy
causes of action), the priority of which liens (relative to prepetition
creditors having valid, non-avoidable, perfected liens in those assets and to
any "adequate protection" liens granted by the Bankruptcy Court) is established
in the Company DIP Orders and the related cash collateral orders entered by the
Bankruptcy Court (the "Company Cash Collateral Orders"). The Bankruptcy Court
has also granted certain prepetition creditors of the Company Debtors
replacement liens and other rights as "adequate protection" against any
diminution of the value of their existing collateral that may result from
allowing the Company Debtors to use cash collateral in which such creditors had
valid, non-avoidable and
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perfected liens as of the Petition Date. The discussion contained in this
paragraph is qualified in its entirety by reference to the Company DIP Orders,
the Company Cash Collateral Orders, and related stipulations, and reference
should be made to such orders (which are available from the Bankruptcy Court)
and stipulations for a more complete description of such terms.
The Company DIP Credit Agreement contains customary representations,
warranties and covenants of the Company Debtors, as well as certain financial
covenants relating to minimum EBITDA, maximum capital expenditures, and minimum
patient census. The breach of such representations, warranties or covenants, to
the extent not waived cured within any applicable grace or cure periods, could
result in the Company being unable to obtain further advances under the Company
DIP Financing and possibly the exercise of remedies by the Company DIP Lenders,
either of which events could materially impair the ability of the Company to
successfully reorganize in Chapter 11.
Mariner Health Senior Credit Facility and Mariner Health Term Loan
Facility. At the time of the Mariner Merger, Mariner Health was the borrower
under a $460.0 million revolving credit facility (the "Mariner Health Senior
Credit Facility"), by and among Mariner Health, the lenders signatory thereto
(the "Mariner Health Lenders"), and PNC Bank, National Association ("PNC Bank"),
as agent for the Mariner Health Lenders (the "Mariner Agent").
Outstanding advances under the Mariner Health Senior Credit Facility bear
interest based, at the borrower's option, either on PNC Bank's prime rate or on
a Eurodollar-based rate, in each case plus an applicable margin which fluctuates
based on a pricing matrix related to Mariner Health's leverage ratio. The
Mariner Health Senior Credit Facility contains covenants which, among other
things, require Mariner Health and its subsidiaries to maintain certain
financial ratios and impose certain limitations or prohibitions on Mariner
Health with respect to the incurrence of indebtedness, liens and capital leases;
the payment of dividends on, and the redemption or repurchase of, its capital
stock; investments and acquisitions, including acquisitions of new facilities;
the merger or consolidation of Mariner Health with any person or entity; and the
disposition of any of Mariner Health's properties or assets.
Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
(a) to reduce the amount of the revolving commitment from $460.0 million to
$250.0 million, (b) to provide additional financial covenant flexibility for
Mariner Health and its subsidiaries, (c) to modify certain of the financial and
operating covenants referred to in the immediately preceding paragraph, (d) to
increase the applicable interest rate margins (see Note 9 to the Consolidated
Financial Statements) and (e) to expand the amount and types of collateral
pledged to secure the Mariner Health Senior Credit Facility.
Mariner Health's obligations under the Mariner Health Senior Credit
Facility are guaranteed by substantially all of its subsidiaries and are secured
by substantially all of the otherwise unencumbered assets of Mariner Health and
such subsidiary guarantors.
Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of December 23, 1998 (the "Mariner Health Term Loan Facility") with PNC
Bank, as administrative agent, First Union National Bank, as syndication agent,
and the financial institutions signatory thereto as lenders (the "Term
Lenders"), pursuant to which the Term Lenders made a $210.0 million senior
secured term loan to Mariner Health (the "Mariner Health Term Loan"). Proceeds
of the Mariner Term Loan were applied to reduce outstanding amounts under the
Mariner Health Senior Credit Facility in connection with the Mariner Health
Senior Credit Facility Amendment. The interest rate pricing and covenants
contained in the Mariner Health Term Loan Agreement are substantially similar to
the corresponding provisions of the Mariner Health Senior Credit Facility, as
amended by the Mariner Health Senior Credit Facility Amendment. The Mariner
Health Term Loan Facility is guaranteed by the same subsidiary guarantors as the
Mariner Health Senior Credit Facility and is cross-defaulted and cross-
collateralized with the Mariner Health Senior Credit Facility.
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As of December 31, 1999, approximately $233.8 million of loans and $8.1
million of letters of credit were outstanding under the Mariner Health Senior
Credit Facility, and $192.4 million of the Mariner Health Term Loan was
outstanding.
Mariner Health and its subsidiaries are treated as unrestricted
subsidiaries under the Senior Credit Facility. Unlike other subsidiaries of the
Company (the "Non-Mariner Subsidiaries"), Mariner Health and its subsidiaries
neither guarantee the Company's obligations under the Senior Credit Facility nor
pledge their assets to secure such obligations. Correspondingly, the Company and
the Non-Mariner Subsidiaries do not guarantee or assume any obligations under
the Mariner Health Senior Credit Facility or the Mariner Health Term Loan
Facility. Mariner Health and its subsidiaries are not subject to the covenants
contained in the Senior Credit Facility, and the covenants contained in the
Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility
are not binding on the Company and the Non-Mariner Subsidiaries. Mariner Health
and the Mariner Health subsidiaries are obligated to continue to comply with the
covenants contained in the Mariner Health Senior Credit Facility and the Mariner
Health Term Loan Facility without taking into account the revenues, expenses,
net income, assets or liabilities of the Company and the Non-Mariner
Subsidiaries. The converse is true with respect to the Company, which (together
with its Non-Mariner Subsidiaries) must continue to comply with the covenants
contained in its Senior Credit Facility without taking into account the
revenues, expenses, net income, assets or liabilities of Mariner Health and its
subsidiaries.
Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility and in the
Mariner Health Term Loan Facility as of March 31, 1999, and again as of June 30,
1999, September 30, 1999 and December 31, 1999. Mariner Health was unable to
obtain a waiver of such financial covenant defaults from the Mariner Agent, the
Mariner Health Lenders and the Term Lenders. Mariner Health failed to make its
October 1, 1999 interest payments due on the Mariner Health Senior Credit
Facility and in the Mariner Health Term Loan Facility within the applicable
grace period, although it subsequently made such payment with cash collateral
previously delivered to the collateral agent for the Mariner Health Lenders,
pursuant to amendments to the Mariner Health Senior Credit Facility and the
Mariner Health Term Loan Facility. Finally, Mariner Health did not repay the
Mariner Health Term Loan and Mariner Health Senior Credit Facility when they
matured by their terms on January 3, 2000. As a result, events of default exist
with respect to both the Mariner Health Term Loan and the Mariner Health Senior
Credit Facility. However, the automatic stay protection afforded by the Chapter
11 Filings by the Mariner Health Debtors (defined below, see "Debtor-in-
Possession Financing for Mariner Health") prevents any action from being taken
by the Mariner Health Lenders and the Term Lenders with regard to any such
events of default unless otherwise determined by the Bankruptcy Court.
Mariner Health Senior Subordinated Notes. Mariner Health is also the issuer
of $150.0 million of 9 1/2% Senior Subordinated Notes due 2006 (the "Mariner
Notes") which were issued pursuant to an indenture dated as of April 4, 1996
(the "Mariner Indenture") with Mariner Health as issuer and State Street Bank
and Trust Company as trustee (the "Mariner Trustee"). The Mariner Notes are
obligations solely of Mariner Health and are not guaranteed by the Company or
any of its subsidiaries (other than Mariner Health). Because of the existing,
unwaived financial covenant defaults under the Mariner Health Senior Credit
Facility and the Mariner Health Term Loan Facility, the agents under such
facilities gave notice to Mariner Health and the Mariner Trustee that they were
instituting a 179-day payment blockage period, during which no payments of debt
service on the Mariner Notes could be made. Accordingly, Mariner Health did not
make the scheduled $7.1 million interest payment due on the Mariner Notes on
October 1, 1999. The 30-day grace period having expired without such interest
being paid, an event of default exists under the Mariner Indenture. Unless
otherwise determined by the Bankruptcy Court, the automatic stay protection
afforded by the Chapter 11 Filings prevents any action from being taken by the
Mariner Trustee and any holders of the Mariner Notes with regard to any defaults
that may exist under the Mariner Indenture.
As a consequence of the Mariner Merger and the resulting change of control
at Mariner Health, the holders of the Mariner Notes had the right under the
Mariner Indenture to require that their Mariner Notes be purchased (the "Change
of Control Purchase") at a purchase price equal to 101% of the outstanding
principal amount of the
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Mariner Notes purchased. Effective on September 11, 1998, Mariner Health and the
Mariner Trustee entered into an amendment to the Mariner Indenture which
permitted Mariner Health to designate a third-party to purchase any Mariner
Notes tendered pursuant to the Change of Control Purchase. Mariner Health
designated NationsBank, N.A. (n/k/a Bank of America, N.A., and herein referred
to as "Bank of America") as a third-party purchaser, and on September 21, 1998
Bank of America acquired all $40.7 million of the Mariner Notes tendered in
connection with the Change of Control Purchase (the "Tendered Mariner Notes").
In agreeing to act as third-party purchaser, Bank of America required the
Company to enter into a total return swap agreement (the "Total Return Swap"),
with the financial institution as counterparty. See "Quantitative and
Qualitative Disclosures about Market Risk." The Company's obligations under the
Total Return Swap are guaranteed by Mariner Health and substantially all of the
subsidiaries of Mariner Health. During the three months ended December 31, 1998,
an additional $6.0 million of the Mariner Notes were acquired by Bank of America
and made a part of the Total Return Swap.
The Total Return Swap terminated by its terms on August 16, 1999. Based on
the bids for the Tendered Mariner Notes solicited by Bank of America pursuant to
the Total Return Swap Agreement, the market value of the Tendered Mariner Notes
for purposes of unwinding the Total Return Swap was determined to be
approximately $700,000, resulting in capital depreciation of approximately $46.5
million being owed by the Company. The Company was the winning bidder in the
auction for the Tendered Mariner Notes. On the August 16, 1999 termination date,
Bank of America applied $15.0 million drawn by it under a letter of credit
issued pursuant to the Mariner Health Senior Credit Facility and applied $5.0
million of cash collateral previously posted by Mariner Health, to satisfy $20.0
million of the total amount owed to Bank of America under the Total Return Swap,
leaving a net deficiency of approximately $26.5 million (the "Net Total Return
Swap Deficiency").
Effective August 16, 1999, Bank of America and the Company incorporated the
Net Total Return Swap Deficiency into a promissory note (the "Deficiency Note")
which generally matures and is payable as to principal and interest on the same
terms as the notes evidencing the Revolving Loans. The guarantee of the Total
Return Swap obligations of the Company by Mariner Health and its subsidiary
guarantors remains in place. Bank of America also waived any default arising
from any failure to be paid the Net Deficiency on the termination date of the
Total Return Swap, in return for the lenders under the Senior Credit Facility
amending the Senior Credit Facility to acknowledge the Deficiency Note as
permitted indebtedness and as an "Obligation" that is secured on a pari passu
basis with the indebtedness outstanding under the Senior Credit Facility. The
$46.7 million of Mariner Notes acquired by Mariner Post-Acute Network, Inc. in
connection with the unwinding of the Total Return Swap remain outstanding as an
obligation of Mariner Health.
The Company did not make the scheduled interest payments due under the
Deficiency Note coming due and payable after October 1999 and is in default
under the Deficiency Note. Unless otherwise determined by the Bankruptcy Court,
however, the automatic stay protection afforded by the Chapter 11 Filings
prevents any action from being taken by Bank of America with regard to any
defaults that may exist under the Total Return Swap, the Deficiency Note or the
related guaranty of the Mariner Health Debtors.
Debtor-in-Possession Financing for Mariner Health. Among the orders entered
by the Bankruptcy Court on the Petition Date in the Chapter 11 cases of Mariner
Health and its subsidiaries (the "Mariner Health Debtors"), were (a) an order
(the "Initial Mariner Health Cash Collateral Order") approving the use of cash
collateral by the Mariner Health Debtors, and (b) an order (the "Initial Mariner
Health DIP Order") approving the funding of up to $15.0 million in principal
amount at any time outstanding under a debtor-in-possession financing
arrangement (the "Mariner Health DIP Financing" and together with the Company
DIP Financing, the "DIP Financings") pursuant to that certain Debtor-in-
Possession Credit Agreement dated as of January 20, 2000 (as amended from time
to time, the "Mariner Health DIP Credit Agreement") by and among Mariner Health
and each of the other Mariner Health Debtors, as co-borrowers thereunder, the
lenders signatory thereto as lenders (the "Mariner Health DIP Lenders"), First
Union National Bank, as Syndication Agent, PNC Capital Markets, Inc. and First
Union Securities, Inc., as co-arrangers, and PNC Bank, National Association, as
Administrative Agent and Collateral Agent. After a final hearing on February 16,
2000, the Bankruptcy Court entered the February 16 Mariner Health DIP Order
granting the full $50.0 million of the Mariner Health DIP Financing.
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The Mariner Health DIP Credit Agreement establishes a one-year, $50.0
million secured revolving credit facility, which is divided into two tranches -
a $40.0 million tranche A commitment, and a $10.0 million tranche B commitment.
The tranche B loan commitment is not activated unless and until the holders of
at least 75% of the Mariner Health DIP Financing loans or commitments so
approve. Advances under the Mariner Health DIP Financing may be used by the
Mariner Health Debtors (and to a limited degree, by certain joint venture
subsidiaries of Mariner Health that are not debtors in the Mariner Health
Chapter 11 cases) for working capital and other lawful corporate purposes.
Amounts outstanding under the Mariner Health DIP Financing may not at any time
exceed the maximum borrowing amounts established for the Mariner Health Debtors
under the February 16 Mariner Health DIP Order (and collectively with the
Initial Mariner Health DIP Order, the "Mariner Health DIP Orders"). Up to $5.0
million of the Mariner Health DIP Financing may be utilized for the issuance of
letters of credit as needed in the businesses of the Mariner Health Debtors. As
of February 22, 2000, approximately $1.0 million was outstanding under the
Mariner Health DIP Financing.
Interest accrues on the principal amount outstanding under the Mariner
Health DIP Financing at a per annum rate of interest equal to the "base rate" of
PNC Bank (i.e., the higher of the PNC Bank prime rate or a rate equal to the
federal funds rate plus 50 basis points) plus the applicable spread, which is
250 basis points for tranche A and 300 basis points for tranche B. Such interest
is due and payable monthly in arrears. During the existence and continuation of
any event of default under the Mariner Health DIP Credit Agreement, the interest
rates normally applicable to tranche A loans and tranche B loans under the
Mariner Health DIP Financing will be increased by another 250 basis points per
annum.
The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable in one year or, if earlier, on the Commitment Termination Date.
The term, "Commitment Termination Date," is defined as the first to occur of the
following: (i) January 19, 2001, (ii) the effective date of a joint plan of
reorganization for the Mariner Health Debtors, (iii) the date of termination of
the exclusivity rights of the Mariner Health Debtors to file a plan of
reorganization, (iv) the filing by the Mariner Health Debtors of any plan of
reorganization (or the modification of any such plan previously filed with the
Bankruptcy Court) not previously approved by the holders of at least 66-2/3% of
the outstanding loans or commitments under the Mariner Health DIP Financing, (v)
the date of termination of the commitments under the Mariner Health DIP Credit
Agreement during the continuation of an event of default thereunder, (vi) 30
days after the Petition Date if the February 16 Mariner Health DIP Order has not
been entered (which deadline is subject to extension at the discretion of the
holders of at least 66-2/3% of the outstanding loans or commitments under the
Mariner Health DIP Financing), or (vii) the date on which all or substantially
all of the assets or stock of the Mariner Health Debtors is sold or otherwise
transferred. The Mariner Health Debtors must also prepay principal to the extent
that the principal amount outstanding under the Mariner Health DIP Financing at
any time exceeds the Borrowing Base then in effect. The Mariner Health Borrowing
Base for any month is an amount equal to $7.5 million in excess of the "Working
Capital Facility" borrowings projected for such month in Mariner Health's year
2000 DIP budget. The Mariner Health DIP Credit Agreement also provides for
mandatory prepayments under the following circumstances: (a) with net cash
proceeds from asset sales, the incurrence of certain debt, the issuance of new
equity, the receipt of tax refunds exceeding $100,000 in the aggregate, and the
receipt of casualty proceeds in excess of $100,000 that are not applied within
60 days after receipt to the repair, rebuilding, restoration or replacement of
the assets damaged or condemned (or committed within such period of time to be
so applied); and (b) on each business day, the amount of cash held by the
Mariner Health Debtors in excess of the sum of $5.0 million plus the aggregate
sum of the minimum amount required by depositary banks to be kept in deposit
accounts, concentration accounts and other with such banks. Amounts prepaid
pursuant to clause (a) of the immediately preceding sentence will permanently
reduce the amount of the Mariner Health DIP Financing commitments on a dollar-
for-dollar basis (first tranche A, and then tranche B). Amounts prepaid pursuant
to clause (b) of the same sentence will not permanently reduce such commitments.
The Mariner Health Debtors have the right to make optional prepayments in the
minimum principal amount of $1.0 million, and in increments of $100,000 in
excess thereof, and, on three business days' notice, to reduce the commitments
under
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the Mariner Health DIP Credit Agreement in the minimum amount of $5.0 million,
or in increments of $1.0 million in excess thereof.
Under the terms of the Mariner Health DIP Orders, the obligations of the
Mariner Health Debtors under the Mariner Health DIP Credit Agreement (together
with certain potential cash management system liabilities secured on a pari
passu basis therewith, the "Mariner Health DIP Obligations") constitute allowed
superpriority administrative expense claims pursuant to Section 364(c)(1) of the
Bankruptcy Code (subject to a carve-out for certain professional fees and
expenses incurred by the Mariner Health Debtors). The Mariner Health DIP
Obligations will be secured by perfected liens on all or substantially all of
the assets of the Mariner Health Debtors (excluding bankruptcy causes of
action), the priority of which liens (relative to prepetition creditors having
valid, non-avoidable, perfected liens in those assets and to any "adequate
protection" liens granted by the Bankruptcy Court) is established in the Mariner
Health DIP Orders and the related cash collateral orders entered by the
Bankruptcy Court (the "Mariner Health Cash Collateral Orders"). The Bankruptcy
Court has also granted certain prepetition creditors of the Mariner Health
Debtors replacement liens and other rights as "adequate protection" against any
diminution of the value of their existing collateral that may result from
allowing the Mariner Health Debtors to use cash collateral in which such
creditors had valid, non-avoidable and perfected liens as of the Petition Date.
The discussion contained in this paragraph is qualified in its entirety by
reference to the Mariner Health DIP Orders, the Mariner Health Cash Collateral
Orders, and related stipulations, and reference should be made to such orders
(which are available from the Bankruptcy Court) and stipulations for a more
complete description of such terms.
The Mariner Health DIP Credit Agreement contains customary representations,
warranties and covenants of the Mariner Health Debtors, as well as certain
financial covenants relating to minimum EBITDAR, minimum patient census, minimum
eligible accounts receivable, maximum variations from Mariner Health's year 2000
DIP budget and maximum capital expenditures. The breach of such representations,
warranties or covenants, to the extent not waived or cured within any applicable
grace or cure periods, could result in the Mariner Health Debtors being unable
to obtain further advances under the Mariner Health DIP Financing and the
possible exercise of remedies by the Mariner Health DIP Lenders, either of which
events could materially impair the ability of the Mariner Health Debtors to
successfully reorganize in Chapter 11.
Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the Company Debtors, but does
contemplate weekly overhead payments to the Company equal to 1.25% of projected
net inpatient revenues for the then-current month, subject to a monthly "true-
up," such that the payments for such month equal 5% of actual net inpatient
revenues of the Mariner Health Debtors. Such payments may be suspended by the
Mariner Health Debtors if certain defaults specified in the Mariner Health DIP
Credit Agreement occur and are continuing, though such fees will still accrue
and will become due and payable if and when the subject default has been cured
or waived.
Healthcare Regulatory Matters. The Balanced Budget Act contains numerous
changes to the Medicare and Medicaid programs with the intent of slowing the
growth of payments under these programs by $115.0 billion and $13.0 billion,
respectively, through the year ended 2002. Approximately 50% of the savings were
to be achieved through a reduction in the growth of payments to providers and
physicians. These cuts have had, and will continue to have, a material adverse
effect on the Company.
The Balanced Budget Act amended the Medicare program by revising the
payment system for skilled nursing services. Historically, nursing homes were
reimbursed by the Medicare program based on the actual costs of services
provided. However, the Balanced Budget Act required the establishment of a PPS
system for nursing homes for cost reporting periods beginning on or after July
1, 1998. Under PPS, nursing homes receive a fixed per diem rate for each of
their Medicare Part A patients which, during the first three years, is based on
a blend of facility specific rates and Federal acuity adjusted rates.
Thereafter, the per diem rates will be based solely on Federal acuity adjusted
rates. Subsumed in this per diem rate are ancillary services, such as pharmacy
and rehabilitation services, which historically have been provided to many of
the Company's nursing facilities by the
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Company's pharmacy and therapy subsidiaries. The inclusion of ancillary services
in the PPS per diem has resulted in significantly lower margins in the Company's
pharmacy operations as a result of increased pricing competition, a change in
buying patterns by customers and the decision by the Company to exit certain
businesses previously operated by the Company such as its third party therapy,
home health and hospital contract management businesses.
On May 12, 1998, HCFA published the "Interim Final Rule" for the skilled
nursing facility ("SNF") PPS along with the acuity adjusted federal PPS rates
for Part A Medicare patients and the facility specific inflation factors
effective from July 1, 1998 through September 30, 1999 and the inflation factors
that are used to adjust the facility specific base period cost to the payment
rates for periods beginning July 1, 1998 through periods beginning September 1,
1999. On July 30, 1999, HCFA published the "Final Rule" for PPS along with
acuity adjusted federal PPS rates that are effective October 1, 1999 through
September 30, 2000, and the inflation factors that are used to adjust the
specific facility specific base period cost to payment rates for periods
beginning October 1, 1999 through periods beginning September 1, 2000. The
acuity adjusted federal PPS rates and facility specific inflation factor that
are published along with the Final Rule follow the guidance included in the
Interim Final Rule and do not provide any long-term relief from the overall
effect of PPS on Medicare revenue decreases. On November 29, 1999, President
Clinton signed into law H.R. 3194, the "Consolidated Appropriations Act" (the
"CAA") (P.L. 106-113), legislation designed to mitigate the effects of the
Balanced Budget Act. While the CAA is expected to ameliorate somewhat the
adverse effects of the Balanced Budget Act, the Company has not yet evaluated
what effect the CAA will have on its operating results. However, the Company
does not believe the CAA will have a material positive effect on its operating
results. See "Business--Regulation." The CAA, however, temporarily increases
the acuity adjusted PPS rates by 20 percent for 15 acuity categories. As
evidenced by the language of the CAA, this payment increase is intended to
compensate SNFs for the provision of care to medically complex patients, pending
appropriate refinements to the PPS system. SNFs providing care to patients
falling within every non-rehabilitation acuity category above the presumptive
(rebuttable) Medicare eligibility line will benefit from this increase. Three
acuity categories falling within the "high" and "medium" rehabilitation category
also are subject to the increase. The increased payments will begin on April 1,
2000, and end before the later of (A) October 1, 2000, or (B) the date HCFA
implements a refined PPS system that better accounts for medically-complex
patients. Neither the CAA nor the accompanying Conference Report provides HCFA
with specific directions regarding such refinements to the PPS system. In
addition, the CAA provides for a four percent increase in the federal per diem
payment rates for all acuity categories in both fiscal years 2001 and 2002. This
increase will not be built into the base payment rates, however, and therefore
future updates to the federal payment rates will be calculated from the initial
base rate.
As of July 1, 1999, all of the Company's SNFs are receiving Medicare
payment through PPS, although transition PPS rates vary from facility to
facility depending on each facility's base period cost that comprises the
facility specific component of the rates and the facility's geographic location
that defines the wage adjuster that is applied to the acuity adjusted federal
component of the rates. For most of the Company's facilities, the facility
specific base period cost is higher than the base period cost that was used to
develop the acuity adjusted federal rates. For some facilities, however, the
facility base period cost is lower than the base period cost used to develop the
PPS rates. The CAA allows SNFs to elect transition to the full federal rate at
the beginning of their cost reporting periods beginning on or after January 1,
2000. SNFs may make the election up to 30 days after the start of their cost
reporting period. The Company will take advantage of this waiver where
appropriate.
The Balanced Budget Act also repealed the Boren Amendment ("Boren"), which
had required state Medicaid programs to reimburse nursing facilities for the
costs that are incurred by efficiently and economically operated providers in
order to meet quality and safety standards. Because of the repeal of Boren,
states now have considerable flexibility in establishing Medicaid payment rates.
In addition, Boren provided a dispute resolution mechanism whereby providers
could challenge Medicaid rates set by the various states, the repeal of which
will now make it more difficult to challenge these rates in the future. At least
one state, North Carolina, is proposing to change its Medicaid payment rates
and/or payment methodology. However, it is unclear how the procedural
protections imposed by the Balanced Budget Act will constrain these types of
changes. Pending the publication of
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a final rule implementing the procedural limitations of the Balanced Budget Act,
the Company anticipates that other states may attempt to change their payment
rate methodologies, and that such changes could result in a reduction in
payments to nursing facilities.
The Balanced Budget Act also revised the reimbursement methodology for
therapy services under Medicare Part B. Historically, Medicare Part B therapy
services were reimbursed based on the cost of the services provided, subject to
prudent buyer and salary equivalency restrictions. In November 1998, certain fee
screen schedules were published setting forth the amounts that can be charged
for specific therapy services. Additionally, the Balanced Budget Act set forth
maximum per beneficiary limits of $1,500 per provider for physical therapy and
speech pathology and $1,500 per provider for occupational therapy. Both the fee
screens and per beneficiary limits were effective for services rendered
following December 31, 1998. The imposition of fee screens, together with the
inclusion of ancillary services in the federal per diem, has had a material
adverse effect on the Company's therapy business resulting in the decision by
the Company to terminate its contracts to provide therapy services. The CAA
temporarily mitigates the Balanced Budget Act limitations by providing that the
therapy caps will not apply in 2000 and 2001. The CAA requires the Secretary of
Health and Human Services (the "Secretary") to conduct focused medical reviews
of therapy services during 2000 and 2001, with an emphasis on claims for
services provided to residents of SNFs. The CAA also requires the Secretary to
study and to submit recommendations to Congress on therapy utilization patterns
in 2000 compared to those in 1998 and 1999.
The CAA also excludes certain items and services from the formerly all-
inclusive SNF per diem rates. Specifically, the following items and services
will become separately reimbursable outside of the PPS rates: (1) ambulance
services furnished to an individual in conjunction with renal dialysis services;
(2) chemotherapy items and administration services (as identified by certain
HCFA Common Procedure Coding System ("HCPCS") codes); (3) radioisotope services
(as identified by certain HCPCS codes); and (4) customized prosthetic devices
(artificial limbs) and other custom prostheses if provided to a SNF resident and
intended to be used after discharge (as identified by certain HCPCS codes and
other instances chosen by HCFA). Payment for such items and services, which are
"passed-through" the per diem payment rates, will be made under Part B, in
conformance with Part B payment rules. Although these items are separately
reimbursed from the PPS rate, the CAA also directs HCFA to make appropriate
adjustments to the PPS payments rates to reflect the fact that certain items and
services have been excluded, and to ensure budget neutrality. Thus, HCFA is
directed to make an appropriate proportional reduction in PPS payments at that
time.
In the process of finalizing certain Medicare cost reports or reopening
previously finalized cost reports filed by various of the Company's Medicare
provider facilities, certain Medicare fiscal intermediaries have issued NPRs,
which include significant audit adjustments that reduce the amount of
reimbursement that previously was received by the facilities. The adjustments
are based, for the most part, on denials of exception to the related
organization principles with regard to services and supplies furnished to the
facilities by the Company's pharmacy and rehabilitation companies and reductions
to costs claimed for therapy services under the prudent buyer principles.
The prudent buyer principle states, in part, "the prudent and cost-
conscious buyer not only refuses to pay more than the going price for an item or
service, he also seeks to economize by minimizing cost." Certain of the fiscal
intermediaries have alleged that the Company was not prudent in its purchase of
occupational therapy and speech pathology services prior to HCFA's establishing
salary equivalency guidelines, effective April 1998. Fiscal intermediaries
calculated facilities' costs to provide services through employed therapists and
reduced costs claimed on the cost reports for providing services through
contracts and adjusted the cost reports accordingly. Appeals were filed with the
Provider Reimbursement and Review Board ("PRRB") and resulted in a favorable
outcome. However, on review the Social Security Administrator reversed the PRRB
and restored the intermediaries' adjustments. The Company believes that it has
substantial arguments to support its position that the contested costs are
allowable and the issue is being appealed through judicial review, pursued
through the appropriate legal processes. Another unrelated provider received a
favorable judicial decision on its prudent buyer appeal based on similar facts.
The Company currently is negotiating a settlement with HCFA for all of its
prudent
40
<PAGE>
buyer appeals and believes that it will have a favorable outcome. However, until
the settlement is finalized, there can be no assurance that the Company will
prevail or that it will not have to expend significant amounts to complete the
appeal process. Contracts between facilities and therapy providers generally
provide for the therapy provider to indemnify the nursing facility in the event
of denials or cost report disallowances. There can be no assurance that the
therapy providers will not contest the triggering of the indemnity provisions of
the contracts or that they will be able to fund the indemnity provisions.
The related organization principle states, in part, "a provider's allowable
cost for services, facilities, and supplies furnished by a party related to the
provider are the costs the related party incurred in furnishing the items in
question." The regulations provide for an exception to the related organization
principle if certain requirements are met and the Company believes that it meets
these requirements with respect to services its facilities previously received
from related pharmacy and rehabilitation subsidiaries. Some fiscal
intermediaries have denied the request for exception and have made adjustments
to reduce the allowable cost that is included in nursing facility cost reports
to the cost of the related organization. The Company has requested PRRB appeals
for these adjustments, but the appeals have not yet been heard. There can be no
assurance that the Company will prevail in the appeal process.
During the third quarter of fiscal 1999, the Medicare fiscal intermediaries
for the subsidiaries operated by Mariner Health reopened approximately 50 1995
and 1996 cost reports and issued revised NPRs imposing prudent buyer or related
party adjustments and applying an administrative resolution related to the cost
report treatment of admissions cost. The reopenings resulted in reductions in
reimbursable cost of approximately $16.9 million. The Company believes that it
has substantial arguments for both issues and will appeal the adjustments to the
PRRB. In lieu of recoupment by the fiscal intermediary, the Company has reached
an agreement with HCFA and the intermediary and has implemented an extended
repayment plan. The balance as of the date of the agreement was approximately
$15.9 million, which will be repaid over a period of one year. The first six
monthly payments of $1.8 million, including interest, have been made. The
intermediary has notified Mariner Health that it intends to issue revised NPRs
for the remaining facility cost reports (1997 through 1999) starting in fiscal
year 2000. As part of the Chapter 11 process, Mariner Health entered into a
stipulation with the U.S. Department of Health and Human Services ("DHHS")
whereby, among other things, HCFA will not recoup certain pre-petition
overpayments for other than the current cost reporting years for the pendancy of
Mariner Health's DIP obligations. Accordingly, repayment obligations which may
arise from the issuance of revised NPRs may be stayed for an interim period.
Should the revised NPRs result in a repayment requirement not within the purview
of the stipulation, or after the pendancy of the DIP obligations, the Company
and Mariner Health would seek to enter into an extended repayment plan with HCFA
at that time.
Other Factors Affecting Liquidity and Capital Resources. In addition to
principal and interest payments on its long-term indebtedness, the Company has
significant rent obligations relating to its leased facilities. Without giving
any effect to any potential restructuring of current rent obligations, the
Company's total estimated rent obligations for fiscal year 2000 are
approximately $90 million, of which approximately $22.7 million was paid in the
three months ended December 31, 1999. In connection with its review of its
portfolio of facilities, the Company anticipates divesting itself of under-
performing facilities, which will have a favorable impact on the Company's rent
obligations.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate the
addition of specialty medical services, and to improve the physical appearance
of its facilities for marketing purposes. In addition, there are capital
expenditures required for completion of certain existing facility expansions and
new construction projects in process, as well as supporting non-nursing home
operations and Year 2000 compliance. The Company estimates that total capital
expenditures for the year ending September 30, 2000 will be approximately $38
million, of which approximately $11.9 million was paid in the three months ended
December 31, 1999.
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The Company has a lease arrangement, originally providing for up to $100.0
million to be used as a funding mechanism for future skilled nursing facility
construction, lease conversions, and other facility acquisitions (the "Synthetic
Lease"). This leasing program historically has allowed the Company to complete
these projects without committing significant financing resources. The lease is
an unconditional "triple net" lease for a period of seven years with the annual
lease obligation a function of the amount spent by the lessor to acquire or
construct the project, a variable interest rate, and commitment and other fees.
The Company guarantees a minimum of approximately 83% of the residual value of
the leased property and also has an option to purchase the properties at any
time prior to the maturity date at a price sufficient to pay the entire amount
financed, accrued interest, and certain expenses. At December 31, 1999,
approximately $66.6 million of this leasing arrangement was utilized. The
leasing program is accounted for as an operating lease under GAAP. The
Synthetic Lease was amended on December 23, 1998 to mirror certain changes made
to the Senior Credit Facility and subsequently amended effective March 31, 1999
to reduce the commitment to $80 million. At June 30, 1999, September 30, 1999
and December 31, 1999, the Company was in violation of certain of these
financial covenants and ceased making rent payments under the Synthetic Lease in
November 1999. Notwithstanding the expiration of the temporary forbearance by
the lessor and its lenders against exercising remedies with respect to such
events of default, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken with respect to any defaults that
may existing under the Synthetic Lease. One consequence of the defaults under
the Synthetic Lease documents was that the lessor under the Synthetic Lease,
FBTC Leasing Corp., has been unable to make additional borrowings under the
related credit facility and make such proceeds available for the completion of
the five facilities currently under construction. Under the terms of the
Company DIP Financing, the Company is permitted to borrow and spend up to $8.8
million to complete such facilities. FBTC Leasing Corp., the Company and the
Agent for the Synthetic Lenders signed and filed a stipulation agreeing that the
Synthetic Lease transaction will be treated as a secured financing rather than a
true lease for purposes of the reorganization of the Company Debtors.
The Company has experienced an increasing trend in the number and severity
of litigation claims asserted against the Company. Management believes that this
trend is endemic to the long-term care industry and is a result of the
increasing number of large judgments against long-term care providers in recent
years resulting in an increased awareness by plaintiff's lawyers of potentially
large recoveries. The Company also believes that there has been, and will
continue to be, an increase in governmental investigatory activity of long-term
care providers, particularly in the area of false claims. While the Company
believes that it provides quality care to the patients in its facilities and
materially complies with all applicable regulatory requirements, an adverse
determination in a legal proceeding or governmental investigation, whether
currently asserted or arising in the future, could have a material adverse
effect on the Company. See "Legal Proceedings."
The Company currently maintains two captive insurance subsidiaries to
provide for reinsurance obligations under workers' compensation, general and
professional liability, and automobile liability for periods ended prior to
April 1, 1998. These obligations are funded with long-term, fixed income
investments which are not available to satisfy other obligations of the Company.
By letter dated June 1999, the Company received a 90-day cancellation
notice from its former general and professional liability ("GL/PL") carrier. In
June, the Company binded a replacement GL/PL policy, effective July 31, 1999,
which resulted in a $4.4 million increase in annual premium and elimination of
the Royal policy's aggregate retention limit under the former policy. The
elimination of the aggregate retention limit is expected to increase the
actuarial cost of general and professional liability claims by approximately
$42.6 million in fiscal year 2000. This increased exposure will have a delayed
negative effect on operating cash flow as claims develop over the next several
years. See "Business - Insurance." The Company is examining its alternatives
with respect to its former insurer.
The Mariner Health Senior Credit Facility generally prohibits Mariner
Health from paying dividends or making distributions to the Company, except as
follows: (a) Mariner Health can make a one-time dividend (which has not yet been
utilized) to the Company in an amount not to exceed Mariner Health's
consolidated net income
42
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for the most recent 12 fiscal months subject to the absence of any default under
the Mariner Health Senior Credit Facility or the Mariner Health Term Loan
Facility, and subject further to demonstrating pro forma compliance with certain
financial covenants; and (b) Mariner Health may reimburse the Company for
ordinary course of business expenses paid by the Company on behalf of Mariner
Health or its subsidiaries. By amendments effective as of January 19, 1999, the
Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility
were each amended to allow Mariner Health also to make a dividend or
distribution of up to $25.0 million to the Company to enable the Company to
purchase Mariner Notes pursuant to the Total Return Swap or to otherwise satisfy
the Company's obligations under the Total Return Swap, subject to the absence of
any default under the Mariner Health Senior Credit Facility or the Mariner
Health Term Loan Facility, and subject further to demonstrating pro forma
compliance with certain financial covenants thereunder. All such dividends or
distributions other than the reimbursement of the Company for ordinary course of
business expenses paid by the Company on behalf of Mariner Health or its
subsidiaries have since been prohibited by subsequent amendments to the Mariner
Health Senior Credit Facility and the Mariner Health Term Loan Facility, due to
Mariner Health's noncompliance with various financial covenants.
The Mariner Health DIP Credit Agreement also limits the ability of the
Mariner Debtors from engaging in affiliate transactions and making restricted
payments, specifically including payments to the Company Debtor. However, the
Mariner Health DIP Credit Agreement permits, among other things, weekly overhead
payments to the Company (see "- Mariner Health Debtor-in-Possession Financing"
above), the purchase of pharmaceutical goods and services from certain Company
Debtors, the allocation to, and payment by, the Mariner Health Debtors of their
share of certain taxes, insurance obligations and employee benefit obligations
paid for and administered on a consolidated basis by the Company, and certain
ordinary course transactions which are on terms no less favorable to the subject
Mariner Health Debtors than the terms obtainable from a non-affiliate, and for
which the approval of the requisite Mariner Health DIP Lenders and the
Bankruptcy Court have been obtained.
There can be no assurance that the amounts available to the Company Debtors
from the Company DIP Financing and cash collateral will be sufficient to fund
the operations of the Company Debtors until such time as the Company Debtors are
able to take the steps necessary to structure a plan of reorganization that will
be acceptable to creditors and confirmed by the Bankruptcy Court. Furthermore,
the Company is unable to predict whether the Company Debtors will have
sufficient cash flow generated from their operations and cash on hand to fund
their working capital needs, anticipated capital expenditures, rent, debt
service requirements and other operating expenses in the event the amounts
available under the Company DIP Financing are exhausted prior to obtaining
confirmation of a plan of reorganization. Finally, there can be no assurance
that any plan of reorganization confirmed in connection with the Chapter 11
Filings of the Company Debtors will allow the Company Debtors to operate
profitably under PPS or give the Company Debtors sufficient liquidity to meet
their operational needs. The ability of the Company Debtors to fund such
requirements will depend, among other things, on future economic conditions and
on financial, business and other factors, many of which are beyond the control
of the Company Debtors.
There can be no assurance that the amounts available to the Mariner Health
Debtors from the Mariner Health DIP Financing and cash collateral will be
sufficient to fund the operations of the Mariner Health Debtors until such time
as the Mariner Health Debtors are able to take the steps necessary to structure
a plan of reorganization that will be acceptable to creditors and confirmed by
the Bankruptcy Court. Furthermore, the Company and the Mariner Health Debtors
are unable to predict whether the Mariner Health Debtors will have sufficient
cash flow generated from their operations and cash on hand to fund their working
capital needs, anticipated capital expenditures, rent, debt service requirements
and other operating expenses in the event the amounts available under the
Mariner Health DIP Financing are exhausted prior to obtaining confirmation of a
plan of reorganization. Finally, there can be no assurance that any plan of
reorganization confirmed in connection with the Chapter 11 Filings of the
Mariner Health Debtors will allow the Mariner Health Debtors to operate
profitably under PPS or give the Mariner Health Debtors sufficient liquidity to
meet their operational needs. The ability of the Mariner Health Debtors to fund
such requirements will depend, among other things, on future economic conditions
and on financial, business and other factors, many of which are beyond the
control of the Mariner Health Debtors.
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Due to the existence of financial covenant defaults under the Senior Credit
Facility as of June 30, 1999, September 30, 1999 and December 31, 1999, and the
payment defaults referred to above, the Company has not been able to satisfy the
borrowing conditions under the Revolving Credit Facility. Under the terms of the
Company DIP Orders and the Company DIP Financing, up to $50.0 million (subject
to increase to $100.0 million upon entry of the Final Company DIP Order) is
available to fund the Company operations of the Company Debtors, subject to
satisfaction of the conditions set forth in the documents pertaining to the
Company DIP Financing, including borrowing base requirements.
The revolving loan commitment under the Mariner Health Senior Credit
Facility terminated, and the Mariner Health Senior Credit Facility and Mariner
Health Term Loan Facility matured on January 3, 2000. Under the terms of the
Mariner Health DIP Orders and the Mariner Health DIP Financing, up to $40.0
million is available under the tranche A loan commitment to fund Mariner
Health's operations, subject to increase to $50 million if, as and when the
tranche B loan commitment is activated up supermajority vote of the Mariner
Health DIP Lenders (i.e., holders of 75% or more of the outstanding credit
exposure under the Mariner Health DIP Credit Agreement) and upon satisfaction of
the conditions set forth in the documents pertaining to the Mariner Health DIP
Financing, including borrowing base requirements. No assurance can be given
regarding the timing or likelihood that the Bankruptcy Court will approve the
February 16 Mariner Health DIP Order, or the terms on which such approval may be
conditioned.
Impact of Inflation. The health care industry is labor intensive. Wages and
other labor-related costs are especially sensitive to inflation. Increases in
wages and other labor-related costs as a result of inflation or the increase in
minimum wage requirements without a corresponding increase in Medicaid and
Medicare reimbursement rates would adversely impact the Company. In certain of
the markets where the Company operates there is a labor shortage that could have
an adverse effect upon the Company's ability to attract or retain sufficient
numbers of skilled and unskilled personnel at reasonable wages. Accordingly,
rising wage rates could have an adverse effect on the Company in certain of its
markets.
Cautionary Statements
Information provided herein by the Company contains, and from time to time
the Company may disseminate materials and make statements which may contain,
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). In particular, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" contains information
concerning the Company's plan to restructure its debt obligations and other
financial commitments; and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000" contains information concerning
management's belief regarding the impact of the Year 2000 issue. The
aforementioned forward looking statements, as well as other forward looking
statements made herein, are qualified in their entirety by these cautionary
statements, which are being made pursuant to the provisions of the Act and with
the intention of obtaining the benefits of the "safe harbor" provisions of the
Act.
The Company cautions investors that any forward-looking statements made by
the Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors, including, but not limited to, the following:
(i) There can be no assurance that the amounts available to the Company
through the DIP Financings will be sufficient to fund the operations
of the Company until such time as the Company is able to propose a
plan of reorganization that will be acceptable to creditors and
confirmed by the court overseeing the Company's Chapter 11 Filings.
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(ii) There can be no assurance that any plan of reorganization
confirmed in connection with the Chapter 11 Filings will allow the
Company to operate profitably under PPS or give the Company
sufficient liquidity to meet its operational needs.
(iii) There can be no assurance regarding the future availability or
terms of financing in light of the Company's Chapter 11 Filings.
(iv) There can be no assurance regarding any adverse actions which may
be taken by creditors or landlords of the Company which may have
the effect of preventing or unduly delaying confirmation of a plan
of reorganization in connection with the Company's Chapter 11
Filings.
(v) The Company may have difficulty in attracting patients or labor
as a result of its Chapter 11 Filings.
(vi) The Company may be subject to increased regulatory oversight as a
result of its Chapter 11 Filings.
(vii) In recent years, an increasing number of legislative proposals have
been introduced or proposed by Congress and in some state
legislatures which would effect major changes in the healthcare
system. However, the Company cannot predict the type of healthcare
reform legislation which may be proposed or adopted by Congress or
by state legislatures. Accordingly, the Company is unable to assess
the effect of any such legislation on its business. There can be no
assurance that any such legislation will not have a material
adverse impact on the future growth, revenues and net income of the
Company.
(viii) The Company derives substantial portions of its revenues from
third-party payors, including government reimbursement programs
such as Medicare and Medicaid, and some portions of its revenues
from nongovernmental sources, such as commercial insurance
companies, health maintenance organizations and other charge-based
contracted payment sources. Both governmental and non-governmental
payors have undertaken cost-containment measures designed to limit
payments to healthcare providers. There can be no assurance that
payments under governmental and non-governmental payor programs
will be sufficient to cover the costs allocable to patients
eligible for reimbursement, especially with the implementation of
PPS and fee screens with respect to therapy services. The Company
cannot predict whether or what proposals or cost-containment
measures will be adopted in the future or, if adopted and
implemented, what effect, if any, such proposals might have on the
operations and financial condition of the Company.
(ix) The Company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing
facilities, construction of new facilities, purchase or lease of
existing facilities, addition of new services, certain capital
expenditures, cost-containment and reimbursement for services
rendered. The failure to obtain or renew required regulatory
approvals or licenses, the failure to comply with applicable
regulatory requirements, the delicensing of facilities owned,
leased or managed by the Company or the disqualification of the
Company from participation in certain federal and state
reimbursement programs, or the imposition of harsh enforcement
sanctions could have a material adverse effect upon the operations
and financial condition of the Company.
(x) With respect to the year 2000 disclosure contained in Management's
Discussion and Analysis of Financial Position and Results of
Operations-Year 2000, management is unable to predict the extent to
which its third-party payors will be affected by the Year 2000
Issue.
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(xi) There can be no assurance that an adverse determination in a legal
proceeding or governmental investigation, whether currently
asserted or arising in the future, will not have a material adverse
effect on the Company's financial position.
In addition, the Company's Chapter 11 Filings may disrupt its operations
and may result in a number of other operational difficulties, including the
following:
(i) The Company's ability to access capital markets will likely be
limited;
(ii) The Company's senior management may be required to expend a
substantial amount of time and effort structuring a plan of
reorganization, which could have a disruptive impact on
management's ability to focus on the operation of the Company's
business;
(iii) The Company may be unable to retain top management and other key
personnel;
(iv) The Company may experience a reduction in the census at its skilled
nursing facilities and hospitals; and
(v) Suppliers to the Company may stop providing supplies or services to
the Company or provide such supplies or services only on "cash on
delivery," "cash on order" or other terms that could have an
adverse impact on the Company's cash flow.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has in the past entered into interest rate swap agreements (the
"Swap Agreements") to manage interest rate risk. The Swap Agreements effectively
convert a portion of the Company's floating interest rate debt to fixed interest
rate debt. Notional amounts of interest rate 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. On August 13, 1999, two Swap Agreements,
each with a notional amount of $20 million, were terminated at a loss to the
Company of $100,000. The Company's one remaining Swap Agreement with a notional
amount of $20.0 million was terminated effective October 27, 1999 at no cost to
the Company.
In September 1998 the Company entered into a total return swap agreement
relating to approximately $40.7 million face amount of Mariner Notes,
subsequently amended to $46.5 million face amount of Mariner Notes (the "Total
Return Swap Agreement"). The Total Return Swap Agreement was restructured in
August 1999 resulting in capital depreciation payable by the Company of
approximately $46.5 million, of which amount $20.0 million was satisfied from
collateral previously provided by Mariner Health and the balance of which has
been incorporated into a promissory note. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Mariner Health Senior Subordinated Notes." Accordingly, as
of December 31, 1999, the Company did not have any Swap Agreements outstanding.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents.
The Company is, from time to time, subject to such negligence claims and other
litigation. In addition, resident, visitor and employee injuries will also
subject the Company to the risk of litigation. The Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. Management believes that this trend is endemic to the long-
term care industry and is a result of the increasing number of large judgments
against long-term care providers in recent years resulting in an increased
awareness by plaintiff's lawyers of potentially large recoveries. The Company
also believes that there has been, and will continue to be, an increase in
governmental investigations of long-term care providers, particularly in the
area of Medicare/Medicaid false claims, as well as an increase in enforcement
actions resulting from the investigations. While the Company believes that it
provides quality care to the patients in its facilities and materially complies
with all applicable regulatory requirements, an adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on the Company.
From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of their respective businesses.
In the opinion of management, other than as set forth below, there have been no
material developments in the litigation matters set forth in the Company's
Annual Report on Form 10-K for the year ended September 30, 1999. As a result of
the Chapter 11 Filings, all matters described in the Company's Annual Report on
Form 10-K for the year ended September 30, 1999 were stayed on January 18, 2000.
On approximately January 20, 2000, the OIG issued subpoenas duces tecum to
Mariner Post-Acute Network, Inc. and Summit Medical Management (a subsidiary of
the Company). The subpoenas request documents relating to the purchase of Summit
Medical Management and other subsidiaries. In addition, the subpoenas request
other broad categories of documents. The Company is cooperating with the
investigation and has retained experienced counsel to assist in responding to
the subpoenas and advise the Company with respect to this investigation. This
investigation is still in its preliminary stages; therefore, the Company is
unable to predict the outcome of this matter.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Certain Securities
The Company made the Chapter 11 Filings on January 18, 2000. As a result of
the Chapter 11 Filings, no principal or interest payments will be made on
certain indebtedness incurred by the Company prior to January 18, 2000,
including, among others, the Senior Credit Facility, the Senior Subordinated
Notes, the Mariner Health Senior Credit Facility, the Mariner Health Term Loan
Facility and the Mariner Health Senior Subordinated Notes until a plan of
reorganization defining the payment terms has been approved by the Bankruptcy
Court. Additional information regarding the Chapter 11 Filings is set forth
elsewhere in this Form 10-Q, including Notes 2 and 4 to the Condensed
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Other Information
From November 4, 1997 through July 1, 1998, the Company's common stock was
traded on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "PGN."
On August 1, 1998, the Company's symbol on the NYSE was changed to "MPN." On
November 2, 1999, trading in the Company's common stock was suspended on the
NYSE and the common stock commenced trading on the OTCBB under the symbol
"MPAN."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Interim Order Authorizing Debtors to Obtain Post-Petition
Financing Pursuant to 11 U.S.C. (S)(S) 105, 361, 362, 363,
364(c)(1), 364(c)(2), 364(c)(3) and 364(d)(1), and to Utilize
Cash Collateral Pursuant to 11 U.S.C. (S) 363 and Granting
Adequate Protection to Pre-Petition Secured Parties
10.2 Stipulation re: Disposition of "Objection by SouthTrust Bank,
National Association, to Debtors' Motion for Order Authorizing
Postpetition Financing and Authorizing Debtors' Use of Cash
Collateral; and Order Thereon
10.3 Final Order (i) Authorizing Postpetition Financing Pursuant to 11
U.S.C. (S) 364, (ii) Granting Senior Liens and Superiority
Administrative Expense Claim Status Pursuant to 11 U.S.C. (S)(S)
105, 364, 503(b) and 507, (iii) Authorizing Use of Cash
Collateral Pursuant to 11 U.S.C. (S) 363, and (iv) Granting
Adequate Protection Pursuant to 11 U.S.C. (S)(S) 363 and 364
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MARINER POST-ACUTE NETWORK, INC.
(Registrant)
By: /s/ George D. Morgan
-------------------------------
George D. Morgan
Executive Vice President,
Chief Financial Officer
By: /s/ William C. Straub
--------------------------------
Vice President, Controller, and
Chief Accounting Officer
Date: February 22, 2000
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EXHIBIT 10.1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- ---------------------------------------X
In re: : Chapter 11
MARINER POST-ACUTE NETWORK, : Case Nos. 00-113 (MFW)
INC., et al., through 00-214 (MFW)
-- ---
:
Debtors. (Jointly Administered)
- ---------------------------------------X
INTERIM ORDER AUTHORIZING DEBTORS TO OBTAIN
POST-PETITION FINANCING PURSUANT TO 11 U.S.C. (S)(S)105, 361, 362, 363
364(c)(1), 364(c)(2), 364(c)(3) and 364(d)(1), AND TO UTILIZE CASH
COLLATERAL PURSUANT TO 11 U.S.C. (S)363 AND GRANTING
ADEQUATE PROTECTION TO PRE-PETITION SECURED PARTIES
----------------------------------------------------
Upon the motion (the "Motion"), dated January 17, 2000, of Mariner Post-
------
Acute Network, Inc., as Debtor and Debtor-in-Possession (the "Borrower"), and
--------
the Guarantors listed on Schedule I hereto, each as a Debtor and Debtor-in-
Possession (hereinafter referred to collectively as the "Guarantors"; and
----------
together with the Borrower, the "Debtors"),
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(i) seeking this Court's authorization, pursuant to Sections 105, 361, 362,
363 364(c)(1), 364(c)(2), 364(c)(3) and 364(d)(1) of the United States
Bankruptcy Code, 11 U.S.C. (S)(S)101, et seq. (the "Code"), and Rules 2002,
------- ----
4001 and 9014 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy
----------
Rules"), for the Borrower to (1) obtain post-petition financing (the
-----
"Financing"), and for the Guarantors to guaranty the payment of the
---------
Borrower's obligations incurred in connection with the Financing, up to the
principal amount of $100,000,000 from The Chase Manhattan Bank ("Chase" or
-----
"Agent"), 270 Park Avenue, New York, New York 10017 and a
-----
<PAGE>
syndicate of financial institutions (together with Chase, the "Banks"), with
-----
Chase acting as Agent for itself and the Banks,
(w) having priority over any and all administrative expenses of the
kind specified in Sections 503(b) and 507(b) of the Code pursuant to
Section 364(c)(1) of the Code, subject to the Carve-Out (as defined below),
(x) to be secured, subject to the Carve-Out, pursuant to Section
364(c)(2) of the Code by perfected first priority security interests in and
liens upon (aa) all cash maintained in the Letter of Credit Account (as
defined in the DIP Credit Agreement hereinafter referred to) and any
investment of the funds contained therein (all of such property referred to
in this clause (aa) being hereinafter referred to as the "Credit Agreement
----------------
Cash Collateral"), and (bb) all unencumbered pre- and post-petition
---------------
property of the Debtors (including, without limitation, all accounts
receivable arising on and after the date of the filing of the petitions
herein (the "Filing Date"), except as otherwise provided herein with
-----------
respect to the adequate protection that may be provided to the Real Estate
Lenders and certain other post-petition Permitted Liens hereinafter
referred to, but excluding all of the Debtors' rights in and to claims and
causes of action under Sections 544, 545, 547, 548 or 549 of, and any other
avoidance actions under, the Code, with the proviso that, notwithstanding
such exclusion, the proceeds of such causes of action shall be available
for the repayment of the obligations incurred under and in connection with
the Financing),
(y) to be secured, subject to the Carve-Out, pursuant to Section
364(c)(3) of the Code by perfected security interests and liens upon all
pre- and post-petition property of the Debtors that is subject to valid and
perfected liens in existence on the
2
<PAGE>
Filing Date (including, without limitation, accounts receivable and
inventory in existence as of the Filing Date that are subject to valid and
perfected liens in favor of SPTMNR Properties Trust, as successor in
interest to Health and Retirement Properties Trust ("HRPT"), Omega
----
Healthcare Investors, Inc. ("Omega"), SouthTrust Bank of Alabama, National
-----
Association ("SouthTrust"), Nationwide Health Properties, Inc. ("NHP"),
----------
limited in the case of NHP to certain inventory, and certain other holders
of Indebtedness (as defined in the DIP Credit Agreement) in an aggregate
amount not in excess of $1,000,000 (the "Other Holders"; HRPT, Omega,
-------------
SouthTrust, NHP and the Other Holders, together with any successors
thereto, including LaSalle National Bank, as successor in interest to
SouthTrust as to certain SouthTrust transactions, the "Real Estate
Lenders") and accounts receivable and inventory arising on and after the
Filing Date through the use of the healthcare facilities financed by the
Real Estate Lenders to the extent that the Real Estate Lenders are granted
liens in such accounts receivable or inventory as adequate protection for
the use of cash collateral (the "Real Estate Receivables") and the proceeds
-----------------------
thereof, but not including property that is subject to the existing liens
that secure obligations under the Existing Agreements referred to in clause
(z) below, which liens referred to in clause (z) below shall be primed
pursuant to Section 364(d)(1) of the Code by the liens to be granted to the
Agent as described in such clause) and to post-petition Permitted Liens (as
defined in the DIP Credit Agreement), junior to such valid and perfected
liens and
(z) to be secured, subject to the Carve-Out, pursuant to Section
364(d)(1) of the Code by perfected first priority senior priming security
interests in and liens upon
3
<PAGE>
all pre- and post-petition property of the Debtors (including, without
limitation, accounts receivable, contracts, documents, equipment, general
intangibles, instruments, inventory, interests in leaseholds, real property
and the capital stock of certain subsidiaries of the Debtors and the
proceeds of all of the foregoing (which property includes, without
limitation, all of the right, title and interest of the Debtors in the
property that is subject to or secures the Amended and Restated Credit
Agreement with FBTC Leasing Corp. and the Synthetic Guarantee referred to
below)) that is subject to the existing liens presently securing the
Debtors' indebtedness owing (including issued but undrawn letters of credit
issued pursuant to the Existing Credit Agreement (as defined below)) to
certain lenders under or in connection with (i) that certain Credit
Agreement dated as of November 4, 1997 (as heretofore amended, the
"Existing Credit Agreement") among the Borrower (formerly known as Paragon
-------------------------
Health Network, Inc.), the several lenders from time to time party thereto
(collectively, the "Paragon Pre-Petition Secured Lenders"), Chase, as
------------------------------------
Administrative Agent (in such capacity, the "Administrative Agent"), and
--------------------
Bank of America, N.A. (formerly known as Nationsbank, N.A.), as
Documentation Agent, (ii) the Tranche A Loans under and as defined in the
Synthetic Credit Agreement hereinafter referred to and in that certain
Amended and Restated Guarantee dated as of November 4, 1997 (as heretofore
amended, the "Synthetic Guarantee"; such Synthetic Credit Agreement, the
-------------------
Synthetic Guarantee, the Existing Credit Agreement and the Deficiency Note
hereinafter referred to, together the "Existing Agreements") made by the
-------------------
Borrower and the Guarantors signatory thereto in favor of Chase, as
administrative agent (in such capacity, the "Synthetic Agent") for the
---------------
lenders
4
<PAGE>
(collectively, the "Synthetic Lenders"; the makers of the Tranche A Loans,
-----------------
the "Tranche A Synthetic Lenders") under that certain Amended and Restated
---------------------------
Credit Agreement dated as of November 4, 1997 (as heretofore amended, the
"Synthetic Credit Agreement") to which FBTC Leasing Corp. ("FBTC"), among
-------------------------- ----
others, is a party and the instruments and agreements executed in
connection therewith (the obligations of the Borrower and the Guarantors
signatory thereto under or in connection with the Synthetic Guarantee and
the instruments and agreements executed in connection therewith shall
include, without limitation, such direct obligations as the Borrower and
such Guarantors may have to FBTC and the Synthetic Lenders upon and after
the entry of an order approving that certain Stipulation Acknowledging
Ownership of Properties Subject to "Synthetic Lease Transactions" among
certain parties including FBTC, the Synthetic Agent, the Borrower and the
Guarantors (including Living Centers Holding Company, Inc., one of the
Guarantors) provided, that such priming security interests and liens shall
not prime the security interests and liens of (x) the Synthetic Agent to
the extent of the Tranche B Loans (under and as defined in the Synthetic
Credit Agreement) outstanding on the Filing Date and (y) FBTC to the extent
of the Lessor Contributions and related obligations (under and as defined
in the Synthetic Credit Agreement) (the security interests and liens
described in the foregoing clauses (x) and (y) are hereinafter referred to
as "Excluded Pre-Petition Collateral"), and (iii) that certain Deficiency
--------------------------------
Note held by Bank of America, N.A. (the "Deficiency Note") (Bank of
---------------
America, N.A. as holder of the Deficiency Note, the Paragon Pre-Petition
Secured Lenders, the Synthetic Lenders and FBTC being hereinafter
collectively
5
<PAGE>
referred to as the "Pre-Petition Secured Lenders"), senior in all respects
----------------------------
to such existing liens (the "Primed Liens") (but not to liens, if any, to
------------
which such existing liens are subject on the Filing Date) and senior in all
respects to any liens granted on or after the Filing Date to provide
adequate protection to the Pre-Petition Secured Lenders
(all of the foregoing property specified in clauses (x), (y) and (z) above
being hereinafter collectively referred to in this Order as the "Collateral")
----------
and (2) provide adequate protection to the Pre-Petition Secured Lenders whose
liens and security interests are being primed by the Financing,
(ii) seeking this Court's authorization, pursuant to Section 363(c)(2) of
the Code, for the use of cash collateral (as such term is defined in the
Code) in which the Pre-Petition Secured Lenders have an interest and for the
provision of adequate protection to the Pre-Petition Secured Lenders with
respect to such use of cash collateral,
(iii) seeking, upon a first day hearing (the "First Day Hearing") on the
-----------------
Motion, the entry of a first day order pursuant to Bankruptcy Rule 4001 (this
"Order"), (x) authorizing the Borrower, on an interim basis, to forthwith
-----
borrow or obtain letters of credit under the Financing from the Banks up to
an aggregate of $25,000,000, which borrowings and letters of credit to be
authorized at the First Day Hearing will be used to (a) provide working
capital and letter of credit support for the Borrower and the Guarantors as
set forth in the Credit Agreement and (b) cover overdrafts and related
liabilities arising from treasury, depository and cash
6
<PAGE>
management services provided by Chase or any of their respective affiliates
to the Debtors or in connection with any automated clearing house fund
transfers effected by Chase or any of their respective affiliates for the
Debtors, (y) authorizing the use by the Debtors of cash collateral and (z)
granting the adequate protection hereinafter described,
(iv) requesting that an interim hearing (the "Interim Hearing") thereafter
---------------
be held for this Court to consider entry of an interim order (the "Interim
-------
Order") authorizing the Borrower, on an interim basis, to borrow or obtain
-----
letters of credit under the Financing from the Banks up to an aggregate of
$50,000,000, taken together with the authorization in this Order, as set
forth in the Motion and the loan documentation filed with this Court; and
(v) requesting that a final hearing (the "Final Hearing") thereafter be
-------------
held for this Court to consider entry of an order authorizing the balance of
the Financing on a final basis, as set forth in the Motion and the loan
documentation filed with this Court;
and pursuant to Bankruptcy Rules 4001(b) and 4001(c)(1), due and sufficient
notice under the circumstances of the Motion and the First Day Order referred to
below having been given by the Debtors to the twenty largest unsecured creditors
of each of the Debtors, the Administrative Agent (on behalf of itself and the
Pre-Petition Secured Lenders), the Synthetic Agent, FBTC, the Real Estate
Lenders, the United States Trustee for the District of Delaware, the United
States Department of Heath and Human Services, all state Medicaid agencies with
which the Debtors deal and to any other party that has filed a request for
notices with this Court, a hearing to consider the Debtors' request to authorize
borrowings under the Financing on an emergency basis having been conducted on
January 18 and 19, 2000 (the "First Day Hearing") and an order authorizing such
-----------------
borrowings having been entered
7
<PAGE>
by this Court (the "First Day Order") and the Interim Hearing having been held
---------------
on January 28, 2000, and upon all the pleadings filed with this Court, and upon
the record made by the Debtors at the First Day Hearing and the Interim Hearing
and after due deliberation and consideration and sufficient cause appearing
therefor;
IS FOUND, DETERMINED, ORDERED AND ADJUDGED, that:
1. This Court has core jurisdiction over these proceedings and the parties
and property affected hereby pursuant to 28 U.S.C. (S)(S)157(b) and 1334.
2. Without prejudice to the rights of any other party (but subject to the
limitations thereon described below in paragraph 25), the Debtors have agreed
that they will not raise any defense, counterclaim or offset of any kind with
respect to the terms of the Existing Agreements and with respect to their
Indebtedness to the Pre-Petition Secured Lenders, and have acknowledged that as
of the Filing Date (i) the Borrower was liable to the Paragon Pre-Petition
Secured Lenders in the aggregate principal amount of approximately $917,271,432
in respect of loans made and letters of credit issued by the Paragon Pre-
Petition Secured Lenders pursuant to the Existing Credit Agreement, plus
interest thereon and fees and expenses incurred in connection therewith as
provided in the Existing Credit Agreement, (ii) the Borrower and most of the
Guarantors were liable to FBTC and the Synthetic Lenders in the aggregate
principal amount of approximately $66,644,000 in respect of loans made pursuant
to the Synthetic Credit Agreement, plus interest thereon and fees and expenses
incurred in connection therewith as provided in the Synthetic Guarantee, (iii)
the Borrower was liable to Bank of America, N.A. as holder of the Deficiency
Note in the aggregate principal amount of $26,485,562.79 pursuant to the
Deficiency Note, plus interest thereon and fees and expenses incurred in
connection therewith as provided in the Deficiency Note, and (iv) certain
8
<PAGE>
Guarantors were contingently liable to FBTC and the Pre-Petition Secured Lenders
in respect of their respective guarantees under the Existing Agreements
(collectively, the "Pre-Petition Debt").
-----------------
3. Without prejudice to the rights of any other party (but subject to the
limitations thereon described below in paragraph 25), the Debtors have also
agreed that they will not challenge the validity, perfection, enforceability or
priority of the liens and security interests granted to Chase, as Collateral
Agent for the ratable benefit of itself, the Administrative Agent, the Synthetic
Agent (collectively, the "Pre-Petition Agent") and the Pre-Petition Secured
------------------
Lenders and the Synthetic Lenders pursuant to the Existing Agreements and all
mortgages, deeds of trust and other security documents executed by one or more
of the Debtors for the benefit of the Pre-Petition Secured Lenders in connection
with the Existing Agreements in the personal and real property described in such
agreement, mortgages, deeds of trust and security documents (the "Pre-Petition
------------
Collateral").
- ----------
4. As of the Filing Date, funds on deposit at Chase and various of the
other Pre-Petition Secured Lenders were subject to rights of set-off under the
Existing Agreements and applicable law and, by virtue of such set-off rights,
are subject to a lien in favor of such Pre-Petition Secured Lenders pursuant to
Sections 506(a) and 553 of the Code. Pursuant to the Existing Agreements, such
Pre-Petition Secured Lenders are obligated to share the benefit of such lien
with the other Pre-Petition Secured Lenders party to such Existing Agreements
based upon their respective pro rata shares of the obligations under such
--- ----
Existing Agreements. Accordingly, any proceeds of the Pre-Petition Collateral
(including cash on deposit at Chase or any of the Pre-Petition Secured Lenders
as of the Filing Date) are cash collateral of the Pre-Petition Secured Lenders
within the meaning of Section 363(a) of the Code herein (the "Cash Collateral").
---------------
The Pre-Petition Secured Lenders are entitled, pursuant to Sections 361, 363(e)
and 364(d)(1) of the Code, to adequate protection of their interest in the Pre-
Petition Collateral, including the Cash Collateral, for any
9
<PAGE>
diminution in value of the Pre-Petition Collateral, including, without
limitation, resulting from the use of the Cash Collateral, the incurrence by the
Debtors of post-petition financing secured by priming liens on the Pre-Petition
Collateral, or the use, sale or lease of the Pre-Petition Collateral and the
imposition of the automatic stay.
5. The Borrower has an immediate need to obtain financing in order to
permit, among other things, the orderly continuation of the operation of its
business and the businesses of the Guarantors and the care of its patients, to
maintain business relationships with vendors and suppliers, to make certain
strategic capital expenditures and to satisfy other working capital needs. The
Borrower is unable to obtain adequate unsecured credit allowable under Section
503(b)(1) of the Code as an administrative expense. A facility in the amount
provided by the Financing is unavailable to the Borrower without the Debtors
granting to the Agent and the Banks, subject to the Carve-Out, (i) pursuant to
Section 364(c)(1) of the Code, allowed claims, with respect to all indebtedness
and obligations of the Debtors under and in connection with the DIP Credit
Agreement (and with respect to all indebtedness and obligations in respect of
overdrafts and related liabilities referred to in Section 6.03(vi) of the DIP
Credit Agreement), having priority over any and all administrative expenses of
the kind specified in Sections 503(b) and 507(b) of the Code, (ii) pursuant to
Section 364(c)(2) of the Code, security for such obligations by the granting of
perfected first priority senior security interests in and liens upon the Credit
Agreement Cash Collateral and all unencumbered pre-and post-petition property of
the Debtors (including, without limitation, all accounts receivable arising on
and after the Filing Date, but excluding (1) all of the Debtors' rights in and
to claims and causes of action under Sections 544, 545, 547, 548 or 549 of, and
any other avoidance actions under, the Code, with the proceeds of such causes of
action being available for the repayment of the obligations under the DIP Credit
Agreement and (2) assets that are subject to
10
<PAGE>
Permitted Adequate Protection Liens and other post-petition Permitted Liens,
both as defined in the DIP Credit Agreement), (iii) pursuant to Section
364(c)(3) of the Code, security for such obligations by the granting of
perfected junior priority security interests and liens upon all pre- and post-
petition property of the Debtors, including, without limitation, accounts
receivable in existence as of the Filing Date that are subject to valid and
perfected liens in favor of the Real Estate Lenders and the Real Estate
Receivables, and the proceeds thereof (but not including the property that is
described in clause (iv) below, as to which the security interests and liens in
favor of the Agent shall be as described in such clause) that is subject to
valid and perfected liens in existence on the Filing Date or to Permitted
Adequate Protection Liens and other post-petition Permitted Liens, and (iv)
pursuant to Section 364(d)(1) of the Code, security for such obligations by the
granting of first priority senior priming security interests in and liens upon
all of the Pre-Petition Collateral (other than the Excluded Pre-Petition
Collateral), senior in all respects to existing liens and to any liens granted
on or after the Filing Date herein to provide adequate protection in respect of
such liens or otherwise, but subject to any liens to which such existing liens
are subject as of the Filing Date. The ability of the Debtors to obtain
sufficient working capital and liquidity through the use of the cash collateral,
incurrence of new indebtedness for borrowed money and other financial
accommodations is vital to the Debtors. The preservation and maintenance of the
going concern values of the Debtors is integral to a successful reorganization
of the Debtors pursuant to the provisions of Chapter 11 of the Code.
6. The terms of the Financing appear to be fair and reasonable, reflect
the Debtors' exercise of prudent business judgment consistent with their
fiduciary duty and are supported by reasonably equivalent value and fair
consideration. The Financing has been negotiated in good faith and at arm's-
length among the Debtors, the Agent and the Banks and any credit extended,
letters of
11
<PAGE>
credit issued for the account of and loans made to the Borrower by the Banks
pursuant to the Revolving Credit and Guaranty Agreement dated as of January 18,
2000 (the "DIP Credit Agreement"), and any credit extended in respect of
--------------------
overdrafts referred to in the DIP Credit Agreement, shall be deemed to have been
extended by the Banks in good faith, as that term is used in Section 364(e) of
the Code.
7. The Debtors have requested immediate entry of this Order pursuant to
Bankruptcy Rules 4001(b)(2) and 4001(c)(2). Absent entry of this Order, the
Debtors' estates will be immediately and irreparably harmed.
8. The Documents (as defined below) are hereby approved and the Borrower
is immediately authorized to borrow or obtain letters of credit pursuant to the
DIP Credit Agreement, and the Guarantors may guaranty such borrowings, up to an
aggregate of $50,000,000 (inclusive of amounts borrowed and letters of credit of
credit issued pursuant to the First Day Order), which shall be used for the
purpose of providing working capital for the Borrower and the Guarantors. In
addition, the Debtors are immediately authorized to incur overdrafts and related
liabilities arising from treasury, depository and cash management services or in
connection with any automated clearing house fund transfers provided to or for
the benefit of the Debtors by Chase or any of its affiliates (in addition to the
amount of borrowings and letters of credit obtained pursuant to the Credit
Agreement). Notwithstanding anything herein to the contrary, no borrowings,
letters of credit, Cash Collateral, Collateral or the Carve-Out (as defined
below) may be used to object, contest or raise any defense to, the validity,
perfection, priority, extent or enforceability of the Pre-Petition Debt or the
liens securing the Pre-Petition Debt, or to assert any claims or causes of
action against the Pre-Petition Agent or the Pre-Petition Secured Lenders.
12
<PAGE>
9. The Debtors are expressly authorized and empowered to execute and
deliver, among other documents, the DIP Credit Agreement, and the Security and
Pledge Agreement to which such Debtors are party (as each such term is defined
in the DIP Credit Agreement) in substantially the forms heretofore filed with
this Court (collectively, and together with the letter agreement referred to in
paragraph 19 (iii) hereof, the "Documents"). The Debtors are hereby authorized
---------
to perform and do all acts that may be required in connection with the
Documents. Upon execution and delivery of the Documents, the Documents shall
constitute valid and binding obligations of the Debtors party thereto,
enforceable against each Debtor party thereto in accordance with their terms.
10. For all of the Debtors' obligations and indebtedness arising under and
in connection with the Financing and the Documents (and in respect of overdrafts
and related liabilities referred to in Section 6.03(vi) of the Credit
Agreement), the Agent and the Banks are granted pursuant to Section 364(c)(1) of
the Code an allowed claim (which allowed claim shall be payable from and have
recourse to, in addition to the property of the Debtors that is made subject to
security interests and liens in favor of the Agent on behalf of the Banks as set
forth in paragraph 12 of this Order, any unencumbered pre- and post-petition
property of the Debtors, including, without limitation, any amounts that are
recovered or otherwise received by any of the Debtors in respect of claims under
Sections 544, 545, 547, 548 or 549 of, or any other avoidance actions under, the
Code) having priority over any and all administrative expenses of the kind
specified in Sections 503(b) and 507(b) of the Code, subject only to (x) in the
event of the occurrence and during the continuance of an Event of Default (as
defined in the DIP Credit Agreement) or an event that would constitute an Event
of Default with the giving of notice or lapse of time or both, the payment of
(i) accrued and unpaid professional fees and disbursements theretofore incurred
or incurred after the cure or waiver of such Event of Default or event, and (ii)
professional fees and disbursements incurred during the time of
13
<PAGE>
such continuance in an aggregate amount not in excess of $2,500,000, in each
case by the Borrower, the Guarantors and any statutory committee (each, a
"Committee") appointed in the Debtors' Chapter 11 cases (the "Cases") and
--------- -----
allowed by an order of the Court and (y) the payment of fees pursuant to 28
U.S.C. (S)1930 and to the Clerk of the Court (collectively, the "Carve-Out"),
---------
provided that following the Termination Date (as defined in the Credit
- --------
Agreement) amounts in the Letter of Credit Account shall not be subject to the
Carve-Out. No other claim having a priority superior or pari passu with that
granted by this Order (i) to the Agent and the Banks and (ii) to the Pre-
Petition Agent and the Pre-Petition Secured Lenders, respectively, shall be
granted while any portion of the Financing (or refinancing thereof) or the
commitment thereunder remains outstanding.
11. So long as an Event of Default or an event which with the giving of
notice or lapse of time or both would constitute an Event of Default shall not
have occurred, (i) Debtors shall be permitted to pay administrative expenses
allowed and payable under Sections 330 and 331 of the Code, as the same may be
due and payable, and (ii) such payments shall not be applied against the Carve-
Out. Except to the extent of the Carve-Out, no expenses of administration of
the Cases or any future proceeding or case which may result therefrom, including
liquidation in bankruptcy or other proceedings under the Code, shall (except as
otherwise stated on the record of the First Day Hearing) be charged pursuant to
Section 506(c) of the Code or otherwise against (a) the Collateral without the
prior written consent of the Agent and no such consent shall be implied from any
other action, inaction, or acquiescence by the Agent or the Banks or (b) the
Pre-Petition Collateral by the Debtors (without prejudice to the rights of any
other party in interest to assert claims under Section 506(c) of the Code)
without the prior written consent of the Pre-Petition Agent (on behalf of the
Pre-Petition Secured Lenders), and no such consent shall be implied from any
action, inaction, or acquiescence by the Pre-Petition Agent or the Pre-Petition
Secured Lenders.
14
<PAGE>
12. As security for all of the Debtors' obligations and indebtedness
arising under the Financing and the Documents (and in respect of overdrafts and
related liabilities referred to in Section 6.03(vi) of the DIP Credit
Agreement), the Agent on behalf of the Banks is hereby granted (effective upon
the date of this Order and without the necessity of the execution by the Debtors
of mortgages, security agreements or otherwise), (x) pursuant to Section
364(c)(2) of the Code, perfected first priority senior security interests in and
liens upon (aa) the Credit Agreement Cash Collateral, and (bb) all unencumbered
pre- and post-petition property of the Debtors (excluding (1) all of the
Debtors' rights in and to claims and causes of action under Sections 544, 545,
547, 548 or 549 of, and any other avoidance actions under, the Code, it being
expressly held that, notwithstanding such exclusion from the liens authorized
hereby, the proceeds or other amounts received by the Debtors in respect of such
claims and causes of action may be applied to, among other obligations, the
payment of the allowed claims of the Agent and the Banks that are referred to in
paragraph 10 of this Order, and (2) Real Estate Receivables), (y) pursuant to
Section 364(c)(3) of the Code, perfected junior priority security interests in
and liens upon all pre- and post-petition property of the Debtors, including,
without limitation, accounts receivable in existence as of the Filing Date that
are subject to valid and perfected liens in favor of the Real Estate Lenders and
the proceeds thereof (but not including property that is subject to the existing
liens that secure obligations under the Existing Agreements referred to in
clause (z) below which shall be primed by the liens to be granted to the Agent
as described in such clause), that is subject to valid and perfected liens in
existence on the Filing Date and to post-petition Permitted Liens, junior to
such valid and perfected liens and (z) pursuant to Section 364(d)(1) of the
Code, perfected first priority senior priming security interests in and liens
upon all pre- and post-petition property of the Debtors (including, without
limitation, accounts receivable, contracts, documents, equipment, general
15
<PAGE>
intangibles, instruments, inventory, interests in leaseholds, real property and
the capital stock of certain subsidiaries of the Debtors and the proceeds of all
of the foregoing but excluding the Excluded Pre-Petition Collateral), that is
subject to the existing liens presently securing the Debtors' indebtedness owing
to the Pre-Petition Secured Lenders (including, in the case of the Paragon Pre-
Petition Secured Lenders, any issued and undrawn letters of credit), such
security interests and liens being senior in all respects to any and all present
and future liens, if any, of the Pre-Petition Secured Lenders which encumber
such security interests and liens referred to in this clause (z) (but not to
liens, if any, to which the liens of the Pre-Petition Secured Lenders are
subject on the Filing Date) and any liens granted after the Filing Date to
provide adequate protection to the Pre-Petition Secured Lenders, in each case
subject only to the Carve-Out; provided that following the Termination Date,
--------
amounts in the Letter of Credit Account shall not be subject to the Carve-Out
and provided, further, that notwithstanding the exclusion of the Excluded Pre-
-----------------
Petition Collateral from the security interests and liens referred to in the
foregoing clause (z), the Borrower shall remain obligated, as set forth in
Section 2.11(b) of the DIP Credit Agreement, to apply to the prepayment of the
loans made under the Credit Agreement that portion of the Net Proceeds (as
defined in the DIP Credit Agreement) received by the Borrower from the sale or
other disposition of properties the completion of which was financed by such
loans that is equal to the amount of the loans so used. The security interests
and liens granted to the Agent on behalf of the Banks hereunder shall not be
subordinated to or made pari passu with any other lien or security interest
under Section 364(d) of the Code.
13. Debtors are hereby authorized effective as of the Filing Date to use
all Cash Collateral of the Pre-Petition Secured Lenders; provided, that the Pre-
--------
Petition Secured Lenders are granted adequate protection as hereinafter set
forth.
16
<PAGE>
14. As adequate protection for any diminution in value of the Pre-Petition
Secured Lenders' interests in the Pre-Petition Collateral resulting from (x) the
use by the Debtors of Cash Collateral and any other Pre-Petition Collateral, (y)
the priming of the Pre-Petition Agent's and the other Pre-Petition Secured
Lenders' security interests and liens in the Pre-Petition Collateral by the
Agent and the Banks pursuant to the Financing and this Order and (z) the
imposition of the automatic stay pursuant to Section 362 of the Code, the Pre-
Petition Agent and the Pre-Petition Secured Lenders (A) are granted (effective
upon the Filing Date and without the necessity of the execution by the Debtors
of mortgages, security agreements, pledge agreements, financing statements or
other agreements) a security interest in and lien upon all the Collateral which
adequate protection lien shall have a priority immediately junior to the priming
and other liens to be granted in favor of the Agent (and, in the case of Real
Estate Receivables arising on or after the Filing Date out of the use of the
properties that are subject as of the Filing Date to valid and perfected liens
in favor of the Real Estate Lenders, also junior to adequate protection liens on
such Real Estate Receivables that may be granted in favor of the Real Estate
Lenders), subject and subordinate to only (i) the security interests and liens
granted to the Agent for the benefit of the Banks in this Order and pursuant to
the Documents (and any other liens to which the liens in favor of the Agent are
subject) and (ii) the Carve-Out, (B) are granted a superpriority claim pursuant
to Section 507(b) of the Code, immediately junior to the claims under Section
364(c)(1) of the Code held by the Agent and the Banks as set forth in paragraph
10 (and junior to the Carve-Out) and (C) shall receive current cash payments
from Debtors of the reasonable fees and disbursements (as to which invoices are
furnished) of counsel and financial, internal and third-party consultants
incurred by the Pre-Petition Agent under the Existing Agreements, the
reasonable counsel fees and disbursements (as to which invoices are furnished)
of the members of the Pre-Petition Steering Committee under the Existing
17
<PAGE>
Agreements, the reasonable counsel fees and disbursements (as to which invoices
are furnished) of FBTC and fees payable to the Pre-Petition Agent under the
Existing Agreements; provided, that, without prejudice to the rights of any
--------
other party to contest such assertion, the Pre-Petition Agent and the Pre-
Petition Secured Lenders reserve their rights to assert claims for accrued and
unpaid letter of credit fees and interest on the Pre-Petition Debt at the
applicable amount or rates of interest, as the case may be, as provided for in
the Existing Agreements (it being understood that neither the Pre-Petition Agent
nor the Pre-Petition Secured Lenders shall seek payment of such claims prior to
the Consummation Date of a Reorganization Plan, as each such term is defined in
the DIP Credit Agreement, in any of the Chapter 11 cases absent a showing of
materially changed circumstances). As additional adequate protection, so long
as no Event of Default or event, which upon notice or lapse of time or both,
would constitute an Event of Default shall have occurred and be continuing, the
Debtors are authorized and directed to pay to the Pre-Petition Agent, for the
benefit of the Pre-Petition Secured Lenders, the cash proceeds of any "prudent
buyer" settlement entered into with the United States Health Care Financing
Administration and 75% of the Net Proceeds of asset sales or dispositions
(other than of Excluded Pre-Petition Collateral) that are permitted under the
Credit Agreement and are not required to be applied to the loans thereunder.
15. Under the circumstances, the Court finds that the adequate protection
provided herein is reasonable and sufficient to protect the interests of the
Pre-Petition Secured Lenders notwithstanding any other provision hereof.
16. The Agent, the Banks, the Pre-Petition Agent and the Pre-Petition
Secured Lenders who were granted security interests and liens hereunder shall
not be required to file or record financing statements, mortgages, notices of
lien or similar instruments in any jurisdiction or take any other action in
order to validate and perfect the security interests and liens granted to them
pursuant
18
<PAGE>
to this Order. If the Agent on behalf of the Banks or the Pre-Petition Secured
Lenders shall, in their sole discretion, choose to file such financing
statements, mortgages, notices of lien or similar instruments or otherwise
confirm perfection of such security interests and liens, all such documents
shall be deemed to have been filed or recorded at the time and on the date of
entry of the First Day Order (as to the Financing and the Documents) and the
Filing Date (as to the use of Cash Collateral). Neither the Pre-Petition Secured
Lenders nor the Pre-Petition Agent shall file such financing statements,
mortgages, notices of lien or similar instruments, or otherwise confirm
perfection of such security interests and liens, unless the Agent on behalf of
the Banks shall theretofore have done so.
17. Upon the request of the Agent, the Pre-Petition Secured Lenders are
authorized to take, execute and deliver such instruments (in each case without
representation or warranty of any kind) to enable the Agent to further perfect,
preserve and enforce the security interests and liens granted to the Agent for
the benefit of the Banks by the Documents and this Order.
18. The Pre-Petition Secured Lenders are directed to (i) promptly turn
over to the Debtors all Cash Collateral, within the meaning of Section 363(a) of
the Code received or held by them, and (ii) so long as there are any borrowings
or letters of credit outstanding, or the Banks have any Commitment (as defined
in the DIP Credit Agreement) under the DIP Credit Agreement, take no action to
foreclose upon the liens granted to the Pre-Petition Secured Lenders pursuant to
the Existing Agreements and this Order, or otherwise exercise remedies against
the Collateral, in each case to the extent not authorized by an order of this
Court.
19. Each of the Debtors is authorized and directed to do and perform all
acts, to make, execute and deliver all instruments and documents (including,
without limitation, the execution of security agreements, mortgages and
financing statements), and to pay fees, which may be reasonably required or
necessary for the Debtors' performance under the Financing, including, without
19
<PAGE>
limitation: (i) the execution of the Documents, (ii) the execution of one or
more amendments to the DIP Credit Agreement for, among other things, the purpose
of adding additional financial institutions as Banks and reallocating the
Commitments for the Financing among the current Banks and such additional
financial institutions, and (iii) the non-refundable payment to Chase or the
Banks, as the case may be, of the Fees referred to in the DIP Credit Agreement
(and in the separate letter agreement dated December 22, 1999, between the
Borrower and Chase referred to in the DIP Credit Agreement) and such Letter of
Credit Fees, Commitment Fees and reasonable costs and expenses (as to which
invoices are furnished) as may be due from time to time including, without
limitation, reasonable attorneys' fees and disbursements (as to which invoices
are furnished) as provided in the Documents, all as such terms are defined in
the Documents.
20. (a) The authority of the United States Department of Health and Human
Services ("HHS") to collect prepetition overpayments from the Debtors shall be
---
governed by this order and the Stipulation dated January 18, 2000, between HHS
and the Debtors, the terms of which are hereby incorporated by reference.
(b) Subject to the HHS Stipulation, any federal governmental unit,
including the departments and agencies thereof, and any fiscal intermediaries
thereof, shall have no right to recoup provider reimbursement overpayments that
were made to any Debtor from any amounts due to such Debtor (or any other
Debtor) other than to recoup such overpayments that arise under the same
provider agreement or comparable applicable statutes, regulations, or
arrangements, and in the same provider cost-year as the amounts due to such
Debtor arise. This paragraph does not affect offset rights permitted by order
of the Court or by written postpetition agreement of the parties.
21. So long as there are any borrowings or letters of credit outstanding,
or the Banks have any Commitment, under the DIP Credit Agreement, or any of the
Documents remains in effect, the
20
<PAGE>
Debtors shall not assume without the written consent of the Agent, and no order
shall be entered authorizing the assumption of, any provider agreements between
any of the Debtors and any governmental unit.
22. This Order shall be deemed the order of a court of competent
jurisdiction for purposes of 42 U.S.C. (S) 1395g(c)(1). In view of the filing of
these Chapter 11 Cases and the HHS Stipulation referred to in paragraph 20(a)
above, 42 C.F.R. (S) 424.90(b) on its face does not apply and nothing contained
herein shall limit any claims or defenses of the Debtors, the Agent or the Banks
under applicable law, except as provided in the HHS Stipulation.
23. Subject only to the provisions of the Credit Agreement, the automatic
stay provisions of Section 362 of the Code are vacated and modified to the
extent necessary so as to permit the Agent and the Banks to exercise, upon the
occurrence of an Event of Default and the giving of the 5 business days' written
notice provided for in the Credit Agreement, all rights and remedies provided
for in the Documents (including, without limitation, the right to setoff monies
of the Debtors in accounts maintained with the Agent or any Bank). Except as
otherwise provided in Article VII of the Credit Agreement, the Debtors' right to
use Cash Collateral shall terminate automatically on the Termination Date.
24. The Documents and the provisions of this Order shall be binding upon
the Agent, the Banks, the Pre-Petition Agent, the Pre-Petition Secured Lenders
and the Debtors and their respective successors and assigns (including any
Chapter 7 or Chapter 11 trustee hereinafter appointed or elected for the estate
of any of the Debtors) and inure to the benefit of the Agent, the Banks, the
Pre-Petition Agent, the Pre-Petition Secured Lenders and the Debtors and (except
with respect to any trustee hereinafter appointed or elected for the estate of
any of the Debtors) their respective successors and assigns.
21
<PAGE>
25. The agreements and acknowledgments contained in paragraphs 2 and 3 of
this Order shall be binding upon all parties in interest, including any
Committee, unless (i) a party in interest has properly filed an adversary
proceeding or contested matter (subject to the limitation contained in paragraph
8) by no later than the date that is 90 days after the selection of counsel by
the Official Committee of Unsecured Creditors in the Cases, (x) challenging the
validity, enforceability, priority or extent of the Pre-Petition Debt or the
Pre-Petition Agent's or the Pre-Petition Secured Lenders' liens on the Pre-
Petition Collateral, or (y) otherwise asserting any claims or causes of action
against the Pre-Petition Agent or the Pre-Petition Secured Lenders on behalf of
the Debtors' estates, and (ii) the Court rules in favor of the plaintiff in any
such timely and properly filed adversary proceeding or contested matter. If no
such adversary proceeding or contested matter is properly filed as of such date,
(a) the Pre-Petition Obligations shall constitute allowed claims, not subject to
subordination and otherwise unavoidable, for all purposes of the Debtors'
Chapter 11 Cases and any subsequent Chapter 7 Cases, (b) the Pre-Petition
Agent's and the Pre-Petition Secured Lenders' liens on the Pre-Petition
Collateral shall be deemed to have been, as of the Filing Date, legal, valid,
binding, perfected, not subject to subordination and otherwise unavoidable and
(c) the Pre-Petition Obligations, the Pre-Petition Agent's and the Pre-Petition
Secured Lenders' liens on the Pre-Petition Collateral and the Pre-Petition Agent
and the Pre-Petition Secured Lenders shall not be subject to any other or
further challenge by any party in interest seeking to exercise the rights of the
Debtors' estates, including, without limitation, any successor thereto. If any
such adversary proceeding or contested matter is properly filed as of such date,
the agreements and acknowledgments contained in paragraphs 2 and 3 shall
nonetheless remain binding and preclusive (as provided in the second sentence of
this paragraph 25) except to the extent that such findings were expressly
challenged in such adversary proceeding or contested matter.
22
<PAGE>
26. Unless all obligations and indebtedness owing to the Agent and the
Banks under the DIP Credit Agreement shall theretofore have been paid in full
(and, with respect to outstanding Letters of Credit issued pursuant to the DIP
Credit Agreement, collateralized with cash or back-to-back letters of credit in
accordance with the provisions of the DIP Credit Agreement), the Debtors shall
not seek, and it shall constitute an Event of Default if any of the Debtors
seek, or if there is entered, an order dismissing any of the Cases. If an order
dismissing any of the Cases under Section 1112 of the Code or otherwise is at
any time entered, such order shall provide (in accordance with Sections 105 and
349 of the Code) that (x) the priming liens and security interests and
replacement security interests granted to the Agent and the Banks and the Pre-
Petition Secured Lenders, as the case may be, pursuant to this Order shall
continue in full force and effect and shall maintain their priorities as
provided in this Order until all obligations in respect thereof shall have been
paid and satisfied in full (and that such priming liens and replacement liens,
shall, notwithstanding such dismissal, remain binding on all parties in
interest) and (y) this Court shall retain jurisdiction, notwithstanding such
dismissal, for the purposes of enforcing the liens and security interests
referred to in (x) above. If any or all of the provisions of this Order are
hereafter reversed, modified, vacated or stayed, such reversal, stay,
modification or vacation shall not affect (i) the validity of any obligation,
indebtedness or liability incurred by the Debtors to the Banks prior to written
notice to the Agent of the effective date of such reversal, stay, modification
or vacation, or (ii) the validity and enforceability of any lien or priority
authorized or created hereby or pursuant to the DIP Credit Agreement with
respect to any such obligations, indebtedness or liability. Notwithstanding any
such reversal, stay, modification or vacation, any use of Cash Collateral or any
indebtedness, obligation or liability incurred by the Debtors to the Banks prior
to written notice to Pre-Petition Agent, the Pre-Petition Secured Lenders and
the Agent of the effective date of such reversal, stay, modification
23
<PAGE>
or vacation shall be governed in all respects by the original provisions of this
Order, and the Banks and the Pre-Petition Secured Lenders shall be entitled to
all the rights, remedies, privileges and benefits, granted herein and/or
pursuant to the DIP Credit Agreement with respect to all uses of Cash Collateral
and such indebtedness, obligation or liability. The obligations of the Debtors
under this Order and the Financing shall not be discharged by the entry of an
order confirming a plan of reorganization in any of the Cases and, pursuant to
Section 1141(d)(4) of the Code, the Debtors have waived such discharge with
respect to such obligations.
27. The Borrower is hereby authorized and directed to perform its
obligations described in the Management Protocol attached hereto as Annex A, the
terms of which are hereby approved.
28. Nothing set forth in this Order shall be deemed to be a determination
as to the validity, priority, perfection or nonavoidability of the liens and
security interests of any of the Real Estate Lenders (including HRPT, Omega,
SouthTrust, LaSalle National Bank, NHP or the Other Holders), and the rights of
all parties with respect thereto are fully reserved.
29. The notice given by the Debtors of the Motion and of the Interim
Hearing constitutes due and sufficient notice of the Motion and of the Interim
Hearing. Debtors shall promptly mail copies of this Order to the parties having
been given notice of the First Day Hearing and the Interim Hearing and to any
other party which has filed a request for notices with this Court and to any
Committee after the same has been appointed, or Committee counsel, if the same
shall have been appointed. Any party in interest objecting to the relief sought
at the Final Hearing shall serve and file written objections; which objections
shall be served upon (i) Stutman, Treister & Glatt Professional Corporation,
3699 Wilshire Boulevard, Suite 900, Los Angeles, California, 90010 Attn: Isaac
Pachulski, Esq. and K. John Shaffer, Esq. (Facsimile: 213-251-5288) and Powell,
Goldstein, Frazer & Murphy LLP, 191 Peachtree Street, N.E., 16th Floor, Atlanta,
Georgia, 30303, Attn: Robert
24
<PAGE>
C. Lewinson, Esq. (Facsimile: 404-572-6999), and Richards, Layton & Finger,
P.A., One Rodney Square, P.O. Box 551, Wilmington, Delaware 19899, Attn: Thomas
L. Ambro, Esq., (Facsimile: 302-658-6548), Attorneys for the Debtors; (ii)
Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178,
Attention: Robert H. Scheibe, Esq. (Facsimile: 212-309-6273), Attorneys for The
Chase Manhattan Bank, as Agent under the Credit Agreement; (iii) Simpson,
Thacher & Bartlett, 425 Lexington Avenue, New York, New York, Attention: Kenneth
Ziman, Esq. (Facsimile: 212-455-2502), Attorneys for The Chase Manhattan Bank,
as Pre-Petition Agent; (iv) Duane Morris & Heckscher LLP, 1201 Market Street,
Wilmington, Delaware 19801, Attention: Adam Landis, Esq. (Facsimile: 302-571-
5560), Attorneys for The Chase Manhattan Bank, as Agent under the Credit
Agreement and as Pre-Petition Agent; (v) Mayer, Brown & Platt, 1672 Broadway,
New York, New York 10019, Attention: Raniero D'Aversa, Esq. (Facsimile: 212-849-
5823), Attorneys for FBTC Leasing Corp.; and (vi) the Office of the United
States Trustee for the District of Delaware, and shall be filed with the Clerk
of the United States Bankruptcy Court, District of Delaware, in each case to
allow receipt by the foregoing no later than five (5) days before such hearing.
25
<PAGE>
30. Notwithstanding anything in this Order to the contrary, any liens and
claims granted by this Order against the Omega Debtors (as referred to at the
First Day Hearing) are limited as stated on the record of the First Day Hearing;
provided that nothing contained in this paragraph 30 applies to GranCare, Inc.
- --------
Dated: Wilmington, Delaware
January 28, 2000
/s/ Mary F. Walrath
------------------------------
UNITED STATES BANKRUPTCY JUDGE
26
<PAGE>
Status of Petitions
Mariner Post Acute Network, Inc.
Mariner Health Group, Inc.
and Subsidiaries
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
1 Mariner Post-Acute Network, Inc. 74-2012902 00-00113
2 American Medical Insurance Billing
Services, Inc. 58-1835451 00-00114
3 American Pharmaceutical Services, Inc. 94-1736287 00-00115
4 American Rehability Services, Inc. 87-0517516 00-00116
5 American-Cal Medical Services, Inc. 95-2950019 00-00117
6 Amerra Properties, Inc. never applied for 00-00118
7 AMS Green Tree, Inc. 39-1445025 00-00119
8 AMS Properties, Inc. 95-4299212 00-00120
9 APS Holding Company, Inc. 88-0365764 00-00121
10 APS Pharmacy Management, Inc. 76-2091355 00-00122
11 Brian Center Health & Retirement/
Alleghany, Inc. 56-1621199 00-00123
12 Brian Center Health & Retirement/
Bastian, Inc. 56-1624374 00-00124
13 Brian Center Health & Rehabilitation/
Tampa, Inc. 06-1209962 00-00125
14 Brian Center Health & Retirement/
Wallace, Inc. 56-1648741 00-00126
15 Brian Center Management Corporation 56-1086182 00-00127
16 Brian Center Nursing Care/Austell, Inc. 56-1108577 00-00128
17 Brian Center Nursing Care/Fincastle, Inc. 56-1621198 00-00129
18 Brian Center Nursing Care/Hickory, Inc. 56-1154190 00-00130
19 Brian Center Nursing Care/Powder
Springs, Inc. 56-1619996 00-00131
20 Brian Center of Asheboro, Inc. 56-1342445 00-00132
21 Brian Center of Central Columbia, Inc. 56-1343624 00-00133
27
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
22 Cambridge Bedford, Inc. 38-2549352 00-00134
23 Cambridge East, Inc. 38-2549069 00-00135
24 Cambridge North, Inc. 38-2549072 00-00136
25 Cambridge South, Inc. 38-2549074 00-00137
26 Clintonaire Nursing Home, Inc. 38-2727238 00-00138
27 Connerwood Healthcare, Inc. 35-1920689 00-00139
28 Cornerstone Health Management Company 75-2339430 00-00140
29 Crestmont Health Center, Inc. 38-2631128 00-00141
30 Devcon Holding Company 76-0504538 00-00142
31 EH Acquisition Corp. 35-1921817 00-00143
32 EH Acquisition Corp. II 38-1923423 00-00144
33 EH Acquisition Corp. III 35-1947211 00-00145
34 Evergreen Healthcare, Inc. 75-2155338 00-00146
35 Evergreen Healthcare, Ltd., L.P. 38-2795206 00-00147
36 Frenchtown Nursing Home, Inc. 38-2697105 00-00148
37 GC Services, Inc. 39-1756284 00-00149
38 GCI Bella Vita, Inc. 39-1756284 00-00150
39 GCI Camellia Care Center, Inc. 84-1247816 00-00151
40 GCI Colter Village, Inc. 39-1747058 00-00152
41 GCI East Valley Medical &
Rehabilitation Center, Inc. 86-0782141 00-00153
42 GCI Faith Nursing Home, Inc. 95-4478515 00-00154
43 GCI Health Care Centers, Inc. 95-4371674 00-00155
44 GCI Jolley Acres, Inc. 95-4478510 00-00156
45 GCI Palm Court, Inc. 95-4386135 00-00157
28
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
46 GCI Prince George, Inc. 95-4478511 00-00158
47 GCI Rehab, Inc. 39-1755667 00-00159
48 GCI Springdale Village, Inc. 95-4478513 00-00160
49 GCI Therapies, Inc. 33-0396430 00-00161
50 GCI Village Green, Inc. 95-4478514 00-00162
51 GCI-Wisconsin Properties, Inc. 39-1756278 00-00163
52 GCI-Cal Therapies Company 33-0592366 00-00164
53 GranCare Home Health Services, Inc. 95-4383753 00-00165
54 GranCare of Michigan, Inc. 38-2483520 00-00166
55 GranCare of North Carolina, Inc. 58-2345994 00-00167
56 GranCare of Northern California, Inc. 95-4450976 00-00168
57 GranCare of South Carolina, Inc. 95-4476032 00-00169
58 GranCare, Inc. 95-4336136 00-00170
59 Hawk's - Perimeter, Inc. unknown 00-00171
60 Heritage Nursing Home, Inc. 38-2697398 00-00172
61 Heritage of Louisiana, Inc. 58-1435495 00-00173
62 HMI Convalescent Care, Inc. 95-4303086 00-00174
63 Hospice Associates of America, Inc. 76-0504536 00-00175
64 HostMasters, Inc. 95-4123374 00-00176
65 International Health Care Management, Inc. 38-2549065 00-00177
66 International X-Ray, Inc. 38-2839855 00-00178
67 LC Management Company 74-1809336 00-00179
68 LCA Operational Holding Company 76-0463839 00-00180
69 LCR, Inc. 76-0490253 00-00181
29
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
70 Living Centers - East, Inc. 74-1955204 00-00182
71 Living Centers - PHCM, Inc. 58-2402848 00-00183
72 Living Centers - Rocky Mountain, Inc. 84-0583991 00-00184
73 Living Centers - Southeast Development
Corporation 56-1286742 00-00185
74 Living Centers - Southeast, Inc. 56-0997245 00-00186
75 Living Centers Development Company 76-0529365 00-00187
76 Living Centers Holding Company 76-0521130 00-00214
77 Living Centers LTCP Development Company 76-0511537 00-00188
78 Living Centers of Texas, Inc. 74-1623371 00-00189
79 Madonna Nursing Center, Inc. 38-2727240 00-00190
80 Med-Therapy Rehabilitation Services, Inc. 56-1120078 00-00191
81 Middlebelt Nursing Home, Inc. 38-2577064 00-00192
82 Middlebelt-Hope Nursing Home, Inc. 38-2599703 00-00193
83 Nan-Dan Corp. 59-1936462 00-00194
84 National Heritage Realty, Inc. 78-2080781 00-00195
85 Nightingale East Nursing Center, Inc. 38-2671539 00-00196
86 Omega/Indiana Care Corp. 38-2795209 00-00197
87 Professional Health Care Management, Inc. 38-2549067 00-00198
88 Professional Rx Systems, Inc. 65-0032651 00-00199
89 Rehability Health Services, Inc. 74-1502449 00-00200
90 Renaissance Mental Health Center, Inc. 39-1772436 00-00201
91 St. Anthony Nursing Home, Inc. 38-2727241 00-00202
92 Summit Hospital Holdings, Inc. 58-2145076 00-00203
93 Summit Hospital of East Georgia, Inc. 00-00204
30
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
94 Summit Hospital of Southeast Arizona, Inc. 58-2264857 00-00205
95 Summit Hospital of Southeast Texas, Inc. 58-2264831 00-00206
96 Summit Hospital of Southwest
Louisiana, Inc. 58-2188760 00-00207
97 Summit Hospital of West Georgia, Inc. never applied for 00-00208
98 Summit Institute for Pulmonary
Medicine and Rehabilitation, Inc. 58-192230 00-00209
99 Summit Institute of Austin, Inc. 58-2145074 00-00210
100 Summit Institute of West Monroe, Inc. 58-2015591 00-00211
101 Summit Medical Holdings, Ltd.
(this is not a partnership) 58-2403691 00-00212
102 Summit Medical Management, Inc. 58-1926543 00-00213
31
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
103 Mariner Health Group, Inc. 06-1251310 00-00215
104 Aid & Assistance, Inc. 06-0922046 00-00216
105 Allegis Health and Living Center at
Heritage Harbour, L.L.C. 58-2433067 00-00217
106 Beechwood Heritage Retirement
Community, Inc. 58-2433064 00-00218
107 Bride Brook Nursing & Rehabilitation
Center, Inc. 06-1281699 00-00219
108 Compass Pharmacy Services of
Maryland, Inc. 06-1460006 00-00220
109 Compass Pharmacy Services of
Texas, Inc. 75-2615244 00-00221
110 Compass Pharmacy Services, Inc. 04-3166495 00-00222
111 Cypress Nursing Facility, Inc. 57-0628689 00-00223
112 IHS Rehab Partnership, Ltd. 75-2196937 00-00224
113 Long Ridge Nursing and Rehabilitation
Center, Inc. 58-2433065 00-00225
114 Longwood Rehabilitation Center, Inc. 04-3105863 00-00226
115 Mariner - Regency Health Partners, Inc. 58-1686105 00-00227
116 Mariner Health at Bonifay, Inc. 06-1447760 00-00228
117 Mariner Health Care of Atlantic Shores, Inc. 59-3331913 00-00229
118 Mariner Health Care of Deland, Inc. 59-3331901 00-00230
119 Mariner Health Care of Fort Wayne, Inc. 35-1924040 00-00231
120 Mariner Health Care of Greater Laurel, Inc. 52-1839750 00-00232
121 Mariner Health Care of Inverness, Inc. 59-3331904 00-00233
122 Mariner Health Care of Lake Worth, Inc. 59-3250672 00-00234
123 Mariner Health Care of MacClenny, Inc. 59-3331909 00-00235
124 Mariner Health Care of Metrowest, Inc. 59-3331905 00-00236
125 Mariner Health Care of Nashville, Inc. 58-2238489 00-00237
32
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
126 Mariner Health Care of North Hills, Inc. 25-1732608 00-00238
127 Mariner Health Care of Orange City, Inc. 59-3260680 00-00239
128 Mariner Health Care of Palm City, Inc. 65-0512016 00-00240
129 Mariner Health Care of Pinellas Point, Inc. 59-3287015 00-00241
130 Mariner Health Care of Port Orange, Inc. 59-3260682 00-00242
131 Mariner Health Care of Southern
Connecticut, Inc. 06-1289658 00-00243
132 Mariner Health Care of Toledo, Inc. 34-1773874 00-00244
133 Mariner Health Care of Tuskawilla, Inc. 59-3331915 00-00245
134 Mariner Health Care of West Hills, Inc. 25-1736852 00-00246
135 Mariner Health Care, Inc. 04-2926741 00-00247
136 Mariner Health Central, Inc. 06-1476203 00-00248
137 Mariner Health Home Care, Inc. 06-1482883 00-00249
138 Mariner Health Properties, IV, LTD 59-3112307 00-00250
139 Mariner Health of Jacksonville, Inc. 16-1459910 00-00251
140 Mariner Health of Maryland, Inc. 52-1988921 00-00252
141 Mariner Health of Orlando, Inc. 06-1462467 00-00253
142 Mariner Health of Palmetto, Inc. 06-144775 00-00254
143 Mariner Health of Seminole County, Inc. 06-1441718 00-00255
144 Mariner Health of Tampa, Inc. 06-1463167 00-00256
145 Mariner Health Properties VI, LTD. 59-3359078 00-00257
146 Mariner Health Resources, Inc. 04-0884000 00-00258
147 Mariner Physician Services, Inc. 06-1423565 00-00259
148 Mariner Practice Corporation 06-1476521 00-00260
149 Mariner Supply Services, Inc. 06-1418697 00-00261
33
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
150 MarinerSelect Staffing Solutions, Inc. 06-1462360 00-00262
151 MedRehab of Indiana, Inc. 35-1710608 00-00263
152 MedRehab of Louisiana, Inc. 72-0912855 00-00264
153 MedRehab of Missouri, Inc. 43-1124329 00-00265
154 MedRehab, Inc. 58-2805053 00-00266
155 Merrimack Valley Nursing & Rehabilitation
Center, Inc. 04-2970051 00-00267
156 Methuen Nursing & Rehabilitation
Center, Inc. 04-3038057 00-00268
157 MHC Rehab Corp. 06-1418699 00-00269
158 MHC Transportation, Inc. 06-1411787 00-00270
159 Mystic Nursing & Rehabilitation
Center, Inc. 04-2847870 00-00271
160 National Health Strategies, Inc. 04-3165077 00-00272
161 Ocean Pharmacy, Inc. 06-0724667 00-00273
162 Park Terrace Nursing & Rehabilitation
Center, Inc. 04-2972799 00-00274
163 Pendleton Nursing & Rehabilitation
Center, Inc. 06-1281698 00-00275
164 Pinnacle Care Corporation 62-1250299 00-00276
165 Pinnacle Care Corporation of Huntington 62-1311408 00-00277
166 Pinnacle Care Corporation of Nashville 62-1282817 00-00278
167 Pinnacle Care Corporation of Seneca 62-1338119 00-00279
168 Pinnacle Care Corporation of Sumter 62-1287142 00-00280
169 Pinnacle Care Corporation of Williams Bay 62-1332923 00-00281
170 Pinnacle Care Corporation of Wilmington 56-1536965 00-00282
171 Pinnacle Care Management Corporation 62-1406751 00-00283
172 Pinnacle Pharmaceutical Services, Inc. 62-1451396 00-00284
173 Pinnacle Pharmaceuticals, Inc. Unknown 00-00285
34
<PAGE>
Subsidiary Tax ID Bankr. Case No.
---------- ------ ---------------
174 Pinnacle Rehabilitation of Missouri, Inc. 43-1210889 00-00286
175 Pinnacle Rehabilitation, Inc. 62-1325550 00-00287
176 Prism Care Centers, Inc. 04-3165075 00-00288
177 Prism Health Group, Inc. 04-3165074 00-00289
178 Prism Home Care Company, Inc. 04-3327298 00-00290
179 Prism Home Care, Inc. 04-3324344 00-00291
180 Prism Home Health Services, Inc. 04-3327297 00-00292
181 Prism Hospital Ventures, Inc. 75-2251466 00-00293
182 Prism Rehab. Systems, Inc. 54-1537031 00-00294
183 Regency Health Care Center of Seminole
County, Inc. 59-3347673 00-00295
184 Sassaquin Nursing & Rehabilitation
Center, Inc. 04-2889876 00-00296
185 Seventeenth Street Associates Limited
Partnership 55-0666388 00-00297
186 Tampa Medical Associates, Inc. 59-3377257 00-00298
187 Tri-State Health Care, Inc. 58-1696013 00-00299
188 Windward Health Care, Inc. 04-3166396 00-00300
189 Mariner Health of Florida, Inc. 06-1447762 00-00301
35
<PAGE>
Annex A
Management Protocol /1/
(a) The MHG Debtors shall make Overhead Payments to MPAN at the times and
in accordance with the terms set forth in Section 7.07 of the MHG DIP
Financing Agreement so long as and to the extent that MPAN provides
supervisory services with respect to certain aspects of the management of the
Healthcare Facilities in substantially the same manner in which MPAN
supervises such aspects of management as of the Closing Date.
(b) The MHG Debtors shall not permit MPAN to, and MPAN shall not, cease
for any reason to supervise those aspects of the management of each
Healthcare Facility which MPAN supervises as of the Closing Date in
substantially the same manner in which MPAN supervises such aspects of
management as of the Closing Date, except as set forth below.
(c) Each of (i) the Required Lenders under the MHG DIP Financing
Agreement or the Administrative Agent under the MHG DIP Financing Agreement
on behalf of such Required Lenders, on the one hand, or (ii) MPAN, on the
other, each in their respective discretion, may terminate MPAN's supervisory
obligations in accordance with the terms and conditions of Section 5.13(b)
and (c) of the MHG DIP Financing Agreement, and the automatic stay shall be
deemed terminated as provided in Section 5.13(b) of the MHG DIP Financing
Agreement as of the Termination Effective Date with respect to any such
termination by MPAN. Each of the MHG Debtors and MPAN shall take such actions
as are contemplated by Section 5.13(b) and 5.13(c) of the MHG DIP Financing
Agreement in connection with any such termination. Court approval of any
Replacement Manager designated pursuant to clause (c)(i) of this Annex A
shall be limited solely to approval of the qualifications of such Replacement
Manager. At all times after the Petition Date until MPAN is permitted
hereunder to cease performing its supervisory services with respect to any
Healthcare Facility, the MHG Debtors shall, and shall cause MPAN to, and MPAN
shall, cooperate fully with the Administrative Agent and the Required Lenders
and any consultants or advisors or other Persons identified by the
Administrative Agent or the Required Lenders in providing reasonable access
to such Healthcare Facility, employees of the MHG Debtors and the MHG
Debtors' books and records all in accordance with the terms of the MHG DIP
Financing Agreement. Without limiting the generality of the foregoing, the
MHG Debtors shall not permit, and MPAN shall not cause, any of the books and
records (including but not limited to separate financial and accounting
records, patient information, personnel information and census information)
or any applicable computer programs and computer materials for any such
Healthcare Facility to be removed from such Healthcare Facility. Such books
and records (including but not limited to separate financial and accounting
- ----------------
/1/ All undefined capitalized terms herein used shall have the meanings ascribed
to them in the Mariner Health Group DIP Financing Agreement in effect as of the
date hereof (the "MHG DIP Financing Agreement"); the term "MHG Debtors" shall
--------------------------- -----------
mean Mariner Health Group, Inc. and its filed subsidiaries and the term "MPAN"
----
shall mean Mariner Post-Acute Network, Inc.
36
<PAGE>
records, patient information, personnel information and census information)
for each Healthcare Facility, which books and records, together with any
applicable computer programs and computer materials, shall be at all times
owned by (or, in the case of computer programs, licensed to) the relevant
Healthcare Facility and copies of which shall be kept at the relevant
Healthcare Facility to the extent consistent with the practices of the MHG
Debtors in effect on the Petition Date.
(d) Except as otherwise permitted under the MHG DIP Financing Agreement,
the MHG Debtors shall not, without the written consent (not to be
unreasonably withheld) of the Agents, (i) cause or permit the transfer of any
Management Employee to MPAN and (ii) enter into any new employment agreement
with, or make any change in the compensation or other terms of employment of,
any Management Employee other than changes consistent with the normal
business practices of the MHG Debtors prior to the Petition Date or
consistent with changes made by MPAN with respect to comparable employees of
MPAN; provided that, in any event, no retention or severance policy may be
implemented after the Closing Date by the MHG Debtors without written
approval of the Agents. MPAN shall not enter into any contractual arrangement
or agreement with any Regional Manager that has the effect of prohibiting
such Regional Manager from accepting employment with the MHG Debtors or the
Healthcare Facilities.
(e) This Annex A and those provisions of the MHG DIP Financing Agreement
herein referenced shall not be amended in any manner that substantively
affects the provisions of this Annex A without the prior written consent of
the Required Lenders and MPAN. This Annex A and the rights of MPAN and the
respective parties to the MHG DIP Financing Agreement and the DIP Credit
Agreement (as defined in the prefixed Order) to enforce this Annex A shall
survive the termination of the MHG DIP Financing Agreement and the DIP Credit
Agreement. Nothing in this Annex A shall be deemed to limit any other rights
or remedies available to (x) the Agents or the Lenders under the MHG DIP
Financing Agreement or (y) the Agent or the Banks under the DIP Credit
Agreement (as each such term used in this clause (y) is used therein). This
Annex A shall be binding on the MHG Debtors, MPAN and their respective
estates and on any trustee appointed for any of the foregoing in this or in
the MHG Debtors' cases or any Chapter 7 case.
(f) The respective obligations of each of the MHG Debtors and MPAN shall
constitute an expense of administration of each of their respective estates,
junior in each case to the Obligations under the MHG DIP Financing Agreement
and the obligations of MPAN under the DIP Credit Agreement and any other
super priority administration claims in the MPAN chapter 11 case.
37
<PAGE>
EXHIBIT 10.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re ) Chapter 11
)
MARINER HEALTH GROUP, INC., ) Case No. 00-215(MFW)
a Delaware corporation, )
) (Jointly Administered
and affiliates, ) Case Nos. 00-215(MFW)
) through 00-301(MFW),
Debtors. ) inclusive)
STIPULATION RE DISPOSITION OF "OBJECTION BY SOUTHTRUST BANK,
NATIONAL ASSOCIATION, TO DEBTORS' MOTION FOR ORDER
AUTHORIZING POSTPETITION FINANCING AND AUTHORIZING DEBTORS'
USE OF CASH COLLATERAL"; AND ORDER THEREON
------------------------------------------
THIS STIPULATION (the "Stipulation") is entered into by and among
SouthTrust Bank, National Association ("SouthTrust"); Mariner Health Group, Inc.
and its affiliated entities which are the debtors in possession in the above-
captioned chapter 11 cases (the "Mariner Health Debtors"); and the post-petition
lenders (the "DIP Lenders") to the Mariner Health Debtors pursuant to that
certain "Interim Order (i) Authorizing Postpetition Financing Pursuant to 11
U.S.C. section 364 (the "DIP Financing"), (ii) Granting Senior Liens and
Superpriority Administrative Expense Claim Status Pursuant to 11 U.S.C. sections
105, 364, 503(b) and 507, (iii) Authorizing Use of Cash Collateral Pursuant to
11 U.S.C. section 363, (iv) Granting Adequate Protection Pursuant to 11 U.S.C.
sections 363 and 364, and (v) Scheduling a Final Hearing Pursuant to Bankruptcy
Rule 4001(b) and (c)" dated January 18, 2000 (the "Interim Financing Order");
with reference to the following facts and recitations:
<PAGE>
A. On January 18, 2000, the date of the commencement of these
chapter 11 cases (the "Petition Date"), the Mariner Health Debtors filed the
"Debtors' Emergency Motion for the Entry of an Interim Order (i) Authorizing
Postpetition Financing Pursuant to 11 U.S.C. Section 364, (ii) Granting Senior
Liens and Superpriority Administrative Expense Claim Status Pursuant to 11
U.S.C. Sections 105, 364, 503(b) and 507, (iii) Authorizing Use of Cash
Collateral Pursuant to 11 U.S.C. Section 363, (iv) Granting Adequate Protection
Pursuant to 11 U.S.C. Sections 363 and 364, and (v) Scheduling a Final Hearing
Pursuant to Bankruptcy Rules 4001(b) and (c)" (the "Financing Motion").
B. In addition, on the Petition Date, the Debtors filed the
"Debtors' Emergency Motion Pursuant to Sections 361 and 363 of the Bankruptcy
Code and Rule 4001 for an Interim Order (i) Authorizing the Use of 'Third Party
Lenders' Cash Collateral, (ii) Granting Adequate Protection Therefor and (iii)
Scheduling a Final Hearing" (the "Cash Collateral Motion").
C. After a hearing on January 18, 2000, this Court entered both the
Interim Financing Order and its order granting interim relief with respect to
the Cash Collateral Motion.
D. On February 11, 2000, SouthTrust filed its timely objection (the
"Objection") to the Financing Motion and to the Cash Collateral Motion.
E. SouthTrust, the Mariner Health Debtors, and the DIP Lenders are
engaged in discussions seeking to resolve the matters raised by the Objection
and are hopeful that they will reach agreement. In light of those discussions,
the parties
<PAGE>
have agreed to preserve their respective rights, remedies, and defenses in the
manner describe in this Stipulation.
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the
parties hereto, through their respective counsel of record, as follows:
1. Proceedings with respect to the Objection shall be adjourned to
March 8, 2000, at 11:30 a.m., or to such other date and time on or before March
17, 2000 as shall be set by the Court (the "Adjourned Hearing").
2. Notwithstanding the Objection, the Court may enter final orders
approving the Financing Motion and the Cash Collateral Motion; provided, that
--------
the entry of such final orders shall be without prejudice to SouthTrust's
Objection, and SouthTrust shall reserve and retain its right to assert at the
Adjourned Hearing each ground for the Objection as set forth therein. The
Mariner Debtors and the DIP Lenders reserve and retain their respective rights
to oppose the Objection and each ground set forth therein. The DIP Lenders also
reserve their right to terminate the DIP Financing if the Objection is sustained
in whole or in part.
3. Nothing contained in this Stipulation shall create any rights,
remedies, or defenses in favor of any party in interest that is not a party to
this Stipulation.
4. Nothing contained in this Stipulation shall constitute, or be
deemed to constitute, an admission on the part of any party hereto.
<PAGE>
DATED: February 15, 2000 -------------------------------------
BRETT D. FALLON (Del. Bar #2480),
SMITH, KATZENSTEIN & FURLOW LLP
800 Delaware Avenue
P.O. Box 410
Wilmington, DE 19899
Telephone: (302) 652-8400
- and -
JAMES J. ROBINSON,
BURR & FORMAN LLP
3100 SouthTrust Tower
P.O. Box 830719
Birmingham, AL 35283-0719
Telephone: (205) 251-3000
Attorneys for SouthTrust
DATED: February 15, 2000 -------------------------------------
BONNIE GLANTZ FATELL (Del. Bar #3809)
BLANK ROME COMINSKY & MCCAULEY LLP
1201 Market Street, Suite 2100
Wilmington, DE 19801
Telephone: (302) 425-6400
- and -
JOEL B. ZWEIBEL
PETER V. PANTALEO
O'MELVENY & MYERS LLP
153 East 53rd Street
New York, NY 10022
(212) 326-2000
Attorneys for the DIP Lenders
<PAGE>
DATED: February 15, 2000 -------------------------------------------
ISAAC M. PACHULSKI (CA Bar #62337),
JEFFREY H. DAVIDSON (CA Bar #73980), and
K. JOHN SHAFFER (CA Bar #153729), Members of
STUTMAN, TREISTER & GLATT
PROFESSIONAL CORPORATION
3699 Wilshire Boulevard, 9th Floor
Los Angeles, California 90010
Telephone: (213) 251-5100
Facsimile: (213) 251-5288
Proposed Reorganization Counsel for
Debtors and Debtors in Possession
- and -
-------------------------------------------
MARK COLLINS (Del. Bar #2981),
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Telephone: (302) 658-6541
Facsimile: (302) 658-6548
Proposed Reorganization Co-Counsel for
Debtors and Debtors in Possession
SO ORDERED this day of February, 2000.
------
------------------------------
UNITED STATES BANKRUPTCY JUDGE
<PAGE>
EXHIBIT 10.3
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
<TABLE>
<CAPTION>
In re
<S> <C> <C>
- ------------------------------------------------------
) Case Nos. 00-215 (MFW)
Mariner Health Group, Inc., et al., ) through 00-301 (MFW)
)
) Chapter 11
)
Debtors and Debtors in Possession ) Jointly Administered
- ------------------------------------------------------
</TABLE>
FINAL ORDER (i) AUTHORIZING POSTPETITION FINANCING PURSUANT TO 11 U.S.C. (S)
364, (ii) GRANTING SENIOR LIENS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE CLAIM
STATUS PURSUANT TO 11 U.S.C. (S)(S) 105, 364, 503(b) and 507, (iii) AUTHORIZING
USE OF CASH COLLATERAL PURSUANT TO 11 U.S.C. (S) 363, and (iv) GRANTING ADEQUATE
PROTECTION PURSUANT TO 11 U.S.C. (S)(S) 363 AND 364
Upon the motion of the above-captioned debtors and debtors-in-
possession, Mariner Health Group, Inc., et al. (jointly and severally, the
"Debtors")/1/ dated January 18, 2000 (the "Motion") for entry of an order,
pursuant to (S)(S) 105, 363, 364(c) and (d), 503(b) and 507 of the United States
Bankruptcy Code, 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code")/2/, and Rules
2002, 4001(b), (c) and (d) and 9014 of the Federal Rules of Bankruptcy Procedure
(the "Bankruptcy Rules"):
(i) authorizing the Debtors to obtain postpetition financing in the
form of loans and other financial accommodations, including the issuance of
letters of credit, pursuant to that certain Debtor-in-Possession Credit
Agreement substantially in the form annexed to the Motion (the "DIP Credit
Agreement") by and among Mariner Health Group, Inc., a Delaware corporation
("MHG"), as debtor and debtor-in-possession, and each of MHG's subsidiaries
listed
- -----------------------
/1/ The Debtors are listed on Schedule A attached hereto.
/2/ All section and rule references are to the Bankruptcy Code and Bankruptcy
Rules, respectively, unless otherwise indicated.
<PAGE>
on Exhibit A hereto; the Lenders listed on the signature pages thereto (each
individually referred to herein as a "DIP Lender" and collectively as "DIP
Lenders"); First Union National Bank ("First Union"), as Syndication Agent; PNC
Capital Markets, Inc. and First Union Securities, Inc., as Co-Arrangers; and PNC
Bank, National Association ("PNC"), as Collateral Agent and Administrative
Agent, and as an issuing bank for Letters of Credit thereunder, (First Union and
PNC collectively, the "DIP Agents"), and in an aggregate principal amount not to
exceed $50 million, in two tranches of $40 million and $10 million, respectively
(the "DIP Financing");
(ii) authorizing the Debtors to grant, as of the Petition Date (as
defined below), to the DIP Agents, for the benefit of the DIP Lenders, pursuant
to the DIP Credit Agreement and the security agreement, mortgages and other
security documents in the form annexed to the DIP Credit Agreement (the "DIP
Security Documents"; the DIP Credit Agreement, the DIP Security Documents, and
all other agreements, instruments and documents executed and delivered in
connection therewith, collectively, the "DIP Financing Documents")/3/: (A)
pursuant to (S) 364(c)(2), first priority, valid, perfected and non-voidable
Security Interests in and Liens upon (as those capitalized terms are defined in
the DIP Security Documents) all unencumbered assets of the estates of each of
the Debtors, including (without limitation) all such real, personal or mixed
property of each of the Debtors at any time existing or arising, wherever
located, all such cash contained in any account to the extent owned by or
maintained for the benefit of any of the Debtors, all such capital stock held by
any of the Debtors, the proceeds of all such causes of action existing as of the
Petition Date, all such real property the title to which is held by any of the
Debtors, or the right to possession of which is held by any of the Debtors
pursuant to a leasehold interest, and all proceeds and products thereof (but
excluding causes of action of the Debtors' estates under (S)(S) 544, 545, 547,
548 and 550), (B)
- ----------------------------
/3/ Capitalized terms used herein and not otherwise defined have the meaning
assigned to such terms in the DIP Financing Documents.
2
<PAGE>
pursuant to (S) 364(d), first priority, valid, perfected and non-voidable
Security Interests in and Liens upon all assets of each of the Debtors which, as
of the Petition Date, were subject to the senior liens of the Prepetition Agents
for the benefit of the Prepetition Secured Parties (as each term is defined in
the Motion), and (C) pursuant to (S) 364(c)(3), valid, perfected and non-
voidable Security Interests in and Liens upon all other assets of the Debtors
subject and subordinate only to the valid, duly perfected and non-voidable Liens
in existence as of the Petition Date (the "Petition Date Liens"), the Permitted
Adequate Protection Liens (as defined in the DIP Credit Agreement) and senior
Liens arising as permitted under Section 7.02 of the DIP Credit Agreement (the
"Post-Petition Prior Liens", and with the Petition Date Liens and the Permitted
Adequate Protection Liens, the "Prior Liens") (the collateral described in
clauses (A), (B) and (C) of this subparagraph (ii), which also shall include all
accounts receivable as of the Petition Date and thereafter arising including all
amounts at any time owing by a Governmental Authority, being collectively
referred to as the "DIP Collateral"), all of the DIP Collateral to secure the
loans, advances and all Obligations at any time owing or to be performed by the
Debtors pursuant to the DIP Credit Agreement and the other DIP Financing
Documents, and subject only to the Carve-Out (as defined below);
(iii) pursuant to (S) 364(c)(1), granting superpriority
administrative claim status for such Obligations, subject only to the Carve-Out;
(iv) pursuant to (S) 363(c), authorizing the Debtors to use Cash
Collateral (as defined in the Motion) of the Prepetition Agents and the
Prepetition Secured Parties;
(v) pursuant to (S)(S) 361, 363(e) and 364(d), providing adequate
protection to the Prepetition Agents and the Prepetition Secured Parties with
respect to any diminution in the value of Prepetition Agents' or the Prepetition
Secured Parties' interests in the collateral granted under the Prepetition
Credit Agreement (as defined in the Motion) (the "Prepetition
3
<PAGE>
Collateral") resulting from (A) the priming Liens and Security Interests to be
granted herein pursuant to (S) 364(d) to the DIP Agents for the benefit of the
DIP Lenders to secure the Obligations, (B) the Debtors' use of Cash Collateral,
(C) the use, sale or lease of the Prepetition Collateral (other than Cash
Collateral) and (D) the imposition of the automatic stay pursuant to (S) 362(a);
and
(vi) scheduling a final hearing (the "Final Hearing") to consider
entry of this order (the "Final Order") authorizing the above-matters in full;
and such Motion also requesting that this Court hold an immediate emergency
hearing (the "Emergency Hearing") on the Motion to consider entry of an interim
order (the "Interim Order") pursuant to Rule 4001(b) and (c) authorizing the
Debtors to use Cash Collateral of the Prepetition Agents and the Prepetition
Secured Parties and borrow from the DIP Lenders an amount not to exceed $15
million under the DIP Credit Agreement for a period of no more than twenty-
five days until the Final Hearing, upon the terms and conditions set forth in
the DIP Credit Agreement and the other DIP Financing Documents, pending the
Final Hearing; and it further appearing, based upon the record presented to this
Court, that:
a. The ability of the Debtors to continue in business so that they can
attempt to confirm a plan of reorganization under the Bankruptcy Code depends
entirely upon obtaining the relief requested in the Motion and the Debtors will
suffer immediate and irreparable injury if such relief is not granted; and
b. Notice of the Motion and Final Hearing has been given to (i) the
United States Trustee, (ii) the twenty largest unsecured creditors of the
Debtors, (iii) the Prepetition Agents for the Prepetition Secured Parties, (iv)
the United States Department of Justice, (v) the Secretary of Health and Human
Services and all fiscal intermediaries; (vi) all state Medicaid
4
<PAGE>
agencies with which the Debtors deal; (vii) all landlords of the Debtors; (viii)
holders of Petition Date Liens; (ix) the DIP Lenders and DIP Agents; (x) the
official committee of unsecured creditors appointed in these Chapter 11 Cases
(the "Committee") and (xi) any party who filed a request for notices in the
Chapter 11 Cases pursuant to Bankruptcy Rule 2002 prior to the date set forth in
the Interim Order for service of notice of the Final Hearing; and
c. Notice of the Final Hearing was published one time, at least one
week prior to the date of the Final Hearing, in the following newspapers: The
Wall Street Journal (national edition), USA Today or The New York Times
(national edition), The Boston Globe, The Houston Chronicle or The Dallas
Morning News, The Miami Herald, The Tennessean and The Washington Post (Maryland
regional edition).
NOW, THEREFORE, upon the entire record of the Final Hearing held
before this Court with respect to the Motion on February 16, 2000, and upon the
presentations of counsel made at the Final Hearing, and upon the record of the
Emergency Hearing held before this Court with respect to the Motion on January
18, 2000, and this Court having found good and sufficient cause therefor, it is
hereby FOUND that:
A. On January 18, 2000 (the "Petition Date"), the Debtors filed
voluntary chapter 11 petitions under the Bankruptcy Code. Each chapter 11
petition filed by a Debtor commencing its Chapter 11 Case and the DIP Financing
Documents were duly authorized by all requisite actions of the board of
directors, shareholders, general and limited partners, or managing members, as
applicable, of such Debtor, in accordance with applicable law and the
Organizational Documents of such Debtor. No trustee or examiner has been
appointed as of the date of this Order. Pursuant to (S)(S) 1107(a) and 1108, the
Debtors are authorized to operate their business as debtors-in-possession.
5
<PAGE>
B. This Court has jurisdiction over these Chapter 11 Cases and the
Motion pursuant to 28 U.S.C. (S)(S) 157 and 1334. Consideration of the Motion
constitutes a core proceeding as defined in 28 U.S.C. (S) 157(b)(2).
C. The Debtors do not have sufficient funds to meet expenses necessary
for the operation of their business and have requested that they be authorized
to use Cash Collateral and that the DIP Agents and the DIP Lenders extend loans
and other financial accommodations to the Debtors pursuant to the terms and
conditions set forth in the DIP Financing Documents.
D. The Debtors are unable to obtain the financing necessary for the
operation of their business either (i) on an unsecured basis under (S)
503(b)(1), (ii) pursuant to (S)(S) 364(a) or 364(b), (iii) solely on a junior
secured basis under (S) 364(c)(3), or (iv) on any other terms or conditions more
favorable to the Debtors than the terms and conditions set forth in the DIP
Financing Documents.
E. In an effort to identify the parties with a potential interest in
the pre-petition accounts receivables or inventory of the Debtors, counsel for
the DIP Lenders conducted a search against each of the Debtors to identify all
such parties. Counsel to the DIP Lenders conducted extensive searches of state
UCC filings and conducted extensive on-line searches of state UCC filings using
Lexis and/or Westlaw in all jurisdictions where a Debtor maintains property or a
chief executive office is located. The Debtors' corporate counsel is satisfied
that the search was conducted in all appropriate jurisdictions and in all
appropriate offices in those jurisdictions. Because there are approximately 86
entities that are Debtors in these cases, and because the Debtors also use
numerous trade names and operate numerous health care facilities located
throughout the country, it is impractical to rely on searches alone. Therefore,
this is a proper case for the use of alternative notice procedures. In
particular, publication of notice as set
6
<PAGE>
forth in this Order is required in order to ensure that all prospective parties
have adequate notice of the Final Hearing.
F. The DIP Lenders have agreed to provide the DIP Financing on the
terms and conditions set forth in the DIP Financing Documents provided that the
Court enters an order satisfactory to the DIP Agents and the DIP Lenders
approving the DIP Financing Documents and granting such claims and priorities to
or for the benefit of the DIP Agents and the DIP Lenders as are set forth
herein, in the DIP Credit Agreement and in the other DIP Financing Documents
with respect to all Obligations.
G. The Debtors will benefit from the loans and other financial
accommodations to be provided by the DIP Agents and the DIP Lenders under the
DIP Financing Documents. The loans and other financial accommodations provided
under the DIP Financing Documents are necessary to fund the business of the
Debtors and will contribute to payment of the actual and necessary costs and
expenses of preserving their estates.
H. The Debtors have agreed both that they are indebted to the
Prepetition Agents and the Prepetition Secured Parties under the Prepetition
Credit Agreement (as defined in the Motion) and shall not raise any defense,
counterclaim or offset of any kind with respect to such indebtedness (the
"Prepetition Obligations"), and have further agreed that as of the Petition
Date, the Debtors were liable to the Prepetition Agents and the Prepetition
Secured Parties in the aggregate unpaid principal amount plus letter of credit
exposure outstanding of approximately $434.4 million, plus accrued interest,
fees and other charges thereunder.
I. The Debtors have further agreed that they will not challenge (a)
the validity, perfection, enforceability and non-voidability of the Liens and
Security Interests granted by the Debtors to Prepetition Agents, for the benefit
of the Prepetition Secured Parties, in the Prepetition Collateral pursuant to
the Prepetition Credit Agreement and (b) that all or
7
<PAGE>
substantially all of the Debtors' cash on hand and proceeds of Prepetition
Collateral received after the Petition Date constitute the Cash Collateral of
the Prepetition Agents and Prepetition Secured Parties.
J. The Prepetition Agents and Prepetition Secured Parties are
entitled, pursuant to (S)(S) 361, 363(e) and 364(c) and (d), to adequate
protection of their interests in the Prepetition Collateral in order to protect
the Prepetition Agents and the Prepetition Secured Parties from any diminution
in the value of the Prepetition Collateral resulting from (i) the Debtors' use
of Cash Collateral, (ii) the priming Liens and Security Interests granted to the
DIP Agents for the benefit of the DIP Lenders pursuant to this Order, the DIP
Credit Agreement and the other DIP Financing Documents, (iii) the Debtors' use,
sale or lease of the Prepetition Collateral other than Cash Collateral, and (iv)
the imposition of the automatic stay.
K. The Debtors do not have sufficient available sources of working
capital from the Prepetition Secured Parties' Cash Collateral or other financing
to carry on the operation of their business as without the DIP Financing. The
ability of the Debtors to provide patient care, maintain business relationships
with their vendors and suppliers, purchase new inventory, pay necessary
employees and otherwise finance their operations is essential to the Debtors'
continued viability. In addition, the Debtors' critical need for financing is
immediate. In the absence of access to Cash Collateral and the DIP Financing,
the continued operation of the Debtors' business would not be possible, a
precipitate liquidation would ensue, and immediate and irreparable harm to the
Debtors' patients, the Debtors' unsecured creditors, and the Debtors' estates
would occur.
L. The ability of the Debtors to continue in business so they can
attempt to reorganize under the Bankruptcy Code depends on obtaining the relief
sought in the Motion.
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M. Based on the record presented to this Court by the Debtors at the
Emergency and Final Hearings, the terms of the DIP Financing are fair and
reasonable, reflect the Debtors' exercise of prudent business judgment
consistent with their fiduciary duties, and, when the initial Loans were funded,
were supported by reasonably equivalent value and fair consideration.
N. Based on the record before the Court, the financing arrangements
contemplated by the DIP Credit Agreement and the other DIP Financing Documents
are the product of an arm's length negotiation and are entered into by the DIP
Agents and the DIP Lenders in good faith, as the term "good faith" is used in
(S) 364(e).
O. The Final Hearing was held pursuant to Rule 4001(b)(2) and (c)(2),
and notice of the Motion has been given pursuant to (S)(S) 102(l), 363(c) and
364(c) and (d), and Rules 2002 and 4001(b) and (c), to the parties set forth
above.
Based upon the foregoing findings and conclusions, and upon the record
made before this Court, and good and sufficient cause appearing therefor,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT:
1. The Motion is granted and the Debtors are hereby authorized and
directed to execute and deliver the DIP Financing Documents, subject to the
terms and conditions hereinafter set forth.
2. Debtors are authorized to: (a) obtain loans and request the
issuance of letters of credit pursuant to the terms of the DIP Financing
Documents; and (b) use Cash Collateral in the operation of the Debtors'
business, in each case in a manner consistent with this Order, the DIP Credit
Agreement (including, without limitation, the prohibitions set forth in section
5.06 thereof), the other DIP Financing Documents and the Cash Budget.
9
<PAGE>
3. The Debtors are hereby authorized and directed to (a) execute and
deliver the DIP Financing Documents and all other documents necessary or
desirable to implement the DIP Financing (through one or more officers
designated by them) including, without limitation, waivers and (after notice to
counsel for the Committee) modifications and amendments to the DIP Financing
Documents with respect thereto which are not material in the judgment of the
Debtors and the DIP Lenders, (b) grant the Security Interests and Liens
contemplated hereby and thereby, (c) effect all transactions and take any
actions provided for in or contemplated by the DIP Financing Documents or in
good faith deemed necessary to effectuate the terms and conditions of the DIP
Financing Documents and this Order, including, without limitation, the payment
of any and all fees, costs, charges, commissions and expenses, including
reasonable counsel fees, payable under the DIP Financing Documents or this
Order, and (d) comply with all provisions of the DIP Financing Documents,
including, without limitation, the payment and satisfaction in full of all
Obligations when due in accordance with the terms of the DIP Financing
Documents.
4. The Obligations shall be entitled to the following protections,
Security Interests, Liens and priorities in favor of the DIP Agents and the DIP
Lenders, to secure full and complete compliance with, and timely payment of, all
Obligations at any time owing or to be performed by the Debtors pursuant to the
DIP Credit Agreement and the other DIP Financing Documents, subject only to the
Carve-Out (as defined below):
(a) pursuant to (S) 364(c)(2), first priority, valid, perfected and
non-voidable Security Interests in and Liens upon all unencumbered assets of the
estates of each of the Debtors as of the Petition Date, including (without
limitation) all such real, personal or mixed property of each of the Debtors at
any time existing or arising, wherever located, all such cash contained in any
account to the extent owned by or maintained for the benefit of the Debtors, all
such capital
10
<PAGE>
stock held by any of the Debtors, the proceeds of all such causes of action
existing as of the Petition Date, all such real property the title to which is
held by any of the Debtors, or the right to possession of which is held by any
of the Debtors pursuant to a leasehold interest, and all proceeds and products
thereof (but excluding causes of action of the Debtors' estates under (S)(S)
544, 545, 547, 548 and 550);
(b) pursuant to (S) 364(d), valid, perfected and non-voidable Security
Interests in and Liens, as of the Petition Date, upon all Prepetition Collateral
(including all accounts receivable as of the Petition Date and all amounts at
any time owing by a Governmental Authority) to the extent that such Prepetition
Collateral was subject to senior liens, as of the Petition Date, in favor of the
Prepetition Agents and the Prepetition Secured Parties, having priority over and
senior to the Security Interests and Liens of the Prepetition Agents and the
Prepetition Secured Parties; and
(c) pursuant to (S) 364(c)(3), valid, perfected and non-voidable
Security Interests in and Liens, as of the Petition Date, upon all other assets
(including all Prepetition Collateral and all accounts receivable as of the
Petition Date and thereafter arising including all amounts at any time owing by
a Governmental Authority to the extent not covered by (b) above) of each of the
Debtors, subject and subordinate only to the Prior Liens (but senior to any
Liens in favor of the Prepetition Agents and the Prepetition Secured Parties).
(d) In addition, in order to further assure full and complete
compliance with, and timely payment of, all Obligations at any time owing or to
be performed by the Debtors pursuant to the DIP Credit Agreement or the other
DIP Financing Documents, the DIP Agents and the DIP Lenders are hereby granted
(subject to the Carve-Out), pursuant to (S) 364(c)(1), superpriority
administrative claim status for such Obligations. All Obligations owing to the
DIP Agents and the DIP Lenders under the DIP Credit Agreement and the other DIP
Financing
11
<PAGE>
Documents (including, but not limited to, the obligation to pay principal,
interest, professional fees, costs, charges, commissions and expenses) shall be
paid as provided in the DIP Credit Agreement and the other DIP Financing
Documents when due, without defense, offset, reduction or counterclaim, and
shall constitute allowed claims to the full extent thereof against the Debtors
arising under (S) 364(c)(1), with priority for such claims over any and all
administrative expenses (other than the Carve-Out) of the kind specified or
ordered pursuant to any provision of the Bankruptcy Code, including, but not
limited to, (S)(S) 105, 326, 328, 330, 331, 503(b), 506(c), 507(a), 507(b) and
(to the maximum extent permitted by law) 726 provided that, the superpriority
--------
administrative claim status of the Obligations, Liens and Security Interests
securing the same shall be subject only to: (i) unpaid professional fees and
expenses incurred (x) prior to the date of the delivery of a notice from the
Administrative Agent or Required Lenders to the Debtors of the occurrence of an
Event of Default and specifying that the limitation on professional fees and
expenses referred to in the following clause (ii) is in effect (such notice
being the "Carve-Out Notice") or (y) after the earlier of (1) such time as no
Event of Default shall be continuing and (2) such time as such Carve-Out Notice
shall be rescinded by the Administrative Agent at the direction of Required
Lenders in their sole discretion, to the extent such fees and expenses described
in this clause (i) are allowed by the Court in the Chapter 11 Cases (including
on an interim basis and subject to final allowance), (ii) from and after the
date of the delivery of a Carve-Out Notice, professional fees and expenses
allowed by the Court in the Chapter 11 Cases in an aggregate amount (determined
without regard to fees and expenses incurred prior to the date of the delivery
of such Carve-Out Notice and which are at any time allowed by the Court either
on an interim basis (subject to final allowance) or final basis) not to exceed
$2,000,000 (for any period commencing at the time a Carve-Out Notice shall have
been so delivered and ending at the earlier of (1) such subsequent time as no
Event of Default shall be
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<PAGE>
continuing and (2) such time as such Carve-Out Notice shall be rescinded by the
Administrative Agent at the direction of Required Lenders in their sole
discretion), and (iii) fees payable to the Clerk of the Court and to the United
States Trustee pursuant to 28 U.S.C. (S)1930(a)(6) ((i) through (iii)
collectively, being referred to herein as the "Carve-Out"); provided, however,
--------
that in no event shall there be paid from proceeds of the DIP Financing,
obligations of the issuer in respect of Letters of Credit, Cash Collateral or
any portion of the Carve-Out any fees and expenses incurred in investigating,
objecting to, challenging in any matter, or raising any defenses to (1) the
validity, perfection, priority or enforceability of the Obligations owing to the
DIP Lenders or DIP Agents, or the Security Interests and Liens in favor of the
DIP Lenders or DIP Agents securing such Obligations, or to assert any claims or
causes of action against the DIP Lenders or DIP Agents in their capacity as
lenders or agents under the DIP Financing, or (2) the Security Interests, Liens
or Prepetition Obligations of the Prepetition Agents or the Prepetition Secured
Parties, although, subject to the Carve-Out, the professionals for the Committee
may be paid (to the extent allowed by the Court) fees and expenses incurred in
analyzing such Liens or claims described in (2) above in an amount not to exceed
$25,000. Subject to the Carve-Out, such claims of the DIP Agents and DIP Lenders
shall at all times be senior, in this and any subsequent case under the
Bankruptcy Code, to the rights of the Debtors, any trustee or examiner and any
unsecured claims of any creditor or other entity. No cost or expense of
administration or any claims in this case, including to the maximum extent
permitted by law those resulting from or incurred after any conversion of this
case pursuant to (S) 1112, shall (except to the extent of the Carve-Out) rank
prior to, or on parity with, the claims of the DIP Agents and DIP Lenders
arising hereunder, under the DIP Credit Agreement or under the other DIP
Financing Documents.
13
<PAGE>
5. Other than the Liens and Security Interests granted pursuant to or
referred to in this Order, and under the terms of the DIP Credit Agreement and
the other DIP Financing Documents, no Liens or Security Interests shall attach
to any property of the Debtors' estates in this or any subsequent case under the
Bankruptcy Code unless either (a) the Liens or Security Interests are Permitted
Adequate Protection Liens or are otherwise permitted under Section 7.02 of the
DIP Credit Agreement, (b) the DIP Agents and DIP Lenders give their express
written consent, or (c) if the DIP Financing has been terminated and all
Obligations have been paid in full and the Commitments terminated, provided,
--------
that in the case of clause (c), notwithstanding such termination and payment, no
- ----
Liens or Security Interests shall be granted under (S) 364(d) on any property
constituting Prepetition Collateral or that is subject to any Replacement Liens
(as defined below).
6. The Debtors shall not incur Debt not permitted by the DIP Credit
Agreement or the other DIP Financing Documents unless (a) the DIP Agents and DIP
Lenders consent in writing thereto, or (b) the proceeds thereof are used first
to satisfy in full all Obligations owing to the DIP Agents or the DIP Lenders
under the DIP Credit Agreement or the other DIP Financing Documents in
accordance with the terms thereof and the Commitments are terminated.
7. Except as set forth in the last sentence of this paragraph, no cost
or expense, including, but not limited to, any cost or expense of administration
of the Debtors' Chapter 11 Cases or any future proceeding that may develop out
of such cases, including liquidation in chapter 7 or other case under the
Bankruptcy Code, or cost or expense incurred in connection with the
preservation, protection or enhancement of, or liquidation of the DIP Collateral
or the Prepetition Collateral, but excluding the Carve-Out, shall be charged
against the DIP Collateral pursuant to (S) 506(c) or otherwise without the prior
written consent of the DIP
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<PAGE>
Agents and DIP Lenders or the Prepetition Agents and Prepetition Secured
Parties, and no such consent shall be implied from any action, inaction or
acquiescence by the DIP Agents, DIP Lenders, Prepetition Agents or Prepetition
Secured Parties. Publication notice given as set forth in this Order is
sufficient to bind third parties not otherwise served with the Motion or this
Order to the provisions of this paragraph 7. Notwithstanding the foregoing
provisions of this paragraph 7, each of MCI WorldCom, Inc. and its affiliates
and Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy Mississippi,
Inc. and their affiliates reserves its right, if any, to assert a claim pursuant
to (S)506(c) against the DIP Collateral and the Prepetition Collateral, and the
Debtors, the DIP Lenders, the DIP Agents, the Prepetition Agents and the
Prepetition Secured Parties reserve their rights and defenses with respect to
any such claim.
8. In addition to the protections afforded the Prepetition Agents and
the Prepetition Secured Parties elsewhere in this Order and in the DIP Credit
Agreement, the Prepetition Agents and Prepetition Secured Parties are granted
further adequate protection of their interests in the Prepetition Collateral as
hereinafter set forth. As further adequate protection to the Prepetition Agents
and Prepetition Secured Parties for any diminution in the value of their
respective interests in the Prepetition Collateral resulting from (a) the
Debtors' granting of priming Liens on and Security Interests in the Prepetition
Collateral, pursuant to (S) 364(d), in favor of the DIP Agents and DIP Lenders,
(b) the Debtors' use of Cash Collateral pursuant to (S) 363(c), (c) the use,
sale or lease of the Prepetition Collateral (other than Cash Collateral)
pursuant to (S) 363, and (d) the imposition of the automatic stay pursuant to
(S) 362(a):
(i) the Prepetition Agents and the Prepetition Secured Parties are
granted (effective as of the Petition Date and without the necessity of the
execution by the Debtors of mortgages, security agreements, pledge agreements,
financing statements or otherwise), valid, perfected and non-voidable
replacement Security Interests in and Liens upon (the "Replacement
15
<PAGE>
Liens") all property of each of the Debtors including, without limitation, all
real, personal and mixed property of the Debtors (including leasehold interests
and capital stock) at any time existing or arising, wherever located, and all
proceeds and products thereof (but excluding causes of action of the Debtors'
estates under (S)(S) 544, 545, 547, 548 and 550 and any assets (if any)
specifically excluded from the Security Interests and Liens granted to the DIP
Agents and the DIP Lenders pursuant to the terms of the DIP Security Documents),
subject only to (x) the Carve-Out, (y) the Liens and Security Interests granted
pursuant to this Order and the DIP Financing Documents to the DIP Agents and DIP
Lenders to secure the Obligations, and (z) the Prior Liens; and
(ii) Prepetition Agents and Prepetition Secured Parties are granted
superpriority claims with priority over any and all administrative expenses of
the kind specified or ordered pursuant to any provision of the Bankruptcy Code,
including, but not limited to, (S)(S) 105, 326, 328, 330, 331, 503(b), 506(c),
507(a), 507(b) and (to the maximum extent permitted by law) 726, subject only to
(x) the superpriority claims granted to DIP Agents and DIP Lenders in respect of
the Obligations pursuant to the Interim Order and (y) the Carve-Out.
9. Subject to the terms and conditions of the DIP Financing Documents,
the DIP Financing and the Debtors' use of Cash Collateral shall terminate on the
Commitment Termination Date provided, that in the event the Obligations shall
-------- ----
have been satisfied in full in accordance with the DIP Financing Documents, such
termination shall be without prejudice to the Debtors' right to seek to use Cash
Collateral pursuant to (S) 363 (c) (2), and the Prepetition Agents' and
Prepetition Secured Parties' right to oppose such use or seek further adequate
protection in addition to that provided herein.
10. The Security Interests and Liens in the DIP Collateral granted to
the DIP Agents for the benefit of the DIP Lenders pursuant to the DIP Financing
Documents and
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<PAGE>
approved herein are valid, enforceable and fully perfected by entry of this
Order, and neither the DIP Agents nor the DIP Lenders shall be required to file
or record financing statements, mortgages, leasehold mortgages, deeds of trust
or other documents in any jurisdiction or take any other action (including
obtaining possession) in order to validate, perfect or otherwise enforce the
Security Interests and Liens in such DIP Collateral. If the DIP Agents shall, in
their or its sole discretion, choose to file financing statements or file or
record any other documents or otherwise confirm perfection of such Security
Interests and Liens in the DIP Collateral, the DIP Agents are authorized to
effect such filings and recordations, and the automatic stay of (S) 362 is
hereby modified to allow such actions, and all such financing statements or
similar documents shall be deemed to have been filed or recorded on the date of
entry of this Order. The Debtors are hereby authorized and directed to execute
and deliver to the DIP Agents, any and all such documents as the DIP Agents may
in good faith request in order to confirm the perfection of the Liens and
Security Interests in the DIP Collateral. The DIP Agents are hereby authorized
to file this Order as evidence of their Security Interests and Liens in lieu of
a financing statement or other filing or recording, and the appropriate state
and local official may accept the same for filing or recording.
11. The DIP Agents and DIP Lenders, having been found to be acting in
good faith, shall be entitled to the full protection of (S) 364(e) and the
claims, Liens, Security Interests and priorities created or authorized in this
Order, the DIP Credit Agreement and the other DIP Financing Documents are so
created and authorized pursuant to (S)(S) 364(c) and (d) and are entitled to the
benefits and protections of (S) 364(e).
12. The DIP Agents and DIP Lenders are entitled to all of the rights,
benefits, privileges and remedies set forth or provided herein or in the DIP
Financing Documents, including, but not limited to, without further application
to or order of this Court, all of the
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rights, benefits, privileges and remedies available to the DIP Agents or DIP
Lenders upon the occurrence and during the continuance of a Default or an Event
of Default (as defined in the DIP Credit Agreement including, without
limitation, any reversal, stay or modification of this Order without the consent
of the DIP Agents or Required Lenders, the appointment or election of an interim
or permanent trustee in this case or the conversion or dismissal of this case)
as follows:
(i) The automatic stay of (S) 362 (to the extent applicable) is
vacated solely to permit the exercise, enjoyment and enforcement of any of such
rights, benefits, privileges and remedies including, but not limited to (a) the
termination by the DIP Agents and the DIP Lenders of all Commitments under the
DIP Credit Agreement, (b) the declaration of all Obligations to be immediately
due and payable in full, (c) termination of the Debtors' rights hereunder to use
Cash Collateral, and (d) the exercise of remedies against the DIP Collateral,
including, without limitation, charging a default rate of interest as set forth
in the DIP Financing Documents or foreclosing on such DIP Collateral under
applicable state or federal law, provided that the DIP Agents or the DIP Lenders
--------
shall give the Debtors, any official committee appointed pursuant to (S) 1102,
and the United States Trustee five (5) business days' prior written notice (an
"Enforcement Notice") of any exercise of remedies against the DIP Collateral
(other than acceleration of the Loans or other Obligations, termination of the
Commitments, but including the exercise of any rights of set-off under the DIP
Credit Agreement or under any other DIP Financing Document), and shall file a
copy of the Enforcement Notice with the Court.
(ii) Furthermore, five (5) business days after the giving of the
Enforcement Notice (a) the Debtors are precluded from using funds maintained in
any bank, whether a DIP Lender or a third party bank, and all banks are
authorized and directed to withhold payment on items presented for payment from
any account of one or more of the Debtors, (b) all banks in
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which any lock-boxes, deposit accounts, concentration accounts, disbursement
accounts or other accounts of the Debtors are maintained are authorized and
directed to comply with any request of the DIP Agents to turnover all funds of
the Debtors to the DIP Agents without offset or deduction (other than ordinary
course of business deductions for returned items and/or postpetition bank
account fees), and (c) without limiting any of the DIP Agents' rights or
remedies to collect directly from any account debtor or obligor (including the
United States), all proceeds of the DIP Collateral received by the Debtors or
any successors or assigns (including any trustee appointed or elected in these
Chapter 11 Cases or any superseding Chapter 7 cases) shall be held in trust for,
and immediately turned over to, the DIP Agents for the benefit of the DIP
Lenders and the Prepetition Secured Parties.
(iii) If any of the Debtors or any other person or entity (including
any official committee) challenges the occurrence of a Default or an Event of
Default, any such objector's remedy shall be, and hereby is, limited to
requesting a hearing before this Court on five (5) business days' written notice
to the DIP Lenders and the DIP Agents. Pending any such hearing, unless the
Court orders otherwise, the DIP Lenders and the DIP Agents shall not take the
actions that are the subject of Enforcement Notices described in the proviso to
clause (i) above and in clause (ii) above. In any such hearing, the sole issue
before the Court shall be whether a Default or an Event of Default has occurred
and (if subject to cure) has not been cured. No other issue or argument shall be
relevant to any opposition to enforcement of the DIP Lenders' rights, under
Bankruptcy Code Sections 105, 362 or otherwise.
13. This Order shall be deemed the order of a court of competent
jurisdiction for purposes of 42 U.S.C. (S) 1395g (c) (1). In view of the filing
of these Chapter 11 Cases and the "HHS Stipulation" dated as of the Petition
Date and approved by the Court, 42
19
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C.F.R. (S) 424.90(b) on its face does not apply. Nothing contained herein shall
limit any claims or defenses of the Debtors, DIP Agents or DIP Lenders under
applicable law as provided under the HHS Stipulation.
14. Except as otherwise provided in this Order, pursuant to Section
552(a) of the Bankruptcy Code, all property acquired by the Debtors after the
Petition Date, including, without limitation, all DIP Collateral pledged to the
DIP Lenders pursuant to the DIP Credit Agreement, and this Order, is not and
shall not be subject to any Lien of any entity resulting from any security
agreement entered into by the Debtors prior to the Petition Date, except to the
extent that (i) such property constitutes proceeds of property of the Debtors
existing on or before the Petition Date or (ii) such entity is granted a
Permitted Adequate Protection Lien.
15. The provisions of this Order, including the priority and validity
of all claims and Liens in favor of the DIP Lenders, and any actions taken
pursuant hereto or in reliance hereon, shall survive entry of any other order
which may be entered in this case, including any order (a) confirming any plan
of reorganization, (b) converting these cases from cases under chapter 11 to
cases under chapter 7, (c) appointing a trustee or examiner (including an
examiner with expanded powers), or (d) dismissing this case, and the terms and
provisions of this Order, as well as (to the maximum extend permitted by law)
the priorities in payment granted pursuant to this Order, the DIP Credit
Agreement and the other DIP Financing Documents shall continue in full force and
effect notwithstanding the entry of such other order, until all of the
Obligations owing to the DIP Lenders are irrevocably paid in full in accordance
with the terms of the DIP Credit Agreement and the other DIP Financing Documents
and all of the Commitments thereunder have been terminated.
16. If any or all of the provisions of this Order are hereafter
reversed, modified, vacated or stayed by subsequent order of this Court
(including in connection with the
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Final Hearing) or any other court, such reversal, stay, modification or vacatur
shall not affect the validity and enforceability of any Obligation, debt or
claim incurred or any Security Interest or Lien or the priority that is or was
incurred or granted pursuant to the DIP Credit Agreement, the other DIP
Financing Documents or this Order, and notwithstanding any stay, reversal,
modification or vacatur of this Order, any Obligations owing to the DIP Agents
or DIP Lenders arising prior to the effective date of such stay, reversal,
modification or vacatur shall be governed in all respects by the original
provisions of this Order and the DIP Financing Documents, as the case may be,
and the DIP Agents and DIP Lenders shall be entitled to all of their respective
rights, privileges and benefits hereunder and under the DIP Financing Documents
including, without limitation, the priorities, rights and remedies granted
herein and therein to or for their benefit with respect to all Obligations owing
to the DIP Agents and the DIP Lenders. Without adversely affecting or limiting
the foregoing provisions of this paragraph 16, the Committee shall have the
right to move by February 25, 2000 to modify this Order solely to the extent
that this Order authorizes the Debtors to execute the DIP Credit Agreement with
the inclusion in the DIP Credit Agreement in the definition of "Commitment
Termination Date" of the language in (iii)(y) of such definition (and such other
provisions of the DIP Credit Agreement ancillary to the foregoing), in which
event such motion shall be heard by this Court no later than March 8, 2000 at
11:30 a.m. If such motion is granted: (a) it shall be deemed an Event of Default
under (S) 8.01 (j) of the DIP Credit Agreement; and (b) the Required Lenders and
the Administrative Agent may exercise their rights and remedies as granted under
the DIP Credit Agreement and this Order, provided that such Event of Default may
not be challenged pursuant to paragraph 12(iii) of this Order or otherwise.
Nothing contained herein shall be deemed to modify any provision of the DIP
Credit Agreement or the other DIP Financing Documents. This Order shall be
deemed a Final Order as defined in the DIP Credit Agreement as to all persons
and entities and for all
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<PAGE>
purposes, except with respect to the Committee's right to make a motion on the
basis set forth in this paragraph. If the Committee makes such a motion and it
is denied or the Committee fails to make such a motion timely, this Order shall
be a Final Order as to the Committee as well.
17. The findings contained in paragraphs H. and I shall be binding
upon all parties in interest, including but not limited to, the Debtors (and the
Debtors waive any right to challenge such findings) and any official committee
appointed in the Chapter 11 Cases unless (a) any such committee has properly
filed an adversary proceeding or contested matter challenging the validity,
enforceability, non-voidability, perfection or priority of the Prepetition
Obligations, or the Prepetition Agents' or Prepetition Secured Parties' Liens on
and Security Interests in the Prepetition Collateral, no later than the date
that is ninety (90) days after the date of appointment of the Committee, and (b)
a Final Order has been entered in favor of such committee in any such timely and
properly filed adversary proceeding or contested matter. If no such adversary
proceeding or contested matter is properly commenced as of such date, (i) the
Prepetition Obligations (less any non-voidable payments made thereon after the
Petition Date) shall constitute allowed claims for all purposes in the Chapter
11 Cases and any subsequent chapter 7 cases, and the Prepetition Agents' and
Prepetition Secured Parties' Liens on and Security Interests in the Prepetition
Collateral shall be deemed legal, valid, binding, and properly perfected, and
not subject to subordination or avoidance, and (ii) the Prepetition Obligations
and the Prepetition Agents' and Prepetition Secured Parties' Liens on and
Security Interests in the Prepetition Collateral shall not be subject to any
other or further challenge by any party in interest seeking to exercise the
rights of any Debtor's estate including, without limitation, any successor
thereto.
18. The provisions of Annex A are approved and the Debtors are
authorized and directed to comply therewith.
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<PAGE>
19. HHS's authority to collect prepetition overpayments from the
Debtors shall be governed by this Order and the Stipulation dated January 18,
2000, between HHS and the Debtors, the terms of which are hereby incorporated by
reference. Subject to the HHS Stipulation, any federal governmental unit,
including the departments and agencies thereof, and any fiscal intermediaries
thereof, shall have no right to recoup provider reimbursement overpayments that
were made to any Debtor from any amounts due to such Debtor (or any other
Debtor) other than to recoup such overpayments that arise under the same
provider agreement or comparable applicable statutes, regulations, or
arrangements, and in the same provider cost-year as the amounts due to such
Debtor arise. This paragraph does not affect offset rights permitted by order of
the Court or by written postpetition agreement of the parties.
20. As long as any portion of the Obligations remains unpaid, or any
DIP Financing Document remains in effect, the Debtors shall not assume without
the written consent of the Required Lenders, and no Order shall be entered
authorizing the assumption of, any provider agreements between the Debtors and
any governmental unit.
21. This Final Order shall supersede the Interim Order and shall be
deemed effective as of the date of the Interim Order. 22. This Court retains and
reserves jurisdiction to enforce all provisions of this Final Order.
22. This court retains and reserves jurisdiction to enforce all
provisions of this Final Order.
Dated: February __, 2000
Wilmington, Delaware
______________________________
Mary F. Walrath
United States Bankruptcy Judge
<PAGE>
DEBTORS
-------
Mariner Health Group, Inc.
Aid &Assistance, Inc.
Allegis Health and Living Center at Heritage Harbour, L.L.C.
Beechwood Heritage Retirement Community, Inc.
Bride Brook Nursing & Rehabilitation Center, Inc.
Compass Pharmacy Services, Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Cypress Nursing Facility, Inc.
IHS Rehab Partnership, Ltd.
Long Ridge Nursing & Rehabilitation Center, Inc.
Longwood Rehabilitation Center, Inc.
Mariner Health at Bonifay, Inc.
Mariner Health Care, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Greater Laurel, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health Care of MetroWest, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut, Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health of Florida, Inc.
Mariner Health of Jacksonville, Inc.
Mariner Health of Maryland, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health of Seminole County, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Properties IV, Ltd.
Mariner Health Properties VI, Ltd.
Mariner Health Resources, Inc.
Mariner Physician Services, Inc.
A-1
<PAGE>
Mariner Practice Corporation
Mariner - Regency Health Partners, Inc.
MarinerSelect Staffing Solutions, Inc.
Mariner Supply Services, Inc.
MedRehab, Inc.
MedRehab of Indiana, Inc.
MedRehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
Merrimack Valley Nursing & Rehabilitation Center, Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab. Corp.
MHC Transportation, Inc.
Mystic Nursing & Rehabilitation Center, Inc.
National Health Strategies, Inc.
Park Terrace Nursing & Rehabilitation Center, Inc.
Pendleton Nursing & Rehabilitation Center, Inc.
Pinnacle Care Corporation
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Rehabilitation, Inc., a Tennessee Corporation
Pinnacle Rehabilitation of Missouri, Inc.
Prism Care Centers, Inc.
Prism Health Group, Inc.
Prism Home Care Company, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Prism Hospital Ventures, Inc.
Prism Rehab Systems, Inc.
Regency Health Care Center of Seminole County, Inc.
Sassaquin Nursing & Rehabilitation Center, Inc.
Seventeenth Street Associates Limited Partnership
Tampa Medical Associates, Inc.
The Ocean Pharmacy, Inc.
Tri-State Health Care, Inc.
Windward Health Care, Inc.
A-2
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